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South Africa
Better promotion of terroirs, exports and the domestic market are the key to industry success

A top quality and good quantity harvest will undoubtedly ensure South Africa a prime spot in the international marketplace this year. Whilst some economic indicators are already positive, the underlying issue of profitability is still very much uppermost in the industry's mind. Professor Nick Vink, agricultural economist at Stellenbosch University, describes the main challenges for the South African wine industry and what it will take to overcome them.
By Sharon Nagel July 05, 2017
Better promotion of terroirs, exports and the domestic market are the key to industry success
Professor Vink, on the left, with other South African agricultural economists
ow would you describe the current state of the South African wine industry?

It is a bit dangerous to generalise. Geographically the South African wine industry is concentrated in one place but there is a very wide range of natural and human resources. In my opinion, at the top end of production, the quality end, people are doing quite well. Exports are doing well to most destinations and even though our economy has been flat for quite some time now, sales of wine seem to be increasing. But at the bottom end, it’s a lot more difficult. There are questions about the profitability of the industry, especially wine grape production. The situation is similar to the South of France where you have a lot of grape growers supplying what used to be co-operatives that are now mostly companies. The biggest reflection of profitability issues is that in net terms we have lost around 8,000 hectares of wine grapes over the last ten years. We are now down to around 95 or 96,000 hectares.


Do you think this trend is likely to continue into the future?

I think it depends on the state of our economy and markets. I think we are still looking at two to three years of relatively flat growth so we are quite dependent on exports.


Do you think vineyard area needs to be further reduced to make it profitable and sustainable?

It depends on the industry’s ability to sell into the new emerging middle class in South Africa. The Johannesburg middle class has doubled in size over the last twenty years and has not started drinking wine properly yet. If penetration in the domestic market stays at the current level then vineyard area is certainly not going to increase. If it gets into that market, we can double the area quite easily. We have the resources – the land is there – it is just a question of getting the market running. The other issue is exports. We are well known in the international market but export at lower unit prices than anybody else so if we could climb a little bit up the price ladder that would also make a difference. The industry has to do something about that, it is not going to just come about automatically.


There has been a lot of talk internationally about improving the sustainability of the industry – do you think any progress has been made towards this?

It is not for lacking of trying at the moment. There is a lot of effort and very commendable things being done but it is extremely difficult to achieve. The first problem is that the economy is not working and the other is that we are sitting in the middle of a political firestorm. The political climate is connected to the economics because people need to have that little bit more faith in the future in order to invest. Investments in the wine industry are for 20-25 years and I think that faith is lacking. There is a general feeling in agriculture that people will invest to maintain the current production capacity but are not prepared to invest to increase it. It is the same for the wine industry. Even with the declining hectareage, technology is improving all the time so the yields produced by that hectareage are increasing. There is also a limit to that, however, in the short term.


At the start of the year, several economic indicators seemed positive – value growth in exports, low inventories, faster loadings...Is the strategic plan WISE starting to bear fruit?

Absolutely. If the industry had done nothing, it would have been in a lot more trouble than it is at the moment. I think it’s definitely a commendable exercise but there needs to be more of it. You also need a certain amount of luck as well.


Is South Africa in a position to take advantage of the balanced global market?

Yes. We are looking very closely at what is going on with Brexit because the UK is still our single biggest market and we don’t want to lose it. Basically we have duty free access into the EU and we want to keep it.


South Africa’s aim is to reduce the reliance on bulk wine exports. Is this realistic?

No and I’m not sure it’s all that desirable because essentially we can land bulk wines at any given quality point cheaper than anybody else in any other place in the world. So the reliance we have at the moment is not just because we don’t have alternatives, it is quite a strategic advantage. We do want to get rid of the absolute bottom end of the production spectrum and we do want to encourage higher end production. We would rather be selling more high-end wines which we will do if we can get the prices up. It’s a chicken and egg situation but you just have to keep working away at it. I think we have enough of a presence in the world market so that if we play our cards right we can make it. It’s not as if we are a new producer coming in any more.


Do you think lack of market intelligence is one of the causes of low prices?

One of the issues the industry is confronted with is fragmentation. There are disadvantages with fragmentation but there are also advantages. One of the disadvantages is that getting information and intelligence on what’s going on in the world market is a very expensive process and the small producers just can’t do it. We need to look for ways of getting around this and this is what WISE tries to do by making information generically available. But obviously generic information is less valuable than proprietory information. However, I would shudder to think that we would try to consolidate the industry just to get over a problem like that. I think that fragmentation is a strength – it makes us less reliant on single cultivars, single producers, mass exporters etc.


Industries in countries such as Chile and Australia are much more concentrated and have achieved greater success...

If you look at the country that achieves the highest price points it is New Zealand and they are certainly not as concentrated. When you have a concentrated industry like Australia, it’s fine when things are going well but when they turn against you, it comes back and bites you. You become very dependent on one or two firms.


The bulk market has been weighed down by additional quantities of former distilling wine. Do you have an idea of how much they represent?

This is a lot less of a problem than it used to be. As an example, most of South Africa’s brandy was made from Chenin blanc. At the time of the demise of apartheid, Chenin blanc accounted for approximately 40% of the total plantings. It is now under 15% and most of it is being used for bottled wine and not for brandy any more. The Chenin vineyards that remain behind are the better quality ones. The brandy market has collapsed – in volume terms it is half of what it was.


What are key USPs the South African wine industry should be focusing on – are its fair-trade credentials being sufficiently promoted and rewarded?

Fair-trade has been quite controversial and I don’t mean in a negative way. There is a general feeling that when standards come in from outside of the country, they are not as successful as they could be. These are voluntary standards and essentially the farmers that already comply with them will tend to sign up. Therefore, they are not really catalysts for transformation. We probably need more home-grown standards and stricter standards. There was an opportunity with the black economic empowerment programmes but because the industry involves relatively small players, it didn’t actually work. So I think we need to look for something else along those lines to act as a lever for land reform and transformation because there is not enough of that happening. There is a potential to use that as a selling point, especially in the international market. But I think that the real selling point we have is our natural resources. Within the Cape Floristic Kingdom, we have an incredible variety of terroirs so the identification of wine by place is extremely important. From my understanding, most people overseas know Stellenbosch wines but nothing else. Certainly there are exceptions – the Swartland is fashionable with some Americans at the moment – but South Africa and Stellenbosch are the two well-known names. There are areas that over the last ten to fifteen years have really got into quality production but they need to sell themselves better. I think it’s around that variety that the message should come.


How do you see the next decade for the South African wine industry?

I have been involved in research where we look at very long-term cycles within the industry, from 1700 onwards. Basically, the industry has done well on three occasions since that time: the first one was around the establishment of the industry in the 17th to 18th centuries; the second was during the Napoleonic Wars; and the third one was at the time when Mandela was let out of prison until around 2004-2005. All three of those have been export led so the industry has never been able to depend on the domestic market. If we could get South African wine to the domestic market over the next ten years, then the industry has a bright future. If we can’t, we’ll have to sit and wait for the export market to help us – and that could take a century!



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