Raising the stakes

South African wines must get their premium act together if they are to become less overly reliant on supermarket promotions and build a lucrative on-trade presence.  Robyn Lewis reports

OVER THE 10 year period between 1992 and 2002, South African wine has achieved a quite staggering volume growth of 362%. During this time it has evolved from a producer of mediocre, cheap wines with an image of well… mediocrity and cheapness, into a formidable force in the UK market.

 And to top it all, over the last year, it has moved fromsixth to fourth position in the UK retail wine sector and is the fastest growing wine category with 9.5% volume share, according to AC Nielsen figures.

In the background, however, there are several key issues beginning to emerge. The rand is increasing in strength, threatening export profit margins and investments; South African wines still primarily populate only the entry-level market; and, for all the sales success, it is volume rather than value that has driven growth.

How to counter these problems is, naturally, what the country’s winemakers and emerging brands are currently debating.  Such issues, no doubt, lay behind the decision by Wines of South Africa (WOSA) to launch its £1m campaign aimed at the UK retail sector. 

 "The theme of the campaign," says Sophie Waggett of WOSA’s UK office, "is ‘explore a different world’. The money will be spent on media activity, merchandising material, tastings, giveaways and a widely targeted competition to visit the Cape winelands, as well as sales incentives.

The 14 major multiple grocer and multiple specialist chains will be targeted in order to attain several key objectives," she explains.  "These include: raising awareness of the wines; getting people to try them; increasing shelf space; and improving South Africa’s value share of the retail market."  In conjunction with the WOSA generic campaign, many of the big UK multiple retailers – Morrisons and Sainsbury’s are already confirmed – will be running promotions this autumn.

However, doubts over the viability of long-term price cutting are coming to the fore, particularly after the recent problems reported by the big Australian players.  "We have seen recently both Hardys and Southcorp struggling because too much of their total volume is sold at reduced prices and these are brands with an awful lot more financial muscle than anything in South Africa," says Simon Thorpe, central buyer for wines at Waitrose.

 "My view is that an over-reliance on discounting will lead the South African wine industry down a dead-end."  But, of course, avoiding price-cutting when competing with Australia and California (where oversupply has sent prices crashing) in particular, isn’t going to be that easy.

"The problem is that we have become promotion junkies as consumers," says Stuart Purdy, wine buyer at Morrisons.  "Unquestionably, South Africa will have to promote with price cuts in order to compete with Australia. We are working with the big South African brands, for example Arniston Bay, all the time and promoting those with price-cuts, primarily.

In fact we have a great South Africa promotion planned for the autumn, though we’ve yet to finalise the details. But there is a definite growing market for the country’s wines and I hope we see more brands emerge over the next few years."

The question of brands and branding is one that crops up often when discussing South Africa and, while a few big brands are now making a name for themselves – Kumala, Namaqua and Arniston Bay are all in the AC Nielsen top 20 – there are still far fewer than Australia can count and many think that this may be an area on which to concentrate rather than price-cuts and promotion.

Again here, Australia provides a model for South Africa, but this time it is a model that should be emulated rather than avoided at all costs.  In truth, Australia enjoyed many advantages that South Africa lacks on its meteoric rise up the top of the wine charts.

The South African industry is far more fragmented than Australia’s which, while containing tens of thousands of growers and wine makers, is dominated by a few major brands. In South Africa there are hundreds of private producers and grape growers – 2003 figures from WOSA put the numbers at 388 and 4,390 respectively.

This could well make it more difficult to establish a strong "Brand South Africa".  The industry has been making huge changes, however, and, as WOSA is happy to say, the South African wineries have made drastic developments in working practices and in the quality of their wines.

With driving momentum forward in mind, WOSA is busy promoting its "Vision 2020" campaign. Promoting an image of the industry as an "innovation-driven, market-directed, globally competitive and highly profitable" one.

But Australia was able to make use of a positive cultural image that already existed. As Gerard Barnes, product development manager for Raisin-Social, points out: "Australia achieved something really special with their marketing when they went from being the producer of wines that were the subject of Monty Python sketches they were considered so naff, to the success they saw in the multiple retailers, all in just a few short years.

But, they had the benefit of an Australia boom which was happening in the UK anyway.  The image of Australia moved from backward province to hip travel destination and there was the popularity of soaps like "Neighbours" and "Home and Away", as well. 

"The Australian wine industry had a lot to build on but we have to start from a less positive image," Barnes continues.  "Fortunately the region is becoming a very popular travel destination for British people now and that has to be utilised fully.

Certainly we are finding that we are getting queries from people who have tasted a wine in South Africa and want to know if they can get it over here, and that is a very good start." 

One way for South Africa to develop a new identity is to create a close relationship with specific varietals, much like New Zealand has managed to do with Sauvignon Blanc and Australia with Chardonnay and Shiraz. So far South Africa has not achieved this (although there is Pinotage) but moves are afoot to remedy the situation.

"The development of a definitive South African wine is important," says Mike Radcliff of Warwick Wine Estates.  "The evolution of the Cape blend is at a stage now where moves are being made to legislate it as a category.  The process will be complex, and maybe drawn out, but it will be well worth it to have a recognisably South African wine out on the global market."

Creating a strong brand and developing customer loyalty entails activity on several planes. It is also an expensive business and South Africa is only just stepping up to the mark in this respect. 

 Although the news of the first significant generic investment (with this autumn’s £1m campaign) is an undoubted boost, others warn that this level of investment must be maintained if South Africa is to truly crack the UK market.

"Many South African wines have received great press coverage, such as the First Cape and Leopard’s Leap ranges, and this is helping to raise the profile of South Africa outside of promotional activity," says Rachel Griffith at Sainsbury’s.  "But continuing promotion will remain important in maintaining momentum and increasing awareness of South Africa as a strong New World producer.

This will undoubtedly get more difficult if the rand continues to strengthen but ongoing investment will be critical, especially for emerging brands," she argues.  The question of the rand is one that concerns many of the multiple retailers at the moment.

It was the best performing currency last year and gained 32% against the US dollar and 29% against UK sterling. "It is essential that we take a long term view of prices in order to keep growth on track," says Lindsay Talas of Tesco.

 "South African wine sales at Tesco are incredibly strong, and it is essential that producers continue to work with us to build customer loyalty for Cape wines.

This means not hiking prices or cutting promotional support as a result of exchange rate moves.  If prices rise, consumers are more likely to switch to buying Californian wines, which are really incredibly good value for money at the moment."  Maintaining consistent price-points for South African wines will be a crucial strategy to adopt, not only for producers but also for retailers in the UK.

 "Deep-cut promotions are becoming unmanageable for everyone," says Russell Smith, wine buyer at ASDA.  "It is more sustainable from a supply chain point of view to avoid the spikes of promotion and price cutting. 

 In the case of Australia it is always a concern that you would either be left for 12 weeks without the product before you could re-stock, if it had sold beyond expectation, or as with any country, you will be left with the surplus if it hadn’t sold well."

So, if price promotion and cuts are proving unviable in the long-term and the strength of the rand is threatening investments and export profits, what can South Africa do? 

Some suggest the industry needs to make a concerted effort to lift the majority of its wines off the entry-level shelf and into a market that relies less on low pricepoints.

"We definitely need to address the issue of volume over value," says Waggett, "Until now the majority of sales have been below £5, with the average retail price for South African wines at £3.60 last year [compared with £4.35 for Australia] and so our aim is to export 500,000 cases of wine retailing at £5 or more by 2005.  Our spend this year is an important part of that." 

Clearly the big South African brands are already positioning themselves for this push. Kumala, the fastest growing brand of the moment, has launched premium, super-premium and reserve ranges in the hope that its strong brand name at entry level will encourage drinkers to trade up.

"We hope that Kumala has enough consumer confidence to encourage more spending," says Paul Sullivan, Kumala’s UK marketing manager.  "We made sure that we did not compromise on quality and that the product was good enough to be called reserve. South Africa really needs to get its premium act together – it’s pitiful in comparison to Australia and almost everywhere else."

Patrick Halliday, marketing director at Raisin-Social whose Namaqua brand is doing very well, agrees: "According to AC Nielsen figures our white Namaqua is the best selling box wine at non-promotion price.

This is the kind of performance that we must go after. We are not about BOGOFs and price-cuts just to drive volume and get better Nielsen results. We have enough value within the product to sell at full price.

It is pointless to promote and price-cut endlessly as all that does is drive the brand and the profile of South Africa down.  What we need to be doing is encouraging customers to trade up, drink better quality wine from South Africa and to pay more for it."

Arniston Bay is another brand that has excelled at entry level and is now aiming its sights toward the premium market.  "Our average price in the UK is £4.49 but we are moving up to £4.99, which means we are promoting down to £3.99 now," says Anton du Toit, the brand’s winemaker.  

"We’ve been very careful with our promotional activity and we try not to do more than 55-60% of our volume on promotion. Sometimes it is difficult, but you’ve got to be careful. We don’t go for deals like BOGOFs.

 We’ve had the opportunity, obviously, but we’ve dug our heels in.  The consumer gets used to paying too low a price for the brand, and perceived quality and price point is important. We want to keep out of price-cutting, increase the price point and ensure sustainable growth for the brand. If you look at Australia, they set the example for price-cutting but some of these companies are in trouble now, and I think that shows that if you cut your margin too much, you will get into trouble."

This certainly seems a sensible way to go but, inevitably, this route is not without its own significant problems.  Warwick’s Radcliffe warns that the confidence within the South African wine industry at the moment should not lead to overexuberance.

"One of the mistakes that South Africa as a country could make is that having success at £2.99, £3.99, £4.99 we mustn’t jump straight over to £10.99.  We’ve got to start getting £5 and £6.99 and we’ve got to start getting market share in that bracket.  That middle market is so lucrative and we mustn’t think we’re too good.

We must start populating those middle shelves, that’s the message that has to go out." One of the other ways forward is to target the on-trade.  Currently sales of South African wine are almost exclusively through the multiple retailers but some of the industry is now looking to remedy this as a way to promote growth.

South African sales in this area have improved significantly and WOSA reports 43% growth last year, which again makes South Africa the fastest growing country (although this was from a base of just 4.7% overall market share).

Kumala has just signed a deal with Matthew Clark with the ontrade in mind and Namaqua is looking to cleave a niche here as well. "We are definitely looking to move into the on-trade," says Halliday at Raisin-Social.

"We are looking to work with the breweries to push the brand in this way, even though it is expensive to do. We would like to find a key partner to work with and echo the success of something like Stowells of Chelsea."

Overall, it seems clear that the South African wine industry has been careful to learn lessons from the mistakes of others.  Persuading the British consumer to pay more for South African wine is going to be far from easy, however, and continued support and investment from WOSA, as well as maintaining quality, will be essential for future growth. 

But in comparison with other countries – the financial problems in Australia and oversupply in California – the future for the South African industry is potentially very bright.