Canada’s Position in the Global Wine Market A look at the broader m arket Stefano Pallotti Vilm a Pum i Head of Credit Analyst March 2012 Rabobank I nternational
Current Trends in the Global Wine Market Summary I Global supply trends I I Production developm ents by region I I I Global dem and analysis- w here w ill grow th com e from ? - The UK - Germ any - - The US - China I V Canada’s position in the w orld m arket
The Global Wine Market What’s happening in the rest of the world?
Global Supply Does the rest of the world matter? � In 2008, Chile and Australia had particularly large harvests (Aus + 27% ) Chilean and Aus im ports add 1 4 � In 2009, both Chile and Australia drop pricing on bulk wine to make room in tanks m illion cases- for incoming harvest Average pricing declines 3 6 % � California grape prices drop, bottled imports drop, California shipments flat! Total US m arket grow s 2 % , but… Bottled imports decline Volume Volume $/ Case California 2008 2009 % Growth % Growth shipments flat Chile & Aus Bulk Imports 3569.3 17939.2 403% -36% Total Bottled Imports 69355.6 68366.1 -1% -12% Total Imports 94948.7 105760.1 11% -22% Total US Wine Market 316800 322800 2% n.a California Wine Shipments 196400 196700 0.0% n.a.
Global Supply Moving towards balance? The global recession in 300 70 2 0 0 9 erased 5 Global stocks Production Consumption + Ind. Use years of dem and grow th 290 60 Production & Consum ption ( Mn HL) Declining supply and grow ing Global Stocks ( Mn HL) 280 50 dem and should continue to reduce stocks in 270 40 2 0 1 2 260 30 Clim ate, the econom y and Europe w ill 250 20 continue to be ‘w ild cards’- oversupply can 240 10 alw ays return 230 0 Source: OIV, 2010, Rabobank estimates, 2011
Global Oversupply The reduction of oversupply is supporting bulk wine prices � Average bulk w ine prices are gradually im proving Bulk w ine � Pricing improvements seen across a diverse range of regions prices generally � Pricing improvements seen across a diverse range of varietals on the rise… … but “be careful w ith ‘Cabernet Sauvignon: Price/ lt. of bulk wine Generic White: Price/ lt. of bulk wine by country, ‘averages’” by country, Sept 2010- Dec 2011 Sept 2010- Dec 2011 2 .5 0 0 .8 0 0 .7 0 2 .0 0 0 .6 0 Sep-1 0 Sep-1 0 1 .5 0 0 .5 0 Dec-1 0 Dec-1 0 0 .4 0 Mar-1 1 1 .0 0 Mar-1 1 0 .3 0 Jun-1 1 Jun-1 1 0 .5 0 0 .2 0 Sep-1 1 Sep-1 1 0 .1 0 0 .0 0 Dec-1 1 Dec-1 1 0 .0 0 Australia I taly Spain ( AUD) ( EUR) ( EUR) Source: Ciatti Wine Brokers
The International Market Easing of oversupply creates other pressures � Rising grape prices raise input costs � Weak economies in major consumer markets create pricing pressure � Margin pressure the story of 2012, particularly by - Producers with strong currencies (Chile, Australia) - Suppliers dependent on spot market - Markets with tightest supplies (US) Index of Chilean Cab. Sauv Prices- Internal bulk market vs. Average bottled export prices in Chilean Pesos (CLP), 2007- 2011 450 400 I nput 350 Costs 300 250 200 150 Sales 100 Price 50 0 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Cab. Sauv. Dom estic bulk price Cab. Sauv. Btld export price
Production Developments Exports of key competitors
Competitiveness of Producers Factors that influence pricing � Currency fluctuations � Weakness of the USD and GBP create pricing pressure for many suppliers (Aus., Chile, South Africa, etc.) � Country ( or regional) im age/ Perception of quality � Image as a wine supplier is built over time- often tied with the broader image of the country � Country image will vary from market to market � Regional supply/ dem and balance � Excess production results in increasing sales of bulk at lower prices � Ongoing/ structural oversupply erodes the country-image, lower perceived quality
Italy Export dynamo Developm ents: 2 0 1 1 harvest 2 ,5 0 0 € 2 .7 0 dow n 1 4 % from 2 0 1 0 € 2 .6 0 -I talian bulk Export Volum e- Million liters 2 ,0 0 0 w ine prices on € 2 .5 0 the rise Average Price btld- € / lt -I taly becom ing 1 ,5 0 0 a m ajor € 2 .4 0 im porter of Spanish bulk € 2 .3 0 w ine 1 ,0 0 0 € 2 .2 0 Export prices recovering from 5 0 0 2 0 0 9 - supported € 2 .1 0 by w eak euro 0 € 2 .0 0 Ontario’s largest im port com petitor by volum e Packaged still Bulk still Average Price- Bottled Source: Union Italiani Vini, 2011
Australia Can it recover its “Premium” image Developm ents: 9 0 0 $ 6 .0 0 Particularly hurt by 8 0 0 strengthening $ 5 .0 0 AUD, oversupply 7 0 0 I m age-erosion Export Volum e- Million liters in som e m arkets 6 0 0 $ 4 .0 0 due to ongoing Average Price btld- $ / lt oversupply 5 0 0 Slow , steady $ 3 .0 0 reduction of 4 0 0 vineyard area Strong 3 0 0 $ 2 .0 0 participation in em erging 2 0 0 m arkets $ 1 .0 0 1 0 0 FTA: Current- Chile, 0 $ 0 .0 0 US, Singapore, Thailand, NZ, Philippines, Vietnam Bottled Bulk Avg Value- Btld Pending- China, Japan, Korea, India Source: Australian Wine & Brandy Corporation, 2011
France The French Paradox Developm ents: Export volum es 1 ,6 0 0 € 5 .4 0 and pricing recovering from 1 ,4 0 0 € 5 .2 0 abysm al 2 0 0 9 Export Volum e- Million liters 1 ,2 0 0 Export grow th € 5 .0 0 Average Price- € / lt being led by highest priced 1 ,0 0 0 segm ents € 4 .8 0 ( Cham pagne, 8 0 0 Bordeaux & Burgundy) € 4 .6 0 6 0 0 2 0 1 1 harvest € 4 .4 0 + 1 1 % ( bulk 4 0 0 w ine prices declining) € 4 .2 0 2 0 0 No. 3 im port in - € 4 .0 0 Ontario 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 e China has been Volum e ( Mn. Lt) Avg Value ( € / lt.) a boon, but is a double edged sw ord Source: FEVS, 2011
USA A very different reality Developm ents Large, attractive 5 0 0 $ 5 .0 0 dom estic m arket Bulk & w eak currency 4 5 0 $ 4 .5 0 set U.S. Bottled suppliers apart Average Value ( US$ / litre FOB) 4 0 0 $ 4 .0 0 Exports Avg Value - Bottled represent a ( RHS) Export Volum e ( ML) sm all % of 3 5 0 $ 3 .5 0 production ( 1 7 % ) but 3 0 0 $ 3 .0 0 opportunistic Pricing for 2 5 0 $ 2 .5 0 bottled w ine exports has 2 0 0 $ 2 .0 0 im proved 1 5 0 $ 1 .5 0 FTA: 1 0 0 $ 1 .0 0 Current - NAFTA, DR-CAFTA, Australia, Chile, 5 0 $ 0 .5 0 Israel, Peru, Singapore 0 $ 0 .0 0 Pending - Korea 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 e
Argentina Rising star Developm ents: Country-im age 4 5 0 $ 4 .0 0 continues to im prove w ith 4 0 0 Malbec $ 3 .5 0 3 5 0 Adverse $ 3 .0 0 Export Volum e- Million liters w eather affects Average Price btld- $ / lt 3 0 0 production in $ 2 .5 0 recent years, reduces bulk 2 5 0 w ine exports $ 2 .0 0 2 0 0 I nflation now $ 1 .5 0 the m ajor 1 5 0 concern- $ 1 .0 0 affecting bottled 1 0 0 exports $ 0 .5 0 5 0 Next steps after Malbec? 0 $ 0 .0 0 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 e FTA: Packaged Bulk Avg Price- pckgd Current- MERCOSUR, Israel Source: INV, 2011
Where are exporters finding growth? Global Demand
Major Global Wine Import Markets Who’s growing, who’s not? 1 6 ,0 0 0 Of the w orld’s 1 4 ,0 0 0 largest w ine im port m arkets, 1 2 ,0 0 0 only three show sustained 1 0 ,0 0 0 grow th 8 ,0 0 0 6 ,0 0 0 4 ,0 0 0 2 ,0 0 0 0 Source: IWSR/ WDR, 2010
Signs of life? Germany
Germany Signs of life? � Germ an m arket � Old World suppliers dominate import market (@75% share of imports) � PL makes up @ 50% of wine sales � 70% of wine sold were valued at < €3.00/ liter; 95% < €4.99/ liter � Growth occurring at the < €1.50/ liter AND €3.00- €4.99/ liter Share of Avg I m port Price Segm ent Mkt Share I m ports Price ( € / l) > € 0 .9 9 14.20% I taly 43.3% € 1.20 € 1 .0 0 -1 .4 9 9.50% France 15.8% € 2.53 € 1 .5 0 - 1 .9 9 22.40% Spain 14.9% € 1.17 € 2 .0 0 -2 .9 9 24.50% South Africa 4.80% € 0.99 € 3 .0 0 - 4 .9 9 23.80% Chile 3.10% € 1.08 € 5 .0 0 + 5.60% 2.70% € 1.14 US Australia 2.30% € 1.25 Source: Euromonitor 2011
Will profitability recover? The UK
UK Can profitability recover in the World’s largest import market? � Governm ent policies affect consum ption The UK had been � Excise tax on wine + 34% since 2005, VAT increased from 17.5% to 20% in the m ost 2011- Taxes make up 54% of retail price of a bottle of wine attractive export � Austerity measures affect consumer demand m arket for m any suppliers � Retailer consolidation increases pricing pressure on suppliers Pricing has now becom e unattractive or UK Wine Imports and excise tax per bottle, 2005- 2011e unsustainable for m any Wine imports down 1,400 £3.00 suppliers Sparkling 8% from 2007 1,350 Still < 15% abv £2.50 Most suppliers Average Excise Paid 1,300 Volum e ( ML) exiting or £2.00 Australian suppliers reducing 1,250 have seen average exposure to the £1.50 ( GBP/ L) income/ case decline UK m arket 1,200 by @ 65% since £1.00 1,150 2002 due to: £0.50 1,100 - Excise tax increase - Currency 1,050 £0.00 Source: IWSR/ WDR, 2010
Still attractive for exporters? The US
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