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Michael Fridjhon: What’s a fair price to pay for a bottle of SA wine?

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There’s an apparently irreconcilable issue around wine pricing in this country. VinPro’s research shows that the majority of growers aren’t breaking even on their production costs (which is why our vineyard area reduces every year) and so we are told that we need to wrap our heads around paying more for wine. At the same time we see premium prices rising well ahead of inflation, suggesting that there’s no connection at all between what it costs to produce a bottle of top-end wine, and what punters are being asked to pay for it. This anomaly is not limited to the domestic market: even a writer as sympathetic to South Africa as Jancis Robinson, and who agrees that Cape wine suffers from a country discount in world markets, raises a metaphoric eyebrow when Mullineux’s Leeu Passant is offered in the UK at £80 or so per bottle.

Parts of the paradox are easily explained. The below-cost pricing afflicts mainly grape growers – in other words, primary producers. While they are responsible for the industry’s essential raw material, they are without brand and therefore powerless. They simply grow and sell the fruit which is transformed into wine. Their crop has a very short shelf-life – they are at the mercy of market forces they can do very little to influence. Their position is no different from that of labour when there is no shortage of unskilled workers: someone who is hungrier will work for less.

At the top end of the market however, we are talking about the sales of branded wine. The owners of these assets are like skilled workers where demand for their particular qualifications exceeds the size of the labour force. Accordingly they are charging as much as the market will bear. The capitalist philosophy says we should praise their prescience: they have manoeuvred themselves into the best possible position, given the environment in which they are operating.

The growers need to earn more if they are to survive in the long term. They are asking their customers (the fruit processors) to pay them more than the going rate – otherwise they will finally succumb. Vinpro, acting as their labour union, has a powerful argument in favour of this seemingly irrational request. “If they don’t earn more,” says Vinpro, “they’ll finally close down and then there will be no more grapes, and no more wine industry. That’s why you need to pay more now, even when you can force them to accept less. At the moment, you’re gaining in the short term, but losing out in the long term.”

Curiously, this is exactly the argument that their own farm labourers are putting to the growers. “We can’t survive on what we’re being paid,” they say. “There’s no alternative employment, so we’re forced to take whatever is offered, but in the long term this structure will be bad for everyone. You need labour, just as fruit processors need grapes. At the moment, you’re gaining in the short term, but losing out in the long term.”

There’s nothing hugely irreconcilable about these two positions viz. Growers and labourers. The growers are going bankrupt – they can’t afford to pay more – and the workers are starving, they can’t withhold their labour. However, this was also a metaphor to describe the relationship between growers and producing wholesalers, and here the position is, in theory, slightly less deadlocked. The processors could pay more for the fruit, if they could earn more for their wine.

Since what is paid for the fruit cost is relatively immaterial once the price of a bottle of wine rises about R40, it does seem as if there could be a little give here. If you assume an average Coastal Region yield of around 7 tons per hectare, growers need to earn R8k per ton. Many are getting less than R6k. An increase of 30% in the grape price would achieve this – and make the fruit growers viable. The extra R2000 per ton translates into less than R3-00 a bottle when it comes to the price of the wine. This is an amount which ought to be affordable for all buyers of bottled (not box) wines. In fact, if retailers were pressured to do so, they could emulate many of the oversees chains/multiples and demand evidence a) that grapes are only sourced from farms whose fruit prices enable them to achieve certain minimum revenues per hectare and b) that the labourers on those farms are paid a living wage.

Instead, producing wholesalers screw the growers because the retailers screw them: a little give right through the system would save growers from financial disaster and keep their workers fed and clothed. It would make cheap wine a little more expensive, but it’s a safe assumption that most consumers of these products would see the merit in this.

This bottom-of-the-market problem is vastly different from the pricing madness which permeates almost every product over R100. Here there is no connection between price and input costs. Producers and wine marketers are simply using the price-tag to convey an impression of value. This situation is not limited to South Africa: there are several studies which show that, excluding land price (itself a factor determined by brand value) it costs very little more to produce a bottle of Chateau Margaux than it does to produce generic wine in the same appellation.

With high priced wines, consumers choose to screw themselves: they feel better for having paid more for bottle A compared with bottle B. That’s why they are often surprised at how well inexpensive wines perform at blind tastings. The question is, do they ever learn from their folly? Does the discovery that they can get better value by being less snobbish in their choice lead to a change in purchasing habits?

This issue has particular relevance for South Africa in international markets. We know that premium wine drinkers elsewhere apply a country discount to South Africa – effectively taking the view that our brand isn’t good enough for prestigious dining environments: good for a barbecue maybe, but not for a high-end dinner party. Changing this perception has been at the heart of what the industry’s leading producers have been invested in for several years, and progress has been disappointingly slow.

The results of a recent Christie’s wine auction in Hong Kong suggest that we are at the cusp of a breakthrough: I have been conducting tastings of fine Cape wines to a select audience of the auction house’s top wine buyers for a couple of years, showing them (by pairing the SA examples blind with leading French wines) how extraordinary they are in absolute terms – not merely in the context of value-for-money. Then, at the March sale, those who had been exposed to these wines were given an opportunity of buying a limited selection from the same producers whose wines they had been tasting. It turns out they were ready to position the South African wines in the same price bracket as Cru Classe Bordeaux from a decent vintage – in other words, they were taking the country discount out of the equation, and buying on what they perceived to be a fair-value basis.

If this is correct, and it’s an indication that over time South Africa can re-position itself as a brand, growers at the bottom of the market are likely to benefit at least as much as producers at the top. The former will profit because even cheap SA wine will go up a price point. The latter will obviously earn more from the export markets, and consign more of their top selections to consumers whose purchase motivation isn’t driven by patriotism. Whether these benefits will percolate down to the folk working the vineyards remains to be seen. Until Vinpro discovers that the issue of conditions of employment cannot be separated from the prices paid to the growers, it probably won’t, which will leave the industry as politically exposed, and therefore as threatened, as it is right now.

  • Michael Fridjhon has over thirty-five years’ experience in the liquor industry. He is founder of Winewizard.co.za and holds various positions including: Visiting Professor of Wine Business at the University of Cape Town; founder and director of WineX – the largest consumer wine show in the Southern Hemisphere and chairman of The Old Mutual Trophy Wine Show.

2 COMMENTS

  1. Michael/ The SA wine industry makes wines no worse (and probably better) than all the comparable new-world producers, especially NZ & Aus. Yet we have perpetuated the expectation from our markets – both local and abroad – that our wines will be cheap. Always.
    Time to bite the bullet and change that perception. Even if it means crop reduction of about 15 – 20% by everyone. Match this with a similar price increase. The outcome will mean even better quality wines, lower overheads from lower production and processing – and probably a surprisingly small fall in income. We will still be cheaper than our main opposition from the new world, but it could prove to be the start of a brave new world of more realistic valuation and pricing.

  2. The quality of the local confidence in the South African wine industry is playing catch up to the quality of the new generation of South African wines. Until South African wine-makers start believing in their own ability to produce world-beating wines, it will be difficult to project a world-beating image. The tall poppy syndrome is currently at play in South Africa.

    South African wine currently has all the ingredients to fly very high – confidence is all that we need to ignite it.

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