SOUTH AFRICA: Raised game

The quality of South African wine has risen immensely in recent years and is set to continue its ascent. But will UK consumers swallow necessary and deserved price hikes, asks Andrew Catchpole.

For its wine producers at least, 2010 should be South Africa’s finest year since Nelson Mandela walked free. Following democratic elections in 1993, overturning the burden of Apartheid, this country’s wine industry has undergone a remarkable transformation under the full glare of international attention.

Following successive advances in overall viticulture, including disease control, site and varietal selection, plus a clear thrust in generic marketing coupled with remarkable upward progress in the overall quality of wines, this year’s World Cup will inevitably bring a sharp focus on both country and its wines around the globe.

Add to this the recession-beating, double-digit, year-on-year volume and value growth in its prime export market, the UK, plus healthy advances elsewhere, and the Cape’s wines have all the makings of a winning team.

So far so good, but as is so often the case, a rash of complications threaten to undermine the march of South African wine. The rand, at the time of writing, is painfully high, impacting dramatically on margin in export markets such as the UK and elsewhere. Meanwhile, glut has turned to potential shortage in two short years following a below average harvest in 2009, compounded by a generally high-quality but low-yielding vintage in 2010.

Headline figures suggest the Cape is down 12% on a normal year, but disastrous spring weather reduced the crop by 50% and more for some producers in regions including Stellenbosch and Wellington where significant percentages of export wines are produced. Su Birch, CEO of Wines of South Africa (WOSA), has openly warned of potential shortfall should demand rise heavily in this World Cup year.

Moreover, focusing on the UK for a moment, South Africa’s average on-shelf price of £3.89 (Nielsen, Jan ’10) leaves no wriggle room on margin for the category-driving entry and just above volume-based brands. The strong rand, a 10% increase in grape prices, an 8% increase in dry goods costs, escalating transport costs, plus upward rolling duty increases on wine in a market where consumers are still suffering the fallout of recession is not a promising mix.

“We all know the cost structure of South Africa and anything under £5 is unsustainable,” says Gary Greenfield, managing director of Distell Europe. “There has been no expansion for the past three years in the vineyard area, the net farming income in areas like Stellenbosch and Paarl is negative (if you include replacement costs in the chain), whereas if you look at the areas that have grown over the past couple of years such as Worcester, they are showing net income profits because they have huge yields and their production process sorted out.”

The high ground

In Europe, 80% of Distell’s business is on the mainland where pressures on margin have been more manageable, with the UK business resorting increasingly to offsetting sales of lower-priced wines with higher priced, higher margin wines.

This is not a unique situation, of course, with similar factors affecting both rival producers and rival countries, most notoriously Australia. The net result, though, has been a sweeping realisation throughout the majority of South Africa’s industry – and one clearly backed and promoted by WOSA – that the country’s producers must chase higher ground to sustain recent export momentum in any meaningful and profitable way. When a country’s best-known premium area of production (Stellenbosch) is cited as unprofitable, alarm bells surely must ring loud and clear.  

With the squeeze on buyers of own-brand and own-label South African wines, the response of South Africa’s headline
brands to pricing will clearly play a critical part in determining consumer perception of the category as a whole. Talk here is of strategies to capture more premium ground.

Box wine specialist Namaqua has opted for increases in the UK of 8-10% this year, admitting that 25-30% increases would not have gone down well. “South Africa is not a low-cost producer and I believe this is a year to consolidate what we are doing,” says marketing director Fanie Augustyne. “We are prepared to risk smaller volume if the short term to make more margin and build a sustainable business for the future.”

It’s a message that many in South Africa appear to be taking on board, although one that anyway is underpinned by the necessity of current financial realities. Barney Davis at The Company of Wine People, meanwhile, is committed to furthering growth of Arniston Bay, now number four South African brand in the UK, with realistic prices (the dual varietal entry wines retail at £5.49) “to ensure both returns and a premium perception as we continue to grow”.

Elsewhere, former flagship brand Kumala has also made a team comeback under the guidance of Flagstone’s Bruce Jack and dedicated Kumala winemaker Ben Jordaan, both through strict adherence to quality principles and by broadening its export market focus far beyond the UK.

From its launch in 1996 by Western Wines, Kumala famously grew to 2.9 million nine-litre cases in the UK before crashing and then being picked up again by Constellation ownership. Kumala may not currently top the UK’s South African hit parade (First Cape holds that position with an average litre price of £5.14 against number two Kumala’s £5.10, all figures Nielsen to December ’09), but Constellation is pushing the brand for global domination.

“There are 32m seconds in a year and we produced 31.5m bottles of Kumala last year,” Ben Jordaan told me at the Flagstone winery on a recent visit. “We have grown 20% by volume and 19% by value in the past 12 months and our aim is to build this into one of the top 10 international wine brands – and not just a top 10 South African brand.”

The markets cited by Jordaan, ranging from Canada to Japan by way of Russia and East Asia, point to a clear shift in emphasis and one that is also increasingly informing South Africa’s export managers across its industry. However, as Ross Sleet, sales and marketing manager at Kleine Zalze, cautions, South Africa should be careful to ensure that its position in the UK market – against the odds still considered by an overwhelming majority of global producers as a showcase to the rest of the world – remains geared to capitalising on it’s recent successes.

“In the UK, 2009 was the biggest year for us ever and the first few months of 2010 were very good,” says Sleet. “Admittedly we planned aggressively throughout the credit crunch, but South Africa as a category must not walk away from the UK now because times are tough as it’s already put in a lot of the hard ground work and is now poised to benefit immensely.”

Sleet’s solution is to encourage the whole category to raise the bar in terms of premium positioning. And it’s a route Kleine Zalze is already following, along with rivals such as Spier, by pushing into the on-trade and demanding fair, premium price-based margins for the wines.

Elsewhere, brands such as Constellation’s Fish Hoek are providing highly visible on-shelf bridges between the up-to-£5 category and the premium £8-£10-and-beyond wines above. Higher up the premium ladder, Vergelegen’s managing director Don Tooth is also pursuing a strategy designed “to ensure that Vergelegen is recognised as an iconic brand not just in the context of South Africa but against wines from around the world”.

Global aspirations

This is an important point, namely the ability of South African producers to deliver not just wines that better their forebears, but wines that also compete with and beat rivals from both New and Old World. Much has been made of South Africa’s positioning stylistically in terms of delivering New World fruit but with Old World structure.

Clichéd though this sounds, various factors including better clonal selection and vineyard management, the continuing exploration and development of cooler climate sites and regions, the emerging recognition of South Africa’s ability to produce stunningly good blends, not least in the hands of winemakers ranging from superstar Eben Sadie to Tariro Masayiti at Distell-owned Nederberg, all add up to a very positive footing for the immediate and longer-term future.

“We are really only at the beginning of what we can achieve,” says La Motte winemaker Edmund Terblanche. “It’s only now that a lot of the most recent plantings are starting to come on line and the results are already showing in the wines, and I am very excited about what we and South Africa will achieve with growing vine maturity over the next 10 years.”

Terblanche is no lone voice. Vine maturity is only part of the equation, but nonetheless another important factor for the quality image of South Africa’s wine category. This is also continuing to receive an important shot in the arm from many overseas journalists and industry figures, Simon Farr of Bibendum among them, saying: “The rise in quality of South Africa has been nothing short of remarkable in the past five years alone.”

The question remains, though, as to whether South Africa can and has moved on from a perception of simply being good value at the (now unsustainable) price, a kind of stand in where Australia went before it in the world’s eyes. Graham Nash, South African buyer at multiple grocer Tesco and thus perhaps the country’s most important export gatekeeper in the world, believes that South Africa has moved beyond price-predicated loyalty alone.

“Promotional activity on South Africa has fallen off but we are seeing a lot of consumers remain loyal to South Africa, so while there has been a slight slowing in growth, it seems that current sales are showing that consumers have developed a liking and loyalty for the wines beyond simple factors of price,” says Nash.

WOSA’s Birch, who is implementing a programme of high-level masterclasses in key markets this year against the inevitable background noise of retailers’ World Cup promotions, is clear on South Africa’s future as a producer of high-quality medium-sized brands and quality wines. “We are effectively a small producer and so our future has to be with premium wines,” she says. “What is really exciting is that there is still so much potential, so much more to happen, and I don’t think we are even making our best wines yet.”

But the best are already very good indeed, and this ongoing raising of the quality bar can be traced from emerging icons to the big-name brands that are the cornerstones of the South African offering.

So long as this country’s industry works hard to match supply and demand and grasps the opportunity to raise its premium profile it stands to come of age in this World Cup year.

Andrew Catchpole, June 2010