Managing the controllable

by | Sep 1, 2017 | Business and Marketing

The South African wine industry is undergoing some of the biggest structural changes of the past decade. Exciting? Daunting? Yes, but it’s all about managing what you can control and navigating what you can’t.

Rico Basson,VinPro MD

 Drought, financial pressures, decreasing vineyards and increasing sales – the South African wine industry is facing some big changes.

“But just like any other agricultural commodity, wine is all about managing the controllable and navigating the uncontrollable,” VinPro MD Rico Basson says. “You can’t control the weather or exchange rate, but you can navigate them by adapting business practices and ensuring you have a sound strategy to mitigate risk.”

As for things you can control, the South African wine and brandy industry has through the Wine Industry Strategic Exercise (Wise) rolled out 10 projects aimed at creating an enabling environment and removing barriers to success.

Wise has been instrumental in providing focus and improving collaboration among industry, government and labour to take the wine industry forward to 2025, Rico says. “The traction and collaboration achieved for specific projects has been heartening.”

The production tide is going out

“We’re at a point where something has to give way structurally,” Rico says. Over the past few years there has been a build-up of financial pressure at producer level combined with overproduction in seven of the past eight years, drought, ageing vines and competition from other agricultural enterprises. “The net result? A phase of significant uprooting of vineyards and business realignment that will in all likelihood shrink the industry’s area under vines by another 10% from the current level of 95 775 ha. However, this trend is not exclusive to South Africa; in Australia producers have uprooted close to 20% or 32 000 ha of the area under vines over the past five years.”

But it’s not all doom and gloom. The improved balance between supply and demand means the pendulum will swing towards demand-driven production. “Grape prices are expected to trend upward towards import parity and we’ll see longer-term contracts being signed,” Rico says.

Business success in this environment requires substantial adaptation, a sound strategic plan, new partnerships and the ability to move with speed. “In the words of former Sanlam CEO Johann van Zyl, ‘If you don’t take risks, don’t expect significant profit.’ This is not the phase to say let’s go back to basics, but rather to devise the new basics.”

Value, value, value

The current focus on repositioning South African wine in higher-value segments in priority global markets is paying off. Industry and government have for instance joined forces to improve market access with the removal of trade barriers and negotiation of preferential trade.

The scoreboard for the 12 months to 30 June this year indicates that local sales volumes increased by 4% to 401 million litres and exports by 9% to 455 million litres. There was also a positive shift in volume (15%) and value (20%) to the American, Chinese and African markets over the past 12 months – key Wise priority markets.

The total sales volume is at an all-time high, but the total sales value is still lagging. The average year-on-year Rand price per litre has increased with inflation locally and declined by 10% in the export markets over this period. “Yes, this performance should be evaluated against the backdrop of a stronger exchange rate, but South African wine can’t afford to lose any further margin as it’s already positioned in the bottom third globally,” Rico says.

Structurally there’s a growing global bipolarisation between packaged and bulk wine. “The same is seen in South Africa, with the gap widening between business models focused on premium wine sales and commodity models, where in some cases  short-term opportunistic behaviour is seen. The latter is unfortunately not contributing to Brand SA wine and wine is frequently traded on spot market principles at marginal value.”

The choice of business model, level of forward and backward value-chain integration and product mix remain controllable decisions. The fact that producers currently only have direct control of 38% of all wine produced beyond the cellar door is not sustainable, Rico says. This is the time to foster new long-term partnerships.

“Ask yourself: Am I jealous enough about my product to demand higher values for higher quality? And do I maintain this quality consistently in medium-priced and premium wines? We need to ensure that every single action from production to market adds measurable value.”

Looking local

“We sell more wine in Gauteng than in the UK, our biggest export market,” Rico says. “How long do we want to ignore the potential on our doorstep?”

Wise research shows there’s still an untapped market of eight million potential wine drinkers in South Africa. The Wise Local Market project aims to target this market by providing a toolkit and arranging workshops on how to leverage four specific local consumer segments.

Wine tourism plays a big role in engaging consumers locally and attracting international visitors, with significant growth being driven by private and public sector initiatives. The final phase of the Wise Wine Tourism Strategy, including the online wine tourism portal, visitwinelands.co.za, is currently implemented.

Strengthen the core

“We need to continue to strengthen the core of the industry by looking after our people,” Rico says. “And here I’m talking about talent retention, skills development, creating a platform for young leaders and establishing ambassadors for our industry.”

“An online Learner Management System – an outcome of the Wise Learning and Development strategy – was launched in April to bring learners, suppliers and industry role players together to create the best environment for talent development and retention.

“The fact that 54% of South African wine is ethically certified, compared with 12% in 2013, is a tremendous achievement and has made a significant difference at various levels.” The industry also works closely with the structures created by the Industry Association for Responsible Alcohol Use (ARA) to effect positive socio-economic change in farming communities.

Although transformed land ownership remains low at 2.5%, significant progress has been made through the industry’s Transformation Plan to assist black-owned enterprises to expand through funding and formalised support structures.

The way forward

“There are challenges, but the South African wine and brandy industry is also alive with possibilities,” Rico says. “I urge all role players to tap into the structures and strategies that have been put in place to support them.”

The key to success is still collaboration, innovation, keeping up to date with trends, initiatives and research, and building an appropriate skills set.

Visit www.winesouthafrica.info for more information on the Wise projects.

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