state of the wine industry 2013 - demeter group
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1.0%1.3%
0.5%
(1.8%) (1.8%)
(0.9%)
(3.1%)
3.6% 3.6%
1.1% 1.4%1.7%
2.7%
6.1%
4.0% 3.8%
0.4% 0.7%1.3%
2.5%
5.7%
2006 2007 2008 2009 2010 2011 2015P
Beer Spirits Wine
66.2 66.9 67.8 68.2 66.9 65.7 65.1 63.1
34.9 36.2 37.5 38.0 38.5 39.1 40.2 42.6
17.0 17.6 18.3 18.4 18.5 18.7 19.2 20.3
118.2 120.8 123.7 124.5 123.9 123.6 124.6 126.0
2005 2006 2007 2008 2009 2010 2011 2015P
Beer Spirits Wine
Wine Has Grown at a 3.4% CAGR Since 2005, Outpacing Total Beverage Alcohol
2
Supplier $ Share (Billions) Beverage Alcohol Market Share
Servings (Billions)(1) Growth in Servings
2011 – 2015P
CAGR: 0.3%
Source: Beer Marketer’s Insights, DISCUS, IMPACT Spirits Databank. (1) Serving size: Beer – 12 oz; Spirits – 1.5 oz; Wine – 5 oz.
2000 2011
2005 – 2011 Absolute Growth: Beer:
Spirits:
Wine:
(1.7%)
15.0%
13.1%
$25.6 $26.3 $27.5 $28.5 $28.8 $28.6 $29.2
$16.0 $17.2 $18.2 $18.7 $18.7 $19.2 $19.9
$8.3 $8.6 $9.2 $9.4 $9.5 $9.8 $10.2 $49.9
$52.2 $54.9 $56.6 $57.0 $57.6 $59.2
2005 2006 2007 2008 2009 2010 2011
Beer Spirits Wine
Beer49%
Spirits34%
Wine17%
Beer55%
Spirits29%
Wine16%
Wine:
Spirits:
Beer:
3.4%
3.7%
2.2%
2005 – 2011 CAGRs
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7.6 7.6
7.7 7.7 7.8 7.8 7.8 7.8
7.9 7.9 7.9 7.8
201120102009200820072006200520042003200220012000
Rising Demand and Declining Supply are Creating a Global Wine Shortage
3
Source: International Organisation of Vine and Wine and IWSR.
Note: Vinexpo reports the U.S. leading global wine consumption.
Global Vineyard Acreage
(Millions of Hectares)
58
52
42
22
13 11
8 7
50
42
33
19 15
13 11 10
FranceItaly SpainUnited States
ArgentinaChinaAustraliaChile
Largest Wine Producing Countries
(Millions of Hectoliters)
(13%)
(20%)
(19%)
(14%)
+57% +38% +24%
+23%
2000 2011
2000 2011
Largest Wine Consuming Countries
30 29
23
20
17
13 12
10
35
21
31
20
11 10
5
14
FranceUnited States
ItalyGermanyChinaU.K. RussiaSpain
(Millions of Hectoliters) (13%)
(25%)
(1%)
(28%) +148% +32%
+59%
+34%
Per Capita
Consumption
(Liters per Year)
53 13 53 37 3 25 7 24
248
265265271269266
282273
296
264257
266280
236244242240248251
244238239238
230228226
249
2012E201120102009200820072006200520042003200220012000
Production Consumption
Global Production vs. Consumption
(Millions of Hectoliters)
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Structurally, Supply is Imbalanced in the U.S.
4
U.S. Vineyard Acreage vs. Rest of World Commentary
Source: International Organisation of Vine and Wine and IWSR.
U.S. Production vs. Consumption
Chile: +16%
Australia: +24%
Germany: +71%
South Africa: +5%
China: +87%
France: (11%)
Italy: (15%)
Spain: (16%)
U.S.: (2%)
(2000 – 2011)
2219 20 20 20
23
19 20 1922 21
19
21 2123
24 25 26 27 28 28 27 28 29
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Production Consumption
(Millions of Hectares)
Growth in Consumption: 34%
A decrease in vineyard acreage and a steady increase in
demand has led to a structural supply imbalance in the U.S.
– Creates opportunities for imports, which have cost
advantaged models relative to U.S. in terms of land,
labor, and water
Following a period of “oversupply”, many growers replanted
to more profitable fruits, specifically pistachios and almonds
– 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
Fewer California Vineyard New Plantings
481
490
481
472467
471475
472 471 473476
480
29.5
20.6
13.2 9.9
11.5 12.6 14.3 13.0
11.0 7.1 6.8
4.4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Acreage New Plantings
(Bearing and Non-Bearing Planted Acres)
2000 – 2011 CAGR: (0.0%)
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$487
$648 $770
$1,256
$1,758
$531
$718 $746
$1,343
$1,829
Pinot Noir Pinot Gris Merlot Cabernet Sauvignon Chardonnay
2011 2012
3.1%4.6%
8.8%10.1%
18.3%
(1.9%)
2.5%
10.5%
12.7% 12.8%
Value($4.99 and Below)
Premium Glass ($5.00 - $7.99)
Super Premium ($8.00 - $10.99)
Ultra Premium ($11.00 - $14.99)
Luxury ($15.00 and Above)
2011 2012
1.4%2.7%
8.3% 8.1%
16.5%
0.3%1.6%
10.1%10.9% 11.6%
Value($4.99 and Below)
Premium Glass ($5.00 - $7.99)
Super Premium ($8.00 - $10.99)
Ultra Premium ($11.00 - $14.99)
Luxury ($15.00 and Above)
2011 2012
Luxury is a Major Growth Segment in the U.S. Wine Industry
5
2012 U.S. Growth By Price Segment 2012 U.S. Top Varietals / Flavors
% Sales Growth Lower
Priced
Higher
Priced
2012 Sales Growth Total: 6.0%
% Unit Growth
Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels.
2012 Unit Growth Total: 4.7%
Market Size ($ in mm)
Rank Varietal$
Share
$
Sales
$ Sales
% Chg
Unit
ShareUnits
Unit %
Chg
Avg Price
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
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Industry Growth is Primarily Driven by the Top 4 Suppliers
6
Industry Growth by Supplier Largest Growing Wine Brands in 2012
Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels.
E. & J. Gallo
Winery 27%
Constellation
Brands
21%The Wine
Group
10%
Trinchero
Family
Estates
8%
Other
34%
In 2012, nearly 70% of the Industry’s dollar growth was
driven by the Top 4 suppliers Growth
Rank Brand $ (mm) % Ownership
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%
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$1,897
$1,511
$999
$578
$482
$342 $332
$189
$4.77
$6.43
$3.06
$5.94 $6.52
$9.44
$13.16
$9.85
E. & J. Gallo Winery
Constellation Brands
The Wine Group
Trinchero Family Estates
Treasury Wine
Estates
Ste. Michelle Wine
Estates
Jackson Family Wines
Diageo Chateau & Estate Wines
IRI Sales (Millions) Average Price per 750 ML
Larger Producers Aspire to Emulate the “Kendall Jackson Model”
Implications Top 8 U.S. Brand Suppliers
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
– Maintains or expands margin to
combat higher COGS
– De-emphasizing <$10 / bottle
segment where imports have
significant cost advantages
“Premiumization” relies on a 2-
pronged approach of brand innovation
and M&A
– Supply is critical in both strategies
as Top 8 suppliers target >1 million
case brands
◦ Translates into more
California appellated wines
– Suppliers will arbitrage existing
fruit from lower margin products
into higher margin products
◦ Proactively phases out
unproductive SKUs while
retaining shelf space
Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels.
7
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Top Suppliers are Successfully Innovating at >$10 per Bottle
8
Largest Suppliers
Growth
$7.17
$9.14
$7.52
+40%
+86%
+265%
$13.44
$14.64
$15.31
NM
+19%
+16%
$16.13
$14.50
$9.10
+26%
+7%
+9%
Growth Drivers
Price
$12.38
$16.46
$9.65
+83%
+28%
+125%
Portfolio Pricing
Portfolio Avg. Price
Per 750 ml
Avg. Price 25 Fastest
Growing Brands(1)
$4.77
$6.43
$3.06
$5.94
$10.59
$9.34
$5.03
$9.87
+122%
+45%
+64%
+66%
Difference
Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels. (1) Fastest growing brands are each company’s 25 fastest growing
brands by unit growth for brands above 100,000 total units (15 fastest growing brands for The Wine Group and Trinchero).
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6%
15%
33%
33%
49%
501%
789%
Industry Average
White Moscato
White Blends
Red Blends
Sparkling Moscato
Red Moscato
Blush Moscato
Top Suppliers are Innovating & Line Extending into the Sweet Wine Phenomenon
9
Commentary New Product Lines
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
Treasury Wine Estates
Beam Diageo Deutsch
Constellation The Wine Group
Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels.
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Like Innovation, Premiumization and Supply are Key Themes Driving M&A
10
Spirits Acquiring Higher Priced Brands Accessing Vineyards / Supply
Supplier Brands Supplier
(Acquirer)
Vineyard
(Target) Acquirer Target
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
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
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
(Australia)
(U.S.)
(Portfolio Avg: $6.43)
(Australia)
(U.S.)
(Portfolio Avg: $8.30)
(Portfolio Avg: $4.77)
($9.94)
($10.12)
($8.34)
(U.S.)
Loxton
Winery
Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels.
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Australia is Poised to be the Center of Gravity between China and the U.S.
11
Australian Wineries
Acquiring U.S. Wineries
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
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Australia: Course Correcting a Decade of Mistakes
12
Commentary Wine Production
Source: Commonwealth Bank and the Australian and New Zealand Wine Industry Directory.
311
375
471524
643702
760786
698
764 781
703$4.78
$4.70 $4.79
$4.54
$4.27 $3.98
$3.72 $3.82 $3.53
$2.97 $2.65 $2.69
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Volume (Million Liters) A$ per Liter
Overplanting (2 million ton footprint) in cooler regions
producing sub-quality fruit led to supply imbalance
– Growers and producers grossly overestimated global
annual growth rates at 15% - 20% vs. 3% - 5%
– Growers overplanted because 80% of South Australia’s
vineyard owners do not rely on viticulture as their
primary source of income
◦ 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
No meaningful exposure to the Luxury sector
– 1 out of 2 liters consumed in Australia is from cask wine
– Grange and Henschke are the only brands marketed
>$100 per bottle and each is <50,000 cases
Australian Exports
169 174 173
163 157
2006 2007 2008 2009 2010
Wine Grape Area
(Thousand Hectares)
2010 Wine Grape
Tonnage By Region
South Australia
48%
New South Wales
29%
Victoria19%
Western Australia
4%
Other0%
+3% (1%) (6%) (4%) Growth:
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Shiraz28%
Chardonnay18%
Cabernet Sauvignon
17%
Merlot6%
Sauvignon Blanc
5%
Semillon4%
Pinot Noir3%
Riesling3%
Other16%
Australia: Set for a Rebound, Barring a 2 Million Ton Crop
13
State of Australian Wine Industry
Inventories improving from peak of 3x annual production to
1.5x
– From 2009 – 2010, more than 8,000 vine acres or ~5% of
the total industry were removed from production to
help foster a gradual reset
– Pricing improving as stock levels improve
Last 2 harvests ranged between 1.6 and 1.7 million tons
Collaborative rationalization efforts by producers to improve
capacity utilization rates (e.g. Treasury Wine Estates /
Accolade Wines July 2012 announcement consolidating
bottling operations)
A new generation of winemakers are improving Australia’s
global reputation and, significantly, willing to build wines
for the American palette
– Opportunity to focus on U.S. market with Luxury wines
that extol the diversity and uniqueness of Australia’s
growing regions
Access to new capital, specifically from China where
interest is supply-based
Top Australian Brands in the U.S.
(IRI Price Per 750ml)
2010 Harvest by Varietal (Tons)
Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels.
Yellow Tail54%
Lindemans10%
Jacobs Creek
6%
Foxhorn5%
Other25%
($5.84)
($3.67)
($5.24)
($6.44)
Premium Glass
($5.00 -
$7.99)75%
Super Premium ($8.00 -
$10.99)7%
Value Glass ($3.49 And
Below)
5%
Other13%
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14
Demeter Group Recent Transactions (December 2010 – 2012)
Acquired by
Acquired by
Acquired by
Acquired by
Acquired by
Acquired by
Acquired by
Acquired by
Has Acquired
Acquired by
Joint Venture With
Acquired by
Acquired by
Private Placement
Transactions Marketed
to Fewer Than 5
Potential Buyers
$850 million
Completed Transaction Value
15
Completed
Transactions
71% 36%
Transactions
Marketed to
1 Buyer
67%
Completed Transactions
in Beverage Alcohol
Acquired by
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15
Demeter Group Recent Beverage Alcohol Transactions
July 2012
Acquired By:
Constellation Brands
May 2011
Acquired By:
Crimson Wine Group
March 2011
Acquired By:
Beam Global Spirits & Wine
December 2010
Acquired By:
Fiji Water
September 2012
Acquired By:
E. & J. Gallo Winery
August 2012
Acquired By:
E. & J. Gallo Winery
June 2012
Acquired By:
Accolade Wines
June 2012
Acquired By:
E. & J. Gallo Winery
May 2012
Acquired By:
Precept Wines
August 2011
Acquired By:
Fiji Water
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16
Jeff Menashe
Chief Executive Officer
220 Halleck Street, Suite 110
San Francisco, CA 94129
(415) 632-4400
www.demetergroup.net