Silicon Valley Bank 20165 State of the Wine Industry Presentation

State of the Wine Industry 2016Videocast PresentationRob McMillan

EVP & Founder, Silicon Valley Bank Wine Division

Follow Rob (@SVBWine)Join the conversation at #SVBWine

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Panelists

• Jeff Bitter, Allied Grape Growers

• Amy Hoopes, Chief Marketing Officer/EVP Global Sales, Wente Family Estates

• Paul Mabray, Chief Strategy Officer of Vintank

• Rob McMillan, EVP & founder of Silicon Valley Bank’s Wine Division

3

Trends: Exports in Volume 2008–2014 (in Mhls)

Source: OIV

4

Worldwide Production vs Consumption (in Mhls)

Source: OIV

5

Trends: New Customers 2000–2014

Source: OIV

6

U.S. Wine Consumption by Volume

Source: California Wine Institute

7

Segment Performance in Table Wine

Nielsen Beverage52 weeks 12-5-2015 $ Vol Table Wine

$ ShareTable Wine $ Shr Chg Case Vol Table Wine

Case ShareTable Wine

Case Shr Chg

TOTAL TABLE WINE 13,226,095,260 100.0 - 159,757,531 100.0 -

TTL GLOBAL TBL BE 0-2.99 828,850,252 6.3 (0.4) 28,594,622 17.9 (1.2)

TTL GLOBAL TBL BE 3-5.99 4,041,378,691 30.6 (1.3) 68,618,309 43.0 (0.5)

TTL GLOBAL TBL BE 6-8.99 1,681,255,025 12.7 (0.9) 18,602,352 11.6 (0.4)

TTL GLOBAL TBL BE 9-11.99 3,049,547,575 23.1 0.7 25,347,167 15.9 0.9

TTL GLOBAL TBL BE 12-14.99 1,773,554,251 13.4 0.9 11,277,079 7.1 0.7

TTL GLOBAL TBL BE 15-19.99 991,226,591 7.5 0.7 4,759,017 3.0 0.3

TTL GLOBAL TBL BE >20 853,289,202 6.5 0.3 2,507,566 1.6 0.1

Source: Nielsen Beverage Group

Source: 2015 Annual Wine Conditions Survey | November 30, 2015 8

Imported Bulk Wine to U.S.

2009 2010 2011 2012 2013 20140

50

100

150

200

250

300

350

Top Countries by Volume

Chile New Zealand Australia Argentina Italy

Mill

ions

of H

ecto

liter

s

Shortfall in U.S. Production vs U.S. Consumption

9Source: OIV.

Forgone Domestic Sales

10

Demographic Demand by Price Point

Source: 2015 Annual Wine Conditions Survey | November 30, 2015

Source: 2015 Annual Wine Conditions Survey | November 30, 2015 11

YOY Changes in Cohort Purchase Share

12

Premium Varietal Growth By Price Segment

Source: 2015 Annual Wine Conditions Survey | November 30, 2015

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Generational Shape of U.S. Net Household Wealth

Source: Deloitte Center for Financial Services, Nov. 9 th, 2015

Millennials will never move out!

Owner Price Projections: Five-Year Survey Comparison

Source: 2015 Annual Wine Conditions Survey | November 30, 2015 14

2015 Retail Price Projections by Production Size

1 - 2,500 2,501 - 5,000 5,001 - 10,000 10,001 - 25,000

25,001 - 50,000

50,001 - 100,000

100,001 - 250,000

>250,0000%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Decrease Prices Hold Prices Increase Price

15Source: 2016 Annual Wine Conditions Survey | November 30, 2015

Three Tier Premium

30%

23%

39%

4%5%

Tasting Room

Wine Club

Wholesale

Export

Other

Wine Club

Wholesale

Percentage of Total Sales by Distribution ChannelDtC is Critical for Success

16Source: 2016 Annual Wine Conditions Survey | November 30, 2015

Tasting Room

Almost 60% of the Average Winery's sales are direct today.

Summary Findings

• Sales growth in fine wine in the range of 9%-13%.

• Imports will gain U.S. market share in bottled wine

• Low priced generic/jug wine, dying/dead

• Drop in per-capita and total domestic wine consumption temporarily.

• Large wine companies will continue to buy premium brands and property.

• DtC still with strong growth but threatened with local regs

• Modest bottle price increases expected this year in fine wine

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Forecast Changes in U.S. Cohort Purchase Share (Fine Wine)

Source: 2015 Annual Wine Conditions Survey | November 30, 2015 18

Gen Z Millenial Gen X Boomers Matures0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

12%

46%

27%

16%

2015-2035

2015 2025 2035

Total Growth Rates of CA Regions

Source: Correia Company, CASS Grape Acreage Report 19

Napa Total Acreage

Source: Correia Company, CASS Grape Acreage Report 20

Napa County Vineyard

Source: Correia Company, 21

District 13 Fresno—Madera

Source: Correia Company 22

California Bulk Wine Inventory 2015

Source: Ciatti Brokerage 23

Direct-to-Consumer Shipments

Source: ShipCompliant, Wines & Vines 24

Financial Performance of Premium Wineries

25Source:SVB Peer Group Analysis Platform

12/31/2006

12/31/2007

12/31/2008

12/31/2009

12/31/2010

12/31/2011

12/31/2012

12/31/2013

12/31/2014

9/30/2

014

9/30/2015

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

45.0%

47.0%

49.0%

51.0%

53.0%

55.0%

57.0%

59.0%

Sale

s Gro

wth

and

Pre

tax

Profi

t

Gros

s Mar

gin

Relative Magnitude of 2015 Harvest Quality

Despite lower yields overall, all major wine regions reported “above average” or “excellent” harvest quality in 2015.

Oregon

Mid-Coastal, CA

Sonoma County, CA

Napa County, CA

2015 Average

Santa Barbara & San Luis Obispo, CA

Virginia

Sierra Foothills, CA

Washington State

Lodi & Other Delta Counties, CA

Paso Robles, CA

Other

Anderson Valley & Mendocino County, CA

1 2 3 4 5 6 7 8 9

8.57

8.13

8.03

7.97

7.87

7.78

7.74

7.62

7.56

7.44

7.42

7.34

7.00

1 = Historical Low 5 = Historical Average 9 = Historical High

26Source: 2016 Annual Wine Conditions Survey | November 30, 2015

Relative Magnitude of 2015 Harvest Yield

Oregon

Virginia

Washington State

Other

2015 Average

Lodi & Other Delta Counties, CA

Anderson Valley & Mendocino County, CA

Sierra Foothills, CA

Napa County, CA

Sonoma County, CA

Santa Barbara & San Luis Obispo, CA

Mid-Coastal, CA

Paso Robles, CA

1 2 3 4 5 6 7 8 9

7.80

5.81

4.77

4.34

3.55

3.00

3.00

2.85

2.62

2.60

2.56

1.63

1.58

1 = Historical Low 5 = Historical Average 9 = Historical High

27Source: 2016 Annual Wine Conditions Survey | November 30, 2015

Changing Landscape 2010 vs. Now…..

• Bearing Acreage (Up 10%)• 500,000 to 550,000.

• Yield (up 5%)• Average 2006-2010 - 6.8 tons/acre.• Average 2011-2015 - 7.2 tons/acre.

• Imports (up 15%)• 2006-2010 import average - 99M cases

annually,• 2011-2015 import average - 114M cases

annually.• Strength of US Dollar – DXY Index (up 25%)

• At end of 2010 was +/-80• At end of 2015 was +/-100Source: Allied Grape Growers. All rights reserved

Production Capability…..

2009 3,703,031 490,000 7.562010 3,588,985 500,000 7.182011 3,342,689 510,000 6.552012 4,018,237 525,000 7.652013 4,244,891 540,000 7.862014 3,894,397 550,000 7.082015 3,700,000 555,000 6.672016* 4,141,450 565,000 7.332017* 4,202,560 571,000 7.362018* 4,255,000 575,000 7.40

Average per acre yield from 2009-2014: 7.31*2016-2018 assume approx 1% coastal & 6% interior attrition rates

Crop Year

Winegrape Tons Crushed or Estimated

AGG Estimated Bearing

Winegrape Acres

Estimated Average

Winegrape Yield

Source: Allied Grape Growers. All rights reserved

Over the Hump…..

Source: Allied Grape Growers. All rights reserved

Evolving Acreage Base.....

Source: Allied Grape Growers. All rights reserved

What’s Hot, What’s Not….

Source: Allied Grape Growers. All rights reserved

Leading Varietals Planted….• 2015

• Cabernet Sauvignon - 31%• Pinot Grigio – 17%• Pinot Noir – 15%• Chardonnay – 13%

• 2014• Cabernet Sauvignon - 29%• Chardonnay – 17%• Pinot Grigio – 12%• Pinot Noir – 12%

• 2013• Cabernet Sauvignon - 29%• Chardonnay – 14%• Pinot Noir – 13%• Zinfandel – 10%

Source: Allied Grape Growers. All rights reserved