2010-2011 State of the Industry

8/6/2019 2010-2011 State of the Industry

1/24

APRIL 2010

2010 - 2011 State of the Wine Industry

Forward

Te 1975 movieMonty Python and the HolyGrail has become a cult classic, rated #4all-time on the IMDb top-rated comedieslist. Te story puts King Arthur, King o theBritons, deeater o the Saxons, Sovereign oall England on a quest to seek Te Grail. Itsa tting story to use as our backdrop this

year or a couple o reasons. First, ever sincethe pillaging and sacking beginning withthe last quarter o 2008, weve all been on aquest to understand and recognize the post-crash shape o the new kingdom stretchingbeore us that which is true and just,and that which is but wizardry. Second, wecould really use a laugh these days.

APRIL 2010

Written by Rob McMillan,Founder, Wine Division

2010-2011 State of the Wine Industry

We have to coness that we hesitate eachyear when we throw the movie themeonto the canvas o the report because theinormation contained herein is serious.Its the culmination o a huge amount odiligent, scholarly work rom many peoplethat begins in November o each year to

spot, drill down and explain emergingtrends in the wine business. But we knowthat ew winery owners can be cast asgravely serious souls, nor dost thou talltabove the masses.1 Tus, we have come tobelieve nay, weve been besought tomake merry o the dismal science.

What is the grail you seek this year

new bank (please call us); inormation

social media, demographics and mark

segmentation; a better idea o prici

moves, restaurant and luxury consum

trends; or an understanding o when t

siege will end and your own Dark Knig

will be vanquished? We pray thee co

hither with us and the good Knights

the Round able wilst we traverse t

countryside o Camelot, pressing or

on the wine business and present you o

2010-2011 State o the Wine Industry.


2/24

APRIL 2010


accurate, we have conveniently let

that out o this record to maintain

our dignity. Specically to the growth

orecast, we show nal 2009 sales ended

in a range o 3 percent positive growth

to a 4 percent decline, depending on the

source cited.

For 2010 we shalt not make thee truly

merry as in days o yore, but do bring

some cheer so we doth not expect

spoiled produce to soil our armor:

We are orecasting improving conditions

in the ne wine business. Te trading-

down trend will end this year. Its a

completed trend that will gradually reverse

on itsel. Growth in $20+ price points

will develop momentum and end the year

in a range 8%-12% higher year over year.

Revenue growth in higher priced wine

will outpace the growth rate in lower tier

wine segments though the best opportunityis still avoring large scale production o

modestly priced wine given the National

economy and consolidation in the chains

and distributors. Te orecast is supported

by improving prospects or luxury buying

rom the auent, slight improvements

in corporate spending and emerging

improvement in restaurant sales notably

in the white table cloth segment which has

been the most impacted in the correction.In addition while there will continue a

prominent level o discounting into Q3,

we expect improving distributor purchases

or the year as depleted wine is reordered.

We urther believe we will see continued

positive results and measured momentum

Executive Summary

King of Swamp Castle: Please!This is supposed to be a happy

occasion. Let's not bicker and argue

over who killed who.

Last year we knew our observations and

orecast would not be pleasantly received

in the village. Tere was a air amount

o bickering in the realm over just who

killed whom, or oddly rom some readers,

i anyone had been injured at all. Oursis a business that taketh not kindly to

naysayers. We nonetheless girded our

loins, dressed in our best armor expecting

an incoming barrage o spoiled produce

and orecast:

Flat growth rom depressed restaurant

sales, higher unemployment levels

(exceeding 10 percent by yearend), higher

oreclosures, and depressed consumerspending through the year as we seek a

bottom. Te economy will not return to

the market experienced during the past

decade. Price points below $35 are selling

but wines between $50 and $125 are in

a dead space, with only established labels

selling. Some wineries will trade hands this

year at bargain prices. Distribution has

all but ended as a viable sales channel or

small wineries.

Many said at the time we were ar too

pessimistic to predict no growth, yet

in hindsight we were pretty accurate

on not only that, but most o our

prognostication. Where we were not

in the adoption o direct-to-consum

sales tactics. Large arming operatio

should also are well with improved wa

shipments, though the continued incre

in imported bulk wine as a replaceme

or traditional domestic sourced ruit ro

the Central Valley is a concern.

Tere are many obstacles still to overcom

We expect persistent nancial and econom

hurdles nationally which are too numero

to give anything but the shortest o attenti

to in this report. We do not believe improving consumer climate will catap

ne wine sales to the high point o the p

decade anytime soon. We expect continu

downward price pressure in all but th

wineries selling on allocation, large sc

producers, or established brands in w

distribution. Wineries selling sizea

production above $50 will again nd 201

2011 a difcult time. Producer protabi

in amily wineries will be negativimpacted again this year as the higher pr

paid or grapes rom purchases made be

the crash are sold in a post-crash market th

is still discounting.

Tere is still slightly too much wine at t

producer level and distributors have so

SKUs that have received no sales attenti

or some time. Tose wines will be moved

deep discounts through the rst two thio the year to clear the decks. Te impa

o higher inventories at the producer le

means growers supplying ne wine produc

will get less or their grapes on expiri

contracts, except in the pinnacle o t

quality range"2


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APRIL 2010


2010-2011 State of the

Wine Industry

Value versus Frugality

the U.S. consumer is not homogenous.

Unemployed consumers on assistance will

make dierent purchase decisions rom

blue-collar consumers who have a secure job, retired consumers with a rebuilt stock

portolio, or auent consumers.

What does your wine customer want?

Do they want cheap wine; is it all about

price? Looking at retail sales trends, the

increase in couponing and growth rates

in less expensive bottles o wine, its

easy to draw a high-level conclusion that

consumers have become more rugal. Tere

is no question about some consumersdropping out altogether rom buying

non-necessities. Likewise, its apparent

some wine consumers have established a

mental ceiling or their wine purchases,

although that describes only part o

consumer purchase decision. Who are

your consumers now? Are they all iPhone-

carrying Millennials? Are they arthritic

Boomers or mid-career Gen-Xers? Maybe

they want to be part o your club, or maybe

they hate your idea o a club? Maybe theyare green and want something that is

authentic and environmentally-riendly?

I your customers attitudes are changing,

what will you do to stay relevant with

them? How will you get the answers?

What strategic decisions will you make

this year to position your winery or

uture success?

Pricing Decisions

Last year with the economic hardships

surrounding us, the oul mood o the

U.S. taxpayer, and resultant inventory

bulge ensuing rom slack retail sales, there

were many who thought the luxury goods

business was dead. Te cold og o doom

settled across the countryside as grim

reapers dressed up as real estate botto

eeders circled the carcass o the

wine business. Gone were the vestiges

conspicuous consumption and any pubcelebrations. Tere were none who ma

merry. Te world was earul and t

expensive wine business was dead. No

wasnt. Yes, it was. I WASN!

The Dead Collector: Bring out ye

dead.3

[a man puts a body on the cart]

Large Man with Dead Body:

Here's one.The Dead Body That Claims It

Isn't: I'm not dead.

The Dead Collector: 'Ere, he says

he's not dead!

Large Man with Dead Body: Yes

he is.

The Dead Body That Claims It

Isn't: I'm not.

The Dead Collector: He isn't.

Large Man with Dead Body: Well,

he will be soon he's very ill.

It really wasnt dead and, to the dism

o the bottom eeders looking or wine

oreclosures, has been anything but gra

o health. But it was and still is pain

Just how bad was discounting last ye

From media reports and the urry

spam e-mails promoting the next barga

crashing servers, you would expe

everyone producing ne wine dropp

price at least 20 percent and the m

expensive wines were probably discount

the most. We can oer many examples

wineries that had very public discounti

programs. However, the notion that t

wine business behaved like a group

lemmings jumping o a cli, executing

In the late 1990s, i you had good wine,

you could take an aggressive pricing

stance with distributors and consumers

buying direct. You could hold to your

price and i buyers didnt like the price,

they didnt need to buy because there was

a line at the door. One winery owner at

the time said, I only sell wine to people

I like. I I dont like you, Im not selling

you any wine. In a reversal o ortune,

today the negotiating power is tilted

rmly to the consumer. I they dont

like you, they are not buying your wine.

Tat said, reading analysis and press

about the U.S. consumer, you might

come to the conclusion consumers just

dont want to buy anything at all, and

i they do buy it better be cheap. We

hear sound bites used to put handles

on much longer discussions such as

the new normal, the new rugality,

and permanent consumer change. But


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APRIL 2010


ace plant into the rocky shore en masse,

appears to be unounded. Would it surprise

you to know that more than 70 percent o

wineries did not lower the price o theirmost expensive wine in the market?

...more than 70 percent of

wineries did not lower the price

of their most expensive wine...

In SVBs Annual Wine Conditions

Survey,4 we asked respondents to tell

us what the retail price o their most

expensive SKU was both beore and ater

the crash.5 Te qualier was that there

needed to be at least 1,000 cases produced.

Te short answer is that the average o all

respondents highest-priced SKUs was

$56 beore the crash and dropped only

4 percent ater the crash. Tats hardly

an alarming drop. But like the industry

as a whole today, the arithmetic average

almost never describes what is really

taking place.

In Figure 1, the horizontal axis is price, and

the three bars are wineries that decreased

their price, made no change or increased

price. Te dierent colors in the stacked

bar chart show what they opted to do

with their volume o production. So or

example, in Figure 1 the top let (green

block) says that 12.78 percent o those

surveyed decreased both their price and

the volume produced. Te surprise is really

in the middle column 63 percent made

no change to price at all. An additional

surprise is in production choices where

nearly 65 percent o all respondents said

they either let production unchanged, or

even increased their volume.

Tis inormation is interesting because

it ocuses on a key component o all

wineries production their agship

wines. It partially reveals a phenomenonwe see time and time again: Te market

or any given producers top brand is still

doing well. In act, as we talk to brokers

and wineries, we nd (not surprising to

us) that there is a shortage o juice to

go into those wines in many instances.

Discounting is not a gment o your

imagination. Te pain point or wineries

is most oten in their higher-volume

mid-priced SKUs wines that are more

available to the consumer.

Te implication or marketing is

intriguing. It suggests to us that, at

least or agship wines, in an era when

consumers look or value, winery owners

dont view lowering price as the solution

to increased value. At a minimum, it

suggests that they rely less on price and

more on something else to create value

or the consumer in those wines. Tat

something else is dierent between winery models, but should be o great

interest to owners because at the core

that solution is a partial answer to t

question: What tactics should I employ

sell my slower moving wine?

Is the change permanent?

Sir Bedevere: What makesyou think she's a witch?6Peasant 3: Well, sheturned me into a newt!Sir Bedevere: A newt?Peasant 3: [meekly after along pause] ... I got better.

One o the most debated topics in the wi

business last year continuing into this h

been the question o the permanence

consumers trading down to lower pr

points. One day the ne wine busin

was admired or its princely charm and t

next day it was a newt. Well ... it

getting better.

Figure 1: Pricing Decisions of Flagship Wines

7.67%

16.93%8.31%

25.88%

12.78%

20.45%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Decrease Production 12.78% 20.45% 2.56%

No Change to Production 8.31% 25.88% 2.24%

Increase Production 7.67% 16.93% 3.19%

Decrease Price No Change to Price Increase Price

Price compression made an

already littered field of brands

even more confusing...

Source: Silicon Valley Bank


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APRIL 2010


We know there has been historic

discounting taking place and we will see

even more taking place at least through

mid-year, i not through Q3. In manyinstances, price points have been reset to

lower tiers and producers are now working

through the mechanics o adjusting their

costs to recover their margins. A winery

that pre-crash might have sold a $35

wine with modest protability woke up

one day to nd new neighbors rom the

high-rent district above $50, dropping

their price and shoving their way into

the neighborhood. As has happened in

many consumer products over the pasttwo years, price compression made an

already littered eld o brands even more

conusing by pressing more brands into

still narrower pricing tiers. Tat makes

the non-price decisions in brand building

that much more critical.

inventory cycle and is always the worst

part or producers. Tink o it this

way: Distributors, when conronted by

a change in demand or supply, stopordering while they work down their

stocks.7 Once they reach their optimal

inventory level, they start ordering again

to match depletions. Te same is true

or restaurants and even consumers with

cellars. Wine didnt stop selling in 2009;

distributors just slowed their ordering

and the producer experienced more

depressed sales than what was actually

being consumed. But since there is nonon-bearing acreage hangover (except in

Oregon), the de-stocking phase will end

in 2010. Tat, in and o itsel, even with

no change in consumer demand will make

or higher producer level sales this year.

Now to the question: Is this a permanent

change? I remind everyone the term

permanent represents a rather long

time horizon. So the answer is no, but

with a limitation. Prices have reset tolower tiers and it will take some time

to ully recover to the point which has

been built during the previous 15 years.

Actual recovery will take time to sort

through as unemployment is lagging

the positive GDP recovery, businesses

have reduced spending on client

entertainment, restaurants are serving

more value-conscience consumers, and

plenty o uncertainty remains around

nancial markets, government spending,sovereign deaults and credit availability.

Tis is not a V-shaped recovery and, as

we said in last years State o the Industry

report, Te economy will not return to the

market experienced during the past decade

anytime soon.

Distribution

King Arthur: Can we come up and

have a look?8

French Soldier: Of course not

You're English types.

King Arthur: What are you then?

French Soldier: I'm French. Why do

you think I have this outraaaageou

accent, you silly king?

Sir Galahad: What are you doing

in England?

French Soldier: Mind your own

business.

The Backdrop

Te large wholesale partners in t

business locked themselves inside th

castles last year and pretended they did

know the small wine producer.

Winery Owner: Good morning Si

Big Distributor: I was wondering

how you were doing selling my wine

this year?Big Distributor: Mind your own

business you silly red-headed step

child!

One day you had a partner and the ne

day you had an uncomortable allian

Where did the love go?

When SVB began its dedicated w

practice in the early 1990s, it was comm

to see successul business models in nea

all volume segments and price poin

Small brands making a ew thousand ca

o super premium wine seemed to thr

right alongside estate operations maki

10,000 cases, negociants making 50,0

cases o popular premium wine, and larg

Prices have reset to lower tiers

and it will take some time to fully

recover to the place industry

participants have enjoyed seeing

build over the past 15 years.

It was very difcult or winery owners

to make pricing decisions last year. Like

everyone, they were short on inormation

about consumption so they had to use

instinct, a good guess and consult a

sorcerer. But despite the gloom cast rom

the still-burning economic train wreck,

conditions or ne wine sales werent quite

as bad as they seemed, and hopeully you

didnt overreact.

Its important to remember this

is the de-stocking phase o a normal


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APRIL 2010


scale wineries making 100,000 cases and

more. Each had a very similar selling

strategy: Tey moved wine through a

nationwide distribution system and solda little in their tasting room. A very

small winery might not make a lot o

money, but it could at least break even

and nd several distributors willing to

work with them.

Te oundation or selling has been

morphing or 20 years slowly until

recently when we now witness the

almost complete consolidation o both

the distribution system and the largeretailer accounts or both chains and

restaurants. Now the relationship between

distribution and the amily winery can

kindly be described as in transition.

SVB has been underscoring the trend

illustrated in Figure 2 or at least the

past seven years, and encouraging both

clients and prospects to consider their

place with this chart as a backdrop or

a discussing their business model. Butwhen the business is working, its hard

to change.

The Crash

In 2009 the Great Recession brought

the discussion into ocus and kicked out

the supports o moth-eaten strategies.

Restaurants whittled back their inventories

o expensive wines, opting instead or

lower priced oerings. White tableclothrestaurants that served $100+ wines

were caught up short when conspicuous

consumption became politically incorrect.

Distributors enorced their own nancial

realities and dropped hundreds o small

brands rom their portolios, then slowed

or halted orders while they worked

down inventory levels. Causing even

more conusion, large wine companies

like Constellation realigned their supply

chain, ocusing their products into ewerdistributors and leaving their ormer

distributors scrambling or replacement

wine brands. rying to key in on a

perceived opportunity, new regionally

ocused distributors started up to capitalize

on the vacuum let rom the big players

that had abandoned smaller markets. But

since the market crash, weve noticed some

o those companies pushing out payment

terms and, in some cases, those debts have

gone bad when their doors closed.

The Response

What is abundantly clear today is the

available sales channels or a winery are

rmly dictated by the size o the operation

and gross margin o the wine sold. Te

wineries with a proverbial oot in the

boat and one on the dock wishing they

could sell all direct but still managing

cobbled together national distribution

and sales relationships. Tose busines

are eeling nancial pressure to make

strategic but difcult change away ro

that which might have been successin the past. For most small bran

the best opportunities lie in developi

direct marketing strategies, both to t

trade and consumers. Tat starts

understanding who your customer is a

employing low-cost consumer resear

and survey tools, then aligning yo

strategy and product with the right gra

suppliers and sales channels consiste

with the scale o your business.

The new normal for your winery

should not be fully defined by the

fate of a damaged consumer, but

by your own sales strategy.

We acknowledge that its very dif

in this economy to change your mod

right size production, align resources a

develop new digital skill sets that evo

Figure 2: Business Models


90%

80%

70%

60%

50%

40%

30%

20%

G

rossMargin

Case Sizes

EfficientFrontier

1,000 10,000 100,000 1,000,000 10,000,000

Small IntegratedDirect Model

Stuck In TheMiddle

Distributor/NegociantModel

Large ScaleHigh Volume

Low Cost


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APRIL 2010


a business away rom what may have

been your model or the past decade or

more. We encourage you to remember

that doing so can be coordinated with astrategy to shrink less protable SKUs,

creating a level o cash that could support

the change. Some wineries will no doubt

continue without reviewing their sales

strategies in the new markets we ace

and will be disadvantaged. Teir strategy

will be to hope everything returns to

normal. As we consistently say, Hope is

not a strategy. Te new normal or your

winery should not be ully dened by the

ate o a damaged consumer, but by yourown sales strategy.

Restaurants

[taunting from the castle wall]

French Soldier: I don't want to talk

to you no more, you empty headed

animal food trough wiper. I pass

gas in your general direction. Your

mother was a hamster and your

father smelt of elderberries.Sir Galahad: Is there someone else

up there we can talk to?

French Soldier: No, now go away

or I shall taunt you a second time.

Yes, or you Python devotees, we had to

clean that quote up just a little.

Te air in Te Castle o the Lord o

Restaurant was ouled last year by thestench o rotting employment data, the

lack o merriment and barren tables. Grogpeddlers almost had to scale the parapets

to seek an audience with Lord Restaurant

to present a new wine or the castle wine

list. Once inside in the presence o the

master o the castle, the peddler was oten

disheartened to learn the Lord, too, was a

little short on sustenance and was unable

to assist in the sale o one more $35+

wine or participate in another by-the-glass-program. Despite these challenges,

winery owners were valiant indeed, not

running away as Brave Sir Robin9 but

pressing on.

Most wineries selling ne wine move

between 20-30 percent o their product

through restaurants. So the changes

that have taken place in restaurants in

2009 have been o particular interest

to the ne wine business. Tat said,the changes weve seen started in early

2007 when the restaurant industry began

a contraction phase according to the

National Restaurant Association (NRA).

Tat downward trend was later magnied

by cuts in corporate &E budgets and

a recession-based shit to more at home

entertaining. When negative press ro

the big bonuses or CEOs and Wall Str

bankers collided with news o bailed-o

insurance giant AIGs lavish spendion corporate retreats, conspicuo

consumption o all types was snued o

According to Nielsen, the most impact

part o the restaurant trade has been t

independent white tablecloth restauran

, precisely the target accounts in whi

ne wine is sold. Examining the NR

Current Situation Index10 (Figure 3),

note that as o this writing the index

still reecting contraction or the 30

consecutive month.

Te good news is the restaurant tra

is bottoming and slowly crawling o

o its bunker. While no exceptiona

strong indicators are yet present showi

a denitive restaurant recovery, seve

analysts have recently upgraded som

Figure 3: Current Situation & Expectations Indices

Source: Source: NRA; Values Greater than 100 = Expansion; Values Less than 100 = Contraction

95

96

97

98

99

100

101

102

103

104

105

Jul-

02

Jan-

03

Jul-

03

Jan-

04

Jul-

04

Jan-

05

Jul-

05

Jan-

06

Jul-

06

Jan-

07

Jul-

07

Jan-

08

Jul-

08

Jan-

09

Jul-

09

Jan-

10

Curren t S itua tion Index Expectations Index


8/24

APRIL 2010


key restaurant stocks including Brinker,

Darden and Ruby uesdays, citing

increased sales and oot trafc. Restaurant

industry employment also has shownimprovement in the early part o 2010

the rst growth since May 2009.11 Te

NRA Expectations Index12 in February

was at its strongest level in 29 months and,

with the second consecutive month over

the 100 level, signies expansion in the

orward-looking indicators. Tere is also

growing consensus that corporate spending

on &E and spending rom auent

consumers is improving. According to

Malcolm Knapp, President o the New York-based consulting rm bearing his

name, amilies earning $70,000 or more

are beginning to spend again as they are

less aected by job loss and are likely to

come out o the recession sooner. Knapp

cites this as a target demographic or the

restaurant segment, making up about

28.5 percent o U.S. households but

accounting or about 50 percent o ood

eaten away rom home.

Financial Performance of Wineries

[King Arthur cuts off the Black

Knight's arm]

King Arthur: Now stand aside,

worthy adversary.13

Black Knight: 'Tis but a scratch.

King Arthur: A scratch? Your arm's

off.

Black Knight: No it isn't.

King Arthur: What's that, then?

[Points at severed arm on the

ground]

Black Knight: I've had worse.

Come on ya pansy.[King Arthur cuts off the Black

Knight's last leg.]

Black Knight: All right, we'll call it

a draw.

[King Arthur rides off]

Black Knight: [Black Knight just a

stump calls after King Arthur] Oh,

oh, I see! Running away, eh? You

yellow bastards! Come back here

and take what's coming to you!

I'll bite your legs off!

Many o our ellow travelers had mo

than a paper cut when reviewing nanc

results in 2009. A ew lost a limb here a

there yet soldiered on through the rink. All things considered, the campai

was successul. Nary a one was alone

battle and many ared well compar

to their comrades in other busines

across the U.S., some o whom we

winnowed out by a combination

negative consumer events and cre

woes. All in the land were encourag

by the bravery displayed by the knigh

who conquered 2009 and, at the end

the year, they drank their ll.

as it relates to wineries,

average is not descriptive of

the health of the industry.

Reports using proprietary but s

unaudited nancial inormation ro

SVBs PGA14

showed ull-year sagrowth through Q4 was a negative 3

percent or the year, roughly in line w

our 2009 projection o at produc

level sales in ne wine. For compariso

Nielsen Scan Data showed total wi

sales or the >$20 category ended 20

with a drop o 3.7 percent, while the to

wine category grew 2.8 percent wh

lower-priced wine sales were include

Gomberg-Fredrickson noted ne wi

shipments rom all warehouses wesignicantly stronger in Q4. In the ca

o the one warehouse that reported th

ull year results, sales were o 16 perce

through the rst hal o the year, but gr

30 percent in Q4 ending the year

which was our orecast or 2009.Source: Silicon Valley Bank Proprietary Research

Figure 4: Fine Wine Financial Snapshot

70.0%

Pre-TaxProfit

GrossMargin

Sales

Growth

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%

-10.0%

59.0%

57.0%

55.0%

53.0%

51.0%

49.0%

47.0%

45.0%12/31/2002

51.5%

5.2%

3.2%

12/31/2003

50.2%

17.6%

6.3%

12/31/2004

51.5%

25.5%

7.6%

12/31/2005

52.8%

19.4%

12.6%

12/31/2006

54.5%

21.2%

11.3%

12/31/2007

57.1%

22.3%

16.3%

12/31/2008

55.3%

2.0%

9.5%

12/31/2009

52.4%

-3.8%

2.2%

Gross Margin

Sales Growth

Pretax Profit


9/24

APRIL 2010


Negative sales growth in the ne wine

segment has not been witnessed or

decades nor the degree o the recent

bloodletting, but there is an encouraging

part to the sot result or the year: We

appear to be moving up again.

Consistent with reports rom the

warehouses noted previously, SVB PGA

data or nine months ended September

30, 2009 showed sales were tracking to

10-percent declines beore nishing the

year with a moderately successul quarter

leading to low single-digit declines.

Conrming the positive Q4 data in the

Conditions Survey, we asked wineries to

compare the last good Q4 (2007) with

2009 holiday sales. Sixty-our percent

reported their holiday sales were the

same or better than Q4 2007 (Figure 5).

Verbal interviews with wineries, brokers

and restaurateurs also indicate improved

conditions in Q1.

Examining gross margin and pretax prot

in Figure 4, the ne wine segment has cycled

back to the lowest levels o protability

since 2002 the bottom o the tech

recession. Many owners still might expect

the recovery in ne wine to be V-shaped

and match the last recession, but there

is a dierence this time compared to the

recession experienced in the early 2000s.Tat was a shallow and ast recession.

We were led out o it by increasing home

values bolstered by a massive amount o

liquidity looking or an investment.15

Tis time we dont believe there will be a

ast recovery with the national economy

or reasons too numerous to give any

meaningul treatment. he slower

recovery will continue to produce a drag

on the nancial perormance o amily-owned wineries at least through this year

as higher cost inventory moves through

the income statement. Tat will likely

continue through 2011 and longer as

grape contracts will not have been ully

renegotiated to improve sagging margins

rom lower-priced wine sales.

How do winery owners view their own

nancial health? Tats a question that

we posed in the Conditions Survey andthose results are displayed in Figure 6.

Te good news is that about 70 percent

describe themselves in the range rom

good nancially, to rock solid. But

nearly 30 percent describe themselves as

alling in the range rom slightly weak

to dead.16 Not too much should be

read into the 7 percent who report their

nancial condition as very weak or on

lie support as its a small number a

slightly better than national statistics

small business.

In the2009-10 State o the Wine Indus

Report we orecast the coming nanc

landscape would support higher lev

o what we coined bargain transitio

a nice way o saying distressed sales.

act, we have seen that happen rom o

perch on the tower wall, but what is cle

is: 1) there are a lot more buyers th

sellers or established wine brands a

2) sellers have a remarkable penchaor holding out or a air price. T

consequence is there are ewer transactio

closing than what casual observers mig

otherwise suppose. We still expect a le

o distressed transactions consistent w

the survey results o very weak winer

in Figure 6.

Figure 5: Holiday Sales in 2009 vs 2007


3.51%

16.63%

23.19%

20.84%

22.48%

12.18%

1.17%

0% 5% 10% 15% 20% 25%

Spectacular

Much better

Better

About the same

Slightly worse

Much worse

Abysmal


10/24

APRIL 2010


Trading Sideways

King of Swamp Castle: You only

killed the bride's father, thats all.17

Sir Lancelot: Well, I didn't mean

to.

King of Swamp Castle: Didn't

mean to? You put your sword right

through his head.

Sir Lancelot: Oh dear... is he all

right?

Perceptions are at times reality. Some

days you can ignore certain things, but

that sword sticking out o your head

well, thats a hard one to miss. Tere

is a general tendency we all have when

discovering something we dont want to

believe. We see rst, then ignore what we

see, surrender to the reality o what we saw

and, nally, incorporate the conclusion

into our belies. We seem to believe

a trend will continue until it doesnt.

Tats what happened to a lot o people

who were in the stock market in early

September o 2008. Te stock market had

gone up and down, but over time always

up until it didnt.

Te term trading down has been that

sword in the head o the ne wine business.

Its not something anyone wanted to

notice, but it was hard to miss and now,

an accepted belie. SVB began noticing

and publicly commenting on the trend in

2008 early enough that one industrypundit, when asked to comment on our

point o view, was quoted saying, there is

no evidence the consumer is trading down

today. In act, conceptually it was a new

trend, so maybe there was little evidence,

but it was a real trend nonetheless as

history has shown.

wo years later weve grown tired o people

talking about trading down because,

rankly, we believe there is no evidence

the consumer is trading down today.What? Tere is no evidence the consumer

is trading down today. Its a dated trend.

Te consumer has already traded down

(past tense). Tere is no indication the

consumer will trade down more unless

the economy stops its recovery or ear

rolls back into the markets. oday we

think the consumer is trading sideways

and bumping along the bottom o a

recovery. But as the year progresses, we

have every reason to believe the consumerwill start trading up again.

While we are sure that sounds great

to the principals in many amily-owned

wineries, lets clariy what that means and

doesnt mean. We will reinorce and repeat

that we are not even close to suggesting a

V-shaped rebound in the ne wine segment

is on the way. We expect the recovery to

be muted and a long process. We arent

implying discounting has entirely ended,that the unemployment rate will drop

below 9 percent this year (it might get

to 9 percent) or that there is a wholesale

move aoot to return to the conspicuous

consuming ways o the 1990s and mid-

2000s. We are simply emphasizing that t

consumer, in a bottomed and improvi

economy, on average will be more willi

to spend slightly more or a bottle o wicompared to last year. Its trading up, b

its the new normal version o trading

and just a baby step on a long path

better days.

The Shape of the Opportunity

Sir Bedevere: ...and that, my liege

is how we know the Earth to be

banana shaped.

King Arthur: This new learningamazes me, Sir Bedevere. Explain

again how sheep's bladders may b

employed to prevent earthquakes.

For years starting in the early 1990s

saw consumers in the U.S. grow th

net worth, spend orward on credit, a

develop a sense o substance rom t

inated values in their homes. Tat eeli

o nancial saety along with the Fren

Paradox and continuing studies on thealth benets o moderate consumptio

spurred increased consumption o wine

higher and higher prices. Te lowest en

o the wine pricing universe saw declin

in sales, while the highest saw grow


Figure 6: Financial Health of Your Winery

0%

5%

10%

15%

20%

25%

30%

35%

Rock

Solid

Very

Strong

Strong

Good

Slightly

Weak

Very

Weak

Onlife

support

Dead


11/24


12/24

APRIL 2010


Te graphic depiction o this phenomenon

in wine sales can be seen in Figure 7. (Hey

it is banana-shaped, just like the shape

o the world!) We asked wineries to tellus how much they elt they would grow

in 2010 and then sorted the answer by

the winerys average retail price point.

o get at a level o conviction, we netted

out the dierence between those who

believed they would have 5 percent

growth or more rom those that believed

they would shrink 5 percent or more,

and ignored the responses that orecast

limited or zero growth. What we are

let with is an interesting opportunitycurve o the industry that shows wineries

producing wines at the lowest and highest

average case price showing the strongest

conviction about their opportunities in

2010. Tere is a secondary trend noted in

the $20-$40 price range, again consistent

with our observation in the market. Te

trends rom the luxury retailers tell us

that the demand or higher-priced wines

should be improved this year.

Market Segmentation

King Arthur: Go and tell yourmaster that we have been charged

by God with a sacred quest. If he

will give us food and shelter for the

night, he can join us in our quest for

the Holy Grail.

French Soldier: Well, I'll ask him,

but I don't think he will be very keen.

Uh, he's already got one, you see.

King Arthur: What?

Sir Galahad: He said they've

already got one!

King Arthur: Are you sure he's gotone?

French Soldier: Oh yes, it's very

nice!

Surveying

How do you know what your customers

want? What i they already got one o the

items you want to sell them? And what i

you lower the price o your luxury wine?

Will they pry some hard-earned quid

rom their money belts or is it possiblowering the price could drop yo wine into a price band requented by

consumer class who knows not your labor its regal heritage? Maybe they want edgier-looking bottle. Maybe they liwines that are all ruit with a little residusugar and arent ond o a balanced hanmade wine. Ten again, its also possibthat by not discounting, you will miss opportunity to sell to your existing buy who have made decisions about hmuch they will spend on any one boto wine, or discovered a better value withat dropped its price to get into yotraditional pricing range.

I the sales velocity o your wines slowlast year, you need to make some decisioabout changes to the quality, price, hoyou market and sell the wine, and tappeal o your products to buyers. Bthose choices shouldnt be made withosome study o the individuals who byour wine already, or an understandingthe characteristics o people to whom y

want to sell.

...wineries that wont take on

water will be those who devote

time and resources to developing

customer level preference

information.

Tere is a saying carpenters oten ciMeasure twice. Cut once. Even weekecarpenters hate to make a mista

measuring and be orced to make anothtrip to the lumberyard. But when it comto pricing decisions and marketing, amowners too oten skip the measuring steTey estimate once, make a decision, athen adjust with thousands o dollin lost opportunity in play. Instinct in

new normal may be deceptive.

Figure 7: Strongest Growth By Retail Price Point


0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

$7.00

-$9

.99

$10

-$1

2.99

$13

-$1

6.99

$17

-$1

9.99

$20

-$2

4.99

$25

-$2

9.99

$30

-$3

4.99

$35

-$3

9.99

$40

-$4

9.99

$50

-$6

4.99

$65

-$7

4.99

$75

-$8

9.99

$90

-$9

9.99

>=$1

00


13/24

APRIL 2010


In this market where the rising tide doesnt

oat all boats anymore, the wineries that

wont take on water will be those who

devote time and resources to developingcustomer-level preerence inormation

(CRM) and embed curiosity into their

culture. Questions such as: Why did

members leave the club? How old are my

customers? Do younger buyers purchase

dierent SKUs? How do my customers

preer to communicate? Do they like to

come to consumer events, or do they

really preer to entertain at home with my

wines? How oten do they buy? Are older

buyers purchasing more than youngerbuyers? Are those who buy my wine using

social media? What is the most a given age

group paid or a bottle o wine in the last

six months? Te list o questions is endless

and each drives at actions that can be

taken to improve sales and marketing.

Tere are many ways to collect data,

including asking the sales orce to

collect inormation rom their drive-

arounds, asking tasting room sta to doverbal interviews, using highly-evolved

CRM tools, and taking advantage o

inexpensive or ree online survey tools

that wineries can employ to get at some

o these answers.22

Demographics

With your market research department

now ormed, how do you group

customers? Are they male or emale?

Young or old? Have they enough pence

to make a purchase? We are aware o

one tasting room that proles each wine

buyer and checks o a box on the internal

sales document to group buyers by

demographics. From that data, it knows

in large terms who is buying what and

how much they spend. Tat inormation

helps make better marketing decisions.

O course, sometimes the guess is wrong,

but most o the time its close enough.

King Arthur: Old woman.23

Dennis: Man.

King Arthur: Man, sorry. What

knight lives in that castle over

there?

Dennis: I'm 37.

King Arthur: What?

Dennis: I'm 37. I'm not old.

King Arthur: Well I can't just callyou "man".

Dennis: Well you could say

"Dennis".

King Arthur: I didn't know you were

called Dennis.

Dennis: Well you didn't bother to

find out did you?

King Arthur: I did say sorry about

the "old woman", but from behind

you looked...

Each generation or cohort as it is

called by demographers has its own

palate o generalized experiences that

support its own values and tastes. Heres a

test: Do Millennials, Gen-X, Boomers, or

the Greatest Generation most value club

memberships?24 Te answer according

to social anthropologists is the Greatest

Generation. You may have noticed how

many Elks, Moose, Masons and Grange

Hall organizations are in disrepair. Tats

because the Greatest Generation has less

spending power today and are getting

along in years and Boomers didnt ollow

their lead to replace them in social clubs.

Tose in the Greatest Generation have a

dierent idea o socializing compared to

Millennials.25 Tat inormation mig

make you adjust your club strateg

depending on the consumer demograph

in your club.

Millennials have been consistently not

as the next greatest opportunity

growing the wine business and indee

the Millennials by all accounts are mo

tuned into wine, nd more pleasure in

and show a stronger interest in the produ

compared to their largely Boomer coho

parents. Studies show this generation

less divided by cultural and geograph

boundaries than ever beore. Teycloser socially and more homogenous ev

between dierent countries and cultu

because o the advent o e-mail, te

messaging and online social networki

channels which ought to in theo

make lie easier or wine marketers. T

are more interested in a work-lie balan

than their parents were, and more grou

oriented.26 But the question you shou

ask is: Are Millennials buying ne win

Largely the answer appears to be no. Tsaid, i they are o drinking age (mo

are not), they have a air amount

discretionary income.

are Millennials buying fine

wine?

Purchasing Power Post-Crash

According to the Nielsen Company,

year the Boomers spent the most

wine at $125 per capita, ollowed

Greatest Generation who spent $1

per capita, Gen-X $78 per capita, a

the Millennials who brought up the re

spending $61 annually (hal the spendi

o their older and wiser cohorts). T


14/24

APRIL 2010


data are not broken into price points

per bottle, but i one can assume the

Millennials drink about the same volume

as the Boomers,27 it can be intuitedthat Boomers are spending about twice

as much per bottle as the Millennials.

Te Wine Market Council urther noted

in their 2009 report on wine trends

that Boomers still have almost twice

the impact in the purchase o wine or

the core drinker category,28 compared to

either the Millennials or the Gen-Xers.

Actual spending by the Boomers is in

contrast to a comment we made at thebottom o the market crash in April o

2009 that said, For that segment o BabyBoomers who have seen their net worthdrastically reduced and who have been the

prime target o wine marketing or nearly 20 years, a $50 bottle o wine is nowpermanently out o the question or a normalpurchase."Certainly the statement is trueor those Boomers nearing retirement who

had to alter their previously spendthrit,

credit-enhanced and saving-averse waysout o need. And its also true that wine

over the $50 price point has slowed in the

market. But the comment was overstated

as the spread o wealth and income

across age groups suggest the Boomer

cohort is reacting to the diminution o

their wealth in a little dierent manner

than we supposed.29 Paraphrasing Mark

wains quote in his letter to the NY Sun,as it relates to the ne wine business,

reports o the Boomers' demise have

been greatly exaggerated.

Cohorts with Capacity

Demographics and proling can help us

understand ones willingness to buy, buteconomics comes into play when it comes

to understanding ones capacityto purchasea luxury good. o get a sense o which

cohorts and age groups have the capacity

to purchase luxury goods, we looked to

inormation provided by the U.S. Census

Bureau on both wealth and income levels.

Te last inormation we ound on wealth

broken out by age was rom the 2002 survey

year released in April o 2008 (Figure 8). It

wasnt precisely broken out by cohort range,and the wealth numbers using 2002 survey

inormation are slightly dated. Tat said,

the market correction probably reversed

wealth rom 2009 back to 2002 levels, so

the inormation is close enough or making

the point. Te data reveal that the Greatest

Generation still has the most wealth o

the generations, ollowed closely by t

Boomers, dropping signicantly with t

Gen-Xers and again with Millennials havi

amassed about 2 percent o the Boomwealth early in their careers.

As previously noted, the Nati

Restaurant Association tracks househo

making more than $70,000 as they a

the ones most likely to dine out a

less impacted by recession. We review

Americans sorted by age in the top

percent o all wage earners. Tat gro

roughly starts at $100,000 per househo

and intuitively would be the wage earn

most likely to signicantly impact

wine sales. In Figure 9, we note again th

the Boomers lead the pack in the high

paid, ollowed by the Gen-Xers, the st

working Greatest Generation, and

again are the Millennials.

...reports of the Boomers' demise

have been greatly exaggerated.Source: US Census Bureau April 2008

Figure 8: Median Net Worth By Age Who Has Wealth?

2002 DollarsMillennial

Gen X

Boomers

128,800

Median net worthMedian net worth excluding home equity

131,950

137,340

132,600

82,435

18,446

41,191

33,876

27,446

23,000

17,91875 Years and older

70 to 74 years

65 to 69 years

55 to 64 years

45 to 54 years

35 to 44 years

Less than 35 years

9,512

5,438

2,446


15/24

APRIL 2010


Finally we reviewed the unemployment

rate sorted by age post-crash and ound the

severity o the unemployment rate today

is inversely related to age. Said plainly, theyoungest have the highest unemployment

and the oldest non-retirees the lowest

unemployment rate. By cohort, the latest

data show 16 percent unemployment or

the Millennials, the Gen-Xers about 9

percent, and the Boomers hovering in the

low 7 percent range.

Te clear reviews o the data indicate

that the Millennials may someday be

the center o a amily winerys customerdemographic, but post-crash and probably

or the next decade, they are unlikely

to matter as much as the Boomers and

Gen-Xers when purchasing luxury wines.

Teir palates and wallets will grow, so the

wineries that have lower priced SKUs will

nd this a ertile marketing opportunity

that will bear longer-term results.

Millennials may someday bethe center of a family winerys

customer demographic, but

post-crash and probably for the

next decade, they are unlikely to

matter as much as the Boomers

and Gen-Xers when purchasing

luxury wines.

Electronic Support

Electronic support seems to have its own

liecycle o introduction, adoption, misuse,

correct use, and nally acceptance o some

dened use by the masses. Troughout

these stages, so that no traveler in the land

need consult the Book o Armaments,

support business will orm beneath thy

eet to both enlighten and give application

to the newest and greatest weapon.

King Arthur: How does it... um...

how does it work?30

Sir Lancelot: I know not, my liege.

King Arthur: Consult the Book of

Armaments.

Brother Maynard: Armaments,

chapter two, verses nine through

twenty-one.

Cleric: [reading] And Saint Attila

raised the hand grenade up on

high, saying, "O Lord, bless this

thy hand grenade, that with it thou

mayst blow thine enemies to tiny

bits, in thy mercy." And the Lord did

grin. And the people did feast upon

the lambs and sloths, and carp

and anchovies, and orangutans and

breakfast cereals, and fruit-bats and

large chu...

Tink back not too long ago and most

o us still remember when the e-mail era

began and some early adopters used it as

a cost eective way to send mass e-ma

to lure people into purchase decisio

with discount oers.31 Tat was co

until the term e-mail blast later becamsynonymous with spam32 and lost

useulness. Ten the Web became r

and wineries all got Web pages. T

was pretty cool too, because it me

computers were connected with ea

other. But nothing happened with sa

until the advent o electronic shoppi

carts, aster modems, ulllment and t

addition o POS tools. About that tim

we started driving eyeballs to our sites a

became obsessed with clicks, thinkingsale was all about the number o at ba

versus the quality o the plate appearan

More recently we have seen the dynam

growth and evolution o social media.

Many early adopters o social med

have their business prole pages up a

running. Its easy enough to get a Facebo

page, but is it helping you sell? Ju

what is your digital media strategy? A

what about you wits? (I think Ill le

Figure 9: Composition of the top 20% of US Wage EarnersBy Cohort


1.45%

12.19%

22.24%26.40%

19.32%

9.11%

Mille

nnials

Mille

nnial/G

en-X

Gen

-X

Boom

erCoh

ort#

1

Boom

erCoh

ort#

2

GreatestG

eneratio

n


16/24

APRIL 2010


that discussion or the present mostly

because I dont get witter yet.) But

rounding back to market segmentation,

are you targeting mature auents or areyou targeting the Millennials with your

social media eorts? You might be getting

riends and ollowers, but what is social

media creating or your brand image? Is

that positive or negative? Who uses social

media anyway?

O course, the answer to the last question

is evolving as each year the users o social

media grow and the masses discover the

power o that connectivity. But it maysurprise you to know that in one survey

o auents recently, 70 percent o people

over 40 and nearly 80 percent o total

auents say they have a prole page on

a social media platorm, but its use is

to gather inormation about a purchase

decision rather than actually buying

something. In reality, the evolving use

o social media may be to connect with

your customers and hear what they think,

more than specically selling.33

...70 percent of people over

40 and nearly 80 percent of

total affluents say they have a

profile page on a social media

platform.

For 2010, i you havent already started

some level o customer segmentation and

research, start in a meaningul way and

embed the process into your culture. I

you havent yet adopted CRM, consider

implementing that as a connecting tool

or email, phone, social media, Web sales,

the wine club, tasting room ulllment

and compliance. CRM at its core is

simply collecting inormation about your

customers so you can properly market

to them, giving them what they want.It limits the guess work that takes place

in transactional selling where you have

to taste through or discover a prospects

preerences each time. It allows you to

scale electronic relationship building

by creating individualized experiences

or groups o people. CRM is the glue

that links all the other electronic tools

together, collecting data, then allowing

you to segment your Millennials rom

your Greatest Generation customers. Amarketing genius in the Silicon Valley

once told me the most important sale is

the second one. Understanding how to

link this data and support relationship

building and the second sale will be a key

to the health o your online and oine

business in the uture.

Credit Availability

A big topic in the world in the past coupleyears has been the system. Is it working?

Are businesses able to get working capital

or are they being repressed by the system?

And beore we go urther, may we just say

its not our ault! (Were just sayin)

Dennis: Come and see the violence

inherent in the system. Help! Help

I'm being repressed!King Arthur: Bloody peasant!

Dennis: Oh, what a giveaway! Did

you hear that? Did you hear that

eh? That's what I'm on about! Did

you see him repressing me? You

saw him, didn't you?

But back on point, when we ask

wineries to compare commercial cre

availability, terms and price pre- a

post-crash, the answers were ar monegative than we expected (Figu

10). Perhaps our experience is unli

other banks. SVBs wine division h

certainly seen a signicant up-tick

new borrower requests this past year, a

we grew substantially as a result. Fr

experience, we knew intuitively cre

had been tightened at most institution

but the surprise was the magnitude a

unanimity o belie with 71 perce

saying credit has become more restrict

than it was pre-crash.


Figure 10: Ease of Finding Commercial Credit

0%

10%

20%

30%

40%

50%

Much

easier to

come by

Somewhat

easier to

come by

Pretty much

unchanged

in rates

terms and

availability

Somewhat

more

difficult to

come by

Much more

difficult to

come by


17/24

APRIL 2010


A bank jumping into the wine businessater the last recession would experienceavorable conditions up though Q3 o

2007. Most deals it booked perormed wellin the growing economy, but regulatorsget very direct when a portolio o loanshas more than about 12.5 percent o theloan balances characterized as havinga material weakness. With 7 percento the industry describing themselvesas very weak today and almost 30percent slightly weak or worse, its nothard to imagine a lender taking on morethan average risk in the past several

years and now being required to makechanges to their lending practices. Tosechanges would apply to healthy and weakborrowers alike. Its unortunate rom aborrower perspective because 71 percentdescribe themselves as good nancially oreven better. Tose owners would clearlybe conused or rustrated over changesin their lending relationship when theyare doing well. Te variable in thiscase is the specic nancial institutions

understanding o the wine business and/or its own regulatory health.

Producer Level Supplies

French Soldier: You don't frighten

us, English pig dogs. Go and boil

your bottoms, you sons of a silly

person. I blow my nose at you,

so-called "Arthur King," you and all

your silly English K-nig-hts.

I dont know what this quote has to

do with anything pigs hording wine

no dog wine not moving no.

It didnt matter in the nal analysis. I

cracked up watching that part so had to

put it somewhere.

When the wine industry experiences an

inventory imbalance, whether rom a

supply shock (excess supply) or a demand

shock (reduce willingness to spend), thereaction by producers is the same. Tey

blend down reserve wines into lower-

priced oerings and sell o bulk. Higher

quality bulk is then purchased by other

wineries otentimes or less than the cost to

produce, and put into less expensive SKUs.

Te end result is the value-conscience

consumer can nd better value at lower

prices, but the trend is not sustainable.

Te production o ne wine is

expensive, lot-by-lot and barrel-by-bar

undertaking. Wineries wont produ

uneconomically or much more than oto two years as they balance their suppli

Once inventories are corrected in t

cellar, the wine consumer who discover

great values in a disjointed market

orced with the choice o paying the sam

or lesser quality wine in the bottle, or h

to be willing to price up slightly to

the quality they want.

Figure 11: Balance of Supply of Wine In Cellar


0%

10%

20%

30%

40%

50%

60%

Have way too much

wine

Have too much wine Are roughly in

balance

Are short on wine Are very short on

wine


Figure 12: Percent of Respondents Reporting Net InventoryImbalance

39.47% 38.89%

35.00%

31.78%

27.46%26.04%

18.75%16.67% 15.79%

-25.00%

Oreg

on

Men

docin

o&La

keCoun

ties

Was

hington

Napa

Averag

e

Sonoma

Mon

terey

Count

y

Lod

i

SanL

uisObis

poCo

unty

Cent

ralVal

ley


18/24

APRIL 2010


Figure 13: Bulk Wine Positions

So with the value-seeking consumer

easting on values in 2009, (lower priced

and higher quality), the next most

obvious question is when wineries willstop blending down their good juice

into less expensive wines. Knowing that

answer gives a good indication o where

we are in the inventory-balancing cycle a

little more than a year into the correction,

as well as an indication with respect to the

likelihood o continued discounting.

From the SVB Wine Conditions survey in

January 2010, it was a bit o a surprise to

us that 35 percent said they still had toomuch wine on hand in the cellar. We have

seen clients and prospects aggressively

discounting, blending down, and selling

bulk, taking their rst loss and positioning

or the uture. But the 35 percent who still

say they are long portends a continuing

period o discounting or the consumer, as

well as a level o additional bulk wine sales

as we move deeper into 2010. Tat said,

wineries walk a tightrope on their cellars

predicting what will sell in two years. We

believe at least a part o the excess supply

in bulk is being held by wineries that are

now hedging their bets on the uture and

want to get a better eel or the marketbeore cutting loose o upside opportunity

in good bulk wine.

A second question regarding supply regards

the appellation as some are closer to being

in balance than others. We netted out the

responses o those wineries that reported

excess positions, against those reporting

short positions with inventories, ignoring

those who said they were in balance.

Figure 12 shows that Oregon has thelargest imbalance and the appellations

that produce wines in higher-scale and

in lower price points are the closest to

being in balance. Te region reporting the

only net shortage is the Central Valley o

Caliornia ,though it should be noted that

it is the most at risk or continuing oreign

bulk imports that today are being used to

ll 25 million cases o domestic brands.

Te clear message is that we will continue

to see some level o discounting in 20

and good value wines will be available

the consumer, much to the consternati

o ne wine producers who will take tnancial hits or another year.

We have monitored the level o b

and grape supply by varietal in a ch

since 2006 to understand the impact

evolving and changing tonnage rom t

vineyard. As we have said in the past, t

best thing about the current recession

we are largely not in a position o ov

supply and, with the exception o Oreg

Pinot Noir and Pinot Gris, not goito see non-bearing acreage make t

current imbalance worse. Tis year the

are no varietals we view as long. Even w

the recession, we are closer to being

balance. But that is an average and th

will be some vineyards this next seas

that may still nd it hard to get a contra

while others in higher demand will ha

their choice o suitors.

Sources: Nielsen Scan Data, Ciatti Company, Turrentine Wine Brokerage, SVB Research

Varietal2009 Sales Growth

Rate >$202006 2007 2008 2009 2010

Chardonnay 2.50%

Sauvignon Blanc 7.40%

Cabernet 4.80%

Merlot -1.70%Pinot Noir 7.20%

Syrah -7.60%

Zinfandel 3.20%

Overall Premium

Short

Short to balanced

Balanced

Long to Balanced

Long


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APRIL 2010


Forecast

Sir Bedevere: There are ways

of telling whether she is a witch.

Peasant 1: Are there?

Oh well, tell us.

Sir Bedevere: Tell me. What

do you do with witches?

Peasant 1: Burn them.

Sir Bedevere: And what do

you burn, apart from witches?

Peasant 2: Wood.

Sir Bedevere: Good. Now,

why do witches burn?

Peasant 3: ...because

they're made of... wood?

Sir Bedevere: Good. So

how do you tell whether

she is made of wood?

Sir Bedevere: Does

wood sink in water?

Peasant 1: No, no, it floats!... It

floats! Throw her into the pond!

Sir Bedevere: No, no. Whatelse floats in water?

King Arthur: A Duck.

Sir Bedevere: ...Exactly.

So, logically...

Peasant 1: If she weighed

the same as a duck...

she's made of wood.

Sir Bedevere: And therefore...

Peasant 2: ...A witch!

Tis is just about how we come up with

our orecasts. Its all logical and makes

completes sense. A little wizardry and a

glass o vino and this is what thou canst

expect? We sayeth, I music be the ood

o love, play on. Give us excess o it, that

sureiting the appetite may sicken, and so

die.34 What?

Looking orward, the U.S. is expectedto be the number one wine-consuming

country in the world by 20112012,

with a projected volume o around 310

million cases by 2013 due to growth in

per capita consumption by Americans.35

Te outlook or small amily-owned

wine business in 2010-2011 is probably

best described as mixed, with success

dened more by the business model,

capitalization and proessionalism o

management. Tere will be more winners,losers and some start-ups taking advantage

o opportunities created by change.

In 2010, we expect sales o ne wine

to grow in the range o 8-12 percent.

Our orecast is supported by improving

luxury consumer trends, bottoming o

the de-stocking phase o the business

cycle, recovering stock market wealth or

Boomers, orward-looking improvement

in restaurant sales, better spending romcorporate &E and the national economy

remaining somewhat more stable than the

year behind us.

We believe the nancial perorma

will be negatively impacted by continu

discounting as inventories balance o

this year with demand, higher taxirom states scraping to balance th

own budgets, distribution and chann

shiting issues, and echoes o the mark

crash that will be addressed in nation

and global politics then played out

world debt and equity markets. O

orecast would be changed i there we

a second dip in the stock market. Its n

something we are anticipating, but t

possibility still exists.

Overall protability in the amily-r

wine business will continue to be s

with lower gross and net prot or

next two years as higher cost invento

is ushed through the income stateme

Growers will continue to nd difc

conditions renegotiating or prices pa

in prior agreements, except or the mo

prized ruit.

Following our orecast o modest growin the ne wine segment, we belie

Figure 14 is probably close to reasonab

relative to what we expect or mark


Figure 14: Expected Sales Growth

0%

5%

10%

15%

20%

25%

30%

>=20

%dec

reas

e

15-19

%dec

reas

e

10-14

%dec

reas

e

5-9.%

dec

reas

e

.01-4%

dec

reas

e

0%(flat

sales

growth)

.01-4%

increa

se

5-9%

increa

se

10-14

%increa

se

>=15

%increa

se%o

fRespondents


20/24

APRIL 2010


growth. Added up, 80 percent o those

surveyed are expecting sales growth in

2010. Te 40 percent that expect growth

above 10 percent may be a little optimisticin our view, but we havent drilled down

on the detail o those respondents and its

possible they are small, maybe newer and

coming o a small base ... then again,

they could just be optimists!

Speaking o which, 67 percent expect 2010

will be a good year and only 26 percent

are suggesting they will be just treading

water. Given the tight credit, constricted

marketplace, and excess supply that aredescribed in the other charts, one might

reasonably expect a ew less optimistic

souls, but hey this is the wine business.

My hope is this is simply saying wineries

are hoping or the best, but planning with

a realistic bent or a slow recovery or the

U.S. wine consumer.

King Arthur: On second thought,

let's not go to Camelot. It is a silly

place.

GOVERNMENT WARNING: (1) ACCORDING TO THE SURGEON GENERAL

STRESSING ABOUT THINGS YOU CANT CONTROL WILL LEAD TO DEFECTS IN

LIFESTYLE.(2) COMPLETELY IGNORING THESE DEPRESSING EVENTS THOUGH WILL

LEAD TO THE EARLY TERMINATION OF YOUR CHOSEN PROFESSION.(3) LISTENING

TO THE FAR LEFT OR RIGHT REGARDING ROOT CAUSES OF THE ECONOMIC

MELTDOWN WILL CAUSE INCREASED CONSUMPTION OF ALCOHOLIC BEVERAGES

WHICH IS A GOOD THING IN MODERATION BUT IMPAIRS YOUR ABILITY TO DRIVE A

CAR OR OPERATE MACHINERY, AND MAY CAUSE HEALTH PROBLEMS IF SAID

MACHINERY IS BIGGER THAN YOU. (4) THE GOVERNMENT IS HERE TO HELP AND

HAS THE SITUATION UNDER CONTROL.


21/24

APRIL 2010


Silicon Valley Banks Proprietary Peer Group Metrics

Silicon Valley Banks Peer Group Analysis program is a benchmarking tool the company developed to track and compare a variety

nancial measures among premium wineries. Due to the companys niche ocus and signicant market share o premium winerie

it is able to develop meaningul benchmarking inormation and it makes the data available to its clients. Te data, based on nancinormation rom over 100 premium wineries over several years, also allows Silicon Valley Banks Premium Wine Group to moni

industry trends.

About SVB Financial Group

For 25 years, SVB Financial Group and its subsidiaries, including Silicon Valley Bank, have been dedicated to helping entrepreneu

succeed. SVB Financial Group is a nancial holding company that serves companies in the technology, lie science, venture capit

private equity and premium wine industries. Oering diversied nancial services through Silicon Valley Bank, SVB Analyti

SVB Capital, SVB Global and SVB Private Client Services, SVB Financial Group provides clients with commercial, investmen

international and private banking services. Te company also oers unds management, broker-dealer transactions and ass

management, as well as the added value o its knowledge and networks worldwide. Headquartered in Santa Clara, Cali., SV

Financial Group (Nasdaq: SIVB) operates through 26 ofces in the U.S. and international operations in China, India, Israel and tUnited Kingdom. More inormation on the company can be ound atwww.svb.com.

About Silicon Valley Banks Wine Division

Silicon Valley Bank is the premier commercial bank or emerging, growth and mature companies in the technology, lie scien

private equity and premium wine industries. Its Wine Division specializes in commercial banking or premium wineries an

vineyards and the industries that support them. SVB has the largest team o commercial bankers dedicated to the wine industry

any bank nationwide. Founded in 1994, Silicon Valley Banks Wine Division has ofces in Napa and Sonoma counties and serv

clients in Napa, Sonoma, the Central Coast o Caliornia, Oregon and Washington. By virtue o its dedication to the wine indust

Silicon Valley Bank is able to support its clients consistently through economic and growth cycles, and oer counsel on many aspe

o their business, beyond traditional banking services. Silicon Valley Bank is a member o global nancial services rm SVB Financ

Group (Nasdaq: SIVB), with SVB Analytics, SVB Capital, SVB Global and SVB Private Client Services. More inormation on t

company can be ound atwww.svb.com.

Contact Us:

For more inormation about this report or Silicon Valley Banks Wine Division, please contact us:

Rob McMillan Bill Stevens

Founder Division Manager

Phone 707.967.1367 Phone 707.967.1373

[email protected] [email protected]


22/24

APRIL 2010


Cover photo courtesy o Natalie McMillan Photography.

tallt - to stand above others in a arrogant manner; a renaissanceera English word in disuse.

Our orecast is conditioned on the lack o a second dip which we view as possible but not plausible. here is no question that markets still are ull o

unknowns, stretching rom government and central banks actions and lack o action, sovereign deault risk and dysunctional credit markets. Any subsequeshock to the consumer will delay a rebound in all consumer markets.

http://www.youtube.com/watch?v=grbSQ6O6kbs

he SVB Annual Wine Conditions Survey is sent out early each year as part o the preparation or this report. his year, the survey was completed on Januar15 and had 465 West Coast respondents and a 21 percent response rate. he complete set o responses, charts and summary analysis is sent exclusively to thparticipants. All wineries are welcome to participate. o participate in the 2011 survey, please email the author.

Its been pointed out the way the question was asked using the suggested retail price (SRP) could cause ambiguous results when looked at rom the positioo the winery and discounting. he SRP could remain the same at the checkout stand even while the winery oered up promotions and allowances to incenthe movement o the wine. he point o the question however was rom the perspective o the consumer and rom that perspective, the consumer would sethe same price with or without discounting.

http://www.youtube.com/watch?v=zrzMhU_4m-g&playnext_rom=QL

Distributors need to know they can get the wine. In a short market they horde as a measure o saety. In a long market they dont worry about it and go t

as close to just in time ordering as they can get. But it doesnt matter i the situation was a demand shock caused by recession or a supply shock caused bover-planting. he reaction is very much the same in the distributors world.

http://www.youtube.com/watch?v=9V7zbWNznbs

http://www.youtube.com/watch?v=BZwuo7zKM8

he Current Situation Index measures current trends in our industry indicators (same-store sales, traic, labor and capital expenditures). Any reading belo100 signiies contraction in the current situation indicators.

Hudson Riehle, SVP, Research and Inormation Services, National Restaurant Association.

he Expectations Index measures restaurant operators six-month outlook or our industry indicators (same-store sales, employees, capital expenditures anbusiness conditions).

http://www.youtube.com/watch?v=2eMkth8FWno&eature=related

SVB Peer Group Analysis is a proprietary inancial data base that includes both SVB client and prospect inormation. Aggregated into custom peer samp

sets to maintain privacy, it allows SVB Relationship Managers the opportunity to present annual comparative inancial perormance data clients to thBank's clients, giving them a unique tool and a leg up on non-SVB clients. With consolidated inormation dating back to 1991, we are also able to use thhomogenous inormation as a tool to express top-level industry inancial trends.

We dont want to get too ar aield discussing the economy this year, but as we see things, the subprime crisis has very likely created a secondary bubble isovereign debt. According to Bianco Research, LLC there is just as much worldwide debt as there was pre-crash. Its just morphed to sovereign balance sheetcreating additional risks. Greece is the most visible starting point, but several other countries are dealing with their own debt issues and could likely slow thpace o recovery in Europe. he U.S. has an advantage as the worlds reserve currency, but the U.S. is not immune. he U.S. Congressional Budget Oicissued a report in March showing that the national deicit, which took 234 years to reach $10 trillion, will likely double during the current administrationtenure. Further, within this decade, the budget will place the U.S. government at a point where the total debt reaches 90 percent o our own GDP. Its adiscussion best had over a glass o wine to numb our perception o reality.

Ater getting the results back, we were not surprised to ind there was a zero percent response to the choice o wineries describing their inancial conditioas dead. It seemed like a thorough approach to the question when we asked it, but looking at the results its a little like taking role call in class and askineveryone who isnt there to raise his hand.

http://www.youtube.com/watch?v=GJoM7V54-che Unemployment Rate includes the unemployed, in addition to those who havent ound jobs that have allen o the ormal Unemployment Rate, pluthose who are under-employed either working less than ull-time.

here is no uniorm market segmentation or aluent households. We are deining the aluent consumer as one making income above $100k annuallyand the absolute aluent consumer as one with an annual income in excess o $250,000; the top 2 percent o households according to U.S. Census BureauPublication H-10 or 2009. Survey inormation or the absolute aluent rom Pam Danzinger, Danzinger Marketing.

Herms is a private company. heir inancial results can be reviewed at http://inance.hermes.com/en/2009/result_annuel.php.

Dow Jones and other public sources

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2010 - 2011 State of the Wine Industry2010 - 2011 State of the Wine Industry

APRIL 2010

Some examples o on-line survey tools include http://www.kwiksurveys.com/, http://www.surveymonkey.com/,

http://www.reeonlinesurveys.com/, http://www.reesurveytools.com/ and a host o others.

http://www.youtube.com/watch?v=dOOKA0aGI0

Greatest Generation/WWII Cohort (ages 65 to 89), Boomers Cohort #1/Edge Boomers (ages 54 to 64), Boomers Cohort #2 (ages 46-53), Gen-X/Baby B(ages 30 to 45), Gen-Y/Millennial (ages 10 to 29)

his is the irst time weve ever had 4 generations in the work place. Understanding the cohorts is o value i you want to resonate with their value system asell in a meaningul way. A couple good books: Y-Size Your Business (http://www.jasondorsey.com/books_YSize.html) and Dot Boom: Marketing to BBoomers hrough Meaningul Online Engagement (http://dotboombook.wordpress.com/about/) .

MEININGERS WBI, May 2009. Lulie Halstead, CEO, Wine Intelligence

When I was a Millennial; beore I became a Boomer, I used to sample rom the gallon jug o wine stored under the sink that my Greatest Generation atstored next to the garbage disposal. Determined to not undermine consumption statistics, I dutiully replaced what I consumed with tap water. So i the wris any indication o actual consumption trends, it is possible Millennials consume a higher volume o wine relative to Boomers.

he Wine Market Council deines a core drinker as one who drinks wine at least once a week. Just once a week ...based on that metric, Im not sure I wto know how my wine consumption patterns are deined.

According to a 2007 study by the American Association o Retired People, more leading-edge Boomers view retirement not as the completion o a career, ban opportunity to change liestyles. 70 percent expect to continue working into their retirement years and the recession has likely increased that percentage

http://www.youtube.com/watch?v=xOrgLj9lOwk

I remember when the e-mail era began at SVB and, believe it or not, still have my irst e-mail address rom 1990. Its [email protected] i you need a gowine bank. I didnt get to inish my name completely on the address as you might notice (its missing the inal n). hats because we were concerned about tprocessing and storage o bits and bites in 1991. (I am starting to sound like my dad. You guys have it easy. I remember mimeographs ...)

According to the Internet Society and other sources, the term spam is derived rom the 1970 Spam sketch o the BBC television comedy series "Monty PythFlying Circus." Didnt think Id work that into a ootnote did you?

Pam Danzinger Marketing. he survey cited placed the average age o respondents at 45.9 years and average household income was $239,300. Nearlypercent o the aluents polled were classiied as 'ultra-aluents,' those at the top 2 percent o U.S. households with incomes o $250,000 or more.

William Shakespeare,welth Night. We are running out o old English words so dropped in a little Shakespeare.

La Journe Vinicole, Edition 2010, February 24 2010

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Special thanks to: ony Correia - Correia-Xavier, Inc.(http://www.c-x.com/), Napa Vintners (http://www.napavintners.com/), Oregon Wine Board, (http://www.oregonwine.org/HomPaso Robles Wine Country Alliance (http://www.pasowine.com/), Washington Wine Commission (http://www.washingtonwine.org/ ), Sonoma County Vintn(http://www.sonomawine.com/), Mendocino Winegrape & Wine Commission (http://www.mendowine.com/ ), Paul Mabray - Vintank (http://www.vintank.com/), StFredricks - urrentine Wine Brokerage (http://www.turrentinebrokerage.com/), Glenn Proctor - Ciatti Company (http://www.ciatti.com/), Carrie Merritt, Maria Menard, CSherman, Scott Brown, Michael Herzberg, Marisa Montanez, Drew Beito, Penny Northrop and Mark Freund.

his material, including without limitation to the statistical inormation herein, is provided or inormational purposes only. he material is based in part on inormation rom thparty sources that we believe to be reliable, but which have not been independently veriied by us and or this reason we do not represent that the inormation is accurate or complhe inormation 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 aspeciic proessional advice beore making any investment decision. Nothing relating to the material should be construed as a solicitation, oer or recommendation to acquiredispose o any investment or to engage in any other transaction.

Foreign exchange transactions can be highly risky, and losses may occur in short periods o

2010-2011 State of the Industry

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