State of the Wine Industry 2013

Wine Has Grown at a 3.4% CAGR Since 2005, Outpacing Total Beverage Alcohol Supplier $ Share (Billions)

Beverage Alcohol Market Share

2005 – 2011 CAGRs Wine: 3.4% Spirits: 3.7% Beer: 2.2% $49.9

2000 $52.2

$8.3

$8.6

$16.0

$17.2

$54.9

$56.6

$57.0

$57.6

$59.2

$9.2

$9.4

$9.5

$9.8

$10.2

$18.2

$18.7

$18.7

$19.2

$19.9

$28.8

$28.6

$29.2

2009

2010

2011

$25.6

$26.3

$27.5

2005

2006

2007

$28.5

2008 Beer

Spirits

2011

Wine 16%

Wine 17%

Spirits 29%

Spirits 34%

Wine

Servings (Billions)(1)

Growth in Servings 2011 – 2015P CAGR: 0.3%

2005 – 2011 Absolute Growth:

118.2

120.8

123.7

124.5

123.9

123.6

124.6

126.0

17.0

17.6

18.3

18.4

18.5

18.7

19.2

20.3

34.9

36.2

37.5

38.0

38.5

39.1

40.2

66.9

67.8

68.2

66.9

65.7

3.6%

42.6

65.1

Beer: (1.7%) Spirits: 15.0% Wine: 13.1% 6.1%

4.0%

1.0%

66.2

1.3%

1.1% 0.5%

1.4% 0.4%

2007

2008

Beer

2009

Spirits

2010

2011

0.7%

2.7% 2.5% 1.3%

(0.9%)

2015P

2006

2007

Wine

Source: Beer Marketer’s Insights, DISCUS, IMPACT Spirits Databank.

1.7%

63.1 Beer

2006

(1)

5.7%

3.6% 3.8%

(1.8%)

2005

Beer 49%

Beer 55%

Serving size: Beer – 12 oz; Spirits – 1.5 oz; Wine – 5 oz. 2

2008

2009

(1.8%) Spirits

(3.1%)

Wine

2010

2011

2015P

Rising Demand and Declining Supply are Creating a Global Wine Shortage Global Production vs. Consumption

Largest Wine Producing Countries (Millions of Hectoliters)

(Millions of Hectoliters) 296 280

266

257

273

264

(19%) 52

282

266

269

271

265

(20%) 42

265 248

226

228

230

238

239

238

251

248

240

242

244

236 +57% 10 7

+38% 11 8

Chile

Australia

+24% 13 11

+23% 15 13

China

Argentina

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E Production

2000

(13%) 22 19

United States

Spain

2011

(Millions of Hectoliters) (25%) 31

7.9

7.9

7.8

7.8

France

Largest Wine Consuming Countries

(Millions of Hectares)

7.8

Italy

Consumption

Global Vineyard Acreage

7.9

50

42

33

249 244

(14%) 58

7.8

7.8

7.7

7.7

7.6

(28%) 14

7.6

+148%

12

10

+59% 17

+32%

13 10

(1%) 20 20

23

(13%) 35 +34% 29

30

21

11

5

Spain 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: International Organisation of Vine and Wine and IWSR. Note: Vinexpo reports the U.S. leading global wine consumption.

2009

2010

Russia

U.K.

China 2000

2011 Per Capita Consumption (Liters per Year)

3

24

7

25

3

Germany

Italy

United States

France

53

13

53

2011 37

Structurally, Supply is Imbalanced in the U.S. U.S. Vineyard Acreage vs. Rest of World (2000 – 2011)

Commentary



Germany: +71%

A decrease in vineyard acreage and a steady increase in demand has led to a structural supply imbalance in the U.S.

–

France: (11%) Italy: (15%)

U.S.: (2%)

Spain: (16%) China: +87%



Following a period of “oversupply”, many growers replanted to more profitable fruits, specifically pistachios and almonds

–



Chile: +16% South Africa: +5%

Australia: +24%

Fewer California Vineyard New Plantings

(Millions of Hectares)

(Bearing and Non-Bearing Planted Acres) 2000 – 2011 CAGR: (0.0%)

Growth in Consumption: 34%

22

21

19

23

Average revenue per acre for almonds and pistachios has grown over 130% and 40%, respectively, since 2002

While planting activity is expected to have increased in 2012, it will take 3 – 5 years to capture the benefit from these new plantings

U.S. Production vs. Consumption

21

Creates opportunities for imports, which have cost advantaged models relative to U.S. in terms of land, labor, and water

24

25

26

27

28

28

27

28

490 481

481

29

472

2001

471

475

472

471

473

476

480

29.5

20

20

20

23 19

20

19

22

21

20.6

19

13.2

2000

467

2002

2003

2004

2005

Production

2006

2007

2008

2009

2010

2000

2011

2001

2002

9.9

2003

11.5

2004

12.6

2005

Acreage

Consumption

Source: International Organisation of Vine and Wine and IWSR. 4

14.3

2006

13.0

2007

11.0

2008

New Plantings

7.1

6.8

2009

2010

4.4 2011

Luxury is a Major Growth Segment in the U.S. Wine Industry 2012 U.S. Growth By Price Segment

Lower Priced

2012 U.S. Top Varietals / Flavors

Higher Priced

% Sales Growth 2012 Sales Growth Total: 6.0%

Market Size ($ in mm) $1,758

16.5%

8.3%

$1,343

11.6%

10.9%

10.1%

$1,256

$1,829

$770 $746

$648 $718

8.1% $487 $531

1.4%

2.7% 0.3%

Value ($4.99 and Below)

1.6%

Premium Glass ($5.00 - $7.99)

Super Premium ($8.00 - $10.99) 2011

Ultra Premium Luxury ($11.00 - $14.99) ($15.00 and Above)

Pinot Noir

2011

Rank Varietal

2012 Unit Growth Total: 4.7% 18.3% 12.7%

3.1%

(1.9%) Value ($4.99 and Below)

10.5%

12.8%

10.1%

4.6% 2.5%

Premium Glass ($5.00 - $7.99)

Super Premium ($8.00 - $10.99)

2011

Merlot

2012

% Unit Growth

8.8%

Pinot Gris

Ultra Premium Luxury ($11.00 - $14.99) ($15.00 and Above)

Chardonnay

2012

$

$

$ Sales

Unit

Share

Sales

% Chg

Share

Units

Unit %

Avg Price

Chg

per 750ml

1

Chardonnay

18.4%

$1,829

4.1%

18.4%

215

3.3%

$6.16

2

Cabernet Sauvignon

13.5%

1,343

6.9%

12.1%

141

4.3%

7.41

3

Merlot

7.5%

746

(3.0%)

8.1%

95

(3.8%)

5.50

4

Pinot Gris

7.2%

718

10.8%

7.6%

89

11.2%

6.28

5

Pinot Noir

5.3%

531

8.9%

4.5%

52

8.4%

9.12

6

Red Blends

4.4%

442

33.1%

3.9%

46

32.3%

9.11

7

Sauvignon Blanc

4.0%

394

12.8%

3.7%

43

9.6%

8.08

8

White Zinfandel

3.7%

367

(6.0%)

4.8%

57

(6.9%)

3.73

9

Muscat

3.4%

339

15.4%

4.2%

49

15.5%

5.68

10

Riesling

2.2%

222

(3.0%)

2.3%

27

(2.2%)

7.42

Total

100%

$9,961

6.0%

100%

1,169

4.7%

$6.14

2012

Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels. 5

Cabernet Sauvignon

Industry Growth is Primarily Driven by the Top 4 Suppliers Industry Growth by Supplier



Largest Growing Wine Brands in 2012

In 2012, nearly 70% of the Industry’s dollar growth was driven by the Top 4 suppliers

Other 34%

Trinchero Family Estates 8% The Wine Group 10%

Rank

E. & J. Gallo Winery 27%

Constellation Brands 21%

Growth $ (mm)

%

1

$65

14.6%

2

48

40.2%

3

37

118.0%

4

24

94.2%

5

24

8.8%

6

21

6.1%

7

18

26.2%

8

18

31.5%

9

18

6.3%

10

15

47.7%

Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels. 6

Brand

Ownership

Larger Producers Aspire to Emulate the “Kendall Jackson Model” Implications 

Jackson Family Wines is the only Top 8 supplier with an average price per bottle >$10



Other top brand suppliers are focusing on moving their “center of gravity” to >$10 per bottle

– – 

$1,897 $13.16

$1,511 $9.85

$9.44

Maintains or expands margin to combat higher COGS

$6.52

Supply is critical in both strategies as Top 8 suppliers target >1 million case brands

$999

$6.43

$3.06

$578 $482 $332

$342

Jackson Family Wines

Ste. Michelle Wine Estates

$189

Diageo Chateau & Estate Wines

◦ Translates into more California appellated wines

–

$5.94

$4.77

De-emphasizing $10 per Bottle Largest Suppliers

Growth Drivers

Portfolio Pricing

Growth Price +125%

$9.65

+83%

$12.38

+28%

$16.46

NM

$13.44

+19%

$14.64

+16%

$15.31

+40%

$9.14

+86%

$7.17

+265%

$7.52

+26%

$16.13

+9%

$9.10

+7%

$14.50

Portfolio Avg. Price Avg. Price 25 Fastest Per 750 ml Growing Brands(1) Difference

Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels. brands by unit growth for brands above 100,000 total units (15 fastest growing brands for The Wine Group and Trinchero). 8

$4.77

$10.59

+122%

$6.43

$9.34

+45%

$3.06

$5.03

+64%

$5.94

$9.87

+66%

(1)

Fastest growing brands are each company’s 25 fastest growing

Top Suppliers are Innovating & Line Extending into the Sweet Wine Phenomenon Commentary

New Product Lines

Blush Moscato

789%

Red Moscato

501%

Sparkling Moscato

49%

Red Blends

33%

White Blends

33%

White Moscato Industry Average

15%

Constellation

The Wine Group

Treasury Wine Estates

Diageo

Beam

Deutsch

6%



Sweet Red and White varietals and blends are growing significantly faster than the overall average for wine



Large wine companies are developing new brands targeted to female consumers (i.e., Strut and Butterfly Kiss)



Gallo with Barefoot and Trinchero with Sutter Home are examples of line extensions into sweet wine

Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels. 9

Like Innovation, Premiumization and Supply are Key Themes Driving M&A Accessing Vineyards / Supply



Suppliers are increasingly deploying capital to lock up supply



Lack of new vineyard plantings in the U.S. is causing suppliers to evaluate sourcing overseas

–

As Australia’s overplanting reaches a point of reset, vineyards may – again - become attractive to foreign buyers Supplier (Acquirer)

Vineyard (Target)

(U.S.)

Acquiring Higher Priced Brands



Large suppliers are able to quickly scale acquired brands by utilizing sales and distribution capabilities



Guaranteed fruit supply remains a key component in brand acquisitions

–

Suppliers are able to arbitrage fruit from an existing program for the benefit of the acquired brand

Acquirer

Target

(Portfolio Avg: $6.43)

($9.94)

(Portfolio Avg: $4.77)

($8.34)

(Portfolio Avg: $8.30)

($10.12)

Loxton Winery (Australia)

(Australia)

(U.S.)

(U.S.)

Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels. 10

Spirits



Suppliers who have relied on innovation to participate in Spirits may evaluate M&A given the rapid growth of their Spirits brands

–

Spirits speak to premiumization and deliver returns greater than what are typically found in Wine

Supplier

Brands

Australia is Poised to be the Center of Gravity between China and the U.S. If rumors of Chinese interest in Treasury Wine Estates lead to a transaction, Australia’s role as the definitive link between China and the U.S. will be solidified Chinese Investors Acquiring U.S. Wineries & Investing in CA Chinese Investors Acquiring Australian Wineries

U.S. Wineries Acquiring Australian Wineries

Loxton Winery

Australian Wineries Acquiring U.S. Wineries

11

Australia: Course Correcting a Decade of Mistakes Commentary



Overplanting (2 million ton footprint) in cooler regions producing sub-quality fruit led to supply imbalance

–

–

–

Wine Grape Area (Thousand Hectares)

Growers and producers grossly overestimated global annual growth rates at 15% - 20% vs. 3% - 5%

169

173

163

157

Western Australia 4%

Other 0%

Victoria 19% South Australia 48%

No financial incentive to invest in course correction

Exports suffered as wine quality “flipped” from high value, interesting product toward a commodity



Growing regions are so broadly defined they haven’t been consistently matched to the optimal varietal(s)



Marketers emphasized origin rather than brand (e.g., Yellow Tail)



SKU proliferation, in part driven by a decade’s explosion in the number of wineries from 200 to nearly 2,800, led to further downward pressure on wine prices

2006

2007

Growth: +3%

2008

2009

2010

(1%)

(6%)

(4%)

New South Wales 29%

Australian Exports $4.78

$4.70

760

$4.79 $4.54

471

No meaningful exposure to the Luxury sector

– –

174

2010 Wine Grape Tonnage By Region

Growers overplanted because 80% of South Australia’s vineyard owners do not rely on viticulture as their primary source of income ◦



Wine Production

524

786

702 643 $4.27

$3.98

$3.72 $3.82

375

1 out of 2 liters consumed in Australia is from cask wine

764

781 703

698

$3.53 $2.97

311

$2.65 $2.69

Grange and Henschke are the only brands marketed >$100 per bottle and each is