Wineconomics

by | Oct 4, 2017 | Business and Marketing

When a few economists discuss the latest trends in the wine world over a glass, some interesting theories arise. Does simple economic theory even apply to our industry? And do the basic principles of supply and demand really have an effect on the current wine market? Perhaps we just are just being optimistic when we think grape and wine prices will increase as demand (sales) rise. Depending on your position within the complex value chain, these questions can produce different answers. Here is a graph to fuel the imagination, and some notes to provoke further thought:

 Demand side

  • What is the price elasticity of wine in the local market? Keep in mind that 80% of South Africans drink wines at a price below R26/L. Considering the condition of the economy (in recession, dare we say?), will consumers absorb a price increase or will they instead be lured by what some call the beer war?
  • On the other hand, our local market has surpassed 400 million litres in consumption for the first time in more than a decade, showing year-on-year growth since 2013.
  • Gauteng is now a larger market for packaged wine products than the UK!
  • The decrease in Brandy consumption has stabilised, although still half of what we consumed 10 years ago (take note that 4 litres of wine equals 1 litre of brandy). Brandy is a very important component and driver of consumption locally.
  • Exports are growing at 7% year-on-year, driven by the US, Canada, Russia and China.
  • SA is still quoted by critics as the most exciting wine producer internationally, but we still fight in the lower price brackets.

Supply side

  • EU production is the lowest in 45 years, with decreases in France, Italy and Spain.
  • Extreme heat in California may hamper volumes.
  • Chilean and Argentinian stocks are very tight.
  • The current drought in the Western Cape will most definitely result in a smaller 2018 harvest, but it may be too soon for estimates.
  • Decreasing stock levels, with the lowest stock to sales ration in the last 20 years.
  • 2016 was the first year that all 10 wine producing regions showed a decline in the total amount of hectares planted to wine grapes.
  • Currently 54% of all red grape varieties are older than 16 years and 42% for white, so longevity and sustainability of current wine production is under question.

I doubt you need to be a wine economist to do the math, but for the first time in a really long time some graphs have drastically changed direction. Is this a turning point? Let’s just hope it’s grape and wine prices that increase and not share prices on the JSE!

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