Jonathan Steyn: How SA wine can realise its true value
By Jonathan Steyn, 25 April 2019
Originally published in Business Day: In 1999, after 81 years under the KWV state cooperative as the proxy for SA Wine, producers at last experienced a world unfettered by state capture. While this was widely celebrated, the institutional vacuum brought about by the repurposing of KWV created its own set of problems. Gone were the days of price control, state-sanctioned monopolies, marketing boards and surplus alleviation. Instead, producers had to design sustainable business models to survive on their own.
Furthermore, when Apartheid-state liberation occurred in the early 1990s, a rapidly growing community of SA wine producers, enthused by the novelty of market access, extended their brands and under-priced their wines in global markets. Spurred on by a bullish export market, increased demand and potential for higher fruit prices, certain areas such as the Swartland engaged in ambitious planting schemes. The effect has been devastating.
Fast-forward 20 years, and only around half of South African wine producers are breaking even or are just about profitable, and most of those by less than 5% on the bottom line. SA wine, despite a recent quality leap, is struggling to sustain itself, in part because it is simply undervalued, especially in international markets.
“Nearly half the packaged wine sold locally trades at less than R30 per litre,” VinPro chairman Anton Smuts told the delegates at VinPro Information Day in January. He noted that some imported water sells for up to R35 per litre, by comparison. “We cannot possibly remain sustainable at these price points,” he insisted.
According to VinPro’s Christo Conradie, by 2017, South African wine exports represented the lowest value out of all mainstream wine producers, at a staggeringly low aggregated global market price point of €1.27 (€1.95 for packaged wine) for a volume of just over 500m litres (around 250m litres packaged). This compared to new world counterpart USA’s global aggregated export market price of €3.80 (€6.34 for packaged wine) at a volume of 380m litres (around 195m litres bottled).
A latent problem surfaced through deinstitutionalisation of SA’s wine sector is that resolving grand societal challenges, such as transformation, is difficult when economic growth is constrained. Without inclusive economic growth, the wine sector cannot achieve its stated imperatives of benefiting people and planet. And, though small wins have been delivered by the Wine Industry Strategic Exercise (WISE) in recent years, as fast as we try to fix things, more problems emerge. This is the nature of grand societal challenges.
The critical struggle for SA Wine going forward is going to be to effectively integrate market and non-market actions to address these issues. This necessitates negotiating innovation on differentiation, pricing, branding and quality on the one hand and societal impact, advocacy and industry image on the other. Considering our legacy, it further requires sincerity: a consistency between our stated beliefs and our actions. We must “walk the talk”.
On the market side, one of the first things we need to address is marketing capital. Right now, we’re simply not putting enough of it behind our country brand. The marketing budget for Wines of South Africa (WOSA) – a not-for-profit industry organisation established to promote South African wine in international markets – is around R50 million, funded by industry levies. Australia’s equivalent, Wine Australia, utilises a budget of around AUS$50 million. Wine Australia is also funded through levies and user-pays charges, but supplemented by the Australian Government, which, according to its website, “provides matching funding for research, development and extension (RD&E) investments”. It’s clear we’re not able to compete on that front.
In addition, a relative dearth of free trade agreements for South African wine isn’t helping, and BRICS membership does not seem to be improving matters. Meanwhile, a newly-signed free trade agreement with China has seen Australian wine exports to that country leapfrog other nations’ in volume. Australia pays zero import duties under the agreement, despite not being a member of BRICS.
It also seems unlikely that any relief will come via government policy matched funding or subsidies, as in Australia, any time soon. We are seeing initiatives like AWARE (Association for Alcohol Responsibility and Education) being supported, but it’s understandable that further government investment will be tentative at best until the industry can demonstrate progress in all valuable beneficiation programmes.
On the non-market side, arguably the most strategic area for the wine industry to engage at this stage is the seeming lack of cohesion at the top of the policy chain. There is a need and indeed calls to start creating a single voice and resonant identity for the SA wine brand. This might include reducing the number of brands to market. South Africa enjoys plenty of diversity in terms of output, but this isn’t necessarily a good thing. It has long been mooted that by reducing brands to market we can focus efforts on building a stronger collective identity.
The legacy of state domination in the sector has perhaps created suspicion that collective identity is simply refashioning industry domination. Understandable, but how does the industry achieve its market and nonmarket goals without unified collective purpose? Within the local industry, there are several groups that are already trying to create value for their respective constituencies: Stellenbosch Cabernet Collective, Pinotage Association, Chenin Blanc Association, Swartland Independent Producers, and Old Vines Project are good examples. What they are trying to achieve in these representative associations needs to translate into an even bigger collective, consolidating these efforts in a way that creates a single voice and purpose for South African wine producers, while retaining individuality.
One issue that can be addressed as a lobby, for example, might be how to drive more revenue back to primary producers, one in three of which is running at an unsustainable loss. VinPro estimates that around 900 producers had shut down in the decade ending in 2017. At the very least, a unified industry can address the fragility of the producer sector and ensure that value realised reaches them.
This approach, in tandem with a market strategy that is working to elevate South African wines’ relatively lowly status in the global market has the potential to deliver strong results.
As a relatively small industry, we shouldn’t be drifting near the bottom tier of the global shelf, especially given the quality of some of our wines. We cannot compete in terms of volume, but we certainly have the talent and quality to sell uniqueness. Without a singular purpose, identity and strategy being promoted through greater industry consolidation, it will be difficult to find niches in which to embed ourselves and realise the true value of our product.
- Jonathan Steyn is the Course Convenor: The Business of Wine running at the UCT Graduate School of Business this May.