Anatomy of Wine Profit and (Mainly) Loss: South Africa versus Australia

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.)rsa

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.oz

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.

Supermarket Empiricism

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.

One response

  1. Mike,

    I think the financial situation is far worse than reported. After reviewing the PDF, it appears this analysis is just done at the winery production level. When the total cost of trying to market wines overseas, including the uncompensated hours for the owners and winemakers, and the total T & E (travel and entertainment) expense gets cranked in, a small number of cellars have a truly positive cash flow. The other thing seldom reported is “true depreciation,” especially of older or virus infected vines; at least 3%, probably closer to 5%, of most vineyards needs to be replanted annually; but when the enterprise is losing money, vineyard replacement is usually the first area to be cut. Accordingly, many farms are seeing their true operating stock fall in productivity and value.

    In South Africa, where we have some experience, and lots of friends who also grow grapes, the number of vineyards being yanked out on a permanent basis and replanted to fruit trees is growing. So while wine quality continues to rise, the lenders own more of the farms every year and the historical owners own less. (Equity is decreasing, which makes it difficult to attract any new equity partners.)

    Back in Napa and Sonoma, the rich are getting richer. With Napa Cabernet at $5,000-$6,000/ton, established farmers are going to the bank every day. Russian River Chardonnay is at half that level, at best, and while profitable, the prices need to be higher to justify the total investment cost. So we’ll replant to Pinot Noir and feel sorry for our chums south of the equator.

    Dave Jefferson Kenwood, CA 95452 415.342.3141

    From: The Wine Economist Reply-To: The Wine Economist Date: Tuesday, May 10, 2016 at 11:02 AM To: David Jefferson Subject: [New post] Anatomy of Wine Profit and (Mainly) Loss: South Africa versus Australia Mike Veseth posted: “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 similariti”

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