I’ve been to South African twice in recent years and each visit has been eye-opening. The quality and value that the best wines provide is really world class. Wine sales have struggled to gain traction in the crowded, fragmented U.S. market, but I believe that hard work plus high quality equals a bright future for South African wines.
How is the wine industry doing in South Africa? I tune in about this time each year to hear what is being said at the Nedbank VinPro Information Day meeting, which is the RSA equivalent of the “State of the Industry” session that I chair at our Unified Wine and Grape Symposium.
This year’s conference included an analysis of vineyard trends, a roundtable discussion by industry leaders and a enlightening long-term perspective on RSA wine industry dynamics by my wine economist colleague from the University of Stellenbosch, Nick Vink.
I was especially interested in Rico Basson’s presentation on South Africa’s progress toward the Wine Industry Strategic Exercise (WISE) goals for 2025 because it seems to me that it represents an unusually clear set of objective and analysis. Each of the eight goals was given a green, yellow or red light rating. The discussion below is based on Basson’s presentation as reported by Jana Loots.
Making wine in South Africa is much easier than making a living making wine.I know from my visits to RSA that while the wine can be great, the wine industry’s profitability is a serious problem. Only producers that can sustain very high yields can consistently profit from bulk wine sales. And bottled wine producers face great difficulties getting the price premium that their high quality deserves.
The WISE goal is to increase industry average profitability to a sustainable 5% real rate of return on investment and — red light! — there is a long way to go on this front. The 2016 return was less than 1%, which is even lower than 2015. VinPro data indicate that “only 13% of the 3 300 producers farm at sustainable income levels, 44% are operating at break-even and 40% are making a loss.” Yikes!
There are many regions in other parts of the world where profitability is as problematic as in South Africa. I give the RSA industry leaders credit for owning their problem and working to resolve it. Objective analysis and serious discussion, although not always easy or popular, are the necessary foundation for effective action.
Not all the signs are “red light.” There is some good news on the inventory front, for example. The overall RSA wine sector swung from surplus in 2015 to tight conditions in 2016. Elusive equilibrium is the 2025 target. It is obviously difficult to raise price or even sustain it in a surplus market, so this progress is significant.
But it will always be difficult to balance the market both because wine is an agricultural product, subject to natural output variations, and also because of market cycles. Bulk wine equilibrium is especially difficult to achieve because of large yearly swings in global production.
The local RSA wine market provides a second optimistic green light. The domestic wine market grew more than 14% by volume over two years ending December 2016. That is very good news, but 80% of local wines are sold for less than 26 Rand (about $2) per liter.Less than 5% of wine is sold are more than 65 Rand (about $5) per liter. Early days, but moving in the right direction. Low domestic prices put added pressure on export markets for profitability.
The fourth goal is to transform the industry by increasing black ownership of wine businesses to 20% by 2025. That is a worthy and ambitious goal and certainly in line with the priorities of the South African producers Sue and I met. The 2016 ownership level is only 2% but Basson reported that progress is being made to lay the institutional foundations for transformation. Check back in future years to see how this develops.
Bulk versus Bottled: there is always tension between these two parts of the wine industry in any country. The WISE goals envision moving the industry from 60/40 bulk to 60/40 packaged goods. The rating is yellow here — cautious optimism due to higher export values and a new EU wine export agreement.Much remains to be done, however, both to develop new markets (see below) and to improve margins on export sales.
I think wine tourism is a key to South Africa’s future because the wine tourism opportunities are fantastic and visitors are often your best brand ambassadors. There is good progress to report in this area for many reasons. When I asked about the biggest barrier to wine tourism on my first visit to RSA I was told that there needed to be more direct flights to Cape Town. International landings increased by 22% last year. Green light.
Basson’s report ends on two positive notes. Good progress has been made in expanding both export volumes and values in the target markets of the U.S., China, and Africa (Africa represents a very solid wine opportunity today and in the future).
There has also been success in getting more producers to gain ethical accreditation for their wines. The goal of 100% ethical certification by 2025 is ambitious, but it would be both a great achievement in itself and could be an important distinguishing element of “Brand South Africa.”
So, is South Africa’s glass half full or half empty? Both, I think. It is critical to make progress on profitability because economic sustainability is a necessary condition for success in other areas. It is going to be difficult to achieve all these goals in less than a decade, but nothing happens unless you try. And keeping a public scorecard as Rico Basson has done here is one way to keep the RSA industry both honest and focused.