Since the 2002 vintage the South African wine industry has had an increase of more than 74% in the stock levels in “producer cellars”. Moreover, the fragmented nature of the industry makes it extremely vulnerable to surplus situations in the market.

These are some of the conclusions reached by a performance measurement profile for the SA wine industry, conducted by PricewaterhouseCoopers (PwC) over a period of three months among 54 so-called “producer cellars” – i.e. wine cellars that process and market members’ grapes in line with co-operative principles, although several of these cellars have transformed to companies in recent years.

The conclusion reached by PwC regarding the stock levels supports the latest Sawis information, according to which the drink wine at private and co-operative cellars will amount to an estimated 417,2 million litres at the end of the year – about 60,4 million litres more than a year ago – with red wine constituting an ever growing portion of the total and already amounting to 44%.

As far as the PwC survey is concerned, said Frans Weilbach, director of entrepreneurial advisory services, it gives industry role players guidelines about how they fare compared to one other.

“In line with international trends, it is increasingly important for South African businesses to measure themselves against peers in their industry. The dynamics of globalisation is increasingly felt in the wine industry. Deregulation, which has been occurring since the early nineties, puts more pressure on winemakers to find a reliable yardstick to measure themselves against so as to ensure that they remain relevant and competitive in the 21st century.

The 58 cellars that participated represent 93% of the producer cellars, thus making “the results at the same time representative and relevant”. The grapes pressed by the participating wine cellars represent more than 75% of the total wine grapes pressed in South Africa in 2003.

In the long run, once the information about annual follow-up surveys becomes available – as well as a new one for private cellars (including estates) next year – cellar managements will have increasing self-confidence to make long term decisions.

Since there are no consolidated survey results with regard to previous vintages, it is only possible to make limited observations about developments regarding stock levels during the 2003 vintage. However, comparisons to previous vintages’ results obtained from other sources indicate that red wine production and exports remained on the increase during 2003.

The other most important findings from the PwC report were:
Financing structure insufficient

A matter that deserves urgent attention is the financing structure. Both the own capital and the industry capital ratios are far below the norms set for other industries. Apart from the fact that the percentage of own capital only amounts to an average of 22% of total financing, the survey indicates that the industry capital ratio also amounts to just 1.16:1. Although the unique nature of the South African wine industry probably requires a unique financing structure, the current structure is such that attention should still be paid to increasing competitiveness in the international market. A possible solution would be to make good use of the current opportunities offered by black economic empowerment partnerships and consolidated marketing strategies.

According to Weilbach, the co-operative structures of these cellars mean that they are not suited to attracting black empowerment investments, since they do not pay out dividends and do not allow outside investors. Investments in the wine industry are currently taking place for ‘romantic’ reasons rather than prospects of good return on investment. More transformation to companies is one way of attracting outside capital. More profit can also be held back by co-operatives. Currently approximately 80% of the average return from sales of almost R2 447 per ton is spent on producer payment – which results in a profit percentage of just 2%.
Areas of greatest success

The most profitable cellars are encountered in the Western Cape region, where each ton pressed contributes an average of more than R100 to the profit. Furthermore cellars that processed between 10 000 and 25 000 tons in 2003 are the most profitable of the three categories, based on size. While the cellars in the Western Cape generally pay the highest price per ton of grapes, producers in the Worcester region generally earn the most per hectare. Medium size cellars generally pay the best prices per ton, while producers delivering grapes to the very large cellars, generally get the highest yield per hectare.

The cultivars earning the most rand per ton, are not necessarily those which earn the most per hectare.
Performance incentives: Volume and noble cultivars

With regard to cost, volume is still an important performance incentive at producer cellars. The relatively big cellars apparently find it easier to control unit cost, a phenomenon that is probably due to the effect of economies of scale. On the other hand it has been found that high volumes put sales prices under pressure. It is probably easier for a smaller cellar to market a relatively smaller crop at higher prices.

Other noticeable incentives that increase average performance, are the number of noble cultivars handled by a cellar, as well as the proportion of the crop marketed as good wine. Although it plays a smaller role, litre recovery per ton also comes into the equation, while the number of tons produced per hectare has a very real influence on the profitability of the producer. Although the quality of the grapes processed and the wine produced do not fall within the extent of this survey, these should also be a performance incentive.
The role of globalisation

Globalisation has forced South African cellars to compete in the international market. Worldwide demand and supply therefore play a deciding role in the price determination of wine products from one vintage to the next.

Better handling of exchange rates and marketing strategies …

Ways must urgently be found to discount the effect of the fluctuating exchange rate on the South African industry.

Lastly consolidated marketing strategies should make a positive contribution to price stabilisation, in the international market especially.

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