Allied Grape Growers, All rights reserved. Unified Wine & Grape Symposium State of the Industry Thriving, Just Surviving or Somewhere in Between? Nat DiBuduo Allied Grape Growers January 27, 2016

Allied Grape Growers, All rights reserved. “It’s more interesting to talk about huge crops during excess or short crops during shortage, but a short crop in a time of ample supply just makes for a boring production story of “moving toward balance.”” -AGG’s Industry Update Newsletter, January 2016-

Allied Grape Growers, All rights reserved Crush…..

Allied Grape Growers, All rights reserved. Today’s presentation utilizes information obtained via Allied Grape Growers’ (AGG) annual Grapevine Nursery Survey combined with evaluation of numerous reports and data made available by the State of California. Wine shipment data is courtesy of the Gomberg Fredrikson Report. AGG’s internal operations data along with unquantified industry observations and anecdotal evidence was also used to draw conclusions.

Allied Grape Growers, All rights reserved. The Changing Five-Year Landscape 2010 vs. Now….. Supply/Production: Bearing acreage up 11% (now 555,000) Yield up 5% on average (7.25 TPA average) Competition: Wine imports up 15% (114m case average) Craft beer/Cider Demographics/Consumers: Less boomers, more millennials Premiumization Economics: Recession vs. Recovery Strength of US Dollar up 25%

Allied Grape Growers, All rights reserved. This changing landscape has/will affect different regions in different ways… Some positive Some negative

Allied Grape Growers, All rights reserved. Over the Hump….. Last Year, AGG predicted 20,000 acres would be planted.

Allied Grape Growers, All rights reserved. Over the Hump….. Our prediction for 2016 is 16,000 new acres.

Allied Grape Growers, All rights reserved. What’s Hot, What’s Not…. 65% Red 35% White

Allied Grape Growers, All rights reserved. Planting Trends, Cabernet Sauvignon - 31% Cabernet Sauvignon - 31% Pinot Grigio – 17% Pinot Grigio – 17% Pinot Noir – 15% Pinot Noir – 15% Chardonnay – 13% Chardonnay – 13% Cabernet Sauvignon - 29% Cabernet Sauvignon - 29% Chardonnay – 17% Chardonnay – 17% Pinot Grigio – 12% Pinot Grigio – 12% Pinot Noir – 12% Pinot Noir – 12% Cabernet Sauvignon - 29% Cabernet Sauvignon - 29% Chardonnay – 14% Chardonnay – 14% Pinot Noir – 13% Pinot Noir – 13% Zinfandel – 10% Zinfandel – 10%

Allied Grape Growers, All rights reserved. Categorical Review Trends, Issues, Threats & Opportunities

Allied Grape Growers, All rights reserved. Breaking it Down…. Value - (<$7/bottle) Interior (excluding Lodi/Delta) Mid - ($7-10/bottle) Lodi/Delta High - ($10-20/bottle) Coastal (standard) Luxury - (>$20/bottle) Coastal (Napa, Sonoma, etc.)

Allied Grape Growers, All rights reserved. Value Category Trends, Issues, Threats & Opportunities

Allied Grape Growers, All rights reserved. +/-21,000 winegrape acres removed between the 2014 and 2015 harvests. 20,000 acres pulled (+/- 10,000 winegrapes) since the 2015 harvest. Vineyard Removal…. (All interior, including Lodi) Removals will likely continue at the current pace thru Spring. Based on current shipment trends/grape buying activity, removals are necessary.

Allied Grape Growers, All rights reserved. “We estimate that – unless demand for <$10 wines recovers or the SJV captures a larger share of the growth of the $10-25 price segment – as much as 40,000 more acres will likely be removed in the coming three years as SJV production will have difficulty finding buyers.” -Stephen Rannekleiv, Rabobank’s Industry Note, July 2015-

Allied Grape Growers, All rights reserved. Source: OIV Wine Production vs. Consumption Worldwide (in Mhls) Used with Permission - Rob McMillan, Silicon Valley Bank

Allied Grape Growers, All rights reserved. Value Segment Trends, Issues, Threats, Opportunities Trends Declining demand/Acreage base revamp Issues Economic sustainability/Competing crops Threats Imports/Water policy Opportunities Differentiate & Premiumize (Quality)

Allied Grape Growers, All rights reserved. Varietal Trends, by Segment….. +25% Note: Change stated cumulatively Annual attrition rates estimated +26% -8% -15% +75% +6% +62% +1% California

Allied Grape Growers, All rights reserved. Mid Category Trends, Issues, Threats & Opportunities

Allied Grape Growers, All rights reserved. Mid Segment Trends, Issues, Threats, Opportunities Trends Improving visibility/recognition Issues Labor, return/cost imbalance Threats Surplus of inexpensive winegrapes in SJV Opportunities Provide value priced grapes for the high category

Allied Grape Growers, All rights reserved. Varietal Trends, by Segment….. +15% +39% -6% +1% +49% +3% +32% +2% Note: Change stated cumulatively Annual attrition rates estimated California

Allied Grape Growers, All rights reserved. High Category Trends, Issues, Threats & Opportunities

Allied Grape Growers, All rights reserved. High Segment Trends, Issues, Threats, Opportunities Trends Premiumization lands right in their back yard Issues Pricing pressure – related ability to provide value Threats Competing beverages/producers (both domestic and foreign) vying for same consumer Opportunities Mechanization

Allied Grape Growers, All rights reserved. Washington and Oregon - formidable competition? Domestic Competition….. Washington since 2005/2006: Acreage up by 66% Acreage up by 66% Number of wineries up by 130% Number of wineries up by 130% Wine volume up by 85% Wine volume up by 85% Net economic impact up by 55% Net economic impact up by 55% Oregon since the recession ( ): Acreage up by 18% Acreage up by 18% Number of wineries up by 45% Number of wineries up by 45% Volume up by 39% Volume up by 39% Net economic impact up by 28% Net economic impact up by 28%

Allied Grape Growers, All rights reserved. Varietal Trends, by Segment….. +32% +23% -2% +6% +23% +11% +16% +2% Note: Change stated cumulatively Annual attrition rates estimated California

Allied Grape Growers, All rights reserved. Luxury Category Trends, Issues, Threats & Opportunities

Allied Grape Growers, All rights reserved. Luxury Segment Trends, Issues, Threats, Opportunities Trends Differentiation Issues Limited opportunity for growth, scarce resources Threats Dependence on economy Opportunities Branding - AVA and associated brands

Allied Grape Growers, All rights reserved. Varietal Trends, by Segment….. +8% -4% 0% +9% +2% +4% +1% Note: Change stated cumulatively Annual attrition rates estimated California

Allied Grape Growers, All rights reserved. The Final Stretch….. Macro-trends

Allied Grape Growers, All rights reserved. Our Production Potential……

Allied Grape Growers, All rights reserved. Evolving California Acreage Base… Represents only 1.3% total growth annually

Allied Grape Growers, All rights reserved. Industry Elephants….. (from a grower’s perspective) Sustainability ……and Hangtime

Allied Grape Growers, All rights reserved. Final Thoughts/Highlights Premiumization is driving acreage base changes. Premiumization is driving acreage base changes. We aren’t pulling the fire alarm, we are being realistic about what needs to come out and why. We aren’t pulling the fire alarm, we are being realistic about what needs to come out and why. The momentum of the business appears to be such that we may revert back to a time of adding an appropriate amount of new acres annually. The momentum of the business appears to be such that we may revert back to a time of adding an appropriate amount of new acres annually. There has been, and always will be, opportunity for differentiation; marketing is key. There has been, and always will be, opportunity for differentiation; marketing is key. Overall, most segments of the wine business are sustainable, on all fronts. Overall, most segments of the wine business are sustainable, on all fronts.

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