The wine and spirits industry is one of the oldest known to civilisation and dates back to at least 3500 BC when it is known that vineyards were cultivated and wines were made in Mesopotamia.
In South Africa this industry was established closely after the Dutch arrival at the Cape of Storms in 1652, and has flourished and waned cyclically ever since for close on 350 years.
Within the context of competing for share in a global and over-supplied market for wine and distilled products, we offer the following description for a logistics system and the desirable consequences of its implementation into our industry. The logistics system is defined within the framework of a value chain for the wine industry as depicted below.
DESCRIPTION OF A LOGISTICS SYSTEM
The ideal to create a market-driven, globally competitive South African wine industry is the real driving force for implementing a comprehensive and coherent logistics system that serves the whole industry.
The importance of the market as the focal point of this driving force cannot be over-emphasised.
The Logistics System is defined and described within the context of the Industry Value Chain, as shown in Figure 1. As depicted, the Logistics System is effective on all the links of the value chain and the elements associated with it and thus should have impact on all.
We define the scope of the Logistics System as to encompass the Effective Provision and/or Flow and Maintenance of the five elements of:
- Labour, and
as required by each link of the Value Chain and each associated element to achieve and sustain a globally competitive industry in a System-efficient manner.
- Each of the five elements that comprise the Scope of our defined Logistics System is facilitated, caused or supported by either:
- Physical infrastructure, and/or
- Formally structured processes, and/or Contracts, and/or
- Services for the:
of the input, throughput and/or output of that element.
The implementation of the above-described Logistics System should be designed such as to result in and support the following 10 benefits to the industry and its markets:
1.The optimisation of the match between the characteristics of industry products and the (shifting) requirements of Users for those products.
2.The synchronisation of the Strategy and Objectives of the majority of role-players in the industry.
3.The facilitation of Synergy of Effort in the industry.
4.The formalisation of Interface Performance Requirements and Acceptance Measures across all value chain interfaces.
5.The facilitation of consistent throughput performance throughout the value chain all the time.
6.The provision of transparent planning and performance measures and formats throughout the value chain.
7.The facilitation of timeliness and quality in the provision of supplies and resources to all value chain elements.
8.The facilitation of timeliness and quality in the delivery of products and services throughout the value chain.
9.The provision for and the facilitation of opportunities for heuristic self-development of interfaces and processes.
10.The facilitation of opportunities for the financing of, and investments in, a well planned, co-ordinated and performing industry.
THE ENVIRONMENT FOR A LOGISTICS SYSTEM:
Short overview of the world wine industry
In a report published during May 1999 titled “The World Wine Business”, Rabobank International finds that the current formal quality standards as implemented in the marketplace are both indirect and confusing to consumers as indicators of product quality, and segments the market into 5 quality segments by price, as elaborated below.
Icon Ultra-premium Super-premium Premium Basic
Price range US$ 50 US$ 14-50 US$ 7-14 US$ 5-7 <US$ 5
Type of consumer connoisseur wine lover experimenting consumer experimenting consumer price-focused consumer
Purchase decision based on image, style quality, image brand, quality price, brand price
Retail winery, boutiques, food service specialty shop, food service better super-market, specialty shop supermarket supermarket, discounter
Market share by volume 1% 5% 10% 34% 50%
Market trend (size) little growth little growth growing growing decreasing
Competition limited, ‘closed’ segment gradually increasing increasing, based on brand, quality:price ratio growing fierce, based on brand, price ratio based on price
Availability scarce scarce sufficient, year round large quantities, year round surplus
Click here to see graph of Emerging Exporter Comparisons.
This segmentation show clear trends for growth in the 44% by volume Super-premium and Premium segments, wherein consumers are increasingly experimenting with offerings from large retail chains based on value for money within the safety of branded products. The small, but elite Ultra-premium and Icon segments dominated by wine lovers and connoisseurs who buy at specialty stores, foodservice outlets or direct from producers show little growth but will remain in demand. In contrast the 50% volume market for low cost Basic wine is both decreasing in size and over-supplied in volume.
In terms of varieties, a clear trend away from white wine to the more sophisticated tastes offered by red wines has been manifest for the last few years in all the major markets for wine. This will no doubt lead to more intensive price sensitivity for white wines until the demand and supply situation stabilises for both white and red varieties
PERSPECTIVES OF THE SOUTH-AFRICAN WINE INDUSTRY
Production and Market Performance Trends
The following figure serves to illustrate the export performance of the South African wine industry within the context of other new exporting countries.
The South African industry product is dominantly white grape variety based, which is counter to market demand.
SCHEMATIC OF THE INDUSTRY STRUCTURE AND LOGISTICS SITUATION
The local wine products industry is structurally an “Old World” industry, with a highly fragmented collection of mostly small co-operative producers, estates and private cellars producing wine products for distribution by wholesalers and exporters, or alternatively managing their own marketing and distribution.
Click here to see the current structure and the flow of product, supplies, and information.
Several salient characteristics of this Logistic Structure can be highlighted:
- The industry can be broadly grouped into three segments: Those producers and producer organisations that have pre-empted, or adapted to the deregulated market situation and who operate a continuous value chain from vines to market, with focus on delivering suitable products into the market. The number of awards awarded to South African wines and winemakers testify to the success of these producers and those in the next sector.
- Bulk buyers and wholesalers who are integrating backwards into producer roles and who manage the value chain from vine to market by contracting with vineyards and cellars to produce market focussed products for their distribution channels.
- Producers and distributors who have been slow to adapt and for who the value chain is interrupted following the link of delivery and certification of their products, with a traditional barrier separating them from the market and its dynamics. These producers are invariably caught in the trap of products that have no demand and for which no channels for disposal other than “dumping” are apparent. In the absence of drastic action these will become more statistics to the unforgiving nature of the free market mechanism.
- The value chain is highly fragmented for the actions of marketing, distribution and warehousing. This situation is not one that is supportive of the crucial action of branding and promotion that is required for success in the highly competitive export markets.
- As previously described, the actions in the chain are highly regulated, but by external agents rather than by the value-adding incumbents themselves. Furthermore quality control is based on physical inspection and/or the testing of products.
- Although record keeping is a regulatory requirement for most industry-critical parameters, these are limited to production factors and market information is not readily available.
- There are no readily accessible online information systems in overall use in the industry as a whole and information flow and the speed of flow of paper documents and certificates consequently govern decision making.
- The flow and timeliness of the certification of product destined for export markets are at present a major stumbling block to the establishment of a viable reputation for South African wine products. Caused by the nature of certification as stipulated in the Act and its regulations and despite the efforts of overworked officials, correction of this defect is the highest priority for short-term action. Happily it is already getting high profile attention.
Within this framework the key dimensions for each value chain element in the logistics structure is depicted below.
Value Chain Characterisation:
Click to see table.
The lead-time indications as shown are informative, and though some of the structural and practice corrections can and should be done concurrently, the vital items of reduction of the cultivar diversity and correction of red/white mix will require a period of some 8 years before real change will be apparent. It can safely be assumed that the demand for red wines will at that time also be oversupplied.
Competition based on good quality, low price and consistent supply will thus most probably apply for both red and white varieties when South African red wines can be supplied in volume.
This reinforces the need for differentiation of South African products starting with cultivar, through leading wine-making technology, outstanding and consistent quality achieved by process management and information transparency and which are anchored in the market by exceptional branding practices.
FOCUS AREAS FOR A LOGISTICS SYSTEM
Achieving the benefits as outlined in our statement of desirable consequences of a logistics system will require a focus on three main areas to establish the necessary infrastructure, processes, services and/or contracts required:
- Quality Management Practices that are internationally accredited;
- An information infrastructure that is accessible to wine industry stakeholders with information systems availing key process-, product-, market- and distribution information online and real time;
- A Regulatory Framework that underpins and provides for the satisfaction of Market Requirements.
With the exception of the information infrastructure, the other focus areas can build on practices, systems and principles that are being utilised successfully by players in the wine industry or elsewhere in South African industry.
The only really crucial dimension is time, and whether this industry can move fast enough and decisively enough to keep in touch with the dynamics of an information-age driven marketplace.