Wineland Article March 2007: VinPro Information Day 2007

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VinPro Information Day 2007
Too much of a good thing...

by Cassie du Plessis
The second annual VinPro Information Day was characterised by a momentous irony: The Cape wine industry finds itself in the midst of the biggest and what might well be the best harvest in almost 350 years, but it is hampered by a serious oversupply situation that forms part of a growing world trend.
But despite the message of unparalleled economic pressure and difficulties, such as a decrease in exports and a stagnant domestic market, the select and outspoken panel of speakers left the 450 delegates with a positive impression about the enormous potential of the industry in many regards.
And the biggest contributor to this feeling of optimism was the speech by Prof Kader Asmal, guest speaker, who made his first public appearance in the wine industry since his election to the hot seat as chairman of the SA Wine Industry Council (SAWIC), previous SAWB.
Asmal's message about the importance of the US market for South African wine was echoed by the other speakers and he also mentioned that he intended to obtain extensive financing for further market development, especially the activities of the export association, Wines of South Africa (Wosa), which will in future also fall under the new SAWIC compensation.

"We as producers should determine exactly what consumers want and at which price so that we can give it to them."
- Abrie Botha

"Dramatic strengthening of the South African presence in the US market through the creation of an all-inclusive market development initiative has the biggest short term potential to relieve the current oversupply".
Asmal said the wine industry required much more money for successful market development. The success of an integrated industry development policy will depend on the availability of significantly more money for market development by an acknowledged marketing body such as Wosa - which is doing good work despite the lack of sufficient funds. The new strategic plan of the SAWIC makes provision for Wosa to handle domestic promotion of wine tourism and wine consumption. Prof Asmal's speech is reported in full alongside.
The first speaker of the day, Dennis Dykes, chief economist of the Nedbank Group - which made a financial contribution to this presentation at Goudini Spa - said in his Economic Outlook for 2007 that in the currently flourishing South African economy, agriculture was the sector that was faring worst. The possible stabilisation of exchange rates at the present level could, however, make life easier with regard to exports. World trends are that the Asian economies, China in particular, are growing fast, with a rapidly developing wine production accompanied by a developing consumer corps, while the USA remains the biggest 'consumer'.
Next came Tom Blok of PricewaterhouseCoopers who warned that the oversupply of wine throughout the world posed enormous management challenges, while retail chains - which handle 86% of our wine sales in South Africa - are exerting strong downward pressure on prices. This situation results in a price war. He recommends that the sales plan be seen increasingly as a point of departure. "Look at the price segmentation. If you cannot compete in certain segments, you first have to produce a product that will enable you to compete."
VinPro agricultural economist Gert van Wyk demonstrated that the average South African producer could not afford to realise less than R4 per litre for his wine - "which is 18% below where we should be". According to Sawis the average selling price of drink wine was R3,38 per litre in 2005. At such profit levels production is not sustainable.
Francois Viljoen, manager of the VinPro Consultation Service, said the past season was "fantastic". "After almost perfect weather conditions the vineyards are currently in a very good condition and it will be easy to harvest the grapes at optimal ripeness. This is of course providing the weather conditions play along during the ripening process. It is any farmer's dream to encounter a harvest like this. Be excited and make the most of the potential," was his message to wine farmers and wine makers.

VinPro executive director Jos le Roux and chairman Abrie Botha with Prof Kader Asmal.

A harvest of 1 335 050 tons (1 029 million litres) is expected, which is 3% more than last year and might well be the biggest in history.
Vinimark manager Tim Rands elaborated on last year's no-nonsense speech regarding the domestic market and said that wine producers should ask themselves whether they are in the commodities or brands business. The wine industry has not yet woken up to the power of brands.
"It is not so much a question of the consumer not having money to spend, but rather that the industry has failed to convey an exciting and desirable message effectively," he said.
Compared to other alcoholic liquor the wine industry's marketing expenditure hardly increased from R40 million in 2005 to R40,5 million last year. The wine industry did not show much domestic growth.
By contrast the marketing spend on spirits increased by 12,6% from R269 million to R303 million. Premium whisky showed an increase of 18% in volume. In the same year the wine industry's marketing spend amounted to less than a quarter of that spent on beer, namely R163 million.
Many products intended for the export market were dumped on the local market thereby putting downward pressure on wine prices. With it came an understanding of the importance of the domestic market in an international sales strategy. The competition is growing rapidly while the domestic market is showing hardly any growth at all.
The industry should refocus and create a demand for domestic products through wine tourism.
Bruce Jack of Flagstone Wines spoke about international markets and expressed his disappointment that South Africa has not yet been able to establish a South African portfolio in the USA. He singled out Canada in particular as a country where South Africa could benefit from the groundwork and success of Australia. "But we should look at premium and super premium and play according to our strengths, such as our biodiversity. Organic wine is also becoming very important. We should work together and believe in ourselves ? convince people to believe we can be up there. Meanwhile we are losing out on the Rosé boom!"
VinPro chairman Abrie Botha added that it was heartening to see cellars starting to collaborate so as to increase effectivity and make a bigger impact on markets through critical mass. However, lessons should be learnt from the mistakes of the past as regards consolidation.
"We as producers should determine exactly what consumers want and at which price so that we can give it to them. The flip side of the coin is also true, however, in that mistakes made by cellars/the industry are usually rectified in one place only, namely, in the payments that are made to the producer."

'Bolster the US presence' - Kader Asmal

The South African wine industry is in a better position now than it has ever been. Large scale supply growth and a fiercely competitive market notwithstanding, the industry stands on the brink of achieving the high level of world recognition that it so desperately craves.
The fruits of democracy have opened up the world to the pleasures of South African produce and at the same time opened the world to accept our young winemakers and vineyard managers to learn 'international' winemaking. The industry is now in the global arena that allows it to more fully understand the markets that it has come to service.
The new baby, the South African Wine Industry Council (Sawic), with its encompassing representivity, faces the challenge of bringing the need for further change to the attention of the broader community. There is an enormous and bewildering array of bodies in the wine industry, technical, professional and commercial and we must harness this energy.
Sawic aims to facilitate change through the intelligent application of academic, political and economic tools to further the joint goals of empowerment and market development.
But what comes first? Empowerment or market development. Does an industry that starts making healthy profits provide a more fertile foundation for facilitating empowerment or does an empowered winemaking community create a wealthy wine industry?
The truth must surely be a middle-ground position with both empowerment and market development holding equal weight. The entire industry needs to embrace the leadership of Sawic in order for the industry to transform in a meaningful manner.
The industry must grapple with the following issues:

The Wine Charter: after nearly three years of work by consultants, meetings and imbizos, the charter process is reaching its end. The adoption by the government of a realistic charter should provide the impetus towards the completion of the wine industry charter.
Land access, land reform and social responsibility programmes must play a big part - the process to be based on the Constitution - the law must be observed.
We must learn to deal with all kinds of deprivation we face in the winelands. In particular the issues of security of tenure and job security cry out for a positive response.
The challenge of GM should be resolved by honest debate.
The practices adopted by those who buy the industry's produce on a wholesale basis for further sale or production should be investigated. Fair competition must mean fair prices.
The country's supply and demand has always been cyclical. The current oversupply, however, is of concern because it coincides with a period of increasing global over-supply. South Africa produces less than 3% and it is of even greater concern that we have under-marketed ourselves into an oversupply situation.

"Dramatically bolstering the South African presence in the US market through the creation of an all-encompassing market development initiative has the greatest short-term potential to alleviate the current over-supply." - Kader Asmal

The creation of an all-encompassing global market development strategy should play a significant role in the future of the wine industry. Creating a new politically and economically empowered wine industry without simultaneously creating new market capacity would not be conducive to success.
The development of additional market capacity should rather be seen as one of the key components that would galvanise and focus any empowerment strategy. A financially successful industry would be an easier vehicle to empower than a wine industry that is losing money.
Wines of South Africa (Wosa) has performed an admirable job despite a long-term problem of being under-funded. The future success of an integrated wine industry development policy hinges on the availability of significantly increased funding and support for market development for a recognised marketing body, which could be a revamped Wosa.
The new master strategic plan for Sawic includes an additional role for Wosa in addressing the two important issues of wine tourism and generic domestic market development - both dependent on funding which has not yet been identified.
The international market development for South Africa should be three-pronged:

Maintain momentum and investment in existing focus markets like the UK, Germany, Holland and Scandinavia.
Significantly increase focus on the US market and upgrade the status thereof to priority number one.
Create a well-researched, carefully co-ordinated strategy for the development of future non-traditional markets in Africa, India, China, South Korea, Russia, etc.
Dramatically bolstering the South African presence in the US market through the creation of an all-encompassing market development initiative has the greatest short-term potential to alleviate the current over-supply. The US market has been clearly identified as the largest driver of future wine consumption as well as being a high value market. Furthermore, South Africa is already recording acceptable levels of growth in this market which has created a fragile momentum.
Sawic, Sawit and the wine industry leadership as a whole should consider channeling influence into the provision of high level non-partisan leadership. The facilitation of high level political support, the buy-in of SA tourism authorities, corporate South Africa and assistance in courting the dti to play a role in the provision of funding.
The most important stepping stone to a successful US campaign would be to open a dedicated office in the USA for which Wosa does not currently have sufficient budget.
Research and development are crucial to the industry to achieve competitiveness and cost-effectiveness. South Africa lacks the research and development funds enjoyed by subsidised industries in, among others, Europe, Australia and New Zealand. Sawic will involve itself in attempting to improve the quality of research to ensure that our wine quality can withstand the competition from outside.
South Africa's hosting of the Soccer World Cup in 2010 must become part of a national festival which must include sectors of the wine industry. We must see this event as providing a great opportunity to obtain massive market leverage for South African wine.
As a contribution to national debate, the Council has inaugurated an annual Freedom Day Lecture, of which the inaugural one will be delivered by the Minister of Finance, Trevor Manuel MP on 28 April 2007 on the theme Challenges and Opportunities in the South African Wine Industry.
Speech condensed - Prof Asmal's full address, as well as the various speakers' presentations are available at www.vinpro.co.za

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