Robert Smiley, PhD

1
2004 WINE INDUSTRY SURVEY RESULTS RESURGENCE
FROM A TOUGH MARKET
Robert Smiley, PhD Professor of Management Dean
Emeritus Director of Wine Industry Programs
2
CEO INTERVIEW PARTICIPANTS
Thomas Klein Rodney Strong Vineyards Randall
Lange Lange Twins, Inc. John Ledbetter Vino
Farms, Inc. Jerry Lohr J. Lohr Winery Erle
Martin Niebaum-Coppola Estate Winery Charles
Merinoff Charmer Industries, Inc. Peter Mondavi
Charles Krug Winery Jon Moramarco Franciscan
Estates William Newlands Allied Domecq Wines,
USA Jeffrey ONeil Golden State Vintners Chuck
Palombini Kobrand Corporation Don Sebastiani Don
Sebastiani Sons Thomas Selfridge Chalone Wine
Group Tom Shelton Joseph Phelps Vineyard Bob
Trinchero Trinchero Family Estates Philip Wente
Wente Vineyard
Ted Baesler St. Michelle Wine Estates Andrew
Beckstoffer Beckstoffer Vineyards Patty Bogle
Bogle Vineyards Thomas P. Burnett Southcorp
Wines, USA Jack Cakebread Cakebread Cellars Ray
Chadwick Diageo Chateau Estates Wine Joseph
Ciatti Joseph Ciatti Co. Mary Ann
Cuneo Sebastiani Vineyards Gregory Evans Robert
Mondavi Winery John Giguiere Phillips
Hogue Dennis Groth Groth Vineyards Winery John
Grant Kendall-Jackson Wine Estates Gary Heck
Korbel Champagne Cellars Bruce Herman Youngs
Market/Estates Group Agustin Huneeus, Jr.
Quintessa Winery Chris Indelicato Delicato
Family Vineards John Kautz Ironstone Vineyards
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INTERVIEW QUESTIONS

• What competitive pressures are you feeling in the
  retail market place? Do you see these pressures
  in the retail market evolving in some way? Will
  we ever return to the days of the late 1990s?
• Some companies like Mondavi, Beringer and Fetzer
  have been hard hit by consumers lately. Will the
  consumer ever return to the big labels?
• What do you think will be the hottest issues over
  the next five years?
• What changes in strategy have you undertaken in
  the last two years?

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INTERVIEW EXCERPTSQUESTION 1
What competitive pressures are you feeling in the
retail market place? Do you see the retail
market evolving in some way? Will we ever return
to the days of the late 1990s? Trends in Market

• I see things starting to open up in the
  marketplace, and life is getting healthier. Each
  cycle, we have to work harder and we have to
  work smarter, but I actually think things are
  improving out there.
• I think we will see wine consumption increase.
  It is the higher now than ever. I think it looks
  pretty good for the fine wine market.
• Im seeing good demand for the 2001 vintage. I
  think we are going to discuss vintage more
  frequently and it will have a bigger impact on
  pricing than it used to, at least in the luxury
  categories.

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INTERVIEW EXCERPTSQUESTION 1
What competitive pressures are you feeling in the
retail market place? Do you see the retail market
evolving in some way? Will we ever return to the
days of the late 1990s? Trends in Market

• The supply side of the equation will
  eventually come back into some form of balance
  with demand and take pressure off of pricing.
  The other factor that will continue to reduce
  competition is that wine consumption continues
  to grow and per capita consumption continues to
  grow. The consumer demographics will persist at
  least through the year 2010 that has to do
  with the sweet spot for wine consumption between
  ages 39-55. That part of the US population will
  continue to grow both in percentage and absolute
  volume.

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INTERVIEW EXCERPTSQUESTION 1
What competitive pressures are you feeling in the
retail market place? Do you see the retail market
evolving in some way? Will we ever return to the
days of the late 1990s? Trends in Market

• Once we get through the vintage 02 wines that
  are out in the market place, and generally
  speaking Im talking about reds, Cabernet and
  Merlot, then we will move more towards a
  stabilized or equilibrium state. Beyond that I
  think we can see some restoration to a more
  sensible pricing.
• If the economy is strong as they are predicting
  its going to be, then I think youll start to
  see some price increases modest ones, not
  excessive.

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INTERVIEW EXCERPTSQUESTION 1
What competitive pressures are you feeling in the
retail market place? Do you see the retail market
evolving in some way? Will we ever return to the
days of the late 1990s? Return to the 90s

• I dont think were ever going back to the
  golden age of the 90s. That was just
  an aberration which was great at the time. We
  probably wont even work towards a normal cycle
  which is an extremely competitive wine industry .
  . . I think generally the wine industry is
  always going be in an oversupply position, its
  just a question of the amount of oversupply and
  the ability of wine companies to stay in
  business.

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INTERVIEW EXCERPTSQUESTION 1
What competitive pressures are you feeling in the
retail market place? Do you see the retail market
evolving in some way? Will we ever return to the
days of the late 1990s? Return to the 90s

• Super-value wines are so erratic in quality
  because consumers are buying different bulk wines
  in the bottle. These wines are just not
  consistent. I dont care how good of blender you
  are, if you got a sous ear you cant make a silk
  purse out of it. I think the consumer will get
  tired of the inconsistent quality after a while
  and will probably move back up to the 6-10
  category.

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INTERVIEW EXCERPTSQUESTION 1
What competitive pressures are you feeling in the
retail market place? Do you see the retail market
evolving in some way? Will we ever return to the
days of the late 1990s? Super Value Wines

• Super-value wines are so erratic in quality
  because consumers are buying different bulk wines
  in the bottle. These wines are just not
  consistent. I dont care how good of blender you
  are, if you got a sows ear you cant make a
  silk purse out of it. I think the consumer will
  get tired of the inconsistent quality after a
  while and will probably move back up to the 6-10
  category.
• Retailers in California are no longer looking for
  10 cases of super value wine on the floor for
  1.99 or 2.99. They just dont make any money on
  their shelf space. I think they have sorted that
  out. The consumers also took a lot of that wine
  home and as they finish up their purchases they
  realize it didnt necessarily get better as it
  sat in their wine cellar or their garage.
  However, I think super-value wines will stick
  around as a category. It was a great move by
  Trader Joes.
• I do not see that market super value being
  much more than just a sopper upper, a sponge if
  you will. When the market dries up it goes away
  and when it gets wet again it comes back.

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INTERVIEW EXCERPTSQUESTION 1
What competitive pressures are you feeling in the
retail market place? Do you see these pressures
in the retail market evolving in some way? Will
we ever return to the days of the late
1990s? Global Issues

• I think you will see an evolving global nature to
  the wine business, in part because some of the
  brands are blurring where they are from.
  Ravenswood is an obvious example. Its now
  putting Australian Syrah into their portfolio of
  what obviously has been a California Zinfandel
  brand.
• The long term changes that will be created by
  consolidation are bigger companies and an
  emergence and acceptance of wines from other
  countries. Hey guess what? The wines are good
  and they are not expensive. They will beat
  American companies by price and Americans will
  drink them. Before the assumption was that is if
  it is from another country, it is not going to be
  as good.

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INTERVIEW EXCERPTSQUESTION 1
What competitive pressures are you feeling in the
retail market place? Do you see the retail market
evolving in some way? Will we ever return to the
days of the late 1990s? Global Issues

• In todays environment, all the major guys are
  global. You take someone like Gallo, in 1990
  they didnt buy one bottle of imported wine.
  Today they bring wines in from all over the
  world. If they run out of something here, they
  dont need to worry because they can go
  somewhere else and push another label. So, our
  ability to raise prices because we were running
  out of grapes, is over.
• When we look at the global paradigm for the
  grape and wine supply, we think that these peaks
  and valleys will be smoothed over particularly
  in the 5-15 wine category. Some of the
  volatility will be taken off of the supply side
  of the equation, which will also lead to more of
  a marketing and agricultural supply driven
  industry.

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INTERVIEW EXCERPTSQUESTION 2
Some companies like Mondavi, Beringer and Fetzer
have been hard hit by consumers lately in their
8-12 offerings. Will the consumer ever return
to the big labels?
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INTERVIEW EXCERPTS QUESTION 2
Some companies like Mondavi, Beringer and Fetzer
have been hard hit by consumers lately in their
8-12 offerings. Will the consumer ever return
to the big labels? Will Consumers Return?

• I think there are two questions there whether
  they are going to come back to the Mondavis and
  Beringers or coming back to the 8-10 bottles of
  wine. Yes theyll come back to the 8-10 bottle
  of wine, depending on how much money they have.
  But are they going to come back to the Mondavi
  and Beringer? I dont think so. I think there is
  so much competition out there that most wine
  drinkers are not loyal. They love to experiment
  and now theyre in love with Australia.

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INTERVIEW EXCERPTSQUESTION 2
Some companies like Mondavi, Beringer and Fetzer
have been hard hit by consumers lately in their
8-12 offerings. Will the consumer ever return
to the big labels? Will Consumers Return?

• I think they are coming back. I think they
  are coming back a bit right now. I think there is
  a lot of experimentation that went on and I
  think those established producers are doing a
  better and better job making the wine. They
  probably adjusted their prices a bit so they
  become more competitive in terms of quality and
  price. I think people go through an
  experimentation phase, and theyll come back and
  try what they liked before. I dont think its a
  permanent departure or permanent exit.

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INTERVIEW EXCERPTSQUESTION 2
Some companies like Mondavi, Beringer and Fetzer
have been hard hit by consumers lately in their
8-12 offerings. Will the consumer ever return
to the big labels? Will Consumers Return?

• Ultimately the consumers are going to want to
  move up in terms of quality, so I would expect
  them to come back.

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INTERVIEW EXCERPTSQUESTION 2
Some companies like Mondavi, Beringer and Fetzer
have been hard hit by consumers lately in their
8-12 offerings. Will the consumer ever return
to the big labels? Market Segment Redefined

• In 2005 Two Buck Chuck will go away and wont
  be driving domestic prices down. They will have
  to raise their prices. The guy who is at 8-9
  who has been forced to head for 6, wont have
  the Two Buck Chuck pressure coming at them. As
  far as the imports go, we will go over 26 in
  imports and we may be looking at 30-35 imports.
• Parts of the industry have restructured to
  effectively get on the playing field with the
  Australians. So because of those factors, I
  think the category has redefined itself on a
  somewhat structural basis from 7 to 6 or
  perhaps even 5 for the same level of quality
  that well have to continue to provide.

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INTERVIEW EXCERPTSQUESTION 2
Some companies like Mondavi, Beringer and Fetzer
have been hard hit by consumers lately in their
8-12 offerings. Will the consumer ever return
to the big labels? Consumers

• I think the producers at all prices are
  looking for differentiation and I think that the
  generalized brands are not as powerful as they
  have been in the past.
• RS Why is that?
• Its a difficult question. I think the answer
  lies in comfort with choosing wines which are not
  mainstream brands.
• RS So you think the consumer is getting more
  confident in their ability to venture out?
• Yes, and certainly much more adventuresome. They
  have learned that its quite OK to buy wines that
  dont sound very familiar and that come from
  origins that theyre not as familiar with as
  California.

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INTERVIEW EXCERPTSQUESTION 2
Some companies like Mondavi, Beringer and Fetzer
have been hard hit by consumers lately in their
8-12 offerings. Will the consumer ever return
to the big labels? Consumers

• Its a hell of a lot easier to grow a brand
  when it doesnt have full distribution and youre
  not getting all your promotional opportunities.
  Its a lot tougher then because what youre doing
  is competing for the consumers share of mind
  every time theyre shopping and youre not
  getting the easy wins for growth.

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INTERVIEW EXCERPTSQUESTION 2
Some companies like Mondavi, Beringer and Fetzer
have been hard hit by consumers lately in their
8-12 offerings. Will the consumer ever return
to the big labels? Consumers

• The consumer who traded down for some of these
  lower varieties in a period where grapes were in
  surplus found some genuinely palatable wines in
  that category. So I think in the consumers
  mind, there has been a discount in what they
  perceive as the value proposition for what they
  are willing to pay. Where a consumer may have
  said I think 7 is a fair price for a decent
  bottle of wine, now theyve been trained to think
  about that same proposition in terms of 4 or
  5. It will take some time and effort to reengage
  or retrain that consumer to move them back up,
  and I think it will take some marketing.

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INTERVIEW EXCERPTSQUESTION 3
What do you think will be the hottest issues over
the next five years?
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INTERVIEW EXCERPTS QUESTION 3
What do you think will be the hottest issues over
the next five years? Disease

• I think genetically modified will become a
  bigger issue because as we look at the problems
  of Pierces disease, were going to realize that
  we ultimately are going to have to get to
  genetically modified plant material and if we
  start passing laws like they did in Mendocino
  its gonna cause real problems.
• Im scared to death of Mealy Bug and I am scared
  to death of Pierces Disease, I think we feel
  that we have managed these issues, but I dont
  think we have. I am certain that they will come
  back in a way that could be very troubling and
  difficult for our industry.

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INTERVIEW EXCERPTS QUESTION 3
What do you think will be the hottest issues over
the next five years? Environmental

• Air and water quality. These are new,
  especially in the northern interior, and thats
  just the beginning with air quality, the
  northern interior is just the beginning.

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INTERVIEW EXCERPTS QUESTION 3
What do you think will be the hottest issues over
the next five years? Cycles

• Well itll probably be grape shortage, rising
  prices, international competition and some new
  thing weve never thought of or heard of yet.
• I think youve got to look at the New Zealand
  phenomenon. Heres a country that got popular,
  that got hot. What happens? They just go out
  plant . . .They go bananas with it. Now theyve
  got all this production, and that affects the
  marketplace. Thats going to happen in other
  places too. South Africa, thatll probably
  happen.
• Systemic change in fighting varietal
  segmentation in this marketplace. It has
  migrated offshore, it has been taken over by
  the international players and thats going to
  have a profound affect on some of the guys who
  were historically our major companies.

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INTERVIEW EXCERPTS QUESTION 3
What do you think will be the hottest issues over
the next five years? Consumers

• How do we influence the Millennium Generation?
  To some extent, the wine business just steals
  customers from each other. From a selfish
  standpoint, Id love to see is some of the big
  boys start a little advertising war.

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INTERVIEW EXCERPTS QUESTION 3
What do you think will be the hottest issues over
the next five years? Packaging

• Specifically, I think we are going to see a
  tremendous shift away from the cork into corkless
  closures. Whether thats Stelvin, whether
  thats going to be more premium bag in the box,
  whether thats going to be more wine in cans, or
  whether thats going to be things that we havent
  even thought of, I do think that corkless
  closures will be a bigger part of how we market
  wine. I think we are going to be pleasantly
  surprised at the tremendous consumer acceptance.
  The people who are the hardest to convince that
  we need to change will be the people in the
  industry, not the consumers.

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INTERVIEW EXCERPTS QUESTION 3
What do you think will be the hottest issues over
the next five years? Packaging

• RS Among the alternatives, you did not
  mention synthetic cork. Was that just an
  accidental omission?
• Its not accidental, you still need an apparatus
  to get the cork out of the bottle. And to me,
  that the big difference.

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INTERVIEW EXCERPTS QUESTION 3
What do you think will be the hottest issues over
the next five years? Distribution Changes

• The 3-tier system will give way.
• There will be 2 or 3 really dominant
  distributors around the country, and the rest of
  it is just chicken feed in the scheme of things.
• We may see a return to thinking about
  authorized dealers for certain wines if the
  regulatory landscape would permit it, and then
  sort of a hybrid system of clubs and authorized
  dealers that are exclusive.

28
INTERVIEW EXCERPTSQUESTION 3
What do you think will be the hottest issues over
the next five years? Costs

• CA is far and away the most expensive place to
  do business. The cost of insurance is going up,
  the cost of healthcare is going up, and it is
  exacerbated in CA, but it is a problem in
  America. It is bad enough to compete with other
  states, but competing with other countries that
  run under completely different systems and costs
  is really scary.

29
INTERVIEW EXCERPTS QUESTION 3
What do you think will be the hottest issues over
the next five years? Protect the Market

• Challenge the government to say All right,
  this is what were going to produce domestically
  and we want to limit imports to the same
  amount. Somewhere along the line people have to
  realize that America is the dumping ground for
  the world, were the people with the most money,
  so when theres a 2 million case oversupply in
  Australia realize its coming here. When theres
  a 10 million case oversupply in Argentina you
  know its coming here.

30
INTERVIEW EXCERPTSQUESTION 4
What changes in strategy have you undertaken in
the last two years?
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INTERVIEW EXCERPTS QUESTION 4
What changes in strategy have you undertaken in
the last two years? Quality

• Weve gone back to the basics. Were looking
  at packaging, pricing, promotion, where were
  spending our marketing money, and improving the
  quality of our wine. Weve been really rigorous
  on the quality front. In the late 90s you
  acquired growers just because they had grapes and
  now were being very selective about who were
  going to buy from because weve got to be able to
  identify the quality in that bottle more now
  than ever before.

32
INTERVIEW EXCERPTS QUESTION 4
What changes in strategy have you undertaken in
the last two years? Quality

• We are investing in vastly improved facilities
  and we are investing a lot of money for
  relatively small incremental increases for
  advances in quality. Because we believe that the
  difference between a luxury wine and a super
  premium wine or a premium wine is sort a like a
  sprinter or a short swimming race. Everybody
  finishes within a tenth of a second, but its
  going to be that very small difference that
  makes a lot of difference in terms of the images
  and perception of the wine.

33
INTERVIEW EXCERPTS QUESTION 4
What changes in strategy have you undertaken in
the last two years? Factors for Success

• The people that are growing are negotiants and
  mid-sized wineries. They are still leading
  the pack. The John Kautzs, the Bogles.
• RS Is that because they are more flexible?
• Because they are flexible, focused, and
  creative and that still means something.

34
INTERVIEW EXCERPTS QUESTION 4
What changes in strategy have you undertaken in
the last two years? Factors for Success

• I think its going to be increasingly hard to
  make money in those lower price ranges.
  Strategically we are working towards higher
  price points. Were doing it in two ways ways
  making good brands, tiering them up, and slowing
  the growth down on lower-priced brands in order
  to support higher price points.

35
INTERVIEW EXCERPTS QUESTION 4
What changes in strategy have you undertaken in
the last two years? Processes

• One of them is moving towards the ability to
  deliver large private label programs thats one
  strategic change. Two, is the proliferation of
  non-traditional packaging. Three, weve changed
  our grape purchases to have a portfolio of grape
  buying strategy, of growing so many grapes,
  buying so many long term and buying so many
  spot.
• More Mechanized pre-pruning with some kind of
  hand follow-up

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INTERVIEW EXCERPTS QUESTION 4
What changes in strategy have you undertaken in
the last two years? Asset Intensity

• To find approaches to the business that
  involve lower asset intensity both from the
  standpoint of inventory and fixed capital. The
  Australians have been effective at reducing their
  inventory cycle times which you know allows you,
  even with lower product margins, to still earn
  the same return if you have fewer assets. So I
  think creative ways to look at asset intensity
  will be important for companies that want to
  grow, because the cost of growing the business
  under the traditional asset model could be
  rather expensive. More flexibility and lighter
  asset load is part of the new strategic
  environment.

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INDUSTRY TRENDS MAIL SURVEY350 PARTICIPANTS
38
INDUSTRY RESPONDENTS BY PROFESSION
350 Participants
Industry Trends Survey, Q1
39
RED VARIETALS THAT WILL HAVE VERY STRONG SALES
OVER THE NEXT THREE YEARS
Industry Trends Survey Q10
40
WHITE VARIETALS THAT WILL HAVE VERY STRONG SALES
OVER THE NEXT THREE YEARS
Industry Trends Survey Q10
41
HOW THE CONSUMER HAS CHANGED SINCE 2003
Industry Trends SurveyQ9
42
REASON FOR SUCCESS AMONG HOT BRANDS WITH DOUBLE
DIGIT GROWTH
Industry Trends Survey, Q6
43
INDUSTRY PROFITABILITY OUTLOOK OVER THE NEXT TWO
YEARS
Industry Trends Survey, Q2
44
BEST STRATEGIES FOR TAKING ADVANTAGE OF THE
CYCLE UPSWING
Industry Trends Survey Q6
45
STRENGTH OF SALES GROWTH POTENTIAL OVER NEXT
THREE YEARS
Industry Trends Survey Q10
46
WINERY MAIL SURVEY80 PARTICIPANTS
47
RESPONDENTS BY AREA
80 Participants
Winery Survey, Q1
48
SURPLUS/DEFICIT FOR RED WINES
Winery Survey, Q1
49
SURPLUS/DEFICIT FOR WHITE WINES
Winery Survey, Q5
50
EXPECTED AVERAGE CASE SALES FOR RED WINES 2004
2007
Winery Survey, Q6
51
PROPORTION OF WINERIES THAT PLAN TO INTRODUCE NEW
PRODUCTS IN THE NEXT 12 MONTHS BY CASES PRODUCED
Winery Survey, Q8
52
NEW PRODUCTS THAT WILL BE INTRODUCEDIN THE NEXT
12 MONTHS
Winery Survey, Q8
53
PROFITABILITY IN 2003 NORTH COAST RESPONDENTS
Winery Survey, Q10
54
VINEYARD MAIL SURVEY80 PARTICIPANTS
55
RESPONDENTS BY AREA
80 Participants
Vineyard Survey, Q1
56
GRAPE CONTRACTS RENEGOTIATED IN THE PAST TWO
YEARS-REASONS
TOTAL 45
Vineyard Survey, Q6
57
AVERAGE PERCENT OF GRAPES RESPONDENTS BELIEVE
WILL BE SOLD ON THE SPOT MARKET
Vineyard Survey, Q4
58
GRAPE CONTRACTS RENEGOTIATED IN THE PAST TWO
YEARS
Vineyard Survey, Q10
59
DISTRIBUTOR MAIL SURVEY21 PARTICIPANTS
60
COMPANIES REPRESENTED
21 PARTICIPANTS
Distributor Survey, Q1
61
MOST IMPORTANT FACTORS IN DECISION TO CARRY A
NEW WINE
Distributor Survey, Q4
62
CONCEPTS/INNOVATIONS THAT WILL MAKE WINE MORE
APPROACHABLE
Distributor Survey, Q7
63
RETAIL RESTAURANT MAIL SURVEY20 PARTICIPANTS
64
TYPES OF RETAILERS
20 PARTICIPANTS
Retail Restaurant Survey, Q1
65
CHANGES MADE TO BUSINESS IN THE LAST 6 MONTHS TO
REMAIN PROFITABLE
Retail Restaurant Survey Q1
66
2004 WINE INDUSTRY SURVEY RESULTS RESURGENCE
FROM A TOUGH MARKET
Robert Smiley, PhD Professor of Management Dean
Emeritus Director of Wine Industry Programs