Silicon Valley Bank Annual State of the Wine Industry 2012-2013 Presentation

Join the conversation on Twitter by following@SVB_Financial and using #SVBWine Rob McMillan, EVP & Founder April 17, 2012

SpeakersRob McMillan Tony Correia Paul MabrayEVP & Founder Agricultural Property Valuation Expert Chief Strategy Officer, Digital GuruSilicon Valley Bank, Wine Division The Correia Company VinTank Tony Correia and Paul Mabray are independent third parties and are not affiliated with SVB Financial Group. Twitter: #SVBWine

Remember 2008? Twitter: #SVBWine

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

The Bad News - Unemployment US Unemployment Rate (Household Survey) 7.5 7.0 6.5Percent 6.0 5.5 5.0 4.5 4.0 3.5 3.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Twitter: #SVBWine

The Bad News - Consumer Confidence Consumer Confidence 160 140 120 100 80 60 40 20Source: Bloomberg Twitter: #SVBWine

The Bad News - Retail Sales Monthly Change in Retail Sales 3 2 1Percent Change 0 -1 -2 -3 -4 Twitter: #SVBWine Bloomberg Source:

The Bad News: Equities Crash Equities Collapse 16,000 1800 1600 14,000 1400 12,000 1200 10,000 1000 800 8,000 600 6,000 DJIA S&P 400 4,000 200 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Twitter: #SVBWine

How Bad is It Going to Get? Twitter: #SVBWine

How Long Will It Last?:Home Prices to Median Family Income House prices bottom Q4 2010 – Q1 2011 2008 2009 2010 2011 Twitter: #SVBWine

2008 Officially in the Rear View MirrorSteering Macro Economic Currentsfor 2012-13 Twitter: #SVBWine

Months of Supply in Existing Homes Twitter: #SVBWine

Housing Values Finding a Bottom Twitter: #SVBWine

Growth in Retail Sales Positive Since Q4 2009 Twitter: #SVBWine

Layoffs Dropping & Job Openings IncreasingSource: http://www.calculatedriskblog.com/ Twitter: #SVBWine

The Hidden Tax: National Average Retail Gas PricesRegular Grade, As Surveyed By The AAA Motor Club Twitter: #SVBWine

Borrowing Rates Edging Higher for Almost All EUInterest Rates on 10-year Government Bonds Twitter: #SVBWine

Eurozone: Exchange Rates – Euro Getting Weaker Twitter: #SVBWine

How Much Dry Powder is Left for the ECB? ECB Now $1 Trillion Larger Than the Fed. Twitter: #SVBWine

Inventory Twitter: #SVBWine

2010 Wineries Short on Inventory By Bottle Price 40.0% 35.0% 30.0% 25.0% 20.0% 2010 Short Inventory 15.0% 10.0% 5.0% 0.0%Source: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

2010-2011 Change in Wineries Short on Inventory 40.0% 35.0% 30.0% 25.0% 20.0% 2011 Short Inventory 2010 Short Inventory 15.0% 10.0% 5.0% 0.0%Source: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

2011 Inventory Positions Sorted by Region 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% Excess Inventory Not Enough Inventory 10.0% 5.0% 0.0%Source: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

Net Inventory Levels 40.0% 30.0% 20.0% 10.0% 0.0% Washington Santa Sierra Oregon Lodi County Napa Paso Sonoma Lake County Mid-Coastal State Barbara Foothills Robles/SLO CA -10.0% -20.0% -30.0% -40.0%Source: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

California Bulk Wine PositionsSource: Turrentine Brokerage Twitter: #SVBWine

Premium Planted Acreage on West Coast 30% 140,000 25% 120,000 25% 22% Non-Bearing Acres as a % of 100,000 20% Total Planted Acres Total Planted Acres 80,000 15% 60,000 14% 10% 12% 40,000 5% 5% 5% 6.3% 20,000 4.7% 4.6% 0% 0 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 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 AcresSource: Ag Stats Service, Ian Malone & Twitter: #SVBWine

LT Grape Prices Continue Upward March Napa Cabernet Central Coast Napa Merlot Sonoma Pinot Noir Sauvignon (SB & SLO) Pinot Noir 90th-10th Percentile Spread Weighted Average +5.1% +2.1% +2.7% +6.8% ’10-’11 ∆ in Wtd. Avg.Source: Ag Stats Service, Ian Malone & Twitter: #SVBWine

LT Grape Prices Continue Upward March Napa Cabernet Central Coast Sonoma Chardonnay Oregon Pinot Noir Franc (SB & SLO) Chardonnay 90th-10th Percentile Spread Weighted Average $2,470 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 -0.9% -0.2% -3.4% ? ’10-’11 ∆ in Wtd. Avg.Source: Ag Stats Service, Ian Malone & Twitter: #SVBWine

Varietal Views of InventorySources: Ciatti Brokerage, Turrentine Wine Brokerage, Silicon Valley Bank Proprietary Research Twitter: #SVBWine

Price Changes in N. Coast Bulk Cabernet $33.00 $31.00 $29.00 $27.00 41% Increase $25.00 $23.00 $21.00 $19.00 Napa Cabernet $17.00 Sonoma Cabernet $15.00 4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 10/1/2011Source: Turrentine Brokerage Twitter: #SVBWine

Grape Pricing and PurchaseExpectations, and the Impacton Land Values Twitter: #SVBWine

2012 Volume Purchase Expectations By Case Size 80.0% 70.0% 60.0% 50.0% 40.0% More Tonnage Less Tonnage 30.0% 20.0% 10.0% 0.0% 1 -2,500 2,501 - 5,000 5,001 - 10,001 - 25,001 - 50,001 - 100,001 - >250,000 10,000 25,000 50,000 100,000 250,000Source: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

2012 Grape Pricing Expectation Price Point 80.0% 70.0% 60.0% 50.0% Pay More 40.0% Pay Equal Pay Less 30.0% 20.0% 10.0% 0.0% < $15 $15 - $20 $21 - $30 $31 - $40 $41 - $70 > $70Source: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

Sonoma County District 3 Values vs. Grape Prices $150 $3,500 Pinot Noir Vineyard Values, Thousands $3,000 $120 Average Grape Price $2,500 $90 Cabernet $2,000 $60 Chardonnay $1,500 $30 $1,000 $0 $500 1994 96 98 2000 02 04 06 08 10Sources: CASS Grape Crush Reports, Annual Land Value Trend Surveys, ASFMRA Twitter: #SVBWine

Napa County District 4 Values vs. Grape Prices $350 $5,000 Vineyard Values, Thousands $300 Cabernet Average Grape Price $4,000 $250 $200 Merlot $3,000 $150 $100 $2,000 $50 Chardonnay $0 $1,000 1994 96 98 2000 02 04 06 08 10Sources: CASS Grape Crush Reports, Annual Land Value Trend Surveys, ASFMRA Twitter: #SVBWine

Monterey County District 7 Values vs. Grape Prices $2,000 $37,000 Chard. $ Cab. Sauv. $ $1,750 $32,000 Pinot Noir $ Average Grape Prices $1,500 Vineyard Values $27,000 $22,000 $1,250 $17,000 $1,000 $12,000 $750 $7,000 $2,000 $500 1994 96 98 2000 02 04 06 08 10Sources: CASS Grape Crush Reports, Annual Land Value Trend Surveys, ASFMRA Twitter: #SVBWine

San Luis Obispo & Santa Barbara Counties District 8 Values vs. Grape Prices Chard. $ $3,000 $52,000 Pinot Noir $ Average Grap Price $2,500 Vineyard Values $42,000 Cab. Sauv. $ $32,000 $2,000 $22,000 $1,500 $12,000 $1,000 $2,000 $500 1994 96 98 2000 02 04 06 08 10Sources: CASS Grape Crush Reports, Annual Land Value Trend Surveys, ASFMRA Twitter: #SVBWine

Sales Growth & FinancialCondition of Wineries Twitter: #SVBWine

Winery Sales Growth Expectations in 2012 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%Source: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

Reported Financial Condition of Wineries in 2011 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 7% Very Weak or Worse 0.0%Source: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

Reported Financial Condition By Case Size 100.0% 90.0% 80.0% 70.0% Rock Solid 60.0% Very Strong Strong 50.0% Good Slightly Weak 40.0% Very Weak On Life Support 30.0% Dead 20.0% 10.0% 0.0% 1 -2,500 2,501 - 5,000 5,001 - 10,001 - 25,001 - 50,001 - 100,001 - >250,000 10,000 25,000 50,000 100,000 250,000Source: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

Winery Financial Condition Gross Margins Squeezed Sales UpSource: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

Demographic Shifts Twitter: #SVBWine

Wine Consumption 1980-2010 Median Age of Boomers: 35 in 1991Source: Wine Institute Twitter: #SVBWine

Window of Affluence: 35-54 Affluent Consumers 86,000 85,000 84,000 83,000 (Millions of Consumers) 82,000 81,000 80,000 79,000 78,000 77,000 76,000 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 79,550Source: Unity Marketing Twitter: #SVBWine

Reported Wine Sales by Cohorts 45.0% 40.0% 35.0% 30.0% 25.0% 41.5% 20.0% 15.0% 29.8% 10.0% 14.3% 14.4% 5.0% 0.0% Millennial (21-34 year olds) Gen X (35-46 year olds) Boomers (47-64 year olds) Matures (65+)Source: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

Wealth of Cohorts as of 2009 $300,000 $250,000 $263,716 $200,000 $150,000 $170,494 $100,000 $50,000 $39,601 $3,662 $- Millennials Gen-X Boomers MaturesSource: U.S. Census Bureau Twitter: #SVBWine

Current Cohort Sales Sorted by Avg. Bottle Price 50.0% 45.0% 40.0% 35.0% 30.0% Millennial (21-34 year olds) 25.0% Gen X (35-46 year olds) Boomers (47-64 year olds) 20.0% Matures (65+) 15.0% 10.0% 5.0% 0.0% < $15 $15 - $20 $21 - $30 $31 - $40 $41 - $70 > $70Source: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

The Digital World & The 5thColumn Twitter: #SVBWine

General Perception of Social Media By Case Size 90.0% 80.0% 70.0% 60.0% 50.0% Negative 40.0% Positive/Active 30.0% 20.0% 10.0% 0.0% 1 -2,500 2,501 - 5,000 5,001 - 10,001 - 25,001 - 50,001 - 100,001 - >250,000 10,000 25,000 50,000 100,000 250,000Source: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

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) Twitter: #SVBWine

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 Twitter: #SVBWine

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) Twitter: #SVBWine

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 Twitter: #SVBWine

Bottle Pricing Twitter: #SVBWine

Reported Bottle Pricing ExpectationsSource: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

2012 Bottle Price Expectations by Avg. Price Point 70.0% 60.0% 50.0% 40.0% Reduce Prices Hold Prices 30.0% Increase Prices 20.0% 10.0% 0.0% < $15 $15 - $20 $21 - $30 $31 - $40 $41 - $70 > $70Source: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

Net Bottle Price Change By Average Price Point 50.0% 40.0% 30.0% < $15 $15 - $20 $21 - $30 20.0% $31 - $40 $41 - $70 > $70 10.0% 0.0% -10.0%Source: Silicon Valley Bank Proprietary Research Twitter: #SVBWine

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• ore transitions, sales and mergers taking place than at any time in M memory• ontinuation of new mergers among wholesalers C• Increasing plantings to feed the looming grape shortage• Modest retail bottle price increases Twitter: #SVBWine

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.• he wealth divide is really more of a demographic divide. T• 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 Twitter: #SVBWine

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. Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources. Opinions expressed are our opinions as of the date of this content only. The material is based upon information which we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. ©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. Twitter: #SVBWine

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Silicon Valley Bank Annual State of the Wine Industry 2012-2013 Presentation

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Silicon Valley Bank Annual State of the Wine Industry 2012-2013 Presentation Presentation Transcript