State of the Wine Industry
2013
Wine Has Grown at a 3.4% CAGR Since 2005, Outpacing Total Beverage Alcohol
Supplier $ Share (Billions)
Beverage Alcohol Market Share
2005 – 2011 CAGRs
Wine: 3.4%
Spirits: 3.7%
Beer: 2.2%
$49.9
2000
$52.2
$8.3
$8.6
$16.0
$17.2
$54.9
$56.6
$57.0
$57.6
$59.2
$9.2
$9.4
$9.5
$9.8
$10.2
$18.2
$18.7
$18.7
$19.2
$19.9
$28.8
$28.6
$29.2
2009
2010
2011
$25.6
$26.3
$27.5
2005
2006
2007
$28.5
2008
Beer
Spirits
2011
Wine
16%
Wine
17%
Spirits
29%
Spirits
34%
Wine
Servings (Billions)(1)
Growth in Servings
2011 – 2015P
CAGR: 0.3%
2005 – 2011 Absolute Growth:
118.2
120.8
123.7
124.5
123.9
123.6
124.6
126.0
17.0
17.6
18.3
18.4
18.5
18.7
19.2
20.3
34.9
36.2
37.5
38.0
38.5
39.1
40.2
66.9
67.8
68.2
66.9
65.7
3.6%
42.6
65.1
Beer: (1.7%)
Spirits: 15.0%
Wine: 13.1%
6.1%
4.0%
1.0%
66.2
1.3%
1.1%
0.5%
1.4%
0.4%
2007
2008
Beer
2009
Spirits
2010
2011
0.7%
2.7% 2.5%
1.3%
(0.9%)
2015P
2006
2007
Wine
Source: Beer Marketer’s Insights, DISCUS, IMPACT Spirits Databank.
1.7%
63.1
Beer
2006
(1)
5.7%
3.6% 3.8%
(1.8%)
2005
Beer
49%
Beer
55%
Serving size: Beer – 12 oz; Spirits – 1.5 oz; Wine – 5 oz.
2
2008
2009
(1.8%)
Spirits
(3.1%)
Wine
2010
2011
2015P
Rising Demand and Declining Supply are Creating a Global Wine Shortage
Global Production vs. Consumption
Largest Wine Producing Countries
(Millions of Hectoliters)
(Millions of Hectoliters)
296
280
266
257
273
264
(19%)
52
282
266
269
271
265
(20%)
42
265
248
226
228
230
238
239
238
251
248
240
242
244
236
+57%
10
7
+38%
11
8
Chile
Australia
+24%
13
11
+23%
15
13
China
Argentina
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E
Production
2000
(13%)
22
19
United
States
Spain
2011
(Millions of Hectoliters)
(25%)
31
7.9
7.9
7.8
7.8
France
Largest Wine Consuming Countries
(Millions of Hectares)
7.8
Italy
Consumption
Global Vineyard Acreage
7.9
50
42
33
249
244
(14%)
58
7.8
7.8
7.7
7.7
7.6
(28%)
14
7.6
+148%
12
10
+59%
17
+32%
13
10
(1%)
20 20
23
(13%)
35
+34%
29
30
21
11
5
Spain
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: International Organisation of Vine and Wine and IWSR.
Note: Vinexpo reports the U.S. leading global wine consumption.
2009
2010
Russia
U.K.
China
2000
2011
Per Capita
Consumption
(Liters per Year)
3
24
7
25
3
Germany
Italy
United
States
France
53
13
53
2011
37
Structurally, Supply is Imbalanced in the U.S.
U.S. Vineyard Acreage vs. Rest of World
(2000 – 2011)
Commentary

Germany: +71%
A decrease in vineyard acreage and a steady increase in
demand has led to a structural supply imbalance in the U.S.
–
France: (11%)
Italy: (15%)
U.S.: (2%)
Spain: (16%)
China: +87%

Following a period of “oversupply”, many growers replanted
to more profitable fruits, specifically pistachios and almonds
–

Chile: +16%
South Africa: +5%
Australia: +24%
Fewer California Vineyard New Plantings
(Millions of Hectares)
(Bearing and Non-Bearing Planted Acres)
2000 – 2011 CAGR: (0.0%)
Growth in Consumption: 34%
22
21
19
23
Average revenue per acre for almonds and pistachios
has grown over 130% and 40%, respectively, since 2002
While planting activity is expected to have increased in
2012, it will take 3 – 5 years to capture the benefit from
these new plantings
U.S. Production vs. Consumption
21
Creates opportunities for imports, which have cost
advantaged models relative to U.S. in terms of land,
labor, and water
24
25
26
27
28
28
27
28
490
481
481
29
472
2001
471
475
472
471
473
476
480
29.5
20
20
20
23
19
20
19
22
21
20.6
19
13.2
2000
467
2002
2003
2004
2005
Production
2006
2007
2008
2009
2010
2000
2011
2001
2002
9.9
2003
11.5
2004
12.6
2005
Acreage
Consumption
Source: International Organisation of Vine and Wine and IWSR.
4
14.3
2006
13.0
2007
11.0
2008
New Plantings
7.1
6.8
2009
2010
4.4
2011
Luxury is a Major Growth Segment in the U.S. Wine Industry
2012 U.S. Growth By Price Segment
Lower
Priced
2012 U.S. Top Varietals / Flavors
Higher
Priced
% Sales Growth
2012 Sales Growth Total: 6.0%
Market Size ($ in mm)
$1,758
16.5%
8.3%
$1,343
11.6%
10.9%
10.1%
$1,256
$1,829
$770 $746
$648 $718
8.1%
$487 $531
1.4%
2.7%
0.3%
Value
($4.99 and Below)
1.6%
Premium Glass
($5.00 - $7.99)
Super Premium
($8.00 - $10.99)
2011
Ultra Premium
Luxury
($11.00 - $14.99) ($15.00 and Above)
Pinot Noir
2011
Rank Varietal
2012 Unit Growth Total: 4.7%
18.3%
12.7%
3.1%
(1.9%)
Value
($4.99 and Below)
10.5%
12.8%
10.1%
4.6%
2.5%
Premium Glass
($5.00 - $7.99)
Super Premium
($8.00 - $10.99)
2011
Merlot
2012
% Unit Growth
8.8%
Pinot Gris
Ultra Premium
Luxury
($11.00 - $14.99) ($15.00 and Above)
Chardonnay
2012
$
$
$ Sales
Unit
Share
Sales
% Chg
Share
Units
Unit %
Avg Price
Chg
per 750ml
1
Chardonnay
18.4%
$1,829
4.1%
18.4%
215
3.3%
$6.16
2
Cabernet Sauvignon
13.5%
1,343
6.9%
12.1%
141
4.3%
7.41
3
Merlot
7.5%
746
(3.0%)
8.1%
95
(3.8%)
5.50
4
Pinot Gris
7.2%
718
10.8%
7.6%
89
11.2%
6.28
5
Pinot Noir
5.3%
531
8.9%
4.5%
52
8.4%
9.12
6
Red Blends
4.4%
442
33.1%
3.9%
46
32.3%
9.11
7
Sauvignon Blanc
4.0%
394
12.8%
3.7%
43
9.6%
8.08
8
White Zinfandel
3.7%
367
(6.0%)
4.8%
57
(6.9%)
3.73
9
Muscat
3.4%
339
15.4%
4.2%
49
15.5%
5.68
10
Riesling
2.2%
222
(3.0%)
2.3%
27
(2.2%)
7.42
Total
100%
$9,961
6.0%
100%
1,169
4.7%
$6.14
2012
Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels.
5
Cabernet Sauvignon
Industry Growth is Primarily Driven by the Top 4 Suppliers
Industry Growth by Supplier

Largest Growing Wine Brands in 2012
In 2012, nearly 70% of the Industry’s dollar growth was
driven by the Top 4 suppliers
Other
34%
Trinchero
Family
Estates
8%
The Wine
Group
10%
Rank
E. & J. Gallo
Winery
27%
Constellation
Brands
21%
Growth
$ (mm)
%
1
$65
14.6%
2
48
40.2%
3
37
118.0%
4
24
94.2%
5
24
8.8%
6
21
6.1%
7
18
26.2%
8
18
31.5%
9
18
6.3%
10
15
47.7%
Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels.
6
Brand
Ownership
Larger Producers Aspire to Emulate the “Kendall Jackson Model”
Implications

Jackson Family Wines is the only Top 8
supplier with an average price per
bottle >$10

Other top brand suppliers are focusing
on moving their “center of gravity” to
>$10 per bottle
–
–

$1,897
$13.16
$1,511
$9.85
$9.44
Maintains or expands margin to
combat higher COGS
$6.52
Supply is critical in both strategies
as Top 8 suppliers target >1 million
case brands
$999
$6.43
$3.06
$578
$482
$332
$342
Jackson
Family
Wines
Ste. Michelle
Wine
Estates
$189
Diageo Chateau &
Estate Wines
◦ Translates into more
California appellated wines
–
$5.94
$4.77
De-emphasizing <$10 / bottle
segment where imports have
significant cost advantages
“Premiumization” relies on a 2pronged approach of brand innovation
and M&A
–
Top 8 U.S. Brand Suppliers
Treasury
Wine
Estates
IRI Sales (Millions)
Suppliers will arbitrage existing
fruit from lower margin products
into higher margin products
◦ Proactively phases out
unproductive SKUs while
retaining shelf space
Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels.
7
Trinchero
Family Estates
The Wine
Group
Average Price per 750 ML
Constellation
Brands
E. & J. Gallo
Winery
Top Suppliers are Successfully Innovating at >$10 per Bottle
Largest Suppliers
Growth Drivers
Portfolio Pricing
Growth Price
+125%
$9.65
+83%
$12.38
+28%
$16.46
NM
$13.44
+19%
$14.64
+16%
$15.31
+40%
$9.14
+86%
$7.17
+265%
$7.52
+26%
$16.13
+9%
$9.10
+7%
$14.50
Portfolio Avg. Price Avg. Price 25 Fastest
Per 750 ml
Growing Brands(1) Difference
Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels.
brands by unit growth for brands above 100,000 total units (15 fastest growing brands for The Wine Group and Trinchero).
8
$4.77
$10.59
+122%
$6.43
$9.34
+45%
$3.06
$5.03
+64%
$5.94
$9.87
+66%
(1)
Fastest growing brands are each company’s 25 fastest growing
Top Suppliers are Innovating & Line Extending into the Sweet Wine Phenomenon
Commentary
New Product Lines
Blush Moscato
789%
Red Moscato
501%
Sparkling
Moscato
49%
Red Blends
33%
White Blends
33%
White Moscato
Industry Average
15%
Constellation
The Wine Group
Treasury Wine Estates
Diageo
Beam
Deutsch
6%

Sweet Red and White varietals and blends are growing
significantly faster than the overall average for wine

Large wine companies are developing new brands
targeted to female consumers (i.e., Strut and Butterfly
Kiss)

Gallo with Barefoot and Trinchero with Sutter Home are
examples of line extensions into sweet wine
Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels.
9
Like Innovation, Premiumization and Supply are Key Themes Driving M&A
Accessing Vineyards / Supply

Suppliers are increasingly deploying
capital to lock up supply

Lack of new vineyard plantings in the
U.S. is causing suppliers to evaluate
sourcing overseas
–
As Australia’s overplanting reaches a
point of reset, vineyards may – again
- become attractive to foreign
buyers
Supplier
(Acquirer)
Vineyard
(Target)
(U.S.)
Acquiring Higher Priced Brands

Large suppliers are able to quickly scale
acquired brands by utilizing sales and
distribution capabilities

Guaranteed fruit supply remains a key
component in brand acquisitions
–
Suppliers are able to arbitrage fruit
from an existing program for the
benefit of the acquired brand
Acquirer
Target
(Portfolio Avg: $6.43)
($9.94)
(Portfolio Avg: $4.77)
($8.34)
(Portfolio Avg: $8.30)
($10.12)
Loxton
Winery
(Australia)
(Australia)
(U.S.)
(U.S.)
Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels.
10
Spirits

Suppliers who have relied on innovation
to participate in Spirits may evaluate
M&A given the rapid growth of their
Spirits brands
–
Spirits speak to premiumization and
deliver returns greater than what
are typically found in Wine
Supplier
Brands
Australia is Poised to be the Center of Gravity between China and the U.S.
If rumors of Chinese interest in Treasury Wine Estates lead to a transaction, Australia’s role as the definitive link
between China and the U.S. will be solidified
Chinese Investors Acquiring
U.S. Wineries & Investing in CA
Chinese Investors Acquiring
Australian Wineries
U.S. Wineries Acquiring
Australian Wineries
Loxton Winery
Australian Wineries
Acquiring U.S. Wineries
11
Australia: Course Correcting a Decade of Mistakes
Commentary

Overplanting (2 million ton footprint) in cooler regions
producing sub-quality fruit led to supply imbalance
–
–
–
Wine Grape Area
(Thousand Hectares)
Growers and producers grossly overestimated global
annual growth rates at 15% - 20% vs. 3% - 5%
169
173
163
157
Western
Australia
4%
Other
0%
Victoria
19%
South
Australia
48%
No financial incentive to invest in course
correction
Exports suffered as wine quality “flipped” from high
value, interesting product toward a commodity

Growing regions are so broadly defined they haven’t been
consistently matched to the optimal varietal(s)

Marketers emphasized origin rather than brand (e.g., Yellow
Tail)

SKU proliferation, in part driven by a decade’s explosion in
the number of wineries from 200 to nearly 2,800, led to
further downward pressure on wine prices
2006
2007
Growth: +3%
2008
2009
2010
(1%)
(6%)
(4%)
New South
Wales
29%
Australian Exports
$4.78
$4.70
760
$4.79
$4.54
471
No meaningful exposure to the Luxury sector
–
–
174
2010 Wine Grape
Tonnage By Region
Growers overplanted because 80% of South Australia’s
vineyard owners do not rely on viticulture as their
primary source of income
◦

Wine Production
524
786
702
643
$4.27
$3.98
$3.72 $3.82
375
1 out of 2 liters consumed in Australia is from cask wine
764
781
703
698
$3.53
$2.97
311
$2.65 $2.69
Grange and Henschke are the only brands marketed
>$100 per bottle and each is <50,000 cases
2000
2001
2002
2003
2004
2005
2006
Volume (Million Liters)
Source: Commonwealth Bank and the Australian and New Zealand Wine Industry Directory.
12
2007
2008
2009
A$ per Liter
2010
2011
Australia: Set for a Rebound, Barring a 2 Million Ton Crop
Top Australian Brands in the U.S.
State of Australian Wine Industry

(IRI Price Per 750ml)
Other
25%
Yellow Tail
54%
Value Glass
($3.49 And
Below)
5%
Other
13%
($5.84)
Foxhorn
5%
($3.67)
Jacobs
Creek
6%
($6.44)
Premium
Glass
($5.00 $7.99)
75%
Super
Premium
($8.00 $10.99)
7%
Lindemans
10%
From 2009 – 2010, more than 8,000 vine acres or ~5% of
the total industry were removed from production to
help foster a gradual reset
–
Pricing improving as stock levels improve
Last 2 harvests ranged between 1.6 and 1.7 million tons

Collaborative rationalization efforts by producers to improve
capacity utilization rates (e.g. Treasury Wine Estates /
Accolade Wines July 2012 announcement consolidating
bottling operations)

A new generation of winemakers are improving Australia’s
global reputation and, significantly, willing to build wines
for the American palette
2010 Harvest by Varietal (Tons)
Other
16%
–

($5.24)
Riesling
3%
Inventories improving from peak of 3x annual production to
1.5x
–
Shiraz
28%
Pinot Noir
3%

Semillon
4%
Opportunity to focus on U.S. market with Luxury wines
that extol the diversity and uniqueness of Australia’s
growing regions
Access to new capital, specifically from China where
interest is supply-based
Sauvignon
Blanc
5%
Chardonnay
18%
Merlot
6%
Cabernet
Sauvignon
17%
Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels.
13
Demeter Group Recent Transactions (December 2010 – 2012)
Acquired by
Acquired by
$850 million
Acquired by
Completed Transaction Value
Acquired by
15
Acquired by
Completed
Transactions
Acquired by
67%
Completed Transactions
in Beverage Alcohol
Acquired by
Acquired by
Acquired by
Acquired by
Private Placement
Acquired by
Has Acquired
Acquired by
Joint Venture With
14
71%
36%
Transactions Marketed
to Fewer Than 5
Potential Buyers
Transactions
Marketed to
1 Buyer
Demeter Group Recent Beverage Alcohol Transactions
March 2011
May 2011
December 2010
July 2012
Acquired By:
Beam Global Spirits & Wine
Acquired By:
Crimson Wine Group
Acquired By:
Fiji Water
Acquired By:
Constellation Brands
September 2012
August 2012
June 2012
June 2012
May 2012
August 2011
Acquired By:
E. & J. Gallo Winery
Acquired By:
E. & J. Gallo Winery
Acquired By:
Accolade Wines
Acquired By:
E. & J. Gallo Winery
Acquired By:
Precept Wines
Acquired By:
Fiji Water
15
Jeff Menashe
Chief Executive Officer
menashe@demetergroup.net
220 Halleck Street, Suite 110
San Francisco, CA 94129
(415) 632-4400
www.demetergroup.net
16