South Africa faces up to profit warning

South Africa’s wine industry faces a real threat to its future if the country cannot raise prices to resolve the current lack of profitability.

A report by the South Africa Wine Industry Information & Systems (SAWIS) released earlier this year showed that while the country’s income from grape production rose by 38% between 2008 and 2013, the same period saw wine production costs increase by 52%.

It cited a study from industry body Vinpro that suggested “around one-third of wine producers are operating at a loss”, although many exhibitors at last week’s Cape Wine were offering estimates of over double that.

Meanwhile in the UK, South Africa’s largest export market, Nielsen data to June 2015 shows an average price for South African wine of just £4.78 per bottle.

Morné Vrey, head winemaker at Delaire Graff, believes that producers need to take a stand. “If we keep charging what we’re charging then the industry will go bust in 20 years,” he warned. “We as an industry should all stand together and increase the price of our top wines by 40%; then we can live again.”

Indian entrepreneur Analjit Singh, who has invested heavily in South Africa’s wine and hospitality industry, including a stake in Mullineux & Leeu Family Wines, called on producers to take inspiration from regions such as Napa Valley.

“It astounds me that their wines can sell for $1,000 a bottle when we struggle to hit $100,” he told attendees at a seminar during Cape Wine. “The industry must work together to project its self-found respect, believe we produce the best quality wines and not undersell ourselves.”

For a growing number of producers, raising the image and therefore prices of South African wine requires a commitment to holding back library stock to show off its ability to mature.

One winery taking this step is Oldenburg Vineyards, whose owner Adrian Vanderspuy told the drinks business: “There’s perhaps a whole segment of the market that’s not buying South African wines because they don’t see that ageability; that’s maybe the next leg for driving the whole industry.”

The struggle to command a higher on-shelf price for its wines means that farmers, many of whom own parcels of old vines that have recently been embraced by the younger generation of winemakers in particular, are better off switching to alternative crops.

Driving home the urgency of this situation, South African viticulturalist Rosa Kruger warned of the challenge it presents both to existing vineyard sites and the development of potentially high quality new ones.

“There’s a lot of pressure from other crops that are five times more profitable,” she remarked. “We have to create more value to justify planting more vines on super sites. South Africa needs more success stories.”

In order to support the efforts of individual producers, Kruger outlined details of a project due to be unveiled “in the next month or so”, which aims to create an online database with details of South Africa’s precious old vineyards.

Once launched, she explained, “there will be more free-flow of information between winemakers, viticulturalists and farmers because right now people don’t know where to find these vineyards.”

One producer working actively to improve this issue is Chris Alheit of Alheit Vineyards, whose new brand Flotsam & Jetsam features old vine Cinsault from individual growers who receive a price that stands at around double to market rate for their grapes.

“You can pick up Cinsault for R5,000 (£240) a tonne, or even a lot less, like R3,000,” observed Alheit. “That’s just unethical – we’re paying R10,000.”

With a plan to expand the project next year, he explains: “It’s going to be a volume driven business in the end because the margins are quite small, but that’s cool. The wine’s lekker, it’s refreshing, you want to brush your teeth with it.”

Read the full report into South Africa’s work to improve profitability and secure a healthy, sustainable future for its wine industry in October’s issue of the drinks business.