MARKET UPDATE Information provided by: Glenn Proctor DEDICATED - PowerPoint PPT Presentation

SONOMA COUNTY WINEGRAPE COMMISSION DOLLARS & $ENSE SEMINAR JANUARY 17, 2019 SONOMA COUNTY GRAPE AND WINE MARKET UPDATE Information provided by: Glenn Proctor

DEDICATED BROKERS IN 8 COUNTRIES GLOBALLY BASED TO BUILD YOUR BUSINESS WORLDWIDE

CALIFORNIA MARKET OVERVIEW - SLUGGISH CASEGOOD SALES THE LAST 12 – 18 MONTHS - HISTORIC 2018 CROP - SPOT MARKET GRAPE ACTIVITY EXTREMELY QUIET - BULK WINE MARKET CONTINUES TO SOFTEN; INCREASED INVENTORIES (PRICES EXPECTED TO DECREASE)

SUPPLY DEMAND DYNAMICS

2018 USA SHIPMENTS – 9 months ending September TOTAL CA WINE 0% DOMESTIC 0% EXPORTS (-16% Bottled; +9% Bulk) (-3%) IMPORTS CASEGOODS +1% BULK (-14%) COASTAL WAREHOUSE SHIPMENTS (-15%) TOTAL US Market (YTD) IMPORT & DOMESTIC (-1%) Source: Gomberg-Frederickson

TABLE WINE SALES Retail Price/ Price Segment Volume Change Volume Share Value Share 750ml Eqv. Under $4 Value - 3.5% 23.7% 9.0% $4 - $7 Premium Box 10.8% 8.0% 5.4% $4 - $8 Popular - 5.6% 30.5% 22.8% $8 - $11 Premium - 0.4% 18.7% 24.1% $11 - $15 Super Premium 7.1% 10.9% 18.7% $15 - $20 Ultra Premium 9.2% 3.9% 9.1% $20 - $24 Luxury 6.8% 1.4% 4.1% $25 + Super Luxury 4.1% 0.9% 5.0% TTL Table Wine All - 0.5% Source: Nielson - Latest 52 Weeks – Ending 12/1/2018

WAREHOUSE SHIPMENT TRENDS Source: Gomberg-Fredikson through Aug 2018, Silicon Valley Bank

2018 CRUSH

CALIFORNIA STATEWIDE GRAPE CRUSH 4.5 4.3+ 4 Tons in Millions 3.5 3 2.5 2 2012 2013 2014 2015 2016 2017 2018 Est. Winegrape Other Crush

SONOMA TOTAL TONS 2014 – 2018 Est. 280,000 260,000 240,000 220,000 TOTAL TONS 200,000 180,000 160,000 140,000 120,000 100,000 SONOMA 2014 2015 2016 2017 2018

SONOMA COUNTY WHITE GRAPE TONNAGES 2014 – 2018 Est. 100,000 90,000 80,000 70,000 60,000 TONS 50,000 40,000 30,000 20,000 10,000 0 Chardonnay Sauvignon Blanc 2014 2015 2016 2017 2018 Est.

SONOMA COUNTY RED GRAPE TONNAGES 2014 – 2018 Est. 60,000 50,000 40,000 30,000 TONS 20,000 10,000 0 Cab Sauv Merlot Zinfandel Pinot Noir 2014 2015 2016 2017 2018 Est.

SONOMA COUNTY PRICING DYNAMICS 102,000 $4,500 92,000 $4,000 ∆ 25% 82,000 72,000 $3,500 62,000 AVERAGE PRICE/TON TONS (US) ∆ 28% 52,000 $3,000 42,000 $2,500 32,000 ∆ 28% 22,000 $2,000 12,000 2,000 $1,500 2013 2014 2015 2016 2017 2018 Est. Chardonnay Tons Cabernet Sauvignon Pinot Noir Chardonnay Prices Cabernet Sauvignon Prices Pinot Noir Prices ∆ Average Growth % 2013 to 2018 Est.

2018 GRAPE MARKET

2018 GRAPE MARKET – BUYER ACTIVITY WAS EXTREMELY SLOW – WEAKEST ACTIVITY SINCE 2010 – MOST GRAPES UNDER CONTRACT – FEW UNCOMMITTED GRAPES – INITIAL EARLY RRV CHARDONNAY, AND PREMIUM CS DEMAND – BUYERS SHUT DOWN MID-SEASON ONCE CROP WAS REALIZED – END OF SEASON NO REAL OFFERS – QUALITY STANDARDS MORE RELATIVE

SUPPLY/DEMAND DYNAMICS 2016 – EARLY 2017 Tight Supply Market Sellers (On sideline) Buying Selling

SUPPLY/DEMAND DYNAMICS - TODAY Expanding Sourcing MOVING TO OVERSUPPLY Options Buyers ( ON SIDELINE ) SELLING BUYING

NEW REALITY! MARKET HAS CHANGEDD

SONOMA COUNTY GRAPE MARKET SURVEY 2019

SONOMA MARKET SURVEY 2019 Current Overall Sonoma County Grape Supply/Demand Situation : 80.00% 60.00% 40.00% 20.00% 0.00% Short Slightly Short Balanced Slightly Long Long

SONOMA MARKET SURVEY 2019 Do you plan to purchase LESS, SAME, or MORE of the following varietals in 2019 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Chardonnay Sauvignon Blanc Cabernet Sauvignon Pinot Noir Merlot Zinfandel Less Same More

SONOMA MARKET SURVEY 2019 In 2019, do you expect grape prices to be DOWN, STABLE, or UP 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Chardonnay Sauvignon Blanc Cabernet Sauvignon Pinot Noir Merlot Zinfandel Down Stable Up

SONOMA MARKET SURVEY 2019 Case good sales projections for 2019 compared 2018 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Down Moderately Down Slightly Down Flat Slightly Up Moderately Up Significantly Up

SONOMA MARKET SURVEY 2019 How have your grape purchasing strategies changed 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Adjust app. Sourcing Cancel supply contracts Long term contracts Renegotiate price Remove old vyds

2019 GRAPE MARKET

2019 EXPECTED GRAPE MARKET – EARLY MARKET EXPECTED TO BE VERY SLOW – WINERIES GRAPPLING WITH INVENTORY FROM LARGE 2018 HARVEST, AND WILL POTENTIALLY BE SELLERS THEMSELVES – MORE SPOT MARKET AVAILABILITY AS WINERIES GIVE CONTRACT NOTICES – BUYERS WILL BE RELUCTANT TO BUY UNTIL THEY KNOW THEY HAVE A REAL NEED – POTENTIAL MARKET ACTIVITY IF 2019 CROP LOOKS SIGNIFICANTLY LIGHTER

WINE/GRAPE MARKET – SOME THINGS WILL NEVER CHANGE? WI Higher! Lower! Grower Winery

BULK MARKET

BULK MARKET – ACTIVITY HAS BEEN SLOW AND PRICING HARD TO PIN DOWN – BUYERS ARE LOOKING FOR DEALS WITH LOWER PRICING – RENEWED ACTIVITY BY NEGOTIANTS IN THE LAST FEW MONTHS – BULK SELLERS HAVE STARTED TO REALIZE NEW MARKET REALITY – WINERIES ALSO LOOKING TO MOVE EXCESS INVENTORY

CALIFORNIA BULK WINE INVENTORY 7,000,000 6,000,000 5,000,000 Bulk Gallons Available 4,000,000 3,000,000 2,000,000 1,000,000 0 Jan. 2017 Jan. 2018 Jan. 2019 Cabernet Sauvignon Chardonnay Merlot Pinot Noir Zinfandel

SONOMA COUNTY BULK WINE INVENTORY 2017 – 2019 500,000 400,000 Bulk Gallons Available 300,000 200,000 100,000 0 Jan. 2017 Jan. 2018 Jan. 2019 Cabernet Sauvignon Chardonnay Pinot Noir Zinfandel

THE MARKET HAS CHANGED! - SALES ARE SLUGGISH - BUYERS ARE CAUTIOUS – SUPPLY IS A BAD WORD ONCE AGAIN - BUYERS HAVE CHANGED SOURCING PLANS TO MANAGE MARGINS - SELLING GRAPES & BULK WINE WILL BE MORE CHALLENGING - GLOBAL DYNAMICS OF WINE BUSINESS

ACTIONS TO TAKE - STRENGTHEN RELATIONSHIP WITH CURRENT BUYERS – RECOGNIZE THEIR NEEDS (INVEST SONOMA COUNTY BRANDS) - BE OPEN TO THE REALITIES OF THE NEW MARKET PLACE - SOMETIMES THE FIRST OFFER IS THE BEST OFFER - MANAGE INPUTS AND ASSETS TO MAINTAIN PROFITABILITY - DEVELOP A STRATEGY : SHORT TERM – SURVIVAL LONG TERM – PROSPERITY

SUMMARY/CONCLUSION - WE HAVE BEEN THROUGH THIS BEFORE - CONSUMERS WILL CONTINUE TO DRINK CALIFORNIA AND SONOMA COUNTY WINE - PREMIUM SALES GROWING – BUT AT SLOWER RATES - NEW BRAND OPPORTUNITIES EXIST TO UTILIZE THIS AVAILABLE SUPPLY - CAPITALIZE AND INVEST IN THOSE OPPORTUNITIES - DON’T BE FEARFUL BECAUSE TODAYS CHALLENGES ARE TOMORROWS OPPORTUNITIES

CIATTI REPORTS / PUBLICATIONS CALIFORNIA MARKET REPORT NEW OFFICE ADDRESS: - GLOBAL MARKET REPORT – 201 ALAMEDA DEL PRADO SUITE # 101 - NOVATO, CA 94949 - WWW.CIATTI.COM THANK YOU GLENN PROCTOR GLENN@CIATTI.COM 415/458-5150

POINTS TO DISCUSS - 2018 WINEGRAPE HARVEST - GRAPE AND BULK MARKET - WHAT TO EXPECT IN 2019 - COMMENTS/QUESTIONS

GROWTH RATES IN LUXURY SALES

AVERAGE PRICE INCREASES

STATE REGIONAL TOTAL TONS 2,500,000 2,000,000 TOTAL TONS 1,500,000 1,000,000 500,000 0 North Coast Central Coast & So. Cal North Interior C & S SJV 2014 2015 2016 2017 2018 Est.

2018 SPOT MARKET GRAPE PRICING Sonoma Napa $500 – 2,800 $1,000 – 3,000 Chard $1,000 – 1,850 $1,400 – 2,500 Sauv Blanc $1,000 – 3,400 $2,000 – 10,000+ Cab Sauv $1,000 – 4,500 $800 – 3,600 Pinot Noir $1,000 – 2,200 $1,800 – 3,800 Merlot $1000 – 3,000 $2,500 – 4,500 Zinfandel How low should we show pricing -$500 per ton ???????????

SONOMA MARKET SURVEY 2019 – MOST NEEDED VARIETY CHARDONNAY, CABERNET SAUVIGNON – – LEAST NEEDED VARIETY ZINFANDEL, CABERNET SAUVIGNON, PINOT NOIR – – BIGGEST THREATS TO SONOMA COUNTY LABOR, PRICING, GOVERNMENT REGULATIONS, COMPETITION, LACK OF GROWING SONOMA COUNTY – BRANDS – VARIETY YOU WOULD PLANT/REPLANT CHARDONNAY, PINOT NOIR, SAUVIGNON BLANC – – VARIETY YOU WOULD REMOVE CABERNET SAUVIGNON/ZINFANDEL CABERNET SAUVIGNON, ZINFANDEL –

SONOMA WINEGRAPE ACREAGE 2017 Reported Reported Non Total Reported N-B % Bearing Bearing We should look at Updating this based on Chardonnay 15,078 559 15,637 4% Latest crop report – Cab Sauv 11,952 383 12,335 3% show that there is really no new acres? Merlot 4,668 106 4,774 2% Zinfandel 4,927 70 4,996 1% Sauv Blanc 2,595 15 2,611 1% Pinot Noir 12,233 349 12,582 3% Potentially bigger issues with CS where Syrah 1,517 11 1,528 1% more planting has Pinot Gris 452 2 454 .4% gone in Others 303 29 332 9% Total 57,603 1,613 59,216 3% Remember when We said we could Not have too much Because we have Limited acres – When demand changes And brand sourcing Changes you Can be oversupplied

NAPA COUNTY BULK WINE INVENTORY 2017 – 2019 400,000 350,000 300,000 Bulk Gallons Available 250,000 200,000 150,000 100,000 50,000 0 Jan. 2017 Jan. 2018 Jan. 2019 Cabernet Sauvignon Chardonnay Merlot Pinot Noir