The Big Squeeze: Inflation’s effect on South African wine

Isaac Matshego, senior economist at Nedbank, says the sharp increase in inflation is largely attributed to higher food and fuel costs. “The impact of the Russia-Ukraine war and China’s ‘Zero-Covid’ policy on supply chains has pushed up global grain and crude oil prices. As a result, local prices have risen at a higher rate.”

In addition to our in-depth article where we speak to Isaac, Carolyn Martin (Creation), Hein Koegelenberg (La Motte), Peter Pentz (Groote Post) and Johann Fourie (Benguela Cove), we also spoke to Ferdinand Appel, managing director at uniWines, for his take on how rising inflation impacts wine producers in South Africa.

Inflation and wine: Q&A with Ferdinand Appel, uniWines

Q: South Africa is currently experiencing its highest inflation rate in five years. How does this affect your bottom line?

FA: As a result, input costs are rising, and this is putting a lot of pressure on the company’s ability to service expenses sustainably with the same income. Costs rise, but revenue does not necessarily rise proportionally.

Q: What segment of your wine production process is hardest hit, and is there a domino effect?

FA: The entire production process is affected. The least amount of pressure was felt during harvest season. But with harvest season over, wine has moved further down the value chain, and puts enormous pressure on costs. Due to cost-pressure inflation, we’re seeing a clear domino effect as everything becomes more expensive. When input costs like fuel rises, it impacts the entire value chain. Everything is somehow dependent on transportation.

Q: Will high inflation rates force you to raise prices?

FA: It will force us to adjust prices upwards. With the new crop negotiations, inflation will always be part of the conversation. On the other hand, the prices of older vintage wines remain ‘fixed’ and the company is forced to absorb the increase of the value chain. This has a direct, negative impact on our bottom line.

Q: How will consumers react to the increase in your wine prices?

FA: Consumers in South Africa are, to some extent, familiar with inflation and how it impacts their disposal income. Local consumers often ‘expect’ price increases. If products become too expensive, consumers will switch over to other, more affordable wines. Cheaper, generic wines’ price increases have a greater impact on consumer choices, as their disposable income is lower, which means sales are also negatively affected.

More expensive wine price increase has little to no impact on volume because those consumers have more disposable income. As a net exporting country, our product delivers in low to no inflation countries and it’s sometimes difficult to explain our own production inflation to customers. With Covid-19 as well as the war in Ukraine, foreign countries are in the same boat.

What we’re currently experiencing is that better and increased price negotiations are more difficult on ‘imported products’ in countries such as the United Kingdom’ because the prices of their own products and services are also now being pushed upwards due to inflation there.”

Inflation rising globally

The rising cost of living is on everyone’s lips, in South Africa, as well as the rest of the world. In the US, consumers today pay 8.5% more for everyday goods compared to last year. It’s considered the highest rate of price increases in more than 40 years. In the United Kingdom, the year-on-year price increase is 6.2%, the highest in decades.

In South Africa, consumer price inflation currently stands at 5.9% year-on-year*, the highest since 2017. This figure has risen dramatically since a low of 2% in early 2020.

WATCH: Inflation is felt throughout the world, even in the US.