Meininger’s: What are the biggest challenges facing the South Africa industry today?
Basson: There is no doubt that we operate in one of the most volatile periods of the past few decades. These are times of true volatility, uncertainty, complexity, and ambiguity -
VUCA - that provide severe challenges but also opportunity. The challenge facing the South African industry is to recover and rebuild after a Covid period where alcohol bans meant that the domestic trade for 200 days over a two-year period that included six weeks of a ban on wine exports. Coupled with this, we have had massive shipping disruptions, operational challenges at Cape Town harbour, and logistics.
Covid also meant that the very important wine tourism sector was severely impacted and lost nearly 60% of its R7,2bn ($420m) value. The result has been a significant build-up of stock levels to the highest level in history. Over 250m litres were uncontracted (compared to an annual harvest of 900m) and wineries face cashflow challenges due to inflation, slower and lower payments. The bottom line is low-to-no profit at producer level. Many producers are exiting the industry, but new investment is coming in. Outside investors tell us that we need to look long term and not to focus on short term politics and problems. Some of that foreign investment, like Heineken’s arrival at Distell can bring distribution advantages as well as the ability to build brands. I often look at parallels between South Africa and New Zealand. Of the five biggest Sauvignon Blanc producers, only one was New Zeakand-owned. I could see t he same thing happening here.
Meininger’s: How is the industry recovering after Covid?
Basson: The industry bodies such as Vinpro, and Wines of South Africa (WoSA) followed a structured approach to disaster recovery, in various deliberations with stakeholders such as producers, wineries, exporters, importers, various government departments both national and local, port authorities, shipping companies, financiers etc. This was all focused on stabilizing the sector as well as ensuring recovery which we know will take time. Very important was that the sector should not dump or discount wine and thus erode price points – especially internationally. We have also sought various alternatives for surplus product that included converting grapes into concentrate, changing legislation to allow the substitution of wine concentrate for apple/pear cider, uprooting unprofitable blocks of vines and exporting industrial wine. The domestic and export markets for still wine has since seen recovery to about 90% of 2018 volumes.
Meininger’s: How much of a challenge is the shortage of power and frequent power cuts?
Basson: Energy remains a severe challenge and adds significantly to cost inflation at wineries due to annual electricity price hikes, but also fuel for the running cost of generators. The investment in green energy is well underway, not only as part of sustainability but also lowering risk of operations.
Meininger’s: The South African currency is notoriously volatile. Its current level may be helpful to exporters, but it is very challenging when it comes to imports of energy but also everything wineries need to buy from overseas. How is the industry faring in this climate?
Basson: As you correctly state this is a double edge sword with short term benefit for exports, but medium- and long-term cost implications for direct and indirect costs. Where possible, hedging instruments are used.
Meininger’s: We are all looking for ways to reduce our carbon footprints, using regenerative agriculture for example. But exporting bottles of wine in refrigerated containers is particularly damaging to the environment. What is the industry doing to build sales in the domestic market?
Calow: Domestically, we are growing. We are still a beer-drinking country - wine is only 12% - but that figure has grown from 8% and we are focusing on education to help to build that. We are learning more about consumers. It’s extraordinary to think that, until five years ago, the industry did almost no consumer research.
Basson: There has been a significant shift in packaging re the domestic market and Bag in Box packaging now surpasses glass. This is for two reasons. First, there was the shortage of glass we have experienced over the last two years due to the local manufacturer Consol being unable to deliver glass after closing a furnace during Covid. There was also a move towards more affordable products, packaged in 2, 3 and 5 litre formats. You would be surprised at the names of some of the estates that have launched Bag in Box. We have seen a trend towards lighter glass bottles.
Meininger’s: How do you see the next five years for the South African industry?
Basson: We have revised our WISE - Wine Industry Strategy Exercise - strategy for the sector to provide a far more focused approach, accountability and role clarification between industry players, associations, various government departments and social partners. The focus is strongly on aspects such as an enabling regulatory environment, demand lead production, strong research, development and innovation – RDI - and world class business intelligence. The focus areas are each defined re consumers (domestic and global including tourism and wine), markets, people development from farm to market and sustainability. Outcomes and Key Performance Indicators well defined for:
- Transformation/ inclusive growth and responsible consumption
- Domestic market growth
- Global market
The recovery and rebuilding process will take time, and inflationary pressure and protracted income do hamper the ability to survive of some of the players (especially smaller ones). I do foresee a consolidation phase that will be from the vineyard, via winemaking and packaging to brand/market level. Over the past 12 months we have already seen 10 sizeable transactions where both local and international investment is involved. The industry will continue to decline in area – down to 84,000ha from the current 90,500 – and volume – with production declining 5% or 50-70m litres.
The sector does have a significant enabler via tourism and I foresee that this will be a significant growth area – to levels of beyond 2018/19. Exports will diversify into North America, Africa and the East from a current split of 11% of volume to 18% of volume. We belief that the domestic market does offer a growth – of up to 50m litres - within the ‘missing middle’ segment selling at 50-70 rand ($3-4) and is an opportunity for the sector to reposition.
The stock equilibrium will return to balance by the end of 2023/24 with the option that there might be shortages with certain grape varieties and even site-specific vineyards.
The business consolidation and models will ensure less fragmentation and more specialisation. Also over time the rise of medium to larger brands that can play a more leading role within the domestic and premium global market.
All of this is very reliant on the ability of our government to create a more enabling environment regarding conducive policy, to semi-privatise critical assets such as ports, logistics, electricity, embrace the green economy and facilitate inclusive growth (transformation) via water and land resources. It is worth noting that when it was imposing an export ban on wine, the government did not really know how this part of our industry operates.
On an international level there will be more protectionism than before and the focus on health, taxation and sustainability will continue to be imperatives for market access.
Meininger’s: China’s sanctions on Australian wine have created an opening in that market for South Africa. How is that going?
Calow: In a very difficult and challenging market, we have doubled our share from around 1% to 2.2% of imported wines in China. This is a combination of large brands switching historically Australian wines such as Rawsons Retreat and Hardy’s to Wines of Origin South Africa. Also, a number of importers which had previously specialised in ‘Boutique’ Australia, have taken on numerous South African wineries for the first time.
The key now is to maintain this momentum for the coming period in order to ensure solid relationships are built that will hopefully negate a massive downturn if in future the trade war were to come to an end. If our producers can ensure that good quality wine is delivered and a good working relationship is present, this can bode well for the foreseeable future.
We’ve seen exciting opportunities in the online space as well such as a South African Pavilion on the Chinese social commerce platform, TMall. For now, however, the strict Covid regulations in China are still having an impact on the sales of all consumer products, but this is something beyond our control.
Meininger’s: How do you see the UK market after Brexit?
Calow: The UK is the leading export market for South African wines and remains extremely important for our industry. It is a market that’s very receptive to South African wines and especially the premium offerings, which do very well. South African exports to the UK have seen strong growth in the past couple of years, so it would be unreasonable to say that Brexit has been detrimental to the South African wine industry, though we’re aware of the increased pressures supply, prices and logistics have placed on importers,. In addition to this, our pro-active approach to Brexit saw South Africa obtain 70m litres of the EU1 quota that is specifically for exports to the UK, in addition to the existing EU quota of 114m litres.
The UK wine trade was very supportive of the South African wine industry during the pandemic and it was clear that there is a great deal of passion for our industry from a market that has had a long relationship with South African wines. As soon as things opened up again we saw many of our producers head into the market to reconnect with their importers and customers. The UK will continue to be a major focus for us.
Meininger’s: The US market has been a tough for South African wine. How is that changing?
Calow: The US market remains a challenge for our exporters, however we’ve seen some growth here more recently, albeit in the bulk wine segment. Where we have seen additional good growth is in the mid-tier segment where SA wine punches well above its weight. Education is key within this market as the bridge needs to be built by US consumers between wine as a luxury product and something that is produced in Africa, which isn’t necessarily considered to be ‘luxury’ in the traditional sense by US consumers.
Meininger’s: A substantial portion of South African wine is shipped in bulk at low prices after being produced by wineries whose profitability remains questionable. How is the industry addressing this problem?
Calow: Due to various bans of local alcohol sales over a total period of 20 weeks, we inevitably had a surplus of wine stock, however we found alternative opportunities for some of this wine, such as concentrate, sanitizer, RTD’s, etc.
There were, however, opportunities that arose due to our international competitors experiencing their own challenges of frost, fires and droughts which led to a shortage of wine – our silver lining in terms of reducing the surplus. Having said that, it is important to note that a lot of the bulk that is shipped overseas does not end up in bottles that are SA branded, so it doesn’t carry any value for us from a positioning perspective.
What we have seen is that there has been a decent amount of ‘premium bulk’ wine going out at higher price points, especially of Sauvignon Blanc, Chardonnay and Chenin Blanc and these are bottled and labelled WO South Africa. There are also a number of our producers who export top quality wine at a transfer price to their own companies abroad, simply to be bottled offshore. This way of shipping is cheaper and has a lower carbon footprint, but this does not mean that the product in bottle is of lower quality. There is also a true brand positioning and status with these kinds of products, which is positive.
Meininger’s: South Africa seems to be breaking into the super-premium market more successfully than in the past. Who or what is driving this trend?
Calow: This feeds directly into our industry strategy, driven by WoSA in our key focus markets. We are seeing more and more producers with premium and super-premium portfolios working with us to drive distribution and to effectively market and position their brands. The consistent quality of SA premium brands has really come to the fore in the past few years with many globally recognised top awards and ratings being given to SA brands.
Trade, media and influencers have turned their gaze on SA, which adds kudos and provides a measure of confidence and awareness through to consumers who are now more likely to select SA wines at higher price points than before, understanding that the quality is likely to exceed the value in many instances.
The #SaveSAWine campaign which was started as a social media campaign when the local alcohol sales bans were imposed created an excellent opportunity for people who’d never before considered buying SA wines, to do so in support of our country. That inevitably also opened up a number of doors to new consumers in markets across the globe.
Meininger’s: In Europe, the UK and Netherlands have always been key markets for S Africa. Which other countries are showing promise - on that continent and elsewhere?
Calow: South African wine exports to African countries increased from 15,5m litres in 2020 to 23,4m litres in 2021. Between 2020 and 2021, volumes traded with countries like Nigeria increased from 1,9m to 6,6m litres, while Kenya’s volumes increased from 3,5 mto 4,8m litres and Tanzania’s from 2,2m to 3,4m litres.
Basson: Africa currently takes 6% of our exports. Most of this red and in bottle, not bulk. In 5 years we should have doubled this African component of our exports, thanks in part to the distribution strength of Heineken, new owners of the huge South African wine business, Distell.
Calow: Roughly 50% of all our exports head out to Europe where the UK is still our single strongest market, but Germany also remains a major player alongside the Netherlands.