Opportunity beckons in Africa and Asia

The South African wine industry faces many challenges but a recent survey indicates it’s not all doom and gloom. PwC‘s recently published South African Wine Industry: Insights Survey 2015 highlights several positives for the sector. Besides exploring some of the economic and financial issues facing the local industry, the survey also focuses on the global megatrends that influence the sector and the opportunities they might present. Few South African wine businesses expect an upturn in current market conditions in the short to medium term. Rising energy costs, inconsistent electricity supply, land reform and labour costs are just some of the most pressing issues facing wine businesses. South Africa is also in the grip of one of the worst droughts in many years, which is expected to significantly affect food price inflation in the coming months. It remains to be seen what the impact of the drought and changing weather patterns will be on the 2016 wine grape harvest. WINE INDUSTRY CEOS’ TAKE Africa and Asia have replaced North America and the European Union as the two geographical areas that CEOs in the wine business consider to be the most important for growth over the short to medium term. In addition, an increase in existing markets and the development of new markets – both locally and internationally – remain at the top of the agenda when CEOs consider growth opportunities. According to the survey 22% of CEOs were confident about revenue growth in the short to medium term in 2015 compared with only 15% in 2014. Global supply and demand continues to have the biggest influence on businesses strategy. Land reform has also moved up the agenda, while the new B-BBEE scorecard requirements are not regarded as significantly influencing the decision-making process. The South African Department of Trade and Industry has made available several support programmes and many organisations have successfully utilised the Employment Tax Incentive, for which the qualifying criteria are less onerous.

Figure 1: The two geographical areas regarded as most important for growth.

Figure 2: Shift in economic power. Figure 3: Major expenses per ton.

Local producers have also gained ground on their international counterparts when it comes to environmental awareness. In 2014, 80% of international participants had environmental programmes in place compared with only 52% of local participants. By 2015, the local programmes had increased to 70%.

When it comes to renewable energy 93% of businesses considered introducing renewable energy programmes, while 56% delayed implementing these programmes due to cost implications.

Forecast demand and the ability to manage inventory are areas where executives believe technological innovation can be of value. The enhancement of precision farming is also high on the agenda.

Only 15% of executives expected an increase in the price of red wine over the short term, while the majority of participants expected white wine prices to remain stable.

GLOBAL MEGATRENDS

Megatrends are sustained global macroeconomic forces that also impact the wine industry.

Changes in demographics, climate change, scarcity of resources, technological advances, accelerating urbanisation and shifts in economic power are all factors that wine businesses should keep in mind so they can be proactive, rather than reactive.

The wine industry needs to ensure it understands consumer segmentation and demographics in order to tap into the global market. There is also no excuse for the wine industry not to utilise the latest technological innovations.

FINANCIAL OVERVIEW OF 2014 HARVEST

Despite record harvests in some areas in 2014, the average tons pressed by participating cellars increased by only 2.3%. This was mainly due to increased red grape production. Although the white grape harvest contributed slightly less to the national crop in 2014 it was still nearly twice the size of the red grape harvest.

Provisional net revenue per ton for red grapes declined by 4% but remains above R3 000 per ton. The increase in net revenue per ton for white grapes was insignificant. Revenue per producing hectare for white varieties continued to increase, edging towards R43 000. Costs per producing hectare have risen and now exceeds the net revenue for red grape hectares.

Labour, electricity, water and chemicals continue to be the most pressing costs for businesses, while finance charges have also increased on the back of rising interest rates.

COMPETITIVENESS INDEX FOR PRODUCER CELLARS

The second competiveness index has been expanded to include important key business and financial drivers and benchmarks. The drivers are: Average age of vineyards, infrastructure replacement ratio, debt-equity ratio, interest cost per ton, marketing spend payout ratio and payout tempo.

Some businesses performed well in a number of areas, but lagged behind in others.

HUMAN RESOURCES MANAGEMENT

While more cellars now have a dedicated HR strategy in place they still struggle to attract the right talent, especially in the fields of senior management, professionals and technicians. This indicates the need for the industry as a whole to put appropriate HR strategies in place to ensure that the right talent is developed and sourced proactively.

Achieving a competitive advantage through the management of diversity is key for the wine industry, so it is encouraging to see that 81% of participating cellars indicated they would continue focusing on workplace diversity over the next 12 months.

WINE INDUSTRY STRATEGIC EXERCISE (WISE)

The South African wine and brandy industry identified the need for a comprehensive strategic exercise to help it reach a desirable future state by 2025. The exercise should be robust and adaptable in order to drive profitability, global competitiveness and sustainability. A task team consisting of representatives from various industry bodies and other role players was created. Wider consultation in the industry is a crucial part of the process.