State of the Wine Industry 2013 - Demeter...

State of the Wine Industry

2013

http://www.demetergroup.net/

1.0%1.3%

0.5%

(1.8%) (1.8%)

(0.9%)

(3.1%)

3.6% 3.6%

1.1% 1.4%1.7%

2.7%

6.1%

4.0% 3.8%

0.4% 0.7%1.3%

2.5%

5.7%

2006 2007 2008 2009 2010 2011 2015P

Beer Spirits Wine

66.2 66.9 67.8 68.2 66.9 65.7 65.1 63.1

34.9 36.2 37.5 38.0 38.5 39.1 40.2 42.6

17.0 17.6 18.3 18.4 18.5 18.7 19.2 20.3

118.2 120.8 123.7 124.5 123.9 123.6 124.6 126.0

2005 2006 2007 2008 2009 2010 2011 2015P

Beer Spirits Wine

Wine Has Grown at a 3.4% CAGR Since 2005, Outpacing Total Beverage Alcohol

2

Supplier $ Share (Billions) Beverage Alcohol Market Share

Servings (Billions)(1) Growth in Servings

2011 – 2015P

CAGR: 0.3%

Source: Beer Marketer’s Insights, DISCUS, IMPACT Spirits Databank. (1) Serving size: Beer – 12 oz; Spirits – 1.5 oz; Wine – 5 oz.

2000 2011

2005 – 2011 Absolute Growth: Beer:

Spirits:

Wine:

(1.7%)

15.0%

13.1%

$25.6 $26.3 $27.5 $28.5 $28.8 $28.6 $29.2

$16.0 $17.2 $18.2 $18.7 $18.7 $19.2 $19.9

$8.3 $8.6 $9.2 $9.4 $9.5 $9.8 $10.2 $49.9

$52.2 $54.9 $56.6 $57.0 $57.6 $59.2

2005 2006 2007 2008 2009 2010 2011

Beer Spirits Wine

Beer49%

Spirits34%

Wine17%

Beer55%

Spirits29%

Wine16%

Wine:

Spirits:

Beer:

3.4%

3.7%

2.2%

2005 – 2011 CAGRs


7.6 7.6

7.7 7.7 7.8 7.8 7.8 7.8

7.9 7.9 7.9 7.8

201120102009200820072006200520042003200220012000

Rising Demand and Declining Supply are Creating a Global Wine Shortage

3

Source: International Organisation of Vine and Wine and IWSR.

Note: Vinexpo reports the U.S. leading global wine consumption.

Global Vineyard Acreage

(Millions of Hectares)

58

52

42

22

13 11

8 7

50

42

33

19 15

13 11 10

FranceItaly SpainUnited States

ArgentinaChinaAustraliaChile

Largest Wine Producing Countries

(Millions of Hectoliters)

(13%)

(20%)

(19%)

(14%)

+57% +38% +24%

+23%

2000 2011

2000 2011

Largest Wine Consuming Countries

30 29

23

20

17

13 12

10

35

21

31

20

11 10

5

14

FranceUnited States

ItalyGermanyChinaU.K. RussiaSpain

(Millions of Hectoliters) (13%)

(25%)

(1%)

(28%) +148% +32%

+59%

+34%

Per Capita

Consumption

(Liters per Year)

53 13 53 37 3 25 7 24

248

265265271269266

282273

296

264257

266280

236244242240248251

244238239238

230228226

249

2012E201120102009200820072006200520042003200220012000

Production Consumption

Global Production vs. Consumption

(Millions of Hectoliters)


Structurally, Supply is Imbalanced in the U.S.

4

U.S. Vineyard Acreage vs. Rest of World Commentary

Source: International Organisation of Vine and Wine and IWSR.

U.S. Production vs. Consumption

Chile: +16%

Australia: +24%

Germany: +71%

South Africa: +5%

China: +87%

France: (11%)

Italy: (15%)

Spain: (16%)

U.S.: (2%)

(2000 – 2011)

2219 20 20 20

23

19 20 1922 21

19

21 2123

24 25 26 27 28 28 27 28 29

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Production Consumption

(Millions of Hectares)

Growth in Consumption: 34%

A decrease in vineyard acreage and a steady increase in

demand has led to a structural supply imbalance in the U.S.

– Creates opportunities for imports, which have cost

advantaged models relative to U.S. in terms of land,

labor, and water

Following a period of “oversupply”, many growers replanted

to more profitable fruits, specifically pistachios and almonds

– 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

Fewer California Vineyard New Plantings

481

490

481

472467

471475

472 471 473476

480

29.5

20.6

13.2 9.9

11.5 12.6 14.3 13.0

11.0 7.1 6.8

4.4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Acreage New Plantings

(Bearing and Non-Bearing Planted Acres)

2000 – 2011 CAGR: (0.0%)


$487

$648 $770

$1,256

$1,758

$531

$718 $746

$1,343

$1,829

Pinot Noir Pinot Gris Merlot Cabernet Sauvignon Chardonnay

2011 2012

3.1%4.6%

8.8%10.1%

18.3%

(1.9%)

2.5%

10.5%

12.7% 12.8%

Value($4.99 and Below)

Premium Glass ($5.00 - $7.99)

Super Premium ($8.00 - $10.99)

Ultra Premium ($11.00 - $14.99)

Luxury ($15.00 and Above)

2011 2012

1.4%2.7%

8.3% 8.1%

16.5%

0.3%1.6%

10.1%10.9% 11.6%

Value($4.99 and Below)

Premium Glass ($5.00 - $7.99)

Super Premium ($8.00 - $10.99)

Ultra Premium ($11.00 - $14.99)

Luxury ($15.00 and Above)

2011 2012

Luxury is a Major Growth Segment in the U.S. Wine Industry

5

2012 U.S. Growth By Price Segment 2012 U.S. Top Varietals / Flavors

% Sales Growth Lower

Priced

Higher

Priced

2012 Sales Growth Total: 6.0%

% Unit Growth

Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels.

2012 Unit Growth Total: 4.7%

Market Size ($ in mm)

Rank Varietal$

Share

$

Sales

$ Sales

% Chg

Unit

ShareUnits

Unit %

Chg

Avg Price

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


Industry Growth is Primarily Driven by the Top 4 Suppliers

6

Industry Growth by Supplier Largest Growing Wine Brands in 2012


E. & J. Gallo

Winery 27%

Constellation

Brands

21%The Wine

Group

10%

Trinchero

Family

Estates

8%

Other

34%

In 2012, nearly 70% of the Industry’s dollar growth was

driven by the Top 4 suppliers Growth

Rank Brand $ (mm) % Ownership

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%


$1,897

$1,511

$999

$578

$482

$342 $332

$189

$4.77

$6.43

$3.06

$5.94 $6.52

$9.44

$13.16

$9.85

E. & J. Gallo Winery

Constellation Brands

The Wine Group

Trinchero Family Estates

Treasury Wine

Estates

Ste. Michelle Wine

Estates

Jackson Family Wines

Diageo Chateau & Estate Wines

IRI Sales (Millions) Average Price per 750 ML

Larger Producers Aspire to Emulate the “Kendall Jackson Model”

Implications Top 8 U.S. Brand Suppliers

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

– Maintains or expands margin to

combat higher COGS

– De-emphasizing <$10 / bottle

segment where imports have

significant cost advantages

“Premiumization” relies on a 2-

pronged approach of brand innovation

and M&A

– Supply is critical in both strategies

as Top 8 suppliers target >1 million

case brands

◦ Translates into more

California appellated wines

– Suppliers will arbitrage existing

fruit from lower margin products

into higher margin products

◦ Proactively phases out

unproductive SKUs while

retaining shelf space


7


Top Suppliers are Successfully Innovating at >$10 per Bottle

8

Largest Suppliers

Growth

$7.17

$9.14

$7.52

+40%

+86%

+265%

$13.44

$14.64

$15.31

NM

+19%

+16%

$16.13

$14.50

$9.10

+26%

+7%

+9%

Growth Drivers

Price

$12.38

$16.46

$9.65

+83%

+28%

+125%

Portfolio Pricing

Portfolio Avg. Price

Per 750 ml

Avg. Price 25 Fastest

Growing Brands(1)

$4.77

$6.43

$3.06

$5.94

$10.59

$9.34

$5.03

$9.87

+122%

+45%

+64%

+66%

Difference

Source: IRI, 52 weeks ending January 6, 2013. IRI tracks data in Food, Drug, Mass, Convenience, and Liquor Store channels. (1) Fastest growing brands are each company’s 25 fastest growing

brands by unit growth for brands above 100,000 total units (15 fastest growing brands for The Wine Group and Trinchero).


6%

15%

33%

33%

49%

501%

789%

Industry Average

White Moscato

White Blends

Red Blends

Sparkling Moscato

Red Moscato

Blush Moscato

Top Suppliers are Innovating & Line Extending into the Sweet Wine Phenomenon

9

Commentary New Product Lines

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

Treasury Wine Estates

Beam Diageo Deutsch

Constellation The Wine Group



Like Innovation, Premiumization and Supply are Key Themes Driving M&A

10

Spirits Acquiring Higher Priced Brands Accessing Vineyards / Supply

Supplier Brands Supplier

(Acquirer)

Vineyard

(Target) Acquirer Target

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

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

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

(Australia)

(U.S.)

(Portfolio Avg: $6.43)

(Australia)

(U.S.)



($9.94)

($10.12)

($8.34)

(U.S.)

Loxton

Winery



Australia is Poised to be the Center of Gravity between China and the U.S.

11

Australian Wineries

Acquiring U.S. Wineries

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


Australia: Course Correcting a Decade of Mistakes

12

Commentary Wine Production

Source: Commonwealth Bank and the Australian and New Zealand Wine Industry Directory.

311

375

471524

643702

760786

698

764 781

703$4.78

$4.70 $4.79

$4.54

$4.27 $3.98

$3.72 $3.82 $3.53

$2.97 $2.65 $2.69

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Volume (Million Liters) A$ per Liter

Overplanting (2 million ton footprint) in cooler regions

producing sub-quality fruit led to supply imbalance

– Growers and producers grossly overestimated global

annual growth rates at 15% - 20% vs. 3% - 5%

– Growers overplanted because 80% of South Australia’s

vineyard owners do not rely on viticulture as their

primary source of income

◦ 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

No meaningful exposure to the Luxury sector

– 1 out of 2 liters consumed in Australia is from cask wine

– Grange and Henschke are the only brands marketed

>$100 per bottle and each is <50,000 cases

Australian Exports

169 174 173

163 157

2006 2007 2008 2009 2010

Wine Grape Area

(Thousand Hectares)

2010 Wine Grape

Tonnage By Region

South Australia

48%

New South Wales

29%

Victoria19%

Western Australia

4%

Other0%

+3% (1%) (6%) (4%) Growth:


Shiraz28%

Chardonnay18%

Cabernet Sauvignon

17%

Merlot6%

Sauvignon Blanc

5%

Semillon4%

Pinot Noir3%

Riesling3%

Other16%

Australia: Set for a Rebound, Barring a 2 Million Ton Crop

13

State of Australian Wine Industry

Inventories improving from peak of 3x annual production to

1.5x

– 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

– 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

Top Australian Brands in the U.S.

(IRI Price Per 750ml)

2010 Harvest by Varietal (Tons)


Yellow Tail54%

Lindemans10%

Jacobs Creek

6%

Foxhorn5%

Other25%

($5.84)

($3.67)

($5.24)

($6.44)

Premium Glass

($5.00 -

$7.99)75%

Super Premium ($8.00 -

$10.99)7%

Value Glass ($3.49 And

Below)

5%

Other13%


14

Demeter Group Recent Transactions (December 2010 – 2012)

Acquired by

Acquired by

Acquired by

Acquired by

Acquired by

Acquired by

Acquired by

Acquired by

Has Acquired

Acquired by

Joint Venture With

Acquired by

Acquired by

Private Placement

Transactions Marketed

to Fewer Than 5

Potential Buyers

$850 million

Completed Transaction Value

15

Completed

Transactions

71% 36%

Transactions

Marketed to

1 Buyer

67%

Completed Transactions

in Beverage Alcohol

Acquired by


15

Demeter Group Recent Beverage Alcohol Transactions

July 2012

Acquired By:

Constellation Brands

May 2011

Acquired By:

Crimson Wine Group

March 2011

Acquired By:

Beam Global Spirits & Wine

December 2010

Acquired By:

Fiji Water

September 2012

Acquired By:


August 2012

Acquired By:


June 2012

Acquired By:

Accolade Wines

June 2012

Acquired By:


May 2012

Acquired By:

Precept Wines

August 2011

Acquired By:

Fiji Water


16

Jeff Menashe

Chief Executive Officer

[email protected]

220 Halleck Street, Suite 110

San Francisco, CA 94129

(415) 632-4400

www.demetergroup.net


State of the Wine Industry 2013 - Demeter...

Documents

Transcript of State of the Wine Industry 2013 - Demeter...