INVESTMENT OPPORTUNITIES IN THE NEW ZEALAND SPIRITS INDUSTRY February 2014

1 Investment opportunities in the New Zealand Alcoholic Spirits industry Part of the Food & Beverage Information Project August 2012 v1.01

www.foodandbeverage.govt.nz

This information was prepared by Coriolis solely for the use of our client; it is not to be relied on by any third party without prior written consent. STAGE III This document represents the third stage of a wider industry screen designed to identify, develop & highlight emerging growth opportunities in New Zealand food and beverage exports for potential investors and other interested parties

Stage I Stage II Stage III Preliminary Screen Secondary Screen Develop Opportunities

Initial input Passed Passed Identified to process through through 20 559 129 25

Explored in depth 3

See related Stage I & II document for details You are Available at www.foodandbeverage.govt.nz here Honey Salmon Spirits

PAGE 3 TABLE OF CONTENTS

Section Page

Contents 4

Glossary of terms 5

Methodology & data sources 6

Summary & conclusions 7

1. Large and attractive market 8

2. Growing global exports 16

3. New Zealand spirit exports are growing 20

4. New Zealand can win 25

5. Potential strategic directions 31

6. Investment opportunities 58 GLOSSARY OF TERMS This report uses the following acronyms and abbreviations

ANZSIC AU/NZ Standard Industry Classification b Billion CAGR Compound Annual Growth Rate e Estimate f Forecast FOB Free on Board FT Full time HS Codes Harmonised System Codes for commodity classifications m Million n/a Not available/not applicable NZ New Zealand NZ$/NZD New Zealand dollar PT Part time S.H./N.H. Southern/Northern Hemisphere SKU Stock Keeping Unit T/O Turnover t Tonne US/USA United States of America US$/USD United States dollar UK United Kingdom

PAGE 5 METHODOLOGY & DATA SOURCES Data was from a variety of sources, and has a number of identified limitations

- This report uses a range of information sources, both qualitative - Coriolis makes no representation, warranty or guarantee, and quantitative. whether express or implied, as to the quality, accuracy, reliability, currency or completeness of the information - The numbers in this report come from multiple sources. While we provided in the report. believe the data are directionally correct, we recognise the limitations in what information is available. - All trade data analysed in all sections of the F&B Information - In many cases different data sources disagree (e.g. project are calculated and displayed in US$ (other than a few Statistics New Zealand vs. FAO* vs. UN Comtrade). places where detailed data is not available). This is done for a - Many data sources incorporate estimates of industry range of reasons: experts. 1. It is the currency most used in international trade - As one example, in many cases, the value and/or volume 2. It allows for cross country comparisons (e.g. vs. Denmark) recorded as exported by one country does not match the 3. It removes the impact of NZD exchange rate variability amount recorded as being received as imports by the 4. It is more comprehensible to non-NZ audiences (e.g. foreign counterparty [for understood reasons]. investors) 5. It is the currency in which the United Nations collects and - In addition, in some places, we have made our own clearly noted tabulates global trade data estimates. - The opinions expressed in this report represent those of the - Coriolis has not been asked to independently verify or audit the industry participants interviewed and the authors. These do not information or material provided to it by or on behalf of the necessarily represent those of Coriolis Limited or the New Client or any of the data sources used in the project. Zealand Government. - The information contained in the report and any commentary has been compiled from information and - If you have any questions about the methodology, sources or material supplied by third party sources and publicly accuracy of any part of this report, please contact Tim Morris, the available information which may (in part) be inaccurate or report’s lead author at Coriolis, on +64 9 623 1848 incomplete.

PAGE 6 * Food and Agriculture Organisation of the United Nations SUMMARY – THE SPIRITS OPPORTUNITY The spirits industry, while still in its infancy, appears to have a bright future

Overview 4. Similar to wine (but unlike, say, razor blades) spirit retailers and - Spirits is a US$47m export industry. Exports have been growing at a consumers globally welcome new products and constant innovation. compound rate of 10% per year for the past decade. Key markets are 5. The success of NZ spirits in the international market is being driven in Australia and the Pacific Islands (36%), North America (31%) and part by the use of NZ unique or signature flavours, examples include developed Asia (31%). manuka honey, feijoa, tamarillo, kawakawa and kiwifruit. These - The success of the New Zealand wine industry over the past 20 years – flavours provide a defensible position for NZ spirits. growing from almost nothing to a billion dollar industry and becoming a highly respected producer of super premium wines has opened the Opportunities door for the growth of NZ spirit exports. - NZ spirits is in the early phases of its growth cycle. The handful of large - Prior to 2000 there were a wide range of small spirit ventures, firms that exist are already controlled by global multi-nationals producing small scale niche spirits for the domestic market. At the same - Independent (Asahi; listed Japan) time Independent Liquor launched RTD* spirit beverages primarily for - Lion (Kirin; listed Japan) domestic consumption and export to Australia. Everything changed - DB Breweries (Heineken; Dutch; F&N; Singapore) with the launch, rapid growth and financial success of 42 Below which created global awareness of NZ as a super-premium spirits provider. In - 42 Below (Bacardi; Bermuda) the wake of 42 Below a large number of new firms have entered the - This ownership structure - and the fact that many of these firms have industry with a wide range of products and brands. only changed hands in the last 5 years - appears to limit opportunity for - The experience of other peer group countries – with strong parallels new participants in the larger end of the industry. with NZ – suggest the NZ spirits industry is still at the early phase of its - However, beyond this top 4, there is a large and growing group of growth cycle. We expect continued growth for the foreseeable future. small-to-medium sized spirits firms. Most of these firms would Drivers welcome investment due to the capital intensive and cash flow negative nature of being an export driven growth company in the spirits 1. NZ has a massive, globally competitive dairy industry which produces as industry. a by-product, very high quality whey alcohol. The alcohol is used as a base alcohol by many NZ and international spirit producers. - Due to its current infancy, there are still a wide range of opportunities for new startups in the NZ spirits industry. The industry is currently akin 2. Spirit advertising strongly leverages country environment and identity to the NZ wine industry circa 1970, perhaps on the cusp of a huge (e.g. Finland and ). NZ is well positioned in key markets as a explosion of new products, new flavours and new producers. trusted, premium producer of safe foods in a natural environment. - The two largest spirit exporters in the world are the UK and France. NZ 3. The industry is thriving with a good mix of large players and new has demonstrated capability to compete successfully with producers in entrants. Significant innovation is occurring across products, packaging these countries. and marketing.

PAGE 7 * Ready to Drink TABLE OF CONTENTS

Section Page

Contents 4

Glossary of terms 5

Methodology & data sources 6

Summary & conclusions 7

1. Large and attractive market 8

2. Growing global exports 16

3. New Zealand spirit exports are growing 20

4. New Zealand can win 25

5. Potential strategic directions 31

6. Investment opportunities 58 TYPES OF ALCOHOLIC BEVERAGES Spirits are one of three types of alcoholic beverages

Comparison of three major classifications of alcoholic beverages (2011)

Product Made from Typical % What is it? Origin Examples alcohol - Malted cereal grains 4-6% - Crushed grains fermented with - Fermented beverages: - Stout (wheat, barley, corn, (1-20%) yeast Mesopotamia ~3,500BC - Porter others) - Hops typically added as a - Modern beer: Germany 1500AD - Lager - Hops preservative/flavour - Pale Ale - Yeast - Pilsener - Water

Wine - Grapes [and other fruit] ~13% - Grape juice fermented using yeast - Georgia/Middle East: ~6,000BC - Pinot noir - Yeast - Chardonnay - Cabernet sauvignon - Gamay - Merlot - Champagne

Spirits - Carbohydrate containing ~20-40% - Anything containing any form of - invented by Greeks in - Vodka substance (e.g. sugar) sugar fermented with yeast Egypt in 200AD - Whisk(e)y - Yeast - Result is then distilled to purify - Spread to Europe via Arabs - - Water and increase alcohol content - Rum - -

PAGE 9 COMPARISON ACROSS ALCOHOLIC BEVERAGES Spirits account for 10% of global alcoholic beverage volume, 36% of global sales and 45% of global pure alcohol consumption

Comparison of global alcoholic beverages across three metrics (2010 or as available)

234b US$577b 100%

Spirits 10%

Wine 10% 36% 45%

32% 19% Beer 80%

36% 33%

% volume (in litres) % sales (US$b) % alcohol

PAGE 10 Source: Coriolis from multiple sources TYPES OF ALCOHOLIC BEVERAGES The three main alcoholic beverages have different industry characteristics; spirits is somewhat more consolidated than wine but much less consolidated than beer

Comparison of three major classifications of alcoholic beverages (2011)

Product Global Global sales Industry structure Share of top Top global firms Key firms in New Zealand volume 10 firms

Beer 1,864mhls US$188b - Several dominant 61% - Anheuser-Busch InBev (Brazil) 343mhls - Heineken (DB (2010) multinational companies - Heineken/FEMSA (Dutch) 161mhls Breweries) - Many thousands of smaller - SABMiller (UK) 159mhls - Kirin (Lion) producers - Carlsberg (Denmark) 102mhls - Asahi (Independent) - China Resource Brew. (China) 93mhls - Numerous smaller - Tsingtao (China) 67mhls - Modelo (Mexico) [50% ABIB] 53mhls - Beijing Yanjing (China) 49mhls - Molson Coors (Canada) 47mhls - Kirin (Japan) 30mhls Wine 2.6b cases US$183.1b - Some large firms 13% - Constellation Brands (USA) $4.1b (11) - Pernod Ricard (9l) (2009) - However highly fragmented - E&J Gallo (USA) (Montana) 31.5b globally - The Wine Group (USA) - Delegats (NZ Listed) bottles - GCF Group (France) €700m (08) - Kirin (Lion) (2009) - Pernod Ricard (France) - Constellation (Nobilo) - LVMH (France) - Villa Maria (NZ private) - Treasury Wine (Aust.) - Numerous smaller Spirits 2.7b cases US$205.9b - Some large firms focused on 26% - Diageo (UK) £13b (10) - Asahi (Independent) (9l) (2009) key global brands - Pernod Ricard (France) €7.6b (11) - Bacardi (42 Below) (2009) - Many smaller producers - Bacardi (Bermuda) US$5.5b - Numerous smaller - Brown-Forman (USA) US$3.4b - Beam Inc. (USA) US$2.7b - LVMH (France) €2.7b (alcohol) - ThaiBev (Thailand) - Belvédère Group (France) €1.2b - William Grant (UK) £838m - Group (Italy) €1.1b

PAGE 11 TYPES OF SPIRITS Spirits themselves can be broken down into multiple major types of product

Classification of major types of spirits (2011)

Product What is it? Example brands Key flavour Product names/types Example brands Vodka Fermented grain or potatoes Moskovskaya Anise Yeni Raki Aquavit Distilled Smirnoff Ouzo Okovita Often with added flavours Aalborg Grand Absinthe Pernod Pastis Fermented grains or rice; distilled Maotai Others Whisk(e)y Fermented barley and other grains Johnnie Walker Coffee Kahlua Distilled Jack Daniels Brandy Distilled wine Hennessy Cream Baileys Remy Martin Courvoisier Fruit Citrus/ Cointreau Fruit Brandy Fermented fruit Pascal Berries Distilled Plum () Chambord Midori 1 PAMA Rum/Tafia Fermented molasses or sugar cane Bacardi Southern Comfort Cachaça Distilled Captain Morgan Gin Ethyl alcohol flavoured by Juniper Gordons Honey berries and other botanical Beefeater ingredients Tanqueray Nuts Tequila Fermented heart of agave plant Jose Cuervo Mescal Distilled Sauza Others (e.g. herbs) Galliano Goldschläger Fermented rice Haamonii Chartreuse Distilled Benedictine Alcohol plus flavour & sugar See next table

PAGE 12 Note: simplified summary; many more products and definitions exist, some overlapping; 1. Note: American schnapps are liqueurs; Source: Coriolis RANGE BY PRODUCT CATEGORY Spirits account for about a third of the range of the typical smaller liquor store; spirits range is spread across multiple varieties proportional to sales or profits

EXAMPLE: Number of items in total alcohol range on Liquor King New Zealand website (# of SKU1; 2/2012)

Fortified wine Fruit wine 3 24 RTD's Beer 4% 1% 46 66 65 8% , 60 , 11% 34% 31% Sparkling 44 8% Spirits, 194 , 33%

Red wine 91 16% Rum Brandy, 20 10 , 5% 113 Tequila 10% 19% Vodka 12 Gin 16 6% 11 6% 8% Total = 577 sku (items)

Total = 194 sku (items)

PAGE 13 1. SKU = Stock Keeping Units (i.e. different barcodes); Source: Liquor King online Feb 2012; Coriolis analysis RANGE BY PRODUCT CATEGORY Spirit SKU1 mix similar across Anglo-Saxon countries; depth of range varies depending on type of retailer (large vs. small format)

EXAMPLE: Share of spirit range across select global retailers EXAMPLE: # of SKU in spirits: BevMo! vs. Dan Murphy’s (% of SKU1; 2/2012) (% of SKU; 2/2012) 1,967 SKU 344 SKU 878 SKU 194 SKU

Whisky 260 21% Whisky 448

31% 34% Liqueur 37% Rum 177 Rum 55 11%

11% 5% Brandy 14% Vodka 361 Vodka 88 1% 11% 6% Tequila 6% The more SKU 4% 6% Gin 4% in the category, the more likely 3% Gin 23 13% 8% Vodka Gin 73 a new SKU can 18% 10% enter 10% Rum 11% 6% Tequila 271 Tequila 34 9%

Brandy 93 31% Whisk(e)y Brandy 217 27% 30% 23%

Liqueur 420 Liqueur 325 BevMo Sainsbury Dan Murphy's Liquor King

(California) (London) (Australia) (New Zealand) PAGE 14 1. SKU = Stock Keeping Units (i.e. different barcodes); Source: Liquor King online Feb 2012; BevMo, Sainsbury & Dan Murphy online website; Coriolis analysis GLOBAL SPIRIT TRADE The US$23b global spirit trade is dominated by Europe on the export side and rich Western countries (particularly the USA) and Asia on the import side

World trade in spirits by key country and region (US$; b; 2010) $23.0 $22.3 Other $0.4 Other C/S America $0.7 $1.0 Other Mexico $0.9 $0.9 Other C/S America Other SE Asia $0.3 $0.3 Mexico $0.5 Other SE Asia Singapore $1.3 $1.1 Singapore E/SE Asia $0.1 $0.1 $0.5 $0.3 South Korea 16% $0.3 $0.1 $0.6 Japan Canada $0.3 $0.4 Hong Kong United States $0.7 China $1.4 $0.1 New Zealand Russia $0.2 $0.5 Australia $0.7 Canada Other Europe $2.7

North America Ireland $0.8 29% Italy $0.7 $5.7 United States Spain $0.5 Germany $1.3

$1.0 Russia Europe 72% France $3.9 $3.4 Other Europe

$0.4 $0.1 Italy Europe $1.4 Spain 43% United $6.6 Germany Kingdom $1.4 $1.2 France $0.8 United Kingdom Export Import

PAGE 15 Source: UN Comtrade database; Coriolis analysis TABLE OF CONTENTS

Section Page

Contents 4

Glossary of terms 5

Methodology & data sources 6

Summary & conclusions 7

1. Large and attractive market 8

2. Growing global exports 16

3. New Zealand spirit exports are growing 20

4. New Zealand can win 25

5. Potential strategic directions 31

6. Investment opportunities 58 GROWING The global spirits trade is growing

Aggregate global exports of spirits 5 year CAGR of aggregate global exports of spirits (US$; b; 1965-2010) (% of US$; 1965-2010)

17% $22.3

15% 14%

CAGR* (65-10) $16.2 8% 11% 9% average (65-10) 8% 7% $10.4 $9.6 5% $7.5

2%

$3.8 $3.5

$1.9 $1.0 $0.6 -2% 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 65-70 70-75 75-80 80-85 85-90 90-95 95-00 00-05 05-10

PAGE 17 *CAGR = Compound Annual Growth Rate; Source: UN Comtrade database; Coriolis analysis SHARE OF EXPORT VALUE In exports, the historical dominance of the UK and France on the world spirit trade is diminishing; consumers appear to be welcoming a wider range of spirits from a wider range of countries

Share of aggregate world spirits exports by key country and region (% of US$; 1965-2010)

100% Other 2% 1% 2% Other C/S America 10% 0% 2% 5% 1% 2% 4% 4% 4% Mexico 2% Other SE Asia 90% 18% 7% 8% 5% 3% 3% 18% 2% 3% 2% 2% 6% Singapore South Korea 13% 0% 3% 4% Japan 5% 0% 0% 4% 2% 5% 4% 2% Hong Kong 80% 2% 2% 4% 0% 5% Canada China 2% 5% 1% New Zealand 4% 2% 2% 5% 0% Australia 4% 1% 5% 11% 0% 6% United States 5% 1% Canada 3% 2% 1% Russia 1% 2% 2% 9% 12% 70% 1% 1% 1% 1% 4% 12% Other Europe 18% 3% 5% 26% 1% 4% 60% 19% 4% 4% 22% 2% 3% 3% Ireland 25% 26% 2% 2% 3% Italy 5% 2% Spain 50% 6% Germany 21% 18%

40% 18% 17% France

30% 55% 50% 47% 49% 44% 43% 20% 36% 37% 32% 29% United Kingdom 10%

0% 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 PAGE 18 Source: UN Comtrade database; Coriolis analysis SHARE OF IMPORT VALUE In imports, the relative importance of the US market is falling, driven by the growth of Europe and Asia

Share of aggregate world spirits imports by key country and region (% of US$; 1965-2010)

100% 3% Other 4% 5% 4% 4% 5% 3% 4% Other C/S America 1% 7% 8% Mexico 90% 1% Other SE Asia Singapore 6% 4% 8% South Korea 5% 16% 80% 7% 3% Japan 12% Hong Kong China Australia New Zealand 70% Canada

60% 28% 29% 26% United States 56% 54% 35% 31% 40% 24% 20% 50%

Russia 40%

12% 14% 14% 15% 11% 15% Other Europe 30% 12% 9% Ireland 9% 5% 10% 8% 7% Italy 20% 1% 2% 8% 2% 6% Spain 7% 1% 1% 8% 9% 7% 7% 6% 7% 4% 6% 6% Germany 10% 4% 7% 4% 4% 5% 5% 5% 4% 5% 5% France 7% 7% 6% 5% 6% 6% 4% 6% 5% 4% United Kingdom 0% 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 PAGE 19 Source: UN Comtrade database; Coriolis analysis TABLE OF CONTENTS

Section Page

Contents 4

Glossary of terms 5

Methodology & data sources 6

Summary & conclusions 7

1. Large and attractive market 8

2. Growing global exports 16

3. New Zealand spirit exports are growing 20

4. New Zealand can win 25

5. Potential strategic directions 31

6. Investment opportunities 58 NEW ZEALAND – FIRMS & EMPLOYMENT After a period of strong growth through 2005/06, the New Zealand spirits industry now appears to be driving productivity increases

Number of spirit manufacturing enterprises in New Zealand Number of people employed in spirit manufacturing enterprises in NZ (#; actual; 2000-2010) (#; actual; 2000-2010)

27 27 27 590 26 580 25 540 520 520 510

21 460 20

16 15

280 12 270 270 11 230

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

PAGE 21 Source: Statistics New Zealand; Coriolis analysis NEW ZEALAND – EXPORT BY TYPE & DESTINATION New Zealand exported US$46.8m in spirits in 2010; RTD’s/other, liqueurs and vodka were the biggest products; markets are split between Australia/Pacific Islands, North America and Asia

New Zealand spirit export value by type New Zealand spirit export value by destination (US$; m; 2010) (US$; m; 2010)

Brandy Other 1% Rum 2% 2% Gin 2% 6% Other SE Asia 12% Australia 31% Other E Asia 1% Singapore 29% Vodka 6% 15% Hong Kong 2% 36% 36% South Korea 7% RTD's/Other 59% Pacific I. Liqueurs 7% 15% Other Europe 2% Canada USA 15% United Kingdom 16% 1%

31%

TOTAL = US$46.8m TOTAL = US$46.8m

PAGE 22 Source: Statistics New Zealand; Coriolis analysis NEW ZEALAND – EXPORT VALUE BY PRODUCT The value of New Zealand’s spirit exports has been growing, achieving a 10% CAGR over the past decade; growth standouts include vodka, liqueurs and rum

New Zealand spirit export value by type (US$; m; 2000-2010) $46.8

CAGR (00-10) 10% $37.1 CAGR $35.7 (00-10)

$31.7 $27.8 RTD’s/other 6% $30.3 $29.2 $27.4 $26.1 $25.8 $18.8 $23.9 $16.9 $20.1 $18.9 $20.5 $21.3 $21.2 $20.1 $18.5 $6.8 Liqueurs 18% $13.3 $0.9 $7.8 $14.8 $6.6

$1.5 $6.9 36% $8.5 Vodka $0.8 $3.9 $4.2 $1.3 $4.4 $3.1 $4.1 $2.7 $3.2 $4.4 $1.1 $1.0 Gin 0% $1.1 $1.2 $1.1 Rum 13% $1.3 $0.3 $0.7 $0.8 $0.8 $0.3 $0.3 $0.4 $0.2 $0.5 $0.5 $1.1 $0.6 $0.8 $1.2 $0.8 $0.3 $0.4 $0.8 $0.7 $0.7 $2.6 $2.8 Whisky 8% $1.4 $1.8 $1.5 $1.1 $1.6 $1.3 $1.6 $2.0 $0.4 $0.1 $0.2 $0.2 $0.3 $0.1 $1.1 $0.1 $0.1 $0.3 $0.2 $0.3 Brandy -3% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 PAGE 23 Source: UN Comtrade database; Coriolis analysis NEW ZEALAND – EXPORT VALUE BY DESTINATION New Zealand spirit exports are growing to most destinations other than Australia

New Zealand spirit export value by destination (US$; m; 2000-2010) CAGR $46.8 (00-10) $0.9 Other 111%

CAGR $5.5 Other SE Asia 24% (00-10) 10% $37.1 $2.8 Singapore 40% $0.5 Other E. Asia 21% $0.1 $35.7 $1.2 Hong Kong -3% $3.5 $0.1 $3.7 $3.5 South Korea 27% $0.2 $0.1 $0.4 $31.7 $0.8 Other Europe 30% $30.3 $2.6 $0.4 $0.4 $0.1 $0.7 U.K. 17% $29.2 $0.1 $0.2 $1.0 $0.7 $3.1 $0.2 $0.4 $0.3 $0.6 $3.4 $27.4 $0.6 $0.3 $0.3 $1.4 $0.5 $0.1 $0.1 $7.1 30% $0.9 $- $26.1 $25.8 $0.1 $0.8 Canada $0.1 $0.2 $0.0 $1.3 $2.1 $4.4 $3.1 $1.2 $0.4 $0.0 $1.0 $0.0 $3.0 $0.1 $0.5 $1.1 $0.4 $0.5 $2.3 $0.3 $0.7 $0.2 $5.2 $0.3 $1.3 $2.5 $0.0 $2.8 $1.8 $2.4 $4.8 $1.1 $20.1 $0.2 $5.2 $0.7 $0.3 $0.3 $3.1 $18.9 $- $0.0 $3.3 $2.2 $3.6 $7.4 USA 98% $0.0 $1.5 $1.2 $0.6 $0.1 $0.3 $0.3 $4.2 $2.4 $0.1 $1.4 $2.2 $1.5 $2.5 $2.5 $2.8 $0.3 $0.1 $2.4 $0.0 $0.6 $0.2 $- $2.7 $1.4 $0.3 $2.4 $2.5 $3.1 Pacific Islands 17% $0.2 $1.7 $2.2 $1.2 $0.0 $1.7 $18.6 $17.3 $15.3 $15.6 $16.6 $15.5 $12.5 $13.8 $13.6 $13.5 Australia -1% $9.2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 PAGE 24 Source: UN Comtrade database; Coriolis analysis TABLE OF CONTENTS

Section Page

Contents 4

Glossary of terms 5

Methodology & data sources 6

Summary & conclusions 7

1. Large and attractive market 8

2. Growing global exports 16

3. New Zealand spirit export are growing 20

4. New Zealand can win 25

5. Potential strategic directions 31

6. Investment opportunities 58 NZ VS. PEERS – TOTAL ALCOHOL EXPORTS – SELECT METRICS New Zealand has achieved strong growth in total alcohol exports (wine, beer & spirits) over the past decade driven by wine; a wide peer group of countries suggests significant further growth is possible

Total alcohol export value 10 year CAGR export value 10 year value growth Alcohol exports per capita (US$; m; 2010) (% of US$; 2000-2010) (US$; m; 2000-2010) (US$; 2010)

France $13,509 Latvia 48% France $6,284 Ireland $161 UK $8,225 Estonia 31% UK $3,710 France $110 Italy $6,333 New Zealand 21% Italy $3,499 Netherlands $79 Germany $4,061 Argentina 15% Germany $2,852 United Kingdom $73 Spain $3,403 Germany 13% Spain $1,984 Denmark $64 Netherlands $3,164 South Africa 12% Netherlands $1,847 Belgium $57 Mexico $2,758 Finland 10% Mexico $1,335 Portugal $49 Australia $2,017 Chile 10% Australia $1,029 Italy $47 Chile $1,581 Sweden 10% Chile $989 Australia $44 Belgium $1,562 Belgium 10% Belgium $945 Sweden $36 Ireland $1,345 Netherlands 9% New Zealand $735 Chile $35 Portugal $1,084 Spain 9% South Africa $719 Spain $30 South Africa $1,057 Italy 8% Ireland $628 New Zealand $28 Sweden $858 Portugal 8% Argentina $614 Canada $21 New Zealand $857 Australia 7% Portugal $558 Germany $15 Argentina $809 Mexico 7% Sweden $524 Mexico $13 Canada $718 Ireland 6% Latvia $293 Finland $12 Denmark $640 France 6% Denmark $286 Greece $9 Latvia $299 UK 6% Estonia $158 Estonia $8 Greece $184 Denmark 6% Finland $108 South Africa $7 Finland $172 Greece 6% Greece $82 Argentina $5 Estonia $169 Canada 0% Canada $6 Latvia $3

PAGE 26 Source: UN PopStat; UN Comtrade database; Coriolis analysis NZ VS. PEERS – ALCOHOL EXPORT MIX New Zealand appears overweighted to wine; aspirationally New Zealand should have a more balanced mix similar to Germany or France

Alcohol export value mix by alcohol type: New Zealand vs. wide peer group (% of US$; 2010)

Mexico 0% 68% 0% 32% Ireland 10%% 26% 16% 0% 57% Sweden 2%0% 6% 10% 7% 76% Canada 4%0% 34% 1% 15% 46% Finland 7% 1% 10% 7% 3% 71% United Kingdom 8% 0% 10% 1%1% 80% Estonia 13% 0% 16% 3%0% 67% Latvia 18% 0%3%1% 5% 72% Denmark 19% 2% 50% 6% 1% 22% Germany 28% 1% 31% 1% 6% 32% Greece 42% 0% 13% 0% 46% France 62% 0%2%0% 6% 29% Spain 73% 2% 3%0% 6% 15% South Africa 74% 02%% 4% 12% 9% Portugal 74% 0% 20% 00%% 5% Italy 82% 3% 2%11%% 11% New Zealand 90% 0%3%10%% 5% Argentina 92% 0%4%1%1%2% Australia 95% 01%00%%%4% Chile 98% 100%1%%%

Wine Beer /other ferm Industrial alcohol Spirits

PAGE 27 NZ VS. PEERS – SPIRITS – SELECT METRICS Peers suggest New Zealand can export more spirits; suggest a 3-6 times potential export growth

Population Spirit export value 10 year CAGR export value 10 year value growth Spirit exports per capita (people; m; 2010) (US$; m; 2010) (% of US$; 2000-2010) (US$; m; 2000-2010) (US$; 2010)

Ireland 4.5 Ireland $763 4% $267 Ireland $171

Italy 60.3 Italy $697 6% $316 Italy $12

Sweden 9.4 Sweden $655 8% $344 Sweden $70

Spain 47.0 Spain $508 11% $333 Spain $11

Canada 34.2 Canada $333 -2% -$87 Canada $10

Latvia 2.2 Latvia $215 55% $213 Latvia $96

Denmark 5.5 Denmark $140 11% $91 Denmark $25

Finland 5.4 Finland $123 12% $83 Finland $23

Estonia 1.3 Estonia $113 34% $107 Estonia $85

South Africa South Africa49.3 $91 15% $68 South Africa $2

Australia 22.4 Australia $81 8% $45 Australia $4

New Zealand 4.4 New Zealand $47 10% $28 New Zealand $11

PAGE 28 Source: UN PopStat; UN Comtrade database; Coriolis analysis NZ VS. PEERS – SPIRITS – EXPORT MIX BY TYPE Peers suggest New Zealand spirit export mix currently overweighted to RTD’s/other

Share of spirits export value by key type (% of US$; 2010) Key products

Ireland 0% 33% 01%% 66% 0% Whiskey, Irish Crème

Sweden 2%4%00%% 91% 2%1% Vodka

South Africa 9% 18% 01%%3% 66% 3% “Irish” Crème

Canada 0% 74% 2%0%4% 16% 3% Whiskey

Estonia 13% 53% 3%2% 8% 16% 5% Whiskey, Vodka

Latvia 24% 33% 1%2% 27% 5% 9% Vodka, Whiskeys, Brandy

Spain 40% 6% 21% 1%1% 21% 10% Brandy, Rum

Italy 13% 3% 7% 0% 7% 57% 13% Liqueurs, Brandy

Finland 7% 4%11%% 62% 6% 20% Vodka

Australia 22% 30% 4% 2% 9% 9% 23% Whiskeys, Brandy

Denmark 11% 20% 4%2% 16% 8% 39% Multiple

New Zealand 1% 6% 2%2% 15% 15% 59% RTD’s, Vodka, Liqueurs

Brandy Whiskies Rum Gin Vodka Liqueurs RTD/other

PAGE 29 Source: UN Comtrade database; Coriolis analysis NEW ZEALAND – AWARDS New Zealand spirits are winning awards

EXAMPLE: Number of awards won by New Zealand firms at the San Francisco World Spirits Competition 12 (#; 2000-2010)

9 9

8

3 3

2 2

- - Not held -

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

PAGE 30 Note: Vodka O and Jinn Dry Gin are made from New Zealand whey alcohol but bottled in Australia by ASM Liquor; Stolen Rum is made in Trinidad but sold by a NZ firm; Source: San Francisco World Spirits Competition; Coriolis analysis TABLE OF CONTENTS

Section Page

Contents 4

Glossary of terms 5

Methodology & data sources 6

Summary & conclusions 7

1. Large and attractive market 8

2. Growing global exports 16

3. New Zealand spirit exports are growing 20

4. New Zealand can win 25

5. Potential strategic directions 31

6. Investment opportunities 58 EARLY IN THE LIFE CYCLE It is important to recognise that the New Zealand spirits industry is at an early point in its life cycle

Proposed “S-Curve” positioning of New Zealand spirits and wine industry (model)

Wine

High growth Fragmented but consolidating

Spirits Early stage of life cycle characterised by high industry growth, medium competition, highly fragmented

PAGE 32 Source: Coriolis NEW ZEALAND SPIRITS – SWOT ANALYSIS Continued growth and success in spirits exports is possible but not guaranteed

Strengths Weaknesses

- NZ recognised in alcohol and holds a strong premium position in wine (particularly in - Fragmented; most NZ firms have low/no economies of scale Australia, UK and the US) - Lack of indigenous alcohol heritage (e.g. vs. Mexico) - Multinational investment in the sector (Asahi, Kirin, Heineken, F&N, Bacardi) - Lack of global power brands; most NZ brands have relatively low brand value - Endorsing high growth potential of this emergent sector - Limited industry depth and institutional knowledge both inside firms and across - Able to feed products into their sales networks wider value chain - Building new brands around RTD’s (e.g. Woodstock, Vault) - Society and government attitude towards sector - New Zealand trusted country and products with secure food source - Lack of critical mass outside RTD’s - Able to leverage favourable opinion of New Zealand in key markets (e.g. China, - Lack of capital Korea, Japan) - Strong Scottish heritage in South Island; historical spirits production by early settlers

Opportunities Issues/Threats/Risk

- Immigrants bringing skills and experience - Government requirement to balance desirable growth of sector with potential social and health issues related to alcohol consumption - Growth of wealth in Asia - Strong foreign ownership of sector limiting vision and vigour - New Zealand unique plants - Growing a liquor startup is capital intensive and cashflow negative (due to pipeline - Increasing global interest in new and unique premium/super-premium spirits fill) - Global growth of micro-distilleries (cf. microbreweries) - No NZ rules or definitions on formulation of specific spirits - Leveraging existing wine industry inputs, outputs and sales networks - Growing a spirit product in export markets is hugely cashflow negative; numerous - No NZ rules or definitions on formulation of specific spirits startups struggle, go under or are sold (e.g. 26000 Vodka)

PAGE 33 Source: Interviews; Coriolis POTENTIAL STRATEGIC DIRECTIONS Our research has identified five potential strategic directions for driving growth in New Zealand spirits exports; the potential directions should not be seen as exclusive, rather as different ways to grow

Identified potential strategic directions for the New Zealand spirits industry going forward (model; 2012)

Conventional spirits Made elsewhere Conventional made in New RTD bottled in New spirits made in Zealand with New New Zealand beverages Zealand New Zealand Zealand flavours unique spirits

u v w x y

PAGE 34 Source: various; photo credit (fair use; low resolution; complete product/brand for illustrative purposes); Coriolis analysis 1. RTD BEVERAGES Much of the success to date of New Zealand spirit exports has come from RTDs; these can be categorised into those produced and branded in New Zealand and global brands (either importer or packed in New Zealand)

Two key types of RTD products in New Zealand (2012)

New Zealand invented brands Global brands sold in New Zealand

- New brands invented in New Zealand in the last two decades - Historic global brands - Developed and packed in New Zealand, then exported - May be packaged in New Zealand from imported bulk spirits

PAGE 35 Source: various; photo credit (fair use; low resolution; complete product/brand for illustrative purposes); Coriolis analysis 1. RTD BEVERAGES – KEY FIRMS Three key firms manufacture RTD’s in New Zealand – Independent Liquor and the two main breweries (The Mill - a NZ retailer – manufacturers in Australia); key wholesalers also import specific global brands

Identified producers of RTD beverages in New Zealand (activity; 2012)

Business type Manufacturer Manufacturer Manufacturer Manufacturer (AU) Importer Importer Importer Retailer Retailer Wholesaler Domestic Woodstock Diesel (bourbon) Barrel 51 (bourbon) Kentucky State - - - NZ-invented (bourbon) Maverick (bourbon) Barrel 71(bourbon) (bourbon) brands Dakota (bourbon) Vault (vodka) Fuse (vodka) Tropix Cody’s (bourbon) Park Lane (Gin) Vudu (vodka) Amp’d Cruiser (vodka) Stil (vodka) Tattoo (vodka) Envy (vodka) Segers (Gin) Cactus (tequila) KGB (vodka) Amy’s (vodka) Pulse (vodka) Bulleit (bourbon) Crazy Mexican (teq.) Mudshake (vodka) Black Heart (rum) Purple Goanna Bellini (wine) Global brands - Archers Aqua - - Jack Daniels & Cola Kahlua & Milk Jim Beam & Cola Barcadi Breezer Southern Comfort Canadian Club Coruba & Cola Cuervo Margarita Gordon’s G&T Heaven Hill & Cola McKenna & Cola Smirnoff Ice

PAGE 36 Source: Coriolis 1. RTD BEVERAGES – SITUATION & POTENTIAL STRATEGIC DIRECTIONS RTD beverages have served to get the New Zealand spirits industry off the ground; the ability of the sector to continue to drive export growth going forward is unclear

RTD Beverages – Situation & Potential Strategic directions Attractiveness Scorecard

Concept - Pre-prepared, ready-to-drink alcoholic beverages in a bottle or can; typically with a strong named flavour Ease of execution 4 summary - Targeted at newer, entry-level drinkers through price point and sweet flavour profile - Convenience a key part of offer to consumer Defensible to NZ 0 - Often segmented by sex (male vs. female), price point and brand (strong known brand vs. weak price fighter) Long term growth 2 - Typically specifically formulated to minimise local tax via variable type and % of alcohol Examples Key global trends History in NZ New Zealand Global - Category moving from start-up brands - Wine Coolers launched in California in to dominated by global players 1981 by E&J Gallo - Woodstock & Cola - Bacardi Breezer - Greater regulation and industry - NZ expat Michael Erceg returned to NZ - Vault 88 - Skyy Blue scrutiny (e.g. advertising) and copied concept in New Zealand - Vodka Cruizer - Smirnoff Ice - Breweries leveraging existing strengths - Strong growth of sector through new - Jack Daniels & Cola (e.g. distribution) into category product development - Growth in Asia - Major brewers enter sector

Opportunities Challenges What is required to win going forward? - Brands developed or invented for RTD products being - Strong moves by global spirits firms with well known - Constant innovation through new flavours and fast transitioned into bottled spirits heritage brands into the category following of global trends - Can act as a “bootstrap” to get spirits industry off - Multiple countries targeting products through specific - Manoeuvring through changing laws targeting ground; industry can then transition to higher value “alcopop” taxes (e.g. Australia, Ireland, Germany) product and category - Growth of store brands/controlled label - Relatively low value; little sense in shipping around - Strong brands demanded by consumers - Growth of consumption in Asia the world (i.e. typically made in market); Independent - High volume, low cost production infrastructure - Low consumption among older consumers and aging Liquor exported to Australia in 1997 then opened two - Constant tactical activities at retail to maintain and baby boomers in-market production plants there build shelf space - Growth of store brands/controlled label - Constantly attracting new consumers while avoiding targeting underage drinkers

PAGE 37 Source: Coriolis 4 2 0 high medium low 2. BOTTLED IN NEW ZEALAND A number of spirits are produced elsewhere but packaged and sold by New Zealand based firms

Examples of non-domestically produced spirits bottled in New Zealand (2012)

Rum Bourbon

PAGE 38 Source: various; photo credit (fair use; low resolution; complete product/brand for illustrative purposes); Coriolis analysis 2. BOTTLED IN NEW ZEALAND – SITUATION & POTENTIAL STRATEGIC DIRECTIONS Packing and branding someone else's spirits is unlikely to be a defensible, long term strategy for robust and ongoing export success

Bottled in NZ – Situation & Potential Strategic directions Attractiveness Scorecard

Concept - Add value to high quality but low price alcohol produced elsewhere by wrapping it in a New Zealand brand and story Ease of execution 4 summary - Typically products where New Zealand does not have scale and/or produce inputs (e.g sugarcane for rum) or protected names (e.g. bourbon) Defensible to NZ 0 - Grabbing brand value in NZ, typically from low skills/capabilities producing countries Long term growth 0 - Low cost way to get off the ground

Examples Key global trends History in NZ New Zealand Global - Countries regulating against bulk - Historical importation of barrels of exports of spirits spirits from around the world - Stolen Rum - ASM Liquor in Australia bottling New - Seven Tiki Rum from Fiji (42 Below) Zealand vodka in Australia - Tahiti Dark Rum (42 Below) - Numerous bottlers of Scottish whiskey - Kentucky Blue bourbon blends outside Scotland - Numerous bottlers of Mexican tequila outside Mexico Opportunities Challenges What is required to win going forward? - Transition to New Zealand production of product (if - Bottle at point of production for export to other - Existing bottling lines with spare capacity and where possible and economic) countries; why do it in New Zealand? - Leveragable assets (e.g. salesforce) - Leveraging low cost entry into stronger wider sector - Multinationals buying the business and taking it away - Building and nurturing strong brands demanded by position from New Zealand or killing product consumers - Mixed message to consumer: where is it from? - Constant tactical activities at retail to maintain and - Producing countries changing bulk export rules and build shelf space requiring bottling to consumer ready at home (e.g. - Hedging and exchange rate management single malt Scottish Whisky) - Double exposure to exchange rate fluctuations - Maturing consumers developing product knowledge and realising product is not “authentic”

PAGE 39 Source: Coriolis 4 2 0 high medium low 3. CONVENTIONAL SPIRITS MADE IN NZ New Zealand produces a wide range of conventional spirits

Examples of spirits produced in New Zealand from primarily local ingredients (2012) Vodka Whisky Rum Gin

Liqueurs Schnapps Brandy

PAGE 40 Source: various; photo credit (fair use; low resolution; complete product/brand for illustrative purposes); Coriolis analysis 3. CONVENTIONAL SPIRITS MADE IN NZ – CONSOLIDATED Global trade in some major conventional spirits are dominated by a handful of countries; new and emergent producers will find it difficult to break into this environment

Value share of global trade in select spirits by key countries and other (% of US$; 2010)

Distilled wine/brandy/cognac/etc. Whisk(e)y/Bourbon Gin

Other Other Other France 14% 18% Canada 16% 2% Italy 3% 2% Ireland Germany 3% Germany 2% 7% Armenia 3% Spain USA 5% 11%

France U.K. 67% 70% U.K. 77%

Top 3 = 78% Top 4 = 84% Top 3 = 86%

PAGE 41 Source: UN Comtrade database; Coriolis analysis 3. CONVENTIONAL SPIRITS MADE IN NZ – FRAGMENTED Global trade in other major conventional spirits is highly fragmented – a more welcoming environment for new entrants

Value share of global trade in select spirits by key countries and other (% of US$; 2010)

Vodka Rum Liqueur

Trinidad and Tobago 1% Nicaragua 2% Panama Brazil Canada 2% 2% 2% Other Other Latvia Other Guatemala 8% South Africa 12% Ireland 3% 14% 2% Germany 2% 18% Finland Sweden 19% Venezuela USA 3% 26% 2% 3% Guyana Germany Spain 3% 3% 4% Netherlands Netherlands Dominican Rep. 3% Netherlands Germany 4% 11% 5% 17% Ukraine Barbados 5% 3% United Kingdom Poland France Spain United 9% 6% 19% 11% Kingdom Mexico Russia France 4% 4% Italy 6% U.K. Italy USA 14% 14% 11% France 5% 10% Jamaica 4% 5%

PAGE 42 Source: UN Comtrade database; Coriolis analysis 3. CONVENTIONAL SPIRITS MADE IN NZ – LEVERAGE New Zealand has the ability to – and is – leveraging its existing comparative advantage into spirits

Existing New Zealand comparative advantage as a point of leverage into spirits (simplified model; 2012)

Existing area of Point(s) of leverage Potential or actual usage in spirits industry comparative advantage Dairy - Ethanol (pure alcohol) a by-product produced from - As a base alcohol to which flavour Is added whey, which is produced during various dairy - Currently used by numerous NZ and international spirits manufacturers to processing techniques manufacture vodka, gin, RTDs and other spirit-based products - “Cream” (typically milk powder) is an ingredient of cream liqueurs

Apples & pears - Second grade fruit - As a flavour in spirits - Global reputation as a quality supplier of apples - As an ingredient into liqueurs - Growing cider exports - Fruit brandy

Kiwifruit - Second grade fruit - As a flavour in spirits - Global reputation as a quality supplier of kiwifruit - As an ingredient into liqueurs

Honey - Growing honey production and exports - As a flavour in spirits - Medicinal benefits of Manuka honey - As a ingredient into liqueurs - As an liqueur-ceutical (cf. nutraceutical) Wine - Premium price and position of New Zealand wine - (made by distilling the skins, pulp, seeds, and stems left over from - Growing strength in many markets after pressing the grapes) - Wine from secondary regions and excess wine - Brandy/Cognac (produced by distilling wine) currently being exported as a bulk product - Port, , madeira, marsala, vermouth and other (wine that has - Waste from wine production process (lees, etc.) had a spirit – typically grape brandy - added to it)

PAGE 43 Source: Coriolis 3. CONVENTIONAL SPIRITS MADE IN NZ – BRAND EXTENSION There may be an opportunity to leverage existing iconic New Zealand brands into the liquor space

Hypothetical examples of brand extensions by existing iconic New Zealand brands into liquor space (2012)

Current product Example potential liquor Brand Current position example product Example global model - Single desk seller of all New Zealand export Zespri Gold liqueur PAMA Pomegranate liqueur using 100% kiwifruit outside Australia California pomegranates - Strong brand and brand position, particularly US$20.99/750ml in Japan, China and other Asia - Industry currently struggling from impact of PSA virus

- 2 IP controlled varieties of apple – Envy and Envy apple schnapps Schoenauer Apfel Apple Schnapps Jazz - developed in New Zealand by US$$23.99/750ml HortResearch - Owned by T&G/Enza, itself recently partially acquired by BayWa of Germany and Mr Apple - Being promoted across major global markets

- New Zealand iconic chocolate brand Whittaker’s chocolate Godiva liqueur US$29.99/750ml

- New Zealand farmer-owned cooperative Anchor Zealandia Cream Baileys Irish Cream controlling ~93% of NZ milk production US$18.99/750ml - Portfolio of strong brands; strength in Asia - Significant producer of ethanol from whey

PAGE 44 Source: various; photo credit (fair use; low resolution; complete product/brand for illustrative purposes); Coriolis analysis 3. CONVENTIONAL SPIRITS MADE IN NZ – SITUATION & POTENTIAL STRATEGIC DIRECTIONS To date New Zealand has achieved early success in producing conventional world class spirits; continued growth will require more of the same

Conventional spirits made in NZ – Situation & Potential Strategic directions Attractiveness Scorecard

Concept - Produce conventional spirits to traditional formulations in New Zealand Ease of execution 4 summary - Leverage positive attributes of New Zealand (water, nature, remote location, low population density) in advertising Defensible to NZ 2 Long term growth 4 Examples Key global trends History in NZ New Zealand Global - Growth and emphasis on - Robust and vibrant spirit production by premium/super-premium early immigrants - 42 Below vodka - Absolut vodka - Search for authenticity; increasing - Industry killed by regulation early - Thomson whisky - Bacardi rum consumer sophistication 1900’s - Canterbury Cream - Johnnie Walker whisky - Increasing range and variety across - Recent industry revival and blossoming - Zumwohl schnapps - Jack Daniel’s bourbon many categories - Lemon-Z - Hennessy cognac - Emergence of new spirits and new - Broken Shed vodka - Baileys Irish Cream producers into world markets - Gifting/gift packs Opportunities Challenges What is required to win going forward? - Transforming wine and wine waste into spirits - Making “world class” products that achieve a - Truly premium/superpremium products that - Leveraging very strong Scottish heritage of New premium is difficult in some products (e.g. whisky) consistently win blind tests and awards Zealand South Island into whisky - Lack of tradition and heritage in products - Distinctive position and character that stands out - Low cost inputs (e.g. whey alcohol) - Strong distribution - In market presence and push

PAGE 45 Source: Coriolis 4 2 0 high medium low 4. CONVENTIONAL SPIRITS WITH UNIQUE NZ FLAVOURS New Zealand produces a number of spirits with unique New Zealand flavours using either native botanicals (e.g. kawakawa) or signature/identity fruit (e.g. kiwifruit)

Examples of spirits produced in New Zealand containing unique or signature NZ flavours (2012)

Native botanicals NZ signature/identity fruit

42 Below Lighthouse South 8th Tribe Schnapp Dragon Mana Zumwohl Vodka Gin Gin Liqueur Liqueur Shochu schnapps

Manuka Honey Kawakawa Manuka berries Gold Kiwifruit Tangelo Kiwi Gold Feijoa Kawakawa

PAGE 46 Source: various; photo credit (fair use; low resolution; complete product/brand for illustrative purposes); Coriolis analysis CASE STUDY – SIGNATURE INGREDIENTS FROM OTHER COUNTRIES Use of unique or signature flavours is a growing trend in the spirits category as these global examples show

Examples of non-New Zealand products leveraging unique or signature botanicals (select examples; 2012)

contains an actual blade of buffalo grass

Kai 44 Degrees North Zubrowka Lychee Flavored Vodka Mountain Huckleberry flavoured vodka Buffalo Grass Vodka USA Poland

“This vodka is produced in in “Distilled from Idaho potatoes, blended with “For centuries in eastern Poland, massive buffalo have roamed the the Red River Delta from a naturally sweet and Rock Mountain water from the Snake River lush and fertile fields that are full of rich flowers and “Zubrowka” or glutinous rice called yellow blossom rice. This Aquifer and then steeped in mountain “Bison Grass,” an herb steeped in intrigue, mystique and makes it gluten free for people who are Celiacs picked Huckleberries for 10 days!” romanticism. High Society would celebrate hunting successes with or otherwise wheat intolerant… For the of a special vodka flavored with “Bison Grass,” in belief this would clarity; this is flavored with lychee, not made yield grand power, increase stature and youthfulness which directly from, infused, or macerated lychee.” centuries later had been banned from American shores.”

PAGE 47 Source: BevMo website; various; photo credit (fair use; low resolution; complete product/brand for illustrative purposes); Coriolis analysis 4. CONVENTIONAL SPIRITS WITH UNIQUE NZ FLAVOURS – SITUATION & POTENTIAL STRATEGIC DIRECTIONS Conventional spirits with unique New Zealand flavours is a highly defensible positioning; execution in sales and marketing is the key to success

Conventional spirits with NZ flavours – Situation & Potential Strategic directions Attractiveness Scorecard

Concept - Add unique NZ flavours to conventional spirits made in New Zealand Ease of execution 2 summary - Leverage positive attributes of New Zealand (water, nature, remote location, low population density) in advertising - Potentially leverage existing NZ positioning with global consumers (e.g. kiwifruit, dairy) Defensible to NZ 4 Long term growth 2 Examples Key global trends History in NZ New Zealand Global - Countries registering and protecting - Early settlers distilled a wide range of their regional product names New Zealand native botanicals - 42 Below Vodka Manuka Honey - Scottish whisky - Constant emergence of new flavours - Various small scale producers (e.g. - Zumwohl Feijoa similar to non-alcoholic beverages kiwifruit or honey liqueurs) - Lighthouse Gin with kawakawa - Nutraceuticals into alcohol = - Strong re-emergence of the concept in - South Gin with manuka & kawakawa alcoceuticals (alcohol that’s good for the last decade - Mana Shochu Zespri Gold kiwifruit you)

Opportunities Challenges What is required to win going forward? - Huge range of New Zealand unique plants available - Can become a flavour exporter in bulk; value captured - Marketing, marketing, marketing nowhere else on earth by market leaders - In market presence and push; sales force execution - Rediscovering traditional Maori knowledge and - Multinationals buying firms leading to loss of vision - Unique flavours yet suited to global tastes (i.e. rather widespread experimentation of early settlers and vigour into conservative bureaucracy than acquired tastes) - Control over product/ingredient name to prevent becoming a flavour supplier

PAGE 48 Source: Coriolis 4 2 0 high medium low 5. NEW ZEALAND UNIQUE SPIRITS New Zealand has yet to develop a unique and iconic spirit; Ti-toki is the best example of the potential of the idea to date

Examples of truly unique spirits produced in New Zealand containing unique or signature NZ flavours (2012)

In the mid 1970's, a West Auckland winemaker drew inspiration from the surrounding native flora to create a distinctive New Zealand liqueur. Using indigenous plants such as kawakawa, manuka leaves and the oils from the ti-toki tree berry - those unique flavours became 'Ti-Toki Liqueur'.

Ti-toki Liqueur is most often recognised by the 500ml hand-made ceramic crock in the shape of a "Tekoteko", the carved figure that guards against evil spirits on the top or in front of a Maori meeting house.

Available in a beautiful greenstone-inspired glaze with paua eyes, this crock is lovingly made in a small ceramics studio minutes from Muriwai Beach, north-west of Auckland.

Ti-Toki Liqueur (37% alc/vol) can be savoured 'straight-up', chilled, in a delicious cocktail, special coffee or served with cranberry juice, soda, tonic water or ginger beer.

PAGE 49 Source: various; photo credit (fair use; low resolution; complete product/brand for illustrative purposes); Coriolis analysis NZ UNIQUE SPIRITS – REGIONAL Unique spirits can come in the form of specific named products tied to a specific region but made by multiple producers

EXAMPLES: Distinctive unique/signature spirits tied to specific regions (various; 2012)

Product What is it? Where is it produced? Protection Annual production or sales Distinctive kind of brandy Armagnac region, Gascony, France Appellation d'origine contrôlée 3,700ha 6m bottles Cognac Distinctive kind of brandy Cognac region, Charente and Charente-Maritime, France Appellation d'origine contrôlée -

Brandy de Jerez Distinctive kind of brandy Jerez area, Andalusia, Spain Protected Designation of Origin (PDO) -

Plymouth Gin Style of gin Plymouth, England Protected Geographical Indication -

Steinhäger Style of gin The village of Steinhagen, North Rhine-Westphalia, Protected Geographical Indication - Germany Irish Cream , cream, and Ireland Protected Geographical Indication - other ingredient Pisco colourless grape brandy Specific regions in both Peru and Chile Appellation of origin -

Tequila Fermented and distilled the state of Jalisco and limited regions in the states of Norma Oficial Mexicana; Mexican laws; - blue agave plant Guanajuato, Michoacán, Nayarit, and Tamaulipas international treaties Ouzo an anise-flavoured aperitif Greece and Cyprus Protected Designation of Origin -

Mezcal Fermented and distilled Durango, Guanajuato, Guerrero, Oaxaca, San Luis Potosí, 330,000ha manguey plant Tamaulipas and Zacatecas, Mexico 2m litres

PAGE 50 Source: “The Ultimate Encyclopaedia of Wine, Beer, Spirits & Liqueurs”; Wikipedia; various published articles; Coriolis analysis CASE STUDY – TEQUILA PRICE POINTS Successful regional spirits create value through a wide range of price points, typically using packaging, barrel aging, and exclusive smaller regional producers to drive perception of value

EXAMPLE: Price points of select tequila products among 273 items for sale at BevMo! California online website (US$; 2/2012) $469.99

52x $239.99

$99.99

$49.99 $52.99 $22.99 $26.99 $28.99 $8.99 $10.99 $13.99

PAGE 51 Source: BevMo online; photo credit (fair use; low resolution; complete product/brand for illustrative purposes); Coriolis analysis UNIQUE SPIRITS – REGIONAL Unique spirits can also be unique branded products owned by specific firms

EXAMPLES: Distinctive unique/signature spirits tied to specific regions (various; 2012)

Product What is it? Who invented it? Who owns it? Typical usage

Midori Bright green melon liqueur - Developed by Suntory (Japan) in 1980’s - As a mixer in cocktail recipes - Midori is Japanese word for green - To add colour to a drink - Unique bottle; green colour from dye not melons - Instant success worldwide Southern Comfort Peach and bourbon liqueur - Originally created by bartender Martin Wilkes Heron in New Orleans - Neat or on the rocks in 1874 - As a mixer in cocktails - Now owned by the Brown-Forman Corporation Tia Maria Coffee-flavoured liqueur - Invented by Dr. Evans in Jamaica just after World War II - Neat or on the rocks - Bought by Pernod Ricard in 2005, sold to Illva Saronno in 2009 - As a mixer in cocktails Pimm’s Gin-based drink/liqueur - First produced in 1823 by James Pimm, a farmer's son from Kent who - With lemonade or soda (technically a fruit cup) became the owner of an oyster bar in the City of London - Purchased by Diageo in 2006 Frangelico Hazelnut and herb-flavored - 1980’s; claimed to be based on 300 year old legend - On ice liqueur - Produced in the Piedmont region of northern Italy - As a mixer in cocktails - Distinctive bottle which resembles the habit of a Franciscan friar, - brand was purchased by Gruppo Campari in 2010, having previously been owned by William Grant and C&C Group Coconut-flavoured rum - Developed to simplify the making of Piña Coladas by bartenders - As a mixer in cocktails - First produced in Curacao, then Barbados - Sold to Diageo in 2002 then Pernod RIcard

Kahlua Coffee flavoured liqueur - Pedro Domecq (cf. Allied Domecq) began producing Kahlúa in 1936 in - On ice Mexico; now part of Pernod Ricard - As a mixer in cocktails

PAGE 52 Source: “The Ultimate Encyclopaedia of Wine, Beer, Spirits & Liqueurs”; Wikipedia; various published articles; Coriolis analysis CASE STUDY – SOUTH AFRICA The success of South Africa’s Amarula crème liqueur shows that a single product can drive export success

South African spirits export value by select categories (US$; m; 1992-2010)

$90.0 Ingredients: Sugar, cream, native Marula tree fruit

“The Amarula phenomenon is a premium cream $80.0 liqueur from Africa. Amarula totally dominates the market locally and it has resounding success in some international $70.0 markets. Amarula is endowed with excellent Liqueurs intrinsics – an accessible and self-indulgent cream Whiskey made from a unique subequatorial African fruit, the Marula. It has truly unique packaging with $60.0 Liqueurs Other spirits strong African icons, such as the African elephant and the Marula fruit. $50.0 The story of Amarula dates back to 1989 when it first appeared on the South African market. Since then it has grown tremendously and today its $40.0 great taste is enjoyed in over 100 countries worldwide. Amarula can be enjoyed over ice, in a unique range of cocktails, as well as in delicious $30.0 dishes. ” Distell website, Feb 2012

$20.0 Whiskies (primarily re-export)

$10.0 Other spirits $-

PAGE 53 Source: UN Comtrade database; photo credit (fair use; low resolution; complete product/brand for illustrative purposes); Coriolis analysis CASE STUDY – KAHLUA LINE EXTENSIONS Once a strong brand is developed, product and line extensions can be used to extend reach and increase shelf presence

EXAMPLE: Line extensions of Kahlua coffee flavoured liqueur (select items; 2012)

Flavours Pre-mix cocktails Ready-to-drink

PAGE 54 Source: various; photo credit (fair use; low resolution; complete product/brand for illustrative purposes); Coriolis analysis NZ UNIQUE New Zealand has a wide range of unique plants/trees that have been used historically to brew alcohol; all can provide unique/defensible ingredient bases…

New Zealand unique potential plants used as waipiro (2010 or as available)

Name Part used Historical usage Suitable attributes Notes

Cabbage tree Root - Roots used for a type of - Fast growing - terminalis is 20% sucrose Cordyline australis / Young stem (2 yrs old) beer using the young stem - Distributed throughout terminalis Cooked tap root - Cooked root made into a sweet NZ in wet areas Tikouka/ti pore paste

Tutu Petals and flesh of seed - Made into wine by early settlers - Distributed throughout - Seeds/plant is highly poison and ingesting causes death Coriaria sarmentosa/ ONLY (used similar to Elderberry) NZ in forest, scrub & - Absinth leverages dangerous elements of wormwood arborea - The edible juice or jelly mixed subalpine (Artemisia absinthium) to create products mystery with seaweed

Kawakawa Berries - Leaves used to make beer - Distributed south to - Relative of native Fijian Kava (but not the same properties) macropiper excelsum Leaves - Berries eaten CHCH; abundant shrub in - A flavoured jelly made from lowland and coastal forest seaweed - Leaves made into tea

Kohekohe Leaves - The leaves and bark are cooked - North Cape to Nelson; Dysoxylum spectabile Bark to brew beer coastal forests

Kiekie Bracts (tawhara) - Overripe tawhara made a - Most common in north - A scrambling climber up to 20m in sheltered moist areas Freycinetia banksii Flowers fermented liquor but far south as - Highly prized by early Maori Pulp of fruit - Prized food of Maori Marlborough

Titoki Berries - Made a distilled liqueur from - Liqueur exported to California New Zealand Ash berries Alectryon excelsus - Edible fruit and fleshy part of root

PAGE 55 Source: various published sources NZ UNIQUE … continued

New Zealand unique potential plants used as waipiro (2010 or as available)

Name Part used Historical usage Suitable attributes Notes

Makomako Ripe berries - Berries eaten traditionally - Fast growing - Small tree up to 10m Aristotelia serrate - Berry jam made by early settlers - Forest and scrub land - Similar to elderberry wine Wineberry - Wine made by early colonists throughout NZ; Often on roadsides after clearing

Manuka/Kanuka Leaves - Used as a tea (by Captain Cook) - Very fast growing, - Captain Cook had recipe for brewing beer in diary Leptosperrnum - Used to brew beer by early - National coverage - Beer made at Mussel Inn “Captain Cooker” and in Belgium scoparium settlers

Rimu Fruit eaten raw - Leaves brewed to make a beer; - Common in all but driest - Tall forest tree; slow growing so not ideal Dacrydium Leaves added to manuka leaves and forests up to montane cypressinium molasses altitues Red pine

Kareao; pirita Roots - Beer brewed from roots - Very fast growing at - Fast growing vine Ripogonum scandens Juice from vine - Juice drunk from vine 5cm/day Supplejack Flesh of berries - Shoots eaten to cure scabies shoots

Matai Sap - Sap of tree called Matai beer - Forest tree reaching 30m Podocarpus spicatus Berries edible - Drilled base with auger and - Common throughout NZ Black pine tapped tree in lowland and montane forest

Nikau palm Hearts - Medicinal; used as laxative and - South to CHCH - Very slow growing therefore heart not suitable for eating as Rhopalostylis sapida Flowers to relax muscles during it kills the plant (only if desparate) Immature berries childbirth

PAGE 56 Source: various published sources 5. NEW ZEALAND UNIQUE SPIRITS – SITUATION & POTENTIAL STRATEGIC DIRECTIONS Developing a unique, defensible and protected New Zealand spirit is a great idea in theory that is easier said than done

NZ Unique spirit – Situation & Potential Strategic directions Attractiveness Scorecard

Concept - Create a unique drink leveraging New Zealand native botanicals or ingredients Ease of execution 0 summary - Product should ideally respond well to barrel aging to drive multiple quality-driven price points - Product should ideally suit consumption straignt/on-the-rock and as a key component in a signature cocktail Defensible to NZ 4 Long term growth 2 Examples Key global trends History in NZ New Zealand Global - Strong push on premium/super- - Early settlers distilled a wide range of premium due to much higher New Zealand native botanicals - Ti-toki liqueur - Amarula (South Africa) profitability and halo effect - Various small scale producers - Kahlua (Mexico) (primarily Ti-toki) - Tequila (Mexico) - Cognac (France) - Bourbon (Kentucky)

Opportunities Challenges What is required to win going forward? - Huge range of New Zealand unique plants available - Easier said than done - A good product nowhere else on earth - Creating a regional product tied to New Zealand - Rediscovering traditional Maori knowledge and rather than a brand sold offshore widespread experimentation of early settlers

PAGE 57 Source: Coriolis 4 2 0 high medium low TABLE OF CONTENTS

Section Page

Contents 4

Glossary of terms 5

Methodology & data sources 6

Summary & conclusions 7

1. Large and attractive market 8

2. Growing global exports 16

3. New Zealand spirit export are growing 20

4. New Zealand can win 25

5. Potential strategic directions 31

6. Investment opportunities 58 ACQUISITIONS The New Zealand spirits sector has seen some large transactions in the past five years

Identified acquisitions in the New Zealand spirits sector over the past 5 years (2006-2011)

Date Target Buyer Seller Price Details Aug 2011 Independent Liquor Asahi (Japan) Pacific Equity Partners NZ$1.5b - From Australian private equity firm (AU) Oct 2010 The New Zealand “Nine international Warren and Debbie N/A - placed in receivership in February 2010 by South Canterbury Whisky Company investors led by Preston (TBC); firm in Finance, owing an estimated $3 million Interglobal Brands Pty, of receivership - Purchased the 450 whisky barrel assets from receivership Tasmania” - “About 225 were barrels of single malt about 18 to 24 years old, which had been branded Lammerlaw, and the other 225 barrels were the former Wilsons brand, which were at least 12 years old” - Single malts include Milford, 1987, (cask strength) 1988 and South Island Single Malt, and blends the Water of Leith and Dunedin DoubleWood Oct 2009 26000 Vodka McCashin’s Brewery Wakefield Quay; in N/A - Ken Telfar and Warryn Bermingham started 26000 Vodka in 2006, receivership working from a corrugated iron shed in Mapua - Fell victim to the world economic downturn Dec 2006 42 Below Bacardi (Bermuda) Listed on NZX US$90m - Bacardi acquires the 42 Below vodka brands, including four NZ$131m flavored - Manuka Honey, Kiwifruit, Feijoa and Passionfruit and the newly developed products of South Gin, Stil Vodka, Seven Tiki White Rum, Tahiti Dark Rum and 420 spring water 2006 Independent Liquor Pacific Equity Partners Erceg family N/A - Pacific Equity Partners and Unitas bought 80 per cent of Independent Liquor following helicopter death of founder - Erceg family keeps 20% in firm 2006 Ti-toki Liqueur Douglas, Murray & Hirst N/A N/A

PAGE 59 Source: various company websites and articles; Coriolis SPIRITS – KEY FIRMS There are a handful of larger firms manufacturing spirits in New Zealand

Key firms in the New Zealand other alcohol sector (2010 or as available) Year founded Turnover Emp. Ownership Key products Notes

1987 $414.4m 300 Japan; listed RTDs www.independentliquor.co.nz; www.asahibeer.com (2010) (Asahi; TYO: 2502) Spirits Originally winery; moved into RTDs & spirits Beer Acquired by PEP following death of founder (M. Erceg) Acquired by Asahi (Japan) August 2011

1968 $605m 1400 Japan; listed Beer www.lionco.com; lion-nathan.com.au; www.kirin.com; (2010) (NZ) (Kirin; TYO: 2503) Wine www.kirinholdings.co.jp 1800 RTDs Lion, Beer Spirits Wine (NZ) trading at Lion (as of Jul 2011) Previously (Au) Spirits NZ company, moved listing to Australia; acquired Brands: Steinlager, Speight’s, Lion, Mac’s, Waikato Draught, Canterbury Draught, others

1930 $461.4m 500 Singapore; listed Beer www.dbbreweries.co.nz; http://www.apb.com.sg (2010) (K) (Asia Pacific Breweries; RTDs www.heinekeninternational.com SGX:A46) www.fraserandneave.com Asia Pacific is 42.5% owned by Heineken; 40% by F&N Previously NZ company, moved listing to Australia; acquired

2000 $10.8m TBD Bermuda; private Vodka www.42below.com; www.bacardi.com (2010) (Bacardi family) Gin http://www.southgin.com/ Rum www.bacardilimited.com Formerly listed in NZ; acquired

2007 $1.9m 25 (NZ) NZ; private Premix cocktails www.vnccocktails.com (2010) (Ke) 20-25 (McKillen,Couillaut & VNC Cocktails Limited established by ex founder 42 Below (Int’l) others)

1980 N/A 11-20 (K) NZ; private Beer http://mccashins.co.nz/ /2009 (McCashin family) Cider Regional small brewer; acquired 2600 vodka and is moving into spirits Spirits

N/A N/A N/A NZ; private [Retailing] http://www.themill.co.nz/ (Chris Simkin) RTDs Discount alcohol retailer Spirits Operates RTD/spirit plant in Australia

PAGE 60 Source: various company websites; various article searches; Kompass (K); Coriolis analysis and estimates SPIRITS – SMALLER/EMERGENT FIRMS There are a wide range of smaller/emergent spirits firms in New Zealand…

Key firms in the New Zealand other alcohol sector (2010 or as available) Year founded Turnover Emp. Ownership Address Notes

2010 N/A Various Australian 14-16 Harbour St http://www.thenzwhisky.com/ investors Oamaru 9400

2009 N/A NZ; private Thomson Whisky New Zealand (3471691) http://thomsonwhisky.com/ (Thomson family) PO Box 44356, Pt Chev, Auckland 1246

2009 N/A NZ; private International Trading Cartel (2261517) http://stolenrum.com/ (Holmes; Duff; others) L3 Buckland Building, 34 Customs Street, Britomart, Auckland 1010

2007 N/A 1-5 NZ; private Mana Shuzou New Zealand (1917224) http://www.manashuzou.co.nz/ (Carran family) 20 Oscar Road, Greenhithe, Auckland 0632

2009 N/A NZ; private Broken Shed Ltd. (2363655) http://www.brokenshed.com/ (Turner, O’Brien) 333 Beacon Point Road, Wanaka, 9305

1970’s/ N/A 1-5 NZ; private Ti-toki Limited (1775736) http://www.ti-toki.com/ 2006 (Hirst, Murray) 30 Elliot St, Riverhead http://boozee.co.nz/liqueur-2874.html

2005 N/A NZ; private Southern Distilling Co. (1592715) http://www.hokonuiwhiskey.com/ (Willmott; Wheeler) 627 Te Atatu Road, Te Atatu Peninsula, Auckland

1979 N/A 6-10 NZ; private Kings Liquor Ltd. (595034) Cream liqueurs Amor and Te Kaha 1993 (Broome, others) 16-18 Greenhithe Rd, Greenhithe, http://www.amor.co.nz

PAGE 61 Source: various company websites; various article searches; Coriolis analysis and estimates SPIRITS – KEY FIRMS … continued

Key firms in the New Zealand other alcohol sector (2010 or as available) Year founded Turnover Emp. Ownership Address Notes

1994 N/A 1-5 NZ; private Ditto Co. Ltd. (610478) http://www.distillerie.co.nz (Deinlein family) 656 Minden Road, Rd6, Tauranga 3176

1980/ N/A NZ; private Southern Grain Spirits (202999) http://www.southerngrainspirits.co.nz/ 1983 (Fitzpatrick family) 9a Peraki Street, Kaiapoi

1992/ N/A 21-50 NZ; private The Prenzel Distilling Co. (2344048) http://www.prenzel.co.nz/ 2009 (Steadman; Wilfred) PO Box 246, Riverlands Estate, Blenheim http://www.theprenzelshop.co.nz 03 578 2800

2006 N/A NZ; private Schnapp Dragon Distillery http://www.schnappdragon.co.nz (Knight; others) 1 Hoddy Alley, Takaka, Nelson

2009 N/A NZ; private Purple Monkey Finger Ltd. (2238575) http://www.purplemonkeyfinger.com (Brent King) 441 Robertson Rd, R D 1, Ruawai, Northland Made from Kumara

2010 N/A NZ; private Exotica Enterprise Ltd. (2449730) http://www.exoticaenterprise.com (Karani family) 7 Reeves Road, Pakuranga Auckland 2010

2011 N/A NZ; private Villa Italia Ltd. (3684535) http://www.limoncello.co.nz/ (Loggia; Turcato) 37 Kingfisher Drive, Kerikeri, 0294

South Pacific Distillery 1982 N/A NZ; private South Pacific Holdings Ltd. (150932) http://www.roaringforties.co.nz/ (Brian Hetzel) PO Box 1359, Nelson

PAGE 62 Source: various company websites; various article searches; Coriolis analysis and estimates SPIRITS – KEY FIRMS … continued

Key firms in the New Zealand other alcohol sector (2010 or as available) Year founded Turnover Emp. Ownership Address Notes

2004 N/A NZ; private Lemon Z Ltd. (1526884) http://www.lemon-z.co.nz/ (Grigg family) 5 General Gates Ave, Kerikeri, Bay of Islands http://www.hancocks.co.nz/brand.jsp?name=L EMON%20Z

Lighthouse Gin 1994 N/A NZ; private Greytown Fine Distillates (620865) http://www.lighthousegin.co.nz (Wright; Catherall; PO BOX 113 Greytown 5742 others)

2008 N/A NZ; private Aotearoa Distillers http://www.zumwohl.co.nz (Fuhrer; others) Level 7, 36 Brandon Street, Wellington, 6011

Wild Days Rum 2003 N/A NZ; private Wild Days Rum (1332982) http://wilddaysrum.co.nz (Duurloo) 21 View Rd, Onetangi, Waiheke Island

Bemrose Estate 1993/ N/A NZ; private Wildfern New Zealand Ltd. (1644265 Honey 2005 (Atkin) 5 Tarras Grove, Lower Hutt http://www.bemrose.co.nz/ http://www.wildfern.co.nz/

PAGE 63 Source: various company websites; various article searches; Kompass (K); Coriolis analysis and estimates www.foodandbeverage.govt.nz