View The Inconvenient Truth - The South African Wine Industry here: http://bit.ly/truthwine
The problems, such as the continued uprooting of vines and failure to replant, are partially addressed but the solutions are nowhere to be found in this video. Certainly, the failure to replant is due to marginal, if any, profitability for farmers and wineries. Further, the extent of the deteriorating condition of a great many planted RSA acres is very difficult to quantify but a definite Cape Winelands reality. So the wine production base is likely in a worse state than publicly acknowledged, and survival issues abound.
Since this discussion is about survival, change and transformation in the so-called South African “wine industry", let’s begin with suggesting we start calling ourselves SA “wine producers” rather than “SA wine industry,” with its factory facility connotations. Wineries have been referred to as “producers” by the trade for decades, so including the wine farms and everyone else in the value and supply chains can fit comfortably into the collective term “wine producers.” (Further, the Hollywood movie industry uses the term producer as the chap/company who gets it all together to make a movie, not an entirely strained metaphor for growing, making and selling premium wine. And almost the only occupation sexier than owning a winefarm is being a Hollywood movie producer, so let’s commingle the terms and hope for the best.)
At the 2018 WOSA AGM, we learned that 20% of the annual budget is now mandated for assistance of BEE wine businesses. Such efforts are usually referred to as assisting Transformation, transforming Brown and Black workers to managers and owners; that acknowledged as a national goal, a still greater Transformation is now essential for the survival and well-being of the entire South African wine endeavors, encompassing not only new Brown/Black owned businesses but all traditional and family owned/managed farms. In short, we need a rising tide to float all South African wine boats, and making a tide rise by ourselves is a big undertaking.
What follows are thoughts regarding the future of South African wine producers, especially their inability to sell wine profitably into the largest wine market in the world, the USA. As a Napa/Sonoma grape grower for the past 45 years, partner in a Sonoma winery for 20 years, and co-founder and director of a Breedekloof wine farm for the past 18 years, I have some experience to share in the wine grape arena in both parts of the world. Nevertheless, my experience as a wine salesperson is more limited: while I have attended all Cape Wine events since 2002 and have been involved in RSA wine importing and marketing efforts of our Silkbush brand since 2010, I have not made a living as a wine peddler. More importantly, the last 10-15 years RSA branded wine sales have plateaued at roughly 1 million cases per year in what is now a 400 million case US market. At .1/4 of 1% of the market, this is a notable marketing failure for our producers. For example, the “South African wine section” which existed 20+ years ago in Safeway and a few other US grocery store chains has disappeared. So if your brand is not already established in the US, forget about trying to get in the conventional way. It is not going to happen. Collectively, South Africa perhaps had a small chance starting after 1994, but was naïve/unready and blew it with inferior wines and inadequate marketing. (The competition was also focused and ruthless: Australia with low priced [Yellow Tail], New Zealand with fresh Sauvignon Blanc, and Argentina with very acceptable Malbec, just to name three major wine regions who grew sales wildly in the US. Their pricing remains competitive and they now own the shelf space that might have been ours.)
As the Managing Partner of a vineyard investment and farm management company, we have survived many vintages, and become successful in NorCal. While leading my farming company for many decades, I freely acknowledge I am not a “real dirt on the boots farmer” as I have never driven a tractor or pruned a vine. (Fortunately, my Afrikaner partner, Anton Roos, is an exceptional farmer, educated at Stellenbosch in viticulture and oenology, and he makes up for my shortcomings; as his bride so succinctly puts it, “Anton can do anything.” Amen.) My other farming partner back CA, John Rauck, has run our NorCal vineyard operations for 35 years. While speaking less Spanish than I, he has proven himself as an inspirational leader and financial fundi. Great farming partners such as these guys are essential for survival and potential success in the wine grape business, and I have been fortunate to have them both at my side.
In addition to resourceful farm management, a second element of wine business survival is sound financing. To our way of thinking, “sound financing” is abundant equity, with little, if any, debt and that only utilized only for short terms. (All equity/no debt is the goal we should aspire to but few seldom reach.) Abundant equity is especially important if you are going to develop vineyards on new land (eg. “from scratch”). Our experience is that new vineyards always shrink from the expected net acreage and development cost always overruns the best budgeting possible. (Our experience is significantly fewer planted acres are obtained and total costs may easily be twice the original budget. And this is after the most expert advance planning efforts by very talented experts.) As a Stanford MBA trained in finance many decades back, I cringe to admit our shocking financial development results but that is what happens in the real agricultural world. The vineyards we built in CA and RSA are wonderful, but the price tag was very high.
Over the next 10-20 years, South Africa may not have to plant much previously bare ground, unless prompted by global warming/climate change, but just replanting of existing acreage will be a massive financial challenge. Most grape farmers and most wineries have been losing money for the past 10 years, if not longer, while all costs of production have been rising on an average inflation rate of almost 10%. Existing older vines are producing fewer tons/hectare, and quality suffers as virus infected vines cannot attain desired sugar levels and grape maturity. Recent increases in grape prices are not enough to pay for the replanting costs. And the accrued interest on development cost bank loans of over 10% per annum have to be paid sometime, or the vineyard will risk foreclosure. This is not an attractive scenario.
Certainly loans are critical for short term needs, planned and unplanned, but long term debt for vineyards is frequently unplanned suicide. The economic swings in grape yields and prices, bulk wine prices, and bottle sales depletions are unpredictable. Working on a project for 10-20 years and then having lenders demand repayment- just when times are tough- is not where you want to be. And a great number of those in the wine farm business are facing such risks. (Loan interest always accrues faster than sales can grow. If you were not “to the Manor born,” such as myself, go get partner equity early, when you don’t need it, because you will always need it one day.
If this sounds like Cassandra, so be it because we have seen this movie before. Several times, but the first time almost 45 years ago in Napa and Sonoma. Brand new to the business, our projected planting costs doubled, the net acreages of the new vineyards shrank at least one third, CA had two years of unprecedented drought, the grape prices fell about 60% or more over two years, and there was little future hope. We (and a few others) survived and ultimately became very successful but it was not a pretty journey. (Most of it was done on hope and blind faith that better times would return.) After 2000, Napa Cabernet averaged $5,000/ton for several years and then the Global Financial Crisis hit in 2009; growers who did not have firm contracts were facing $1,000/ton offers for Napa Cab, or often “no bid” whatsoever from old customers, for the next two years. (Our vineyards again survived due to low debt and a “custom crush” venture with a new winery partner. In other words, we made bulk wine and prayed.) The fact we are now averaging $7,000/ton for Napa Cab is great, but it is no guarantee of happy days lasting forever. They never do …
The general guidance of most wine country’s marketing organizations is quite similar: engage stands and participate in the usual wine shows, submit your wines to the competitions and wine journals for reviews, presumably find willing distributors, go on “ride-alongs/work-withs” with sales reps, and hope for the best. Roughly 15-20 years ago this worked for some pioneering RSA wineries and some brands became established in a few US markets. These brands will likely survive but the same strategy for new market entries is conjectural and we believe ill-founded.
To understand the US distribution business, read Tom Wark’s discussion of the shortcomings/limitations of the (often) mandated 3 Tier system. He is spot on: https://fermentationwineblog.com/2018/09/a-corrupt-scheme-at-the-middle-of-the-american-wine-industry/
Very simply, fewer than 10 US distributors sell 80%+ of all the wine. The daily sales calls of their reps are dictated by management, and chiefly reflect the requirements of the top ten producers (Gallo, Constellation, K/J, and so on). Worse still, literally thousands of US producers are begging to get onto their lists simply to get distribution potential in other than their home state; the distributors will fill such orders, but it is up to the producers to go out and sell their products. Quite simply, this is not possible for almost all RSA producers; the trip is too far, the jet lag too arduous, and the cost too high. In the opinion of many, the US features a very expensive distribution system that simply does not work for most of the US wine industry, to say nothing about the aspirations of foreign producers (especially those of South Africa).
A little background on our activities in the Cape may be of interest. Our profitable Napa/Sonoma vineyards, with very little debt, encouraged us to commence a large vineyard development in the Cape 18 years ago. We had been coming to the West Cape for six prior years on over 12 trips, advising Beringer Wine Estates about local opportunities, and had acquired excellent local advisors. So we were fairly well prepared for our “African adventure.” Or so we thought.
Our basic plan was to develop a top quality hillside vineyard of over 100 Ha, sell the 90%+ red grapes to independent wineries, and divide up the future profits. As you might have surmised, that has not happened. My local partner is brilliant at making budgets and is a confident, inspirational manager. When I told him at inception that we would have significant cost overruns and the plantable acreage would shrink, he laughed. (“Dave, you are not a farmer and I am trained in this field. Don’t worry…”) Well, the large new blocks of virgin land had very extensive subsurface rocks and boulders that could not be seen before the heavy equipment moved in. And stayed for several months for years to come. The cost overruns mounted and the plantable acreage shrank. Accordingly, more equity was required from partners and we carried on.
Ultimately we developed a great farm at Silkbush. But had not the Rand continued to depreciate against the Dollar, we could not have hung in there and funded the replanting costs of virused vines. We now sell 90% of our grapes to top flight wineries, have 10% made by a local Breedekloof winery into wine for our account and are developing the Silkbush brand. Most assuredly, even ten years ago, this was not the plan and it has taken enormous efforts. Fortunately, the grapes are top quality and so is the wine, but a bottle never sells itself. We are selling chiefly in South Africa and making a small amount of headway in the US. Yet the “3 Tier” system, and lack of presence of South African wine in the US is hurting everyone.
What can be done about it?
I think we need to attain at least 4 million 9 liter cases per year in the US, or 1% of the market, over the next five years or so, for a chance to become relevant and collectively profitable. The conventional marketing approaches have failed to provide growth, and while the following ideas may work, they are not guaranteed. I hope we can collectively give them a chance. They are based on the following assumptions:
- People who have come to the Western Cape are our best potential ambassadors and continuing wine buyers abroad. But we need to keep the relationships alive and we must make it easy for them to help us. In short, this means an investment in Big Data and creative use of email and allied technology, and major coordination with the RSA tourist industry. Creating and maintaining such a data base will take money and effort and cooperation.
- RSA wine producers who do visit the US (or elsewhere) must make themselves available to pitch the Beloved Country and wine of all producers in the respective market. We envision key producer personnel (owners, winemakers, senior sales staff and other VIPs) being available for 1-2 hour meetings with consumers alerted to the opportunities via the visitor data base. Who arranges such meetings/tastings remains to be seen but presumably by local retailers who carry RSA wines and/or importers/distributors with wines in the individual market. Again, this will require ongoing efforts and coordination, perhaps through Social Media.
- Quite a few fundis believe the future of most consumer marketing will be on a “subscription basis.” For wine producers, this means wine clubs of an unprecedented magnitude, hopefully eclipsing present US wine sales through the 3 Tier system. (Exactly how we are going to accomplish this remains to be determined.) Reportedly 65% of Napa winery sales are now DTC (direct to consumer) which is both tasting room plus wine clubs. Clearly to make this channel effective, an initial consumer tasting and awareness of RSA wine usually must be accomplished by one or more US marketing organizations who will offer “wine clubs” nationally.
DTC (direct to consumer) discussion
For those who have better memories than I do presently, you may recall my discussion of DTC three years ago. (If not, here is the link to the infallible www.wine.co.za library: https://news.wine.co.za/News.aspx?NEWSID=27331 ) I tried not to disparage the new delivery channel but rather put it in perspective. Then DTC was not more than 1% of the US wine market, and perhaps 1.5% of retail volume because the sales price of courier-delivered bottles is far above bottles purchased in stores. Since then DTC sales reportedly have increased to 1.5%/2% of volume (6 million cases) and are estimated to reach $3 billion (almost 5%) in sales volume in 2018. Some wine business analysts believe that DTC will ultimately attain 10% of US wine sales. Be still my heart if such levels are attained in my lifetime; that would be marvelous, as reflective of appreciation of better wine and an acknowledgement that many of the better wines are not on the grocery store shelves.
However, even in such a new wine world, at least 90% of the wine will still be sold through retail stores and restaurants. Such outlets will continue to be serviced by distributors who wield immense, perhaps unfair, power in the business, and the largest distributors are not motivated to expose the wines of unknown regions, South Africa especially. Moreover, “unseen is unsold.” We also assume that most DTC sales are of wines previously tasted or otherwise exposed to US consumers, either at a local winery tasting room or in a friend’s home on a social occasion. So unless the consumers are intrigued by an Internet promotion, touted competitive award, well crafted video, or friend’s advice, and actually seek out and purchase a wine without prior tasting, South African wines never get into this virtuous cycle. We continue to believe the sale of imported wines via DTC is a major uphill struggle. DTC and 3 Tier will continue to coexist, but do not expect much success with 3 Tier for the reasons already stated.
We have discussed these new approaches with numerous RSA winefarm owners and their key sales staff. They largely believe they have merit but think it will be very difficult to get the majority of the farms and cellars to cooperate; hopefully, most producers will realize the times have changed and will consider a degree of cooperation in the interests of all. (Further, everything else has failed…) Funding, especially for needed software and support employees, may have to come from the RSA tourism sector.
What is working right, of course, is the wines of most RSA producers are superb, the pricing very competitive, and the international wine journalist community is supportive. So if we can get the wines exposed and tasted abroad, we will sell much more than we do today. So we have to get those who have visited the Beloved Country and those who are presently buying RSA wine to kuier (share) with their friends. The first step is creation and maintenance of an email database of everyone who visits (not just tasting rooms but also guest houses, hotels, rondavels, you name it.) We believe 99% of the visitors to South Africa and who may drink RSA wine are using the Internet; those that are not now may have Alzheimer’s and are not buying wine from anybody.
We must transform, simply to survive and have a chance at future profits. We also must help those of color who are crazy enough to join us in this glamorous but unprofitable endeavor. We can do all this, as well as promote wine tourism, if we develop some new plans and stick it out. Those that are doubtful will just go along with the old ways. But if you have lost the farm or cellar in another 10-20 years, and are then driving tour vans of Chinese visitors, don’t be surprised.