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VinPro(SA) Bulletin
August 2001
Financial survival of the SA wine producer under increasing pressure
The financial health of the primary wine producer in SA is under constant pressure and it is mainly producers whose cultivar portfolios are favourable, or who deliver their grapes to a cellar with an effective marketing strategy, backed by good management skills, who perform well financially.
The primary producer is one of the most important links in the wine industry's value chain, for without a sustainable supply of quality raw material, the most effective marketing strategy is worthless.
The wine industry, like all other industries, is subject to rapidly increasing input costs. Incomes, however, do not rise at the same tempo. This state of affairs obviously entails the ongoing weakening of wine producers's profitability.
The question is how long the producer will be able to absorb the current situation before he is forced, financially, to bail out of the industry.
The figure below compares, on an index basis with 1990 as the basis year, the changes to producer income, production cost and processing cost of cellars. An example is given of the price evolution of a premium cultivar compared to a non-premium cultivar.
From the figure it is clear that the gap between production and processing cost and producer income has been widening at an ever accelerating pace since 1998.
Clearly noticeable as well is the extremely healthy growth in prices obtained for premium cultivar grapes since 1996.
Over the period as a whole, measured from 1990, the total increase in these prices is in line, however, with the total increase in production cost. Processing cost, at cellar level particularly, increased considerably compared to the other indicators.
The negative effect on the financial position of producers who did not have a significant percentage of premium cultivars in their cultivar portfolio, or who did not have an effective marketing strategy, can be deduced by looking at the trend of the prices obtained by non-premium cultivars.
Although these prices indicate healthy growth from 1997 to 1998, the trend since then has been a steep decline, with the subsequent negative effect on profitability. Producers operating in this market in particular are currently under extreme financial pressure.
The question to be asked is how long the producers who currently find themselves in this unenviable situation will be able to survive.

Contribution of labour cost to total cash production expenses still increasing
The section of total cash production expenses on farm level represented by labour cost is still on the increase. In 2000 labour cost represented an average of 51% of the total cash expenses in the industry, compared to 46% the previous year. This implies that labour coast increased more rapidly than the other cost items, or that less was spent on other costs.

Expenditure on direct costs, which includes pest and plague control and fertilisation, represented 1% less of the total cash expenses. The contribution of mechanisation cost, which includes maintenance and repair of machinery and fuel, remained constant.
It appears though that the increased contribution of labour cost occurred at the expense of expenditure on fixed improvements, which includes maintenance and repair of fixed property such as outbuildings and labourers' houses, as well as general expenses such as admin cost, electricity and water cost.
Since the general expenses are represented by fixed costs, these costs do not usually fluctuate significantly from season to season.

World surpluses more and more critical
Nature has a substantial influence on agriculture and as such wine farmers and winemakers are subject to the unpredictability of nature on the one hand and the changing preferences of the consumer on the other hand. This means that wine producers are forever involved in a tricky balancing act between production and consumption.
The world wine market is characterised, however, by a large structural oversupply, specifically as a result of 20% decreased demand over the past 20 years, while production only decreased by 11% over the same period.
The latest research by Vinexpo, the company organising the largest wine and spirits exhibition, indicates that 27 200 million litres of wine were produced in 1999, an increase of 18,3% since 1994. They also predict that world-wide an estimated 28 200 million litres of wine will be available for consumption in 2005.
This is in comparison with consumption figures that stood at 18 800 million litres in 1999 (8,1% higher than in 1994) but which will increase to only about 19 800 in 2005.
The above implies an annual world-wide surplus of about 10 000 million litres, the equivalent of approximately ten times South Africa's total crop.
Comments Robert Beynat, executive manager of Vinexpo: "The surpluses that will be created in the next five years will be one of the biggest challenges facing the global industry."
Since 1994 the biggest continous increases in production have been occurring in Australia (49%), North America (41%), and South Africa (41%).
The situation in Western Europe is a matter of concern, since production increased by 17% between 1994 and 1999, despite a significant decrease in the surface planted to wine grapes. The result is of course poor quality wine displaying a lack of character, body and ability to last.
From the above the message for South African wine producers should be clear. Only produce wine for which there is an existing market, develop new niche markets and focus on quality.

Wine exports appear lacklustre
South African wine exports are struggling to gain momentum, according to SAWIS. Total exports for the six month period from November 2000 to April 2001 show a decrease of 7% compared to the corresponding period the previous year. Only exports of bulk red wine show an increase (17%).
Exports for the twelve month period from May 2000 to April 2001 indicate a decrease of just more than 7%. In this period too only bulk red wine exports remained constant.
Red wine prices still increasing - but for how long?
Average prices obtained for bulk red wine in 2000 clearly indicate a respite in the increasing trend. The average price paid for bulk red wine made from premium cultivars increased by 5% only, compared to an increase of 9% the previous year. Almost 71% of this red wine was sold in the price category above R7 per litre, compared to 60% the previous period.
The average price paid for non-premium red wine still showed healthy growth of 10%, compared to 14% growth the previous year. The above phenomenon is perhaps a sign that the market is slowly but surely moving towards saturation point with regard to red wine of average standard.
Source: SAWIS

Opportunities on domestic market are looking attractive
A perception is being created that the outlook for South Africa's domestic wine market is far from rosy. This derives from the reluctant growth in recent years and the predictions from the industry that once again, growth will be slight in 2001.
The industry should not be blinded by this trend, however, and the potential domestic opportunities should be noticed and explored. Research indicates that wine sales in the Western Cape represent about 40% of the total wine sales in South Africa, but approximately 80% of the total alcohol consumption occurs in the rest of the country. This illustrates the potential opportunities outside the Western Cape to expand wine sales in the rest of South Africa, depending on the establishment of a marketing initiative with a sharp focus.
Taking advertising expenditure into account, the table below provides a partial explanation for the reluctant growth in domestic wine sales. Given the minimal expenditure on advertisements by the wine industry, compared to the very large advertising campaigns of the beer and alcoholic fruit beverage industries, it is surprising that the wine industry performs as well as it does.

It comes as no surprise either that the biggest wine brand in South Africa occupies the 14th position only on South Africa's list of Top 40 liquor brands, according to the 2000 Alcoholic Beverages Review.
It is also well-known that sales, and therefore market share, are directly linked to expenditure on advertising and marketing. The South African wine industry should not ignore the potential opportunities of a bigger domestic marketing focus. Australia is a very good example of this, having established a very healthy domestic market by means of a focussed marketing strategy.
Wynboer is incorporated in WineLand, magazine of the SA wine producers.
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