SA wine industry best suited to premium wines, study shows

Tuesday, 16 November, 2004
Pippa Pringle
A new study into the international cost-competitiveness of the South African wine industry shows that the decision to focus more on the marketing of premium and luxury wines, is the right route to follow, says Su Birch, CEO of wines of South Africa (WOSA).

The WOSA-commissioned research was undertaken by internationally respected wine business analyst James Herrick, who looked at South African wine production costs in relation to those in Australia and France. His findings suggest that South Africa performs best in an environment of medium or high-cost wine farming, as opposed to low-cost farming. The country's wines thus prove more globally cost-competitive at the higher end of the spectrum than in the value segment, where Australia fares significantly better.

After extensive interviews with South African producers involved in low, medium and high-cost farming with vineyard yields varying from low to medium and high, Herrick contends that the majority of South Africa's wine-producing areas are best suited to the production of premium wines and higher. The widely varying growing conditions throughout the Cape winelands, while making wine growing highly demanding and expensive, give rise to wines of great diversity, complexity and interest, ideally suited to the more sophisticated, less price-sensitive segments of the market

Herrick, who is based in France, suspects many South African producers servicing the value end of the market have been selling their wines below acceptably profitable levels. In some instances their costings do not even take into account all the sustainable expenses involved in grape production, such as their capital and land costs, nor the costs associated with the replacing of vineyards every 20 years on average.

Working to cost models developed for specific wine grape varieties, he says it is neither possible nor relevant to make blanket assertions about one country's cost-competitiveness over another. The value of the research lies in identifying how efficiencies can be enhanced within specific wine business models. The imperatives driving high-cost farming to produce low yields are different from those, for example, governing low-cost and high-yield farming. 'The point is to efficiently match the way production assets are employed with the final outcome desired,' he says in his report.

According to Birch: 'One of the most important issues raised by the research is the need for South African producers to move away from the mistaken notion that high quality is automatically synonymous with low yields. As an industry we have already improved efficiencies by planning wines and their price points in the vineyard rather than in the cellar, but better application of vineyard management techniques can give us better quality and better yields. Local viticultural research, supported by international studies, shows that if vines are kept free of known viruses, suitable canopy management and trellising practices are adopted and vine vigour is appropriately controlled, yields and quality can both be increased. While even marginal increases in yields can contribute significantly to profitability, our viticultural experts believe appropriate vineyard management can push up high quality yields by as much as 20%.'

Birch says the other major point highlighted by the study is the high cost of capital in South Africa, even with the current lowered interest rates. 'If debt is more expensive here than among our competitors, it is obviously harder for us to generate the profit margins required for reinvestment in a competitive marketplace. And in such a capital-intensive industry as wine with a lead time of at least three years before vines even begin to bear suitable crops, new wine farmers have no hope of financial survival without Government support. In France and other EU countries, start-up farmers are subsidised. It is vital that transformation of the industry is accelerated yet how can we possibly expect to attract black farmers to the industry without such assistance?'

But access to low-cost capital must not be used to discount as a way of garnering market share, she warns. 'We should be competing by building brands, not by undercutting on price.

'If we are to succeed in advancing our value share ahead of our volume share on export markets, we must invest heavily in marketing and in brands. The country's suitable wine growing terrain is finite. We cannot sustain the high pace of vineyard growth of the past five to eight years, so growth will have to come from more effective practices at every level of the industry, from production to marketing and distribution,' Birch contends.

She says a follow-up research study is needed to determine the actual distribution of the various wine farming models employed in terms of farming costs and yields. 'It would appear from the initial study that areas suited to low cost farming of varying yields probably account for no more than 30% of the country's national vineyard. Once we have more clarity, we can develop strategies to maximise potential in all areas of wine growing.'

Herrick, whose consultancy Wineprophet consults to businesses internationally, was involved in wine farming in Australia and France, before selling his operation to global wine giant Southcorp.

ISSUED BY DKC (DE KOCK COMMUNICATIONS)
ON BEHALF OF WINES OF SOUTH AFRICA (WOSA)

QUERIES SU BIRCH, CEO, WOSA (021) 883 3860
TESSA DE KOCK/PIPPA PRINGLE, DKC (021) 422 2690, 082 579 2358

*Wines of Africa is the international marketing company of the South African Wine and Brandy Company.

Appropriate vineyard management can push up quality yields
Appropriate vineyard management can push up quality yields

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