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VinPro Special Report
2011-03-01  |  Navigate through the negatives

Jana Loots

The South African wine industry is steering towards a crisis, with 2011 likely to be a watershed year for many producers. However, specialists at the annual VinPro Information Day were encouraging, advising them on ways to navigate through the negatives. Collaboration, adaptation and Government support are crucial.

More than 500 delegates from various sectors of the wine industry value-chain attended the day at the Lord Charles Hotel in Somerset West. It was held thanks to a financial contribution from Nedbank Business Banking.

Profit margins spiralling downward

“Primary wine producers are experiencing the lowest profit margins ever, with grape prices not keeping up with hiking input costs,” said wine producer and VinPro chairman, Abrie Botha. According to the latest VinPro Production Plan figures, average net farming income dropped 41% in 2010 (R3 696/ha) compared to 2009 (R6 277/ha) – continuing the downward spiral since 2004, during which an income of R12 236/ha was realised.

The result is that producers have not been able to maintain the annual recommended vine replacement rate of 5% of the total South African vineyard area. The total area under vines has declined since 2006, with annual production following a downward trend since 2008. “If this continues, the industry could face a massive production problem,” said Botha.

In order to address these challenges, producers should align their practices with wine goals, consider diversifying into other areas of farming and consolidate with other producers and cellars.

Good harvest prospects

On the up side, VinPro Consultation Service manager Francois Viljoen announced an estimated 4% increase in the 2011 wine grape harvest compared to 2010. According to the Sawis January estimate, a total of 1.3 million tons will be harvested, from which 1 010 million litres of natural wine, wine for distillation and brandy, grape juice and grape juice concentrate will be produced.

Although the Western Cape experienced a hot and dry season, the quality looks promising, with smaller grapes having good colour and flavour concentrations. “However, quality in the Northern Cape is still unsure, and we hope that many producers will still have grapes to harvest, following the extensive rain in December and January,” Viljoen added.

Economy is looking up

Further good news is that the global economy is looking up after the recession, and South Africa is – slowly but surely – following suit. This, according to Dennis Dykes, chief economist of the Nedbank Group.

While developed countries are still below par, developing economies such as China are generally strong.” Recovery is underway locally, however medium-term prospects will be moderate and consumer spending will remain conservative due to high debt and limited employment growth,” said Dykes, adding that improvements are expected in 2012.

Get your swagger on

“In the emerging black consumer base lies a big opportunity to boost domestic consumption, however proper research is needed,” said Botha, whose sentiments were echoed by two other speakers.

Black urban areas represent the largest untapped market domestically, with the buying power largely situated within townships, according to Eion du Toit, an independent ethnographer. “Screwcap wines and those with bright, African-inspired labels do not appeal to these consumers. They prefer traditional labels, cork closures and even the traditional dent at the bottom of a bottle – perceiving these wines as high quality,” explained Du Toit.

Nederburg Baronne is seen as the “Coca-Cola of wine”, Zonnenbloem, Four Cousins and JC le Roux are also very popular and Moët & Chandon champagne is perceived as a high-class drink.

“Tavern and shebeen owners are open to new wines. Build a relationship with them and have an open discussion about how both parties see your brand growing, with incentives along the way,” said Du Toit.

Ray Edwards, Spar’s head of liquor, said that although the main focus has been on the upper class “black diamonds”, a younger, more impressionable generation – the “swaggers” – present even greater opportunities. These consumers, aged 18 to 25, represent close to 30% of the country’s black adult market.

“Central to swag living is status, socialising and brands,” said Edwards. Unlike black diamonds, swaggers do not yet have disposable income, but have distinct tastes and are eager to explore new things. Their motto is “fake it till you make it”, mixing fake brand names with authentic brands, or buying expensive champagne or whisky collectively, posing with the drink and posting photos on facebook.

In order to get their attention, wine marketers should make their brand appear more exclusive; get the right celebrities to drink it, align it with the highlife, and pair it with brands already in this space. At the same time wines should be made more accessible. “Wine is an acquired taste and swaggers don’t have the time or money to experiment. Give them an easy, entertaining way to understand your product,” said Edwards. He also suggested that wine glasses be branded, as branding disappears once wine is poured into a glass.

Swing exporting problems around

South Africa’s wine industry is under pressure due to a limited domestic market and strong competition overseas from subsidised wine producers, said Jean Engelbrecht, owner of Rust en Vrede Wine Estate and wine export boffin. “The industry is in trouble, but not in so much trouble that we can’t get out of it. We need to take a realistic look at the problems and swing it around.”

A mind shift is needed in consumers that South African wine is a "must-have” and not a merely a “nice to have”. Engelbrecht said there has been tremendous improvement in South African wines over the past few years with regard to quality and international ratings. Producers should therefore no longer be satisfied with low price points, especially in the UK. “If we don’t believe our wines are worth more, no one else will either.”

The USA offers good opportunities for expansion, as it is a large market that is very positive towards South African wines at the moment. Distribution networks are, however, rapidly changing and producers should adapt at a faster pace. “Talk to importers and agents to ensure the quickest, most direct and cost-effective route for your product. Face to face communication is critical,” said Engelbrecht.

Call on Government for support

South Africa has come a long way in overseas markets, but is still falling behind counterparts such as France and Australia due to a lack of Government support. “Producers will no longer be able to sustain individual exporting efforts – we as an industry should make an urgent appeal to Government for support,” Engelbrecht said.

Botha reiterated this, saying that Government support should extend further than funding – more importantly, he called for greater consideration of the effects of new legislation on the wine industry, which is a major (2.2%) contributor to the country’s GDP. “Water and electricity costs and excise duties have soared over the past five years. It is crucial that the industry continues making a strong stand for the wine producer in discussions with the relevant Government officials,” he said.

Harald Pakendorf, political analyst, strongly urged producers to give their input on rural development plans before implementation. “The main focus of the National Growth Plan will be the development of rural areas, including small scale farmers and farm workers,” he said.

There is also great uncertainty surrounding new legislation regarding security of tenure, which will mean that workers cannot be evicted from farms.

Pakendorf predicted that South Africa would shift from a predominantly free-market system to Government-owned. “We’ve already seen this in the mining sector; I believe this will happen in the agricultural sector as well,” he said. However, input from the private sector will be crucial to reaching Government’s goals.

He said that some of the major influences on agriculture would be a financial and political shift from the West to the East and South Africa joining the BRIC group of fast-growing markets – made up of Brazil, Russia, India and China – “which will have a positive effect on trade and investments”.

Local wine media reprimanded

South African wine journalists were reprimanded by Jean Engelbrecht for being overly critical of their own country’s wines.

“I don’t know of another wine producing country that will accept the negative criticism that its own journalists write about its wines, as we do. I’m not saying all journalists do this; some do, and it hurts us internationally,” he said, adding that international wine journalists who haven’t been to South Africa draw their information from what is written by local journalists.

“It is an old problem, that the industry as a whole needs to rectify.” On the other hand, he said international wine journalists were “the best friends we have right now” in terms of positive reporting on South African wines.

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