Michael Fridjhon: The high and low road scenarios for SA wine

It’s no secret that the Cape wine industry is in crisis: not a crisis caused by years of pillage and plunder like Eskom, but nevertheless with some striking similarities. For a start, like Eskom, the problems seem intractable; secondly, the causes are largely chronic and have persisted for many years, arising partly from an inability to control the operating environment. Finally, like Eskom, the financial issues relate, at least in part, to the seemingly impossible task of fully recovering operating costs.

That’s probably where the similarities end – except to say that whereas now Eskom is on life-support paid for by the tax-payer, the wine industry has been forced to be self-sustaining, having previously operated in much the same fools’ paradise as the ANC-controlled power utility. Certainly from about 1920 to 1990, supported by a minimum pricing structure and access to the ruling political party, the wine industry worked very well for the country’s grape farmers: they were rewarded on volume rather than quality and successive white governments were rewarded with the votes of the Cape’s wine producers.

When the country’s grape farmers recognised that they were about to lose their access to political power they began transforming their modus operandi. For a while it appeared as if they had made a seamless transition. Exports were doing well, fuelled by international interest in South Africa as well as a weak currency. That benefit has long ago evaporated. Exports stagnated and then declined while domestic inflation has eroded whatever benefit successive currency devaluations conferred.

We all know the rest of the story: in the past three decades the number of grape growers has actually halved. Area under vine has declined by about 15% with a further loss of about 10% of the national vineyard predicted in the next decade. Only a fraction of the country’s grape farmers are making enough money to consider their businesses “sustainable”.

The figures are frankly chilling. Only 9% are making enough money to replace vineyard as it ages (or succumbs to sickness).  50% are breaking even on cashflow – but without the surplus necessary to replant. 3% are cash neutral while 38% are actually bleeding money. At the same time, sales are not really growing. Where they appear to be treading water, it has been at the expense of margin. Exports seem solid enough – until you unpack the data and discover that two thirds of what is leaving our shores is bulk wine earning no real profit for the growers.

You could argue (and there’s some truth to this) that the industry has always produced more than it could profitably sell. In the KWV-controlled era the shortfall was subsidised by consumers via the minimum wine price, creating an industry which was artificially bloated. On this interpretation what is happening now is merely a correction, with the systemic oversupply is finally being purged from the system.

While this is undoubtedly true, the way the market manages its own regulation is not necessarily what is best for the country’s aspirations as a fine wine producer. It’s perfectly possible for growers of the cheapest fruit in high yielding areas to flourish as prices move inexorably downwards. After all, as John Ruskin said almost two centuries ago “there is hardly anything in the world that someone cannot make a little worse and sell a little cheaper…”

Downward price pressure on our wines will produce two apparently contradictory outcomes. The one is the Ruskin vision of the triumph of the cheap and nasty. What this means is that those places where it is possible to make make wine more cost-efficiently will overwhelm those appellations where considerations other those of low cost of production reign supreme. Regions with plenty of sunshine and plenty of irrigation water will dominate. Regions where the terroir delivers more interesting fruit would  succumb. The economics of grape growing in our premium appellations simply make it impossible for growers to meet the price points demanded by the bulk wine trade.

This leads to the other possible outcome – namely that in order to survive, farmers will need to be more directly aligned to brand: brand adds value and eliminates or at least reduces the downward price pressure imposed on wine which has no alternative platform except as a commodity. You can buy an Italian leather handbag in the street markets of Florence for a fraction of what you will pay in the Ferragamo shop in Via de’ Tornabuoni.

As long as the Cape wine industry depends on commodity pricing it is under threat. The producers who are flourishing are those who have strong brands, and manage their own routes to market. The current crisis is a threat – or an opportunity. Those growers/producers who use it to evolve from a dependency on price determination beyond their control will survive. A significant percentage of the others will lose their properties and will watch developers turn their historic estates into row upon serried row of townhouses.

• Michael Fridjhon has over thirty-five years’ experience in the liquor industry. He is the 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 Trophy Wine Show.