Rob McMillan, EVP & Founder April 17, 2012
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Speakers
Rob McMillan EVP & Founder Silicon Valley Bank, Wine Division
Paul Mabray Chief Strategy Officer, Digital Guru VinTank
Tony Correia and Paul Mabray are independent third parties and are not affiliated with SVB Financial Group.
Tony Correia Agricultural Property Valuation Expert The Correia Company
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Remember 2008?
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The Good news: There is a good reason to drink …
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The Bad News - Unemployment
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Perc
ent
US Unemployment Rate (Household Survey)
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The Bad News - Consumer Confidence
20
40
60
80
100
120
140
160
Consumer Confidence
Source: Bloomberg
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The Bad News - Retail Sales
-4
-3
-2
-1
0
1
2
3
Per
cent
Cha
nge
Monthly Change in Retail Sales
Source: Bloomberg
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The Bad News: Equities Crash
Equities Collapse
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008200
400
600
800
1000
1200
1400
1600
1800
DJIA S&P
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How Bad is It Going to Get?
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How Long Will It Last?: Home Prices to Median Family Income
2008 2009 2010 2011
House prices bottom Q4 2010 – Q1 2011
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2008 Officially in the Rear View Mirror Steering Macro Economic Currents for 2012-13
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Months of Supply in Existing Homes
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Housing Values Finding a Bottom
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Growth in Retail Sales Positive Since Q4 2009
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Layoffs Dropping & Job Openings Increasing
Source: http://www.calculatedriskblog.com/
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The Hidden Tax: National Average Retail Gas Prices
Regular Grade, As Surveyed By The AAA Motor Club
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Borrowing Rates Edging Higher for Almost All EU
Interest Rates on 10-year Government Bonds
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Eurozone: Exchange Rates – Euro Getting Weaker
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How Much Dry Powder is Left for the ECB?
ECB Now $1 Trillion Larger Than the Fed.
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Inventory
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2010 Wineries Short on Inventory By Bottle Price
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
2010 Short Inventory
Source: Silicon Valley Bank Proprietary Research
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2010-2011 Change in Wineries Short on Inventory
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
2011 Short Inventory
2010 Short Inventory
Source: Silicon Valley Bank Proprietary Research
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2011 Inventory Positions Sorted by Region
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Excess Inventory
Not Enough Inventory
Source: Silicon Valley Bank Proprietary Research
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Net Inventory Levels
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
Washington State
Santa Barbara
Sierra Foothills
Oregon Lodi County Napa Paso Robles/SLO
Sonoma Lake County Mid-Coastal CA
Source: Silicon Valley Bank Proprietary Research
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California Bulk Wine Positions
Source: Turrentine Brokerage
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Premium Planted Acreage on West Coast
14%
22%
12%
25%
5% 5%
4.7% 6.3%
4.6%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
0%
5%
10%
15%
20%
25%
30%
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011P 2012P 2013P
Tota
l Pla
nted
Acr
es
Non
-Bea
ring
Acre
s as
a %
of
Tota
l Pla
nted
Acr
es
Non-Bearing Acres (vineyards planted within last 3 years and not yet bearing fruit) Bearing Acres (vineyards more than 3 years old, bearing fruit) Non-Bearing Acres as a % of Total Planted Acres
Source: Ag Stats Service, Ian Malone &
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LT Grape Prices Continue Upward March
90th-10thPercentileSpread
WeightedAverage
+5.1% +2.1% +2.7% +6.8%
’10-’11 ∆ in Wtd. Avg.
Napa Cabernet Sauvignon Napa Merlot Sonoma Pinot Noir Central Coast
(SB & SLO) Pinot Noir
Source: Ag Stats Service, Ian Malone &
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$2,470
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
LT Grape Prices Continue Upward March
90th-10thPercentileSpread
WeightedAverage
-0.9% -0.2% -3.4%
’10-’11 ∆ in Wtd. Avg.
Sonoma Chardonnay Central Coast (SB & SLO) Chardonnay Oregon Pinot Noir Napa Cabernet
Franc
?
Source: Ag Stats Service, Ian Malone &
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Varietal Views of Inventory
Sources: Ciatti Brokerage, Turrentine Wine Brokerage, Silicon Valley Bank Proprietary Research
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Price Changes in N. Coast Bulk Cabernet
$15.00
$17.00
$19.00
$21.00
$23.00
$25.00
$27.00
$29.00
$31.00
$33.00
4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 10/1/2011
Napa Cabernet
Sonoma Cabernet
41% Increase
Source: Turrentine Brokerage
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Grape Pricing and Purchase Expectations, and the Impact on Land Values
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2012 Volume Purchase Expectations By Case Size
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
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
>250,000
More Tonnage
Less Tonnage
Source: Silicon Valley Bank Proprietary Research
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2012 Grape Pricing Expectation Price Point
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
< $15 $15 - $20 $21 - $30 $31 - $40 $41 - $70 > $70
Pay More
Pay Equal
Pay Less
Source: Silicon Valley Bank Proprietary Research
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Sonoma County
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$0
$30
$60
$90
$120
$150
1994 96 98 2000 02 04 06 08 10
Aver
age
Gra
pe P
rice
Vine
yard
Val
ues,
Tho
usan
dsDistrict 3 Values vs. Grape Prices
Cabernet
Pinot Noir
Chardonnay
Sources: CASS Grape Crush Reports, Annual Land Value Trend Surveys, ASFMRA
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Napa County
$1,000
$2,000
$3,000
$4,000
$5,000
$0
$50
$100
$150
$200
$250
$300
$350
1994 96 98 2000 02 04 06 08 10
Aver
age
Gra
pe P
rice
Vine
yard
Val
ues,
Tho
usan
dsDistrict 4 Values vs. Grape Prices
Cabernet
Chardonnay
Merlot
Sources: CASS Grape Crush Reports, Annual Land Value Trend Surveys, ASFMRA
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Monterey County
$500
$750
$1,000
$1,250
$1,500
$1,750
$2,000
$2,000
$7,000
$12,000
$17,000
$22,000
$27,000
$32,000
$37,000
1994 96 98 2000 02 04 06 08 10
Aver
age
Gra
pe P
rices
Vine
yard
Val
ues
District 7 Values vs. Grape Prices
Chard. $Cab. Sauv. $Pinot Noir $
Sources: CASS Grape Crush Reports, Annual Land Value Trend Surveys, ASFMRA
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San Luis Obispo & Santa Barbara Counties
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$2,000
$12,000
$22,000
$32,000
$42,000
$52,000
1994 96 98 2000 02 04 06 08 10
Aver
age
Gra
p Pr
ice
Vine
yard
Val
ues
District 8 Values vs. Grape Prices
Chard. $Pinot Noir $Cab. Sauv. $
Sources: CASS Grape Crush Reports, Annual Land Value Trend Surveys, ASFMRA
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Sales Growth & Financial Condition of Wineries
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Winery Sales Growth Expectations in 2012
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Source: Silicon Valley Bank Proprietary Research
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Reported Financial Condition of Wineries in 2011
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
7% Very Weak or Worse
Source: Silicon Valley Bank Proprietary Research
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Reported Financial Condition By Case Size
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
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
>250,000
Rock Solid
Very Strong
Strong
Good
Slightly Weak
Very Weak
On Life Support
Dead
Source: Silicon Valley Bank Proprietary Research
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Winery Financial Condition
Sales Up
Gross Margins Squeezed
Source: Silicon Valley Bank Proprietary Research
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Demographic Shifts
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Wine Consumption 1980-2010
Median Age of Boomers: 35 in 1991
Source: Wine Institute
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Window of Affluence: 35-54 Affluent Consumers
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 35-54 83,500 84,800 84,700 84,900 84,100 83,000 81,800 80,900 80,100 79,550
76,000
77,000
78,000
79,000
80,000
81,000
82,000
83,000
84,000
85,000
86,000
(Mill
ions
of C
onsu
mer
s)
Source: Unity Marketing
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Reported Wine Sales by Cohorts
14.3%
29.8%
41.5%
14.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Millennial (21-34 year olds) Gen X (35-46 year olds) Boomers (47-64 year olds) Matures (65+)
Source: Silicon Valley Bank Proprietary Research
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Wealth of Cohorts as of 2009
$3,662 $39,601
$263,716
$170,494
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
Millennials Gen-X Boomers Matures
Source: U.S. Census Bureau
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Current Cohort Sales Sorted by Avg. Bottle Price
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
< $15 $15 - $20 $21 - $30 $31 - $40 $41 - $70 > $70
Millennial (21-34 year olds)
Gen X (35-46 year olds)
Boomers (47-64 year olds)
Matures (65+)
Source: Silicon Valley Bank Proprietary Research
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The Digital World & The 5th Column
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General Perception of Social Media By Case Size
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
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
>250,000
Negative
Positive/Active
Source: Silicon Valley Bank Proprietary Research
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The 5th Column
• The 5th Column consists of disparate companies with online solutions to help sell and market wines such as: • E-commerce sites (Wine.com, Winelibrary.com)
• Flash Sale Sites (Lot18, WineAccess, Cinderellawine, Winestillsoldout.com)
• Consumer information sites (Winesearcher.com, Cellartracker.com)
• Mobile applications (HelloVino, Drync, Vivino)
• Software solutions (Vin65.com, Shipcompliant, Vinespring.com, Vinovisit.com)
• Social Media Solutions (Social-Candy.com, VinTank)
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Challenges For the 5th Column
• For software solutions for the wine industry: • Total addressable audience: ~ 7500 wineries in the US
• Very little digital acumen
• Fragmented
• Behave differently by region
• Slow adoption
• Under resourced to manage any of the 5th column players
• Primarily focused on tasting room sales, wine club or traditional 3 Tier sales
• Salary rates for digital employees is at least 40% below comparable positions 45-90 miles away
• Many Investors are gun shy of the category
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Challenges For the 5th Column
• For Online Sales Companies • Regulation
• Margin erosion
• Cost of carrying inventory
• Total wines available in the US (150K+ annually)
• Consumer behavior
• Cost and challenges with shipping
• Winery resistance
• Wholesaler and retailer friction
• Limited nature of luxury wines thus stunting the ability to scale
• Investors WERE gun shy of the category (Lot18 recently received over $40M in funding)
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The Future of the 5th Column
• Pandora’s Box is now open and success is obtainable • The past failures have left a roadmap for success to new contenders
• The recession has forced wineries to explore alternative solutions in the digital sphere
• Winery management is getting younger and more open to digital
• The juggernaut of digital is pressing on the wine industry
• Silicon Valley (only 90 miles away from CA North Coast) grows ever closer to the wine industry
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Bottle Pricing
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Reported Bottle Pricing Expectations
Source: Silicon Valley Bank Proprietary Research
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2012 Bottle Price Expectations by Avg. Price Point
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
< $15 $15 - $20 $21 - $30 $31 - $40 $41 - $70 > $70
Reduce Prices
Hold Prices
Increase Prices
Source: Silicon Valley Bank Proprietary Research
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Net Bottle Price Change By Average Price Point
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
< $15
$15 - $20
$21 - $30
$31 - $40
$41 - $70
> $70
Source: Silicon Valley Bank Proprietary Research
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Summary
• Domestic wine inventories evolving into shortage. Will last for some time.
• ��Increasing prices for grapes and bulk juice • ��Increasing difficulty for négociants to find wine of consistent quality
for the price point • Fewer private labels • ��More transitions, sales and mergers taking place than at any time in
memory • ��Continuation of new mergers among wholesalers • ��Increasing plantings to feed the looming grape shortage • Modest retail bottle price increases
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Summary Continued
• ��Increasing difficulty for third-party marketers who’ve sold with a culture of discounting
• The 5th Column is a viable and improving channel. • ��The wealth divide is really more of a demographic divide. • Millennials are the future. Gen-X is now. Boomers largest but will start
to decline • The euro will enter a weakening trend versus the U.S. dollar • ��Imports gain a larger market share • The U.S. economy will gradually positively evolve with more middle
class consumers jumping on the moving train • 2012 sales growth rates of 7-11 percent, a slight drop from the prior
year
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Disclosures
This material, including without limitation to the statistical information herein, is provided for
informational purposes only. The material is based in part on information from third-party sources that we believe to be reliable, but which have not been independently verified by us and for this reason we do not represent that the information is accurate or complete. The information 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 and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction.
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©2012 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and
Federal Reserve System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. B_WD-12-12064. Rev. 04-12-12.
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