02_JPEW_Marlborough2021_VintageImpact_Post-harvest_August

Marlborough 2021 Vintage Impact Post-harvest Update August 2021

We provide specialist wine industry services, advice, and insights to improve your business performance.

Request a free no-obligation consultation. www.jpew.co.nz This is a post-harvest update to understand the impact of the Marlborough 2021 vintage.

The insights we share in this paper keep leading back to a recurring question “is the wine industry moving more towards a value-led strategy due to constraints on supply”?

In April we predicted the Marlborough 2021 grape harvest would yield a total of between 258–272k tonnes. NZ Winegrowers have confirmed the Marlborough yield was 270k tonnes, 21% below the previous vintage, from 28.5k producing hectares.

The approach is to take a macro view to understand the Marlborough2021 vintage then create insight into the downstream impact on the global sales volume of NZ wine.

Summary and key insights 1.

The global sales volume of NZ wine in 2021 (June year end) is forecast to be 334 ML. This is marginally lower than the previous year due to a declining trend in the domestic market, low carry over stock from previous vintages, and a correction in export-led growth due to supply constraints.

2.

Consumer and trade demand is healthy, especially in the off-trade, as availability grows across the globe and distribution deepens in established markets. The distinctive taste of Sauvignon Blanc contributes 85% of total export volumes with Pinot Gris and Rose growing 16% and 43% respectively.

3.

In a 5-year period (2017-2021) global sales have increased by 29 ML or 9%. However, the 5-year average yield (2017–2021) in Marlborough is 307k tonnes which is very close to the 2-year average of 306k tonnes. This highlights that supply in Marlborough has remained relatively constant over the past 5 years despite a 3.2k or 13% increase in producing hectares.

4.

There are two forecast scenarios for the 2022 harvest from Marlborough. They predict a low-high range between 279-353k tonnes. There will be pressure on early release dates with both scenarios.

5.

We forecast global sales volume of NZ Wine at MAT 289 ML by June 2022; a decline of 45 ML (13%) for the year. This reflects the supply constraint impact arising from the Marlborough 2021 vintage. It is expected to adversely impact export markets.

6.

The impact for each NZ Winegrower business will be different as they individually optimise current supply to manage their operating performance and balance sheets.

Operating cash flow in Jan-June 2022 will need to balance the lower export receipts with growing vintage 2022 payments.

7.

Customer relationship management is a key challenge in the next 10-12 months to ensure continuous availability for consumers at the point of purchase.

Marlborough 2021 Vintage Impact Post-harvest Update

1

Supply trends and 2022 yield projections This year the Marlborough 2021 vintage resulted in a total of 270k tonnes harvested.

Following a record harvest in 2020, this is the first time since 2015 that a harvest has fallen below 300k tonnes.

The 5-year average yield between 2017–2021 is 307k tonnes which very close to the 2year average of 306k tonnes. This highlights that supply in Marlborough has remained consistent over the past 5 years despite a 3.2k or 13% increase in producing hectares.

Historic yield declines to the previous years vintage (Supply Var to Prev) occurred in 2012, 2015, and 2021. Each time the preceding vintage was a record harvest (Note: Vintage 2011 = 245k tonnes).

Vintage 2022 Forecast

Source: Vintage 2012 – 2020 statistics from New Zealand Winegrowers Inc Annual Report 2020. Vintage 2021 from New Zealand Winegrowers Vintage Survey Report. Vintage 2022 hectares from Marlborough Wine Industry Growth projected hectares in production.

This chart includes two scenarios (A & B) to forecast the tonnes harvested in 2022.

Key points to understand are: • Both scenarios use the same producing vineyard hectares assumption of 29,400 ha, 3% above 2021.

• Each scenario considers the weighting of the key grape varieties within Marlborough.

• Scenario A (2022 A) is a low case assuming 9.5t per producing hectare. Scenario B (2022 B) is a high case assuming 12t per producing hectare.

Key Insight Other than an increase in producing hectares, an improvement in the 5-year average yield directly correlates with how the industry manages: climatic conditions, water availability, labour supply, the impact of trunk disease, and availability of new vine supply to support the larger vineyard footprint.

Marlborough 2021 Vintage Impact Post-harvest Update

2

Global sales trends and 2022 forecasts The global sales for NZ wine in 2021 is forecast to be 334 ML*. This is marginally lower than the previous year due to a declining trend in the domestic market and a correction in export led growth (refer to next page) that began in February 2021.

Over a ten-year period (2012-2021) global demand has increased by 90 ML or 37%. The leading market movements are: USA (+40ML), UK (+22 ML), AU (+13 ML), Other Export (+31 ML) and domestic (-15 ML). This highlights the importance of the USA market combined with an increased breadth of demand from Other Export markets, which connects more consumers to the distinctive taste of NZ wine.

Export volumes plateaued in 2021 due to a supply constraint of Sauvignon Blanc. This constraint will be amplified in the next 12 months resulting in an export forecast decline to 240 ML by June 2022. This was last achieved in March 2017.

Source: New Zealand Winegrowers reports: NZ Domestic Market Report May 2021 & NZ Wine Export June 2021 The Gap This forecasts an export demand volume if supply of Sauvignon Blanc was unconstrained resulting in 314 ML by June 2022. It calculates a 5% export growth rate in 2021 & 2022. This rate is based on the 10-year export CAGR** and assumes pricing remains at current levels.

The gap of 74 ML reflects the missed export sales due to the lower supply available from the Marlborough 2021 vintage.

* June year end = on 12 months actual sales for export plus domestic market MAT of 49 ML (May MAT = 48.3 ML) ** CAGR = Compounding Annual Growth Rate over the 2012 – 2021 period.

Key Insights Consumer demand is healthy as availability grows across the globe and distribution deepens in established markets. The challenge in the next 10-12 months is to manage the constrained 2021 supply and ensure continuous availability at the point of purchase.

Marlborough 2021 Vintage Impact Post-harvest Update

3

Understanding the recent correction in export growth and future impact.

By January 2021 the MAT export volume peaked at 308 ML, on track to achieve the forecasted $2.1b in value or 313ML by June 2021. How did this all change so quickly in such a short period of time? Quite simply the industry ran out of Sauvignon Blanc to sustain the growth. I will explain why we were always destined towards a 289ML MAT in May 2021. Export growth between points A and B (below) relied on vintage 2019 and 2020 supply from Marlborough. The net increase in supply from these two vintages was 30k tonnes, equating to an estimated 18-19ML of additional supply. From point A (MAT 270 ML) demand was always supply constrained to point B (MAT 289 ML).

• Period 1 (July 19 – June 20) = in this period Sauvignon Blanc 2019 was the key vintage sold. From a MAT 272 ML growing by 14 ML to 286 ML in June 2020. In Marlborough, the 2019 vintage yield was 305k tonnes, 8k tonnes below the previous vintage. How can you increase sales with less supply?

Primarily by reducing stock on hand levels throughout this period.

• Period 2 (July 20 – June 21) = commencing with lower stock on hand the export growth stepped up to 7% or 22ML , peaking to 308ML in January 2021. Even with a record 2020 harvest this growth could not be sustained due to supply levels from vintage 2020 and 2021.

• Period 3 (July 21 – June 22) = through this period Sauvignon Blanc 2021 is the key vintage sold. In Marlborough the 2021 vintage yield was 269k tonnes, 21% or 74k tonnes below the previous vintage, leading to a forecasted 47ML decline in export volume to 240 ML in June 2022. This declining export trend (due to the low vintage 2021 supply) began in May 2021.

NOTE: • Sauvignon Blanc contributes 85% of export volume. It is 75% of the total 2021 NZ harvest, and Marlborough Sauvignon Blanc is 90% of the total Sauvignon Blanc NZ harvest.

• We assume the majority (90+%) of Sauvignon is sold between July (in the year of vintage) through to June in the following year of vintage.

B 47 ML

A ACTUAL 1

FORECAST 2

Source: all the historic data above was sourced from New Zealand Winegrowers NZ Wine Export reports Marlborough 2021 Vintage Impact Post-harvest Update

3

4

The route to export markets has changed Demand for the distinctive taste of NZ wine remains strong with global consumers. The route to market, to connect with the international trade has changed significantly in the last two years.

The decision by wine businesses to bottle wine outside NZ is reflected by the nonpackaged MAT trend in the table below.

This trend began to change in August 2019 when exports of non-packaged wine to Australia began to grow, partly due to NZ Wine being bottled in Australia then distributed globally. A year later, the growth of non-packaged wine stepped up (adversely impacting packaged wine) due to the continued trend in Australia combined with significant growth in the UK. This is partly due to timing with the release of wines from the record 2020 harvest.

Combined with wine businesses seeking to build in market stock due to growing shipping constraints, an increase in at home consumption by consumers, and post-covid uncertainty. Interestingly, the USA market was not part of this change as non-packaged exports declined in the 12 months to June 2021.

Source: all the data above was sourced from New Zealand Winegrowers NZ Wine Export reports

A recent trend we will continue to monitor is the stabilisation of the packaged wine decline in May – June 2021. The decline in export volume over this period was 4.4 ML or 15%. All from non-packaged wines with 68% of this decline from the new 2021 vintage.

Marlborough 2021 Vintage Impact Post-harvest Update

5

We provide specialist wine industry services, advice, and insights to improve your business performance.

Request a free no-obligation consultation. www.jpew.co.nz

Aligning global sales trends with vintage variability in Marlborough The purpose of this section is to illustrate the correlation between the vintage variability in Marlborough and the global sales trend for all NZ wines. The aim is to build an understanding of the 2021 vintage impact on future global sales, placing it in context with historic trends.

Source: Vintage 2012 – 2020 statistics from New Zealand Winegrowers Inc Annual Report 2020. New Zealand Winegrowers reports: NZ Domestic Market Reports & NZ Wine Export Reports.

Supply – Total tonnes harvested in Marlborough (Vintage Year) Supply Var to Prev – Variance of the total tonnes harvested in Marlborough compared to the previous vintage Global Sales – NZ wine sold in the domestic market and all export markets. (June Year End)

The year after a lower vintage (compared to the previous) results in a decline or levelling of global sales volume; refer to the blue rectangles above which illustrate the impact vintage 2012, 2015, and 2021 had on the demand trend. The opposite occurred with vintage 2013, 2014, 2016, and 2018.

Global demand in 2021 (334ML) is marginally below the previous year. This reflects the initial impact of the low harvest from vintage 2021, which began to adversely impact non-packaged exports in May and June 2021. The ongoing impact is highlighted in the dashed global sales line (above), with a MAT forecast of 289 ML by June 2022.

Marlborough 2021 Vintage Impact Post-harvest Update

6

We provide specialist wine industry services, advice, and insights to improve your business performance.

Request a free no-obligation consultation. www.jpew.co.nz Disclaimer This document is published solely for informational purposes. It has been prepared without taking account of your objectives, financial situation, or needs.

Before acting on the information in this document, you should consider the appropriateness and suitability of the information, having regard to your objectives, financial situation and needs, and, if necessary seek appropriate professional or financial advice. We believe that the information in this document is correct and any opinions, conclusions or recommendations are reasonably held or made, based on the information available at the time of its compilation, but no representation or warranty, either expressed or implied, is made or provided as to accuracy, reliability or completeness of any statement made in this document. Any opinions, conclusions or recommendations set forth in this document are subject to change without notice and may differ or be contrary to the opinions, conclusions or recommendations expressed. Neither JPEW Advisory Limited nor any person involved in the preparation of this document accepts any liability for any loss or damage arising out of the use of all or any part of this document. Any projections and forecasts contained in this document are based on a number of assumptions and estimates and are subject to contingencies and uncertainties. Different assumptions and estimates could result in materially different results. JPEW Advisory Limited does not represent or warrant that any of these valuations, projections or forecasts, or any of the underlying assumptions or estimates, will be met.