Minimizing Impact of Grape Surplus

Notes:

The wine industry has rarely been in balance during the 24 years I have worked in the industry
- Having too few grapes (like mid to late 1990’s) creates problems
- Having too many grapes (like now or early 1990’s) also a problem

We think this current oversupply will last another 2 to 3 years depending on the variety – longer for CS or PN, shorter for CH or SB

Here are steps we are taking to deal with oversupply:
- At RMW, we are able to be more selective, blending surplus higher quality wines into RMPS & WB. Allows us to increase quality of all wines while recognizing the reality of slower demand for high priced wines, and more robust demand for wines priced from $8 to $12 per bottle.
- At Woodbridge, working closely with LT growers to reduce yields, which also improves Woodbridge’s wine quality.
- In our own vineyards, we are divesting up to 1500 acres that are not required to meet our brands’ LRP’s, although it may take some time to sell the vineyards in this market.
- Inventory turns [COGS/Inventory], which have historically been in the 0.74-0.77 range, dropped to 0.62 in F02 but should be back to normal (0.74) by year-end.

In summary, while there is some pain involved in managing through these cycles, we see an opportunity to improve the quality of our wines and become more efficient in the process.

Balancing inventory