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Beverage Alcohol Trends In a Recessionary Environment January 20-21, 2009 Presenter: Eric Schmidt, Manager of Informa

Beverage Alcohol Trends In a Recessionary Environment January 20-21, 2009 Presenter: Eric Schmidt, Manager of Information Systems. Wine. Wine. The Downward Spiral. 1) High gas prices

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Beverage Alcohol Trends In a Recessionary Environment January 20-21, 2009 Presenter: Eric Schmidt, Manager of Informa

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  1. Beverage Alcohol Trends In a Recessionary Environment January 20-21, 2009 Presenter: Eric Schmidt, Manager of Information Systems

  2. Wine Wine

  3. The Downward Spiral 1) High gas prices • Many small wineries depend on tasting-room sales and wine club memberships for most of their revenue. • High gasoline prices deterred some casual drinkers from touring wine country, while some customers dropped out of wine clubs that ship bottles automatically. 2) Rising Costs • Small wineries are being squeezed by rising costs. Prices for barrels, corks, fertilizer and shipping all increased along with energy. • Retailers and wineries are working twice as hard to sell the same amount of wine 3) Bad Economic News • Consumers tightened their wallet and are cutting back even further. • Cutbacks are most damaging to small, independent wineries, as they need to charge more than big winemakers to cover costs and make a profit. • Sales in restaurants have been slowing throughout this year and high-end wine sales slumped as fine dining dropped off. Also, wine sales by the bottle are down while wine sales by the glass are up. 4) On-Premise Wine Sales Decrease • 2008p nationwide decrease of 5.0% Source: B.I.G. Handbooks (p) Preliminary

  4. Wine - Trends Trading Down • Consumers that purchase wines above $12 were trading down to premium wines, $9-$12 ,which is reportedly the fastest-growing segment. In turn, consumers that buy wines priced $6-$9 are trading down to wines below $6, particularly in the $3-$5.99 range. • The average price of a bottle at Wine.com sold in December of ’08 was 17% below the average bottle sold in December ’07 while the number of bottles sold was 15% higher. Showing that consumers are trading down for less expensive wines but what they save per bottle, most made up for it in quantity. • Revenue has been largely unchanged because the quantity of bottles sold has increased. Trending Off-Premise • Higher-priced wines are getting hurt because 40 to 60 percent are sold in restaurants and instead of going to a restaurant and ordering $30 bottles, people are getting together at home and drinking $15 bottles of wines. • Aficionados feeling the economic pinch are drinking cheaper wines, are buying less or consuming what's already in their cellars, slowing sales growth.

  5. Industry Quotes "Consumers are still enjoying wine in every day life, they are just enjoying value-oriented products. Value-priced wines are growing as are premium wines. Everything in the middle is suffering." said Stephanie Gallo, senior director of marketing at E&J Gallo Winery "I think that consumers are going to get their confidence up of enjoying wines that don't cost as much, finding the values are there," Fred Franzia of Bronco Wine Co. “We’ve seen a pick up in growth in the ‘everyday’ wine category (below $5) and some slowdown in the above $5 range. Trading up is not as strong as it has been in the past because you don’t see everyday wines shrinking and premium brands growing. You see the whole wine industry growing.” CEO of Constellation Brands Rob Sands "If you work that backwards from what we had last year, and admittedly some of the prices for last year were very good for the red grapes, but the outlook is very disappointing and I have to say I am terribly concerned about where we are going and what the future of the wine industry in this area is."Fosters Growers Liaison Group chairman Dennis Mills "We've got to make some adjustments because our industry isn't growing as strongly as it has in the past."said Clay Gregory, president of Jackson Family Wines

  6. Thinking Strategically • One winery adapting to a softening restaurant climate is Flowers Vineyards & Winery. Eighty percent of pinot noir and chardonnay is sold in restaurants and the winery views the slow sales as an opportunity to offer wines to new retailers. “I think the key to this recession is to use it position yourself for the next four to five years," said Tom Hinde, the winery president. • Experience has shown that slashing prices to drive sales is not a smart long-term strategy, said Chris Hanna, owner of Hanna winery. That's what wineries did in the early 90s. It's tough to recover from such a move because consumers become accustomed to the lower prices.” • Chateau Petrus' Jean-Francois Moueix said he could not "exclude the possibility that there will not be an en primeur campaign in 2009.“ En primeur is a method of purchasing vintages while they are still in the barrel which provides the chateau with cash and offers the customer the opportunity to buy at a price that may be lower than when it is released. • Investments in out of stock market alternative funds may continue to rise next year. During financial crises, investors prefer things like wine, art or antiques, "things they can touch”. “We expect to see alternatives rise into next year. Everyone is knocked off balance by the performance of equities and bonds.” said John Godden, chief executive officer IGS Group Ltd

  7. Going Green • FOUR wine is marketing its Cabernet Sauvignon/Petite Sirah blend in three-liter canisters. The tubes are more eco-friendly and less expensive than bottles. The wine can last longer after being opened, said brand manager Larry Leigon. Less oxygen enters through the tube and its spout than a bottle whose cork has been popped. • Boisset bottled its entire 2008 harvest in plastic bottles. The lightweight PET (polyethylene terephthalate) bottles drastically cut shipping costs without affecting the young Gamay wine inside and created packaging that was recyclable. • The Wine Group is replacing its 187 ml single serving glass bottles with environmentally-friendly 250 ml Tetra Paks for the popular Glen Ellen and Fish Eye brands. • Perpetual Energy Systems, financier and developer of solar powered renewable energy systems, and Foster’s Wine Estates Americas, announced the activation of four solar installations. • Beringer Vineyards hosts a 1,341,200 W DC solar energy system, the largest operational solar installation at a winery in the country. • Asti, hosts the third largest system of its kind, producing 1,152,144 W DC. • Etude and Stags’ Leap Winery, will generate 3.85 million Kilowatt hours of energy annually.

  8. Ups & Downs Champagne Down • People are thinking about their discretionary spending on all luxury goods and that is adversely affecting sales of Champagne. • We hope that the cooling down of the Champagne economy will make the grape market healthier and stop growers bottling excess production, encouraging them to sell more of their grapes to the houses that "add value“. • Historically, prices have risen by an average of 11 per cent per annum over the past three years, while volumes have risen by only 7 per cent. • People believe it may be painful in the short-term but this will good for the future of Champagne, for quality and for consumers. Riesling Up • Riesling has been the fastest growing white wine in the last three years. • One explanation for the growth is generational. The large Millenial generation has been very open to the sugary sweet flavor profile that Rieslings offer. • Despite the growth, some producers are hesitant to import German Riesling due to the weak dollar and strong euro. • Fetzer has imported German Riesling for the last couple of years, but now Fetzer is relying exclusively on California Riesling.

  9. Advertising • In a recessionary environment research has shown that investing in brands during the downturn helps build the brand not only during the downturn but aids in its rebound afterward. E&J Gallo E & J Gallo is reportedly launching its first TV ad campaign in a decade. In support of its Gallo Family Vineyards Twin Valley line, the tagline reads: “We’re All Family.” Yellow Tail 2008 saw the launch of Yellow Tail’s first national television advertising campaign, called “Tails, you win.” The campaign is running on 10 popular national networks such as Lifetime and A&E. Wilson Daniels Wilson Daniels readily agreed to help award-winning filmmaker Bret Lyman shoot on location at Wilson Daniels' suppliers in France and Hungary. As a result, www.wilsondanielsfilms.com offers excellent Web-based wine films. Superb production quality and unique presentation style set these films apart.

  10. Economic Factors • Importers and distributors are running down their stocks rather than renewing them. There are extreme downward pressures on prices while producers and traders are worried about the financial implications of maintaining relatively high stock levels. • The middle price segment is suffering as some artisanal producers are being hurt because they haven't been around long enough to develop a wide following with consumers. On the other end of the spectrum, demand is still strong for some expensive vintages. Some wineries have long wait lists for bottles that have cult followings and sell for hundreds of dollars. • A lack of liquidity in financial markets is affecting the capital-intensive wine business. The wine business should survive better than most, though it will share the pain of a downturn in consumer spending, and specific business models will not be applicable. • As an investment,top vintage wine has always held its value and it is always going to hold its own. Buying from the right producers and the right vintages is the key. The market has softened but there is still strong demand for top bottles.

  11. 2008p Wine ConsumptionTotal U.S. On- & Off-Premise Source: B.I.G. Handbooks (p) Preliminary

  12. Long Term Wine Growth ContinuesTotal U.S. On- & Off-Premise Source: B.I.G. Handbooks (p) Preliminary

  13. Import vs. Domestic Wine GrowthTotal U.S. On- & Off-Premise Source: B.I.G. Handbooks (p) Preliminary

  14. Top 10 Domestic Wines Source: B.I.G. Handbooks (p) Preliminary

  15. Fastest Growing Domestic Wines* (000 9-Liter Cases) * Case sales must reach 800,000 cases. Source: B.I.G. Handbooks (p) Preliminary

  16. Top 10 Imported Wines Source: B.I.G. Handbooks (p) Preliminary

  17. Fastest Growing Import Wines* (000 9-Liter Cases) Source: B.I.G. Handbooks (p) Preliminary * Case sales must reach 200,000 cases.

  18. Wine Internationally Thriving • Bargain priced bottles have been a boon to vintners in Chile, Argentina, Portugal and Spain. Less well-known wine countries such as Israel and Cyprus have also seen their shares of the U.S. rise. • Some Argentine winemakers claim the recession is helping their wines grow in the U.S.. Several winemakers are confident the country's exports growth will continue because the price tier where they are most competitive, $15 and below, is growing. • New World countries, such as Chile, South African and Argentina, are performing much better in the unstable economy than Old World wines like France, Italy and Spain. Surviving • A significant part of France's wine industry is teetering on bankruptcy. Wine players around the globe, from Italy and Spain to New Zealand are struggling to meet adequate margins to finance the investments that are instrumental in preserving their future. • Australia, prices of most wine varieties are expected to drop as much as 30-40% from last year. • New Zealand, as much as one-third of this year's sauvignon-blanc crop might not be picked, in response to the financial crisis and an oversupply of grapes. It is expected that some smaller wineries could go at fire-sale prices as their land value fell.

  19. Table Wine Imports: Share of Market by Leading Countries Source: B.I.G. Handbooks (p) Preliminary

  20. Top Brands from Leading Countries (000 9-Liter Cases) Source: B.I.G. Handbooks (p) Preliminary

  21. Fastest Growing On-Premise Wine Varietals Share of Market Source: B.I.G. Handbooks

  22. Fastest Growing On-Premise Wine Varietals by Region, 2008 • Midwest • Pinot Grigio • Chardonnay • White Zinfandel • Merlot • Pinot Noir • Northeast • Chardonnay • Pinot Grigio • White Zinfandel • Pinot Noir • Merlot • West • Chardonnay • Pinot Grigio • Merlot • Cabernet Sauvignon • Pinot Noir South • Pinot Grigio • Chardonnay • White Zinfandel • Merlot • Pinot Noir Source: B.I.G. Handbooks (p) Preliminary

  23. BOTA BOX 2009 Growth Brands Fast Track – Wine Red Truck Casillero del Diablo Crane Lake Salmon Creek Castle Rock Bota Box Barefoot Cellars Castello di Gabbiano Cellar 8 Segura Viudas Simi Kim Crawford La Crema King Estate Source: B.I.G. Handbooks

  24. 2009 Growth Brands Fast Track – Wine, continued 7 Deadly Zins Mionetto RELAX Red Diamond Fish Eye Big House Ménage à Trois Nobilo La Vieille Ferme Dona Paula Black Box Liberty Creek Source: B.I.G. Handbooks

  25. 2009 Growth BrandsRising Star – Wine High Note Twisted Gnarly Head 337 Irony Loredona Don Miguel Gascon Coastal Vines Rockbrook Fat Cat Cellars Little Black Dress Redtree Line 39 Clean Slate Root:1 Source: B.I.G. Handbooks

  26. 2009 Growth BrandsRising Star – Wine, continued Cuma Cycles Gladiator Paso Creek Silver Palm Tin Roof Sonoma Vineyards 14 Hands Red Rock Tisdale Five Oaks Polka Dot Martin Codax Ghost Pines Starborough Bohemian Highway Source: B.I.G. Handbooks

  27. 2009 Growth BrandsRising Star – Wine, continued Two Hands Seven Daughters Tangley Oaks Chamarre Veuve Moisan OWS Cellar Selection Pinot Evil Newman’s Own Red Guitar Diseno Cono Sur Source: B.I.G. Handbooks

  28. Sake Awareness Increasing • More sake products available to the U.S. as Asian food trends are booming. • U.S. has become the largest importer of Japanese sake worldwide growing an estimated 14% a year. • Greater understanding, appreciation of sake as more premium brands arrive. • Leading Brands of Domestic Sake • 9-Liter Cases (’07/’08p %Chg) • Takara - 700,000 (4.5%) • Gekkaikan - 405,000 (5.2%) • Ozeki - 355,000 (4.4%) Source: B.I.G. Handbooks

  29. Beer

  30. On-Premise - Trends Economic Trends • U.S. Beer is getting a boost from the poor economy and taking some share from wine and spirits on a volume basis. • Beer is more recession-proof than wine and spirits because of its lower price points. Trading Down • The Craft-beer segment is slowing due to price points. • Prices of ingredients are causing brands to raise their costs forcing some consumers to trade down. • High-end beer drinkers are buying a six-pack for home rather than heading to a bar, to save money. • Imported beer is struggling to find their way, for the most part, in this turbulent economic time. • Meanwhile retro brands like PBR and Schlitz are doing well as consumers tend to look back to the past during tough times. Consumer Trends • Beer is a great mixer as it provides a broad array of flavors. From spicy to sweet to rich. • People are saving money by offering Beertails both on- & off-premise. They are on average 80% less expensive then champagne or traditional liquor cocktail. • Beer dinners are gaining in popularity, pairing food with different types of beer.

  31. Advertising Bud Light Bud Light packaging by giving its cans and bottles a makeover to play up refreshment in 2009. Bud Light packaging to be more blue, pitch "drinkability“. Sapporo Sapporo Breweries Ltd. are selling beer with “Carbon Footprint” labels. The labels will show the amount of carbon dioxide emitted during the production process of each can. Coors The Coors Brewing Company is offering consumers a chance to win tickets for the 2009 Super Bowl. The video clips that contestants are invited to submit on two Web sites (coorsbeer.com and coorslight.com).

  32. Beer Landscape • Beer sales in emerging economies are cooling, sapping a key source of profit growth. The abrupt weakness, especially in Eastern Europe, is putting pressure on brewers' profits and could accelerate consolidation in an industry that has seen several multibillion-dollar deals in the past few years. • Beer titans ratcheted up investments in emerging markets in recent years, partly to offset weakness in mature markets like North America and Western Europe. But recent high inflation and slowing economic growth are prompting consumers in some developing economies to buy less beer. • The weaker growth in developing markets has coincided with rising costs for brewers for such items as barley, glass and aluminum. However, those cost pressures are starting to ease, which may help blunt the impact of softer sales. • SABMiller warned it is looking to cut back investment spending as a global economic slowdown hits beer drinking. It will suffer from higher commodity costs for another year, while the recent strength of the U.S. dollar will dent future results. • Cost cutting measures are being taken in order to consolidate resources through mergers. • Anheuser Busch and InBev • Molson Coors and Miller Brewing

  33. Beer Volume Overall 2003 - 2008pTotal U.S. On- & Off-Premise +0.6% Source: B.I.G. Handbooks (p) Preliminary

  34. Beer Volume by Category 2003 - 2008pTotal U.S. On- & Off-Premise Millions of 2.25-Gallon Cases Source: B.I.G. Handbooks (p) Preliminary

  35. BEER CATEGORIESShare of Market 2003 vs. 2008p Source: B.I.G. Handbooks (p) Preliminary

  36. 2003 2008 1. 1. 2. 2. 3. 3. 4. 4. 5. 5. Top 10 Beer Brands 2003 & 2008pDomestic & Imported Source: B.I.G. Handbooks (p) Preliminary

  37. 2003 2008 6. 6. 7. 7. 8. 8. 9. 9. 10. 10. Top 10 Beer Brands 2003 & 2008pDomestic & Imported Source: B.I.G. Handbooks (p) Preliminary

  38. Top Light Beer Brand Performance* *Ranked by 2008 Volume Source: B.I.G. Handbooks (p) Preliminary

  39. Imports Share of Market Softens Source: B.I.G. Handbooks (p) Preliminary

  40. 2003 2008 1. 1. 2. 2. 3. 3. 4. 4. 5. 5. Top 10 Imported Beer Brands 2003 & 2008p Source: B.I.G. Handbooks (p) Preliminary

  41. 2008 2003 6. 6. 7. 7. 8. 8. 9. 9. 10. 10. Top 10 Imported Beer Brands 2003 & 2008p Source: B.I.G. Handbooks (p) Preliminary

  42. Top Imported Brands by Country* *Ranked by 2008 Volume Source: B.I.G. Handbooks (p) Preliminary

  43. %Chg – '07/'08p %Chg – '06/'07 1. +56.3% ++% 2. +33.3% +50.0% 3. +25.0% +63.9% 4. +20.0% +20.0% 5. +12.6% +16.0% Fastest Growing* Imported Brands * Case sales must reach 3,000,000 Source: B.I.G. Handbooks (p) Preliminary

  44. Anchor Steam Up 5.0% Sam Adams Boston Lager Up 6.5% Redhook ESB Up 3.8% Shiner Bock Up 5.7% Yuengling Traditional Lager Up 3.4% Fat Tire Amber Ale Up 1.0% Domestic Craft Brewing Gains in 2008p Selected Brands: Source: B.I.G. Handbooks (p) Preliminary

  45. Leading On-Premise New/Emerging Beer Brands Source: B.I.G. Handbooks

  46. Leading On-Premise New/Emerging Beer Brands by Region, 2008 • Midwest • Bud Light Lime • Blue Moon • Miller Chill • Heineken Light • Sam Adams • West • Stella Artois • Blue Moon • Fat Tire • Sam Adams • Newcastle • Northeast • Sam Adams • Coors Light • Corona • Heineken • Blue Moon • South • Blue Moon • Sam Adams • Bud Light Lime • Corona • Stella Artois Source: B.I.G. Handbooks

  47. Spirits

  48. Economic Impact Economic Factors • Declining home values, job losses and drained stock portfolios have forced many Americans to become more frugal in their purchases and leisure time. • If unemployment rates reach high levels, consumers may do two things: 1) Purchaseless frequently 2) Purchasemore quantity of lower quality U.S. Dollar Influence • In 2008, the weakU.S. dollar made imports more expensive causing cost conscious consumers to purchase a cheaper domestic brand instead of an imported brand. • Imports on the Rise • Canadian Whiskey (Foreign Bottled) +2.2% • Scotch Whisky (Foreign Bottled) +1.6% • Scotch Whisky (Single Malts) +4.0% • Irish & Other Whiskey +18.4% • Vodka (Imported) +6.8% • Tequila +3.9% • Imports on the Fall • Gin (Imported) -1.6% • Brandy (Imported) -2.3% • Cognac -5.0% • Cordials & Liqueurs (Imported) -1.3% Source: B.I.G. Handbooks (p) Preliminary

  49. Trading Down Overall • In this economic environment value priced brands are benefiting the most in the spirits segment, after years of little or no growth. • Growth across the premium spectrum has slowed although mid-priced and premium brands are outpacing the higher end. • Consumers are trending to the off-premise which doesn’t bode well for spirits brands which rely heavily on on-premise growth for dollar sales and drinking occasions. • The trading up trend was so strong before the recession hit, expecting consumers to return to their old ‘trading up’ habitsonce it's over is not far fetched. Categories • Not all import segements of categories are being adversly effected. As foreign bottled Canadian (2.2%) & Scotch (1.6%), Single Malts (4.0%), Irish (18.4%), and imported Vodka (6.8%) are still reporting results in the black. • American Whiskey has a lower price point for premium products, allowing entry for new consumers. Also the categories specialty and small batch introductions helping to renew interest and excitement to the category. Growth has also been aided by retro cocktails like Bourbon Sours, Old Fashioneds and Manhattans. • Vodka, the reigning share leader in spirits is showing signs of slowing growth. Vodka (imported & domestic) continues to post gains, but price categories that used to grow double digits are now softening.

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