08 Feb 2017 Tough times, but SA wine industry is tougher
The South African wine industry is going through some tough times, but sustainable growth is on the cards. What’s needed is a clear game plan, a stronger domestic market focus, ingenious marketing and a collective drive towards higher price points.
The Nedbank VinPro Information Day in Cape Town on Thursday [2 Feb] revealed its annual forecast to around 750 wineries, producers and other role-players in the wine industry value chain. The day centred on ways to unlock value from the farm gate to the shelf.
Economy to remain strained
South Africans should not be too optimistic about the economy in 2017, following a challenging year in 2016.
Nicky Weimar, senior economist at Nedbank, said the South African economy grew by only 0.4% year on year in the first three quarters of 2016. Slowed growth in China had a significant impact on commodity reliant industries, a vicious drought led to higher food prices, which along with a rise in inflation put pressure on consumer spending.
“Government’s weak finances and political turmoil creates further uncertainty, which will continue to have an impact on the economy in 2017,” said Weimar. She expects GDP to grow by 1.1% in 2017, with the rand forecast to strengthen to R13.85 against the US Dollar and R14.37 against the Euro.
Get the price right
The wine industry is currently in a slump, with only a third of grape producers farming at financially sustainable levels and return on income dropping below 1%. The average net farming income is at around R45 000/ha compared to the R70 000/ha required in order to be sustainable.
“We need to increase wine prices collectively to get to that level. Stop dumping wine at cheap prices in our export markets – it hurts the industry as a whole,” said VinPro chairman Anton Smuts.
According to VinPro MD Rico Basson, it is encouraging that the industry has seen export value growth of 10% to nearly R9 billion, compared to volume growth of 3% to 428 million litres in 2016.
“However, bulk wine which is sold at lower prices remain the biggest contributor in terms of volume.”
The Wine Industry Strategic Exercise (WISE) target for bulk versus packaged wine ratio by 2025 is 40:60, compared to the current 61:39.
Drive quality, look local
“If the wine industry is in a difficult spot, don’t worry – it’s normal,” said prof Nick Vink, dean of Stellenbosch University’s Agrisciences faculty. Since the start of the industry in the 17th century, contractions would last for a decade and be much more severe than expansions that lasted around 8.5 years.
Producers and wineries have traditionally focussed on driving quantity rather than quality and although this started to change in the 1970s, sanctions curtailed exports and domestic sales were primarily focused on the white consumer.
“Since democracy in 1994, the industry has become heavily dependent on exports, which is now seeing slow growth. It’s time to get back to that earlier drive of quality and refocus on the domestic market to get us out of the current slump,” said Vink.
Basson reiterated the importance of the domestic market, which has seen a hike of 50 million litres in the past two years to 400 million litres.
“Again, however, the biggest contributor to this increase is the bag-in- box segment, which is sold at lower prices and needs to be addressed.”
Healthy, but smaller harvest underway Wine producers and viticulturists expect a harvest close to last year’s size due to heat, drought, black frost, wind and a decline in area under vines. The 2016 harvest amounted to 1.4 million tonnes.
On the upside, the dry, windy conditions resulted in healthy vines, uneven bunches and smaller berries with greater colour and flavour intensity.
“We can really expect good quality wines from this harvest,” said Francois Viljoen, manager of VinPro’s viticulture consultation division.
Due to the smaller harvest, as well as an increase in local demand, stock levels are projected to be the lowest in 5 years at the end of 2017.
Rattle the marketing cage
“Don’t think because you’ve got less wine the price will automatically go up. Wine prices are not driven by availability, but by demand from the consumer for wine as a commodity,” said Michael Fridjhon, wine critic and columnist who led a panel discussion on ways to unlock value in the industry chain…..