SOUTH AFRICA MARKET ANALYSIS: Cape Fear

There does seem to be a lot of finger-pointing going on in the South African wine category at the moment. With an 11% decline in volume and value in the UK market – the Cape’s largest – producers and importers are looking for someone to blame. Luckily, the “virtual” brand that is Kumala provides the perfect scapegoat. It changed owners twice in less than two years from Western Wines to Canadian-owned Vincor and then US giant Constellation. Passed between distributors like hot coal, a focused and consistent approach to sales and marketing was not possible. In its final resting place, prices were pushed up. The end result? It lost around 640,000 cases last year, a 26% drop from 2.45 million to 1.81m.

But, rather than explain away South Africa’s sliding global exports with the troubled performance of a single brand, surely the country should be asking itself how it developed this unstable, top-heavy structure in the British market? Kumala has almost single-handedly built the Cape’s wine category, dominating it with a 23% share of South Africa’s sales in the off-trade and more than a million-case lead on its nearest competitor.

Funding this level of growth has proved unsustainable, but damning Kumala for dragging South Africa into double-digit decline is not constructive. What one brand can build can also easily be destroyed – especially in Britain’s consolidated retail sector. Insurance against this outcome is a healthy base of brands not far behind the leader.

But what does South Africa have in its UK multiple off-trade stable? Ailing and neglected private label, a static supermarket exclusive in Evolution, and a clutch of small and, in some cases, unloved labels. OK, so this is a little harsh, but Kumala lost 640,000 cases and South Africa lost over 1m cases in the UK overall. Where did the other 360,000 cases disappear from, more if one takes into account those few brands, like FirstCape, that posted growth? Well, private label lost around 180,000 cases, Arniston Bay, 145,000, Gôiya, 100,000 and KWV, 45,000. Then there are others who lost a few thousand cases here and there (see table, p28).

However, that was last year, and many are inclined to see 2006’s overall decline as more of a temporary blip in South Africa’s vinous development. Along with Kumala’s changing fortunes, the rand offered no support for the Cape’s producers. Currency strength eroded what little margins existed in export markets, and as a result promotional support dried up. On the other hand, 2007 has seen the rand weaken, while Constellation has promised a renewed vigour when it comes to Kumala. There are other reasons too to suspect South Africa will make a comeback.

Positive outlooks
To begin, South Africa’s own-label wines are receiving something of a dust-off. PLB’s business development manager for South Africa, Paul Meihuizen, admits that “own-label out of South Africa has struggled over the last three to four years,” but adds confidently that “we will see a change.” The area experienced an 11% decline last year and makes up around 20% of South Africa’s UK off-trade sales. He reports that Tesco is looking at its own-label, and that Asda is focusing on this area too. “A lot of growth will come from South African own-label – we will see positive figures in the future.”

Patrick Halliday from UK South African specialists Raisin Social points out that last year, “when the rand strengthened, a lot of players switched to shipping in bulk for own-label. However, Tesco are resourcing bottled produce from us [using Swartland Winery]. The ratio of bulk to bottle will shift towards bottle which is great for the economics and quality of South African wine.”

Similarly, Greg Wilkins from Brand Phoenix, UK agent behind FirstCape, says, “I do anticipate South African own-label coming back. It hasn’t been looked at for a long time, the ranges in some cases are two to three years old. This year we will see them refreshed and growth return.”

But what about the brands? These too are receiving attention. Wilkins believes last year’s export decline and strong rand “was a wake up call,” for many in South Africa, “a leveller and a way of identifying those people with a serious and long term ambition for export.

“You can’t take success for granted,” he continues. “In the longer term South Africa is stronger. The upside of the strong rand is that it makes producers better at what they do because you have to be more efficient to survive those periods. Historically South Africa has had the benefit of a softer currency and that is not necessarily good for the long term.”

As for Kumala, Constellation is “in the process of pulling together a strong campaign,” according to Clare Griffiths, vice president for marketing at Constellation. This will involve nationwide advertising for the brand. Arniston Bay too has plans to revive UK growth. Last year the label was taken on by Ehrmanns and split into three tiers – with an entry level and premium wine compared to the previous £4.99-only propostion. “We restructured to be more profitable,” says Johan Hewett, brand and business development manager at The Company of Wine People, “and we took out some of our less profitable business which meant we lost some volume.” Also, interestingly for a brand so well suited to white wine, with its summery imagery and clear glass bottle, the “red outsold the white for the first time in December. We changed the red to a much more commercial style,” explains Hewett. “South African reds have always been too serious for a lifestyle brand,” he adds, pointing out that what’s needed is a “fruit-driven approachable wine as opposed to one with a firm structure and full body.”

He also says that the brand will be introducing “smaller convenience packs later in the year, for instance 25cl, some glass, some not, and we intend to rejuvenate the category with innovation.

“The South African category is not down and out. Kumala will get increased focus from Constellation, we’ve done a lot on wine styles and marketing and FirstCape is doing well.”

Hewett also believes declining cost prices in South Africa could help the category in export markets. This is because in general the price of grapes has gone down, in particular for red ones as an oversupply intensifies. This may be reaching a head. “A few big producers have gone down the route of paying suppliers not to deliver grapes to stop it entering the value chain,” he says of the 2006 vintage.

Growth brands

South Africa’s number two, Namaqua, also has plans for UK growth. A line extension called Diamond Coast at £6.99 is going into Tesco in late March and Raisin Social are planning to “invest £500,000 in sponsorship, PR and press advertising” in 2007 for the brand as a whole.

Then there’s the planned rejuvination of the KWV stable (which includes Pearly Bay and Robert’s Rock) under the direction of new UK distributor Thierry’s after it absorbed South African-owned Edward Cavendish late last year. “We are hoping to launch a redeveloped Edward Cavendish portfolio at the London International Wine & Spirits Fair,” explains Shona McGill, PR manager. The company’s aim is to become a “one-stop shop for the South African category,” she adds. “The addition of the KWV Portfolio, Bellevue Estate and Arabella to our existing family of wines from Ken Forrester, Danie de Wet, Diemersfontein and Excelsior, plus our own Cape Grace brand gives us a new commercial edge,” says Thierry’s deputy buying director, Lindsay Talas. The latter label is receiving over £300,000 worth of investment this year according to McGill.

DGB (Douglas Green Bellingham) are also confident of growth this year in the UK market. “The South African category is crying out for a premium offering with branded credibility,” says Garreth Anderson at DGB. “At the end of 2007 I see Boschendal as the number one premium South African brand by volume and value.” By premium he means a wine with an average price above £5.

Spier is already showing impressive growth, albeit from a small base, and the brand is expected to increase its volumes this year as the results of almost full distribution in the multiple retail sector take effect.

No mention of the South African sector is complete without looking at FirstCape, which has sped up the brand charts, almost catching up with Namaqua and posting a growth rate of 120%. The brand is split according to Wilkins between a limited release, which accounts for 50% of sales, a First Select, which he describes as a “half-price vehicle” and which brings in 30% of sales and lastly an entry point which makes up 20% of sales. “With the Limited Release at £5.99 we do a few half-price offers because it is a useful part of the mix but we don’t want to rely on them. And the brand is increasing in everyday off-the-shelf sales which proves the brand is gaining consumer traction.”

Finally, there’s the likes of Stormhoek, always making the news, be it through blogging or more recently, making a television documentary about love, set in Tesco stores throughout the UK. The brand “accounts for more than 20% of the £5 plus South African wine market in the UK,” according to Nick Dymoke-Marr at UK brand owners Orbital. Also worthy of mention is Lourensford because UK agent Hatch Mansfield has high hopes for the wine, and a history of success with brand-building in the multiple off-trade. Then there’s WaverleyTBS, which is enjoying growth with Cape Promise in the on-trade and Distell’s Nederburg for both channels.

As Richard Mew, South African wine buyer at Tesco sums up, “Within the multiple arena, the Western Wines integration into Constellation and the subsequent ‘Kumala effect’ certainly didn’t help the South African category. However, we can’t point the finger at a single brand and significant efforts are required from producers, sellers and buyers alike in 2007 to remedy the situation. South Africa undoubtedly has all the components to make for a successful year, it just requires a fresh approach.”

However, one part of that approach will need to include heavy price promotion if South Africa is to claw back market share. “You have to discount to get volumes,” says Marius Kotze, Swartland Winery, “but the demand for promotional slots is brutal.”

Strength a Weakness

With the media attention given to binge drinking in the UK and an increasing concern over health issues among the British population in general, alcohol levels in wine are under the spotlight. And South Africa in particular has been guilty of producing high alcohol wines, with reds often posting 14% plus abvs. Most of the major exporters are aware of this issue and are looking at ways to cap the level of alcohol in their wines.

“There is a lot of work being done in South Africa on the alcohol issue,” says PLB’s Paul Meihuizen. “Alcohol removal is allowed but it has not been passed by law for export, but there is a lot of experimenting.” However, most appear to be focusing on viticultural solutions, for instance, canopy management and cropping levels. Some are also trialling different yeasts, as current ones have become too “efficient” at converting sugar to alcohol.

Greg Wilkins at Brand Phoenix points out that “with blending you can keep alcohol levels under control and this year, abvs are not quite as high as the year before. We aim for the 13.5% level and try not to drift too far north of that because at the consumer level the appetite for high alcohol wines is less than it used to be.”

However, Oscar Foulkes at Cloof believes there is “a huge overreaction to alcohol levels in wine. As long as the wine is in balance alcohol is not an issue.”

Nevertheless, Simonsvlei, distributed by Crush Wines in the UK, is introducing a low-alcohol wine. The grapes come from bush vines grown in an area with lower than average temperatures. A Chenin Blanc and rosé will be the first wines in the range.

Global Outlook
Globally, exports from South Africa declined by 3.5% over 2006, mostly because of a shift towards shipping in bulk and due to the drop in sales in the UK market (by far South Africa’s largest export market, double the size of Germany’s in second place). Third biggest export market the Netherlands also showed a decrease in South African wine sales. Sweden, Germany and Denmark on the other hand saw an increase in exports.

Swartland Winery’s marketing manager Marius Kotze believes the Scandinavian markets are looking particularly attractive for South Africa “because the margins are good. However,” he adds, “it’s not easy to get through the monopoly system.” In Germany “there is a price war at the moment and the average bottle price is around E2 per bottle,” he points out. “The US is also a focus and Asia is starting to work, margins are good but it will take time to create volume.”

Certainly Stormhoek is building distribution in the US and is currently listed in 16 states. However, achieving these, state by state, is not easy, only alleviated by the actions of a good distributor. It is hoped Constellation’s ownership of Kumala will help increase awareness of South African wine in the US. Presently, according to Simon Halliday at Raisin Social, “In the US the average price per bottle for South African wines is second only to New Zealand.”

 Â© db March 2007