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| August 11th 2011 |
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| The black diamonds of South Africa |
By Michael Fridjhon
Internationally, wine making is predominantly a preoccupation of people descended from Europeans, even in countries with multi-cultural populations. But in the case of South Africa, empowering black workers has been made a central plank of industry development. |
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The post-Apartheid South African wine industry was never likely to escape its history of discrimination. The international community, which had driven the boycott of Cape wine as one of the most visible products of the inequitable ancien regime, expected that this would remain a key area through which to push for the socio-economic transformation of rural communities. The supposedly non-racial society which emerged out of the 1994 election demanded a degree of redress. Whereas other wine-producing countries are never asked to account for the living and/or employment conditions of their vineyard workers, South Africa's history made that state of 'normalcy' an improbability.
In many ways, the pre-1994 Cape wine industry was inextricably bound up in the history of apartheid. While many of the country's avante-garde wineries had an impeccable track record of labour relations, they represented a very small percentage of the total wine farming community. Fifteen years ago there were no more than 200 producing cellars in South Africa. Roughly half were privately owned. A few were part of listed companies. Many were cooperatives, crushing the bulk of the national crop – which was delivered to them by the 5000 or so grape farmers.
Some of the high profile independent producers were acutely aware of their responsibilities – and the international scrutiny. However, they constituted less than 1% of the country's grape growers. It was on the grape farms – which accounted for over 90% of the industry – rather than the producing wine estates that the worst abuses took place. Low wages, appalling working and living conditions and – though not widespread after the late 1980s – the use of cheap wine as a substitute for wages (the so-called 'dop' system) all contributed to massive social problems in the communities. Weekend drunkenness, foetal alcohol syndrome, domestic violence and the usual litany of crime which flourishes in this environment were all features of the grape-growing rural areas.
Clearly the evolution of the wine industry as a socially responsible participant in the national economy would have to take place in tandem with the socio-political transformation of the Western Cape. This was a process that began during the dying days of the Apartheid regime and continues today. It happened without a blue print, though it followed a clearly discernible pattern which covered public-private strategic alliances, skills transfer, education and training as well as the more visible land and business ownership programmes.
First steps
Early in the 20th century the government had abdicated management of the wine industry to an organisation called the KWV – formed in 1918 to manage the post-World War glut. In time it was granted statutory powers, and became the national cooperative and the buyer of last resort. It represented the politically influential wine farming lobby and enjoyed close access to the Nationalist government. It is |
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an indication of the importance the ruling party attributed to the wine farmers of the Western Cape that in the 1970s and 1980s there was no excise payable on wine. Unsurprisingly, the state expressed no interest in the plight of workers (and their families) in the country's wine lands.
The KWV's board accepted that political change was inevitable, and even ahead of the 1994 election it began reinventing the organisation as a commercial rather than administrative force. By 1996 it launched a process to transform its legal status from a cooperative to a company with a view to abandoning its statutory responsibilities.
The Minister of Agriculture in Mandela's government, Derek Hanekom, understood the implications of this and opposed the KWV's court application. To meet his objections the KWV finally acceded to the minister's demand to put aside a sum of money (nominally calculated from the value of the assets the organisation had built up from performing its statutory functions) for the benefit of the industry as a whole.
Out of this was born the South African Wine Industry Trust (SAWIT), to be endowed with about $80m to be paid by KWV over a ten year period. Its function was to oversee the business and development needs of the entire industry. Roughly half the money was expected to fund research and generic promotion. The other half was supposed to assist the previously disadvantaged communities working in the wine industry. It was also specifically earmarked to facilitate black ownership of viticultural land and processing facilities. Half the trustees were appointed by government, half by KWV. I was the first chairman and served from 1999 until 2001.
The business side of the Trust's activities proceeded relatively successfully. However, the division charged with managing socio-economic transformation was less successful. To an extent this was a function of the immediate post-Apartheid environment. For example, most applicants for funding could not even meet even the basic criteria by which the Trust was bound – such as presenting a business plan to accompany their applications.
Progress was further compromised when, within six months of the Trust beginning its work, there was a cabinet re-shuffle. The new minister showed no interest at all in the organisation and for two years failed to nominate new trustees in accordance with the statutory rotational requirements.
Only at the end of my three year tenure was a new board appointed. It restructured the organisation, handing over its entire fund, together with its reserves, to a small and unrepresentative group of black entrepreneurs who used the proceeds to buy a 25.1% stake in KWV. This enabled KWV to gain valuable BEE status and rendered SAWIT technically insolvent. At this point government simply walked away from the industry. Today, some seven years later, there is no forum for any kind of joint interaction and no body driving enhanced opportunities for those who work within it in positions of chronic |
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disempowerment.
While what should have been the dominant force in managing transformation in the South African wine industry was being pillaged under the eyes of the minister, several private initiatives were taking place. Some – such as the provision of funding for tertiary training in oenology and viticulture to students from previously disadvantaged groups – pre-dated the Trust. Other ran in parallel and evolved into often highly innovative shareholding and funding arrangements for land, winery and brand ownership.
New entrants
The first of several bursary schemes was launched in 1995. Initially the fund struggled to find black school-leavers interested in a career in the wine industry. The early intakes also experienced language difficulties since the only university in the country offering a degree course was an Afrikaans-medium institution. Within a few years the funding committee prevailed on the department to provide bridging courses for the bursary students and to give instruction, when required, in English. By 2000 a small but steady stream of graduate black winemakers began to enter the industry. Now, some 15 years after the programme was launched there appears to be more funding than demand. Haskell/Dombeya Vineyards, which launched a scholarship a few years ago, reported that in 2009 it did not receive a single application.
Still, while skills training is central to the idea of transformation of participation in - and ownership of - the post-Apartheid wine industry, the real focus of black economic empowerment (BEE) in South Africa has been equity ownership. In those industries where the key businesses are listed companies, an easy formula was devised. The empowerment partner would need little or no hard cash. Instead 'soft loans' with extended repayment terms were obtained. The company disposing of the shares would – in the event of the black shareholding exceeding 25.1% of its total equity – obtain BEE status, entitling it – amongst other benefits, to preferential rights in government tenders and contracts. In this way, the empowerment partner brought some 'value' to the arrangement and qualified for a discounted entry price.
Deals of this kind were made from the second half of the 1990s. At the time the economy was in the midst of an unprecedented boom arising from South Africa's release from pariah status. Annualised growth rates of between 4% and 6% drove a rising stock market and a seemingly inexorable pattern of ever-increasing profits. Accordingly, the funders in such schemes worked on the assumption that dividend flows would service the debt repayments of the empowerment partners. This ‘Muscovisation’ of the South African economy created surprisingly few oligarchs. A small group (referred to by the press as ‘the usual suspects’) were always there to take up the black empowerment stake when new deals were announced.
The wine industry however does not lend itself to any such simple arrangement. There were |
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very few listed companies, and therefore not many potential candidates for a simple dividend-flow/debt-repayment scenario. Even the privately owned mid-size players operated on tighter margins than other, more desirable businesses. They often carried a debt burden which made them unattractive to the oligarchs – who had the pick of South Africa's blue chip companies to choose from. Finally, government patronage was relatively meaningless in the context of wine producers – so there was little motivation against which to trade-off dilution of equity.
When it comes to privately held wine estates, the situation is even less tempting. Most struggle to remain cashflow positive, and virtually none are profitable if the service of debt on current land values is taken into account. Add to this the fact that many have been in the hands of the same family for at least a century and it is clear that there is no easy recipe for black empowerment wine business partnerships.
Other ideas
Accordingly the easiest and cheapest deals to set up have been brand ownership arrangements. A consortium of black shareholders – with access to a new segment of the market – creates its own brand and enters into a deal with an established producer to provide the wine on an ongoing basis. Names like Yamme, Ses'Fikile, Women in Wine and Lathitha developed on this basis and appear to have gained a toehold in the market. The more high profile ‘Epicure’ brand, established by a syndicate which included the then Gauteng Premier, Mbhazima Shilowa, is a low volume, super-premium offering but little more than a hobby for its well-heeled participants.
One step up from brand ownership without land or winery are a number of ventures which have hard assets to go with the marketing intangibles. Amongst the earliest ones is Thandi, a joint venture established between Paul Cluver (of the eponymous Elgin wine and fruit estate), the local community, and SA Forest Investments (a para-statal owner of forestry in the area). Now into its second decade, the Thandi operation has evolved from its early beginnings. The brand is now one third owned by The Company of Wine People but the sales of the Fairtrade accredited wine generate revenue for the community – which still owns the vineyards.
This model – part or full ownership of brand and land – also describes an equally early player – Tukulu. This is a joint venture between Distell, the largest wine and spirits producer in the country, a group of black entrepreneurs and the Maluti Groenekloof Community Trust whose beneficiaries inhabit and work on the farm which is owned by the enterprise. Once again the arrangement works because each of the parties brings value to the venture.
The deal, now ten years old, involved the purchase of the 970 hectare Papkuilsfontein farm, the creation of a consortium of retailers and the financial structuring which would allow the various parties to fund their respective |
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shareholdings. Chairman Joe Chakela says the consortium's leverage at the time the partnership was formed lay in their market access. “We were in the enviable position of holding almost 80% market share of the retail and wholesale liquor trade of Soweto, Vosloorus, Katlehong, Springs, Carletonville and Vereeniging.” The consortium owns 36% of the entire enterprise, the community (including the farm workers) 15% and Distell the remaining 49%.
These brand and land ownership deals – where the participants are employees with an equity stake - are still relatively few. They include Charles Back's high profile Fair Valley operation and a similar set-up called Freedom Road. Some empowerment operations have indirect ownership of land or winery: the Thokozani brandowners are 30% shareholders in Diemersfontein, thus granting them a meaningful participation in one of the country's most successful mid-size cellars. There is a similar workers' shareholding arrangement in Solms-Delta and at Koopmanskloof.
Otherwise most of the black equity participants in the South African wine industry are simply outside shareholders. The Phetego consortium – which acquired 25.1% of KWV in the controversial deal which left SAWIT without funds – just holds shares in one of the country's biggest wine and spirits businesses. The same is true of WIP Beverages, the empowerment consortium which acquired an effective 15% of SADW, the holding company for all Distell's operations.
Emerging model
Perhaps the model now emerging with the greatest growth potential is the one familiar to most capitalist economies: as the black middle class grows and acquires other assets, wine farms are simply another business prospect, or an investment for the super-wealthy. The Rangaka family - which hails from Mafikeng in the dry hinterland – (much closer to Johannesburg than Cape Town) acquired their Stellenbosch vineyards by lodging their Mafikeng properties as collateral. They were unable to secure a government subsidy, but at least they had assets against which to borrow. “Some people still think we are crazy, and I am one of those,” says Professor Diale Rangaka, who together with his wife Malmsey, the CEO, runs the day-to-day operations of the business. Listings at Marks & Spencer and growing exports have provided crucial cashflow but local sales are still very small.
Other newcomers are considerably better capitalised. Valli Moosa, former ANC cabinet minister acquired a property in Bot River not far from Hamilton Russell Vineyards and is now developing his own Ecology brand. Tokyo Sexwale, now a minister in President Zuma's cabinet, controls a massive industrial and financial consortium. Among his various properties is the Constantia Uitsig estate, together with its vineyards, restaurants and hotel.
South Africa has more Fairtrade accredited wineries than any other country and runs its own ethical trading endorsement process (WIETA). These are features |
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which facilitate exports – but they don't really provide any motivation for local market sales. In fact, except the network of customers linked to specific brands, most of the wines produced by black entrepreneurship in South Africa are sold abroad.
Su Birch, CE of Wines of South Africa, the country's generic export body, believes that lack of access to distribution channels is one of the reasons why black-owned businesses struggle to obtain local shelf space. Lebo Rangaka, Diale's daughter, suggests that the export route is actually the course of least resistance. “Firstly,” she observes, “it's easier to get funding to market our wines at international trade shows, and secondly, the competition is much fiercer in South Africa.”
Perhaps this is the next frontier for the wine industry. Rather than attempting to deal with the perennial demands from government to change the complexion of land and brand ownership in the country's winelands, it needs to deal with the profile of the country's wine-drinkers. Fine wine consumption is still a predominantly white consumer activity. The transformation of the wine business is only partly about product and route to market. It will only develop significant momentum when it obtains the buy-in of the consumer.
A version of this article appeared in the December, 2009 issue of the magazine. To read the whole article, you can purchase a back issue by emailing spuhler@meininger.de To keep up to date with what's happening in the world of wine, subscribe to the magazine. |
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