South Africa

“We need a 10% price increase next year or 15% of producers are going to fall off the wagon”

Friday November 04 2016 by Vitisphere

With the World Bulk Wine Exhibition in Amsterdam just a couple of weeks away, Vitisphere asked Johan Heckroodt, managing director of one of South Africa’s largest cellars and suppliers of bulk wines, Lutzville Vineyards, to describe the current bulk market for South African wine.

Can you briefly describe your company?

We produce 37 million litres and export in the region of 13 million litres in bulk, with just a small portion in bottles. Our bulk wines are 90% white and 10% red. We produce mostly Chenin and Colombard along with Chardonnay and Sauvignon blanc. For the reds, we produce Cabernet, Shiraz and Merlot, but the largest volume we produce is Ruby Cabernet. The UK is our biggest customer and we work with retailers such as the Co-Op, Morrisons and Bookers via Kingsland Wines. We also ship directly to International Procurement & Logistics which is wholly owned by Asda/Walmart and bottles their wines.


How would you describe your bulk strategy?

We seek strategic partners in the value chain who can hopefully help us to build a sustainable relationship which in turn of course means sustainability for our seventy producers, who own the company. Sustainability allows us to execute social and ethical responsibilities in South Africa specifically. In terms of marketing, we try and avoid being exposed to too much speculative volume, which unfortunately is the nature of a commodity like bulk wines. Around 80% of our bulk sales are through long-term contracts and 20% spot market sales.


South Africa harvested a smaller crop this year. Has this impacted on the amount of bulk wine for sale this year?

The crop was around 6% less than the previous year, which represents probably 30 to 40 million litres less wine available in total, mostly for the bulk wine market. I think South Africa will be in a slightly better position than this time last year, simply because there is a projected smaller crop in Europe, mainly due to France and Italy. Chile and Argentina have also come in 20-25% lower than previous years. That effect is already manifest in the markets so we’ve walked into some of the Chilean shortages. We have had opportunities in China which we have exploited, although I don’t know if this new demand will be sustainable. Russia is always knocking on our door but really it buys wines in South Africa if there’s a European shortage. So does France. It has been buying consistently from South Africa to make up for its own shortages and that seems now to have turned into a more sustainable procurement arrangement.


What wines do French buyers tend to look for in South Africa?

They’re looking for generic rosé. Whether they strip out the colour to benefit from lower import duties than for whites or actually market the wines as rosé, I don’t know. It is also true that a lot of them are being used to produce flavoured wines, which are increasingly popular with women and millennial drinkers. South African generic rosés are light and fruity and suited to that palate.


How are prices trending for generics?

We are still struggling with prices. I don’t suppose we will see much change over the next five years. It’s a structural problem for South Africa. We are at the end of the row when it comes to established long-term partnerships and there is quite a speculative portion which filters down through all the prices. We are not getting the prices of Chile or even Argentina and Australia. Our biggest competition is Spain - they are at the doorstep to the biggest market and are the price leaders that we have to follow. If there were to be a significant reduction of about one billion litres in supply out of Spain, things may change. But it would have to be about 25% of their volumes to have an impact on our prices. As an industry, we are getting to the end of our ability to manage or reduce costs and increase volumes. In the next three to four years, we are going to need price increases, otherwise our industry is undoubtedly going to suffer and will be reduced in size. There is already a trend of uprooting and replanting with citrus and nuts, mainly. There may be some vine pull and then simply not replacing vines when they come to the end of their productive life.


South African wine industry leaders are pushing to move away from bulk. Would you agree this is the right strategy?

At the end of the day, the basic rules of supply and demand will rule the roost. We would like to think that the consumer has a responsibility to buy from suppliers who are engaged in ethical practices and sustainability. The trouble is that we can’t do that if we don’t get the right price. If 3 UK pence on the shelf could be filtered down to the producer, we are a 100% sustainable industry. No consumer is going to make a decision to buy or not if a product is 3 pence more expensive, but sadly it just doesn’t happen. All along the value chain, people are taking undue margins. Even when the rand was significantly weaker, that advantage did not flow through to South Africa. It is very frustrating, there is a lack of willingness from the big retail buyers to really engage in sustainable partnerships.


Are production costs rising?

Absolutely, they rise by a minimum of 6% a year. We have been able to counter that with bigger yields in the vineyards, better recoveries at cellar and by streamlining processes. We have saved costs where we could, so the opportunities for cost-saving have pretty much been saturated. We need a 10% price increase next year or 15% of producers at least are going to fall off the wagon over the next couple of years.  


How do you think Spain – your main competitor - manages to be so competitive?

I understand that the Spanish are doing absolutely minimal practices – they don’t irrigate, they don’t do post-harvest fruitigation and they don’t spray, so I think their production costs on average are lower. There are also a lot of small, family-owned farms, keeping costs down. The large European buyers believe that Spain’s production volumes will definitely decrease in time because the younger generations don’t want to farm. So the structural correction is on its way. How long it will take is difficult to say. The maximum age of a vineyard can be 20 to 40 years. We don’t have 20 years. We have already witnessed uprooting and replanting with other crops here and diversification. We have been advising our farmers to diversify too.


Project Khulisa aims to grow wine exports by 13% over the next decade. Will South Africa achieve this?

I believe our opportunities are really in the local market and in the sub-Saharan African market because we are able to beat our competition on price, with the exception of Mozambique and Angola which have a strong Portuguese influence. That’s where our focus should be. To continue an export drive into Europe in my opinion is a waste of time. We should also be focusing on America and South-East Asia. I’m not even convinced about Russia, I don’t think that sustainability makes any sense there.


Will you attend the WBWE and if so, what are your aims at the show?

We will be attending and will be looking to empty the cellar of what is left un-contracted before the next harvest. We obviously want to plan for the following season too. 80% of our presence at the bulk wine show is about meeting our existing customers and discussing volumes and prices for the new season. 


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