For the first time in years, South Africa’s wine exports are down significantly. What does this mean for the industry, and is there a silver lining? Anton Pretorius finds out.
In its latest Export Report for 2019, Wines of South Africa (WoSA) indicated the overall value of our wine exports declined by 7% to R8.5 billion, while the total volume of our exports went down by a sizeable 24% to 320 million litres. Read the report here.
In essence, this means South Africa sold 100 million litres less wine than in 2018.
In its official press release, WoSA says the struggling export figures are related to the downturn in overall production due to the drought experienced in the Western Cape between 2015 and 2017.
According to WoSA’s report, the Western Cape had a slightly more favourable rain season in 2018 compared to the three years leading up to it. “However, vines were still struggling to recover with yields coming in lower than previous years.”
According to Maryna Calow, communications manager at WoSA, the fact that harvest volumes were down is one of the major contributing factors of the low export figures. “Add to this a rise in price and an oversupply of wine in other markets and you’ve got a trio of events that form part of the bigger picture.”
The drought, in combination with an international oversupply has resulted in a perfect storm, which has caused South African wine to lose listings among major retailers at the lower price end.
An executive at a big South African wine brand that exports to various major international markets (who wishes to remain anonymous) says the wine industry price adjustment was premature. “Lifting prices by close on 50% over two years was a bit greedy. Yes, it would have made sense when there was a global shortage of wine. However, now we’re risking an oversupply and consumers are not prepared to pay more.”
He says South Africa doesn’t have enough strong wine brands with sufficient volumes to back up such radical price adjustments.
Dennis Matsane, Distell Group‘s communications manager, says the company has experienced a decrease in its export volumes, but managed to retain listings at major UK retailers. “Part of the decrease is due to us exiting unprofitable business in markets such as the UK. In markets where we could increase prices we have seen pressure on volumes due to higher price points, but we have not lost listings as a result.”
Maryna adds that lost listings – mainly with multiple grocers and mainstream retailers – is a major consequence of the reduced exports.
Ben Jordaan, director of procurement at Cape Wine Exporters and former winemaker at Kumala, says he’s definitely seen a decrease in South African wine exports to the United Kingdom. “We’re feeling it in our bottom line.”
Ben says the most notable knock-on effect is the loss of listings in major UK retailers. “With the price increase, we’re losing considerable shelf space among UK retailers, and there’s no quick solution here. Consumers move on to more affordable offerings and it takes years to re-establish relationships with retails to win back listings.”
Dennis says another knock-on effect of the low export numbers is that normal production volumes will put pressure on stock levels which will in turn, “lead to pressure on bulk prices.”
Light at the end of the tunnel?
While WoSA’s export report paints an ominous picture, there’s a silver lining for wine producers and the South African wine industry as a whole.
While bulk wine exports declined by 30% in volume, the 17% decline in value indicates that higher prices were fetched for these exports, and early signs indicate that we may well have broken the glass ceiling in terms of pricing.
Premium and super-premium ranges in particular showed the most growth, tying into WoSA’s strategy for the premiumisation of South African wine. Packaged wine exports declined by a mere 4% in value compared to the 14% decline in volume to 145 million litres.
Maryna agrees. “One of our focus areas is to premiumise South African wine. Given this, we’ve seen a move in the right direction. This certainly will lead to a rise in South Africa’s premium category.”
The good news, according to WoSA, is that there’s momentum building at higher price levels where South African wine is garnering good recognition, leading to positive listings.
However, Dennis says that this is not necessarily the case. “The average recommended selling price (RSP) for South African wine in the UK has improved, but we’re still well below the average price.”
He adds: “In the on-trade and specialist channels, we’re seeing growth at premium price points, but the challenge is at the multiple retailers (grocers) level, where the South African category is struggling to premiumise.”
The United Kingdom remains South Africa’s trusted number one export destination, leading the charge in terms of packaged wines both in value and volume.
Furthermore, according to an article on www.iol.co.za, South Africa and the Southern African Customs Union economic partnership agreement with the UK, one of the biggest wine export destinations, signed last year will now kick into gear post-Brexit. The post-Brexit deal allows the export of 70 million litres to the UK duty-free, while maintaining the current duty-free rate of up to 110 million litres exported to the EU.
The UK was followed by The Netherlands, which saw positive growth of 11% in terms of value, overtaking Germany for the first time. The Canadian market also showed a positive upturn of 10% in value, despite a decline in volume.
In WoSA’s other focus markets, there were declines in China, Africa, Sweden and Germany, while the US market remained flat. Maryna comments that despite the decline in focus markets, WoSA will maintain their current market strategy for these countries.
In terms of top-rated varietals, white wine seems to be the hot favourite in export markets with Sauvignon Blanc leading the pack in terms of volume. Chenin Blanc and Chardonnay also had positive value increases of 14%. Positive prices for South African Cap Classique and Sparkling Wine categories are also worth mentioning.
Commenting on the better performing markets like The Netherlands and Canada, Maryna says that the key take-away message here is premiumisation.
“The message is clear. The quality of South African wine is superb. Now retailers and importers need to recognise that South African producers must be paid a commensurate rate for our products.”
Solving the issue
But what is the solution going forward to fix or correct export figures? “Firstly, we’re hoping for a better 2020 harvest. It also depends on what happens to the South African economy as a whole.”
Following further good rains in 2019, harvest 2020 has begun in many ways for our growing regions, with preliminary feedback from producers being positive in terms of both quality and volume.
South Africa’s 2020 wine grape harvest will, according to industry’s first estimate, be equal to or larger than in 2019, but still smaller than the average wine grape crop over the past five years.
“Add to this vineyard losses in competitive regions such as California and Australia, and what we have seen is a fluidity in movement when it comes to export,” says Maryna. “There’s a global picture at play here. What we must continue to do is to grow on the quality of our offering and set realistic price points for our wine that will allow us to ensure the long-term sustainability of our industry.”
Given the slightly bigger harvest predicted for 2020, the South African wine industry will have to sell up to 100 million litres more wine to prevent a surplus of stock. This must be done without lowering the price in a very challenging economic climate. The big question is: Did we overplay our hand by increasing prices too quickly and thus, scaring off buyers?
Ben feels that this is definitely the case. “This should serve as a reality check for grape producers on market-related price points versus sustainable price points. Being ‘good-value-for-money’ was South Africa’s unique selling point, but with the prices increasing significantly, we’re losing that tagline.”
He says SA Wine must go back to the drawing board. “We need a downward price adjustment of 10%. Producers need to look at grapes with better yields (Colombar and Chenin Blanc) to allow for better margins. “The price expectation of the producer is way too high. We’re competing on an international level now, and the market is brutal. If the price is too high, wines take longer to contract or move.”
Dennis says there’s no quick fixes. “We need to establish South Africa as a recognised category in the United States, as well as establish free trade agreements with BRICS countries.”
There’s some positivity too…
Saskia Lesch, Overhex International’s sales manager for Africa, says the export growth in Africa has been “incredible for the company.” Overhex has seen phenomenal growth in East and West Africa with their Survivor and Balance range of wines.
“There’s amazing growth potential in Africa,” she says. “Because people think the market is price sensitive, people tend to be careful exporting to Africa. But from what we’ve experienced, export margins are better in Africa than bigger economies like Europe.”
She says Africans have developed a strong connection to Overhex’s Survivor and Balance range of wines. “Maybe it has something to do with the elephant on our label. But it’s exceptional quality wine at a very good price.”