silicon valley bank annual state of the wine industry 2012-2013 presentation

Rob McMillan, EVP & Founder April 17, 2012

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Speakers

Rob McMillan EVP & Founder Silicon Valley Bank, Wine Division

Paul Mabray Chief Strategy Officer, Digital Guru VinTank

Tony Correia and Paul Mabray are independent third parties and are not affiliated with SVB Financial Group.

Tony Correia Agricultural Property Valuation Expert The Correia Company

http://www.svb.com/viewprofile.aspx?id=2147483667

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Remember 2008?

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The Good news: There is a good reason to drink …

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The Bad News - Unemployment

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Perc

ent

US Unemployment Rate (Household Survey)

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The Bad News - Consumer Confidence

20

40

60

80

100

120

140

160

Consumer Confidence

Source: Bloomberg

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The Bad News - Retail Sales

-4

-3

-2

-1

0

1

2

3

Per

cent

Cha

nge

Monthly Change in Retail Sales

Source: Bloomberg

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The Bad News: Equities Crash

Equities Collapse

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008200

400

600

800

1000

1200

1400

1600

1800

DJIA S&P

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How Bad is It Going to Get?

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How Long Will It Last?: Home Prices to Median Family Income

2008 2009 2010 2011

House prices bottom Q4 2010 – Q1 2011

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2008 Officially in the Rear View Mirror Steering Macro Economic Currents for 2012-13

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Months of Supply in Existing Homes

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Housing Values Finding a Bottom

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Growth in Retail Sales Positive Since Q4 2009

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Layoffs Dropping & Job Openings Increasing

Source: http://www.calculatedriskblog.com/

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The Hidden Tax: National Average Retail Gas Prices

Regular Grade, As Surveyed By The AAA Motor Club

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Borrowing Rates Edging Higher for Almost All EU

Interest Rates on 10-year Government Bonds

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Eurozone: Exchange Rates – Euro Getting Weaker

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How Much Dry Powder is Left for the ECB?

ECB Now $1 Trillion Larger Than the Fed.

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Inventory

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2010 Wineries Short on Inventory By Bottle Price

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2010 Short Inventory

Source: Silicon Valley Bank Proprietary Research

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2010-2011 Change in Wineries Short on Inventory

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%




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2011 Inventory Positions Sorted by Region

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Excess Inventory

Not Enough Inventory


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Net Inventory Levels

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Washington State

Santa Barbara

Sierra Foothills

Oregon Lodi County Napa Paso Robles/SLO

Sonoma Lake County Mid-Coastal CA


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California Bulk Wine Positions

Source: Turrentine Brokerage

http://www.turrentinebrokerage.com/

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Premium Planted Acreage on West Coast

14%

22%

12%

25%

5% 5%

4.7% 6.3%

4.6%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

0%

5%

10%

15%

20%

25%

30%

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011P 2012P 2013P

Tota

l Pla

nted

Acr

es

Non

-Bea

ring

Acre

s as

a %

of

Tota

l Pla

nted

Acr

es

Non-Bearing Acres (vineyards planted within last 3 years and not yet bearing fruit) Bearing Acres (vineyards more than 3 years old, bearing fruit) Non-Bearing Acres as a % of Total Planted Acres

Source: Ag Stats Service, Ian Malone &

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LT Grape Prices Continue Upward March

90th-10thPercentileSpread

WeightedAverage

+5.1% +2.1% +2.7% +6.8%

’10-’11 ∆ in Wtd. Avg.

Napa Cabernet Sauvignon Napa Merlot Sonoma Pinot Noir Central Coast

(SB & SLO) Pinot Noir


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$2,470

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

LT Grape Prices Continue Upward March

90th-10thPercentileSpread

WeightedAverage

-0.9% -0.2% -3.4%

’10-’11 ∆ in Wtd. Avg.

Sonoma Chardonnay Central Coast (SB & SLO) Chardonnay Oregon Pinot Noir Napa Cabernet

Franc

?


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Varietal Views of Inventory

Sources: Ciatti Brokerage, Turrentine Wine Brokerage, Silicon Valley Bank Proprietary Research

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Price Changes in N. Coast Bulk Cabernet

$15.00

$17.00

$19.00

$21.00

$23.00

$25.00

$27.00

$29.00

$31.00

$33.00

4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 10/1/2011

Napa Cabernet

Sonoma Cabernet

41% Increase

Source: Turrentine Brokerage

http://www.turrentinebrokerage.com/

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Grape Pricing and Purchase Expectations, and the Impact on Land Values

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2012 Volume Purchase Expectations By Case Size

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

1 -2,500 2,501 - 5,000 5,001 - 10,000

10,001 - 25,000

25,001 - 50,000

50,001 - 100,000

100,001 - 250,000

>250,000

More Tonnage

Less Tonnage


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2012 Grape Pricing Expectation Price Point

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

< $15 $15 - $20 $21 - $30 $31 - $40 $41 - $70 > $70

Pay More

Pay Equal

Pay Less


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Sonoma County

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$0

$30

$60

$90

$120

$150

1994 96 98 2000 02 04 06 08 10

Aver

age

Gra

pe P

rice

Vine

yard

Val

ues,

Tho

usan

dsDistrict 3 Values vs. Grape Prices

Cabernet

Pinot Noir

Chardonnay

Sources: CASS Grape Crush Reports, Annual Land Value Trend Surveys, ASFMRA

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Napa County

$1,000

$2,000

$3,000

$4,000

$5,000

$0

$50

$100

$150

$200

$250

$300

$350

1994 96 98 2000 02 04 06 08 10

Aver

age

Gra

pe P

rice

Vine

yard

Val

ues,

Tho

usan

dsDistrict 4 Values vs. Grape Prices

Cabernet

Chardonnay

Merlot


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Monterey County

$500

$750

$1,000

$1,250

$1,500

$1,750

$2,000

$2,000

$7,000

$12,000

$17,000

$22,000

$27,000

$32,000

$37,000

1994 96 98 2000 02 04 06 08 10

Aver

age

Gra

pe P

rices

Vine

yard

Val

ues

District 7 Values vs. Grape Prices

Chard. $Cab. Sauv. $Pinot Noir $


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San Luis Obispo & Santa Barbara Counties

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$2,000

$12,000

$22,000

$32,000

$42,000

$52,000

1994 96 98 2000 02 04 06 08 10

Aver

age

Gra

p Pr

ice

Vine

yard

Val

ues

District 8 Values vs. Grape Prices

Chard. $Pinot Noir $Cab. Sauv. $


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Sales Growth & Financial Condition of Wineries

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Winery Sales Growth Expectations in 2012

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%


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Reported Financial Condition of Wineries in 2011

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

7% Very Weak or Worse


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Reported Financial Condition By Case Size

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

1 -2,500 2,501 - 5,000 5,001 - 10,000

10,001 - 25,000

25,001 - 50,000

50,001 - 100,000

100,001 - 250,000

>250,000

Rock Solid

Very Strong

Strong

Good

Slightly Weak

Very Weak

On Life Support

Dead


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Winery Financial Condition

Sales Up

Gross Margins Squeezed


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Demographic Shifts

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Wine Consumption 1980-2010

Median Age of Boomers: 35 in 1991

Source: Wine Institute

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Window of Affluence: 35-54 Affluent Consumers

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 35-54 83,500 84,800 84,700 84,900 84,100 83,000 81,800 80,900 80,100 79,550

76,000

77,000

78,000

79,000

80,000

81,000

82,000

83,000

84,000

85,000

86,000

(Mill

ions

of C

onsu

mer

s)

Source: Unity Marketing

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Reported Wine Sales by Cohorts

14.3%

29.8%

41.5%

14.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Millennial (21-34 year olds) Gen X (35-46 year olds) Boomers (47-64 year olds) Matures (65+)


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Wealth of Cohorts as of 2009

$3,662 $39,601

$263,716

$170,494

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

Millennials Gen-X Boomers Matures

Source: U.S. Census Bureau

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Current Cohort Sales Sorted by Avg. Bottle Price

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

< $15 $15 - $20 $21 - $30 $31 - $40 $41 - $70 > $70

Millennial (21-34 year olds)

Gen X (35-46 year olds)

Boomers (47-64 year olds)

Matures (65+)


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The Digital World & The 5th Column

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General Perception of Social Media By Case Size

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

1 -2,500 2,501 - 5,000 5,001 - 10,000

10,001 - 25,000

25,001 - 50,000

50,001 - 100,000

100,001 - 250,000

>250,000

Negative

Positive/Active


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The 5th Column

• The 5th Column consists of disparate companies with online solutions to help sell and market wines such as: • E-commerce sites (Wine.com, Winelibrary.com)

• Flash Sale Sites (Lot18, WineAccess, Cinderellawine, Winestillsoldout.com)

• Consumer information sites (Winesearcher.com, Cellartracker.com)

• Mobile applications (HelloVino, Drync, Vivino)

• Software solutions (Vin65.com, Shipcompliant, Vinespring.com, Vinovisit.com)

• Social Media Solutions (Social-Candy.com, VinTank)

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Challenges For the 5th Column

• For software solutions for the wine industry: • Total addressable audience: ~ 7500 wineries in the US

• Very little digital acumen

• Fragmented

• Behave differently by region

• Slow adoption

• Under resourced to manage any of the 5th column players

• Primarily focused on tasting room sales, wine club or traditional 3 Tier sales

• Salary rates for digital employees is at least 40% below comparable positions 45-90 miles away

• Many Investors are gun shy of the category

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Challenges For the 5th Column

• For Online Sales Companies • Regulation

• Margin erosion

• Cost of carrying inventory

• Total wines available in the US (150K+ annually)

• Consumer behavior

• Cost and challenges with shipping

• Winery resistance

• Wholesaler and retailer friction

• Limited nature of luxury wines thus stunting the ability to scale

• Investors WERE gun shy of the category (Lot18 recently received over $40M in funding)

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The Future of the 5th Column

• Pandora’s Box is now open and success is obtainable • The past failures have left a roadmap for success to new contenders

• The recession has forced wineries to explore alternative solutions in the digital sphere

• Winery management is getting younger and more open to digital

• The juggernaut of digital is pressing on the wine industry

• Silicon Valley (only 90 miles away from CA North Coast) grows ever closer to the wine industry

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Bottle Pricing

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Reported Bottle Pricing Expectations


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2012 Bottle Price Expectations by Avg. Price Point

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

< $15 $15 - $20 $21 - $30 $31 - $40 $41 - $70 > $70

Reduce Prices

Hold Prices

Increase Prices


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Net Bottle Price Change By Average Price Point

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

< $15

$15 - $20

$21 - $30

$31 - $40

$41 - $70

> $70


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Summary

• Domestic wine inventories evolving into shortage. Will last for some time.

• ��Increasing prices for grapes and bulk juice • ��Increasing difficulty for négociants to find wine of consistent quality

for the price point • Fewer private labels • ��More transitions, sales and mergers taking place than at any time in

memory • ��Continuation of new mergers among wholesalers • ��Increasing plantings to feed the looming grape shortage • Modest retail bottle price increases

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Summary Continued

• ��Increasing difficulty for third-party marketers who’ve sold with a culture of discounting

• The 5th Column is a viable and improving channel. • ��The wealth divide is really more of a demographic divide. • Millennials are the future. Gen-X is now. Boomers largest but will start

to decline • The euro will enter a weakening trend versus the U.S. dollar • ��Imports gain a larger market share • The U.S. economy will gradually positively evolve with more middle

class consumers jumping on the moving train • 2012 sales growth rates of 7-11 percent, a slight drop from the prior

year

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Disclosures

This material, including without limitation to the statistical information herein, is provided for

informational purposes only. The material is based in part on information from third-party sources that we believe to be reliable, but which have not been independently verified by us and for this reason we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction.

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©2012 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and

Federal Reserve System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. B_WD-12-12064. Rev. 04-12-12.

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silicon valley bank annual state of the wine industry 2012-2013 presentation

Economy & Finance