Introduction. World Wine Industry Statistics 2015**

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2 Introduction World wine production is dominated by traditional Old World wine-growing regions of Europe. Italy, France and Spain combined account for nearly half of global wine production. However, the world s vineyard acreage started contracting in 2004, led by reductions in Europe. Decreases in acreage have stabilized recently, but remain lower than early 2000 s levels. Growth in global wine production and consumption is fueled by New World countries. The United States, Argentina, Chile, Australia, South Africa and China lead New World production, which is estimated to have grown 4.2 percent from 2011 to Still, these countries contribute only 30 percent of world production. World Wine Industry Statistics 2015** Country Vineyard Acres Production (Million Liters) Consumption (Million Liters) Per Capita Consumption (Liters) Italy 1,685,259 4,950,000 2,050, France 1,942,248 4,750,000 2,720, Spain 2,522,946 3,720,000 1,000, U.S. 1,035,372 2,210,000 3,100, Argentina 555,987 1,340,000 1,030, Chile 521,392 1,290, , Australia 368,187 1,190, , South Africa 321,237 1,120, , China 2,050,945 1,100,000 1,600, Other 7,613,347 5,770,000 11,250,000 - World 18,616,919 27,440,000 24,000, Source: International Organization of Vine and Wine (OIV), State of the Vitiviniculture World Market, April 2016, Census data. **The available statistics are a forecast of 2015 and should not be considered final. 1

3 White Wines US Overview The U.S. surpassed France to become the world s largest wine consumer by volume in 2013, and is the largest market in terms of dollars. In 2015, Americans consumed 364 million cases. Although Americans do not drink as much wine per capita as Europeans, consumption has risen to an all-time high. Making approximately 8 percent of the world s wine, U.S. production ranks fourth behind Italy, France and Spain. California accounts for approximately 85 percent of U.S. wine production with a crush of 3.7 million tons in According to the Wine Institute, California accounts for 60 percent of bottled wine sold in the U.S.; California also supplies 90 percent of all exported U.S. wine. The other large wine-producing region in the U.S. is the Northwest, concentrated in Washington, Oregon and Idaho with more than 85,000 acres of wine grapes and over 1,600 wineries accounting for approximately 7 percent of U.S. wine production US West Coast Wine Industry Statistics % Non- Vineyard Bearing Production State Bearing Acres Acres (Tons) Acres Yield (Per Acre) Grape Value (Total Value) ($000) Grape Value (Per Ton) Wineries (Number) Calif. 482, , % 4,196, $3,100,000 $739 4,700 Wash. 56, , $312,390 $1, Oregon 30,435 27, % 79, $167,859 $2, Idaho* 1, , *2015 Sources: California: USDA NASS 2016, Wine Institute 2016; Washington: Washington State Wine and The Association of Washington Wine Grape Growers survey of state wine grape acreage; Oregon: Southern Oregon University 2016 Oregon Vineyard and Winery Census Report; Idaho: Idaho Wine Commission, Wine Grape Fact Sheet. Pacific Northwest Perspective Washington Vineyards Washington ranks second in U.S. wine production. The state has 14 appellations, or American Viticultural Areas (AVAs), that cover more than 55,000 planted acres. Most of the plantings lie east of the Cascade Mountains. Washington s four primary varietals cabernet sauvignon, riesling, chardonnay and merlot account for more than 75 percent of the state s total acreage. The main variety grown in Washington is cabernet; most other reds grown are used for red variety blends that have been growing in popularity Washington Wine Grape Production by Varietal Variety Production (tons) Average Price (per ton) Riesling 44,100 $760 Chardonnay 42,000 $926 Pinot gris 9,000 $796 Sauvignon blanc 6,700 $905 Gewurztraminer 2,600 $754 Viognier 1,600 $917 Semillon 900 $1,082 Chenin blanc 500 $864 Other whites 1,800 $992 2

4 Red 2015 Washington Wine Grape Production by Varietal, continued Variety Production (tons) Average Price (per ton) sauvignon 47,400 $1,527 Merlot 35,200 $1,231 Syrah 16,000 $1,314 WinesCabernet Cabernet franc 3,400 $1,486 Sources: USDA NASS 2015 Approximately 350 wine-grape growers operate in the state. The vast majority of vineyards in Washington, upward of 70 percent, grows grapes under contract for Ste. Michele Wine Estates. Washington Wineries The Washington wine industry now boasts around 900 wineries; three dominate the industry, the rest are small or very small. Walla Walla Valley and Woodinville have been hotbeds of growth for Washington wineries. Boutique wineries have transformed Walla Walla into a destination town. Woodinville, outside of Seattle, is home to Ste. Michelle, and other wineries have captured opportunities by locating there. Emerging destinations include Prosser and Red Mountain. Washington has gained fame for producing high-quality wines that are moderately priced. As a percentage, Washington wines receive more scores of 90 or above from Wine Spectator than any other region, including France and California. Ste. Michelle Wine Estates commands Washington s wine industry, accounting for over 60 percent of Washington s annual production with around nine to 10 million cases. Its largest brands are Chateau Ste. Michelle, 14 Hands and Columbia Crest. 14 Hands and Columbia Crest brands target the $7 to $14 per-bottle range. The Chateau Ste. Michelle brand produces 2.8 million cases and targets prices between $15 and $40 per bottle. Over the last few years, Ste. Michelle has diversified its holdings by purchasing Erath Vineyards in Oregon and Stag s Leap in California s Napa Valley. Precept Wines in Seattle, producing about 1.5 million cases of wine a year, is Washington s second-largest wine company. Precept sells over 30 brands with a focus on prices between $7 and $15 per bottle. Constellation is Washington s third-largest wine company, producing 1 million cases. Ste. Michelle, Precept and Constellation combined produce more than 12 million cases. The remaining 897 wineries in Washington produce less than a million cases a year. Oregon Vineyards Oregon currently has 18 AVAs, about half are sub-avas (wine growing region within a region). Unlike Washington, most of Oregon s vineyards are cultivated west of the Cascades. Western Oregon s climate favors cooler-season grapes such as pinot noir and pinot gris. Notably, 58 percent of Oregon s grape production is pinot noir. Due to the state s cooler climate, particularly in the Willamette Valley where 73 percent of Oregon s grapes are grown, grape yields are much lower than those in other Western states. 3

5 2016 Oregon Wine Grape Production by Varietal Variety Production Average Price (tons) (per ton) Pinot noir 45,851 $2,422 Pinot gris 13,601 $1,484 Chardonnay 4,359 $1,897 Riesling 3,095 $1,131 Syrah 1,663 $2,274 Merlot 1,374 $2,097 Cabernet sauvignon 1,652 $2,472 All others 3,452 $1,788 Total 84,949 $1,958 Source: Southern Oregon University 2016 Oregon Vineyard and Winery Census Report Oregon Wineries The Oregon wine industry is relatively young. The first pinot noir vineyards were planted just over 50 years ago. Oregon s pinot noirs have since been recognized for high quality, creating a boom over the last decade. Currently, the state is home to approximately 725 wine companies and most are relatively small, with average annual sales of around 4,400 cases per winery. Many Oregon wine producers enjoy the advantage of being located near the state s largest population centers, which allows for a greater volume of direct sales. Because many of Oregon s wineries are small and have a boutique-quality focus, the prevailing prices of these wines are higher than national averages. Driven by land costs, supply and portfolio diversity, Oregon has seen increased interest from out-of-state wine businesses since In August 2013, France-based Maison Louis Jadot purchased an Oregon vineyard in Newberg. Jackson Family Wines purchased 1,350 acres in two Willamette Valley vineyards and opened a tasting room during spring In 2016, the company extended its investment in Oregon vineyards even further by purchasing prestigious wine companies Penner-Ash and WillaKenzie. Idaho Vineyards According to the Idaho Grape Growers and Wine Producers Commission, Idaho s vineyards encompass an estimated 1,300 planted acres. The state s wine output consists mainly of grape varietals that can withstand comparatively harsh winter-weather conditions, as most of the growing areas are at elevations higher than 2,500 feet. Idaho s leading varietals include chardonnay, riesling and cabernet sauvignon. Idaho s AVAs are all relatively new. In 2007, Idaho s first AVA, Snake River Valley, was approved. The Eagle Foothills AVA, authorized in 2015, lies within the Snake River Valley. The newest AVA, approved in May 2016, is the Lewis-Clark Valley. Idaho Wineries Idaho has an estimated 51 wineries that produced almost 110,000 cases in Ste. Chapelle Winery and Sawtooth Estate Winery, both owned by Precept, make up a large portion of the state s production. Most of Idaho s wineries and vineyards are located in the Snake River Valley within an hour s drive of Boise. Wineries other than Ste. Chapelle and Sawtooth are 4

6 independently owned, boutique wineries that rely primarily upon tasting-room sales and local distribution to market their products. Value Chain In the Vineyard New vines are supplied primarily by nurseries in California or Washington. Once in the ground, it takes about two years before the vines are productive, so it s important the vines grow rapidly. In year one the grower establishes irrigation and installs trellis systems, hence incurring most of the start-up costs, which also include spraying expenses. In year two, the irrigation and trellis systems will be finished and training of the vines will begin. By year three, most vines can produce a decent crop. Parts of the Northwest are especially susceptible to freeze, which can severely damage vines. After a bad freeze, damaged vines have to be cut back or removed. Rain can prolong harvest; however, most grape varieties are not damaged by rain. Pests and diseases also threaten vines and have to be constantly managed. Red Blotch, a disease that turns leaves red and reduces sugar accumulation in berries, has been pervasive in California vineyards, and is now being reported in Oregon. Research is currently in process, but the exact origin or how the disease is transferred is unclear. Harvest Vineyard managers measure Brix, the sugar level in grapes, to determine harvest timing. Harvest typically begins around August or September for whites, which are harvested before reds. Cabernet is the last grape harvested and is typically picked by October. Grapes are harvested mechanically or by hand. Machines hover over the vines, shaking them until the grapes fall. A conveyer belt on the bottom of the machine collects the grape clusters into a bin and transports the harvest to a storage cellar or directly to a crush facility. Harvesting by hand is much more expensive because it requires more labor and time. Typically, grapes going into bottles of wine priced under $20 are machine harvested, while grapes for higher-end wines are generally hand harvested. Washington vineyards are almost solely machine harvested, while in Oregon hand harvesting is more common. Labor shortages will drive vineyards to use machine harvesters. If this trend continues, more vineyards will be machine harvested especially as the technology improves. There is a longstanding belief that hand harvesting leads to better-quality wines. However, new optical-sorting machines are more advanced and efficient at removing materials other than grapes (MOG). Wineries Once grapes are harvested, they are sent to the winery for crush, aging and bottling. As grapes are crushed the fermenting stage starts. Grapes are typically fermented and aged in large steel tanks or oak barrels; sometimes oak chips are added to steel tanks to obtain some oak flavors in a more cost-effective way. 5

7 To make white wine, grapes are pressed to remove skins before fermentation. Grape skins are left on for red wines and there is a period with skin contact, also known as maceration or cold soaking. Winemakers will adjust the maceration time to change flavors and color. When the maceration time is complete, the red wine is pressed to remove skins. Once fermented, wines are transferred to bottles where they are aged so the flavors can fully develop. White wines age only for a couple of months, but reds need longer. Higher-end wines can age for several years before going to market. Marketing Channels A three-tier system was designed to track alcohol movement to minimize illegal production and sales. A producer, such as a winery, must sell to a distributor, who in turn must sell to a retailer. The basic premise of the system is that only retailers may sell to consumers. Consolidation in the number of distributors has been significant over the past two decades. The Stonebridge Research Group reported that in 1998 there were 7,000 distributors and 2,000 wineries in the U.S. By 2008, there were an estimated 500 to 700 distributors and 5,000 wineries. 1 Due to tighter margins, individual distributors now carry more brands, but devote less time selling each brand. Because a winery with a broad product base more effectively serves the distributors needs than 10 different small wineries, they prefer a one-stop shop. With distributors focus on efficiently moving product, smaller wineries often find their product is a lower priority. Therefore, smaller brands are more difficult to find through retail outlets. Attracting a distributor and getting placements in out-of-state restaurants and other retailers is increasingly difficult, especially for small wineries. Out of necessity, small wineries are taking control of their own marketing and focusing on the direct-to-consumer (DtC) channels. However, the ability of small wineries to ship their wine DtC has been hindered by state and federal distribution laws. For example, some states allow their in-state wineries to sell directly to consumers, but prohibit out-of-state wineries from doing the same. However, states are increasingly opening up DtC shipments to out-of-state wineries, thus expanding the DtC market. Although the wine industry s distribution system is being modified, distributors continue to largely control wine sales. Over 95 percent of U.S. wine sales are through distributors, either off premise (retail) or on premise (restaurants). DtC accounts for about 3.5 percent of total U.S. wine sales. Although still a small portion, DtC sales show double-digit growth. According to Wines & Vines, DtC sales for the 12 months ended in June 2017 were up 18 percent, while total wine sales were up 3 percent for the same period. 2 1 Stonebridge Research Group. Stonebridge Research Group Announces Website and New Offices in Napa. Sept Available URL: 2 Wines & Vines. Wine Industry Metrics. November Available URL: 6

8 Drivers Wine Consumption Global wine consumption has remained largely flat since Global consumption appears to have stabilized near 240 million hectoliters (6.34 billion gallons) after trending steadily upward through In addition to a slow global economic recovery, anemic growth in world wine consumption is also a function of declining consumption in the Old World wine-growing regions of Europe. Although European nations continue to have the highest per-capita wine consumption levels in the world, consumption growth will be led by increasing interest in wine by New World wine consumers. U.S. wine consumption is at an all-time high and per-capita consumption has risen 10 percent since Economic Health Just a few years ago, the Great Recession caused consumers to change their wine-buying habits. Economic weakness resulted in reduced consumption, trading down to lower prices and less spontaneous wine buying. According to a Nielsen Company survey published in May 2009, 24 percent of wine consumers opted for a cheaper bottle when ordering drinks at restaurants and bars. Consumers also ordered fewer drinks in restaurants, or shifted to consumption at home. As the health of the U.S. economy has improved, so has consumer confidence, which impacts wine demand. Consumer Confidence Index and Wine Consumption Growth 15% 10% 5% 0% -5% -10% -15% Wine Consumption Y/Y % Change (Left Axis) Consumer Confidence (Right Axis) Source: Consumer Opinion Survey, OECD. Wine Institute The gradual rebound in consumer confidence has positively impacted the wine industry. With improved conditions, consumers are increasingly interested in high-end and/or new brands. Premiumization U.S. wine sales have been growing at a rate of 2 to 3 percent per year for the past several years. The estimated retail value of 2016 shipments was $39.8 billion, up 5 percent from

9 Premium wines, between $10 and $20 a bottle, are responsible for much of the growth in wine sales. Consumers are trading up and spending more on wines, a trend known as premiumization. Consumer Tastes and Preferences According to the U.S. Census Bureau, millennials outnumbered boomers, 75.4 million to 74.9 million, for the first time in A study by the Wine Market Council revealed that millennials, now all of drinking age, make up the largest percent of the wine-drinking population at 38 percent. 3 However, baby boomers still consume the largest amount by volume even though millennials are quickly catching up. Millennial wine drinkers are more likely to spend over $20 a bottle, contributing to the continuing trend of premiumization. According to the Wine Market Council study, 17 percent of millennials purchased a bottle costing $20 dollars or more in the past month compared to only 10 percent of all drinkers and 5 percent for baby boomers. 4 Consumer preferences for varietals constantly change. A few years ago cabernets were the hot item. Currently, red blends and rosés are experiencing explosive growth. Although it is difficult, staying on top of varietal preferences is imperative to match varieties in the vineyard to consumer preferences. This requires forward thinking, given that it takes three years for a vine to produce grapes and another one year or more to make wine. U.S. Exports and Imports Exports According to the Wine Institute, the value of U.S. wine exports gained just over 1 percent to reach a record $1.62 billion in However, the volume of U.S. wine exports declined almost 11 percent. Huge growth in exports to China, increasing over $25 million from 2015 to 2016, drove the slight rise in value. However, the primary export market for U.S. wine is still the European Union. Over 40 percent of U.S. wine exports by value were shipped to the 28- member countries of the European Union. US Wine Exports in 2015 and 2016 Value in U.S. Dollars Volume in Liters % % change change EU $685,170,785 $622,325, ,188, ,843, Canada $431,402,639 $461,217, ,776,570 99,780, Hong Kong $98,615,294 $97,293, ,438,896 12,540, Japan $87,488,237 $96,602, ,613,126 29,474, China $81,689,265 $55,742, ,871,716 13,385, All U.S. Exports $1,619,726,756 $1,603,244, ,650, ,196, Source: Wine Institute and Global Trade Information Services, using data from U.S. Dept. of Commerce. 3 Wine & Vines, Number of Millennial Wine Drinkers Catches Boomers Available URL: 4 Wine Spectator, The Youngest Millennial Just Turned 21. What Does that Mean for Wine? Available URL: 8

10 Approximately 90 percent of U.S. wine exports are from California. However, Washington is the nation s next largest wine exporter and is strategically positioned to continue to expand into Asian markets such as China and South Korea. Historically, Asian countries have shown the fastest growth rates in terms of export market growth. U.S. wine exports will be pressured by a higher-valued U.S. dollar and increased competition from Chile, Australia and Argentina. Imports Growth in U.S. wine consumption continues to outstrip growth in domestic wine production, leaving room for imported wine to find increased favor with U.S. consumers. In the last 10 years, U.S. imports of wine have grown 23 percent in value. From 2015 to 2016, growth in imports grew 3 percent. Imports will most likely continue to grow with a strong dollar and consumers accepting imported wine. The U.S. imports the most wine, in terms of value and volume, from the EU. Italy and France account for the largest volume of wine imported into the U.S. with 35 percent of import value and 25 percent of volume. New Zealand, Australia, Spain, Argentina and Chile follow Italy and Spain, accounting for another 18 percent of imported volume and 28 percent of value. 5 Financial Implications and Industry Benchmarks Focus Area Profitability Trend and Current Performance Washington Profitability is strong. Exceptions include isolated areas experiencing winter freeze damage and sites with greater variability in production and/or quality. Profitability continues to hinge on the wineries ability to connect with consumers. The top five wineries produce and sell 80 percent of the volume, crowding the marketplace for small wineries. Oregon Profitability for established vineyards and wineries is strong. Large crop sizes and high-quality vintages for the last few years help producers market wines at profitable prices pretax profit margin was 13 percent and overall solid earnings are expected again in Market demand for pinot noir and premium wine labels plus increasing DtC sales bode well for the industry. Idaho Idaho s 2015 grape tonnage was cut nearly in half due to an early frost. Ideal 2016 growing conditions recovered yields and mild harvest weather led to a balanced vintage. Demand for Idaho wines has increased with more press and tourism. Wineries report wine club sales are key to generating earnings. California Total 2016 crush increased 9.3 percent over 2015; this does not top the record 2013 crop, but does compare to historically strong vintages in 2012 and Napa County grapes continue to receive the highest prices on average, followed by Sonoma and Marin counties. Premiumization continues to drive growth and profitability. 5 USDA Foreign Agricultural Service s Global Agricultural Trade System (GATS). Available URL: 9

11 Focus Area Liquidity Solvency Trend and Current Performance, continued Washington Vineyard liquidity is stable to improving due to positive 2016 cash flow and profits. Operators in expansion phases used excess liquidity to fund vineyard development and/or processing capacity. Liquidity for wineries is often tied up in inventory. The top five wineries processing capacity has not kept pace with expanding grape contracts. As a result, investments in crush capacity are increasing with thousand more tons expected in the next few years. Oregon Liquidity should improve in 2016 as earnings for profitable producers strengthened balance sheets. Certain operators have used excess liquidity and leverage in expansion and acquisition opportunities. On average, 2015 inventory levels increased 11 percent and will likely increase further in 2016 as the large 2014 and 2015 vintages work through the depletion cycle. More average-size 2016 and 2017 crops should bring 2017 inventories in balance. Some wineries are trimming grape purchase contracts and relying on elevated inventories and estate fruit. Idaho Liquidity suffered going into 2016 due to lower 2015 tonnage and inventory. Larger and higher-quality 2016 harvest should result in recovered 2017 liquidity. The 2017 crop is anticipated to decrease due to freeze damage in Idaho s Treasure Valley, reducing liquidity for year-end Cash expenditures made to retrain damaged vines will also impact 2017 liquidity. California Liquidity remains adequate due to bolstered balance sheets from consecutive years of earnings. Others have looked at vineyard purchases or acquisitions. The goal of acquisitions is to enhance brand portfolio or scale higher prices and grow in the DtC channel. Washington Solvency remains adequate. Some vineyards and wineries reinvested in fixed assets while others used stable profits to leverage positions and build equity. Major Californian players including Duckhorn, Gallo, Constellation and Terlato and private equity firms acquired vineyards over the last few years. Oregon Leverage is relatively modest for mature wineries. Cash-flow leverage tends to be higher for larger wineries than smaller ones. Major players out of California including Kendall Jackson and equity firms have driven acquisitions. Idaho Typically, Idaho wineries and vineyards are highly leveraged. Most are small businesses with limited capital and need to borrow for large purchases or cash flow. As the industry continues to grow, solvency is expected to improve; however, these businesses will likely continue borrowing money to expand. California Wineries continue to be opportunistic with vineyard purchases and acquisitions. Many of the larger acquisitions in 2016 were financed with an even mix of debt and equity. Higher valuations are driving cash-flow leverage ratios up across the industry. However, lenders risks are mitigated by significant up-front equity investment by the acquiring entity. 10

12 Focus Area Repayment Capacity Trend and Current Performance, continued Washington Vineyards with contracts have enjoyed a stable pricing environment and adequate returns on investment. Established growers in preferred sites will enjoy growth opportunities and solid repayment capacity. Wineries face a varied repayment landscape, with many heavily leveraged in fixed assets and inventories. However, reputable wineries with economies of scale and/or successful DtC marketing have an opportunity to capitalize on increasing demand and strengthen profits and cash flow. Oregon Record crop sizes have resulted in favorable repayment capacity as highyielding vintages result in lower cost of goods per unit sold, helping to boost profit margins. Labor access remains a key concern to vineyard managers. Idaho Due to inconsistent crops in recent years, repayment capacity has also been inconsistent. However, repayment capacity has remained positive due to growth in demand for Idaho wine. California Repayment capacity remains adequate for the industry. Generally increasing earnings and stable interest rates have supported incremental debt taken on by some producers. 11

13 Appendix Best Practices The following points summarize best practices common among successful vineyard and winery operations. For the sake of this discussion, it is accepted that most successful operations employ best industry practices in the area of production to maximize product quality and economic return. Accordingly, the following discussion of best practices is confined to marketing and finance. Marketing Successful vineyard owners: o Carefully align their long-term strategic production goals with the practical needs of the winery and the general marketplace where that fruit will be marketed. o Develop market alliances before the vineyard is designed and planted. o Give careful consideration to critical factors around vineyard establishment (trellis type, irrigation system, plant spacing, elevation, row direction, soil type, slope orientation, rootstock, clones, AVA, site selection, etc.) that can profoundly impact quality, production and marketing throughout the life of the vineyard. o Have a vineyard branding strategy and create additional value in the vineyard asset through effective marketing of grapes to reputable wineries. o Broaden their marketing to multiple wineries, and strive to produce high-quality grapes that will merit vineyard-designated wines. o Use long-term contracts with wineries to minimize marketing risk. o Partner with reputable vineyard management companies that can help maximize fruit quality and raise the overall profile of the vineyard in the marketplace. Successful winery owners: o Develop strong branding and marketing strategies. o Craft a story around their brand that is authentic and durable in the marketplace, and that is further enhanced by the personality and energy of the owners. o Genuinely enjoy people and marketing, and don t tire of telling their story over and over again an essential requirement of a winery owner. o Have a distinct channel strategy and effectively develop all three traditional marketing channels (retail, wholesale and distributor). o Align themselves with reputable and financially sound brokers and distributors. o Closely participate in the marketing process in all channels. o Produce high-quality wines, differentiating their brand not with the occasional high score or good review, but with consistently strong recognition year after year. o Develop wines at multiple price points that will accommodate changes in market demand and normal variations in quality from vintage to vintage. o Consider replacing wine brokerage relationships with in-house sales staff to gain better representation of the wines in the marketplace. 12

14 Finance Successful vineyard owners: o Resist the notion that appreciation is guaranteed over time on a land and vineyard investment (a common investor motive), and carefully manage vineyard costs to generate annual cash returns. o Use long-term contracts to limit downside risk. o Continually challenge conventional vineyard production practices that add cost without materially improving grape quality. o Use crop insurance and other risk-management tools to minimize income volatility. Successful winery owners: o Align with accounting firms that have a solid understanding of the unique accounting characteristics of the wine industry. o Develop high-quality accounting systems that provide internal and external audiences with a clear understanding of accrual earnings and balance sheet health. o Develop clear financial performance metrics that allow them to compare their operation to industry benchmarks. o Are smart about deploying capital and focus capital resources, if limited, first on inventory and brand building, and then on development of hard assets such as land, vineyard development and winery facilities. o Maximize use of their winery capacity with their own production, or market their unused capacity by sharing space with another winery. o Maintain health in their balance sheet, particularly liquidity, recognizing that the wine industry is highly cyclical. In summary, much of financial management is about preparing the company s balance sheet to withstand the inevitable next down cycle. When the industry is in distress, wineries can expect lower margins with pressure on quality and price. Growers can expect downward pressure on grape prices with increasing expectations for quality and slowing of new vineyard development. Meanwhile, consumers will enjoy a period of great bargains. Beyond this period, a new phase will develop where supply and demand will rationalize, and prices and general market conditions will begin to once again tilt in favor of vineyard and winery owners. Owners who have positioned their operation to survive adversity will be ready to take advantage of opportunities in a recovering market. Glossary American Viticultural Area (AVA) or appellations: geographical wine grape growing regions in the U.S. Established at the request of wineries or other petitioners, the Alcohol and Tobacco Tax and Trade Bureau designates the boundaries. Boutique wineries: small, artisan and sometimes family-owned wineries. 13

15 Brix: a scale system used to measure the degree of sugar content of grapes and wine. Each degree is one gram of sugar per 100 grams of grape juice; table wine is usually between 20 to 25 Brix. Crush facility: processing facility where grapes are crushed to start the wine-making process. Direct to Consumer (DtC) and direct sales: marketing and selling directly to consumers, bypassing distributors and third-party retail locations. In the wine world this is often done through wine clubs, tasting rooms and other direct communication with the consumer. Distributor: an agent who supplies goods to stores and other businesses. Fermentation: chemical breakdown of a substance by bacteria, yeasts, or other microorganisms; the process for wine converts sugars to ethyl alcohol. Maceration: process of soaking crushed grapes, seeds and stems in a wine to extract color, aroma and tannins. Measurements: The following table shows frequently used metrics in terms of liters and bottles. Metric Liters Bottles 1 bottle 0.75 liters (750 milliliters) = 1 bottle 1 case 9 liters = 12 bottles 1 gallon 3.79 liters 5 bottles 1 hectoliter (hl) 100 liters 133 bottles 1 million hectoliters (mhl) 100,000,000 liters million bottles New World wine: wines from countries or regions where winemaking was imported during and after the age of exploration, typically refers to the regions outside the traditional wine-growing areas of Europe. Oak barrels: the most common oak barrels are either French oak or American oak. American oak tends to be more intensely flavored with more sweet and vanilla overtones since the grain is looser. French oak, which has tighter grain, generates a sensation of light sweetness with fruity flavors. The most common size of a barrel holds almost 60 gallons. Oak barrels are the most expensive storage method and can be used only a couple of times before the flavoring effects wear off. Old World wine: wines from countries or regions where winemaking first originated, mostly refers to Europe and regions around the Mediterranean basin. Pre-productive: when a plant is young and does not yet bear fruit Steel tanks: stainless steel tanks vary in size from a couple of gallons for home brewing up to 400,000 gallons (for reference, 800 gallons is about 4,000 bottles of wine). Steel tanks are great for temperature control during fermentation. They have a chamber surrounding the tank that holds coolant, which the winemaker can adjust. Sub-AVA: An AVA within a larger AVA; see AVA definition. Tannin: naturally occurring polyphenol found in plants, seeds, bark, wood, leaves and fruit. In wine, it is the textural element that makes wine taste dry. 14

16 Tasting room: part of a winery or brewery typically located on the premises, the primary purpose is for guests to sample products. Trellis system: A frame used to support climbing plants; helps to train the vine and canopy into an ideal shape for fruit growth, fruit ripening and harvesting. Varietals: refers to the types of grape used in winemaking. 15