The U.S. Beverage Alcohol Industry: Navigating Brand Entry & Distribution

1. The U.S. Beverage Alcohol Industry: Navigating Brand Entry & Distribution

2. Navigating Brand Entry & Distribution • The US Beverage Alcohol Distribution System • Historical Perspective • “Three Tier System” & Distribution Outlets • Open verses Control States • Understanding the past and looking to the future • Brand Approval-Federal / State Process, and Launch Time Line. U.S. Drinks Conference 2010

3. Navigating Brand Entry & Distribution • Price Structures For Wine, Spirits, and Beer • New Brand Introduction Trends • Brand / Industry Valuation Discussion • Distribution Options / Partners / Approaches To Market Entry • Summary U.S. Drinks Conference 2010

4. The US Beverage Alcohol Distribution System • To understand it today and to consider where its going tomorrow, history is important • Direct Shipping, privatization of control states, HR 5034 • There is the potential for big changes over the next decade U.S. Drinks Conference 2010

5. History Of Beverage Alcohol In US U.S. Drinks Conference 2010

6. History Of Beverage Alcohol In US U.S. Drinks Conference 2010

7. History Of Beverage Alcohol In US U.S. Drinks Conference 2010

8. U.S. Drinks Conference 2010

9. History Of Beverage Alcohol In US U.S. Drinks Conference 2010

10. U. S. Beverage Alcohol Industry History & overview 1933 Repeal Of Prohibition And Enactment Of Twenty-First Amendment • Protect Federal Tax Revenues • Federal Regulations (BATF-Now TTB) • Licensing qualified importers, manufacturers, wholesalers, warehouses, not retailers) • Bans “tied-house” • Prohibits consumer deception and ensures quality with standards of identity, labels and formula approval • Bans false advertising • Bans unfair inducements to retailers U.S. Drinks Conference 2010

11. U. S. Beverage Alcohol Industry History & overview 1933 Repeal Of Prohibition And Enactment Of Twenty-First Amendment (Continued) • States Given Power To Regulate Sale & Distribution Of Beverage Alcohol Within Their State • 32 “Open States” (Private enterprises working through “Three Tier System”) • 18 “Control States” and Montgomery Cty MD-State controls products entering and sold in the state (primarily for spirits, some wine) U.S. Drinks Conference 2010

12. Three Tier System PRODUCER (Wineries, Brewers, Distilleries, Importers) Wholesaler (Distributor) Retailer Consumer U.S. Drinks Conference 2010

13. Control States U.S. Drinks Conference 2010

14. Navigating Brand Entry & Distribution HR 5034 - Beverage Alcohol and the Commerce Clause Wholesalers and State Control (21st Amendment) verses suppliers and consumers that prefer a Federal approach consistent with other consumer products (Commerce Clause) Where does this take the industry in the near future? U.S. Drinks Conference 2010

15. Direct Shipment Overview Reciprocity States Limited Direct Shipping & Permit States Allowance of limited shipments Direct Shipment not possible Powered By SHIPCOMPLIANT U.S. Drinks Conference 2010

16. Navigating Brand Entry & Distribution Brand Entry - The Approval Process Federal Certificate Of Label Approval (COLA) • Submitted by licensed importer or domestic producer • Approval process and timeline is dependant upon the product, category (wine, spirits or beer) and specific requirements of TTB • Pre import approval, TTB lab and formula submissions, statement of method of manufacture and approvals, TTB flavor approvals etc U.S. Drinks Conference 2010

17. Navigating Brand Entry & Distribution Brand Entry - The Approval Process State Registration and Approval • Most states require the out of state entity (shipper) to maintain certain state licenses and / or permits in order to sell products to wholesalers • Most states require the Federal COLA as a requirement for brand approval • Many states require paperwork submissions with fees and return a formal approval prior to shipping • Be aware of franchise states U.S. Drinks Conference 2010

18. Federal Label (COLA) Approval • 1 to 8 weeks depending on product and complexity Product Ships To Wholesaler Brand Approval / Launch Timeline • State Registration & Approval • 1 to 8 weeks including price posting where required U.S. Drinks Conference 2010

19. States Have Unique Rules / Regulations • Outlet Differences • Supermarkets/ grocery stores/ drug stores, convenience stores, gas stations, Liquor Stores selling beer, wine , spirits • Off Premise Sale • Sunday sales (8 states still prohibit) • In store tastings (12 states prohibit) • Promotion & Merchandising • Discounts, consumer refunds, sweepstakes, gift sets / combo packs U.S. Drinks Conference 2010

20. Wine Brand Economics Example 750ML / 12 Bottle Case Imported $9.99 Retail Bottle Price U.S. Drinks Conference 2010

21. Premium Spirit Brand Economics Example 750ML / 12 Bottle Case Imported $29.99 Retail Bottle Price (Generally sold in 6 Packs) U.S. Drinks Conference 2010

22. Premium Beer Brand Economics Example 24 Bottle / 12 oz Case Imported $9.88 6 Pack (Generally sold in 6 Packs) U.S. Drinks Conference 2010

23. Three Tier System PRODUCER (Wineries, Brewers, Distilleries, Importers) Thousands Hundreds but Dominated By Few Wholesaler (Distributor) Retailer 630 Thousand Outlets 221 Million over 21 Yrs old Consumer U.S. Drinks Conference 2010

24. Three Tiers Are Consolidating Increasing Dominance Creates Worries For The Smaller Players Sources: Impact Newsletter; Beverage Marketing Group Handbooks; USDA (Food Marketing System Briefing Room) and Food Marketing Institute (May 2008. U.S. Drinks Conference 2010

25. Top U.S. Wine And Spirits Wholesalers. Source: 2010 Impact Databank U.S. Drinks Conference 2010

26. Top U.S. Wine And Spirits Wholesalers. * Less than 0.05%. Source: 2010 Impact Databank U.S. Drinks Conference 2010

27. Overview The U.S. Retailer Tier There are over 340,000 Beverage Alcohol retailers divided into the on and on-premise channels with several sub-segments each There Are 342,739 Retail Outlets That Sell Spirits On Premise 230,207 Outlets Off Premise 110,161 Outlets Other Premise 2,371 Bar/Night Club 79,521 Outlets Liquor Stores / State Stores 35,913 Outlets Military On/Off 1,666 Outlets – Under Reported Grocery 8,977 Outlets Dining 92,458 Outlets Transportation 519 Outlets Lodging 12,719 Outlets Drug 2,784 Outlets Other 186 Outlets Warehouse Club 310 Outlets Recreation 36,000 Outlets Convenience Stores 11,438 Outlets Catering 3,715 Outlets Other 5,794 Outlets Other 50,739 Outlets Source: BIG 2010 Handbook U.S. Drinks Conference 2010 Source: TDLinx

28. New Wine Brand Introductions 269 257 307 260 152 Source: The B.I.G. 2010 Wine Handbook U.S. Drinks Conference 2010

29. New Distilled Spirit Brand Introductions Majority Are Imports! 74% in ‘09 153 200 186 225 183 Source: The B.I.G. 2010 Spirits Handbook U.S. Drinks Conference 2010

30. Brand Sales & Valuations • Spirit Brands Commanding Huge Prices • Grey Goose stretched the multiple • Major Beverage Companies willing to pay big for growth brands caught in early stages of development • All categories involved in the rush to market-intent to sell • Discussion on brand valuations and brand sales • Campari (Carolans, Frangelico, Irish Mist), Grey Goose, 42 Below, Hpnotiq, Wild Turkey, Chambord, Svedka, Absolut, Ketel One, Wines-Big House, Red Truck, Rex Goliath, many others U.S. Drinks Conference 2010

31. Distribution Approaches For Foreign Suppliers • Major US Importer And National Distributor • Small / Medium Sized Importer • National Import & Distribution Service Companies • State Wholesalers With Import Licenses • US Based Internet & Direct Mail Distribution Systems • Establish US Based Import Operation • Other U.S. Drinks Conference 2010

32. Foreign Supplier Approaches To U.S. Wine Market U.S. Drinks Conference 2010

33. Entering The US Beverage Alcohol Market ANSWERS CHALLENGES Key Organizations And Memberships With Critical Contacts Key Trade Shows Industry Law Firms For TTB Licensing, Contracts etc. Industry Consulting And / Or Service Companies (Outsourcing Operations for Efficiencies etc.) Independent Sales & Marketing Agents / Brokers Key Industry Reference Material • Initial Market Research Is Critical • Committed Approach To US Market Including Adequate Resources (Time!!)? • Finding The Right Importer And Distribution Approach • Test market where possible • Monitoring Sales & Brand Activity (Keeping Sales Pressure Up & Understanding Market Conditions) • You Must Be Active!! • Brand Ambassadors etc. U.S. Drinks Conference 2010

34. Key References For Foreign Suppliers U.S. Drinks Conference 2010

35. THANK YOU John Beaudette President 272 Plandome Road Manhasset, NY 11030 516-869-9170 jbeaudette@mhwltd.com U.S. Drinks Conference 2010