Australia and South Africa are rivals on the rugby field, where they compete at the highest levels, and on your store’s wine shelves, too, where they fight for shelf space and consumer attention.
It is a good idea to study your opponent to see similarities and differences and that is just what Christo Conradie did earlier this year at the Vinpro Information Day meetings in the Cape Winelands in a talk called “Producer and Winery Realities.” Conradie revealed the results of a study of profitability within South Africa’s wine industry and the data were sobering. (You can download a pdf of the presentation here.)
Profit and Loss
Overall, only about 15% of South African producers are making strong profits while 49% have what might be unsustainably low profitability and 6% are breaking even. Fully 30% of producers reported losses. That’s a lot of red ink.
That news got my attention, but Conradie’s comparison with Australia really made me sit up. Breaking profitability down by region, the data for Australia show what you might expect. Profitability is best in some of the premium wine areas — Barossa, Yarra Valley, McLaren Vale, Coonawarra — where a majority of producers are profitable. But in Riverland and even in Mudgee the red ink flows and flows. Almost no one reported a profit in 2014 in these two regions.
Lots of reason for red ink. Weather, exchange rates, market momentum, problems in China and so on. Margins are the key to profitability and the premium prices that Barossa and Coonawarra producers are able to earn are certainly an important factor in their success.
The Premium Premium Problem
Now turn to an analysis of South Africa’s regions and a somewhat different picture emerges. Stellebosch is a premium wine production zone but also a high cost area. The price premium that Stellebosch wines receive in the market does not appear to be enough to offset higher per bottle costs, eating into margins. Only 8% of Stellenbosch producers reported strong profits while 56% indicated loss.
The South Africa regions with the best profitability were generally those where higher yields were possible, which brings down cost, although Conradie made a point to show that the problem is not as simple as getting higher yields. A balance of many factors is needed to produce sustainable profit levels.
Sue and I last visited South Africa in 2014 (I was a VinPro Information Day speaker) and we were surprised by the wine prices we saw. Converted into dollars, the inexpensive wines (including a South Africa-sourced Gallo Barefoot that we spotted in one supermarket) were about where we expected them to be. But premium RSA wines, many of them world-class, seemed under-priced, especially when converted to U.S. dollar amounts.
In other words, it seems that the quality price premium for South African wines is relatively low and I think this is true in the export market as well as for domestic sales. Higher quality South African wines get higher prices, but not always to the same extent as producers in other countries. Or at least that our unscientific observation.
This is not news to the South African winemakers, who seem divided about whether to focus on the profitable higher-yield sector of the industry or to invest in reputation and regional identity to differentiate products and raise the premium premium (if you know what I mean). Selling more is important in the short term, but earning higher prices is key in the long term.