State of the Industry Jeff Bitter Allied Grape Growers Piecing Together the Wine Industry Supply/Demand Puzzle Temecula Valley Winegrowers April 19, 2018

What are consumers buying? Wine Shipments: What are consumers buying?

Gomberg Fredrikson Report (GFR): 2017 Wine Shipments Quote from the Annual Gomberg Fredrikson Report (GFR): “The U.S. market saw good growth with an increase of 9.7 million cases or just over 2% in 2017.”

Wine Shipment Highlights Gomberg Fredrikson Report, 2017 Overall: U.S. market grew to 407.2 million cases of wine California wines to the U.S. market were up by 1% Imported wines to the U.S. market were up by 7% California wines were down overall by 1% Imports/Exports: Bottled imports were up 3% Top importers (in order) were Italy, France, Australia, Chile, Argentina, New Zealand and Spain Bulk imports were up by 19% Top importers (in order) were Chile, Australia, New Zealand, Argentina, Italy and Spain Bottled exports down 16% Bulk exports were flat

Are Premium Wine Growth Rates Slowing? Wine Shipments Are Premium Wine Growth Rates Slowing?

Wine Shipments Are Premium Wine Growth Rates Slowing? Rolling 52-Week Sales Comparison of Wine, by Price Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

Wine Shipments Are Premium Wine Growth Rates Slowing? Premium Winery Sales Growth Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

Wine Shipment Highlights For 2017, as compared to 2016 As reported by Neilsen As reported by the GFR <$4/bottle - down 4% <$3/bottle - down 7% $4-8/bottle - down 4% $3-7/bottle - up 1% $8-11/bottle - up 1% $7-10/bottle - flat $11-15/bottle - up 7% $10-14/bottle - up 12% $15-20/bottle - up 10% $14-20/bottle - up 9% >$20/bottle - up 8%

Wine Shipment Highlights Gomberg Fredrikson Report, 2017 Varietal Volume Performance (scan data in food stores only) Chardonnay flat (value up 2%) Pinot Grigio up 4% Moscato up 2% Sauvignon Blanc up 8% (value up 10%) Other whites down 6% White Zinfandel down 5% Cab Sauv up 3% (value up 6%) Red Blends up 2% Merlot down 6% Pinot Noir up 7% (value up 10%) Red Zin down 6% (value down 1%) Other reds up 3%

Value Change, by Variety, for >$8/Bottle 2017 as compared to 2016 Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

Volume Growth by Variety and Price Range Source: With Permission - Danny Brager, Nielsen Company

What about the “trade war” with China?

What is our winegrape supply future? Supply Trends: What is our winegrape supply future?

Supply Stability Planting at Attrition Rate (Forecast)

Production for 2018-2020 based on average yield of 7.2 tons/acre Supply Stability Production for 2018-2020 based on average yield of 7.2 tons/acre

Huge preference toward reds: 28% white

Segmenting Supply Central Valley North Valley California Coastal AVA (Value Wines) North Valley (Daily Drinkers) California Coastal (Premiums) AVA Based (Luxury Wines) <$6/bottle $6-10/bottle >$20/bottle $10-20/bottle

Central Valley (Value Wines) <$6/bottle

Central Valley

Central Valley “The bottom line is that, following the 2015 crop, we will still need to remove about 36,000 acres…”

Central Valley Doesn’t equal 36,000 acres (Forecast)

North Valley (Daily Drinkers) $6-10/bottle

Bright Spots/Opportunities North Valley Regional Bright Spots/Opportunities Premiumization Potential “Middle” of the Market Varietal Diversity

North Valley

North Valley

California Coastal (Premium Wines) $10-20/bottle

California Coastal

California Coastal

Bright Spots/Opportunities California Coastal Regional Bright Spots/Opportunities Epicenter of Growth “Managed” Growth AVA Extenders and Alternatives

AVA Based (Luxury Wines) >$20/bottle

Reginal Market/Supply AVA Based Reginal Market/Supply Hot Topics Relationship with “The Economy”

Premium Winery Sales Growth AVA Based Premium Winery Sales Growth Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

Sales Growth Rates of U.S. Luxury Goods AVA Based Sales Growth Rates of U.S. Luxury Goods Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

AVA Based

AVA Based

Summing up Supply…

Supply Stability 9,000 Net Acre Reduction (-5%)

Supply Stability 9,500 Net Acre North Valley Addition (+7%) Overall Interior Acres Flat From 2016

Most of the new acres came in 2017! Supply Stability 16,500 Net Acre Addition (+7%)

Summary Wine consumers continue to be very fickle; they are not particularly loyal to California, readily looking to foreign alternatives. Premiumization will continue as the dominate wine industry trend, as consumers trade up in quality, all while being value conscious. California will experience no material growth in bearing acreage through 2020, but higher yields and larger crops are likely. Producers will continue to adjust regional supply, in response to continually changing consumer preference.