An Interview with James Miles, Founding Director of Liv-ex
(This interview was taken in December 2011, and is being published now for the very first time)
James, many thanks for taking the time to talk with us here at 12×75.com
12×75.com: Liv-ex has revolutionised the Fine Wine Industry, and it all started in a rented office above a pizzeria in South London. So I suppose my first question would be, how good were the pizzas downstairs and how much influence did they play in Liv-ex’s start?
They always smelt delicious but strangely we never sampled them. It was a takeaway pizza place and Justin and I always preferred the local Italian for lunch. (The chef did a delicious tagliatelle with spicy sausage). As you are suggesting our first office wasn’t very salubrious. It was freezing in winter and boiling in summer and the noise of buses rumbling past our window often drowned out our telephone conversations. Crucially though it was very cheap and this was pretty important in keeping our heads above water in the tough early years.
12×75.com: You started the company with your friend Justin Gibbs. Tell us a little bit about how you met and how you coined the idea of a Fine Wine Exchange?
We both worked for a boutique Asian stock broker called Asia Equity. I was an equity analyst, following small cap stocks in Hong Kong, and he was a salesman in the London office, selling our research to large institutions in the City. We are a similar age and had friends in common outside work. We first met in 1993 or 1994 on his first trip to Asia and have been friends ever since.
12×75.com: Is it easy to work with friends? How would he respond to this question?
I think working with friends can be very awkward, but we have always worked well together. We have different strengths, which has meant that we couldn’t have built Liv-ex without each other. He focuses on running the sales and I run the business side of things. We were also friends at work, so we knew that we could work together. I think people are often different at work as to how they are socially. This tends to be where people get into hot water. They assume that they can go into business with their best friend, only to find out that they are totally incompatible in a business environment. Fortunately we had already worked pretty closely for 7 years, before setting up Liv-ex, so we knew we could do it. We spend more time with each other than with our families – so hopefully he feels the same way. I have never asked him this question, but we have a pretty transparent relationship and he wouldn’t hesitate to tell me if he wasn’t finding it easy!
12×75.com: Before you guys started, how was the exact ‘market price’ for a specific wine and vintage determined, and how was that information distributed?
I am not sure that there was an exact market price, but the answer is that the process was very slow and inefficient. Most merchants 10 years ago would have a pile of paper price lists or catalogues on their desk and they would flick through them to find the best price. Alternatively they would call around their contacts in the market or send out wants lists by fax or email. They would then wait for their contacts to reply with availabilities and prices.
12×75.com: So let’s rewind a little bit. You grew up in Hong Kong, came back to the UK to study at Oxford, and then went back to Hong Kong to join the world of finance. How available and prestigious was Bordeaux Wine then?
I didn’t know much about it. At Oxford we drank gallons of Bulgarian Cab Sav (which subsequently I have discovered was actually South African wine, bottled in Bulgaria to avoid the apartheid trade embargo) because it was cheap. The early nineties was a tough time in the UK, but Asia was booming and in my early 20s I was earning more money than I deserved. I first came across top Bordeaux wine at lunch one day, where one of my mates said he had secured a parcel of 10cs of Lafite 1995 (from Richard Kihl) and persuaded each of us at lunch to buy 2 cases each (because it was going up!). They were about £700 per case. As it happened one of the others changed his mind and I ended up with 4 cases. A couple of years later just as the Asian crisis was unfolding in 1997/1998, I managed to sell these at 1,800 per case and I bought 20cs of more affordable names (in those days) like Lynch Bages, Haut Bailly etc. So really I learnt about the fine wine market by accident, but this got Justin and I thinking about building an exchange for fine wine.
12×75.com: What was Liv-ex initially created to do, and how different or similar is the finished product?
I was reading our initial business plan the other day and we have really not deviated far from the initial idea, which was to build a stock exchange for wine.
12×75.com: When you started Liv-ex, you’ve spoken of having competition. Your competitors at the time had plush offices in Mayfair with a larger staff. They ended up losing millions of pounds. Why do you think that you prospered and they didn’t?
I think more from luck than judgement. We launched our business at the peak of the dotcom boom. I think Lastminute.com floated the same week we opened our office. The buzz at the time was very much about cutting out the middleman, so many of the competitive ideas to ours were about connecting the producer to the consumer or the consumer to the consumer directly. Our model was built around the middleman. Our thinking was that electronic trading was already a reality in the City, yet Goldman Sachs and others didn’t seem to be going out of business. But this didn’t capture the imagination of the venture capitalists at the time, so we never had millions to spend – hence the office above the pizza joint. This just meant we were forced to play a longer game, which as it happened was the right strategy, because until broadband reached critical mass in about 2004/5, the Internet wasn’t fit for purpose and equally our target customers weren’t in a hurry to change. In the first five years, we definitely didn’t prosper, but we did survive, and that was just because we kept costs very low.
12×75.com: When you guys first pitched the idea, what was the reaction in the industry to your quest for ‘transparency’? Was it met with open arms or slammed doors?
I am not sure that it was met with either open arms or slammed doors. Our message was that transparency was coming. This might lead to lower margins but also much higher volumes. It is true that the message was better received by the small and medium sized players than the big boys. The smaller players saw some advantages and felt that they would benefit from greater scale and better information if they signed up to the exchange. The bigger players didn’t slam the door in our face, but they didn’t rush to join either, they weren’t going to help transparency to establish itself. In fact, the three biggest players in the UK didn’t join until 2007, by that point the transparency horse had well and truly bolted.
12×75.com: What further improvements can be made to improve transparency?
I think that the market is already pretty transparent. Clearly it will continue to become more so. What excites us today is the potential to make the back office logistics and accounting functions more efficient. There is huge scope for improvement in this area. Most of the legacy accounts and stock systems were designed before the Internet. As such we are not yet enjoying the benefits of connectivity that the Internet brings in this area. What this means in practice is that the same transaction is being re-keyed dozens of times through the supply chain. We believe that electronic trading and straight through processing are now achievable and will hugely reduce the cost of trading in fine wine. We also strongly believe that it is time for fine wine to design its own supply chain and separate itself from the commercial wine logistics infrastructure. Basically the existing system requires too much movement, which is risky, expensive, bad for provenance and results in slow working capital cycle time. We believe we can learn from the equities market here and build a central depository for fine wine. This is quite a big topic, which we explain in a bit more detail in our blog here: http://www.blog.liv-ex.com/2011/11/fine-wines-online-revolution.html
12×75.com: What are the main benefits to wine merchants of using the L-Win?
To facilitate this move to electronic trading, there is a requirement for the trade to develop a universal product code, so that our systems can all communicate and swap data with each other. L-Win – the Liv-ex Wine ID Number – is a 7 digit code that uniquely identifies the wine name. If the L-Win is widely adopted by the trade, then by establishing a common language, it will contribute to much lower costs by facilitating communication with customers and suppliers and also help people to better organise and populate their wine databases with value added information.
12×75.com: In your ‘Fine wine’s online revolution’ presentation at the WineFutures Summit, you referred to a ‘central depository,’ a mechanism for storing and managing fine wine ownership records in multiple locations. How important is this to the future of fine wine the fine wine supply chain?
I have briefly touched upon this above, but as you suggest one of the big inefficiencies currently is that ownership is very fragmented because it is stored at the warehouse level. If the trade can create a central database of ownership above the warehouse level, then transactions can be completed without excessive stock movements. This will dramatically reduce costs, risks and cycle time and also improve provenance. We will be introducing elements of this idea into our own supply chain. If it works it could be every bit as “revolutionary” for fine wine trading as transparency has been in the last 10 years.
12×75.com: Tell me honestly, it looks like Liv-ex is pretty much cornering a lot of aspects within the market. Are we running the risk of all roads lead to Liv-ex?
We are interested in making it easier for our members to trade, as such our business has three key elements ie the trading platform, data and storage/ transport. The reality, however, is that none of our members have to trade with us, they are all professionals and have their own network of customers and suppliers to deal with. We only trade with merchants or professional traders and not with restaurants, hotels, private collectors or producers. Our role is to facilitate trade in the secondary market and is complimentary to what our members do. They are in the wine business and we are in the exchange business. With less than 3% market share, it is difficult to argue that all roads lead to Liv-ex. Our USP is really that we are the place merchants come to find out the market price. We don’t have a monopoly as to how they choose to use that information.
12×75.com: What is the future of Liv-ex?
Our future is more of the same. We want to continue to develop our three businesses, the trading platform, data and Vine –our storage/ transport arm.
12×75.com: In your opinion, what is the reason for the not so great performance in the market this year?
The main problem is that Hong Kong and China, which has been the most important market for the last few years, has enough stock for now (particularly of Lafite). It may take some time for them to work this off and start buying again.
12×75.com: As someone who has worked in both sectors, do you think we have underestimated the correlation between the fine wine market and the financial market?
Do you mean correlation as in price performance? It seems that at times of financial dislocation, as now and in 2008, all asset classes become very closely correlated and everyone panics into cash, but most of the time it is clear that wine is not closely correlated to other assets.
12×75.com: How soon do you think we can hope to see our first growths ‘flying’ again?
I am not sure that they are going to “fly” again for a while. I think it will take time for the current economic difficulties to resolve themselves. I also wouldn’t be at all surprised if the next bull market was lead by different wines to the last. This always seems to be the way. In other words, might it be DRC or Parker’s Magic 20? I am pretty confident that it will not be Lafite any way.
12×75.com: Other than 12×75.com and Liv-ex, who else can the Wine Industry not live without?
I think Winesearcher and Cellar Tracker have become pretty powerful in their own spaces. But my suspicion is that the correct answer is Bordeaux!
12×75.com: What advice would you give to someone who is thinking of investing in fine wine for the first time?
Do your homework thoroughly
12×75.com: What are your thoughts on DRC vs Lafite. Which do you think will be a better investment in the long run?
The long run is a very long-time. DRC in the next year.
12×75.com: You must get to taste a lot of great wine. What have been some of your tasting highlights in 2011?
You’d be surprised… we actually hardly ever taste. One of our members did bring a bottle of Latour 82 to lunch. He was fairly confident that the fine was going to be oxidised, because the level was low/ mid shoulder. To his horror it was absolutely perfect and a highlight of our wine career so far. We also had an amazing bottle of Lafleur 79 in Hong Kong with spicy Chinese (Szechuan) food… which again we assumed would be a disastrous combo, but the Lafleur blew the food away.
12×75.com: Are there any wines you would love to taste that still elude you?
Sadly most wines elude us.. so yes too many to name here.
12×75.com: The fine wine market doesn’t seem to be as stuffy and closed as it was once perceived. Is this all down to the improved transparency of the marketplace?
Yes transparency has been crucial. Not least the ever increasing number of critics and peer to peer sites like Cellar Tracker and other sources of info. It has never been easier to learn about wine generally or individual wines or find out where to buy them or check the latest price. This has brought a huge number of new people and new money into the market.
12×75.com: Tell us something that the wine community doesn’t know about you eg likes, dislikes, fetishes, etc…
Nothing that is terribly interesting.. I enjoy the simple things…work, family, sport, food, wine… my guilty pleasure is a long soak in a hot bath… couldn’t survive without that.
12×75.com: Parker always plays down his role in the fortunes of the estates whose wines he tastes. How do you think the industry will change when he finally calls it a day?
The market is already changing and Parker gets less influential every day. He is still the most influential critic and will probably always be, but my suspicion is that critics and scores are becoming more commoditised. I think in future, as in financial markets, the consensus will become more and more important.
12×75.com: Congratulations to both you and Justin for making the Fast Track 100 (again). Liv-ex has appeared on this list 3 times in the last 5 years, what’s your secret?
I think luck, hard work and belief in our idea – but mostly luck.
12×75.com are humbled to release their first interview for 2012 with someone that we admire so much. 12×75.com are big fans of James Miles and Liv-ex and we look forward to report their continued success in the future – The Editor