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1 APRIL 2009
2009 - 2010 State o the Wine Industry
Forward
Jerry Maguire
:
I am out here or you. Youdon't know what it's like to be ME out here or YOU. It is an up-at-dawn, pride-swallowing siege that I will never ully tell you about, ok?
Te 1996 movie
Jerry Maguire
tells thestory o a sports agent living the high lie o sports celebrity, with all the accoutrements:ancy cars, nice clothes, a beautiul ancée,Rolex watch, hot car, expensive wine andmembership in the local country club. Jerry told clients what they wanted to hearand made them ortunes by being loose
APRIL 2009
Written by Rob McMillan,
Founder, Wine Division
2009-2010 State o the Wine Industry
with his word and ast with his pen. Tenone day it was all gone (except or the wine, in our Betamax version o the story).It’s a hauntingly amiliar story i you called Wall Street your home last year. Seven-gured high-yers living in the FinancialCenter o the globe were taking risks thatproved catastrophic.Te attitudes and preerences o theU.S. taxpayer and wine consumer are inmarkedly dierent places today than they were a year ago. I the prevailing moodin early September was disbelie, popularopinion today places our Wall Street bankercousins somewhere beneath ungi, mold,roundworms and viral parasites. Along with the Dow, ne wine consumptiontumbled in Q4, taking our retirementbalances with it.o be air to our Wall Street relatives, theblame or our economic situation shouldbe shared by some o our current andormer elected representatives who aremaking some progress today, but doing aneven better job o deecting constituentscorn by viliying others. Paradoxically,
2009 - 2010 State o the Wine Industry
APRIL 2009
bump on the bottom, and positiveQ4 sales. We believe the year willend essentially at in terms o overallgrowth in the ne wine segment, andshow modest growth in higher volumesegments.
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Wine supply is running in balance toshort.
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More electronic tools are available tosupport direct-to-trade and consumersales.
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Per capita consumption continues torise in the U.S.
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Credit is available or smaller wineries,though spreads have widened overreasuries, the Prime Rate and LIBOR.
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Cult wines sold out their allocations inQ4.
Bad news°
Q4 2008 was the worst Q4 in memory or the ne wine business.
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Restaurant sales are depressed.
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We expect higher unemployment(exceeding 10 percent by year end),higher oreclosures and depressedconsumer spending through the yearas we seek a bottom. Te economy willnot return to the market experiencedduring the past decade.
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Price points below $35 are selling, but wines between $50 and $125 are ina “dead space,’ with only establishedlabels selling.
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Some wineries will trade hands this yearat bargain prices.
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Distribution has all but ended as aviable sales channel or small wineries.as o this writing, to bring about ahappy ending to our economic airytaleand drive improved prospects or the wine industry, our elected ofcials ndthemselves in the awkward position o asking the same people undressed orpublic spectacle and pilloried in thecourt o C-SPAN to participate in apublic/private partnership to rid thebanks o toxic assets and restart lending.Someone should write a movie about itsomeday. But in the meantime, you willhave to satisy your curiosity by readingthrough our
State o the Wine Industry Forecast and Recommendations
.
Jerry Maguire: But if anybody elsewants to come with me this momentwill be the ground floor of something real and fun and inspiring and true in this godforsaken business and wewill do it together! Who's comingwith me besides...”Flipper" here?
Come with us in the ollowing pages,and you will nd our predictions or2009 and 2010, as well as commonsenseexplanations or the present state o the economy and timing o a rebound,a view o the rapidly changing wineindustry and practical advice romour experienced sta to guide you oninvestment strategy and tactics in thebrave new world we ace.
Executive Summary
Good News and Bad
Good news°
On a year-over-year basis, we predictslightly improved sales in Q2, at salesin Q3 as the economy continues to
2
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Large credit extensions to single entitiesare harder to nd, and syndicated creditmarkets are nearly rozen.
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Te secondary market or collectable wines continues to soten.
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Drought conditions persist inCaliornia.
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Sin taxes are being widely applied toalcoholic beverages nationwide.
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Distributors continue to drop smallbrands rom their books.
The Wine Industry at Large: ValueComes in Vogue
Te next 12 months will be difcult or thene wine segment, with declining growthrates and at year-to-year sales overall. Tisis oset by higher volume segments thatare experiencing good business conditionsas consumers trade down to value-priced wines, or which positive year-over-yearresults are expected.Down-trending economic conditions inthe U.S. have exposed business models inthe ne wine segment that were already inneed o change, largely due to distributorconsolidation. Tis will lead to sometransitions in the near term at less-than-hoped-or prices. Tat said, the negativeimpact will be winery-specic and willdepend on several actors includingprice points, brand strength, appellation,volume produced and most importantly,sales strategy.
“Supply in both the volumeand premium segments is inbalance overall, which is asigniicant positive actor.”
APRIL 2009
2009 - 2010 State o the Wine Industry
Supply in both the volume and premiumsegments is in balance overall, which isa signicant positive actor allowing orless discounting than would otherwisebe the case. Te opportunity to raiseprices, however, is limited at presentor producers and growers alike, thoughgrowers in volume segments may have alittle more upside negotiating room thisyear depending on the strength o thedollar, corresponding prices o oreignsubstitutes, inventory levels in large scaleproducers and consumer spending. With continuing increases in per capitaconsumption, planting should take placeas non-bearing acreage is below vinereplacement levels. Tat said, a number o actors will lead to continuing shortagesin vineyard planting: alling asset prices,the high cost o land, lack o committedcontracts, conusion about pricing in adeationary economy, uncertainty over thestrength o the dollar and the consequentimpact o imports, credit tightening andgeneral ear. Because we see a lack o development today, growth in the U.S. wine industry will be eclipsed by imports. We acknowledge those plantings have tobe in the right places and at prices that themarket will support in bottle price.Feedback rom the 2009 SVB WineConditions Survey shows winery ownersbelieve 2009 will be a difcult year, with Central Valley suppliers the mostoptimistic and Napa and Sonoma suppliersthe most pessimistic. Oregon producersare more optimistic than their Caliorniane wine counterparts, but they may beoverly optimistic in our opinion.
Large-Scale Producers: Ever theOptimists
Dorothy: I just want to be inspired.
Te SVB Annual Wine Conditions Survey suggests this segment is appropriately themost optimistic and inspired segment, with many expecting solid growthrates in the coming year and improvedcontract prices at the grower level. It’s anassessment with which we agree. Only astrengthening dollar opening the door orhigher volumes o cheaper imported bulk wines, deepening economic problems,taris and protectionism, possible highercarried inventories in large producersthat right-size later in the year and water restrictions could moderate theopportunity.
Fine Wine: Growth Declines andSales Stay Flat
Jerry Maguire: Jump in my nightmare, the water's warm!
Despite declining growth rates andnightmarish results in the ourth quarter o 2008, we predict wine sales will be sluggishthrough the early part o 2009, but nishthe year with a better Q4 thus creatingat year-over-year sales in the segment. While zero growth is comparatively goodin this economy, a growth rate that hasallen rom 23 percent to zero percent in24 months causes many problems or abusiness that has long-term contracts withgrowers and has to commit to productionand inventory positions well ahead o thekind o nancial collapse we experiencedlast year. Tis will inevitably lead todeclining gross and net prot marginsover the next two years.Te ourth quarter o 2008 saw winery level sales slow precipitously into negativegrowth territory compared to Q4 inthe prior year. Full-year growth rates in2008 were modest, but positive, however.Distributors and restaurateurs aggressively worked down inventories in the lastquarter o 2008, sending a demand shock through the business when they held o reorders. But we believe depletion-levelsales still took place, albeit at a slowedpace, based upon inormation we havedeveloped rom various industry sources,
3
“Despite declining growthrates and nightmarish resultsin the ourth quarter o 2008, we predict wine sales will besluggish through the early part o 2009, but inish theyear with a better Q4—thuscreating lat year-over-yearsales in the segment.”
which include proprietary nancialinormation, surveys distributor-leveldepletion inormation, retail and winery interviews. During the market collapsein Q4, even expensive wine was stillbeing consumed, but distributors werenot ordering and overall winery-level salesin Q4 were dismal with more expensive wines suering disproportionately more.Sales in Q1 are still negative comparedto the prior year, but we believe the U.S.economy will start to bottom out during2009, and consumption will pick uprequiring inventory restocking.On a year-over-year basis we are orecastingslightly improved sales in Q2, at sales inQ3 as the economy continues to bumpon the bottom, and positive Q4 sales. We
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