These solutions, amongst others, have emerged as being the most effective in helping producers to combat the problems posed by the strong rand, oversupply in both the international and domestic wine markets, and fierce competition in both arenas. Some producers adopting them have already proved themselves capable of weathering the storm.
For example, Vernon Davis, CEO of Winecorp, which exports 90% of its total production of 1.3 million cases (9-litre equivalent), says that since he joined the company earlier this year, it has already made significant strides in these areas. 'We have really looked hard at our costs and productivity in all aspects of the business. This includes improving inventory management and debtor management, turning our production quicker and keeping service levels high.
'We have also been spending a substantial amount on above-the-line marketing for the first time and have undertaken serious marketing and promotion of our products. I encourage other South African producers to do so as well, since we must combat tough competition like Chile, Argentina and the US - we must tell the world how our quality has improved. South Africa can't hold back on marketing expenses or we'll live to regret it.'
He is optimistic about the quality of South African wines and their ability to compete on the world stage. 'The quality we have achieved now can face the competition - if you compare the cost of the wine versus our competitors, it is not unfair. So we must get our act together on the marketing front - although we've made good progress, we are still nowhere near the kind of concentrated market effort that is required.'
He says Winecorp's budget going forward is based on a strong rand, with no concessions toward a softer local currency, and that the exchange rate is no longer hurting the company, given its lower cost base. The group has no plans to raise its percentage of wine sold in South Africa, either.
Davis agrees with Western Wines marketing head James Reid that improving wine quality is also key to survival in the current conditions. Both companies have introduced higher quality wines in the UK market (their largest), allowing them to go for higher price points and therefore wider margins. 'We have really been focusing on the value side more in our business,' says Reid. 'In the UK we are concentrating on higher price points - last year we brought out wines at the £ 15.00 mark and have recently introduced another product at the £ 8.00 mark.'
Western Wines produces the Kumala brand, currently the UK's fourth best-selling brand (according to the October 2004 AC Nielsen survey). With total exports of 4.5 million cases (of which Kumala makes up 2.2 million), the company is also responsible for about 40% of all South African wines sold in the UK and a substantial portion of all South Africa's wine exports.
In an effort to improve brand recognition further, the group has launched television advertising for Kumala in the UK for the first time, thus lifting above-the-line marketing spend considerably after previously concentrating its efforts on the trade press. And so far this has proven effective, says Reid - Kumala grew 4% by volume in the UK over the past year, and 16% by value.
KWV South Africa Managing Director Willem Bestbier says that the company is combating the strong rand by not only focusing on stronger marketing and cost-cutting initiatives, but also by improving supply chain efficiencies - particularly where the strong rand offers favourable import opportunities. KWV is also one of South Africa's largest exporters, but has recently also entered the South African market.
Along with KWV, Davis and Reid also agree that there is still great potential for wine sales growth in the local market, given the emergence of the black middle class and the current very consumer-friendly economic conditions. South African per capita wine consumption, at about 8 litres, is relatively low compared to other countries, so what is required is more marketing and education. 'There's a whole new market of up-and-coming middle class people who are ready and willing to start consuming wine,' notes Davis. 'Our job as producers is to educate them and promote our wines.'
In the current market conditions, Reid believes brand holders have an advantage over other producers, since they are adding value and are less vulnerable to pressure on wine prices to fall, as has been seen in line with the stronger rand offshore and the growing oversupply of red wine in the local market.
Top quality producers such as Kaapzicht and Waterford, holders of exceptionally strong brands, say they are also boosting their marketing campaigns overseas in response to growing competition and the strong rand. Vrede en Lust's Dana Buys, meanwhile, points to lower yields as another way of easing the rising oversupply problem in the local market, which would also help improve wine quality. 'Hopefully the growers of red grapes will carefully consider the yields in the coming harvest,' he observes. 'Lower yields will help improve quality and at the same time reduce the crop size and thus the extent of the surplus and improve incomes at the producer level.
'This has to be a better outcome than large crops that get made into bulk and sold at a loss or grapes that do not even find a buyer. Let's spread the message and get those red grape yields lower this year.'