A spot of why bother?

Does the current British passion for all things fairtrade and organic represent enough of an opportunity to tempt South Africa to keep doing business in a notoriously tough sector? Patrick Schmitt reports

It’s a problem for all producer countries, but the debate is raging most vocally in South Africa at the moment: how can one sell wine profitably in the UK market in this age of increasing retailer-margin requirements, rising production costs, creeping duty and widespread discounting, fuelled by a global supply-demand imbalance?

This concern culminated in a seminar entitled Why bother with the UK market? The event was held at Spier Wines’ impressive estate in early April, a few days before Cape Wine 2006. This discussion forum was a chance for Mike Paul from Western Wines, Jonathan Butt from Thresher and Waitrose’s Justin Howard-Sneyd MW to defend the British position.

Analysing the British market
And so they tried. Paul encouraged South Africa not to be despondent, despite its current slightly dipping market share in the UK, down from 9.8% to 9.6% (ACNielsen, 25.02.06). He blamed the decline on the impact of the Australian surplus, “which is the equivalent of two years’ worth of global exports, or 1 billion litres of wine”. The Aussies have been literally dumping this glut of liquid on the UK market at prices that South African producers can’t compete with. Furthermore, South Africa’s situation “has been exacerbated by the increasing rand and uncompetitive cost of goods – for example, Chardonnay from Australia is 60% cheaper to produce,” Paul explained.

But the UK offers potentially valuable returns for South African wine, he argued. “The market is around 130 million cases and growing at around 4%; the fastest growth is over £5, meaning the consumer is trading up; and there is a major retailer commitment to wine – nearly 90% of market growth is down to the supermarkets.” Like them or not, as Paul pointed out, “If the multiples had not decided to make wine a destination category, then the industry would be worse off.” Finally, he drew producers’ attention to the specialist sector: “Thresher has been reborn,” he said; “there is also Majestic and a vibrant independent sector.” Lastly, there is the on-trade to consider.

He also emphasised the UK consumers’ empathy with South Africa and their willingness to try New World wines, as well as the historical cultural links between the two countries. He urged producers to use the UK retailer power to their advantage, making the most of initiatives such as fairtrade wines, which most of the northern hemisphere countries and also Australia in particular, can’t offer.

Thresher’s Butt agreed, emphasising “the massive opportunity” that is fairtrade wine, while reminding those assembled that “South Africa is the number-one long-haul destination for the British, and the host of the World Cup in 2010”. However, he criticised South Africa for not building “strong-enough brands”, noting that Thresher’s two-for-three offer has led to a decline in demand for South Africa in Thresher because of a “lack of loyalty”. “Find your niche,” he exclaimed, be it Chenin, Sauvignon or Pinotage, while warning that “Germanic names don’t work in the UK”.

Howard-Sneyd then drew on the UK’s open market as a further advantage. “It’s not protective like France or Italy.” He agreed that South Africa has a “high cost of production, which, because of the infrastructure, is hard to bring down”, but added that trading up – certainly Wines of South Africa (WOSA)’s current policy – “was the right answer”. Howard-Sneyd also encouraged producers “to push brands with real South African heritage, as well as fairtrade wines”, and stressed that “organic and natural winemaking was a real opportunity for South Africa” and that “Rhône-style varieties suit the terroir”. Lastly, he highlighted the fact that, to succeed in Britain, “relationships with buyers are important, since [through them] you can find out what UK consumers really want”. If not direct links, then Howard-Sneyd suggested using a “good agent”. “Not competing in the UK is like saying you are not going to compete in the Olympics,” he stated, before summing up, “How should you succeed in the UK? Make wine people want to buy.”

Is South Africa convinced?

Much of the discussion at Cape Wine this year was focused on emerging markets, the US and Asia often cropping up in conversation. The former, in particular, is viewed by many, often mistakenly, as a potential pot of gold. Returns are higher in the US, consumption of wine is growing at a faster rate than the UK – and across a greater spread of price points – and the reaction to South African wine has apparently already been extremely positive. “More Americans are also visiting South Africa,” said Gary Jordan from Jordan Wines, who thinks that when it comes to consumption of his own wines, “the US will take over from the UK this year”.

Kumala, the UK’s largest South African brand by a considerable margin, is currently experiencing growth rates of 150%, shifting some 75,000 cases, according to Western Wines’ marketing manager, Paul Sullivan. But that is put into perspective by Kumala’s growth in the UK alone last year – up from just under 2m cases in April 2005 to almost 2.5m in April this year. And while Sullivan notes that the likes of Wine Spectator “are giving the South African superpremium end more attention”, he also says that “while South Africa does seem to be getting a positive reception in the US, you must ask: is it South Africa itself or sweeping critter brand wine?” He is referring to the likes of Douglas Green Bellingham (DGB)’s increasingly successful South African brand Tall Horse (not seen here because “critter brands don’t work in Europe”, according to John Worontschak, consultant winemaker for DGB).

Furthermore, the whole South African category is no more than 400,000 cases, while the Australian one already has 10m cases. The latter country also has many advantages in the US, in terms of production volume and cost, shipping time and brand awareness.

Hermann Bohmer, CEO of The Company of Wine People (previously Omnia), is pragmatic. “The US is for the long term – you can’t expect to grow volumes immediately. We see the US more like the EU: we are not in all 25 member states of the EU, and we are working state by state.” He also points out that, “for the US, you need to focus on single varietals since a lot of retail is arranged by varietal”. Concluding the subject, Bohmer believes that, “a strong presence in the US does have a halo effect on both sides of the Atlantic. The South African industry has grown – it now has the capability and capacity to supply a market like the US – but an established position in the UK is still a form of calling card.”

Others warn of the difficulty of setting up distribution in the US, with Simon Halliday of Raisin Social pointing out that, while cities like New York are “a massive market, getting distribution is hard, and grocers aren’t allowed to sell wine in New York”. He also says that “the US market has its own problems,” citing in particular, “Australian brands selling at US$3.99”.

But potentially opening up the US market for South Africa must be behind the increasing interest by multinational wine companies in the Cape. Certainly, at Cape Wine, rumours were circulating of Gallo’s partnership with the massive Swartland Winery, until recently a cooperative and one of South Africa’s five largest producers. FGL also had a number of employees prowling the stands at Cape Wine, while the hot topic was, unsurprisingly, Constellation’s takeover of Vincor, adding Kumala to its portfolio. “I think shortly there will be a lot of interest in South African companies, because a lot are under strain at the moment,” KWV’s Bryan Anderson whispered.

The keys to the UK market

Success in any export country depends on the presence of an effective partner in that market, if not brand ownership in it. Howard-Sneyd’s comment about the need for a good agent in the UK is key. Think of examples of South African brand success in Britain: Kumala, for one – conceived, developed and owned by a UK company; FirstCape, a brand on course to hit 500,000 cases by the time this article hits desks, thanks to its relationship with UK agent Brand Phoenix; Thierry’s Cape Grace, and Stormhoek, a wine that has benefited from clever marketing by Orbital Wines, its creative owners on the ground in the UK. If not outright ownership, at least financial collaboration with agents who have strong relationships in retail is vital – just consider the success of Raisin Social’s raft of brands – Beyerskloof, in particular, a Pinotage its owners insist shifts some 1.5m bottles abroad – and without a deep promotional nudge.

On the other hand, others have decided to open an office in the UK. “We set up in the UK to capture the distribution margin and invest in the brand,” explains DGB’s Garreth Anderson, while Cloof has appointed a sales manager in Britain to boost sales of its wines. Currently peddling these is Stuart Lawson, who previously occupied a similar role for Beringer Blass.

Also central to the success of any producer nation, aside from powerful brand propositions, must be the image of the country from which the wine is sourced. And South Africa, as Orbital’s Dymoke-Marr says, “has a rapport with the UK consumer. It is seen as a fab country that’s easy to get to, with so many positive connotations.” And brands can certainly use this to their advantage, while those that don’t, do little to build the image for the category, even if they provide a valuable platform for South African shelf space. Certainly, many don’t believe Kumala’s heritage is South African, more that this is a global product for a global market. One producer even claimed the brand was deliberately designed to be “stateless”, so if the political situation in South Africa had turned for the worse, the wine could have been made in South America. Conjecture, perhaps, but South Africa does need brands that really engage with consumers – and not just through
half-price deals.

There is no doubt, however, that while Australia’s ability to undercut South Africa when it comes to price pointing in both the US and UK markets has had a negative impact on the Cape’s performance, the strength of the rand is also to blame. Raisin Social’s Halliday describes the currency’s new-found muscle as “a shock”, although he does note “that it has slipped a bit, putting South Africa on a more level playing field with South America and Australia”.

Steve Barton, director at Brand Phoenix, even recalls that “prior to the 2001/02 period, the exchange rate was about 17 rand to the British pound, while the average now is nearer 10. That, coupled with duty hikes in the UK, means there are two big pieces of the puzzle working against South Africa.” However, Barton also points out that “currency hedging and forward planning are crucial to brand success”, and points out that “the Australia dollar has also been volatile”.

In conclusion
So, back to the original premise: why bother with the UK? For a start, the UK is the biggest market for South Africa and, at over £400m, it accounts for 46% of South Africa’s exports. The second-largest market, the Netherlands, is half this, and the third, Germany, less than a quarter. There is a good reputation for South Africa in the UK, and much potential for growth of the Cape’s produce, not least in the on-trade, where South Africa has half as large a share as it does in the off-trade. Furthermore, there is the 25–30% of the wine market that is not dominated by the multiples to consider, which is, like the on-trade, a relatively untapped channel by South Africa. As for the multiples, Barton says, “they do trade aggressively, but they also offer a massive audience of consumers through their consolidated network, and if you have the logistics and you forward-plan for volume demands, you should be able to partner up.” There is also the opportunity to sell smaller parcels of wine through supermarket websites, speciality stores and fine wine sections – Tesco is currently rolling one out. Lastly, as Halliday urges, “South Africa mustn’t neglect its biggest export market. After all, many a South African business has been built on the back of the UK.”

Oh yes, and if there’s one product the UK should look out for, it’s Pinotage rosé. There was a proliferation of these at Cape Wine. db June 2006

Pushing prices
“Because of the input costs and the strength of the rand, it is difficult for South Africa to compete with Australia on volume lines,” says Paul Meihuizen, business development manager for PLB in South Africa. “WOSA has a huge drive into selling product over £5, and South Africa is good there and can make some money. But with all the effort pushing over £5, we mustn’t forget below £5.” This is because, as Meihuizen continues, “the market above £5 is a tough struggle: it is such a small sector, and miracles at that level are unrealistic. As for the on-trade, that’s very slow to get going.”

Interestingly, with all the talk of South Africa’s increased premium positioning, a handful of producers at Cape Wine seemed to be releasing entry-level wines. Arniston Bay, for example, has added The Shore to its line-up, “a tool at £3.99”, according to CEO Hermann Bohmer. Similarly, African Pride Wines, which is tied up with UK agent D&D Wines, added an entry-level wine to its Footprint range. It is priced at £3.99 because “£4.99 is so crowded in the UK”, according to a spokesman for D&D Wines.

Hitting such price points is extremely hard, however. Marius Kotze of Swartland Winery, producer of brands such as Eagle Crest and “a lot of Tesco own-label”, says that producers must try and cut costs when it comes to raw materials. “The cost structure is fixed on glass in South Africa, because there is a monopoly, but we are looking at using other cheaper raw materials.” Areas like Swartland, the “bread basket” of South Africa, can supply vast volumes of wine, as can Vrendendal, an area feeding Namaqua and Goiya brands through Westcorp. Robertson, too, is the source of large quantities of South African price-pointed wine, as is Orange River, a place where “they never planted wines, they sowed them”, according to Pieter Ferrara, winemaker at Graham Beck. HwCg is working with Orange River and the River’s Tale brand. 

But potential does lie with premium, and while so far the wines from Charles Back and Graham Beck have led in this area, DGB is planning a push with its Bellingham line. As Anderson says, “there is an opportunity for a 1/4m case £7.99 brand. And don’t forget: even when Penfolds and Rosemount were established, there was still room for Wolf Blass.”

Finally, at the superpremium end, it is interesting to see Michel Laroche making wines in South Africa, with his L’Avenir project. “I am focusing on Chenin and Pinotage,” he says, “because the two grapes are symbolic of South Africa.”

What does the retailer think?

Graham Nash, PDM for South Africa and France, Tesco, answers the questions: “Is the potential that WOSA sees for South Africa at higher price points, realistic? Where do South Africa’s strengths lie?”

“Selling wines at higher prices is always realistic if the quality matches the price – that is, if they represent decent value for money,” he comments.

“In the key £5–£10 area, South Africa is really strong and has genuine potential, but delivering is another matter. Strengths are Shiraz and Sauvignon Blanc, as well as – when well made – Chenin Blanc and Pinotage. Also, and more importantly, the image that South Africa presents to the UK consumer is one of a lifestyle aspiration, and in this respect it is similar to Australia. South Africa is a country that has undergone a lot of recent change but is seen as extremely picturesque, diverse, exciting, an increasingly popular holiday destination, a country on a journey, and the sun shines. The message I give to producers regarding packaging is the necessity to sell the country to the UK.”  db June 2006