SA Wine Industry has to be more cost-effective

Friday, 30 January, 2004
Tessa de Kock
A less expensive chain of events
The most pressing priority facing the South African wine industry this year was to find ways of making the supply chain more cost-effective, in the view of Distell’s corporate affairs director André Steyn.

Stressing that wine growers, producers, packaging manufacturers and other suppliers to the industry had to ensure South Africa remained globally competitive in the face of a stronger rand, he said: ‘We have to work in concert to stay cost-competitive in whatever segments of the international market we operate so we continue to deliver value in terms of quality. This has become imperative given the oversupply experienced by some other New World wine producers who are aggressively promoting their merchandise to deplete a build up of stocks.’

He said a process had already begun among Distell supplier growers to curtail operating costs, not only by planning wines in the vineyard and matching growing costs to the eventual price point at which wines would be sold but across the board. The examples he cited included irrigating at night to reduce electricity charges and avoiding water wastage through judicious irrigation practices, like partial rootzone drying (where half the roots of each vine are irrigated, leaving the other half dry, reversing the process after a few days, with the dry roots receiving water and the previously irrigated roots left to dry) and better co-ordination of grape deliveries to the cellars.

Producer savings were also being introduced through energy audits, he said, as well as through the smarter use of cellar equipment and technology, and the sourcing of more cost-effective packaging materials, using returnable, recyclable materials and also by opting for lighter weight containers.

‘To resort to aggressive discounting as a quick fix to stay on the shelves is unsustainable. South Africa needs to provide foreign growth markets with well defined and clearly positioned brands as a way of defending margins and remaining viable in the long-term.’

His view was echoed by Wines of South Africa (WOSA) CEO Su Birch, who said: ‘Without margins to support our brands, we are going to battle to maintain market share.’

Both she and Steyn have cautioned that this year could see a fall-out of some producers with consolidation occurring elsewhere in order to survive. ‘It’s going to be survival of the fittest,’ warned Birch. ‘There are too many players operating within the middle-priced segment of the international market without the capital to invest in sustaining their brands.’

Writer Michael Fridjhon, who has also cited cost-cutting as critical to the industry’s wellbeing, has suggested the local market follow the approach of a leading foreign producer by examining the real value of investment in relationship building. ‘Sometimes these loyalties mask inefficiencies and keep costs higher than necessary. This is not to negate long-standing relationships but to suggest that they be evaluated dispassionately to determine whether they continue to offer actual rather than sentimental value. And if suppliers are not willing to adjust to current realities, producers should be prepared to look elsewhere, outside the country if necessary. Packaging is an area that comes to mind’.

Fridjhon said growers would have to bring their grape prices in line with hard currency values while producers would need to follow ‘a brave and painful purge to match what is required of growers.’

Steyn said in addition to focusing on short-term ways of cutting costs, it was vital to ‘simultaneously identify new wine growing sites and follow viticultural practices that will raise yields and quality, while investing in more training to increase productivity’.

‘Let us not be caught short when the market improves. We should be focusing on the premium quality segment and higher to be prepared for increased demand when it comes’.

Birch said: ‘The rate of increase in the area under vine in South Africa has lagged behind the growth in exports and producers should be investing to enjoy the benefits of the next upturn. It will be driven primarily through growth in demand from the UK albeit at a slower pace, Germany, where consumers are now spending more on wine than beer and the US, where widespread potential has still to be tapped.’

Steyn said Distell was fortunate in that the domestic market had always been an integral part of the company’s wine marketing strategy and that it would not have to begin courting local consumers anew because of a tougher export climate.

‘However, this does not give Distell cause for complacency. On the contrary, we have several initiatives underway to grow the size of the wine consuming public. As more prominent and positive role models are associated with wine, more consumers of alcoholic beverages will begin to identify with it as a beverage of choice. We have already seen the growing popularity of wine among a new generation of urban sophisticates in their 20s and 30s.’

Steyn said another area that had to be addressed was investment in infrastructure for wine tourism to draw foreign and domestic wine tourists and build on cellar door sales, which still constituted far too low a proportion of overall industry sales.

Transformation also remained a critical concern, and efforts were required to source what he called ‘patient’ capital (slow to deliver returns) to advance black economic empowerment (BEE). ‘The level of capital investment demanded for developing trademarks does not bring short-term rewards. As an industry we need to work with Government to explore subsidy schemes to generate the type of investment required to change the demographics of key decision making and ownership.’

He praised industry moves underway to advance BEE and said the Producer Manifesto for Land Reform, scheduled for completion in February, would provide a meaningful way in which to engage with Government on the issue.

Said Birch: ‘Expectations are high that new BEE opportunities will materialize soon. These ventures will need the support of good marketers and the industry must do all it can to attract top quality candidates.’

Steyn said skills transfer remained a critical component of transformation and would ensure its sustainability. ‘We must develop not only more extensive wine growing and wine making expertise but also business management and operational skills through industry co-ordinated initiatives backed by adequate resources.’

Tessa de Kock for Distell News Service