Silicon Valley Bank 2017 State of the Wine Industry Report

State of the Wine
Industry 2017
Written by Rob McMillan, EVP and Founder
Silicon Valley Bank Wine Division

Contents
Introduction
No Lifeguard on Duty. 2
Swim at Your Own Risk.
1
Our Predictions in Review 4
2
2017 Summary Forecast 10
3
Premiumization and 14
Restaurant Sales
4
Varietal Demand 22
5
Harvest Yield and Quality 26
6
Bulk Wine and Imports 32
7
Land and M&A 36
8
Shifting Cohorts and 46
Improving Economics
9
Winery Financial 54
Performance
10
Final Thoughts 62
Endnotes 64
About Silicon Valley Bank 67
Disclosures 69

Introduction
NoLifeguardonDuty.SwimatYourOwnRisk.|1|2|3|4|5|6|7|8|9|10
2

We lead this year’s report with a reminder that while
market conditions appear strong in places, some market
components are weakening and dangerous, and still
others are overheating as currents of change gain momen-
tum. Once again, “average” is not a useful term when
describing the wine business. You need to look below the
surface because what you see on top belies risks that lurk
in the depths.
In 1975, the U.S. wine business was still considered
a backwater — quiet but soon to make some big waves.
It was the year before the historic Judgment of Paris1
that opened the eyes of the world to premium California
wines. News of that seminal event caused ripples through
all producing regions, rearranging the worldview of
fine wine2 and setting the stage for unabated growth in
premium U.S. sales for decades to follow. 1975 was also
the year the blockbuster3 movie “Jaws” was released.4
Starring Roy Scheider, Robert Shaw and Richard Dreyfuss,
the film was about the small vacation island of Amity
that seemingly had everything: clear skies, gentle surf
and warm water. People flocked there every summer,
making it the perfect feeding ground for a marauding
great white shark.
With a little creative license, we are using the movie
“Jaws” as a metaphor to describe the ups, downs and hid-
den threats in the U.S. wine business. You might ask,
why would a serious business report use a popular movie
as a metaphor? It’s something we do for fun to make a
long business report more readable. By reading, we hope
you catch a few ideas and avoid unforeseen business risk.
If there is blood in the water, we don’t want it to be yours!
We invite you now to make ready and cast off as we present
Silicon Valley Bank’s annual review and discussion of and
predictions for the U.S. wine business in 2017. ◻
“There’s blood in the water!”
That ominous phrase strikes fear in swimmers throughout the world.
But in business, it means a market opportunity exposed by a changing
tide. That blood in the water could be a buyer’s market flooded with
predatory bargain hunters scheming to feast on the carcasses of the
weak. Or it could be a seller’s market bursting with schooling challeng-
ers, each vying for a few highly desirable assets. In either case, the
ensuing feeding frenzy leads to either exalt or demise for participants.
No Lifeguard on Duty.
Swim at Your Own Risk.
NoLifeguardonDuty.SwimatYourOwnRisk.|1|2|3|4|5|6|7|8|9|10
3

Tom Cassidy: What’s your name again?
Christine “Chrissie” Watkins: Chrissie.
Tom Cassidy: Where are we going?
Christine “Chrissie” Watkins: Swimming!
1
Introduction|1OurPredictionsinReview|2|3|4|5|6|7|8|9|10
4

Our Predictions in Review
Chrissie opened the movie running toward the moonlit surf, peeling
off her clothes while coaxing her inebriated new male friend to
follow. Clearly not her first encounter with that section of ocean, she
seemed expert in her subject matter and confidently predicted to
her acquaintance that the water would be fine.
Sadly, Chrissie’s ocean forecast missed vital analytic
components and had undesired consequences when the
shark, rising up from the depths, struck her with such
force that she appeared to be an oceangoing ragdoll stuck
inside a big Waring blender. Obviously, the prediction
about the water being fine is one she would have liked
to rethink.
We have been researching the wine business since 1991
and making predictions for more than a decade. Some
years, we properly characterize a market change and coax
others into the deep end. In other years, we issue beach
warnings and caution market participants about looming
risks. On rare occasions, our findings might be off in
timing or even wrong,5 but we always review the forecasts
made the prior year just to make sure that no one ended
up being fish bait. In particular, this year a key assumption
we got wrong set up a broader discussion of the market.
Here is what we said in last year’s report.
Wine-Specific Predictions
▸▸ We forecasted a sales growth range of 9 to 13 percent
for the premium wine segment in 2016, down from 14
to 18 percent in 2015.
▸▸ Growing local regulations around tourism would
continue to damage opportunities for small wineries
to sell direct.
▸▸ With the transactions we saw in the queue, we said
we would start the year with some large and notable
sales of premium vineyards and wineries. Mergers
and acquisitions (M&A) would remain active through-
out the year.
▸▸ Tens of thousands of additional grape acres would be
permanently removed from California’s Central Valley.
▸▸ A strong and strengthening U.S. dollar, available
foreign supply and willing millennials would encourage
imports at all premium price levels.
▸▸ Growing market share of bottled imports should be a
heightened concern of U.S. producers.
▸▸ The narrowing supply of arable land suitable for
higher-end wine production would drive vineyard
prices upward.
▸▸ Oregon and Washington would continue to see high
interest for vineyard acquisition for premium and luxury
wine production.
▸▸ We expected to see bottle prices rise by 4 to 8 percent
above the $10 price point and both volume and price
to drop below the $8 bottle price. →
5

continued
Supply
▸▸ Our guess for total harvest in California in 2016 was
3.6 million tons crushed, which would have been about
8 percent lower than the 3.9 million tons crushed in 2014.
▸▸ We said worldwide supply was beginning to creep up
into uncomfortably familiar territory, particularly in the
European Union. Area under vine was increasing, while
world and EU per capita consumption was decreasing.
▸▸ We said quality was excellent, but some area-specific
challenges would be noted from set issues in the spring.
Harvest was early everywhere. The crop size was
average in the San Joaquin Valley and light elsewhere.
▸▸ We noted that Oregon’s harvest was early, huge and
another consecutive “Vintage of the Decade.”
▸▸ Our early read on Washington’s harvest suggested that
it would be similar to Oregon’s in timing and quality but
more of a normal yield.
Demand
▸▸ Per capita consumption of wine (case volume divided
by population growth) in the United States would
temporarily reverse trend as millennials, who consume
more craft spirits and beer, began replacing retiring
baby boomers, given the larger consumer focus placed
on premium vs. generic sales overall.
▸▸ We said that millennials were beginning to affect the
lower price range of premium sales. They were
most visible in the $8 to $14 red blend category but
would trend higher as their incomes allow.
▸▸ We noted that millennials are more open to world
wines compared with baby boomers at the same time
in their palate evolution.
▸▸ We noted that growth in restaurant wine sales fell
dramatically in 2015 across all premium price points.
We expected that to stabilize in 2016.
▸▸ We said the Gen X cohort would surpass the baby
boomers around 2021 to become the largest fine wine
consumer demographic in the United States. We also
said that a short five years later, by 2026, millennials
would surpass Gen Xers to become the largest fine
wine–consuming cohort.
▸▸ The young consumer was giving blends a chance and,
from our view, taking a page from the mature cohort,
who placed their trust in brand vs. varietal. That has
implications for producers that have leaned on varietal
labeling to develop a brand identity.
▸▸ We noted that the lowest-price generic segment that
appealed to entry-level consumers of the 1960s had
permanently lost its appeal. According to wine brokers
with whom we’ve spoken, producing countries are
showing no interest in that segment today.
▸▸ We would see decline and stagnation in wine sold by
volume, as the premiumization trend persisted and
wine by volume continued to lose favor. The $3 to $6
segment appears most at risk. →
Generic
Wines
Producing countries are
showing no interest in the
generic wine segment.
6

Shark fishing has a certain risk attached to it, as does forecasting
future business conditions. Sometimes all the correct preparation
still results in missing the desired target and pulling up an old
boot. This past year, we reeled in virtually all of our forecasts,
but there was one big one that got away.
What we got wrong...
Per capita consumption of wine in the United
States would temporarily reverse trend as millen-
nials, who consume more craft spirits and beer,
began replacing retiring baby boomers, given
the larger consumer focus placed on premium vs.
generic sales overall.
What we got close...
A strong and strengthening U.S. dollar, available
foreign supply and willing millennials would
encourage imports at all premium price levels.
What we got right...
We forecasted a sales growth range of 9 to 13
percent for the premium wine segment in 2016.
Our guess for total harvest in California in 2016
was 3.6 million tons crushed.
and here is why…
Nielsen scan data through November 2016 show
that total wine case growth was up 1.96 percent,
while estimates from the World Bank show that the
2016 U.S. population will end the year larger by
0.82 percent. With cased volume growth exceeding
population growth by about 1 percent, total per
capita wine consumption was actually slightly higher
year over year in 2016, and we have to call that a
missed prediction.6
and here is why…
The dollar did indeed strengthen, but domestic
sales gained slightly over foreign market
share by 0.5 percent. In the import category,
France in particular has had a very strong year
due to rosé exports.
and here is why…
We expect final sales growth figures to come in at
about 10 percent for 2016 when the final numbers
are calculated. SVB Peer Group Database infor-
mation shows year-to-date sales growth through
September of 9.9 percent. Respondents to the
SVB State of the Industry Survey expect year-end
sales growth of 11.9 percent.8
Close guess, but the final number came in at
3.7 million tons.7
7

continued
What we got right... continued
Growing local regulations around tourism
would continue to damage opportunities for
small wineries to sell direct.
We would start the year with some large and
notable sales of premium vineyards and wineries.
M&A would remain active throughout the year.
and here is why…
This was particularly true in Santa Barbara,
Sonoma and Napa counties, with Santa Barbara
County demonstrating the most restrictive and
damaging regulatory climate (e.g., except for
some grandfathered wineries, tasting at a winery
is essentially not allowed in Santa Barbara).
That trend was quite accurate and remains part
of the industry fabric in 2017.
Tens of thousands of additional grape acres
would be permanently removed from California’s
Central Valley.
We expected to see bottle prices rise by
4 to 8 percent above the $10 price point and
both volume and price to drop below the
$8 bottle price.
Growth in restaurant wine sales fell dramati-
cally in 2015 across all premium price points.
We expected that to stabilize in 2016.
This was accurate and still needed for balance
in supply. Current estimates suggest that
30,000 acres will be removed by 2018.9
According to Nielsen, below $8.99 sales did
drop in dollars and volume; above $8.99 sales
growth was 8.8 percent through the period
ended October 8, 2016.
By all measures, this appears accurate, though
“stabilizing” off a precipitous decline is not
positive for restaurant wine sales. Total restaurant
wine sales and traffic are still trending lower.
grape acres will be removed
in California’s Central Valley
by 2018.
30K
8

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3/26/16
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5/21/16
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7/16/16
10/8/16
9/10/16
2
1
0
–1
–2
–3
–4
–5
–6
(% change)
Figure 1
Changes in Cased Sales of Wines Below $9
Source: Nielsen
$0–$2.99 $3–$5.99 $6–$8.99
While I would love to be right about all the observations
and forecasts, I will take being mostly right in this case.
The interesting miss for me was the lower per capita call,
which is instructive because it shows how the macro
trends I forecasted can be overridden by good marketing.
Given the trends at the time for the volume drops in the
below $9 group, we predicted that 2016 would be the first
year since 1994 that we would see declining per capita
consumption (see figure 1). The overall per capita growth
rate in 2015 was near zero, and there was nothing to
suggest that it would change, but an interesting event took
place in the middle of 2015: The growth rate in the $3 to
$5.99 price segment, which represents 44 percent of
total volume, turned decidedly positive in July.
Fishing for clues, we discovered that the reversal in trend
was due to the popularity and marketing of the 3-liter
box and Tetra Pak format wines from Constellation,
Delicato and Gallo. Without the large formats, the category
would have remained negative in growth, but that did
spur added volume sales.10
Steaming out of the harbor toward 2017 predictions, we
first have to tip our hat to the great work done by the large
wine companies to market and sell in a difficult price
segment. I am reminded that there is more than one way
to skin a catfish. ◻
Steaming out of the harbor toward 2017 predictions,
we first have to tip our hat to the great work done
by the large wine companies to market and sell in
a difficult price segment. I am reminded that there
is more than one way to skin a catfish.
99

Ellen Brody: What am I going to tell the kids?
Brody: Tell them I’m going fishing.
2
Introduction|1|22017SummaryForecast|3|4|5|6|7|8|9|10
10

For longer than I want to admit, we’ve researched the wine business,
and we have been making our observations and forecasts public for
more than a decade now. In 2017, we expect improving business condi-
tions with some notable sinkholes, such as a worsening regulatory
environment, interest rates that have been increasing of late and poor
markets for generic wine. Otherwise, the forecast is for sunny and mild
business conditions — ideal for a deep-sea fishing trip.
Wine Business Predictions
and Observations
▸▸ We predict a sales growth range of 10 to 14 percent
for the premium wine segment in 2017, up from 9 to
13 percent in 2016. The confluence of better retail
conditions in the economy, strong consumer demand
and good supply will collide to deliver improving
industry performance.
▸▸ For the industry as whole, we believe that dollar sales
will rise by 4 to 6 percent while volumes will increase
2 to 3 percent. The growth will be exclusively in
premium wine, with volume and price drops below
the $9 bottle price segment.
▸▸ With the new federal administration’s agenda for the
first 100 days possibly including deportation, we
believe that farm labor supply and costs will be a more
dominant concern in both headlines and conferences
in 2017.
▸▸ Even with M&A facing greater headwinds from
interest rates that have trended higher, we expect
acquisitions to remain quite active through 2017.
▸▸ A strong and strengthening U.S. dollar, available
foreign supply, foreign in-country marketing
support and willing millennials will encourage import
growth in lower premium price points.
▸▸ Federal, state and local regulations will continue to
garner headlines in the trade press in 2017.
Pricing
With the median baby boomer rolling toward retirement
while retaining wealth and the cash-strapped millennials
growing in purchase influence:
▸▸ Under $9 bottled wines will continue to struggle.
Price drops for glass format wines are to be expected.
▸▸ Wines sold between $12 and $25 will grow in demand,
and limited price increases will be available.
▸▸ Wines sold between $35 and $75 will find price
increases difficult without the U.S. economy demon-
strating improved performance.
▸▸ High-end luxury wines with an established brand will
have no problem retaining volume levels and taking
small price increases. →
2017 Summary Forecast
11

2017 Summary Forecast
continued
Supply
▸▸ Our guess for total harvest in California for 2017 is
3.95 million tons crushed, which is about 7 percent
higher than the 3.7 million tons crushed in 2016.
▸▸ Quality was excellent in 2016, and the harvest size
was average but heavier than the 2015 light harvest.
Crop size in 2016 was slightly below average in
the San Joaquin Valley, but that is a good thing given
demand weakness for generics.
▸▸ Oregon, Washington and the Okanagan Valley in
British Columbia take the “Vintage of the Decade”
honors, with all three regions reporting concurrent
strong quality and yields.
▸▸ Overall supply is balanced with shortages of high-
quality pinot noir and cabernet, but excesses are
evident in certain non-core varietals and for grapes
destined for lower-priced wine.
▸▸ The narrowing supply of arable land suitable for
higher-end wine production combined with good
buyer interest will drive vineyard prices higher
in premium regions.
▸▸ Oregon and Washington vineyards will continue to
see high interest from larger wine companies.
▸▸ California’s Central Valley has some additional acreage
to remove.
Demand
▸▸ Per capita consumption faces crosscurrents with
retiring wine-loyal baby boomers being replaced by
less affluent millennials, who are ambivalent about
their alcoholic beverage of choice. If economic
conditions continue to improve in 2017, we will offset
those currents, leading to slightly higher per capita
consumption for another year.
▸▸ Today millennials are beginning to affect the lower
price range of premium sales. Their presence is most
visible in the $8 to $11.99 red blend category, but
they will gradually move away from blends and into
varietal wines or imports as their incomes improve.
▸▸ Growth in restaurant wine sales stabilized somewhat
in 2016 but still dropped once again across virtually
all premium price points. The exception is premium red
and red blends, which demonstrated positive sales
growth last year. Restaurant wine sales should show
no to limited growth in 2017, which is an improvement
over recent declining sales.
▸▸ The Gen X cohort will surpass the baby boomers
around 2021 to become the largest fine wine consumer
demographic in the United States. Five years later,
by 2026, millennials will surpass Gen Xers to become
the largest fine wine–consuming cohort.
▸▸ The young consumer is giving blends a chance and,
from our view, is taking a page from the matures, who
placed their trust in brand vs. varietal wine through-
out their beverage-consuming years. If premium blends
and branding are done well, that approach reduces
the confusion for entry-level wine consumers. If new
consumers are content with brands over varietals, the
observation has massive implications for producers
that have leaned on the fighting varietal11 to develop
their brand identity.
▸▸ The lowest-price generic segment that appealed to the
entry-level consumers of the 1960s has permanently
lost its appeal. According to wine brokers with whom
we’ve spoken, producing countries are showing no
interest in that segment today.
▸▸ Gen Xers and millennials will remain the growth
demographics for premium wine. While baby boomers
will retain their dominance in wine consumption,
their overall purchases will continue to decline. ◻
12

The Gen X cohort will surpass the baby
boomers around 2021 to become the
largest fine wine consumer demographic
in the United States.
13

Ellen Brody: Martin hates boats. Martin hates water. Martin...
Martin sits in his car when we go on the ferry to the
mainland. I guess it’s a childhood thing. It’s a...there’s a
clinical name for it, isn’t there?
Brody: Drowning.
3
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11/1/16
$8
$7
$6
$5
$4
$3
$2
$1
$0
–$1
–$2
(in millions)
Figure 2
Wine Sales Growth by Price Segment
Source: Nielsen
$0–$2.99 $3–$5.99 $6–$8.99 $9–$11.99 $12–$14.99 $15–$19.99 >$20
What’s the clinical name for being afraid of the water? Drowning!
Sometimes business is simple, and if it were a shark, it would have
bitten you!
Premiumization and
Restaurant Sales
Sometimes it’s easy to see trends when reality stares
you in the face like the steel gray eyes of a shark. Other
times business trends aren’t what they appear to be, and
that shark you saw swimming at you from the shadows
was just seaweed. In the case of premiumization, it’s the
former. It’s now a very clear business trend and an obvious
driver of consumer demand.12
Premium wine dominates sales today and is responsible
for nearly all the growth in the trade (see figure 2). Look-
ing back, the only time in recent memory we have seen
trading down as a trend was during the Great Recession,
but in reflection things weren’t what they seemed.
During the financial crisis, wine conference discussions
centered around the direction of spending. Consumers
who were hit by the financial collapse didn’t give up their
wine; they just switched to less expensive wines. But in
a market-driven paradox, many of the less expensive wines
that sold during the recession were actually the more
expensive fine wines from producers who had to discount
them to move product. It didn’t give lower-cost producers
a true advantage, so the argument can be made that the
consumer has never traded down. →
15

Premiumization and
Restaurant Sales
continued
Even if we acknowledge the single trading-down data
point during the recession as being true, there’s no way
to create a business from it. A model based on the hope
of recession is clearly on rocky ground, a fact to which our
growers in the Central Valley can attest firsthand.
That said, an interesting change has taken place in the
nonpremium segment below $9. In the past year, the
segment has slowed the rate of decline in both dollars
and case volume, going against the other trends (see
figure 1, page 9). While still negative in sales volumes,
the below $3 price point bottomed in March 2016 and
then started trending upward, and the $6 to $8.99 price
point also ended the year on higher ground.
The growth came from Constellation, Delicato and Gallo,
who used their distribution muscle to push $18-plus
3-liter boxes and Tetra Pak formats. Therefore, the trend
is a bit of a mirage because better juice is being sold
more efficiently in larger containers. Because the price
segment represents such a large component of volume
sales (44 percent), it was noteworthy to see the growth,
but the trend should not be seen as a reversal in premi-
umization.
For the majority of the San Joaquin Valley farmers, that
last point isn’t comforting because it’s hard for the
average grower there to make money below $5.99 a bottle,
but it’s nonetheless encouraging to see a lower-priced
sweet spot for value-conscious consumers.
Restaurant Wine Sales
Quint in his colorful way was really singing about the
way things were — the good old days when a drink was
a buck and a cup of coffee was 10 cents. We can also
see his rhyme as a metaphor for restaurant wine sales,
which in the good old days were a healthy part of a
fine wine producer’s revenue expectations but over the
past decade have dropped precipitously: Here lies
the corpse of restaurant sales, sunk to the bottom like
bricks. For decades they were important, but now they’ve
been deep-sixed.13
At the individual producer level, restaurant wine sales
have been declining for a decade, with the trend
accelerating of late (see figure 3). Restaurants themselves
have been suffering from declining same-store sales for
some time.
Technomic’s growth forecast for wine sold in restaurants
for 201614 was just 2 percent, but given recent down-
ward revisions in 2016 foot traffic and same-store sales
expectations, that number should decline somewhat
when full-year results are reported.
Separate confidential measures to which we are privy
support the Technomic full-year estimate. These reports
show that restaurant wine sales are growing less than
1 percent in dollars and are shrinking 2 percent by volume.
Quint: Here lies the body of Mary Lee;
died at the age of a hundred and three.
For fifteen years she kept her virginity;
not a bad record for this vicinity.
16

45%
25%
5%
2,501–
5,000
5,001–
10,000
10,001–
25,000
25,001–
50,000
50,001–
100,000
100,001–
250,000
>250,000
Average
1–2,500
Figure 4
Annual Change in Restaurant Sales by Production Size (in Cases Produced)
Source: SVB Annual Wine Conditions Survey
2014 2015 2016
35%
30%
25%
20%
15%
10%
5%
0%
2014
2015
2016
(% change)
31%
19% 16%
Figure 3
Decline in Restaurant Sales Share
With all other sales trending lower in volume, the only
restaurant category with positive growth is the group
of red varietals and blends above $25. That segment is
up about 1 percent.
On a dollar-weighted basis, the news is slightly better, with
total U.S. restaurant wine sales flat for the year. The only
growth category again is in the segment of red varietals
and blends above $25, with a 12-month growth rate of
1.8 percent. Those same tides of flat volumes but higher
dollar sales are also reflected in retail sales as a whole, so
the trend of lower volume and higher dollar sales isn’t a
surprise. The extent to which sales of wine in restaurants
have fallen makes one wish for the good old days.
In our survey work, we ask wineries to give us relative
weightings of their overall sales channels. With that
information, we are able to track relative movement in
sales to restaurants from year to year (see figure 4).
From those findings, we can see that all wineries have
trended lower in restaurant sales over the past three
years. Only the wine segment of larger than 250,000
cases showed a year-over-year improvement in restaurant
sales. That segment has better access to distribution and
so will rise and fall with general drinking and visitation
trends in restaurants, whereas the small wine producer is
being shut out of restaurant wine sales entirely.
Why are restaurant sales showing poor performance?
Without the ability to attract distribution, the small producer
has limited restaurant access. Every day, restaurant lists
are becoming increasingly captive to large producers with
access to distribution. Big restaurant chains are served
by big wholesalers, who in turn get their wine from big
wineries. Nevertheless, there are other, more permanent
changes taking place that indicate consumer preferences
also are at play.
Our frugal millennial consumers don’t want to pay
restaurant wine markups. They know they can buy a bottle
of wine at the store for less, so in the restaurant they are
more likely to satisfy their consumption needs by starting
with a beer or cocktail and having a glass of wine with
dinner.15 More baby boomers are retiring and living on
fixed incomes, and that influences their restaurant beverage
choices, as well. →
17

Mississippi
Alabama
Delaware
Kentucky
Utah
Oklahoma
Figure 5
Small-Winery Sales Channel Evolution
Source: ShipCompliant
Some form of direct shipping allowed No direct shipping allowed
Premiumization and
Restaurant Sales
continued
With many economists expecting overall inflation to
move higher in 2017, Technomic has cut its growth
forecast for the restaurant industry as a whole to a real
rate of growth of just 0.8 percent.16 The good news
for the fine wine business is that the white tablecloth
segment of restaurant sales is expected to see the
highest growth. That’s where high-income consumers
and improving business development spending enhance
the prospects for better wine sales. Given structural
dynamics, restaurants are not a good source of growth
for small wineries in 2017.
Small Winery Sales Channel Evolution
The wine business is mostly composed of family-run
wineries, but there was a time when that was put in
doubt because direct sales weren’t viable nationwide
and distributors weren’t interested in representing
the growing numbers of small family wineries.
In 1996, wineries could ship to only 13 reciprocal states
and an additional 17 “personal use” states, many of
which restricted consumers to less than a quart of wine
annually.17 Direct-to-consumer sales were estimated
by some to total less than $100 million per year.18 There
18

2,501–
5,000
5,001–
10,000
10,001–
25,000
25,001–
50,000
50,001–
100,000
100,001–
250,000
>250,000
1–2,500
70%
60%
50%
40%
30%
20%
10%
0%
(% share)
Figure 6
Direct Sales Share vs. Producer Size (in Production Size)
2014 2015 2016
61%
59%
57%
55%
53%
51%
49%
47%
45%
2012
2013
2014
2015
2016
(% change)
49%
51%
52%
53%
59%
Figure 7
Growth in Direct Sales Share
were far more closed states, where consumers could
not purchase wine directly, compared with states where
shipping was legal. Underscoring the absurdity, more
states allowed people to carry concealed weapons than
to buy wine directly from the producer. At that time,
wineries depended on wholesalers, and direct purchases
from the tasting room or wine club represented less than
20 percent of total sales.
The industry dodged a bullet with the favorable Granholm
decision in 2005.19 That ruling knocked the legs out
from protectionist state laws that favored in-state wine
producers. The timing couldn’t have been better because
wholesalers had moved away from the small winery en
masse in 2001 as the wholesaler client base evolved
from small chains and unit retailers into nationwide
big box retailers. Without the three-tier system willing
to move wine, the small producer was in a bind, but
that all changed with Granholm vs. Heald.
The smaller producers would have been put out of busi-
ness long ago without the subsequent evolution of
direct shipping, and when we say “small” in this context
we are talking about wineries with less than 100,000
in case sales (see figure 5). Large wineries don’t need
direct sales and so, not surprisingly, the percentage of
direct sales for the larger companies is dropping and nearly
insignificant (see figure 6). →
19

(in millions)
$10
$30
–$10
Chardonnay
Cabernet
Sauvignon
PinotGrigio
Red
Blends
PinotNoir
M
erlot
SauvignonBlanc
M
oscato
Riesling
$50
$70
$90
$110
$130
Figure 8
Varietal Growth in Premium Wine Categories
Source: IRI data 52 weeks through 10/31/16
$18+ Box $8–$10.99 Glass $11–$14.99 Glass $15–$19.99 Glass $20–$24.99 Glass $25+ Glass
Premiumization and
Restaurant Sales
continued
Direct-to-consumer sales are now a large and critical part
of a family winery’s revenue base (see figure 7, page 19).
While state laws vary — and some permitted state laws
can only be described as arcane if not stealth protec-
tionism — at this point wineries cannot legally ship
to Alabama, Delaware, Kentucky, Mississippi, Oklahoma
and Utah, with Utah and Kentucky retaining felony
anti-shipping laws.
Varietal Segment Growth
Value is defined as price divided by quality, and it is a
dominating component for consumer purchase decisions.
When it comes to fine wine, I believe it’s really price
plus experience divided by quality that defines value, but
there is no question that consumers buy everything with
value in mind. For that reason, understanding the evolving
industry trends in price segments and varietals is another
key to unlocking the real drivers of industry growth.
We can look at growth from two angles: price segment
and varietal category. With respect to price segment,
reds are dominating premium wine growth at this point.
Cabernet, red blends and pinot noir are the top three
growth varietals (see figure 8). The $11 to $14.99 price
point is the strongest consumer price segment today in the
U.S., with chardonnay, cabernet, red blends, sauvignon
blanc and pinot noir all doing well. ◻
20

Understanding the evolving industry
trends in price segments and varietals
is another key to unlocking the real
drivers of industry growth.
21

Hooper: Ah. Just like I thought … He came up with the
Gulf Stream—from southern waters. [He pulls a Louisiana
license plate from the shark. Brody examines it.]
Brody: He didn’t eat a car, did he?
Hooper: Naw, a tiger shark’s like a garbage can, it’ll eat
anything. Someone probably threw that in a river.
4
Introduction|1|2|3|4VarietalDemand|5|6|7|8|9|10
22

Box Wine
Box Wine
20%
2015 2016
Growth of cabernet,
chardonnay and
pino grigio box wines
Varietal Demand
Hooper wasn’t so sure the shark he was examining was the same variety
they were hunting. He understood what various species consumed
and their dining preferences. The license plate was a good clue that he
wasn’t looking at a shark that liked cold water. He probably would have
been a good wine business analyst...if only he were more handsome.
Knowing what consumers are drinking is a key in plan-
ning. Reviewing emerging trends gives clues that can be
important when examining strategies, for not only the
big wineries but the smaller family-run wineries as well.
And this year, the trends are continuing their defining
move to fewer varietals and more blends.
While cabernet is still the king of varietal growth in the
$11 to $14.99 price range, red blends come in second and
are the current darling of discussion in the business. The
reason is obvious from the large producer’s perspective.
The category allows the large wine companies that
dominate production enormous freedom in the substi-
tution of varietal and place of origin, yet they are
still able to maintain overall quality and margin. There
may be wide bottle-to-bottle variation, but for the
price, quality is there. It’s really the jug wine craze of
the 1960s on steroids. Emerging consumers are
acquiescing to branding from the large wine companies
because it makes their purchase easier to understand.
It replaces varietal and vintage comparisons with some-
thing simple and catchy like Sexy Wine Bomb, The
Prisoner, Vicious Red Blend, SLO Down Sexual Chocolate,
or Cupcake Red Velvet.20
While the $11 to $14.99 segment is the strongest overall
in growth, the hottest spot for price and varietal taken
together is in red blends in the lower $8 to $10.99 space.
Techonomic data suggest that growth in the lower price
tier is driven by frugal-minded millennials.
From a packaging perspective, 3-liter premium box wine
and Tetra Pak formats have continued to grow, with
cabernet, chardonnay and pinot grigio each posting more
than 20 percent growth. Merlot, syrah and moscato
have struggled — the result of overplanting the “next hot
varietal,” which always results in wines with no consis-
tent characteristic in the bottle. Sadly for me, even
zinfandel has dropped below riesling as a growth varietal
and is falling out of favor with consumers in general. →
growth of cabernet,
chardonnay and pinot
grigio box wines
2015 2016
>20%
23

Varietal Demand
continued
Who is driving the growth in these categories? Our own
research suggests that the two growth cohorts are the
millennials and Gen Xers. While it’s just supposition at
this point, we expect the retiring baby boomers to have
an impact on growing the lower premium price segments
compared with the higher price segments they previ-
ously occupied. But there is no question: We are seeing
a sea change in premium wine. The young consumer is
giving blends a chance, and from our view their palate
maturation looks like a sequel to the baby boomers’
entrance to wine, which started with Bartles & Jaymes21
and then moved to white zinfandel and chardonnay
before settling on merlot.
The millennial, in the same way, experienced the short
moscato boom promoted by recognizable hip-hop
stars such as Kanye West and Lil’ Kim.22 While premium
moscato still exists (see figure 8, page 20), like the post–
wine cooler baby boomer, the post-moscato millennial
is evolving to favor more-complex albeit lower-priced red
blends and box wine. Where they move next is anyone’s
guess, but I suspect we will see growth in cabernet
and foreign wines in the short term. Longer term, we should
see some varietal, country or domestic region emerge
from the blend fog to forge a new relationship with emerg-
ing U.S. consumers.
Supplying Segment Growth
I always cringe when I attend conferences with the topic
“The Next Hot Varietal.” Whenever growers follow a trend,
it is seemingly already over right at the time the plants
are producing (Muscat of Alexandria) or the varietal
ends up being ruined by overplanting (merlot and syrah).
Some suggest that merlot was hurt by the 2004 movie
“Sideways,” but that was more helpful for pinot noir than
it was a drag on merlot sales. That conclusion is supported
by past research.23
From our vantage point, a decade or longer after their
planting booms neither merlot nor syrah gained a consis-
tent and identifiable character profile with the consumer,
leaving the door open for popular growth in other red wines.
While it’s not something that is clearly identified in
literature, observation tells us that many of the red blends
being produced now include significant, if not dominant,
quantities of merlot and syrah.
Large wine producers participated in the moscato
boom-and-bust and are active in the lower-priced varietals
and red blend craze too. But what happens when more
of the matures leave the consuming market and the baby
boomers move down the premium price ladder and
collide with millennials, who also want wines that are more
distinctive and consistent and that have a greater sense
of place than a red blend? This leads to the next question:
Can the large wine companies produce consistent and
remarkable wines in mass quantities to meet the premium
consumer demand of tomorrow? The answer leads us to a
discussion about real estate and trends. ◻
24

Can the large wine companies produce
consistent and remarkable wines in
mass quantities to meet the premium
consumer demand of tomorrow?
25

Quint: Hooper, ya idiot. Starboard.
Ain’t you watchin’ it?
5
Introduction|1|2|3|4|5HarvestYieldandQuality|6|7|8|9|10
26

Harvest Yield and Quality
The wine business is still agriculture. Port, starboard, bow, stern —
you need to understand the change in direction of vineyards because
it will influence pricing and competitiveness for juice and grapes.
If you are looking port when you should have been watching
starboard, you’ll miss an opportunity or, worse, get eaten alive!
Drought should get headlines in California’s Central
Valley, where the lack of effective water policy is leading
to catastrophic damage of irrigated permanent crops
and sinking terrain from pumping. But it’s really not the
same issue in other regions.
Reporters routinely call me, fishing for information about
a disaster on the North Coast or in Oregon or Washington.
They hope to see the corpse of the wine industry
washing up on the shores of unavoidable cyclical weather
patterns. We all know the news saying: “If it bleeds, it
leads.” They all bite down hard when I say, “Write this:
Drought ruins wine harvest! No grapes to crush. Consumers
switch to cannabis.”24 Then I reel them in, dashing their
predatory hopes. I say, “Not really. The water is fine.”25
Anyway, with regard to wine grapes, droughts produce
good growing conditions generally speaking, as the
harvests in 2012, 2013 and 2014 proved by delivering
historically heavy yields and great quality in most of
the West. The reporters never printed those good-news
stories, of course.
Harvest Yield
I don’t put 2015 in the heavy-yield category. Quality was
great generally, but yield was a little lighter compared
with other years. I’ve heard some explain that salts need
to be leeched from the soils with rain; others suggest
what I’ve always believed: Vines don’t normally produce
routinely heavy yields year over year without taking a
rest. I’m not a viticulturist, but, no matter the cause, yield
was light in 2015 and quality in the vintage year was
fantastic overall.
The news from the 2016 harvest was even more boring
for reporters because on average the yield was, well,
pretty average. That’s not entertaining enough to report,
and it isn’t going to sell newspapers or generate clicks.
Yield was a little heavier than last year’s short crop, but
with good demand for premium grapes the higher haul
in 2016 is welcome. →
Excellent quality
and better yield
in 2016
2016
27

0%
10%
20%
40%
30%
60%
50%
80%
70%
100%
90%
Washington
Lodi and Other Delta Counties, CA
Canada
Sierra Foothills, CA
Anderson Valley and Mendocino County, CA
Oregon
Paso Robles, CA
Average
Santa Barbara and San Luis Obispo, CA
Other
Virginia
Napa County, CA
Sonoma County, CA
Mid-Coastal, CA
Texas
Figure 9
2016 Harvest Yields by Region (% of Respondents Reporting Each Condition)
Source: 2016 SVB Annual Wine Conditions Survey
Above Average Average Below Average
continued
Fortunately, we did get a little rain on the drought-stricken
areas this past winter, setting up more—healthy con-
ditions for the 2016 harvest. But, as always, there was
regional variation (see figure 9). In California, the early
rains in November and December 2016 were welcome,
but much more is needed.
Growers in California’s Delta region, Lodi and Canada26
also reported harvests slightly larger than normal.
Oregon, California’s Central Coast, Mendocino and the
Sierra Foothills were slightly above average, but
Sonoma and Napa were closer to average production.
The central and southern interior of California reportedly
came in light. That’s a good thing for that region, and
from a supply perspective it all worked out just about
right — except a lot more Napa cabernet and some
Sonoma pinot noir would have been great news, as those
varietals are short.
28

“Vintage of the Decade”
honors go to Washington,
Oregon and Canada.
Oregon has won the honor
three years in a row.
Year
3
0%
10%
20%
40%
30%
60%
50%
80%
70%
100%
90%
Oregon
Napa County, CA
Washington
Average
Sonoma County, CA
Mid-Coastal, CA
Paso Robles, CA
Other
Canada
Virginia
Texas
Figure 10
2016 Harvest Quality by Region (% of Respondents Reporting Each Condition)
Excellent Good Average Below Average/Poor
Harvest Quality
Moving off yield, harvest quality in 2016 was again
excellent across all West Coast regions. The U.S. wine
business is really on a hot streak in producing great
vintages (see figure 10).
Oregon and Napa reported the best results compara-
tively, but I don’t think any region will complain much,
with the exception of Texas, which reported mixed
results this season because of heavy rains and hail in
May and early June.
Of course, from a winery perspective the Valhalla
of vintage years is when you get heavy yields
and excellent quality at the same time. It doesn’t
happen often, but it can, as we’ve seen recently
with some regions having a “Vintage of the Decade”
in consecutive years. This past season, a few
locations reported just such an event (see figure 11,
page 30). In 2016, “Vintage of the Decade” honors
go to Washington, Oregon and Canada, with Canada
overrepresented in our survey with Okanagan
producers. Not coincidently, all the regions are in
the Pacific Northwest (broadly defined). ◻
29

Virginia
Other
Washington
Santa Barbara and
San Luis Obispo, CA
Napa, CA
Anderson Valley
and Mendocino, CA
Sonoma, CA
Oregon
Canada
Lodi and Other
Delta Counties, CA
Paso Robles, CA
Texas
Mid-Coastal CA
0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9
1.2
1.0
0.8
0.6
0.4
0.2
0.0
–0.2
–0.4
–0.6
–0.8
–1.0
–1.2
Yield (lowest to highest on record)
Average
Figure 11
2016 Harvest Quality by Harvest Yield
continued
30

2016 was again excellent across all
West Coast regions. The U.S. wine
business is really on a hot streak in
producing great vintages.
31

Quint: [The Orca, their boat, is clearly sinking, with
water all over the deck; Quint hands Brody a small hand
pump] Pump it out, Chief!
6
Introduction|1|2|3|4|5|6BulkWineandImports|7|8|9|10
32

Bulk Wine and Imports
The wine business is cyclical. Some years, we have a light yield and are
underplanted to a variety. Other years, we are overplanted, following a
string of heavy years with bulk imports flooding our domestic decks.
Any action we take may seem like trying to siphon the Orca with a hand
pump, and doom starts to loom over us. But not today. The vintage yields
in 2016 have lined up with consumer demand, and with exceptions on
the edges of expensive cabernet and generic juice, we’re not getting close
to the gunwale.
The bulk wine markets had been a little oversupplied
with heavy vintages prior to 2015, so last year even juice
from 2013 and 2014 was available. The overall picture
was largely described as being in balance; with the past
average-sized harvest added, the situation for bulk wine
is still described as in balance, with some bulk categories
in shorter supply because of strong consumer demand.
Using our survey information that shows higher yields
than 2015 and applying math27 and a little estimating
using a dart, our guess for total harvest tonnage in 2016 in
California is 3.95 million tons crushed, which is 7 percent
higher than the 3.7 million tons crushed in 2015.
As we’ve noted, demand for premium wine has been
healthy, especially for cabernet, red blends, chardonnay,
sauvignon blanc, pinot grigio and pinot noir. Merlot,
syrah, riesling and zinfandel28 haven’t seen the same
degree of consumer demand, and the varietals have
struggled. All of those red varietals consumers think
they don’t like have been blended into brands con-
sumers do like. At some point, with the new generation
of wine consumer, I think we will see a breakout of
some other defining red varietal or maybe an imported
wine. But for today, blends trend higher as non-core
varietal wines trend lower.
The overall impact of higher varietal demand combined
with the average harvest size has led to a rapid drop
in bulk cabernet, chardonnay and pinot noir. Prices have
increased accordingly over the past year (see figure 12,
page 34). Merlot is dropping in volume available not
because it’s become popular again but because it’s filling
out the short demand for cabernet sauvignon. Good
merlot can be found at a significantly lower price than
similar-quality cabernet. →
33

6
5
4
3
2
1
0
35
30
25
20
15
10
5
0
Total Bulk Wine
(in millions of gallons)
1/15
1/16
12/16
1/15
1/16
12/16
Bulk Gallons Available (in millions, by variety)
Figure 12
California Bulk Wine Inventory
Source: The Ciatti Company
Cabernet Sauvignon Chardonnay Merlot Pinot Noir Zinfandel Total Gallons (all varieties)
Bulk Wine and Imports
continued
Imported Wine
There can’t be a discussion of supply without addressing
the impacts and threats from foreign wine.
The import winners in the past year have been easy to
spot. While Italy and Australia have the top import spots
by volume in 2016, New Zealand, with the continuing
growth of its sauvignon blanc, and France, with demand
for low-price rosé, are gaining popularity, as their wines
appeal both to consumers’ palates and pocketbooks.
Argentina, with its political problems; Australia, with its
marketing problems and stronger currency; and Chile,
which isn’t well positioned for a premium consumer, are
the losers (see figure 13).
Foreign bottled wine makes up 35 percent of the U.S.
market, but that share is slowing after a long growth
march. I believe that bottled imported wine will start to
take market share from domestic producers again. That
conclusion is drawn from the following observations:
▸▸ Millennials drink beer and spirits as well as wine and
are slowly gaining consumer share over wine-drinking
baby boomers.
▸▸ Good-value bottled foreign wine is widely available
for purchase in multiple chain retail outlets and
grocery stores.
▸▸ Digital access and evolving direct-shipping laws
make foreign wine as available as domestic wine for
the first time in history.
34

Figure 13
Imported Wine
Source: Nielsen
52 Weeks Ended 11/5/16
Volume %
Total Premium Change vs. Case Volume
Varietal Table Wine $ Volume a Year Ago Case Volume % Change
Domestic 10,092,730,550 5.4 121,966,923 2.7
Imported 3,726,592,876 3.2 41,317,891 0.2
Italian 1,232,164,747 6.2 11,186,488 4.6
Australian 720,386,902 –3.7 12,367,133 –3.4
Argentine 407,296,950 –4.4 4,763,651 –7.2
New Zealand 387,066,144 15.4 2,841,704 13.5
French 348,624,773 16.1 2,311,059 13.5
Chilean 280,447,184 –4.6 4,019,081 –4.6
Spanish 167,092,200 2.6 2,103,334 –0.4
▸▸ Declining per capita consumption in the European
Union, the evolution to more “new world” wine styles
in export brands and in-country export marketing
support — all contribute to the momentum to expand
exports to the U.S.
▸▸ The growing millennial demographic has an evolved
view of world wines vs. the baby boomer and Gen X co-
horts, who favored U.S. producers in the same period
in their development. We shouldn’t expect millennials
to assume the baby boomers’ preference for domestics.
▸▸ Given a choice, large U.S. producers have shown a
willingness to switch to foreign-bulk sources when
there are cost advantages. They can easily do the same
with bottled imports and have distribution access.
Imported bulk wine has already damaged and perma-
nently replaced a share of the wine sourced in California’s
Central Valley. While we believe that it’s inevitable that
import share in U.S. bottled wine will grow, it’s not yet
clear if bottled imports will absolutely hurt the growth of
domestic wineries.
With per capita consumption still growing, it is possible
to surrender low-price market share to foreign wine
and still see growth in domestic wineries. That’s what
we’ve witnessed since the late 1990s, with good
domestic growth and a shrinking domestic share of U.S.
wine sales. Imports represent about 35 percent of
U.S. wine sales today.
While we could still see growth in the total number of
wineries in the United States, higher volume of wine
produced and more wine sold by value, we believe that
growth in per capita consumption will indeed slow
for a time, and imports will become a greater threat to
domestic wineries’ financial returns. The question must
be asked of fine wine producers at some point: How
much market share are you willing to cede before imported
wine becomes a threat to your growth and health? The
parallel question is of equal importance: How will U.S.
wine producers defend their market share? ◻
Foreign bottled wine makes up 35 percent
of the U.S. market, but that share is slowing
after a long growth march.
35

Quint: Y’all know me … know how I earn a livin’. I’ll catch
this bird for you, but it ain’t gonna be easy. I value my neck
a lot more than three thousand bucks, Chief. I’ll find him
for three, but I’ll catch him and kill him for 10, but you’ve
gotta make up your minds.
If you want to stay alive, then ante up. If you want to play
it cheap, [you’ll] be on welfare the whole winter. $10,000 for
me by myself. For that, you get the head, the tail, the whole
damn thing.
7
Introduction|1|2|3|4|5|6|7LandandMA|8|9|10
36

Quint had negotiating power. The businesses in Amity made all of their
money in the summer, so it was a seller’s market for white shark hunting.
The town folk didn’t want to make waves. They wanted to keep the
news of the attacks quiet, but it was already leaking out when a reward
was offered for the shark’s capture. The city wanted to buy cheap, but
Quint knew his value and he set his price higher than anyone expected.
Land and MA
In the wine business, there is blood in the water. The
fishing is for premium wine assets, but there are more
buyers who want land, brands and production space,
particularly on California’s North Coast. The line snaps
too often because there are fewer and fewer arable
acres, and owners are in no hurry to sell. The combination
is making for some eye-catching property transactions
today, and it’s also driving up asset prices in regions
other than Napa and Sonoma.
Mergers and Acquisitions
In 2008, Silicon Valley Bank and Scion Advisors issued
a report titled “Ownership Transitions in the Wine
Industry” in which we forecasted that more than half
the wine industry would change hands in the succeeding
decade.29 At the time, there wasn’t much movement
in winery sales, and of course there were other things
taking place in the financial world that certainly should
have slowed down transition activity.
In the report, we defined transitions broadly to include
sale or transfer to the next generation, but no matter;
many transactions fly under the radar in this family-run
industry. So while it is impossible to truly research all
the transitions in the wine business and determine if we
were right, directionally the findings and predictions
appear accurate. 2016 was another banner year for
MA in the wine business, with numerous transactions
that closed (see figure 14, page 39).
Interesting wine can be produced in mass quantities
so long as the consumer is looking only for something
round, ordinary and consistent in style. As discussed
elsewhere in this report, that is the current intersection
of segment growth and consumer demand, where the
$8 to $10.99 red blends are prominently found. That
explains the growth of the $8 to $10.99 red blends seg-
ment. A wine with merlot, syrah and zinfandel will be
interesting but not distinctive, and variability is a given.
The pace of MA has seemingly increased, and schools
of new buyers have formed. Large wine companies
know that the breakpoint is arriving when consumers
won’t be satisfied with blended wines, so they are
already planning for the next wave of consumer trends
by buying foreign brands, acquiring domestic wineries
and brands, or buying arable property that can support
a future premium brand. →
37

28%
Winery/
Production
Facility
18%
Hospitality
Facility
13%
Brand
41%
Vineyard
Figure 15
Target Assets for Acquiring Wineries
30%
Considering
or Likely
50%
Not Hap-
pening or
Unlikely
20%
Possibility
Figure 16
Likelihood of Winery Sale within Five Years
Companies like Constellation, Gallo, Diageo and Jackson
Family Wines might have dominated transitions in past
years, along with a host of individual buyers. Today the
large wine companies continue their buying but are
more focused in their strategy. They are joined by medium-
sized players such as Huneeus Vintners, Crimson Wine
Group, Foley Estates, Vintage Wine Estates and Chateau
Ste. Michelle, each of which is looking for strategic
acquisitions in the premium segment along with better
production efficiencies.
Several private equity companies were fishing in the
background in 2016. Some closed deals and some did
not, but of note were the Far Niente and Duckhorn
deals. With low interest rates favoring risk taking and
with debt available, there is every reason to believe
that we will see several more private equity companies
put their toe in the water in 2017 and perhaps one or
two close on a transaction.
There were a few more acquisitions by smaller wine
companies in 2016. In the past, it was rare for a bou-
tique or luxury winery to buy another, but we are now
seeing more transactions in which existing smaller
wineries are looking for vineyard and winery assets to
secure supply, permitting and capacity, but as it is
for all other buyers, vineyards are in primary demand
(see figure 15).
There has to be an end to a cycle; but while we got lucky
in 2008 and predicted this boom in MA, it’s a little
more difficult to pin down when the cycle will end. Typi-
cally, that comes with changes in debt availability or
cost; fluctuations in other, competing business conditions;
or an evolution of the overall business environment.
But we have again asked wineries about their desire to
sell in the next five years, and still 30 percent say that
they are considering their options or will look at a trans-
action in the next five years (see figure 16). I read in
that response that there is a good chance 2017 will continue
with the torrid MA pace we’ve witnessed over the past
five years. →
Land and MA
continued
38

Figure 14
Mergers and Acquisitions
Source: Various public sources; SVB
Seller/Target Acquirer Asset/Type
Ardente Estate Winery Sill Family Brand and real estate
Benzinger Family Winery The Wine Group Wineries and brand
Cerise, Demuth and Knez Vineyards Kosta Browne Vineyards
Charles Smith Wines Constellation Brands Brands
Copain Wines Jackson Family Wines Brand
Dancing Hares Vineyard Tuck and Boo Beckstoffer Winery, brand and vineyards
Diageo sale of Chalone Estate Vineyard Foley Family Wines Winery, brand and vineyards
Diageo US Treasury Wine Estates Wineries and brands
Duckhorn Wine Company TSG Consumer Partners Wineries, brands and vineyards
Evolve Winery West Coast Wine Partners Brand
Far Niente Wine Estates GI Partners Winery, brand and vineyards
Field Stone Winery Jackson Family Wines Winery, brand and vineyards
Gamache Vineyard Sagemoor Vineyards Winery and vineyards
Goldrock Ridge Vineyard Paul Hobbs Vineyard
Greenwood Ridge Winery Wilson Artisan Wineries Brand and tasting room
Hartwell Estate Vineyards Realm Cellars Winery and vineyards
Hop Kiln Winery Roll Global/Landmark Vineyards Winery and vineyards
Huneeus Vintners, The Constellation Brands Brands
Prisoner Wine Company
Kosta Browne J.W. Childs Associates Winery and brand
Milliken Creek Vineyard Private investment group Vineyard
Oak Knoll Ranch Vineyard Hancock Agricultural Vineyard
Investment Group
Olsen Estates Smasne Cellars Winery and tasting room
Orin Swift Cellars E. J. Gallo Winery Brand and tasting room
Patz Hall Wine Company Ste. Michelle Wine Estates Brand only
Penner-Ash Wine Cellars Jackson Family Wines Winery and vineyards
Rita’s Crown Vineyard Sea Smoke Cellars Vineyard
River Road Vineyard Delicato Family Vineyards Vineyard
Robert Hall Winery O’Neill Vintners Distillers Winery and vineyards
Robert Rue Vineyard and Winery Venge Vineyards Winery and vineyards
Saitone Vineyard Williams Selyem Winery Vineyard
Seven Hills Winery Crimson Wine Group Winery and brand
Striker Sonoma Winery Foley Family Wines Winery and tasting room
St. Clement Vineyards Huneeus Vintners Winery
VML Winery Huneeus Vintners Winery
WillaKenzie Estate Jackson Family Wines Winery, brand and vineyards
39

66%Oregon acreage
18%Washington acreage
500,000
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2012
2011
2015
2014
2013
40.7% North Coast 5.9%
Central Coast 17.3%
Lodi 18.0%
Others 27.5%
San Joaquin Valley -24.8%
65.0%
63.3%
55.8%
17.5%
1995 38.1% 2001 0.64% 2015
(in acres)
Figure 17
Total Growth of California Regions
Source: California Agricultural Statistics Service Grape Acre age report; The Correia Company
Planted Acreage Changes
The old pattern of domestic consumers drinking American
gateway wines30 early in their lives and then gradually
trading up to more complex and expensive domestic wines
has ended. This change in the new domestic consumer’s
drinking pattern is a threat to U.S. wine companies
because those consumers are now using foreign wine
as their gateway instead of domestic wine — but there’s
no stopping that ship now. It has left the dock.
The scale of changing consumer demand is hard to see
if we look at averages or general trends, but the shift
is etched into planted acreage reports and works almost
like a viticultural thermometer.
While total vineyard growth since 2001 has been up
slightly less than 1 percent, a look beneath the surface
shows a monumental change that’s been under way
for 15 years (see figure 17). The San Joaquin Valley, which
has traditionally produced generic wine, has removed
45,000 acres from production; other regions that grow
grapes destined for more premium production have
grown by about 48,000 acres. Moreover, in the smaller
growing regions in Oregon and Washington, where
essentially all production is premium, acreage is esti-
mated to have grown by 66 percent and 18 percent,
respectively, just since 2008, underscoring the rotation
into premium and out of generic wine.
Land and MA
continued
40

$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
2015
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
VineyardValue(peracre)
By Location Category 2007–2015 vs. Average Napa Grape Prices
PriceperTon
Figure 18
Napa County Vineyard Values vs. Grape Price
Source: Wine Industry Investment Consulting; Annual “Trends” Report of the California chapter of the American
Society of Farm Managers and Rural Appraisers; annual California grape crush reports; The Correia Company
Cabernet Whites Total Range Outlying Secondary Prime
The Luxury Component of Grape Acreage
Given the reputation of Napa and Sonoma as premium
wine-growing regions, it is logical to presume that
California’s North Coast should have the highest growth
rates in planted acreage, but that’s not the case. The
highest growth rates are in regions where plantable
land is available and where prices are more reasonable
compared with those on the North Coast.31
While the growth rate on the North Coast is smaller than
in other regions, price per acre is a different issue. As
noted earlier, cabernet is leading the growth among all
premium varietals today, and Napa cabernet acreage
has a value structure unto itself. That price and
value equation has become even more distorted in the
past year (see figure 18).
With Napa at one end of the growing spectrum, you can
see how the average price per ton of cabernet (black
line) has increased dramatically over the years since
the median baby boomer hit age 35 in 1994. In the past
several years, the price for grapes has risen steadily,
with good-quality Napa cabernet now fetching north of
$8,000 per ton. →
41

50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2013
2014
Others
Pinot Noir
Merlot
Chardonnay
Cabernet Sauvignon
0.41%
(in acres)
Figure 19
Napa Total Varietal Acreage
Source: California Agricultural Statistics Service Grape Acreage Report; The Correia Company
Cabernet Sauvignon Chardonnay Merlot Pinot Noir Others
Grape prices will drive land values, so with the exception
of a small decline in secondary regions of Napa during
the recession, there has not been a noticeable downturn
in the price of Napa grape acreage in the past 30 years.
The reason comes down to consumer demand but also to
the lack of plantable land in Napa.
Total planted acreage in Napa (see figure 19) has grown
slightly less than 0.5 percent per year. More land
would be planted if it were available, but it’s not, with
the exception of small sections in the hills, the southern
Carneros region and the edges of the county.
Land and MA
continued
The Napa cabernet bottle price has been on a constant
upswing because of growing worldwide and domestic
demand for Napa cabernet. But there is a permanent cap
on grape production, which is limited by acres planted.
So in an increasing bottle price environment, the only
variable that can move is the price per acre.
In theory, the price of land and grapes will stop climbing
when the demand for Napa cabernet stabilizes at
some future price. Even then, land and grape prices may
not fully stabilize because the best properties behave
42

$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
$400
$350
$300
$250
$200
$150
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
VineyardValues
PriceperTon
Figure 20
Napa vs. Fresno-Madera in Revenue per Acre
Source: District 13 (Fresno-Madera) statistics from the California Agricultural Statistics Service and The Correia Company
like superior goods. As a result, Napa land will likely
always be more expensive than land in other wine-
growing regions.32 To paraphrase Mark Twain, they aren’t
making land anymore.
The Commodity Side of Grape Acreage
Not all regions are like Napa, so we should review the
other end of the grape spectrum and look at District 13
(Fresno-Madera) to see the opposite view.
Compared with Napa’s price of $8,000 per ton, Fresno’s
$300 per ton seems like a mistake, but you have to
look at it as revenue per acre. In the case of Napa, pre-
suming an average yield of 4 tons per acre, revenue
per acre comes out to $32,000. With Fresno, we presume
12 tons per acre, which comes out to per-acre revenue
of $3,600. Growers will affirm that that insufficient return
is unsustainable. Valuation is appropriately different,
with District 13 averaging around $20,000 per acre vs.
Napa at $270,000 per acre (see figure 20). →
Compared with Napa’s price of $8,000 per ton,
Fresno’s $300 per ton seems like a mistake, but
you have to look at it as revenue per acre.
43

“They aren’t making
land anymore.”
0.41%growth over 15 years
in Napa
Land and MA
continued
In Fresno’s case, instead of growers replanting popular
varietals, much of the production has gone into unfamiliar
generics at the behest of large wine-producing companies
(see figure 21). Finding a home for those out-of-favor
grapes with a reasonable return has become difficult and
at times impossible. Stories abound of growers getting
offers of $100 per ton on the spot market, especially for
zinfandel, white zinfandel, merlot and syrah.
Because the grapes in California’s inland region have
not been effectively differentiated from foreign juice,
better-priced foreign bulk has replaced vine acres in the
Central Valley. That productive capacity is now forever
lost to other world producers.
The impact on land values given this rotation away from
generics is probably not as bad as might otherwise be
expected because land is used for other crops such as
almonds, pomegranates and pistachios that historically
carry better returns. That said, in the past year the nut
crops in Fresno have also had a pricing setback to go
along with extended drought conditions. That too will
influence land values.
It should be noted that my colleagues and friends in
Fresno who planted uncontracted and out-of-favor
varietals are in a dire position today. Everyone in the
industry hopes the growers there can find a better path
for their future, but it’s not an easy solution. It’s going
to require a rebranding to premium varietals that are
not commodities or subject to threats from lower-priced
foreign bulk juice. While a little luck is helpful, too, I
believe that with proper effort the interior can be recast
as a premium wine–producing region in its own right.
Land Summary
Average vineyard land prices are moving strongly higher
because the large wine companies aren’t the only ones
that see the need to buy land that can produce premium
wine. Wine companies in the next tier down from the
majors have been active, as well, in California, Oregon
and Washington, where more-favorable price/quality
measures exist compared with California’s North Coast.
The Napa Valley, known for cabernet, is effectively planted
out. No more acreage exists of any size. The smaller
wine companies with growth plans in Napa are desperately
seeking land and/or vineyards to acquire, but absent
adequate cabernet acreage many are looking toward
Sonoma County to start pinot noir programs. The added
buying pressure combined with the favorable growth
in pinot is driving vineyard prices higher in Sonoma,
Lake and Mendocino counties as well.
The result of high demand for coastal land, combined
with the strong MA market and low long-term rates,
has been that land prices in all wine-producing regions
have been moving strongly higher. Although we have
correctly predicted bubbles in the past, we don’t believe
that this is one. The growth in price per acre and price
per ton in premium areas could flatten, but given that
the underlying demand for premium wine continues to
grow, we can’t see any reasonable event that turns the
current price environment into a bubble in the near term. ◻
44

120,000
100,000
80,000
60,000
40,000
20,000
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Others
Chardonnay
Barbera
Rubired
French Colombard
(in acres)
Figure 21
Fresno Total Varietal Acreage
Source: California Agricultural Statistics Service Grape Acreage Report; The Correia Company
French Colombard Rubired Barbera Chardonnay Others
Average vineyard land prices are moving strongly
higher because the large wine companies aren’t
the only ones that see the need to buy land that can
produce premium wine.
45

[… about to go fishing for the shark]
Brody: On the water?
Hooper: Well, if we’re looking for a shark, we’re not
gonna find him on the land.
8
Introduction|1|2|3|4|5|6|7|8ShiftingCohortsandImprovingEconomics|9|10
46

(% by cohort)
$15
$15–$19.99
$20–$29.99
$30–$39.99
$40–$69.99
$70
5%
0%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Figure 22
Proportion of Direct-to-Consumer Sales
to Age Cohorts by Price Point
2016 Millennials (ages 22–38) 2016 Gen X (ages 39–50)
2016 Baby Boomers (ages 51–68) 2016 Matures (ages 69+)
Understanding the evolving consumer is one key to developing
strategies to maneuver your business into safe waters. You aren’t going
to find satisfying sales if you are fishing in the wrong place.
When it comes to the discussion of who is biting on
the line, the story about millennials being the
largest consuming cohort of wine is nothing but a wild
fish tale and flat-out inaccurate.33 Casting into that
pond today will not yield the result that premium wine
owners are hoping for. That said, all generations over
21 years of age have some component of consumer
demand that, depending on your own model, could be
an important consideration.
Each year, we survey wineries to better understand
the key issues they face, and we receive between
550 and 800 responses. The wineries that track their
direct sales are able to give us data on the thousands
of consumers who buy their wine. From that, we are
able to derive several views and estimates of overall
cohort demand.
Today we see the impact of four different generations
in the U.S. wine trade, and all are evolving the business
in obvious ways with their consumption patterns.
Baby boomers are still the dominant consumer of fine
wine, but this year for the first time the millennials
moved fully off the bottom in all price points, bypassing
the mature generation, which now occupies the bottom
position in wine consumption (see figure 22).
Matures
Matures grew up during the Great Depression.34 Their
ensuing behaviors, such as thriftiness, saving and
the conservative use of debt, resulted from their inability
to find employment or even the bare necessities early
in their lives. Add rationing during WWII, and decades
later many still save everything and throw away nothing
— ever. Their wine consumption historically has been
in low-price value wines. Consistent with their cohort
shift to the bottom, inexpensive wines are also falling
permanently out of favor with consumers. →
Shifting Cohorts and
Improving Economics
47

Millennials
(ages 22–38)
Gen X
(ages 39–50)
Baby Boomers
(ages 51–68)
Matures
(ages 69+)
(% of sales)
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Figure 23
Change in Cohort Share of Wine Sales
2012 2013 2014 2015 2016
Improving Economics
continued
Baby Boomers
The baby boomers, who are responsible for the past
20 years of growth in the American fine wine sector
and still maintain the largest demographic footprint on
the business with a 41 percent share, are beginning a
slow decline in their consuming patterns (see figure 23).
That trend will continue as the group ages and should
accelerate within the next six years as the median baby
boomer reaches retirement age in 2022. The cohort will
have increasingly less discretionary income.
Gen X
The always-overlooked Gen Xers are currently in second
place, and their consumption of fine wine continues to
increase. While the cohort is smaller, they are perfectly
positioned to pass the baby boomers as the dominant
demographic of fine wine consumption. As noted last
year, if current trends are maintained and all other exter-
nal factors remain constant, we expect Gen X to surpass
the baby boomer cohort around 2021 to become the largest
wine-consuming demographic in the United States.
48

28%
24%
23%
23%
22%
21%
19%
17%
16%
16%
16%
16%
15%
12%
12%
28%
37%
31%
34%
34%
37%
36%
41%
42%
41%
42%
43%
43%
44%
46%
Texas
Canada
Mid-Coastal, CA
Average
Oregon
Sonoma County, CA
Paso Robles, CA
Napa County, CA
Washington
Other
Virginia
Figure 24
Cohort Share of Sales by Region
Millennials (ages 22–38) Baby Boomers (ages 51–68)
Millennials
Representing just 17 percent of the current consumption
market share of premium wine is the millennial generation,
whose outsized impact has been falsely prognosticated
in the trade press for at least a decade.
The reality is the generation does not have the same
financial environment to push spending compared with
the baby boomer and Gen X cohorts at the same life
stage. Significant headwinds include underrepresentation
in the U.S. workforce, significant amounts of student
debt, declining productivity and the setback in wealth
accumulation during the Great Recession. But in an
interesting parallel, the millennials are living at home
Baby boomers are still the
dominant cohort.
with their parents longer than any prior generation
except the matures, who lived with their parents
due to the Great Depression and only started moving
out in the early 1940s as the economy improved.
While the millennials’ overall impact on fine wine
buying more closely resembles that of the matures in
volume and price point today, millennials are a
growth cohort and the future of the wine business.
Today, as one would expect with lower financial
capacity, they have greater impact in regions such as
Texas and Virginia, with lower average bottle prices,
but they have lower representation in more expensive
regions such as Napa and Sonoma (see figure 24). →
41%
33%
10%17%
Millennials
(ages 22–38)
Gen X
(ages 39–50)
Baby Boomers
(ages 51–68)
Matures
(ages 69+)
49

50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
34%
45%
41%
37%
32%
27%
28%
16%
11%
12%
1%
16%
Gen
Z
M
illennials
Gen
X
Baby
Boom
ers
M
atures
(% of sales)
Figure 25
Forecast Changes in U.S. Cohort Purchase Share
2015 2025 2035
Improving Economics
continued
Building on the premium evolution of the American wine
culture, since the 1960s each successive generation
enters its consuming years knowing more than the pre-
vious generation. Matures began with jug wine. Baby
boomers followed with premium domestic wine, as did
Gen Xers. Millennials are no different, but they have
the added advantage in their formative years of the
digital age, which allows them wider selection, better
pricing information and greater ease of purchase.
Perfect digital price information in the hands of a thrifty
consumer is a nightmare for marketers.
While still after a premium product and experience,
evidence from many sources suggests that millennials
are inclined to substitute craft beer and spirits for wine,
especially on premise, and are ambivalent as to the place
of origin.35 The youngest consumer cohort has demon-
strated a propensity for frugal hedonism,36 meaning they
are quite price conscious but don’t sacrifice quality when
selecting their adult beverages.
The hope for the group as they gain traction in life and
careers is that they evolve to become less penny-wise and
loosen up the grip on their wallets, becoming traditional
mass-luxury consumers. Our forecast is that the millennial
cohort will surpass the Gen Xers around 2026 to become
the largest wine-consuming demographic (see figure 25).
50

(% change)
1950–
1953
1954–
1957
1961–
1969
1958–
1960
1970–
1973
1980–
1981
1975–
1980
1982–
1990
1991–
2001
2001–
2007
2009–
2016
7.1%
4.1%
5.7%
5.3%
5.1%
4.3%
4.5%
4.3%
3.6%
2.8%
2.1%
Figure 26
Real Growth in Gross Domestic Product
Source: U.S. Bureau of Economic Analysis
The Economic Engine
What? You thought we’d leave that quote out of the report?
It has to be one of the most iconic lines of all time.
Interestingly, according to screenwriter Carl Gottlieb,
“You’re gonna need a bigger boat” was not scripted
but was ad-libbed by Roy Scheider. As they say, some-
time it’s better to be lucky than good.
When it comes to the U.S. economy, we’ve been both
since the recovery started. Writing this in early December
2016, it looks like the economic engine that is driving
U.S. consumer sales is indeed sufficient to drive a bigger
boat, so while most economists are predicting an
improving economy in 2017, we aren’t going to be get-
ting the same-sized boat we once had.
In past reports, we dedicated up to half the space for
economic issues simply because they were the most
important aspect of changing consumer demand. The U.S.
economy is still every bit as important overall, but today
thankfully we don’t need to spend so much time dis-
cussing economics because the U.S. economy is looking
pretty good!37 Still, a couple of overarching aspects
of economics are important to note: the potential growth
of U.S. gross domestic product and cohort opportunity.
Many expect that we will return to “the good old days”
and see 4 percent GDP, but that’s just not going to happen.
Getting to a sustained 3 percent GDP would be fantastic
but will require direct investment, fiscal stimulus, the
pullback of free money from the Fed and an improve-
ment in productivity. We can use what’s been called the
Golden Age of Capitalism38 as a model to explain the
points. (Stick with me. I won’t be too boring here.) →
Brody:
You’re gonna need
a bigger boat.
51

1947–1973
1973–1979
1979–1990
1990–2000
2007–2015
2000–2007
(% change)
2.8%
1.2%
1.5%
2.2%
2.6%
1.3%
Figure 27
Average Annual Change in U.S. Productivity
Source: U.S. Bureau of Labor Statistics
Improving Economics
continued
As World War II was winding down, economists started
to weigh in on how the U.S. economy would fare. They
were nearly unanimous in their view that without war
manufacturing, the economy would return to the
recession that existed prior. Obviously, that prediction
was entirely wrong.
Because the United States was pretty much the sole
modern industrial power still standing at the end of the
war, the world had to come to our shores for goods
and services. Massive capital investments were made
to retool manufacturing into peacetime uses. That
investment drove employment and productivity. In addi-
tion, the men and women who served were beneficiaries
of the GI Bill39 and received billions in financial assis-
tance to get educations and low-cost mortgages. That fiscal
injection should not be overlooked because it too drove
the growth in housing and jobs during the period.
Fast-forward to the present era, and the picture is much
different. As the world was healing from the war, manu-
facturing started leaking out to other countries that had
lower wages, and by the mid-1970s more than half the
U.S. GDP had become based on personal consumption
expenditures (the consumer). The echo from the massive
peacetime investment ended and was reflected in lower
real GDP (see figure 26, page 51).
Today capital investment that leads to job growth and
better productivity has been negative for the first
time since the end of WWII. That has led to the lowest
era of productivity since OPEC put a worldwide chill
on investment and inflation raged (see figure 27).
To the point you’ve waited for about cohort opportunity,
the millennials don’t have the same opportunity as
the generations that preceded them. The GDP potential
of the U.S. economy isn’t the same. Other world
economies are moving up the investment, population
and GDP ladder.
If the stock market is indeed a leading indicator, the
economy looks like it’s readying to make a positive move
in 2017. That will be reflected in growing wine sales
once again. But with wealth-heavy baby boomers retiring
and financially disadvantaged millennials replacing
them one for one, it’s intuitively obvious that the long-term
potential for consumer growth won’t be as robust as in
previous decades. ◻
52

The millennials don’t have the
same opportunity as the generations
that preceded them.
53

Mayor Vaughn: I don’t think either of one you are
familiar with our problems.
Hooper: I think that I am familiar with the fact
that you are going to ignore this particular problem
until it swims up and BITES YOU ON THE ASS!
9
Introduction|1|2|3|4|5|6|7|8|9WineryFinancialPerformance|10
54

In the past year, I’ve seen firsthand the impact of regulations gone
haywire. They are frustrating family winery owners across the
country, increasing the cost of doing business and reaching the point
where some of the regulations will put family-run wineries out of
business. The problem can’t be ignored, and it’s not going away by itself.
Don’t get me wrong — I’m grateful for politicians, if for
no other reason than that they always show up worse
than bankers in the “least trusted” surveys, but let’s be
nice. We need their help in balancing out good regula-
tions and political ones, and in some cases we
need a reversal of administrative overreach, especially
regarding immigration.
The topic of regulatory reform and the financial impact
on business has been a continuing discussion since the
2016 presidential election. Many in the business com-
munity are hoping for tax relief in addition to regulatory
reform. Regulations at the state, federal and local levels
are hurting the performance of family-run wineries in
many ways. Whatever happens, it’s not going to resolve
itself without every winery owner and stakeholder con-
tributing to change.
Local Regulations
Small wineries take up space in bucolic settings. Some
would argue that the wine industry might even add to the
beauty and culture of an area.40 But running a winery
today requires direct sales, which brings a trail of visitors
to the countryside — and not everyone appreciates that.
Local regulation aimed at slowing tourism and winery
growth has continued to evolve in several regions, most
notably Santa Barbara,41 Sonoma and Napa counties.
What seems common at this stage is an alignment of
diverse agendas from NIMBYs,42 anti-change concerns,
anti-alcohol advocates and those with parallel environ-
mental agendas. They align using media and the
political process to paint a negative view of the industry
and its practices.
We asked winery owners what they thought local
residents felt about the growth of wine tourism in their
region. The good news is that 80 percent felt that
tourism was appreciated and supported locally. Not
surprisingly, California’s Central Coast wineries were
the least positive about the question, but Sonoma
and Napa wineries weren’t far behind in their responses
(see figure 28, page 56).
According to articles and comments from readers
in the trade press, the debate is about a threat that is
changing the character of [fill in your growing region
here]. Those accusations are backstopped with refer-
ences to the negative impacts from traffic, noise, tourism
and heavy water use. The specter of drunk driving
on county roads is often inserted into the discussion,
as well. →
Winery Financial
Performance
55

12%
12%
19%
40%
39%
40%
28%
62%
12%
14%
6%
57%
54%
33%
39%
0%
13%
38%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
45%
35%
80%
10%
33%
33%
56%
33%
0.6
0.2
58%
17%
50%
13%
78%
4%
Santa Barbara and
San Luis Obispo, CA
Sonoma County, CA
Napa County, CA
Average
Mid-Coastal, CA
Anderson Valley and
Mendocino County, CA
Paso Robles, CA
Virginia
Lodi and Other
Delta Counties, CA
Washington
Other
Texas
Oregon
Canada
Figure 28
Are Wineries and Tourism Welcomed by Locals?
Appreciated and Publicly Supported Welcome but Publicly Opposed Unwelcome and Actively Opposed
Winery Financial
Performance
continued
56

While the debate has received immense attention in
the regions noted, beyond checking off the CEQA43 box
(California Environmental Quality Act), only recently
has consistent effort been expended to produce studies
that give a supported view of the impact of the wine
business on a community. Are wineries responsible for
unbearable traffic, noise and drunk driving? It’s clear
that wineries are responsible for job growth and positive
economic impact, and they are among the largest sources
of philanthropy, but what of the other claims? How are
we promoting the good the wine industry does in a com-
munity to offset the vocal minority opposition?
In the case of Napa, the public narrative was that heavy
traffic came from tourism, but a traffic study funded
and run by the county determined that the source of the
congestion was actually locals,44 and on most days
tourism represented just 15 to 17 percent of the traffic.
Napa, like the rest of the Bay Area, has grown and so
has traffic. In the case of Santa Barbara, the narrative
was punctuated by pictures of accidents. Secondhand
testimony was that wineries were responsible for an
increase in drunk driving. Yet when the facts were
researched, all the cases of alcohol-influenced driving
accidents turned out to be late at night when tast-
ing rooms were closed. Outside of doing that kind of
research and study, the local narrative comes from
unsupported testimony, but allegations left unchallenged
will lead to inaccurate conclusions.
My belief is that tourists come to wine country because
it is beautiful, so we all have something to lose from
unplanned growth. If wine country gets too crowded and
loses its charm, we will be killing the goose that lays the
golden egg. The focus in the debate should be on common
ground: the protection of a wine region. The emphasis
for all the local anti-winery battles should drift toward
inserting facts into the debate so that we can protect the
beauty, culture and environment from which we all make
our living. →
15%–17%
Percentage of
tourism traffic in Napa
on most days
Local Regulation continued
Hooper: [singing] Show me the way
to go home / I’m tired and I want to
go to bed ...
Hooper, Quint, Brody: [all singing together]
I had a little drink about an hour ago
and it got right to my head / Wherever
I may roam / by land or sea or foam ...
57

0.6
0.5
0.4
0.3
0.2
0.1
0
–0.1
–0.2
–0.3
Econom
ic
Consum
er
Sales/
Distribution
Fruit/
Bulk
W
ine Labor
Legal
Debt Access
Foreign
Com
petition
W
ine
Substitutes
Other/
General
Overall
Figure 29
Wine Industry Sentiment Index
Winery Financial
Performance
continued
State and Federal Regulations
In our annual survey, we ask wineries questions modeled
after the methodology used in the Conference Board
Consumer Confidence Index.45 From that we can get a
read on how the general industry views the current state
of affairs and what their concerns are (see figure 29).
Looking at the results of the past two years, we can say
that the industry is more confident in the economy and
the state of consumer demand. But overall, respondents
reported that confidence is lower because of critical
labor issues and, to a lesser degree, foreign competition
and substitutions.
With respect to the latter, it’s a reflection of the growing
concern about legalized cannabis. It remains to be seen
if that will cool demand for fine wine. I’m on the side that
believes that fine wine and cannabis will co-exist.
A more pressing concern is labor. In every growing
area, the labor force is inadequate, which is leading to
increased costs and more incentive to mechanize.
From an American Viticultural Area perspective,
Mendocino shows this as the largest concern. In our
survey, one respondent said:
“Much of this shortage, especially during harvest, is caused
by the competition from marijuana growers who hire laborers
to sit on a white bucket and “trim buds” for $25–$30 an
hour vs. working in the hot sun in the vineyard, where the
average wage is around $20 an hour.”
Another survey respondent from Paso Robles succinctly
pointed out the following problems:
▸▸ Increasing difficulty in finding sufficiently trained and
motivated labor for hand harvest
▸▸ Rapidly increasing labor costs as a result of the ACA,46
Proposition AB 151347 and soon AB 106648
▸▸ Increasing age of the labor force
▸▸ Political uncertainty concerning immigration and the
future supply of qualified labor
58

40%
30%
20%
10%
0%
–10%
59%
57%
55%
53%
51%
49%
47%
45%
GrossMargin
SalesGrowthandPretaxProfit
57.1%
22.3%
16.3%
55.3%
2.0%
9.5%
52.4%
–3.8%
2.2%
53.7%
10.8%
6.7%
53.2%
12.2%
6.1%
53.4%
7.7%
6.9%
54.8%
9.2%
6.6%
56.8%
11.9%
8.0%
56.9%
8.8%
9.6%
56.6%
7.5%
9.1%
57.6%
8.7%
11.4%
12/31/07
12/31/08
12/31/10
12/31/09
12/31/11
12/31/13
12/31/12
12/31/14
12/31/15
6/30/15
6/30/16
Figure 30
Winery Financial Benchmarks
Source: SVB Peer Group Analysis Benchmarking Database
Gross Margin Sales Growth Pretax Profit
The last bullet point references the concern that labor
issues will be made worse with the possible deportation
promises of the president-elect. But the Obama admin-
istration also contributed to the issue by tightening the
rules under the Fair Labor Standards Act.49 I saw this
firsthand at a winery client in 2016, when I came for an
appointment and found they were getting a surprise
audit from the U.S. Department of Labor. Although they
had worked through a labor contractor for harvest
help and had no vineyard employees, administrative
changes to the law now passes liability for recordkeep-
ing to the winery.
The topic of labor issues is far too long and complex to
address in this report,50 but there is no question that
this issue is a real threat that needs to be addressed —
and not just the issue of cost but more importantly the
availability of labor or substitutes for labor with more
mechanical options employed.
Family Winery Benchmarks
Getting financial information about the wine business is
even more difficult than finding someone to go into a
shark cage with pork spareribs. The wine business is a
collection of private companies, and financial statements
and tax returns aren’t lying around in the wheelhouse
or tasting room. Ask a winery owner how the business
is going, and you are likely to get something garbled like
Quint when he’s had a few too many.
As we look at the financial position of wineries this past
year, revenue growth through the nine months ended
September 30, 2016, was about 10 percent, which is right
in line with our 2016 predicted growth range of 9 to
13 percent (see figure 30). The data for nine months →
59

Excludes Wineries 5 Years Old
25%
20%
15%
10%
5%
0
Oregon
Canada
Texas
M
id-Coastal,CA
Sonom
a
County,CA
Napa
County,CA
Average
Santa
Barbara
and
San
LuisObispo,CA
Virginia
Sierra
Foothills,CA
W
ashington
Lodiand
Other
Delta
Counties,CA
Paso
Robles,CA
Other
Anderson
Valley
and
M
endocino
County,CA
Figure 31
2016 Owner-Reported Sales Growth
Winery Financial
Performance
continued
aren’t seasonalized, and we should still see the impact
of a strong October-November-December period.51
Survey respondents estimate that average sales growth
for the year will end at 11.9 percent, which is a very
good report card given the headwinds. Improved sales
are due to increased demand for premium wine overall,
a growing proportion of direct-to-consumer sales, the
release of the well-regarded 2013 vintage and very minor
price increases (see figure 31).
Each year, I like to see where producers suggest there
is pricing power or a lack thereof. There are several ways
to do that, but this year I like the chart of case price
increases to bottle price increases. If a segment shows
that cases increased 10 percent while sales increased
20 percent, that would be a sign of healthy demand in
that segment (see figure 32).
60

$15–$19.99
$20–$29.99
$30–$39.99
$40–$69
$69
$15
Excludes Wineries 5 Years Old
3%
7%
11%
15%
7%
11%
9% 10%
14%
16%
7%
11%
Figure 32
2016 Reported Sales and Case Growth by Price Segment
Case Growth Sales Growth
$400
$350
$300
$250
$200
$150
$100
$50
12/15
10/16
11/15
1/16
2/16
3/16
4/16
5/16
6/16
7/16
8/16
9/16
2016
2015
Cumulative Sales through October 31, 2016
(in millions)
Figure 33
Direct-to-Consumer Sales
Source: Wine Vines Analytics/ShipCompliant
In 2016, we note stronger price increases below $30 and
more-modest price increases above. That coincides
with the other data in this report that show value growth
(dollars) stronger than volume (cases). It also supports
my hunch that there is currently limited opportunity to see
price increases for luxury wine. Price increases in 2015
were minor, but it was the first year since the recession
that price increases were passed on to the consumer; that
is a statement about the improving economic situation
in the United States and was consistent with our forecast
in early 2015.
Direct-to-consumer sales trends continue to show
impressive growth rates. ShipCompliant is reporting
12-month shipments totaling nearly $2.3 billion
through October 2016, representing a 20 percent
growth rate, with Napa County responsible for the
largest component of shipments. The largest varietal
component remains cabernet sauvignon, followed
in a virtual tie for pinot noir and red blends. The fiscal
year will again end with record volume and sales
(see figure 33). ◻
61

Brody: What day is this?
Hooper: It’s Wednesday ... eh, it’s Tuesday, I think.
Brody: Think the tide’s with us?
Hooper: Keep kicking.
Brody: I used to hate the water ...
Hooper: I can’t imagine why.
10
Introduction|1|2|3|4|5|6|7|8|9|10FinalThoughts
62

Final Thoughts
I’m reminded of the quote: “We can easily forgive a child
who is afraid of the dark; the real tragedy of life is when
men are afraid of the light.” Each of us can become stuck
in a rut and believe what we believe, shutting ourselves
off from possibilities. It’s why I love writing this report
each year. I deconstruct the wine business and discover
what I missed that was beneath the surface while I
was scanning the horizon and doing my full-time day job:
being a normal banker.
I hope that the message is an encouragement to you,
the winery owner, to stop, look around and get a
fresh perspective on the year ahead. Market conditions
don’t stay the same, so don’t be lulled by the easy
response “because that’s the way we’ve always done it.”
Don’t stick with routine without asking why.
Yes, this is a very traditional business, and some things
should and will always remain as they are. But the
fact that this business resists change only means that
there is that much more opportunity to find new and
creative solutions. Business is a team sport, so get your
team together early this year and dissect the business,
strategize, discuss solutions and keep kicking! Your goal
is within reach.
This was the last line in the movie. Chief Brody was noted as being
deathly afraid of the water, and by the end he was holding on to a barrel
and swimming back to the beach with Hooper.
Introduction|1|2|3|4|5|6|7|8|9|10FinalThoughts
63

1
The Judgment of Paris was a landmark blind wine competition
held in 1976 which proved that American wines could compete on
equal footing with European wines. https://www.meininger.de/
en/wine-business-international/judgement-of-history.
2
There is no widely accepted definition of fine wine. We use the
term “fine wine” for wine that sells for more than $20 per bottle
simply because there are several data sources that can be used
to look at that segment. In the same way, “premium wine” has
no definition. In this report, premium wine is sold in price points
generally above $6 but below $20.
3
Little known fact: The term “blockbuster” was first attributed to
the movie “Jaws” and remains a means to describe hit films today.
It says that in this link, so it has to be true: http://jaws.wikia.com
/wiki/Jaws.
4
“Jaws”: http://www.imdb.com/title/tt0073195/.
5
When I say I’m wrong, I can’t help but think of this scene with
Henry Winkler and Ron Howard from “Happy Days”: https://www
.youtube.com/watch?v=WkqgDoo_eZE. And, yes, that makes me
old because I remember the original airing.
6
Note that we didn’t actually compute per capita GDP. We used
the ratio of case growth to population growth to come up with
an estimate. Gallop lists several other stats that could affect
the calculation of per capita consumption, such as the percentage
of adults who drink, the volume consumed and the mixture of
wine to other alcoholic beverages for an average consumer,
among others, but this is close enough for the point. http://www
.gallup.com/poll/1582/alcohol-drinking.aspx.
7
“Guess the Tonnage” is an annual ritual we all play in California
because nobody knows at this time of year, but we all love to
apply voodoo and twisted science to see if we can find the perfect
algorithm. Dinners are wagered and bragging rights won. I was
only close this year, but I’ll have to take my lovely parting gifts
this time.
8
SVB State of the Industry: Throughout this report we reference
the SOTI or SVB Annual Wine Conditions Survey. We survey
the wine business annually to get a better understanding of the
state of industry affairs. Respondents get about 75 pages of
charts and analysis for 12 minutes’ invested time. If you would
like to be added to the two surveys SVB does each year, please
email Penny Northrop: pnorthrop@svb.com.
9
Allied Grape Growers, CAWG 2016: http://www.alliedgrapegrow
ers.org/present/CAWG2016.pptx.
10
Note that the box wines are premium wines above $18. Box wines
below $18 are not doing well. The reason they show up in the $3
to $6 category is the in-store price is divided by four to adjust the
3-liter format to compare with the other 750-milliliter bottles.
11
Fighting varietals: http://www.nytimes.com/1990/04/18/garden
/wine-talk-715490.html.
12
The origination of the term “premiumization” has been attributed
to Rob McMillan by the award-winning author Jeff Siegel, aka
The Wine Curmudgeon. If Jeff said it, it must be true. https://www
.winecurmudgeon.com.
13
Yes, it’s a crappy rhyme, but Quint’s is pretty bad, too.
14
Technomic Anticipates Modest Growth of Alcohol Sales in Bars,
Restaurants: https://www.technomic.com/Pressroom/Releases
/dynRelease_Detail.php?rUID=434.
15
2016: A Happy New Year On-Premise?: https://blogs.technomic
.com/2016-a-happy-new-year-on-premise.
16
Technomic Trims Restaurant Industry Growth Expectations
Moving into 2017: http://www.prnewswire.com/news-releases
/technomic-trims-restaurant-industry-growth-expectations-
moving-into-2017-300369455.html.
17
Wine Sparks War Between the States: https://static1.square
space.com/static/533dbefce4b0b65c53504cf3/t/5368c
22be4b0dbc1364ef3b3/1399374379281/wine+sparks+war
+between+the+states.pdf.
18
Estimates of total direct sales in the mid-1990s vary widely in
the literature.
19
Granholm vs. Heald: https://en.wikipedia.org/wiki/Granholm
_v._Heald.
20
Red blend craze: https://www.fb101.com/2016/12/prowein-
2017-speciailst-article-no-2.
21
Bartles Jaymes was a marketing masterpiece in the 1980s.
If you are interested in marketing, that brand is worth reviewing.
Here’s a clip from one of the commercials: https://www.youtube
.com/watch?v=hYdWHK6AA6E.
22
Moscato drives US wine sales to new heights: http://bit.ly
/1XL1Hll.
Endnotes
Introduction|1|2|3|4|5|6|7|8|9|10
64

23
The “Sideways” Effect: http://www.winesandvines.com/template
.cfm?section=featurescontent=61265.
24
I am told that cannabis takes a lot more water than grapes but,
no, I am not going to talk about the legalization of marijuana in
the West. Don’t we have bigger fish to fry?
25
See what I did there? Ironically, using drought juxtaposed
against “the water’s fine” when the water is short while at the
same time referencing the movie? I might get a Pulitzer for
that one.
26
Wineries in Canada have organically started to increase their
response rates on the survey. We are to the point today where we
can produce some meaningful information. That said, Canada is a
big country and the results from a winery in British Columbia can
vary dramatically from results in Ontario.
27
Instead of saying we applied math to come up with our forecast,
I really wanted to say I used an algorithm. Doesn’t that sound
so much more awesome and intense? Wall Street bankers use
algorithms all the time, but I’m a little more old school. I just have
math and experience to guide me.
28
I can’t believe that red zinfandel is falling out of demand as a
varietal because it’s always been one of my favorites, but this is
a bit of a repeat, I think. To this day in the United States, merlot
and syrah are still not desirable varietal wines because they were
planted in too many different places and consumers never knew
what they were getting. With zinfandel, it’s the Ravenswood and
Rosenblum effect. Big wine companies bought premium brands
and tried to make a million-plus cases, but there weren’t enough
grapes for that and now consumers don’t know what good Califor-
nia zinfandel is. steps off his pulpit
29
SVB Report on wine transitions in 2008: https://www.svb.com
/pdfs/wine/WineTransitionReportJan2008.pdf.
30
“Gateway wines” is a term used in the trade for entry-level wine
that has historically been produced in California’s Central Valley.
They were simple, well-made wines, often with a little residual
sugar remaining that appealed to wine consumers at the start of
their discovery curve. That’s another phrase that should be added
to the Urban Dictionary.
31
Information about Washington and Oregon land and values
isn’t presented in this report because of a lack of available data.
Without question, growth rates in both states exceed what is
happening in California precisely because there is plantable land
in Oregon and Washington that fits consumer demand at better
values compared with California.
32
Superior good: https://en.wikipedia.org/wiki/Superior_good.
33
SVB on Wine: http://svbwine.blogspot.com/2016/03/the-2016-
wine-market-councils-findings.html.
34
Great Depression: http://www.history.com/topics/great-
depression.
35
Technomic Finds Millennials’ Adult Beverage Choices Evolving
as They Mature: https://blogs.technomic.com/technomic-finds-
millennials-adult-beverage-choices-evolving-as-they-mature.
36
“Frugal hedonism” is a term I’m coining to describe a consumer
trend I’ve noticed but haven’t seen documented. Younger consum-
ers understand artisanship and quality. Instead of consuming as
much as they can by volume on credit as did my generation, they
prefer to live in smaller homes, reduce their living expenses, stay
away from consumer credit, drive less expensive cars that have
appealing style and save their discretionary income for simple
luxuries they truly enjoy.
37
This past year, I was the keynote and final speaker at the three-
day Romeo Bragato conference in New Zealand. I addressed
some important economic underpinnings, and just before I went
on the organizers told me that normally the final slot was for
their inspirational speaker — “so go be inspiring!” My opening
line was, “You guys asked a U.S. banker speaking on the dismal
science — economics — to be your inspirational speaker?!” It
did get a good laugh, which is what’s most important. http://www
.bragato.org.nz.
38
The Golden Age of Capitalism refers to the post–WWII economy.
Here is a short article if you want better color: http://www
.glovesoff.org/features/gjamerica_1.html.
39
GI Bill: http://www.history.com/topics/world-war-ii/gi-bill.
40
The findings of a Sonoma State University survey on the locals’
views of tourism was revealing and covered in a blog post here:
http://bit.ly/1NSAVmo. California Polytechnic State University
conducted a similar survey several years ago with similar results.
41
I’ve been speaking to planning commissions about the wine
business for the past couple of years. It is important that local
officials be given the facts about the business to consider in their
deliberations vs. long lines of people taking the podium to com-
plain and then offer unsupported opinions about the business.
While that’s not a contest anyone wants to win, I’d say Santa
Barbara has the worst situation. A small group of residents there
is pushing for regulation that is even more restrictive, when
the county already prohibits tours or tastings at the winery itself.
Endnotes
continued
Introduction|1|2|3|4|5|6|7|8|9|10
65

Endnotes
continued
42
NIMBY (“not in my backyard”): Individuals who protest any
change that may have an impact on their living space, using any
variety of true or invented rationale. For instance, someone who
moved to the wine country because of its beauty might show up
and complain about a winery starting up near their home.
43
The California Environmental Quality Act (CEQA) is a law that
was put in place to ensure that stakeholders have a say in any
development that could affect the environment. It is often used
as a stalling tactic because the cost is borne by the party wishing
to develop a property; it can cost well over $100,000 and take
several years to complete. http://resources.ca.gov/ceqa
/docs/2016_CEQA_Statutes_and_Guidelines.pdf.
44
Napa traffic is locals: http://napavalleyregister.com/news/local
/study-reveals-who-s-clogging-napa-highways/article_267462a6-
3de7-58fa-80f4-4055273d2621.html.
45
Conference Board Consumer Confidence Index: https://www
.conference-board.org/data/consumerconfidence.cfm.
46
Affordable Care Act (Obamacare): https://www.irs.gov/afford
able-care-act/affordable-care-act-tax-provisions.
47
Piece-rate legislation: http://www.dir.ca.gov/piecerateback
payelection/AB_1513_FACT_SHEET.htm.
48
Assembly Bill No. 1066: https://leginfo.legislature.ca.gov/faces
/billNavClient.xhtml?bill_id=201520160AB1066.
49
Fair Labor Standards Act: https://www.dol.gov/whd/flsa.
50
Immigrant farmworkers are at times politicized and are said to
take U.S. jobs. On the face, that seems unlikely to me. The hard
labor the farmworkers have been willing to assume isn’t some-
thing most Americans want. To that end, I found this interesting
study from the milk industry in North Carolina: http://www
.renewoureconomy.org/sites/all/themes/pnae/nc-agr-report-
05-2013.pdf.
51
In the wine business, the months of October, November and
December represent about 40 percent of annual sales.
Introduction|1|2|3|4|5|6|7|8|9|10
66

For more than 30 years, Silicon Valley Bank (SVB) has helped
innovative companies and their investors move bold ideas forward,
fast. SVB provides targeted financial services and expertise
through its offices in innovation centers around the world. With
commercial, international and private banking services, SVB helps
address the unique needs of innovators. Learn more at svb.com.
About Silicon Valley Bank
Silicon Valley Bank’s Wine Division
Founded in 1994, SVB’s Wine Division offers financial
services and strategic advice to premium vineyards
and wineries. With one of the largest banking teams
in the country dedicated to the wine industry, SVB’s
Wine Division has offices in Napa and Sonoma counties
and primarily serves clients in the fine wine–producing
regions along the West Coast of the United States.
Learn more at www.svb.com/winedivision.
For more information about this
report or Silicon Valley Bank’s
Wine Division, please call or email:
Rob McMillan
EVP and Founder
Silicon Valley Bank Wine Division
1.707.967.1367
rmcmillan@svb.com
899 Adams Street #G2
St Helena, CA 94574
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67

Introduction|1|2|3|4|5|6|7|8|9|10
68

Disclosures
This material, including without limitation to the statistical
information herein, is provided for informational purposes only.
The material is based in part on information from third-party
sources that we believe to be reliable but which have not been
independently verified by us, and for this reason we do not
represent that the information is accurate or complete. The infor-
mation should not be viewed as tax, investment, legal or other
advice, nor is it to be relied on in making an investment or other
decision. You should obtain relevant and specific professional
advice before making any investment decision. Nothing relating
to the material should be construed as a solicitation, offer or
recommendation to acquire or dispose of any investment or to
engage in any other transaction.
Silicon Valley Bank is not selling or distributing wine or wine-
related products. Through the online informational platform,
SVB Cellar Selections, Silicon Valley Bank provides material to
employees about a variety of premium Silicon Valley Bank
winery clients and their wines. These communications are for
informational purposes only. Silicon Valley Bank is not responsi-
ble for (or a participant in) the sales of any wineries’ products
in any fashion or manner and makes no representations that
any promotion or sales of alcoholic beverages will or will not be
conducted in a lawful manner. Further, Silicon Valley Bank
disclaims any responsibility or warranty for any products sold
by wineries or other wine industry service providers.
©2017 SVB Financial Group. All rights reserved. SVB, SVB
FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN
NOW and the chevron device are trademarks of SVB Financial
Group, used under license.
CompID-Jan2017-8
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Silicon Valley Bank 2017 State of the Wine Industry Report

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