HERE’S TO GROWTH!
HOW SA’S WINE INDUSTRY CAN CASH IN
the local wine industry is running the risk of producing too low volumes over the next three years, especially with regard to the more expensive wines – in other words, the category that South Africa is hoping to increase in order to boost its reputation overseas. This is the opinion of Hein Koegelenberg, CEO of La Motte, near Franschhoek.
In 2014, SA wine exports reached R8bn. While this figure was slightly higher than the R7.9bn produced in 2013, according to data in the Economic Survey of SA Agriculture, which has been adjusted by Sars and SA Wine Industry Information and Systems (Sawis), volumes dropped 19.6% over the same period.
In terms of agricultural products, SA’s wine exports are only exceeded in value by citrus exports.
The drop in production volumes (see box on page 27) is, among others, attributed to the removal of old vineyards at a greater rate than new stock has been planted since 2006. This goes hand in hand with little or no growth in the producer price of wine grapes and the waning profitability of some of the wine farmers.
In addition, the producers’ organisation VinPro is expecting a year-on-year increase
of 10% in production costs to reach a level of R45 519/ha. According to VinPro’s figures, the net farming income of wine farmers who were among the top third in 2015 was R21 063/ha or more. The smaller harvest expected in 2016, owing to less rain, could negatively affect wine farmers’ profitability even further.
How about SA’s exports?
In 2013, export volumes reached a high, thanks to favourable l ocal production conditions. I n addition, this could be fully exploited due to the fact that some European countries had smaller harvests. However, i n 2014 exports once again dropped (see table below).
Dennis Matsane, a spokesperson for SA’s largest wine company, Distell, points out that the slight increase in the value of wine exports in 2014 could be ascribed to a reduction in bulk exports of 65% in 2013 to 57% in 2014 and therefore a concommitant increase in exports of bottled wines.
This data does, however, indicate two bottlenecks:
The value of wine exports should in fact have been quite a bit higher in 2014 given the rand’s continued weakening since the middle of 2012.
The increase in exports of bottled wines in 2014 did not quite reach the expected price points and hoped-for margins.
Rico Basson, executive director of VinPro, points out that importers are objecting to pass on the full benefit of the weakening rand to SA wine producers. According to him, the volumes exported by local roleplayers are simply too small compared to those of our major competitors, with the result that they cannot flex their muscles in all cases when it comes to price negotiations.
Koegelenberg points out that the average price point achieved for a bottle of wine by SA in the UK is only £5.37 (R116), while the average price point in this market is £6.34 (R138). Data on the previous page gives an indication of the various wine-exporting
countries in the UK market. Koegelenberg says that France, with 44%, has the biggest share of the Chinese wine market, while the market shares of Australia, Argentina and Chile are 15%, 8% and 8% respectively. On the other hand, SA’s share of the Chinese wine market is only 2%, of which La Motte’s brands represent one third.
Expected figures for 2015
Siobhan Thompson, CEO of Wines of South Africa (Wosa), who is responsible for exploiting international platforms for SA’s wine exporters, is optimistic about the country’s performance in its targeted growth markets, among others China, Japan, the US, Angola, Nigeria, Kenya, Uganda, Tanzania and Ghana in 2015. Export volumes to these countries increased by double digits in most cases. However, the EU market, to which the bulk of SA wines is exported, remains under pressure.
The total export volumes therefore moved sideways in 2015. Although Thompson is hoping for year-on-year growth of 2% to 5%, she said at the beginning of November that this kind of growth appears to be highly unlikely.
A healthy balance between real export volumes and export margins will, therefore, clearly have to be found.
Brands and price categories
De Bruyn Steenkamp, KWV’s sales and marketing director, says that SA has to have several good global brands overseas in order to be more sustainable and profitable.
Nevertheless, Koegelenberg reckons that a complete turnaround to large global brands, as happened in Australia, is also not the ideal answer. Australian wines have gained a reputation for being “cheap and cheerful”, a trend that encouraged Australian winemakers to come to SA to look at our achievements with a rich diversity of estate, single vineyard and food wines.
SA does very well in the small category of top wines at the apex of the pyramid. In fact, SA’s yuppie winemakers, especially those who have made a name for themselves with the so-called Swartland Revolution, are still drawing attention, and foreign wine writers regard SA as an extremely exciting wine country. (Thanks to a new generation of innovative winemakers, the Swartland area has become known for unique, more complex wines in recent years that reflect the character of the terrior.) The dilemma with wines at the base of the pyramid that find their way to overseas supermarkets, is that the quality is in fact too good for this category, but not good enough to move up, says Steenkamp.
Several wine exporters agree that Wosa is concentrating on only the top category, while SA’s value-for-money retail category
is left to brand owners to drive their own foreign sales. They also agree that the wines in the middle category are the most difficult to market.
In general, wine grape producers in dry-land production areas such as Stellenbosch and Paarl are entering a more difficult phase than those in irrigation areas such as the Olifants River and Orange River valleys as well as Robertson, but this is not true in all cases. In fact, as far as profitability is concerned, the Breedekloof and Worcester districts are performing better than all the others. Yet, wine farmers who fall under the industry’s top third come from all nine wine districts, despite major differences in yields per hectare.
Basson reckons the profitability of wine producers in all of SA’s wine districts was more or less the same in 2004. “The change that has come about in the meantime tells a story of business models, management skills and marketing channels,” he says.
Consolidation, transformation and further growth
According to Basson, diversification possibilities on wine farms, especially with certain citrus varieties, which yield excellent net farming income, should not be forgotten. The only alternative is consolidation, also with regard to SA’s 559 wine cellars.
After the acceptance of the free-market system and the remodelling of KWV in 1997, real attempts were made to transform the industry, also with regard to ownership and land tenure. In addition, the industry drew up a strategic plan in 2001 – Vision 2020 (see box with milestones). Unfortunately, Vision 2020 was never truly implemented.
The SA Wine I ndustr y Strategic Excercise ( Wise) did, however, come i nto being i n 2014. The general aim of Wise is to ensure an adaptable, robust, competitive and profitable international SA wine i ndustry. Those who drive it realise that such changes require an effective management process, which includes creative stress, courage and the necessary leadership.
Koegelenberg proposes, among others, the following general solutions:
The inclusion of new, black farmers or shareholders in the wine industry.
The inclusion of trade agreements by, for example, the South African and Chinese governments.
Making a concerted effort to build a positive image for the South African wine industry, the establishment of brands and growth of wine tourism.
“We must start a new Distillers with black farmers and/or shareholders, but it should be an industry initiative. This is how Dr Anton Rupert helped [white] wine farmers in the 1960s when he established Distillers and the Bergkelder.
“The Bergkelder system applied quality control for the first estate brands in SA, and also organised the blending, bottling, packaging and distribution of these wines,” says Koegelenberg.
Furthermore, he points out that China has exempted Australia, New Zealand and Chile from the first 20% of its import duties of 47% on wine, while the full 47% is levied on SA wines.
Koegelenberg believes that the industry should reconsider its structures, especially as far as marketing is concerned, and that VinPro’s function should be extended – like Australia’s Wine Institute – to become the fully-fledged mouthpiece of the industry. After the transformation of KWV, a vacuum was created that has not as yet been filled.
According to Basson, Koegelenberg’s proposals form part of Wise’s comprehensive planning and projects.
“We must start a new Distillers with black farmers and/ or shareholders, but it should be an industry initiative. This is how Dr Anton Rupert helped [white] wine farmers in the 1960s when he established Distillers and the Bergkelder.”
Vineyards in the Cape winelands. Right: The South African wine industry is known for the strong development of its tourism market.
CEO of La Motte
Despite a decline in the growing of wine grapes, yields per hectare increased in the past few years due to great emphasis on modern pruning techniques and cultivation practices. Weather conditions were also favourable.
Rico Basson Executive director of VinPro
De Bruyn Steenkamp Sales and marketing
director at KWV
Siobhan Thompson CEO of Wines of South Africa
KWV’s head office in Paarl
The SA wine industry provides 290 000 people with jobs. In this image Wongalakhe Ngcenge is taking a sample of a load of Cabernet Sauvignon
grapes to register the grade Brix (the sugar level) before the load can be
delivered to a cellar.