The past month was characterised by several meaningful KWV activities, including the annual general meetings of KWV Co-operative and KWV Group and the annual VinPro (SA) information meetings, as well as an informative “media day” by KWV International. The following important issues were raised:

No profit, but growth in real earnings

In the year under review the group increased its headline earnings by a solid 22,4 %. Mr Lourens Jonker divulged at the AGM that this was the result of the following factors:

  • A sluggish local brandy market that was still not showing signs of recovery
  • Low foreign concentrate prices
  • Good growth in wine exports
  • An increase in production efficiency and comprehensive fiscal discipline – the latter including cuts in personnel.
  • The attributable consolidated loss of R3,7 million (2000: R47,7 million profit) should be viewed against the following background:
  • A considerable decrease in income (R25 million) which is attributed to the group’s most important associate company, Distell Limited,
  • The contribution to the South African Wine Industry Trust (SAWIT) increased by R12,7 million – mainly as a result of a decrease in the interest rate on the RSA 153 bond, and
  • A one-off profit of R25,4 million realised by the sale of investments.
  • “With the exception of Distell’s contribution to the nett income as well as the discounting effect on the income statement of the SAWIT obligation, I am pleased to report that the group more than reached its budget goals for the year.”
  • Capital expenditure was high, mainly due to the replacement of maturation barrels and upgrading of winemaking and bottling equipment. Although cash flow from operational activities improved, there was greater expenditure on fixed assets, once again leaving KWV more or less in a neutral cash flow situation.

The group is subject to a considerable income tax burden, provided for largely as deferred tax. The burden is brought about mainly by the re-evaluation of liquid stock.

In the light of the cash flow situation,the board did not declare a dividend for the year.

can confirm that we are succeeding in the goals we have set for ourselves. Up to now, KWV’s structure has been adjusted and finalised to reflect a commercial focus. KWV, as an organisation, currently consists of a co-operative which controls a group of companies. Having adjusted its operational business to become commercially focussed, control of KWV still remains in the hands of its producer shareholders – Lourens Jonker.

Dissatisfaction with dawdling Devco
While Busco (the business division of SAWIT) channelled funds satisfactorily through WOSA and Winetech, inter alia, KWV is highly dissatisfied with the lack of progress made by Devco (on the development side) with the empowerment of farm workers and their communities.

“Although a measure of see-sawing between SAWIT and the Farmworkers’ Organisation has delayed progress, the biggest problem is the lack of facilitating. Our concern is with the decrease in the number of development projects in the industry since the foundation of SAWIT and that consequently less is being achieved in the industry than KWV managed to do with considerably less funds in the previous few years.

“The problem lies not so much with the availability of funds, but rather with the structures by means of which the farmworkers can negotiate, on their own behalf, for the support and services they require. SAWIT’s chairman undertook to launch an urgent investigation into the situation.

SAWIT was founded at the time of KWV’s transformation to take over those functions that the KWV group could not handle comfortably as a company. Generic export promotion and research are driven by Busco and the establishment and development of new farmers, as well as the empowerment of farmworker communities, by Devco.

KWV’s producer services organisation, VinPro, is the most important link between KWV Co-operative, the industry, the government and SAWIT, to whom KWV group paid out R22,7 million in the last financial year.

Serious warnings about foil bags
It is unacceptable for wine to be dumped on the market at below cost. If the prices are not adjusted, the government will attempt to do so by means of increased excise duty.

This warning was issued by Mr Jonker both at the series of four VinPro information meetings for cellar management in the various regions and at the KWV AGMs in Paarl. He made a serious appeal to producers not to have any part in the sale of cheap, low quality wine to developing markets.

“It is bad enough to practically give away wine for free. However, the effect of the low prices on the rest of our quality products is catastrophic to the wine industry. The foil bag issue is rapidly developing into a major embarrassment for the wine industry and is becoming a threat to its economic sustainability.”

During the first six months of this year more than 40%, the equivalent of 65 million litres, of the country’s bulk white wine was still being sold for less than R1,25. Whereas foil bags represented 18,2 % of the domestic wine sales last year, this figure increased to 24,5% in the first four months of the year.

Plastic packaging also increased from 25,8% in 2000 to 27,9% in April.

This product can play an important role in the domestic and even export markets of the future. Unfortunately the opportunity is rapidly passing the industry by, due to the implementation of unacceptable and illegal practices.

“The product is currently being stigmatised as low quality wine at a highly subsidised price, which makes a considerable contribution to abuse. Despite the code of conduct for liquor merchants imposed by ARA, as well as other industry initiatives, the government blames the industry for irresponsible conduct which results in fetal alcohol syndrome and other social problems.

“There are clear signs that the product will cause the wine industry to be singled out once again next year for a considerable increase in excise duty.

“Due to the totally unacceptable price structure of foil bags, at times as little as R13,00 for five litres, the wine industry now provides the cheapest alcohol on the local market and probably in the wine world – As a result of foil bags the increase in excise paid this year is estimated at more than R50 million.

“The government considers price to be a mechanism to control consumption. If we do not raise the prices to sustainable economic levels, they will do so on our behalf.

“We must ensure that the quality of the wine and the packaging are correct when the wine reaches the consumer. We must also ensure that we do not sell wine to merchants who are guilty of adding water, artificial sweetener or illegal alcohol and that the labelling requirements are being met. It is also totally unacceptable to supply wine to merchants who are in the market at ridiculously low prices.

“Various government departments have convened about this issue. They are under pressure from complaints by us that the law is not being enforced, and have made plans to act in a co-ordinated and strict manner against offenders. A system of monitoring and policing will have to be considered.

“KWV will not hesitate to expose offenders. I strongly support any behaviour aimed at eradicating this harmful practice.”

Further expansion for VinPro
The control body of VinPro (SA) has been expanded and transformed from an advisory committee to a board, which makes it the most representative organisation serving wine producers and their winemaking interests.

“The Board will be justified in claiming the support of more than 90% of the wine farmers and more than 90% of their cellars,” said Mr Jonker, chairman of both KWV and VinPro, at the information meetings.

The board of KWV Co-operative has been evaluating the VinPro structure on an ongoing basis over the past few years and has adjusted it to comply with producers’ service and representation requirements.

At a recent KWV board brainstorming session, and following consultation with the industry organisations CEWPA, WFA, IV and VKL, it was decided to further expand and support the VinPro Board.

The VinPro Board is a voluntary association of elected (primary) producers and representatives of the most important industry organisations.

In future the Board will consist of:

  • One KWV director who is democratically elected in each district (eight).
  • Four representatives from the ranks of CEWPA and WFA, two representatives from the Cape Estates Association (VKL). This follows on the heels of the Private Wine Producers (PWP) also pledging their support to the VKL.
  • A representative of the Independent Vignerons (IV).
  • A representative from new producer groupings which may come about and enjoy substantial support.
  • The chairman of the Board may also co-opt experts from the industry.

“It is important to note that these Board members do not serve on the Board to further the interests of their own organisations, but that the common interest of the industry, from the point of view of the wine farmer and his organisation, is being served.”

Responsibility for the management of the VinPro budget, as well as decisions in the broader interest of the industry, have been delegated to the Board. Financing for VinPro’s budget is obtained from the KWV Group of companies. The VinPro personnel report to this Board and there is complete organisational division between the activities of VinPro and those of the KWV Group of Companies.

Surplus of red wine anticipated
The industry’s estimated wine stocks will amount to just over 226 million litres by the end of 2001. This figure is 100 million litres less than in 1999 – “truly something to be grateful for”. Speaking once again was Mr Jonker at the information meetings.

The total crop this year was the smallest in many years and supplies had to be drawn from stocks since sales exceeded production.

“Plantings were mainly red, but investment does not end with the planting of red grapes. A fair amount of investment will have to go into cellar equipment, maturation stocks and market development in particular, to put the new plantings on the market. When we look at the price trends of red wine, it is obvious that good financial planning is critically important throughout the entire process, from the farm until the product reaches the market.”

For now the industry is expected to have a red wine surplus of 20 million litres, which will increase to 81,5 million litres in 2005.

In the past year, the industry first experienced a surplus of certain products and then, early this year, a very small crop, with the result that producer income remained stagnant for the third year running. Together with increasing input costs, the financial burden became unbearable for many producers and as a result, job opportunities and the quality of life in rural areas have suffered. One of the most important challenges arising from this situation is for KWV Co-operative to develop joint planning for the industry at producer level in a manner that will focus all production on proven market demands and eliminate surplus production. – Lourens Jonker.

Changes in KWV board

Danie de Wet, member for Robertson, was unanimously elected as vice-chairman of KWV Co-operative Limited in the place of Jannie le Roux, who stepped down from the position after seven years, but remains as a board member.
Johann Krige, co-owner of Kanonkop Estate, was elected as a director of KWV Co-operative Limited after being unanimously nominated to succeed Johan Gerber. The latter reached the end of his term of office as KWV director for the Stellenbosch district.

New era in market development
KWV Group developed a comprehensive business plan for the next four years in the course of the past financial year (July 2000 – June 2001).

This includes a comprehensive, properly researched advertising and promotional programme spanning the next four years, supported by a multi-million rand advertising campaign – which will double KWV’s previous budget for this purpose, with a view to the doubling of exports. The amount is not being revealed, but is considered to be a milestone in the South African context.

At the AGM Mr Jonker said that the market development plan for wine involves volume planning per cultivar per brand per annum. The final approval was only granted by the board of KWV Co-operative Limited once the plan was also developed in the focus markets by a consulting group.

Similar to the wine growth plan, a plan is currently being developed for short and medium term brandy sales. There are indications that the brandy market is beginning to stabilise. KWV is equipped to capitalise on any revival in the market, brandy being an important source of income for the company.

As far as spirits and concentrate is concerned, Mr Jonker said the commodity markets required extremely cautious management and solid market information. “The goal is to continue honing our ability to position these products against strong global competition from various sources, and to establish long term profitable associations.”

KWV International aims for 4 million cases
KWV International intends to double its wine exports to 4 million cases by 2005, says Vernon Davis, managing director of this wholly-owned subsidiary of the KWV Group.

Mr Davis addressed the media at Laborie Estate in Paarl where the company’s global strategy was conveyed to the South African media, following the previous five years’ focus on the establishment of brands and benchmarking abroad.

This follows on the KWV Board’s approval of an ambitious advertising and promotional programme over the next four years, supported by a multi-million rand advertising campaign – a campaign of unprecedented magnitude from a South African point of view, which will double KWV’s previous budget for this kind of exercise, with a view to doubling exports.

According to Mr Davis his company’s business has already increased by 38% compared to this time last year. The company’s philosophy is to provide excellent service and offer products with competitive quality/price ratios. His exports currently consist of:

  • 1,7 million cases of wine brands
  • 100 000 cases of South African estate wines; and
  • 500 000 cases of overseas brands.
  • A third of KWV International’s turnover is earned from non-South African products such as French, Chilean and Italian brands.

Eggers & Franke, the German subsidiary, accomplished a huge breakthrough with Robert’s Rock, the particulars of which will soon be made known. This dual cultivar, fun wine range has experienced phenomenal growth of 0 – 300 000 cases in a few years. Roodeberg, which has been upgraded, is also doing exceptionally well and so too the KWV brand name which has seen a relaunch in the USA. Pearly Bay is selling like hot cakes and Perold has lived up to all expectations.

Davis emphasised that KWV International has a structured portfolio and correctly positioned products at various price points. To prove his point, the media tasted 14 white wines and 16 red wines comparing KWV products in various classes to their most important competition abroad – an exercise in which KWV passed with flying colours. In several instances there was consensus about the KWV product being the best – even, for example, when a Cathedral Cellar Sauvignon Blanc was compared to a Rosemount from Australia and a Red Birch from New Zealand. Only in one category, out of 12, did the local product not shape up.

The events of 11 September totally changed the wine trade in the USA. Restaurants are empty, nobody is flying any more, Disney’s bed occupancy is down to 10% and that of Las Vegas to 15%. People are buying wine off the shelf instead to enjoy at home with their beloved ones. This benefits value for money wines and puts KWV International’s brands in an excellent position. – Peter Morales, President of 57 Main Street Wine Co in the USA, KWV International’s American partner.

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