Wines From Spain Advisory Council 2020 Report by FutureShift

Final Report on the sixth annual Wines From Spain Advisory Council Meeting October 7, 2020 Trade Commission of Spain in New York

INTRODUCTION The sixth annual Wines from Spain USA, Advisory Council discussion took place on October 7, 2020. Ten leaders in the U.S. food and wine market gathered virtually with ICEX and the Trade Commission of Spain in New York for a moderated discussion on Spain’s position in the American wine market. The discussion group included buyers, sellers, media and educators from different segments of the U.S. food and beverage industry. The goal of the Advisory Council meetings is to conduct a discussion among an interdisciplinary team of American leaders from wine importation and distribution, independent and chain foodservice, chain retail and supermarkets, chain hotels, and wine educators, along with senior representatives from Spain’s export promotion authority. Wine producers and exporters are not included in order to keep the discussion focused on the needs and perceptions of the American market. The daylong discussion was managed and moderated by Jon Stamell of Futureshift, a consultant who has worked with ICEX and Spanish wine regions since 2005.

COUNCIL PARTICIPANTS

• • • • • • • • • •

Importer: Diego Lo Prete, Senior VP, Winebow, GM MundoVino Importer: Patrick Mata, CEO, Olé & Obrigado Supermarket Chain: Doug Bell, Global Beverage Buyer, Whole Foods Online Retail: Wendy Stanford, Senior Wine Buyer, Wine.com Chain Retail: Brian Gelb, Director of Category Management, Total Wine & More Chain Retail: Gary Fisch, CEO, Gary’s Restaurant Chain: Gretchen Thomas, VP of Food & Beverage Innovations, Barcelona Wine Bar Group Restaurant Chain: Andy Myers, M.S., Wine Director, Think Food Group Corporate & Wine Educator: Andrea Robinson, M.S. Delta Airlines Media: Ray Isle, Executive Wine Editor, Food & Wine magazine

ICEX MADRID • Javier Serra Guevara, Director General, ICEX • Maria Naranjo Crespo, Director, Spanish Food, Wine and Gastronomy, ICEX • Alfonso Janeiro, Department Head, Wines from Spain, ICEX TRADE COMMISSION IN NEW YORK • Bruno Fernández Scrimieri, Senior Trade Commissioner, Trade Commission of Spain • Katrin Naelapaa, Director, Wines from Spain USA MODERATOR • Jon Stamell, CEO, Futureshift Recruitment for the meetings strives for a sales channel or category mix of participants. This year’s participants represented a range of industry verticals with the addition of Andrea Robinson, who is both an educator and wine director for a global airline and cruise line and Ray Isle from Food & Wine Magazine. The extended reach of the group’s combined store/restaurant and online presence gives them direct contact with a majority of American consumer wine buyers and much of the wine trade. Category Importer/Distributor Chain Foodservice Chain Hotels Supermarket Wine Retail Online Retail Culinary/Wine Educator Wine Data Analysis Entertainment/Event F&B Media TOTAL

2014 2 2 2 1 1 0 2 0 0 0 10

2015 2 3 1 1 2 0 1 0 0 0 10

2017 2 5 0 1 1 0 1 0 0 1 11

2018 2 2 0 1 1 1 1 1 0 1 10

2019 3 2 0 1 1 1 1 0 1 0 10

2020 2 2 0 1 2 1 1 0 0 1 10

This report and the group’s recommendations focused around six major areas: 1. 2. 3. 4. 5. 6. 7.

Impact of Covid-19 Reliance on comfort wines Time to address Millennials and Gen Z Growing appeal of organic wines Experiential initiatives Recommendations for Spanish Wineries ICEX/Wines From Spain initiatives

1. IMPACT OF COVID-19 The global coronavirus pandemic posed an enormous challenge to the wine industry in 2020. Additionally, Spanish wines, like other EU producers suffered the impact of 25% tariffs that were imposed by the now outgoing Trump administration. The greatest impact has been on the onpremise market as hundreds of thousands of restaurants have been forced to limit their wine sales to curbside pickup, delivery or have closed entirely. Additionally, most of their sales were to reduce inventories so very few new purchases were made from suppliers. The off-premise market including online has seen dramatic increases as in-home consumer drinking Is up.

U.S. Bottled Table Wine Imports from All Countries

Through September 2020, packaged table wine imports were down 22% in value and 9% in volume. This decline was almost entirely driven by the tariffs on wines from France, Spain and Germany. Spanish wines, overall, were down -12% in value and -8% in case volume. If there is a bright spot for Spain, it is the performance of still wines over 14% alcohol, which were up 275% in value and 202% in volume. This is due to the reclassification of many wines to 14+% alcohol where tariffs are not being charged.

U.S. Bottled Table Wine Imports from Spain

The way that consumers select and buy their wines has changed dramatically over the last year because of the COVID-19 pandemic. While consumers may not be going out or hosting like they used to, they are still drinking as much as ever while at home. Whether they’re bored or coping with stress, consumers have been stocking up on wines to drink in the comfort of their own homes. Ecommerce sales for wine retailers have skyrocketed, as customers have turned to buying wine online for delivery or curbside pickup.

The pandemic has heightened stress levels and wine has become a refuge for many consumers. As people have been cooking and drinking more at home, online engagement has reportedly increased for food and wine magazines and blogs as people seek to learn how to cook more meals and pair them with complementary wines in their own safe haven. The pandemic has undeniably accelerated the rate of innovation in terms of digital and ecommerce capabilities in the wine industry. Wine, beer and spirit retail businesses have been slower to adopt technology than other consumer packaged goods retailers. Now it is rapidly evolving to fit the needs of online consumers. Whether it be partnering with third party marketplace delivery, establishing their own delivery mechanisms, or providing curbside pickup, the wine business is adapting for survival. The sudden changes brought on by the pandemic this year have not been without logistical challenges to retailers. Some of the country’s most successful retailers closed their stores during the height of the pandemic and adapted to shift from between one hundred percent to ninety-five percent in-store business to one hundred percent mobile. Retailers could further benefit from new enhancements in how technology can facilitate delivery and pickup. At highvolume stores an application that could help would enable the input of license plate numbers for a convenient curbside pickup.

The pandemic has undeniably accelerated the rate of innovation in terms of digital and ecommerce capabilities in the wine industry.

Retailers have also been adding extensive descriptions of wines on ecommerce sites to encourage consumers to branch out and purchase more premium and artisanal wines. As an example of how quickly consumer behaviour changed this year, Gary’s Wine with four stores in New Jersey and one in California saw usage of its mobile application jump from two thousand to thirty thousand users in just two weeks.

Similarly, online only retailers have seen their sales go through the roof. The increase in ecommerce sales offers an opportunity to provide more information on details of the wine. Retailers are adding descriptions of flavors, sustainable practices and winery stories to their websites and orders have risen as a result. By investing in consumer education, retailers are able to diversify orders. Throughout the pandemic, consumers have continued to buy in bulk increasing orders of threeliter boxes. However, many retailers have found that the average selling price has decreased. As consumers are drinking more, they’re ordering lower-priced brands that they’re familiar with rather than exploring stores for lesser-known wines, a shopping behavior common when walking through stores. More expensive brands that built equity before the pandemic are continuing to grow. Companies that have invested in promoting awareness in their brands have shown that building brand equity pays off in difficult times. The restaurant industry has suffered from lockdowns and reduced capacity, so wine sales have dropped precipitously. After reopening and following safety protocols, restaurants are favoring paperless menus and going digital. This poses a threat to speciality wines as it is difficult for consumers to read hundreds of wines on a digital menu. A major restaurant chain with 400-500 wines on their list has had to reduce their listings because the pandemic has made it difficult to retain staff who, in other times, would explain the wines to diners. The travel industry has understandably suffered as a result of the pandemic, with air travel struggling the most. This has resulted in a limited wine selection on planes, for both cost and

safety reasons. Delta is currently serving just one white and one red; another example of how limited choices and popular brands are dominating. Based on these trends and recommendations, Spanish wine producers should invest in digital communications and partner with different digital providers to extend their marketing reach. Spanish wine producers will need to build on their brand awareness to encourage consumers to purchase beyond the well-known, national brands.

2. RELIANCE ON COMFORT WINES Due to the impact of Covid-19, consumers are understandably spending less time in stores. Doug Bell of Whole Foods refers to this phenomenon as “kamikaze shopping”, whereby consumers are quickly in and out of the store to buy and not browse. As a result, consumers have been buying large, national wine brands, such as Kim Crawford, Kendall Jackson, La Marca Prosecco in bulk. These are brands that have made big investments in advertising. Affordable “comfort wines” have become a common feature in numerous food and wine magazines and websites. As shown in the chart below from our recent survey of 202 wine retailers of all types, wines priced between $10-$20 at retail have been leading sales.

Wine Price Ranges Leading Off-Premise Sales 38%

40% 35%

29%

30% 25% 20%

17%

15%

10%

10% 5%

0% Under $10

$10+ to $20

$20+ to $30

$30+ to $50

$50+ to $100: More than $100:

Source: Oomiji LLC survey of 140 wine retailers, August 2020

Another factor that has depressed wine exploration has been the absence of sampling and tasting events in retail stores. This has caused consumers to gravitate towards familiar comfort wines, rather than trying specialty wines. In the past, when consumers would buy familiar wines, many would also buy something new to try that they tasted in the store. Digital platforms that track past purchases can promote trial by creating suggestions based on previous purchases or current baskets. This is common on sites such as Vivino and Wine. com. Producers could add features such as “tastes like…” or “if you love _____ (e.g. Burgundies), you’ll love our ______ (e.g. reservas). While retail wine sales have been up, margins have dropped and comfort brands have not helped. They are often sold at a discount and yield less profit to the retailer than when consumers purchase a broad assortment of wines. Larger stores, considered destination retailers, have further lost margin and loyalty from less exploration of wine aisles featuring different regions and grapes and the loss of conversations between consumers and sales staff. While comfort brands have dominated, there continues to be a market for higher priced wines that consumers have shunned in restaurants but are buying for home consumption as they’re not going out to dine. The big splurge on wine at home has become more acceptable. A wine costing $200 in a restaurant may only be around $50 at retail making it an easier purchase to accept.

The reliance on most comfort brands presents a challenge to Spanish brands as they are not as well-known as domestic wines. Therefore, there is a need to engage in digital programs both on their own and with their importers to familiarize their wines to consumers. True engagement requires not just selling wines but using digital tools to develop a relationship with consumers and to convey unique stories about family traditions, authenticity, sustainability and other aspects of a producer’s wines in order to make them memorable to the consumer. Giving consumers what they want rather than trying to sell them what you have is going to yield more success. As consumers are spending more time in temporary outside eateries, the high demand for an easy to drink beverage like sangria is also an opportunity for Spanish producers.

3. TIME TO ADDRESS MILLENNIALS & GEN Z The wine industry is facing a marketing dilemma. Baby boomers continue to drive sales for wine, particularly at the high end. They still hold more than half of the wealth in the U.S. However, they are declining in population from natural attrition and the wine industry has to turn its attention increasingly to Millennials and Gen Z. Millennials are the focus now but Gen Z is already the largest population in the U.S. In every one of the next 20 years, more than 4 million members of Gen Z will turn 21. In order to stay relevant among the younger generations, the wine industry must capture what is important to them, without alienating their loyal baby boomer consumers.

During the pandemic, more Millennials have been drinking wine. Millennials represent 33% of Wine.com’s overall business, but during the pandemic, first time customers on Wine.com have been 44% Millennials. Millennials are familiar and very comfortable with making digital purchases, so they have seamlessly adapted to the trend of purchasing wine online. Many older consumers still do not know that wine can be purchased online. Spanish producers should take advantage of digital database tools and social media to connect consumers to online retailers that carry their wines and where possible to their listings on that retailer’s website. Major social causes are more likely to influence Millennials and Generation Z, from environmental or sustainability initiatives, to the Black Lives Matter movement. Millennials and Generation Z are increasingly spending on brands that appeal to their moral conscience. Brands

that place emphasis on overall values that appeal to Millennials and Generation Z have a better chance of success in the long term. Millennials are concerned about the quality of the wine they buy, how it’s made, and what went into the bottle, with an interest in looking at the ingredients listed and descriptions on the back of the bottle. Therefore, it is important to make sure that necessary labels and certifications are clearly shown on wine bottles. In order to capture the Millennial and Generation Z markets, Spanish wine producers should highlight their own sustainable farming practices. Spanish wineries are well positioned for the demand of sustainable farming due to the natural dryness and climate of Spain. Unlike Italy and France, Spain uses less harmful spraying and other treatments in the vineyards, which can make Spanish wine more sustainable.

4. GROWING APPEAL OF ORGANIC WINES Increasingly, consumers are reading wine labels, both front and back, to understand the healthfulness of the wines they’re buying. The topic of organic wines is confusing because there are different certifying bodies and rules in the EU and U.S. Which type of certification a wine may have doesn’t mean as much to the consumer as knowing that they are certified by some authority. However, just because a wine is certified as organic in Spain does not mean it will be certified as organic in the U.S.. As shown in the table below, any use of sulfites will disqualify it from using a organic seal of any type in the U.S.. Category/requirements USDA-EU equivalency arrangement (exporting to the U.S. à NOP/USDA standards must be met)

Labeling

100% organic (sulfites CANNOT be added)

-Certified organic by ** or similar - 100% Organic -Organic

Organic (at least 95% of organic ingredients; sulfites CANNOT be added)

-Certified organic by ** or similar - Organic

Made with organic grapes (limited number of sulfites can be added)

- “Made with organic grapes”

Logo

No official logo.

Source: USDA 2021

At present, Spanish (EU) wineries cannot use an organic seal on their wine labels on wines shipped to the U.S. because they use sulphites. However, if they qualify and are approved as having “wines made with organic grapes”, they should indicate that on the label. Organic wines and wines made from organic grapes do resonate with consumers. In stores, organic and sustainably produced wines are grouped together to make it easier for those who seek out those wines. Whether customers are looking for organic, sustainable, or sulfur free wines, retailers are making sure to carve out a space for those bottles. A recent survey of 140 U.S. wine retailers indicated that consumers are increasingly going to organic sections in their stores and reading back labels throughout their stores. Spain has more organic vineyards than any other wine producing country. Some retailers, who are aware of Spanish wines made from organic grapes are placing them next to USDA approved wines. Many are using the term “green category” to bridge the differences between organic grapes and organic vineyards because of the different certifications.

Both the U.S. wine trade and consumers are asking that labels include more transparency about how wines are made, what goes into them, and whether sulfites are added. Often customers, particularly Millennials, want to know much more than if it is simply organic or not.

5. EXPERIENTIAL INITIATIVES Given that most wineries, hotels, and travel services are shut down or operating at a limited capacity, virtual experiences have become an important way to engage audiences. Producers and their importers can do more to engage consumer audiences to keep them interested. One U.S. importer, started their “Olé & Obrigado Experiences,” a series of virtual tastings, recipe pairings and video tours through Spanish vineyards. The series partners with celebrity chefs and chooses a recipe to cook with wine pairings. Customers buy tickets to attend these events, and a portion of proceeds are donated to the restaurant community. These types of promotions have been well received and have kept importers and the wines they import relevant during the pandemic. Price and value remain important but younger generations, in particular, are willing to pay more if a brand’s values align with their own. As shown in the table below, brands that actively support causes that consumers believe in have more influence.

The role of the importer is changing to offering experiential initiatives. Importers are now telling the story and communicating directly with the final consumer, as opposed to telling their story to distributors. This shift in their role is helpful as the message would often get distorted in the past. However, the responsibility to engage the consumer should not fall to the importer alone and can’t be assigned solely to the on- or off-premise operator. Producers should be adding both video and text content to their websites, promoting stories on social media, and developing other forms of direct communication with consumers. Both Millennials and Gen Z are influenced by the stories that wineries tell about their history, authenticity, sustainability and community engagement.

6. RECOMMENDATIONS FOR SPANISH WINERIES In order for Spanish wineries to successfully grow in the US market, they must seek a more indepth understanding of the nature of US demand and supply chains as well as the three-tier

system. It is a common issue for Spanish wineries to misunderstand the needs of buyers at every level and they are often underprepared with their brand strategy when presenting their wines to American buyers. While knowledge of each segment of the U.S. market is necessary, the style and way in which messaging and all marketing communications is delivered is equally important. In both tone and content, Americans like their communications to be locally versus globally delivered. Spanish producers will do better if they can create an affinity with Spain among Americans. There has already been a lot of messaging to American consumers that during and post-pandemic, it’s important to buy local. Foreign products are more likely to be accepted if they are seen as supporting American jobs, lifestyles and pandemic recovery. It is essential that Spanish wineries create a solid brand identity, business plan, determine their target audience, and create a large amount of content that is easy to understand and digest. Content is instrumental in helping the consumer understand the vision of the brand and for retailers to find a way to market the wine.

6 keys to great content 1. Content is storytelling and great stories describe a challenge and how the producer overcame it. (e.g. how the family built their winery and passed it on to new generations; how the decision to farm sustainably was made and the results; how the winery supports its local community, etc.) 2. Content is not about wine scores, quality ratings, soil content or sugar levels. These are of interest to winemakers, sommeliers, wine “geeks” and few others. 3. Content can be shared via short video (90 second limit), in text, or told in presentations in person or online. 4. Stories should have short versions that can be shared by retail wine staff, sommeliers or consumers to their friends at the dinner table. 5. Content gives character and depth to the presentation and enjoyment of wine. Consumers will more readily identify a wine with a good story than they will a foreign brand name.

Spanish wineries need to communicate clearly about availability with retailers and importers so they can work seamlessly with their US partners to sell more wine. There are many examples of foreign wineries and some from Spain that have been successful in the U.S. by partnering with major retailers through a mix of programs that help build brand equity. They have their labels approved by U.S. regulatory authorities, reliable shipping and customs management, pricing that works with the retailer, have created a story around their brand and continuously provide content to help sell their wines making the retailer’s job easier. Retailers notice when a supplier is solution focused.

6. Stories should always be true and express the authenticity of the winery’s past, values or future plans.

As generational cohort groups and global events like pandemics and climate change cause the world to change, they also force changes on wine producers and importers. Where formerly the producer’s job was to cultivate the best grapes, make great wine, price it competitively and get it to market, now video production, social media, and proficiency in using new communication tools have all been added to the job description. It’s a lot to ask but is required if one wants to be competitive in a crowded market like the U.S. 2020 has been a year when our communications have moved from in-person to virtual and people commonly complain about “Zoom fatigue”. Producers can’t be expected to communicate as well online as they do in-person, which makes an investment in media training essential for anyone engaging in presentations to communicate information about their brand.

The people who are best on camera should be the ones to receive training to communicate with both consumer and trade audiences and this may not always be the most senior person.

7. ICEX/Wines from Spain Initiatives ICEX/Wines from Spain has introduced three new programs to help build awareness and support the market’s post-pandemic recovery: 1. Spain Food Nation is an initiative to educate and build awareness of the wealth Spanish food products, wines and gastronomy. As Spanish cuisine increases in popularity, the strategy will spur culinary development and awareness of the culture and diversity of Spanish food, drink and gastronomy. 2. The Spanish Wine Specialist program is an engaging and educational training program to help industry members increase their knowledge level to help sell Spanish wines both to the trade and consumers. The first courses will be offered in early 2021. The advanced level certification will follow in 2022. 3. Restaurants from Spain has had a welcome introduction in other countries and is under development for the American market. It is intended to support the recovery of the hotel and restaurant sector, that will continue to face difficulties after the pandemic is over. Spanish restaurants and others serving Spanish menu items will be able to obtain certification for preparing and serving authentic Spanish cuisine. All three initiatives are meant to build confidence in Spanish food and wine products, in their high quality, safety and sustainable production.

From one difficult year into another The world is breathing a sigh of relief as global vaccination is beginning. However, it will not be until mid-2021 that we will begin to see some recovery of the on-premise market. Many restaurants and bars will have closed and consumers are likely to be uncomfortable visiting busy bars and restaurants until safety is assured. There will likely be more family meals and wine marketers should build promotions around the return to “safe” togetherness. While restaurants will reopen, the market will be smaller as many will have closed. Menu offerings are likely to be fewer and wine lists smaller. Fewer restaurants will want to build extensive wine cellars. Wines priced to sell quickly will do well. The movement to ecommerce will continue at a rapid pace and every winery will need to increase their understanding of each customer segment and different types of consumers. Wineries should adopt all forms of digital communication that build their conversation with trade customers and consumers. As the pandemic has forced some regulatory changes on how and where wine is sold, it will likely increase pressure for regulatory changes to the three-tier system. Wineries and importers should build their digital tools now to prepare for a changing market environment.