The rand, trading at around R15 to the US Dollar at the beginning of this month, has shown a steady decline since 2012 and reached an all-time low of R17.99 early in January.
At the same time, the export market for South African wine – a mainstay of the post sanctions era since the 1990s – has decreased by 20% and 1% in volume respectively in the past two calendar years (bulk and packaged). In the 12 months period until end February, packaged exports dropped by 4%, but the domestic market grew 8% until end January and continued its sudden upswing of the past two years.
Something’s got to give – Rico Basson
The CEO of producers’ organisation VinPro, Rico Basson, said in an interview “something’s got to give” with all the pressure on the wine industry and average return on investment being a mere 2% at producer level. He foresees the uprooting of more than 4 000 hectares of the industry’s total of close on 100 000 hectares under vines over the medium term as wine farmers switch to alternative crops.
The economic pressure would result in structural change including the forming of strategic alliances, not so much take-overs, but collaboration at many levels and even over regional boundaries, he said.
“Exchange rate volatility is not good for stability in any industry, but it’s particularly difficult to make adjustments in the wine industry with longer cycles. A large portion of our exports are handled by negociants who have minimal production risk and do not always pass gains such as favourable exchange rates and shipping rebates through to farm level
“The disadvantage of the weak rand is that it can lead to short-term discounting of foreign price points. This is part of the reason why we battle so much to move average price point above £5 a bottle in the United Kingdom.
“It is a structural issue; producers are largely price-takers with minimal control over the global price negotiations. The industry also comes from three record harvests before the drought, with too much stock and huge cash flow pressure which led to some price discounting.
“A significant portion of the 2016 crop had already been contracted at the end of 2015 before the steep devaluation of the rand or the full impact of the drought was known. With the smaller crop, industry stock levels will now be in equilibrium, but producers will not see material price increases in 2016.
“The owners of strong brands, which they own from production to the market, have full control over their positioning and now have the opportunity to hold back on volume and reposition price points.
“The wine producer will find that white wine prices will increase with inflation, red remain stagnant and even decrease while the crop is smaller. This is not a nice story as the producer income will decline by 10 – 15%, while production costs keep on rising at 8 – 10%.
“On the positive side, there is the unprecedented phenomenon that while the rand is at its weakest in a very long time, export volumes are stagnant, but the domestic market is up. We have, for the first time in many years, growth at every price point locally.
“So it will be a watershed year – where producers will draw a line and make critical investment decisions. We’ll probably see the largest uprooting in a long time. Other agricultural commodities do significantly better than wine. Industries sometimes need crises to adjust and diversify.”
In South Africa, Basson said, brands represent only half the business; the rest are commodities. The established businesses with sound business models built over years with strong marketing and distribution, are here to stay.
“Consolidation will have to take place, but not in terms of mergers and take-overs. Rather formal collaboration, less talk about bricks and mortar but investment in brands and supply chains. And taking innovation to new levels.
“This is the ideal opportunity to reposition and to embrace the new Wise (Wine Industry Strategic Exercise) strategy which provides a number of game changers and numerous opportunities for co-operation,” said Basson.
Disadvantages weigh more than the benefits – André Morgenthal
Wines of South Africa’s communications manager, André Morgenthal, said the “other side” of the weak rand and favourable exchange rates, unfortunately, weighs much more than the benefits.
“There are many negative factors that affect exports, but although the total volumes are marginally down, value is up by 6%. Also, the German, Chinese and US markets for packaged wines are up by 12%, 28% and 7% respectively for 2015. We focus on these countries.”
What must be kept in mind with the volume decline in exports is that it follows exceptional growth years in 2012 – 2014, with packaged wine exports up by 9% in 2013 and because of huge bulk wine sales which represented “an opportunistic situation”, not a sustainable tendency. Some wine countries had droughts and a huge demand developed for bulk wine.
The “opportunistic bulk” situation is over, but a new development is exporting entry and mid-level branded wines in bulk and bottling them more economically overseas as controlled, quality products from South Africa, because of the rising costs of imported materials like capsules and corks.
“The lower value of the rand will have a substantial impact on input costs, especially as all imported inputs – such as barrels, equipment, yeast etc will escalate due to forex exchange. Furthermore, local suppliers of glass, labels and cartons will be influenced due to their imported materials. Production and labour costs are increasing rapidly.”
In terms of marketing and promotional budgets to support international brand building, budgets will be depreciated by 25 – 30% due to the forex conversion from the rand to the country currency. It does, however, create a huge opportunity to grow local wine tourism. South Africa is now a very affordable tourist destination and it is reported that premium wines are flying off the shelves at top Cape restaurants.
Meanwhile, some of South Africa’s oldest export countries in Europe are in the aftermath of a serious recession and in the UK multiple grocers are consolidating stocks, and reducing SKUs (stock-keeping units), said Morgenthal.
International markets are tough – Carina Gous
The country’s largest wine exporter, Distell, is also feeling the pinch in a big way. Said Carina Gous, the company’s brand director: luxury brands, “We are at a disadvantage when the rand is strong as we’re maintaining our price positioning of our brands in our key export markets, leading to eroded margins. When the rand is weak, like now, we still maintain price positioning but risk losing volume as opportunistic traders can undercut our price based on the weak exchange rate.
“South Africa, and Distell, are still heavily reliant on Europe for exports, but we do not see the export growth one would expect, because most European countries are recovering from the recent recession and are heavily impacted by the current refugee crisis. The consumers in especially Continental Europe are affected negatively psychologically which impacts on consumer spending. There is also a trend towards pro-Europe sentiments and supporting products produced in Europe.
“Despite all this, Nederburg is doing really well in Continental Europe and we will keep supporting and building the brand despite tough trading conditions.
“In the UK – still South Africa’s biggest export market – the large retailers are under pressure from the big discounters, especially Aldi and Lidl. This led to range rationalisation and consolidation and SKU reduction as well as extending their own label ranges. This impacted negatively on a number of South African producers.”
Ms Gous said that Distell’s exports were down on history in volume in the six months ending December 2015 but at the same time the company’s wine business grew 9% in the domestic market – a phenomenon that is largely attributable to the affordable section of the market, with 4th Street Natural Sweet in the lead.