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SA wine: At a crossroads

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OLifants River vineyards
The drought has seen drastic water restrictions forcing farmers to make tough decisions when it comes to irrigation.

The most staggering statistic delivered by VinPro managing director Rico Basson at the organisation’s Information Day sponsored by Nedbank last week was that a mere 14% of producers are in a viable position or properly profitable while 37% are loss making and the rest are either low profit or break even.  Average return on investment in 2017 was less than one percent, the target of 20% by 2025 that VinPro has set in terms of the Wine Industry Strategic Exercise seemingly a very long way off.

Ok, wine prices are set to rise due to a looming wine shortage both domestically and internationally and this should bring producers some short-term relief but production costs have gone from an average of R19 000/ha in 2004 to a projected R51 790/ha in 2018, an increase of over 170% and it’s not hard to see why the number of growers is in declining rapidly (from 4 656 in 2004 to 3 142 in 2016) or why the national vineyard has fallen from an all-time high of just over 102 000ha in 2006 to under 96 000ha in 2016 and might reach as low as 85 000ha by 2022.

Attempt to put a positive spin on the above and you could argue that with the wine industry cyclical by nature, we’ve just had a period of supply exceeding demand, leading to stagnant grapes prices. This causes inefficient producers to be shaken out of the market, the process we are currently witnessing, but demand will inevitably increase and this will result in improved profitability for the remaining producers as well as balance between supply and demand until the whole shebang begins again.

This doesn’t allow for a whole gamut of extraneous factors, however. The observation might be made that while we have some very canny operators at both the top and bottom of the market, those servicing the middle simply aren’t as good as our competitors. There is, of course, a country discount to be factored in – South Africa’ s overall image not what is should be relative to other wine producing nations, this resulting in buyers, consciously or unconsciously, disinclined to pay a premium or even parity for our wine.

Then, primary producers might insist to themselves  that they  must negotiate a more equitable deal with those higher up the supply chain such as distributors and retailers but you have a sense that the odds are, and always will, be stacked against them. That’s not defeatist – we are talking about the very nature of the free market economy which is premised on getting the best product at the cheapest price to the end-consumer.

One way to achieve profitability is to focus on scalability and branding, as Mike Ratcliffe of Warwick in Stellenbosch argued in his Information Day presentation. He noted that while the global economy is busy becoming more consolidated (Amazon’s acquisition of Whole Foods being a case in point), the South African wine industry is increasingly more fragmented, a proliferation of small-scale producers having occurred in the last 10 years or so. What is urgently needed therefore is “fewer brands, bigger brands and more focused brands” – Chocolate Block, for instance, an example of a local label able to stand proudly alongside world greats like Lafite, Opus One, Screaming Eagle and Cloudy Bay.

Ratcliffe conceded that the “small guys” or the “mavericks” have been key drivers of South Africa wine industry’s success in the last five or 10 years but still argued for producers to be more business-minded. “Not everybody wants to build a mega-company but iconic wines made in tiny quantities and sold too cheap [ultimately doesn’t help our cause]”, he said.

Contrary to Ratcliffe, I’m grateful for the independents out there who are motivated by love of the land and a life less ordinary as much as profit but perhaps that’s precisely how we go into this mess in the first place.

1 COMMENT

  1. I was unfortunately unable to attend the VinPro day and I’d be interested to learn which wine business models make up the 14% that are profitable. Is there a pie chart example of which business models dominate this 14%? Similarly, what makes up the 37% that’s loss making? Are there business models that dominates this 37% segment?

    It seems to me that if your business model was the same or similar to the 37% loss makers, you’d have to change how you go about things, and ideally copy those models found in the top 14%. Or are the majority of us just happy to float along in the middle somewhere, just keeping our heads above water?

    More basically, if the bottom 37% of the industry does not change its business models/approach, we cand surmise that this 37% should expect to be wiped out sooner rather than later (especially under current conditions). Is a 37% drop out rate therefore inevitable in the next few years? How long can a business stay unprofitable or are these businesses just continuously being propped up annually by outside funding, as there is too much of an emotional attachment to just let them go?

    Pricing
    Also, there is talk of putting up our prices by as much as 20% because the opportunity is there as a result of a global wine shortage. So we do this. Next year there is a bumper crop and surplus and then the UK would rather buy in Chilean/Argentinean juice because we have just gone and put up our prices, and their prices are now 50 pence/L cheaper?

    Or are we able to put up our prices because they have already done so, because of tight supply. We can follow the trend – as South Africa is a trend follower re pricing and not a trend setter. The northern hemisphere crop comes in only 6 months after us – so there is only really a short 6 month window period internationally available. Can we really put up our prices due to a shortage domestically when there is not a shortage of SA juice internationally in the bigger scheme of things as we are only a pin prick in the entire global industry?

    Do we raise our prices due to a volume shortage or do we raise our prices because we have earned our stripes and there is now an international perception that our quality has improved to match a pending price increase? We have the like of Tim James saying that our top end more expensive wines are not selling/moving off shelves, and then we have Vinpro saying we should be putting up our prices. Why up our prices, is this to save the bottom 37% of the industry? Maybe the bottom 37% of the industry should just not be operating as it is currently, in the first place? Well if the bottom 37% is unprofitable, then go figure.

    Did Mike Ratcliffe allude to the fragmented part of the industry being unprofitable and the focused end of the industry being profitable? Small crafty wine labels selling shares to investors to continually raise working capital is also not a sustainable business model (as their investors would soon realise). Is continuously launching new labels and new SKUs an indication of grasping at straws and hedge betting? Or is it’s a means to an end, as in to test the market in terms of its receptiveness higher end styles of wines and price points? Does an initial fragmented approach lead to tested results and focused follow on? We are now talking about planting new varieties and it seems as if every second person is planting something different. Is the the layman going to support many of these unpronounceable varieties? Are the noble grapes varieties not the tried and tested varieties from a market perspective?

    So basically, what is working and what is not? What’s not needs a reboot. Not just for themselves but also for the SA industry at large surely?

    Future plantings, 7L of water = 1L of wine stuff
    Interesting, from a viticulture perspective I would rather be working with healthy vines, vibrancy and extra hang time instead of stress, vine decline and therefore shortened hang time.

    No business person would invest in a vineyard area where the vineyards are in constant decline. Unless you find yourself in an area where nothing else grows of course – which would be sad as we all know that wine grapes bring in some of the lowest return per hectare from a crop perspective. You would have to make great wines at great prices and be able to sell the wines to justify this, and we know there are only a handful of these examples (are they in the top 14%).

    Did Vinpro indicate that the vineyard footprint needs a huge shift besides as much as 15 000 ha being pulled? In the whole of France harvest is basically only the month of September. Early would be last week of August and late would be first week of October – no matter which area/wine region you are in. In SA we start in first week Jan and pick till mid/end April. So the northern hemisphere/Old World (who know a few tricks from 1000ss of years of wine production) know to plant to harvest around the equinox, their 21st/22nd September and our 21st/22nd March. Also to plant vines where you have about 400 – 500mm of summer rainfall (vine budburst to leaf drop).

    If we had to replant on just those two parameters and then spread to other areas based on where you could supplement with “available” irrigation – I think the vineyard footprint would be very different – someone should do this exercise. Unless of course it’s the bulk guys making up the 14% that’s profitable and then we should all be moving our vineyards up further north to crop at higher tonnes, on the back of developing greater irrigation schemes, that’s if there is enough natural rainfall to fill these irrigation schemes in the future.

    Let’s consider the hypothetical case of boutique producer with 1.5ha available to plant. Does he plant some other crop, a noble wine grape variety or an untested and an unpronounceable new geeky wine grape variety? Sounds like a braai (no, no would be too quick) or rather a lamb potjie is required to give us enough time to find the answers at the bottom of a decent bottle (or two) of vino.

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