Navigating through challenging currents

Canadian Vintner’s Alliance

Kelowna, BC

July 2018

Canadian Wine Market Intelligence

2

Mmmmmmm… Sorry about that!

3

Table of contents

Sections

I Overview of the US wine market

II Strategies for entering the US wine market

III Defining geographic priorities

4

Hell Gate: Navigating change from all directions

5

Hell Gate: Navigating change from all directions

Disruption in the Canadian Wine Market I

7

Consumer values are clearly changing…

8

Millennials seek quality, authenticity, and health & wellness

9

Current trends favorable for wine

Source: StatsCan, 2018

2.3%

4.1%

3.6%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Beer Wine Spirits

Growth rate (%) in Canadian consumption of beer, wine & spirits, 2017

10

“Who is my consumer?” according to industry messaging

DILLY DILLY!!!

11

Craft beer is on the rise- a competitor for ‘share of throat’?

Source: Beer Canada, 2018

644

695

817

0

100

200

300

400

500

600

700

800

900

2015 2016 2017

No. of breweries in Canada, 2015-2017

12

Beer is targeting wine’s monopoly on healthy lifestyles

13

… And cannabis is now the breakfast of champions

14

Cannabis winning the war of “healthy” perception vs alcohol

51.5%

37.4%35.5%

18.3%

54.1%

36.6%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

Perceived ‘Great Risk’ of Weekly marijuana use*

weekly marijuana use (12-17)

weekly marijuana use (18-25)

weekly marijuana use (26+)

38.2%39.2%

33.2%

33.5%

44.5%

41.6%

30%

32%

34%

36%

38%

40%

42%

44%

46%

Perceived ‘Great Risk’ of Weekly binge drinking*

weekly binge-drinking (12-17)

weekly binge-drinking (18-25)

weekly binge-drinking (26+)

Source: NSDUH, Marist/Yahoo News

15

Why do different consumers avoid cannabis?

5% 4% 9% 6% 2% 6% 4%7% 6%

6%5%

7%6% 7%

13%6%

17%

8%6%

9% 10%

9%

11%

6%

7% 12%11% 8%

16%17%

10%

13%20%

16%15%

25%27% 24%

31%28% 28%

25%

25% 29% 28% 30% 25% 25%31%

men women millenials genx boomers income <

50k

income >

50k

family no_interest school/work other

health don't_like illegal

Source: WAPO, Marist/Yahoo News

16

Is it the beer consumer that will shift to cannabis?

26%

34%

18%

33%

56%

20%

67%

0%

10%

20%

30%

40%

50%

60%

70%

men women millenials genx boomers < $50k > $50k

How Individuals Expect Their Consumption to Change After

Legalization(difference between those who currently use and those that say they will use after legalization)

Source: NSDUH, DEA, Marist, Journal Substance Use and Misuse

Canadian wine and the US marketII

18

The role of imported wines in the US market continues to evolve

Source: Gomberg-Fredrikson, 2018

Imports share (%) of US wine market, 1970-2017 US wine imports by country, avg. price and growth rate, 2017

-10%

-5%

0%

5%

10%

15%

20%

$-

$10

$20

$30

$40

$50

$60

$70

$80

$90

Growth % $/case0%

5%

10%

15%

20%

25%

30%

35%

40%

1970 1980 1990 2000 2010 2017

Source: Gomberg-Fredrikson, 2018

19

52.1% 56.2% 66.0%

0%

20%

40%

60%

80%

100%

2007 2013 2018

Top 5 wholesalers Next 5 Wholesalers All Others

Wholesaler tier increasingly consolidated

Source: Impact Databank, 2018

Source: Nielsen, 2018

Market share of top 5 and top 10 US wholesalers, 2007-2018

No. of retailers generating 80% of US FMCG sales, 2006-2016

Source: IMPACT Databank, 2018

Wholesaler networks evolve

Wholesalers continue to consolidate

Driven by large liquor companies

Southern-Glazers and RNDC-Breakthru have national

footprint- #1 and/or #2 in most markets

It is increasingly difficult for small brand owners

Using smaller wholesalers is also challenging, given

retailer consolidation. 76

52

0

10

20

30

40

50

60

70

80

2006 2016

20

Imports increasingly dominated by large suppliers

21

Registered wineries in the U.S.

Source: WineDirect, 2018

Market share top 10 US wineries

Source: Gomberg Fredrikson Report, 2013

Frag-solidation trends in the US wine market

62%58%

0%

10%

20%

30%

40%

50%

60%

70%

2014 2017

8,1008,638

9,0699,645

0

2,000

4,000

6,000

8,000

10,000

12,000

2014 2015 2016 2017

22

Can Canadian wineries achieve sufficient scale?

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Constellation- wine only

(CAD)

Andrew Peller Ltd

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

California wineries by volume (‘000 9 lt. cases), 2017

Revenues for publicly traded wine companies, FY2018

23

DTC in growth mode in the US

Source: Shipcompliant

DTC in the USA

• US DTC sales (vol) growing 11.6% CAGR since 2011

• Avg bottle price DTC channel is $38.75, (vs $10 retail)

• DTC generates just 1.5% of US wine sales volume,

but represents 4% of US market retail value

• DTC now generates 10% of US winery revenue

• 60% of DTC generated by small/medium wineries…

• … but not an option for Canadian wineries

Share of DTC shipments by winery size, 2017

1.8%

16.5%

43.0%

26.9%

11.8%

<1,000 1,000- 4,999

5,000-49,999 50,000- 499,999

500,000+

24

New three-tier compliant wholesaler models emerging

25

Retailers struggling with the shift to online sales

26

Traditional retailers facing pressure

Source: Nielsen, 2018

Source: Rabobank estimates, 2018

Dollar growth by supermarket department, 2011-2016

Bev alc underperformance (USD Mn) in online grocery, 2017-2022

Retailers challenged by shift to online shopping

Beverage alcohol key growth-driver for retailers

Retailers investing to improve ecommerce capabilities

Retailers struggle with alcohol online (4.6% B&M,

0.7% online)

Retailers set to lose $4 billion in sales by 2022

Alternative retailers (TW&M) challenging traditional

retailers

$515

$3,900

$0

$1,000

$2,000

$3,000

$4,000

$5,000

2017 2022

Bev Alc sales lost by supermarkets online

Bev Alc sales by supermarkets online

25.3%22.5%21.1%

18.1%17.5%

13.6%12.0%11.3%

10.2%

7.0%5.8%

4.6%4.1%2.0%1.0%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

(1(16.0)

27

There might be more accessible opportunities…

Source: OIV, 2018

Domestic

Production

Imports $-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

Exports to Canada Average Exports

Sourcing for Canadian wine market, 2017

Source: Wine by Numbers, 2018

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Canada remains a highly attractive export market

Source: Rabobank, 2012

Ranking of global markets for branded wines, 2012

Rank Country

1 U.S.

2 Canada

3 China

4 Hong Kong

5 Japan

6 Switzerland

7 Korea

8 Nordics

9 Germany

10 Denmark

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Canada’s position in the global wine market?

30

What defines Canadian wine?

?Canada

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