Napa County: Wine Business Update

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1 Napa County: Wine Business Update JUNE 21 ST 2017 ROB MCMILLAN, EVP & FOUNDER SILICON VALLEY BANK WINE DIVISION

2 Rob McMillan - Curriculum Vitae Subject matter expert cited in CNBC, LA Times, PBS, Barron s, Forbes, NBC Universal, NY Times, Bloomberg, Wine Spectator, Decanter, and many others In demand International speaker on the U.S. wine business. Only banker ever named as one of the 50 most influential people in the Wine Business. Founder, Silicon Valley Bank s Wine Division Published author of numerous reports on industry trends used in Business, Universities in the US and throughout the World. Has worked in the wine business since Resident of Napa County for more than 20 years.

3 Owners Are Optimistic About Demand and Economic Conditions Labor, Substitutes, Imports - Supply? 70 Winery Sentiment Index Source: 2016 Annual Wine Conditions Survey 3

4 US Wine Sales 4

5 Growth in Total Table Wine Volume - USA Total Table Wine Consumption Millions of Gallons Neo-Prohibition Recession Recession Source: Wine Institute, DOC, BW166/Gomberg, Fredrikson & Associates.

Factors Driving Shifting Sales Channels -

room? 900 9-11 & Tech Recession Granholm

Distributors: Too Much Inventory 800 700

Internet Shopping Million Gallons 600 500

6 Factors Driving Shifting Sales Channels - Can t wineries sell wine without a tasting room? & Tech Recession Granholm Decision End of 2 Martini Lunch Distributors: Too Much Inventory Search for New Sales Grape Shortage Internet Shopping Million Gallons Grape Excess Source: CA Wine Institute & SVB Research

7 Why Have Wine Sales Gone Direct to Consumer? Distributors Have Consolidated and Don t Serve Small Wineries ,600 Wineries 9,000 Wineries 1.15 Distributors Per Winery 0.08 Distributors Per Winery 3,000 Distributors 700 Distributors

8 Revenue Dependence from DtC Sales DtC Sales Now Critical to Survival 65% 63% 61% 59% 57% 55% 53% 51% 49% 47% 45% Source: SVB Annual Wine Conditions Survey

9 Wine Sales in Restaurants Are Dropping Consumer Behavior, Wholesaler Consolidation and Markups All Playing a Role 37% 32% 27% Napa Overall 22% 17% 12% SVB Annual Wine Conditions Survey 9

DtC Accounts for 59% of the Average Winery

10 DtC Accounts for 59% of the Average Winery s Sales In Napa In the Early 90 s, Twenty Percent of Sales were Direct Phone 5% Offsite Events 3% Onsite Events 2% How Are Direct Sales Segmented? Internet/Web 13% Wine Club 46% Visitor Center/Tasting Room 31% Source: Silicon Valley Bank and Wine Business Monthly 2017 Direct-to-Consumer Survey

11 Good News: Premiumization Has Become the Dominant Trend $10 and Above is where you find Growth Growth Rate Share of Total Wine Change in Growth Rate TOTAL TABLE WINE TTL GLOBAL TBL BE (2.6) 5.7 (0.3) TTL GLOBAL TBL BE (0.7) TTL GLOBAL TBL BE (3.8) 11.1 (0.8) TTL GLOBAL TBL BE TTL GLOBAL TBL BE TTL GLOBAL TBL BE TTL GLOBAL TBL BE > Nielsen Scan Data 52 weeks Ending May 20 th,

12 Bad News: Premium Value Priced Imports Are A Concern Europe and New Zealand Leading the Way Share of Total Wine Change in Growth Rate Growth Rate TTL DOMESTIC WINE TTL IMPORTED WINE (0.2) TTL FRENCH TBL TTL NEW ZEALAND TBL TTL ITALIAN TBL TTL SPANISH TBL (0.0) TTL CHILEAN TBL (5.9) 1.9 (0.2) TTL ARGENTINE TBL (4.2) 2.9 (0.2) TTL AUSTRALIAN TBL (2.7) 5.1 (0.3) Nielsen Scan Data 52 weeks Ending May 20 th,

13 Cabernet is Driving Varietal Growth Today Red Blends Still Expanding Glass Source: IRI, SVB Analysis 13

14 Heat Map Of Varietal / Price in Premium Segments What Are We Training Young Consumers To Drink? $18+ Box $8-$10.99 Glass $11-$14.99 Glass $15-$19.99 Glass $20-$24.99 Glass $25+ Chardonnay $22,401,610 $508,039 $24,608,787 $8,992,753 $8,505,185 $8,764,175 Cab Sauvignon $19,944,224 $25,541,909 $54,667,132 $11,623,711 $11,685,505 $4,396,192 Red Blends $5,486,321 $59,252,334 $24,078,209 $8,847,479 $2,464,761 $4,137,486 Pinot Grigio $17,060,165 $9,036,963 $11,134,526 $4,521,303 ($947,342) $16,615 Pinot Noir $7,855,515 $10,003,069 $22,846,341 $6,886,543 $27,505,776 $3,009,378 Sauv Blanc $3,655,843 $22,634,471 $29,211,556 $3,218,170 $3,253,529 $1,473,433 Merlot $5,156,120 ($2,781,442) $2,245,834 ($1,868,772) $240,761 $159,502 Moscato $1,190,354 $4,240,840 $833,723 $25,790 ($22,081) ($3,899) Riesling ($16,010) ($214,895) $1,158,426 $105,715 ($90,506) $40,583 Syrah? Zinfandel? Source: IRI, SVB Analysis 14

15 Generational Changes and Consumer Demand Can t Win By Doing it The Same Way 15

16 Projection of U.S. Net Household Wealth to 2030 Kids Will Never Move Out! Source: Deloitte Center for Financial Services, Nov. 9 th,

17 Changes to Consumer Demand in Pictures You can t find this wine. It s a Parker 97. $95 a bottle I m going to rush home and tell mom I think I found the one! 2000

18 Isn t this a killer wine value?? COSTCO, $15 a bottle Oh What a thrifty guy! He s the one! 2008

19 Isn t this an awesome Napa Cab? $500 a bottle He can afford that? He s definitely THE ONE!

20 Oh no she can tell I borrowed this bottle from my dad.should I tell him I still live with my mother

21 Boomers Retiring Millennials Arriving Source: Calculated Risk Blog

22 Boomers Retiring Millennials Arriving 22 Source: Calculated Risk Blog

23 Boomers Still Dominate Sales of Fine Wine Gen X is the Real Growth Story 50% 45% 40% 35% 30% 25% % 43% 44% 41% 41% 32% 33% 29% 28% 29% 20% 15% 10% 5% 16% 17% 13% 14% 14% 14% 15% 13% 11% 10% 0% Millennials (22-38) Gen X (39-50) Boomers (51-68) Matures (69+) Source: Annual Wine Conditions Survey

24 What is Driving Premiumization? Growth in Upper Middle Class ($100K - $250k) 24

25 Cohort Demand Boomers Rotating Off. Millennials Rotating in Gen X Soon to Pass Boomers in the $20-$29 Segment Source: 2016 Annual Wine Conditions Survey November

Jaymes White Zinfandel Chardonnay Merlot Cabernet Millennials

26 Palate Development of Boomers vs Millennials Familiar Consumption Patterns Boomers Beer & Everything Bartles & Jaymes White Zinfandel Chardonnay Merlot Cabernet Millennials Good Beer & Everything Prosecco Moscato Sauvignon Blanc Red Blends Pinot? 26

27 Napa Specific Benchmarks and Stats

28 Direct Sales from Wine Club and Tasting Room % DtC Sales Wine Club/Allocation Subscribers % Visitor Center/Tasting Room Paso Robles Napa County Sonoma County Santa Barbara Santa Cruz and Monterey Mendocino County Texas Livermore, Lodi, & Delta, CA Oregon Average Rest of California Washington Sierra Foothills British Columbia Virginia International Rest of US Illinois New York 52% 46% 45% 41% 41% 40% 39% 37% 36% 35% 32% 29% 26% 21% 20% 10% 10% 9% 10% 30% 30% 29% 40% 34% 36% 46% 52% 47% 44% 40% 51% 52% 59% 69% 57% 73% 68% 58% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Silicon Valley Bank Proprietary Research Silicon Valley Bank 2017 Direct-to-Consumer Survey

29 Napa Visitation Skewed to Large Established Wineries 4% of Respondents Responsible for 40% of Visitors 16,000 14,000 12,000 10,000 8,000 6, ,000 2, Average 2015 Average 2016 Average Silicon Valley Bank 2017 Direct-to-Consumer Survey

30 Club Members Who Live Nearby vs Total Revenue from DtC Sales Napa Depends on Out-of-Towners for 80% of Club Sales 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % Wine Club Members Who Live Nearby Percent of Revenue DtC Source: Silicon Valley Bank Proprietary Research Silicon Valley Bank 2017 Direct-to-Consumer Survey

31 More DtC Sales Happen Outside of CA Napa Wine Sales are Tourist Dependent 31

32 Total Annual Wine Revenue per Club Member *Total Annual Revenue = Annual wine club shipments + annual additional member purchases Napa County Sonoma County International Average Texas British Columbia Livermore, Lodi, & Delta, CA Washington Oregon Rest of US Paso Robles Santa Barbara Santa Cruz and Monterey Rest of California Virginia New York Mendocino County Illinois Sierra Foothills $800 $772 $750 $678 $671 $638 $632 $605 $593 $586 $576 $560 $539 $517 $440 $425 $367 $291 $1,075 $0 $200 $400 $600 $800 $1,000 $1,200 Source: Silicon Valley Bank Proprietary Research Silicon Valley Bank 2017 Direct-to-Consumer Survey

33 Average Monthly Visitors per Winery Virginia New York Texas Napa County Livermore, Lodi, & Delta, CA Paso Robles Rest of US Rest of California Illinois British Columbia Average Sonoma County International Santa Cruz and Monterey Sierra Foothills Santa Barbara Oregon Washington Mendocino County Open to the Public and By Appointment 384 1,609 1,497 1,351 1,342 1,290 1,169 1,168 1,159 1,116 1, ,075 2, ,000 1,500 2,000 2, Source: Silicon Valley Bank Proprietary Research Silicon Valley Bank 2017 Direct-to-Consumer Survey

34 Difficulty in Finding Tasting Room Staff Napa s Starting Wages Are Highest in the Industry Texas Napa County Paso Robles Santa Sonoma Sierra Rest of Mendocino Average Oregon New York Rest of US British Washington Livermore, Virginia Illinois Santa Cruz International 7% 45% 42% 40% 36% 36% 32% 29% 28% 28% 25% 22% 22% 20% 19% 17% 17% 16% 57% 34 Source: Silicon Valley Bank Proprietary Research Silicon Valley Bank 2017 Direct-to-Consumer Survey

35 Vineyard Real Estate Update

36 Consolidation: Not Just with Distributors 36

37 California Regions Aren t Growing With US Demand Foreign Wine Taking Increasing Consumer Market Share 500, , % % , % North Coast 5.9% 350, , % Central Coast 17.3% Planted Acres 250, , , ,000 50, % 55.8% 17.5% Lodi Others San Joaquin Valley 18.0% 27.5% (24.8%) California Grape Acreage Report

38 More Grapes Going Into Estate Programs Less Grapes for Others Forcing Supply Decisions 70,000 60,000 Napa Cabernet, Tons Crushed 50,000 40,000 30,000 20,000 10, % 35.6% Estate Tons Grower Accounts Tons Sold Tony Correia, 2017 Vineyard Economic Forum

39 Napa Cabernet and Sonoma County Pinot Noir Pricing Up $7,000 $6,000 Average Grape Prices $5,000 $4,000 $3,000 $2,000 $1,000 D4 CS D3 PN $ Tony Correia, Calif Assn of Ag Statistics, 2017 Vineyard Economic Forum

40 Cabernet Pricing Driving Land Values Up to Unpresented Levels VINEYARD VALUES; PER-ACRE $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 NAPA COUNTY ~~ VINEYARD VALUE RANGES By Location Category vs Average Napa Grape Prices Sources; Annual CALASFMRA "Trends" report, Annual Calif. Grape Crush Reports, Wine Industry Investment Consulting $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $50,000 $0 $1,000 Total Range Outlying Secondary Prime Cab Whites $ Tony Correia, Calif Assn of Ag Statistics, ASFRMRA, 2017 Vineyard Economic Forum

41 Concluding Business Comments Napa wines attract consumers from around the Nation & world Napa has one of the worlds strongest wine luxury brands 59% of an average Napa winery sales are made Direct to Consumer The only relevant source of new club members is from the tasting room Visitation in Napa is skewed to the largest wineries 80% of Napa Club sales are from tourists, but only 21% of traffic is from tourists Napa is essentially planted out That limits growth Threats Harvest and Tasting Room labor shortages Roll-up of family wineries into larger production wineries Transition from Boomers to Millennials as dominant consumers wont be smooth. European Imports are Gaining Mind Share with New Consumers Rapid growth in price of Napa Vineyard Land High Cost of Premium Grapes Inability to Pass Higher Labor & Grape Costs to Consumers

42 About SVB About Silicon Valley Bank s Wine Division: Silicon Valley Bank s Wine Division specializes in commercial banking for premium wineries and vineyards. SVB has the largest team of commercial bankers dedicated to the wine industry of any bank nationwide. Founded in 1994, SVB s Wine Division has offices in Napa and Sonoma counties and serves clients focused in the fine wine producing regions of California, Oregon and Washington. By virtue of its dedication to the wine industry, Silicon Valley Bank is able to support its clients consistently through economic and growth cycles, and offer guidance on many aspects of their business, beyond traditional banking services. Silicon Valley Bank is a member of global financial services firm SVB Financial Group (Nasdaq: SIVB), with SVB Analytics, SVB Capital and SVB Private Bank. More information on the company can be found at Contact Us: For more information about Silicon Valley Bank s Wine Division Rob McMillan EVP & Founder Phone rmcmillan@svb.com 42

U.S Consumer Demand For Wine Can New Zealand Grow in the US?

U.S Consumer Demand For Wine Can New Zealand Grow in the US? FRIDAY AUGUST 26 TH 2016 MASTER ROB MCMILLAN, EVP & FOUNDER SILICON VALLEY BANK WINE DIVISION Comparative Country Performance Into the US Market