2020 US Wine CurrentsWashington Winegrowers Convention

Rob McMillan, EVPSilicon Valley Bank

Presented March 3rd 2020

Washington Centric

-12.2

8 8

39

-12

0 0

-4

-47

-20

-100

-50

0

50

100

150

Economy ConsumerDemand

SalesChannels

Grape Supply Labor Alcohol Laws Capital ForeignCompetition

Substitutes Overall

Net S

enti

men

t Ind

ex

2015 2016 *2017 2018 2019

Change in Washington Industry Sentiment:Successful, but Negative Sentiment – Business is Getting Harder

3Source: 2020 SVB State of the Wine Industry Survey

Overall Industry

Sentiment

Trend of Washington Winery Financial HealthGood, But Getting Weaker as a Trend

4Source: 2020 SVB State of the Wine Industry Survey

6%

8%

31%

19%

31%

6%

0%

5%

16%

29%

34%

16%

1%

6%

22%

36%

23%

12%

3%

8%

28%

43%

13%

8%

2%

6%

10%

29%27%

20%

6%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Dead Very Weak Slightly Weak Good Strong Very Strong Rock Solid

2015 2016 *2017 2018 2019

Growth of Washington DTC as a Percent of Sales

5Source: SVB State of the Wine Industry Survey

49%

51%

52%53%

59% 58% 57%

65%

45%

50%

55%

60%

65%

70%

2012 2013 2014 2015 2016 *2017 2018 2019

Washington: 2019 Direct to Consumer Stats are respectable

Source: Wines & Vines, Savos 2020 Report

2.90%

12.80%

16.10%

5.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

Price Per Bottle Volume Growth Value Growth Market Share of DtC ($$)

Average BritishColumbia Napa County New York OregonSonomaCounty Virginia Washington

2015 1237 1644 2507 527 1288 1096 7892016 1297 1369 2776 587 1099 1644 6562017 1114 1159 1497 2051 716 1039 2075 6182018 1160 1261 1453 712 1004 1482 8082019 1520 1815 1372 2729 1079 1098 1464 942

0

500

1000

1500

2000

2500

30002015 2016 2017 2018 2019

Average Monthly Visitors To the Tasting RoomWashington Taking from California?

7

*Only three years worth of information for British Columbia.*2017 New York did not have a significant number of responses to calculate average in 2018

Silicon Valley Bank and Wine Business Monthly 2019 Insights to Successful Consumer Wines Sales Survey

Above Avg. Results Today,But Washington is part of the Wine Industry and …

… the Industry is Hitting a Ceiling

Total US Table Wine Consumption is Flat … at BestLong Term Wine Trends 1980 to the Present

300

400

500

600

700

800

90019

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

1620

1720

18*2

019

Mill

ions

of G

allo

ns

Source: California Wine Institute, Gomberg-Fredrikson, SVB

155,000,000

156,000,000

157,000,000

158,000,000

159,000,000

160,000,000

161,000,000

162,000,000

163,000,000

164,000,000

165,000,000

$12,000,000,000

$12,500,000,000

$13,000,000,000

$13,500,000,000

$14,000,000,000

$14,500,000,000

$15,000,000,000

Dollars Cases

Current US Off-Premise Wine Sales Trends 2014 - PresentVolume Turned Negative 2017. Value has flattened. Some Channel Shifting.

Dollars

Cases

Source: Nielsen 12-2019

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ry. 16.7%

16.6%

17.1%

17.5%17.7%

2015 2016 2017 2018 52 we 9/28/2019

Private Label Wine Channel GrowingCategory Plays to Frugal Consumer’s Pocket Books

Source: Nielsen Retail Measurement Services, 2015, 2016, 2017, 2018, and 52 weeks ended 9/28/2019

Origin $ $ CYA$ % Chg

YA 9L EQ 9L EQ CYA9L EQ % Chg YA

DOMESTIC 10,638,323,208 69,990,043 0.7 119,123,670 -2,748,337 -2.3IMPORTED 3,826,915,144 7,880,107 0.2 39,527,114 -808,870 -2.0CALIFORNIA 9,579,368,020 61,409,984 0.6 110,526,363 -2,612,746 -2.3WASHINGTON 608,937,551 -14,836,957 -2.4 5,038,221 -174,550 -3.3OREGON 219,134,411 24,091,075 12.4 1,114,914 121,110 12.2ITALY 1,213,754,152 18,509,681 1.5 10,407,186 -112,246 -1.1AUSTRALIA 717,867,363 -15,208,046 -2.1 11,730,989 -326,820 -2.7NEW ZEALAND 507,401,792 38,619,451 8.2 3,635,764 258,289 7.6FRANCE 485,741,469 12,401,969 2.6 2,921,598 -75,274 -2.5ARGENTINA 323,728,442 -21,833,939 -6.3 3,510,600 -294,756 -7.7CHILE 254,015,872 -4,423,065 -1.7 3,842,281 -2,201 -0.1

SPAIN 158,766,744 -9,992,295 -5.9 1,987,319 -110,564 -5.3

Off-Premise Sales By Area of Origin52 Weeks as of 12-28-2019

Source: Nielsen 12-28-2019

Cases - VolumeDollars-Value

TOC

Edit Data Selections

Table of Contents

Market : All Outlets • BA_SUBCATEGORY(C) : TABLE • Product Share Basis : TABLE

Report Name : Report ID : RB01Source : Nielsen AnswersData Context : MFG BevAl Suite WineRun Date : 10/11/18 3:58:13 PM PDT

Copyright © 2018 The Nielsen Company

ReportMeta

Edit Data Selections

https://answers.nielsen.com/portal/site/answers/menuitem.0d4f8dc7a5fb276424fd3c70685072a0/?job_id=A936ABD5BCA94D67A03212F676372C75&open_selector=true

Market : All Outlets • BA_SUBCATEGORY(C) : TABLE • Product Share Basis : TABLE

Report1

Origin$$ CYA$ % Chg YA9L EQ9L EQ CYA9L EQ % Chg YA

DOMESTIC10,638,323,20869,990,0430.7119,123,670-2,748,337-2.3

IMPORTED3,826,915,1447,880,1070.239,527,114-808,870-2.0

CALIFORNIA9,579,368,02061,409,9840.6110,526,363-2,612,746-2.3

WASHINGTON608,937,551-14,836,957-2.45,038,221-174,550-3.3

OREGON219,134,41124,091,07512.41,114,914121,11012.2

ITALY1,213,754,15218,509,6811.510,407,186-112,246-1.1

AUSTRALIA717,867,363-15,208,046-2.111,730,989-326,820-2.7

NEW ZEALAND507,401,79238,619,4518.23,635,764258,2897.6

FRANCE485,741,46912,401,9692.62,921,598-75,274-2.5

ARGENTINA323,728,442-21,833,939-6.33,510,600-294,756-7.7

CHILE254,015,872-4,423,065-1.73,842,281-2,201-0.1

SPAIN158,766,744-9,992,295-5.91,987,319-110,564-5.3

Year-End Sales Growth for Smaller Wineries in Washington: SolidEstimates are normally about 2% High Though

13Source: SVB State of the Wine Industry Survey, October 2015 - 2019

17%

19%

16%

13% 13%12%

15%

13%

11%10%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2015 2016 *2017 2018 2019

Change in $ Sales Change in Case Sales

Washington: Data and Marketing Analytics“Do you have an employee dedicated to analyzing your consumer data?”

14Source: SVB State of the Wine Industry Survey

Full-Time14%

No57%

Part-Time29%

Who is the Current Wine Consumer?

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100

Male Female

MatureBoomerGen XMillennial

Gen

Z

Population is Hitting Milestones. The Current Wine Consumer is Aging.The New Consumer Opportunity is Younger than Today

Source: U.S. Census Bureau

Num

ber o

f Peo

ple

2.3%

16.2%

32.2%

35.9%

13.4%

2.1%

18.0%

32.9%

40.8%

6.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Gen Z (21-22) Millennials (23 - 38) Gen X (39 - 54) Boomers (55 - 73) Mature (74+)

2014 2015 2016 *2017 2018 2019

Which Consumers does Washington Attract?Washington is Attracting the Same Age Consumers as Other Regions

17

Source: SVB Winery Conditions Survey, 2019

This is a Problem

Exclusive Beer18% People/7% $

Exclusive Spirits6% People/2% $ Vol

Wine & Beer19% People/17% $

Wine & Spirits7% people/7% $

Beer & Spirits8% people/9% $

Exclusive Wine15% People/4% $

Most Wine Consumers Drink Across CategoriesOnly 15% of Drinkers Are Exclusive to Wine. Competition is from Spirits, Seltzer & Craft Beer

Source: Nielsen Homescan Panel, Total US: 52 weeks ending 06/29/19 Wine includes Still & Sparkling; Beer includes FMB and Ciders

WineBeerSpirits

Wine/Beer/Spirits27% People/55% $

Wine Beer

Spirits

More Alc. Bev. Consumers Are Selecting SpiritsSpirit Producers Are Better at Marketing Compared to the Wine Community

Source: Nielsen Syndicated Bev Al Databases 52 weeks ending 11-2-2019

2.8

1.31.7

2.1

5.8

2.6

BEER WINE SPIRITS

Wine is 2X more expensive than Beer or Spirits per serving

0

50

100

150

200

250

$-

$2,000.0

$4,000.0

$6,000.0

$8,000.0

$10,000.0

$12,000.0

$14,000.0

$16,000.0

4 Yr Ago 3 Yr Ago 2 Yr Ago 1 Yr Ago Lat. 52 weeks

Num

ber o

f Bra

nds

Mill

ions

of D

olla

rsDollar Sales Number of Brands

Spiked Seltzers: Economic Substitute or Gateway?20% - 40% of Spiked Seltzer Growth is Coming From Wine Occasions

Source: Nielsen, 11-16-2019

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More Young Consumers Drinking Wine in Cans – Occasion Driven?Ready to Drink Sizes Break Down Price Barriers for Frugal Consumers

Source: Nielsen Total U.S. 52 weeks ended 11-2-2019

0

100

200

300

400

500

600

$-

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

4 Yr Ago 3 Yr Ago 2 Yr Ago 1 Yr Ago Lat 52 weeks

# of

Item

s Se

lling

Dolla

r Sal

es

Dollar Sales # of Items

Led by …• White and Pink• 375 ml; 250 ml; 187ml

About 1% of dollars

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

187 ML 375 ML 500 ML 750 ML 1.5 L 3 L 4 & 5 L

Shar

e of

For

mat

Gro

wth

Rat

e

Growth Rate Share

Growth and Share of FormatsSmaller and Alternative Formats Growing – Supports Old & Younger Drinkers

22Source: Sip Source, 9-19Tetra Pak in 500ml

2.1%

0.9%

-0.3% -0.9%

-2.3%

3.4%3.0% 3.0%

2.8%2.3%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Wine On Premise Spirits On Premise

Wine Consumers Opting out of Restaurants: Alc. Bev. is SufferingBy-The-Glass Programs Suffer in Restaurants Today

Source: SipSource, 2019

Spirits

Wine

Younger Consumers Fingerprints on Varietal GrowthBubbles and Rosé Leading Growth – Both Skew to Younger Drinkers

24

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

Shar

e of

Mar

ket

Gro

wth

Rat

e

Growth Rate Share of Market

Source: SipSource, 12M rolling Sept 2019

Younger Consumers Are Spirits and Beer ConsumersWill Younger Consumers Continue to Move to Wine as they Age?

Sources: Scarborough Research, SVB Analysis

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

Millennials (22 - 37) Gen X (38 - 53) Boomers (54 - 72) Matures (73+)

Inde

x Ba

se =

100

Recent Beer Recent Liquor Recent Wine Recent Cannabis

Young Consumers Drink Less AlcoholWhat Happened to the French Paradox and the Mediterranean Diet?

• Source: Nielsen Beverage

5%5%

9%10%

13%14%

15%17%

18%19%

21%24%

32%

0% 10% 20% 30% 40%

I/my partner is expecting or recently had a child

Other

Friends/family are drinking less

More interested in Cannabis

Consuming more non alcoholic beverages

Want to maintain clarity/control

Can't afford to drink as much

Don't want to be hungover

Health related reasons

Don't go out as much as I used to

Consuming more of a different Alcohol beverage

Lost interest in drinking alcohol in general

Opting for healthier lifestyle

Why Are Younger Consumers Cutting Back?Sixty-Three Percent Cited Health as the Main Reason

Survey conducted online by The Harris Poll in partnership with Nielsen (January 7-9, 2019); n=1,964U.S. adults21+

$-

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

$180.00

$200.00

White Hispanic AfricanAmerican

Asian

Young Consumers Are More Ethnically DiverseEven More Opportunity with Hispanic, African American and Asian Consumers

• Source: Nielsen Syndicated Bev Al Databases

Annual Wine Purchases by Ethnicity

Millennials Aren’t BoomersIf You Want to Sell to Someone, Sell Features they Care About

Value Boomer Millennial Action

Support Group Family Friends Drive Club Socialization

Choice in Food Don't eat if it's bad for you Only eat if it's good for you Ingredients, Calories, "Better for You"

Business Capitalism is the path to individual wealth Wealth comes with social responsibility Define Social Reason You Exist

Diversity Civil Rights Movement drove change Social and ethnic diversity drives change Staffing, tasting room diversity, advertising

Landfills and Waste Disposable culture Green, reuse and repurpose culture Packaging, Carbon Footprint, Sustainability

Spending Conspicuously On important things Improve Wine Value by selling on important personal values

Fun Work Before Fun With Everything! Embed into Events, Tasting Room, Marketing & Communications

• Source: Silicon Valley Bank

Changing the Message

The Mixologist, Experience & Fun

Curling lanes …Entertainment

More Fun Social Venues Popping Up Daily

The Experience Is Social. Leverage Community

Alcohol Occasions are Increasingly ActiveIs Wine Something that is Routinely Shared in These Types of Environments?

The Wine Industry's Idea of Fun is Dated

The Solution For Wineries?…Just a Placeholder for a Larger Conversation

Current Marketing for Consumer Goods

Selling Features that Resonate with ConsumersServing Size, Calories, Low Sodium, Low Sugars, Green, Authentic, “Natural,” Causes

The word “No,” Certification Badges, Plant-Based Products

White Claw – Why?Question: Can

We Put Calories on Wine Bottles?

Yes!

Moving Away from Long Days and Cool NightsNobody reads long back labels. We need to adjust to consumers with no time.

Final Thoughts & Take-Aways

42

1. Old & Young: “Two lenses” on all projects, initiatives, strategies, changes and events

2. Be Brave: Sell to Young Consumer’s Values (Health/Pithy/Calories/Fun/Friends)

3. Use Data: Make Marketing & Sales More Effective & Efficient. Understand your Core

4. Internet sales: 3% of winery sales vs total Luxury at 17% on-line (Virtuous Loop)

5. Quality Last: Sell features, values, or a brand concept – and then, sell wine quality

6. Break the Tasting Room Bottleneck: Regional Focus. Take Experience on the Road.

7. Connect: Activate and encourage lateral communication in your Consumer Communities.

8. Wine… is the Beverage Young Consumers Want … THEY JUST DON’T KNOW IT!

Thank You!

For questions and comments on this presentation, or about banking with SVB, contact:

Rob McMillanrmcmillan@svb.com

Slide Number 1Slide Number 2Change in Washington Industry Sentiment:�Successful, but Negative Sentiment – Business is Getting HarderTrend of Washington Winery Financial Health� Good, But Getting Weaker as a TrendGrowth of Washington DTC as a Percent of SalesSlide Number 6Average Monthly Visitors To the Tasting Room�Washington Taking from California?Slide Number 8Total US Table Wine Consumption is Flat … at Best�Long Term Wine Trends 1980 to the PresentSlide Number 10Private Label Wine Channel Growing�Category Plays to Frugal Consumer’s Pocket BooksSlide Number 12Year-End Sales Growth for Smaller Wineries in Washington: Solid�Estimates are normally about 2% High ThoughWashington: Data and Marketing Analytics� “Do you have an employee dedicated to analyzing your consumer data?”Slide Number 15Slide Number 16Which Consumers does Washington Attract?�Washington is Attracting the Same Age Consumers as Other RegionsMost Wine Consumers Drink Across CategoriesMore Alc. Bev. Consumers Are Selecting Spirits�Spirit Producers Are Better at Marketing Compared to the Wine CommunitySlide Number 20More Young Consumers Drinking Wine in Cans – Occasion Driven?�Ready to Drink Sizes Break Down Price Barriers for Frugal ConsumersGrowth and Share of Formats�Smaller and Alternative Formats Growing – Supports Old & Younger DrinkersSlide Number 23Younger Consumers Fingerprints on Varietal Growth�Bubbles and Rosé Leading Growth – Both Skew to Younger DrinkersYounger Consumers Are Spirits and Beer Consumers� Will Younger Consumers Continue to Move to Wine as they Age?Slide Number 26Slide Number 27Slide Number 28Slide Number 29Slide Number 30The Mixologist, Experience & FunMore Fun Social Venues Popping Up DailyThe Experience Is Social. Leverage CommunityAlcohol Occasions are Increasingly Active�Is Wine Something that is Routinely Shared in These Types of Environments? The Wine Industry's Idea of Fun is DatedThe Solution For Wineries?�…Just a Placeholder for a Larger ConversationSlide Number 37Slide Number 38Slide Number 39Slide Number 40Slide Number 41Slide Number 42Slide Number 43