Pushing the boundaries

South Africa is already breaking its own ambitious forecasts for 2005 in the off-trade, but is performance in the on-premise affecting the feelgood factor? Chris Orr thinks not

When Wines of South Africa set their targets for 2005 they thought they were being fairly tough on themselves.  And they weren’t the only ones.  Many were surprised at the ambition that was wrapped up in the little bundle of potential sales figures supplied.

In 2005 in the off-trade, the country’s generic body is looking for a 13.5% rise in value, an average price per bottle of £4.16, and 500,000 cases sold over the £5 price point. 

Given that sales of the latter were hovering around 200,000 in 2003, it seemed a bit of a stretch to see 150% rise in sales in one of the most competitive slots in the market, where the country is having to fight the likes of Australia, France, Chile, Italy, Spain and the US – among others – for much sought after business.

And yet by August of this year, the sales of wines in this "premium" sector had already tipped 500,000 cases for South Africa, showing one of the strongest performances in the bevvy of countries at the top of the price band.

In real terms, the over £5 sector of the off-trade in the UK was worth 7m cases in June 2003. According to ACNielsen figures to June this year, that had grown to 7.8m cases.  That means South Africa contributed more than 37% of the total growth in the over £5 category in Britain last year – a phenomenal performance.

It also had a big impact on the country’s price per bottle, rising from £3.58 to £3.80 and making the 2005 target of £4.16 seem stiff, but eminently achievable.  And performance in the offtrade overall for South Africa was similarly impressive.

Latest figures to August this year, show that in terms of both value and volume, South Africa saw positive rises.  In volume terms during the period it rose from 9.7% to 10.2% total share of the wine market.

In value terms, during the same period it went from 9.4% up to 10.1%, helping it achieve 5th place in the league tables in both volume and value. 

"The most significant move over the last year has been the capacity of many South African producers to move beyond extreme value pricing to price categories with healthier margins," says Su Birch, CEO of WoSA worldwide.

"And this in turn is helping to shift perceptions of South Africa as exclusively a source of mainstream value for money wines.  "We set ourselves a target of selling half a million cases of wine for £5 and over in 2005 and we reached the mark a year ahead of schedule.

At the same time we are growing faster than any of our competitors in the £7 and £8 category."  "If one looks at the year on year case sales, we have made tremendous strides," agrees Sophie Waggett, head of WoSA in the UK.

"In 2003 the total market case sales above £5 was 7m, this rose to 7.8m in 2004.  Of those 800k case increase – South Africa contributed 300,000 cases which is pretty exciting reading for us! More importantly it shows our premium wine strategy to be having some real success."

And those figures and strategies were echoed, and in many cases surpassed, in other key markets globally.  In the top five main exports, as well as the growth in the UK in volume terms, there was a rise of 13% over 2003/4 in the Netherlands, the country’s second biggest export market, standing at around 42m litres.

Germany saw a rise of 25% in volume terms, surpassing the 20m litres point. Sweden saw rises of 130% to 12.6m litres and the US saw rises of 10% overall, shipping in 4.9m litres of South African wine.

But the UK remains the number one export market by far and South Africa is continuing to focus much of its efforts and funding in ensuring it stays in the top five countries working the UK market this year, and, according to Waggett, "moves on up the ladder next year.

I reckon we have the capability to move a position or more upwards."  To this end the generic body is spending more than £1m in developing the UK this year, after encouraging results indicated that consumers are following their lead.

As well as the large increase in sales over £5, the country also saw a 19% rise in the amount of wines sold between £4 and £5 but a drop of 1.4% in the level of wines sold below £3-4 – the sector where the bulk of South Africa’s wines are sold in the UK market.

"To be honest, the vibe about South Africa at the moment in the UK," says Simon Halliday, managing director of Raisin Social, "is absolutely fantastic.  WoSA have been extremely proactive and it’s paying dividends.

The fact that over the last year we’ve hit that all important target of 500,000 cases – a year ahead of the intended deadline – is quite amazing and a pretty good testament to the positive feeling that many buyers and agents have about the country at the moment."

The success that South Africa has seen over the last year, and in fact – given that its overall share of market in the UK has increased from 6% in 2002 to 10% in 2004 – its success over the last three years, has been helped considerably by the investment and marketing push from a number of big brands.

Most obvious is Kumala – which by June this year was sitting in 6th position with sales worth £74m and a 2.4% share of the total volume sales in the UK.  With Arniston Bay entering at 16 in the list of Top 20 UK brands, representing sales of over £16m and a 0.5% share of total volumes, and Namaqua hitting spot 18, with £15m worth of sales and a 0.7% share of total volumes.

That means in the space of a couple of years South Africa has managed to whack three brands in to the top 20 list – and there could be even more to come.  The presence of brands in the UK, in an echo of the work done by the likes of Penfolds and Hardy’s to build the overall Australian branded market, is crucial if South Africa is going to maintain the momentum and take advantage of the gains made so far.

"I think having brands in the UK market is an essential part of the overall growth of South African wines," says Anton du Toit, chief executive of Vinfruco.  "The shelf space, especially in the big retailers in the UK is extremely limited and it’s difficult to launch new brands into this.

That’s why it’s good for South Africa to have several strong brands performing well."  "It is important to have some big brands out there," says Alistair Morrell, head of buying at Stratfords Agencies, "brands that are hopefully fighting South Africa’s corner in the market place.

But it’s also crucial for South Africa to continue to innovate at all levels.  I think the success that South Africa has seen over the past year, especially in the over £5 bracket shows that there is an enormous potential for them.

And frankly there’s enough people out there with £10 in their pocket who simply need to be given the right product and package to prompt them to spend it.  I think South Africa can do it, and should do it.

But you have to get it all right.  The product itself, the packaging, the right promotional package, it all has to be there."  Getting all the elements in the right place and ticking the right boxes, whether it’s under or over £5, has not been easy for South Africa over the past two years thanks to the fluctuation of the Rand.

Over the past six months it appears to have stabilised but not necessarily at the right end of the scale.  Fluctuating between 11 and 12 Rand to the Euro, it is currently a very strong currency in comparison to 18 months ago when it was recording levels of 19, 20 and even higher.

"The Rand is still a problem and proving quite a challenge for most people in the trade ," agrees du Toit, "but then it has made a lot of the industry focus much more clearly on cost of goods."

"Short term," explains Johan Bestbier, managing director of KWV International, one of the largest exporters in South Africa, "the current strength of the Rand is putting pressure on retail price points versus very competitive pricing from Australia and California.

Longer term we believe it will be good for the industry and will encourage focus on costs and on the longer term development of premium quality wines.  "Most producers are looking to capitalise on the current success in the UK.

We and others are looking closely at the cost of producing in order to compete in an international marketplace when there is still a surplus of wine."  Surplus stocks is another issue that is threatening the stability of South Africa’s current performance and continued growth.

"There is definitely the potential for similar developments to Australia and California," says Bevan Johnson, from First Cape, the sixth biggest selling South African brand on the UK market.

"I guess it just depends on how we deal with it, and very much on whether South Africa sees itself as a global player or more of a niche market operation."  "There is an excess of wine, just like there is anywhere in the world at the moment," says the ever pragmatic Morrell, "but frankly the wine industry is always in a boom or bust situation.

South Africa needs to stand on its own two feet in this regard and really face up to the challenges it has in terms of growing the market enough and developing a suitable supply and demand situation.

What I think it needs to be is more creative.  There are some very creative people out there in South Africa, but not necessarily creative enough." 

One area where producers, agents and the generic body alike agree South Africa should become more creative is the on-trade. "It’s a sector of the market that we really haven’t paid that much attention to in the past," says Gary Proctor, managing director of Edward Cavendish, representatives in the UK for KWV, "but we need to step up our game in this sector.

There are massive opportunities for South Africa in the on-trade."  To date the country’s performance in the on-trade has not been as impressive as that in the off.

According to ACNielsen figures to June 2004, the country sat in sixth position in the league table for value and volume sales in the on-trade.  It saw a modest rise in overall volumes of 3.4%, from 8.07m litres to 8.34m, but its share of the category dropped from 5.3% to 5.2%.

Worse still, the value of wine sold in the on-trade has dropped by over 10% whilst the average price paid per litre dropped by 13.7%.  "Personally, I think South Africa has to look more seriously at the on-trade," says du Toit.

"We talk a lot about it, but none of us have really made a break in it to date.  I believe we need to think carefully about what we’re doing in the on-trade and ask ourselves what we really want to achieve in the sector. I think from a brand point of view, a lot of the barriers are breaking down in the on-trade and it’sbecoming – at a certain level –a lot more like the off-trade.

That gives us certain opportunities to exploit and we shouldn’t be too slow in seizing those opportunities."  "It is," agrees Simon Halliday, "a sector where the growth opportunities are very real and very inviting.

I think South Africa is offering fantastic value at all points in the off-trade, and frankly there is no reason why it can’t do exactly the same in the on-trade."  But even a mediocre performance in the on-trade can’t diminish the overall feelgood factor that has been injected into South Africa’s push in the UK.

"After a difficult 18 months I think the UK market is feeling pretty buoyant for us again," says an enthusiastic Waggett.  "I sense a renewed energy towards the South African category as a whole.

Buyers seem to reflect this enthusiasm and we’re performing well across the board."