The South African wine industry needs an upward price adjustment to ensure a sustainable supply going forward, amidst a looming wine shortage, says industry body Vinpro.
Vinpro’s ‘Wine Harvest Report 2018’ shows that wine grape production is at 1.2-million tonnes – an almost 15% decrease compared with 2017.
This amounts to 170-milion litres less wine produced than in 2017.
However, wine grape producers and cellars and South Africa remain positive about the quality of wines from the 2018 harvest, despite challenging conditions resulting in one of the smallest crops in more than a decade.
“The 2018 harvest season was really challenging, owing to a prolonged drought which some believe to be the worst in 100 years and accompanied by water restrictions and frost damage in some areas,” Vinpro viticultural consultation service manager Francois Viljoen says.
“The South African wine industry sold 447-million litres of wine in the local market and exported 448-million litres in 2017, for total sales of 895-million litres – a 3.5% increase compared with 2016,” Vinpro MD Rico Basson points out.
The 2018 wine harvest – juice and concentrate for nonalcoholic purposes, wine for brandy and distilling wine included – is expected to amount to 948.3-million litres, calculated at an average recovery of 777 litres per ton of grapes.
Basson adds that the challenge for this year will be that the combination of lower production and stock levels that have reached equilibrium does imply a significant shortage of wine to service the local and export markets at 2017 levels.
Therefore, after years of financial pressure, wine producers need a significant income adjustment of close to 30% to ensure a more viable and sustainable environment.
“At the moment, [wine producers], on average, earn a meagre 1% return on investment, which does not justify the establishment of vineyards,” Basson says.
This has led to more than one-third of wine grape producers operating at a loss, and the industry has around 25% fewer producers than a decade ago.
According to the Wine Industry Strategic Framework, wine grape producers need to earn consumer price index (CPI) plus 5% to be sustainable, which Basson says other farming enterprises offer.
Many wine grape farmers, therefore, leave the industry, uproot vines to make way for more profitable crops, or don’t replace vineyards. The area under wine grapes has shrunk by close to 9% in the past ten years.
“The only way to ensure a sustainable supply going forward is increasing the prices we receive for our wines, so that wine grape producers have sufficient financial means to plant and renew vines, increase production, and are able to accelerate the already significant investment in socioeconomic aspects, including further training and upliftment of their people,” Basson states.
However, not all is lost, as Basson notes that the industry has, in the short term, already seen evidence of above-average adjustment at South African retail level for certain wine categories with further adjustments expected over the medium term.
“What is important to note is that in an environment of short supply and with both the local and export markets as possible considerations, the highest bidder will win,” says Basson.
In the meantime, he says South African wine grape producers are innovative and have done a lot over the past few years to adapt as weather patterns change globally.
This includes making use of alternative practices and technology; investment in new, more drought-tolerant clones and cultivars; continuously evaluating the financial viability of vineyard blocks; and venturing into new geographical regions.
On a positive note, however, a global wine shortage does have a positive effect on both sales volumes and value growth in priority export markets.
Europe’s wine production is also at its lowest level in nearly 45 years, while Spain, France and Italy have specifically been dealt a blow owing to climate conditions such as frost and drought.
Having happened simultaneously in all three regions contributed to a significant global decrease in wine.
From a South African perspective, this will present the opportunity to secure sound export agreements; not only in terms of volumes, but also increasing value.
“Technical adjustments can afford South African exporters the opportunity to reap the true benefits of the quality we have on offer,” Vinpro said, adding that a decrease in volumes available for export can also enable South African exporters to negotiate better prices.
According to Basson, as with any crisis or external impulse, the shortage might also ignite discussions around traditional business models and route-to-market.
“Just looking at international trends, we also believe that constructive dialogue might lead to new business relationships, mergers and/or acquisitions,” he says.
However, South Africa’s focus on the export markets is two-fold, says Wines of South Africa CEO Siobhan Thompson.
She explains that the industry aims to maintain its traditional markets – the UK, Germany, Netherlands, Sweden, Canada and Japan – while growing value (rand per litre) as well as the volume and value of exports to what are considered to be growth markets, namely the US, China and Africa.
“More importantly, our aim is to grow the image and perception of Brand SA and South Africa as a country that produces some of the best wines in the world. By changing and maintaining this perception with international consumers, we believe that value growth will follow,” Thompson notes.
LOOMING PRICE HIKES
The Bureau for Economic Research and the Bureau for Food and Agricultural Policy expect average bulk wine prices to increase by about 15% in the next year.
“This, together with the above-inflation increase in excise and the value-added tax rate increase, will result in significant pressure on wine retail selling prices. Consumers can expect to pay between 8% and 11% more for their favourite wine,” says South African Wine Industry Information and Systems MD Yvette van der Merwe.
The downward trajectory in wine production leaves very little room for volume growth going forward.
However, the opportunity does present itself, given the positive macroeconomic factors in the model, to grow volume together with value.
Brandy, fairly sensitive to price, is also likely to be negatively affected over time as supply constraints impact on the price, Van der Merwe warned.
South Africa is the eighth largest producer of wine in the world and contributes 4% to global production.
The wine industry contributes R36-billion to the country’s gross domestic product and employs close to 290 000 people.