Reduced travel, retail and tourism as well as repeated alcohol bans have made the South African wine industry heavily reliant on a crowded export market for survival. Local sales – which usually account for more than 55% of wine sold – were down more than 30% in 2020 compared with the year before, and 2021 isn’t looking much rosier. Unsold surplus wine remains at extremely high levels as the harvest commences. In the meantime, Vinpro’s consultation services manager Conrad Schutte estimates the 2021 crop will be 2.3% higher than 2020.
This combination places producer prices under severe pressure, says Vinpro MD Rico Basson. Even if planned intervention strategies are successful, cash flow will certainly be tight. “Under these conditions there will be minimum capital expenditure, a squeeze on cash flow, and the possibility of a ‘doom loop’ if we don’t have stability and certainty,” says Rico.
Prelude to the crisis
The wine industry’s sustainability was already under pressure going into 2020, according to Yvette van der Merwe, executive manager at SAWIS. “Wine grapes showed the lowest average real price growth of all fruit industries from 2010 to 2019,” she says. “The low profitability has deterred large scale investment in the wine industry. We lost about 10 000 ha in the past ten years and foresee the trend to continue in the next five years.”
The onset of the drought and lower yields of 2017 supported bulk wine price increases and eased some of the pressure. This led to slight revenue growth in 2018, but that came at a cost. “The increase in bulk wine prices, above inflation excise and VAT increases placed significant pressure on retail prices. Over the next two years this resulted in a cumulative decline of about 210 million litres in sales from exports and the local market,” says Yvette.
Then came 2020, which left consumers with less expendable income, devastated the tourism industry and erased an estimated R3 billion of wine and brandy retail sales from GDP. “We’ll probably sit with excess stock for the next two to four years.”
It’s clear the industry won’t be able to rely on industrial wine or exports alone to reduce the surplus. “The European Union, our biggest trading partner, also has high stock levels and not enough opportunities to significantly address the 250-300 million litres of excess stock.”
That means finding the right market, price and logistics will be a challenge in these markets. “The industry needs to find a balance, and there are only so many levers one could pull,” Yvette says. “To achieve equilibrium, we have to produce less, reallocate wine to other uses or sell more wine.”
Bulk wine prices are expected to keep falling until alcohol bans are lifted, but the bottom hasn’t fallen out yet. The recovery rate after previous bans have been surprising, says Yvette, which yields a glimmer of hope. “When the industry opens up, it seems some lost sales are actually recovered,” says Yvette. “This has especially been the case for wine and spirits.
“We will still hit supply problems during the next three to five years, but there will also be opportunities for producers.”
Bank on value
WoSA CEO Siobhan Thompson points out that in 2013, when South African exports reached a peak of 525.7 million litres, most of that volume was bulk. Since then the focus has shifted toward value. “Export value has increased over time and WoSA will continue driving value growth,” says Siobhan.
The initial five-week export ban and subsequent struggles at the ports resulted in lost listings which will have a long-term impact on lost sales. “The pleasing thing is we have seen our export value increased,” says Siobhan, and not just due to favourable exchange rates. “We manged to grow in the higher price bands and dropped in lower price bands.”
The performance proves WoSA’s strategy is working, she says. “This is important for restoring confidence to investors who’re looking for a return on investment.”
Equally heartening was the market’s surprising resilience showing relatively quick recovery after each ban. This has meant the damage has been less than was feared in March last year. “We put campaigns in place to encourage pro-South African sentiment, which really helped and we found people came on board who had never tried South African wine before.”
Among importers and important trade partners, such as the UK (where South Africa has an additional 70 million litres of tariff-free quotas post-Brexit), this may help turn them into ambassadors for SA wine and assist in the road to recovery. Siobhan says other export countries that have been shy on packaged product, such as Netherland and Sweden, have even been showing growth in packaging. At the same time, markets that have shown spikes in bulk sales, such as America and Canada, bought those volumes for unbranded wine and blending which means it doesn’t appear as South African wine on any shelves, and therefore hasn’t damaged South Africa’s image.
Building Brand SA
WoSA follows a well-defined strategy that earmarks four regions for sustained growth and investment. These are East Africa (Kenya, Tanzania and Uganda), UK & Germany, USA & Canada and China. Markets identified for seeding new business include Japan and Ghana, while Netherland, Sweden, Nigeria & Angola and Hong Kong are maintained to keep current momentum going.
Bringing them all together will be the southern hemisphere’s biggest wine trade show, CapeWine, which has been moved to 5-7 October 2022. CapeWine 2022 will bring together approximately 360 producers to generate international buzz for the South African wine industry. Promotions running this year should already begin to stimulate interest. “I’m pleased with our performance in 2020 considering all the challenges we faced, and optimistic about 2021,” says Siobhan. “Brand South Africa is in a very good position. Onwards and upwards!”
Play the long game
Together, the accumulating surplus, cash flow squeeze and collapse of local sales has put significant pressure on local producers and prices. More important than getting stock moving will be our ability to instil confidence in investors, buyers and importers.
The South African wine industry finds itself in a negative economic environment, but in the long term it’s also the regulatory environment that will determine its fate. Policy decisions around excise taxes, harm reduction, marketing restrictions and further levies carry serious implications for the industry and pose risks that need to be mitigated.
Producers and institutions who understand these pressure points (and can see beyond them) will play an important role in restoring certainty and bringing stability back to the industry. There’s reason to hope and the seeds of recovery are already being planted.
As Rico says, at the end of every crisis there’s a celebration. May the world get to celebrate the end of Covid-19 with South African wine.