The Only Way Is Up

South Africa must breach the £5 price barrier if its wine industry is to maintain a sustainable campaign in the UK. A strong rand and an absence of icon wines don’t help, says Patrick Schmitt

What exactly is driving South Africa in the UK market? Brand South Africa or branded wine? Colourful imagery or promotional activity? One suspects it’s really the latter in both cases, ie branded wine on promotion. And there’s nothing unusual in that. With around 70% of the 70% of wine which passes through Britain’s consolidating supermarket sector sold on some form of price offer, if South Africa is to have a share of the UK market at all, it has to play the promotion game. It also has to develop strong brands, as the consumer is becoming increasingly reliant on recognisable names.

South Africa has and is continuing to do both these things. Most of South Africa’s branded wines may be playing catch-up with Kumala, but a mixture of modern packaging, promotional activity, and increasingly better quality liquid is ensuring growth when it comes to most of the country’s top-10 best sellers.

Big players

As Brand Phoenix’s director, Steve Barton, says, “There are now five to six 200,000 case-plus players in the UK market all looking to grow their brand. South African wine quality is getting better and so is the packaging – we have moved away from ethnic-y African labels. All this means South Africa is getting bigger displays on the shelf.” Then there is the leader, Kumala, which now shifts over two million cases and is still surging ahead, mostly driven by its Zenith extension, and by deep cut promotions.

But South Africa is rightly worried about the sustainability of such growth because of the price points at which it is occurring. A study of South Africa’s wine industry by analyst James Herrick highlighted a land unsuitable for low-cost farming. It simply can’t compete with the likes of Australia’s Riverland either in terms of volumes or production costs. This, coupled with a strong rand, increasing margin pressure in the UK, is encouraging South Africa to look upmarket, to an arguably more sophisticated, less pricesensitive end of the market – and hence the £5-plus strategy which has been pushed by Wines of South Africa. The current situation is also encouraging the likes of WOSA to approach the independent sector and ontrade, where margins tend to be higher, while some producers in South Africa are switching their attention to markets other than the UK, for example the domestic one or, more commonly, the US.

Growing pains

But in the UK, the question must be, is South Africa ready for a step up the pricing stairway? And will it help South Africa’s share of the UK market? Presently, as Brand Phoenix’s Steve Barton points out, “South Africa has an average price of £3.76, and just under 10% market share. It is showing negligible growth at the moment. There are lots of big players in the category – Kumala Zenith, a very affordable bag-in-box under Namaqua, own-label which is all entry point, First Cape, Evolution, Arniston – and all share price points which are definitely sub-£5 and most sub-£4. The growth is being driven by products in the £5 and under category whether they are on promotion or not, which is exactly where the category should be because, like it or not, that’s exactly where the consumer is right now.” Similarly, as Paul Stratford, managing director, Stratfords Wine Agencies comments, “South Africa is so strong up to £5 it’s difficult to get people into the mindset of beyond £5.”

Sadly, as Thierry’s Lucy Warner laments, “I just can’t get over how tight-fisted the UK consumer is. He is quite happy to spend a fortune on his prepacked Thai take away from Tesco, or his Mexican chicken tortilla wrap from Sainsbury’s, but when it comes to spending his money on a bottle of wine he becomes a stingy sod.

“However,” she continues, “this is being perpetuated by the retailers, who are doing nothing to help. We, for example, have some cracking wines to launch in our £6.99 level, but all but two retailers have said they are only looking for £3.99 to promote at £2.99. This simply can’t be done from South Africa if you are to give the UK retailers the margins they demand – unless the producer wants to lose money. This ‘criminal’ price barrier of either £3.99 or £4.99 is totally ludicrous. Since when did anyone’s shopping trolley add up to a 99p price point at the end of it? They don’t give a monkey’s if the loo paper is £1.27, or the jam is 63p or their total bill comes to £62.66 – what difference would it be if their wine was £5.24 and their total bill came to £62.91, for example. None!”

Nevertheless, as frustrating as the situation is, such price-point pressure is not unique to South Africa – which has so far been effective in helping to slow the growth of Australia and possibly Chile too – because of the Cape’s mass-market appeal. Also, as Hermann Bohmer, CEO of Omnia, says, “Even Constellation, with a 12-14% market share in the UK, doesn’t have power over the retailers.” Furthermore, when it comes to raising the average price of South African wine, is there actually enough volume to really push the premium end?

Certainly the likes of Graham Beck, Ken Forrester and Charles Back have the potential to really grow in the £5-plus segment, but as Nancy Kerry, export manager for Europe and Asia, Graham Beck, points out, “With South Africa there is this big gap between those producing boutique wines at around the 40,000 case mark and those doing a million cases.” The former wineries, as Kerry adds, “don’t have the volumes to hit the UK market”. As for Graham Beck, however, the producer is 70% up in the £5-plus category.

And interestingly, Flagstone Winery owner Bruce Jack – a producer with 14 separate labels in national retail above £5, which is possibly the largest selection in the UK – says that, “UK ownership of the brand seems to be one of the key motivating factors in getting wine sold profitably.” He cites the success of Kumala: “It has always had a strong strategy based on UK ownership of the brand. Only the perception of the wines’ provenance is holding them back from moving strongly over the £5 mark.” He also mentions Raisin Social and “new kid on the block, Stormhoek,” as good examples of UK ownership helping South African brands gain volumes and actually make some money. Concluding, he notes, “Moving South African wines above £5 might require strong UK ownership interests in brands. At the very least we need to see more financial collaboration with agents.”

Certainly Patrick Halliday, at Raisin Social, confirms Namaqua as now number two in the South African brand charts and it now has an extended range, including bottled versions up to £5.99 (it was launched as an entry-point bag-in-box). Goiya, also Raisin Social owned, “is currently the fastest growing South African UK wine brand.”

Overall, South African wine volumes are increasing at 5% (ACNielsen MAT to w/e 07.08.04), at exactly the same rate as the market (and hence the static share for South Africa). In the multiple grocers South Africa’s growth is 10%, outstripping total light wine growth of 7%. But the challenge still remains to remind the trade, as John Worontschak, winemaker for the Douglas Green brand, says, “that South Africa is not just one big petrol tank. It struggles to make lower-end wines competitive. We need to push up the average price per bottle to make a sustainable industry.” 

KEY CURRENT CHALLENGES FACING SOUTH AFRICA:

Increasing the average price (currently £3.76): “Our challenge is to convince the consumer that we are not only a value producer,” Gary Greenfield, managing director, Distell Europe
Increasing market share: “We need to convince the consumer of the quality of the products which underpin the South African category using highly visual activities. That way we can build a rock solid foundation from which to propel the next 5% market growth,” Steve Barton, director, Brand Phoenix
“We need to improve the overall quality perception of South African wine, focusing on the diversity of the country’s wines. We need in particular to develop more iconic wines and continue to drive sales over £5 to demonstrate South Africa’s ability to produce distinctive premium wines,” Kate Doyle, corporate communications manager, Edward Cavendish & Sons
Developing good feeling towards South Africa: “We have to get the punters to fall in love with South Africa, much as they did with Australia 20 years ago,” Lucy Warner, Thierry’s Wine Agencies
Red wine surplus: “With prices now under pressure there is now a surplus of Cabernet Sauvignon, Merlot and Shiraz, as there is in other parts of the world. Interestingly, quality Pinotage from good producers and terroir is currently fetching higher bulk prices than Cabernet Sauvignon, Shiraz and Merlot,” Simon Halliday, managing director, Raisin Social
Cutting costs: “South Africa needs to eliminate costs in the value chain through collaboration with other producers up to the point of competition,” Johan Hewett, business development manager, Omnia Wines

KEY OPPORTUNITIES FOR SOUTH AFRICA:
£5-plus wines: “Premium wines have real potential for South Africa, particularly with characters like Graham Beck and Ken Forrester putting their names against premium brands which really deliver at the price point,” Nikki Fletcher, PR and events manager, Thierry’s Wine Agencies
On-trade: “South African wine will grow in importance in the on-trade, including gastropubs and quality on-trade outlets,” Simon Halliday, managing director, Raisin Social V
arietal points of difference: “South Africa has two varietals in particular that they can ‘own’: Pinotage and Chenin Blanc,” Nikki Fletcher, Thierry’s “Pinotage will continue to grow – we see Pinotage as a great opportunity for South Africa,” Simon Halliday, managing director, Raisin Social
Healthy image: “South Africa has some really positive associations outside of the wine category which need to be developed and used to our advantage. The tourism aspect, portraying Cape Town as a hip and trendy destination alongside a plethora of landscapes and a strong and interesting cultural history,” Nikki Fletcher, Thierry’s The World Cup in 2010: “The World Cup will be the biggest global sporting phenomenon to ever hit South Africa,” Steve Barton, director, Brand Phoenix Consolidation/change cooperatives: “Consolidation has not done the industry any harm; further on, I would like to see the demutualization of cooperatives,” Simon Halliday, managing director, Raisin Social