The growth of South African wine exports in the years which followed the country’s first democratic elections (1994) has been impressive. Volumes have increased from an annual 20m L in 1990 – when Nelson Mandela was released from prison – to almost 500m L today. The country’s winemakers have become citizens of the world, and are more likely to be seen hosting a wine tasting in London or New York than presenting their wines to local audiences in Johannesburg or Durban. Given the current political and economic situation in South Africa – a far cry from the all-pervasive optimism of the Mandela era – the export triumph of Cape wine has become something of a good-news story to which cling publicists (as well as the wine industry itself) – rather like shipwreck survivors clutching planks and flotsam on storm-tossed seas.
Perhaps this is the reason that no one is driven to unpack the figures to determine just how successful this whole enterprise has been. Year-on-year growth in export sales has become something of an industry mantra, and while it is recognised that a significant percentage of what leaves the borders travels in bulk containers, the sense that Brand South Africa is making inroads in the wine markets of the world has been something of a sustaining myth. For most of this time the local market has been stagnant, so to be able to travel to far-flung places and bring home evidence that Cape wine is making progress has been important for the national psyche.
Lately however, exports have slowed, and in the past year or two there have actually been small reversals of the trend. It seems reasonably clear that volumes have peaked, and that the challenge now is to increase the value, rather than the volume component of the trade. However, it is here that evidence is being gathered suggesting that most of this much-vaunted business may be little more than a mirage.
In the early days of the export boom it was widely acknowledged that what was being sold abroad was destined for the lower-priced segments. The isolation years of the 1980s had seen very few new plantings. The red-to-white ratios were totally wrong (one-third to two-thirds) and the varieties themselves had little international appeal. It took more than 10 years to achieve a reasonable balance in the vineyards and to have more marketable product. But that was 15 years ago, and while volumes have continued to grow – mainly, it would seem, as a result of the replanting programme – values have remained resolutely low.
The average on-shelf price for Cape wine in the UK (the country's most important export market by volume) has edged up 15% over this time, but still hovers under the ₤5.00 ($6.30) mark. Over the same period, increases in duty and VAT have been significantly higher than the movement of the retail price point. In fact, it’s widely recognised that producers are banking less money (in hard currency) from these sales now than they did at the turn of the century, despite the apparent increase in the on-shelf price. The standard calculation for winery income 15 years ago was to attribute just under 30% of the UK retail price as the producers’ share. Nowadays, with increased transport, handling, and storage costs, as well as statutory imposts, the figure is closer to 20%.
Producers would have been more sensitive to what was happening, but for the continued devaluation of the South African Rand. In 2007, ₤1.00 cost R14.00. Today, despite Brexit, it costs nearly R17.00. Whether brand owners can continue to bank on currency decline to compensate for this loss in income is a matter of some doubt. Over the past 10 years, the Rand-Sterling rate has fluctuated between R10.00 and R24.00. While the long-term trend has been downward, there have been protracted periods where the Rand has either strengthened or held its own. With no real prospect of an increase in the hard currency income, producers have become addicted to the devaluing currency to make up for the impact of domestic inflation. Some of the high-volume exports are, at best, break-even and, possibly, for higher-cost producers, yield an actual loss on the selling price. The discovery that exports are not a panacea for producers has begun to introduce a jarring sense of reality to the formerly upbeat mood.
Part of the problem is that roughly two-thirds of all exports are sold in bulk, making this component of the offshore trade merely a surplus disposal arrangement to replace the function performed up to the mid-1990s by the KWV. There’s no meaningful revenue for any high-quality producer at the price point of the bulk wine trade. Of the remaining exports, some goes in bag-in-box (Sweden is an important market) but only 137m L leave the country in glass. The most important customer here is the UK, accounting for 30m L, followed by Germany (18m L) and the Netherlands (14m L). The US comes in at 9.6m L, China at 8.6m L and Canada at 7.7m L. It is these figures, and their relationship to the domestic market sales, which have had such a sobering effect on the country’s producers as 2016 came to a close.
Firstly, almost all of these bottled wine trades are achieved at significantly lower price points than in the domestic market. Spot checks, focusing on some of South Africa's most iconic names, suggest a discount of around 40% – and an even higher percentage if the benchmark of cellar door sales is applied. However, it is even more instructive to look at average selling prices, if only to get a sense of the margin squeeze that comes with these trades. Taking the Nielsen UK average retail price figures (₤4.78 in 2015) and adjusting this to exclude the lower-priced European bottlings, it would seem fair to suggest that the average selling price in the UK of Cape wines bottled in South Africa would be in the order of ₤8.00. The producer recovers between 20% and 25% of the on-shelf price – assume that for these slightly higher-priced wines the impact of statutory imposts is less significant – which would mean winery income of around 25% of ₤8.00, which is ₤2.00, translating into an average producer revenue of around R35.00 ($2.63) at current exchange rates.
The wines that are achieving these export prices would certainly yield R50.00+ in the domestic market, making it clear that the offshore sales come at a reduced margin. However, they also come with higher marketing costs. In the local market, producers despatch their wines to their distributors, who then pick up the bulk of the below-the-line marketing expenses. In the international markets, producers are expected to support their brands. Many of them invest time and considerable sums of money on international visits. Since each market is largely discrete, this investment is significant – one trip a year (at least) to the US, a couple to Europe, and increasingly at least one trip to China.
In 2015, bottled wine exports totalled roughly 40m L less than domestic market sales. The UK, as the largest buyer, accounts for 22% of the total, followed by Germany at about 12%, the Netherlands at 10%, the US at 7% and China at around 6%. Compared with sales to the important domestic centres, none of these markets is particularly significant. By volume, the entire UK is worth roughly one third of what the city of Johannesburg consumes, while Durban (hardly considered a major local market) is bigger than the whole of the US. Since these are volume and not value figures, if account is taken of the lower export prices, the effect of the comparison would be much more dramatic.
Up until now, producers have largely neglected local market promotion, focusing on growing their presence abroad, and no doubt enjoying the tax-deductible international travel. They spend very little time drumming up support in the country’s regional capitals. Even the Greater Johannesburg area – which gets through over 100m L of Cape wine in glass, compared to a total worldwide export of 137m L – sees winemakers and proprietors only briefly, and for designated events, rather than to work the trade.
Despite this neglect, volumes in the domestic market are now growing 5% faster than exports. If producers were to make more of an effort at home, visiting regional centres like Port Elizabeth, Bloemfontein and Nelspruit (each of which at present accounts for bigger volumes of bottled Cape wine than Sweden or Denmark) their finances might look much healthier. Instead, with roughly half the industry losing money, or at best breaking even, the export fantasy still holds sway. Some of the more insightful producers recognise that marketing costs have escalated, sales have slowed down, and net revenues per bottle sold earn a fraction of what can be achieved in the local market. The question being asked right now is whether enough producers will act before it’s too late, what effect this will have on the country's export efforts, and whether the local market will respond quickly enough to the new strategy to save some of the marginal producers.
