PUGLIA 2015 !Visit by U.S. delegation to

Puglia June 2015

U.S. Drinks Market: Options for Suppliers to Enter the American

Wine and Spirits Market

Hope is Not a Strategy

Model Has Changed

Suppliers

Distributors

Consumers

From To

Courtesy of Nora Favelukes, QW Wine Experts

The right “CHEMISTRY”Fills an identified void in portfolio

Brands with existing US volume they can growNew brands they feel their expertise can develop and

growBrands that have a unique positioning

Enhances image, value and profitability (Synergy with importer’s mission)

Strengthens importer’s position within the tradeSupplier understands the U.S. Three-Tier systemFinancially sound, budget to invest and support the

brand.

What Importers Want

Company description/historyProduct description – varietals, style, ranges, proposed US

retail price by line/sku, and price structuresBrand point of difference/value proposition for consumer;

why THIS importer should be interested in you.Marketing materials as backgroundA defined target audience Production InfoPast history of importers, distribution agreements, list of

distributors/brokers of products and volumes by statePrice structure for U.S.Marketing support budgetSamples

Presenting Your Brand to Importers

Brand Approval / Launch Timeline

Federal Label (COLA) Approval• 1 to 8 weeks

depending on product and complexity

State Registration & Approval• 1 to 8 weeks

including price posting where required

Product Ships To Wholesaler

Caution-New TTB Turnaround

Wine Brands Economics Example

Supplier FOB (Varies-Packaging etc.)

$ 29.00 Ocean Freight 4.50

Fed Tax/Duty (80 Proof) 3.30 PPU/BF/INS 1.4

0 Importers Margin (24% Margin) $ 12.14 Price to Distributor $50.34 State Tax .71

Freight 2.50 Distributor Margin (50% Mark Up/33%

Margin)26.37 Distrib. Price To Retail $79.9

2 Retailer Margin (50% Mark Up/33%Margin)

39.96 Retail Case Price $119.88

750ML / 12 Bottle Case Imported $ 9.99 Retail Bottle Price

Bottle Price $9.99

Read the Book

U.S. Population 2013By Single Age

0.0500,000.0

1,000,000.01,500,000.02,000,000.02,500,000.03,000,000.03,500,000.04,000,000.04,500,000.05,000,000.0

Age

About 4 million people

more than the cohort ahead of

them.

Source: US Census CPS, 2014.

New Adults

Two Thirds ( 2 out of 3) of these people

drink alcohol according to Gallup

Poll!

Alcohol Beverage Import Values Beer, Wine, Spirits 1992 to 2013

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

$0

$2,000,000,000

$4,000,000,000

$6,000,000,000

$8,000,000,000

$10,000,000,000

$12,000,000,000

$14,000,000,000

$16,000,000,000

$18,000,000,000

Beer Value Wine Value Spirits Value

Per Capita Alcohol Beverage Import Values Beer, Wine, Spirits 1992 to 2013

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

$3 $3 $4 $4 $4 $5 $6 $6 $7 $7 $8 $8 $8 $9 $11 $11 $10 $9 $10 $10 $10 $10 $4 $3 $4 $4 $5 $6 $6 $7 $7 $7 $8 $10 $10 $11 $12 $14 $13

$11 $12 $14 $14 $14

$6 $6 $6 $6 $7

$7 $8 $9 $9 $10

$10 $11 $12

$13 $15

$16 $16

$14 $16

$18 $18 $19

Beer Value Wine Value Spirits Value

Continued positive growth across Alcoholic Beverage

Source: Nielsen Scantrack; All measured off-premised channels (AOC+Conv+Military+Liquor Plus)

2012 2013 2014$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Beer/Cider Wine Spirits

$ M

illion

s

+3.4%

+3.2% +5.0

%

+3.1%

+4.2% +6.6

%

Sprits up 5% in dollar volume, followed by Beer 3.4%, and Wine 3.2%

GuestMetricsNational Association of Beverage Importers

March 2015

GuestMetrics Update

• Collecting data from 15K locations daily today• Aggressively ramping with 10K+ more coming in ‘15• Total number of transactions 1.3B+ today• Total Dollar Sales captured = 41B+ today

• Capturing all transaction level data: • Entire basket including food items, flavors• Every item time stamped, during of occasion captured• Table, server, tender, tip, party size

• Strategic alliance formed with IRI in April ’14 – data science/projections

• Coming in ’15: Tying credit card data to transactions for consumer insights

• On-boarding National accounts

2.0%

-0.8%

2.8%

-2%

-1%

0%

1%

2%

3%

4%

Sales Traffic Price / Mix

On-Premise: Year-over-Year Growth (2014)

On-Premise traffic was down slightly in 2014 - though increased pricing led to positive sales growth

Traffic declined across On-Premise channels… and was particularly weak in Bars & Clubs

0.3%

-0.6%

-1.6%-2.1%

-3%

-2%

-1%

0%

1%

2%

Lodging Casual Dining Fine Dining Bar / Club

Year-over-Year Traffic Growth by Channel (2014)

Traffic to the channel continues to improve…

-2.4%

-1.4%

-0.8%

-3%

-2%

-1%

0%

2012 2013 2014

On-Premise: Year-over-Year Traffic Growth

Note: Sample size increasing over time

…and recent traffic trends have been encouraging (after a rough start to 2014)

-3%

-2%

-1%

0%

1%

2%

3%

1/26 3/23 5/18 7/13 9/07 11/02 12/28 2/22

On-Premise: Year-over-Year Traffic Growth(4 weeks ending)

Food is 2/3rds of On-Premise sales… and alcohol is 27% of total revenue

5.5%6.4%

8.9%

11.5%67.7%

Share of Total Food & Beverage Sales (2014)

Non-Alc Bev

Wine

Beer

Spirits

Food

27%

…but total sales mix varies significantly by channel

7%24%

2% 7%4%

6%

15% 10%8%

29%

8% 15%6%

3%

3%11%

75%

38%

72%57%

0%10%20%30%40%50%60%70%80%90%100%

CasualDining Bar/Club Fine Dining Lodging

Total F&B $ Sales Mix by Account Cat. (2014)

Food

NAB

Spirits

Wine

Beer

…some of Beer’s weakness was likely due to lower total average check (i.e., weaker value proposition to operators)

$20 $26

$73 $90

$135

$0

$20

$40

$60

$80

$100

$120

$140

$160

Alcohol Only Food Only Food + Beer Food + Spirits Food + Wine

Average Check by Type

Spirits dominates late night, Wine important at dinner

41% 39% 31% 30%

20% 22% 30%11%

39% 40% 39%59%

0%10%20%30%40%50%60%70%80%90%100%

Lunch Happy Hour Dinner Late Night

Alcohol $ Sales Mix by Day Part (2014)

SpiritsWineBeer

Traffic Growth: 0.4% 1.5% -1.5% -3.4%

-0.9%

2.0%

-0.7% -1.1%

-2.7%

-5%

-3%

-1%

1%

3%

Total Lodging Bar / Club CasualDining

FineDining

WINE -- Y/Y Unit Growth by Channel (2014)

Shifting gears and looking briefly at the Wine category… Wine volume has been struggling in Fine Dining

73.8%

26.2%

74.7%

25.3%

74.7%

25.3%

75.2%

24.8%

0%

25%

50%

75%

100%

By-the-Glass By-the-Bottle

WINE -- $ Sales Mix by Container

1H13 2H13 1H14 2H14

Consumers have continued to trade down from bottles to glasses when ordering wine…

…and have continued to choose higher end brands within by-the-glass, but not by-the-bottle

23.9%

47.3%

24.5%

46.6%

24.7%

47.2%

24.4%

46.3%

0%

25%

50%

75%

By-the-Glass By-the-Bottle

WINE -- Ultra Premium / Luxury Share of $ Sales(>$14 per glass, >$70 per bottle)

1H13 2H13 1H14 2H14

Cab Sauvignon, Sauvignon Blanc & Prosecco have gained the most share in wine, while Merlot & Champagne lost the most ground

Cabernet Sauvignon Sauvignon Blanc Prosecco Malbec Red Blend Pinot Noir Moscato Bordeaux Blend

Merlot Champagne Riesling Zinfandel Pinot Gris White Zinfandel Shiraz White Blend

What’s Hot… …What’s Not

Additionally, in terms of growth in price/mix, Beer increased faster than Spirits increased faster than Wine, which could also be a contributing factor of Beer’s soft volumes

3.6%

2.2%

1.5%

0%

1%

2%

3%

4%

Beer Spirits Wine

Y/Y Price / Mix Growth by Alcohol Segment (2014)

Your Options1. Large National Importer

4. Specialist Company that both

Imports and Distributes

3. Regional or Multi-

State Importer

5. Set Up Your Own

Import Company

8. Chain Retailer

Exclusive Brand

9. Direct Import thru

Control State

7. Large Distributor that also Imports

2. Specialist National Importer

6. Nat’l Licensing, Import and Services

10. Wine Club/ E-

Comm/ Flash Site

1. Large/National Importer

1. Large/National Importer

Pros ConsExisting national distribution network

Small brands get lost in portfolio.

Clout with distributors, your brand benefits from their portfolio strength

Agency brand gets lower priority than owned brands.

Large sales force Importer controls pricing, marginsOn staff marketing department, existing ad and PR agencies

Internal competition for company resources

Participate in their sponsored events: portfolio tastings that attract more and more important trade, press than you could reach on your own.

Importer determines marketing strategy, creative, promo, POS…fits your product into their portfolio

Existing business with chain accounts

Set up to work with bigger suppliers, focus on big volume brands

“National” price

2. Specialist National Importer

2. Specialist National Importer

Pros ConsExisting national distribution network

Smaller brands less important to distributors.

Participate in their sponsored events: portfolio tastings that attract more and more important trade, press than you could reach on your own.

Importer controls pricing, margins, brand priority, creative look and feel, fits your product into their portfolio

Category expertise Specialization may mean limited appeal

On staff marketing personnel Limited in house marketing and sales resources

Existing business with chain accounts

Sales management presence in multiple states limited.

3. Specialist, Regional or Multi-State Importer

3. Specialist, Regional or Multi-

State Importer Pros Cons

Smaller, more focused and nimble Limited geographic reach

Get more attention/not lost in the portfolio

Limited capital, credit, payment history may be a problem.

Specialize in specific area (country of origin, indigenous varietals, price)

Smaller/limited resources, limited capital availability, often no marketing staff, small sales staff, hire out PR on project basis.

The smaller you are, the smaller the importer should be

Tend to be with smaller, specialty distributors so don’t get wide off and on premise distribution.

If you only make 50,000 btls, you don’t need national distribution, you need strength in a limited set of markets.

Limited interest in investing in the brand, likely that the majority of marketing has to come from brand owner.If you have multiple importers, will need multiple labels …implications on inventory, compliance

4. Specialist Company that both

Imports and Distributes

4. Specialist Company that both

Imports and Distributes

Pros ConsMore motivated to work with you because they control two levels of margin

Relatively limited sales force

Focus on major markets/cities, not outlying areas.

Limited geographic reach

Specialize/known for something: country of origin, wine style

Different importers in different states require separate labels…inventory management issuesSmaller/limited resources, often no marketing staff, small sales staff, hire out PR as projects.

May take lower margins at each tier because keep both.

Not sustainable price structure if move to traditional importer/distributor relationshipMarketing has to come from brand owner.

5. Set Up Your Own

Import Company

Pros Cons100% of attention to your brand. Bear the complete cost of

everything, can’t amortize anything, need volume to make it work.

Have complete control of everything: marketing, sales, pricing, distribution, margin, focus, message.

Need people with lots of skills: marketing sales, import logistics, warehousing, which can take your eye of what you should be doing…promoting and selling.

Works better for spirits than wine. Not your expertise

5. Set Up Your Own

Import Company

6. National Licensing, Import and

Related Services

6. National Licensing, Import

and Related Services

Pros ConsVery efficient at what they do Do not do marketing.

Cost savings in logistics, freight consolidation, etc.

You will need either a rep in country or you’ll have to hire someone who can do the things below

Only pay for services you need Need to do everything else yourself: marketing, sales planning, distributor management, marketing, inventory, pricing etc.

“Incubator” distribution services in NY, NJ, CAHandle cash flow, invoicing, billbacks and other price modifications and distributor deals.

Need to find/set up distribution network.

Quicker market entry

7. Large Distributor that also Imports

7. Large Distributor that also Imports

Pros ConsBuilt-in distribution network, integration

Distributor is focused on satisfying needs of big internationals like Diageo, Bacardi, Pernod. You will never be a priority.

Existing sales force Not in the brand building business

Efficiencies and margins of having combined functions of importer and distributor

Can’t/don’t work with multi-state chains on or off premise if have operations outside their markets.

May get more attention here than with a large national importer.

Difficult to get distributors in states where this distributor does not operate. Dist’s are not interested in helping competitive distributors make money

Primary business is distribution and sales

Not their primary business

8. Chain, Retailer

Exclusive Brand

73 stores, 11 states

Anakena

500 stores, 19 states

8. Chain, Retailer

Exclusive Brand

Pros Cons“Shadow” distributor works on very low margin, so retailer has more room to price aggressively

Extra margin does not usually accrue to supplier

Establish distribution in multiple states quickly

Limited to selling through only that retailer or retailer group

Minimal marketing costs (Don’t need to fund distributor incentives, consumer awareness programs)

Limited opportunity to grow brand outside dedicated distribution, no on premise business.

Immediate volume with first order Business limited to the states in which the retailer operates. In Total Wine example, no opportunity for sales in NY or IL.

9. Direct Import thru

Control State

9. Direct Import thru Control State

Pros ConsGetting “traction” in one state can get the interest, credibility with other import options.

Only works in one state

An experienced broker with relationships in that specific state can facilitate.

Broker generally only knows that one state.

Not a scalable strategy.

10. Wine Club/E-comm/

Flash Site

Wine Clubs E-Commerce Sites

Flash Sites

10. Wine Club/

Ecomm/ Flash Sites

Pros ConsAn option…to at least get a beachhead.

Limited reach to only their customer base

Low support costs for supplier. Retailer assumes burden of marketing, securing customers.

No real brand building for the long term.

Can represent good volume via a simple sales, shipping, inventory, labeling process to a single customer.

Every sale involves a DTC shipping cost to retailer, meaning a lower margin to supplier.

E-commerce allows you sell in states even where you don’t have a distributor.

E-commerce represents limited volume potential…now.

Off premise solution only

11. Other ideas

Enter competitions to get U.S.-based ratings and reviews. Some will work with brands that do not have a current importer. (Great way to legally import samples)

Use Wine Enthusiast Importer Connection program.US trade shows: click here for updated list

WSWA/US Drinks Conference/US Beverage Alcohol Forum, Nightclub and Bar Show, Manhattan Cocktail Classic, NY Bar and Wine Show, Tales of the Cocktail,

Data on U.S. market, brands, volumes, share, trends: Beverage Information Group Handbooks for Wine, Liquor, Beer, On-premise

ImporterConnect™: Service to help find U.S. importers

Only US domestic wineries may ship direct to consumers (DTC)

EU wineries have very limited ways to access this market

Small and medium wine producers are most negatively impacted - not otherwise commercially viable due to limited production.

US wine Importers should be recognized as a well regulated conduit to DTC. Estimated 1200 active US importers approved by TTB

Only 14 states permit DTC shipping by retailers

The US Wine market is experiencing a significant increase in “Private Label” wine brands. This practice is disruptive to the three tier system and can be offset by SME suppliers finding a conduit to consumers through direct shipping. The US DTC wine market was opened to domestic wineries by the 2005 decision of the supreme court in Granholm v. Heald 544 U.S. 460 (2005)The US three tier system (Wholesalers) can present headwinds to this initiative

Out-of-State Wine Retailer Shipments Allowed in 14 States and DC: AK, CA, DC, ID, LA, MO, NE, NV, NH, NM, ND, OR, VA, WV, WY

DTC Shipping by Out-of-State Wine Retailers (American Wine Consumers Coalition)

MT

WYID

WA

OR

NVUT

CA

AZ

ND

SD

NE

CO

NM

TX

OK

KS

AR

LA

MO

IA

MNWI

IL IN

KY

TN

MS AL GA

FL

SC

NC

VAWVOH

MINY

PA

MDDE

NJCTRI

MA

MEVT

NH

AKHI

Size of the winery direct shipment market?

$2.5 billion value of winery DTC shipments is 8.6% of total US wine retail off-premise market value. (+ 7.5% YOY)

-- (5.6% of total $28B US wine market)

3.47 million cases is approximately 2% of total wine retail off-premise wine volume. (+9.3% YOY) (1% of total US wine volume)

A Few Important Numbers

Limited production wineries 0 to 999 cases made 3.8% of shipments (4.9% of value)

Very small wineries 1,000 to 4,999 cases made 14.7% of shipments (21% of value)

Small wineries 5,000 to 49,000 cases and under made 47.8% of shipments (47.3% of value)

Midsized wineries between 50,000 – 499,000 cases made 28.5% of shipments (23.2% of value)

The largest 55 wineries (each over 500,000 cases) made only 5.2% of shipments (3.7% of value)

Who is Shipping?

Limited production winery 0 to 999 cases - $48.56 per bottle

Very small winery 1,000 to 4,999 cases - $54.05 per bottle

Small winery 5,000 to 49,999 cases – $37.33 per bottle

Medium winery 50,000 to 499,999 cases - $30.68 per bottle

Large winery 500,000+ cases - $27.12 per bottle

What are they each shipping?

DTC allowed DTC prohibited

Direct-to-Consumer Shipping (as of 9/19/14)

Varietal Info, Regional Info, Price Category Info, etc.

Download from www.shipcompliant.com

Lots More Terrific Data

Domestic Small Beer and Wine Producer Credits

Lower excise tax rates (not available to imports)

Wine - $ .17 vs $ 1.07 per wine gallon

Beer - $ 7.00 vs $18.00 per 31 gal barrel

Small Wine Producer = >250,000 gal , $.90 on first 100,000 gals

Small Brewer = > 2 million bbls, $7.00 per bbl on first 60,000 bbls

No excise tax on the first 7,143 barrels; $3.50/barrel on barrels 7,144-60,000; $16/barrel on barrels 60,001-2 million; and $18/barrel on every barrel above 2 million. Applies to all brewers both domestic and import

Small brewer defined as under 6M bbls $3.50 on first 60K bbls $16/bbl 60,001 to 2M $18/bbl 2M to 6M bbls Limited to domestic brewers only

Fair beer Act H.R. 767 would:

Small Brew Act H.R. 232 would:

US Competitions

Do not need a US importer to enter Need a US importer to enterUltimate Beverage Challenge Beverage Testing Institute

MicroLiquor AwardsNY International Spirit Awards

Indie Spirits CompetitionSan Francisco

International Wine Comp.Spirits International Prestige Award (SIP)

Steve RayeManaging PartnerBrand Action Team 1 Darling Dr.Avon, CT 06001 860-676-7900sraye@comcast.netwww.TheBrandActionTeam.comwww.BATChat.net (blog)

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