Finweek English Edition - - FRONT PAGE - By Jac­ques Claassen

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.

Hein Koege­len­berg

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.

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