Bulk wine a mixed blessing for SA

"Bulk is a complete disaster for the SA wine industry," says expert and columnist Neil Pendock "We are losing jobs and the defining quality characteristics of SA wine."

"It is not good to be known primarily as a bulk exporter," agrees Erhard Wolf, Distell's grape and wine supply general manager. SA is indeed at risk of becoming just that. Bulk exports have risen from 32,3% of SA's exports in 2005 to double that level in the first five months of this year.

"The global trend is towards bulk wine exports," says Yvette van der Merwe, SA Wine Industry Information and Systems (Sawis) executive manager. "But SA is at the extreme."

SA, says Van der Merwe, is regarded as a New World wine producer together with Argentina, Australia, New Zealand, Chile and the US. Across those six countries, which account for a quarter of global wine exports, packaged wine makes up 53% of total exports and bulk wine 47%, she says.

The surge in demand for bulk wine was sparked by drought in the world's three biggest wine-producing countries: France, Italy and Spain. The International Organisation of Vine and Wine (OIV) reports a combined 12% fall in the three countries' wine production. Together, they produce 55% of the world's wine.

European droughts

Put in perspective, the 930m litres (18%) fall in France's wine production in 2012, as reported by the OIV was just short of SA's total wine production of 1,095bn litres. SA ranks as the ninth-largest wine producer and fifth-biggest exporter.

"SA was perfectly positioned to benefit," says Rico Basson, executive director of wine farmer services organisation VinPro. "We had our biggest harvest ever and the benefit of the weak rand."

Of SA exports in 2013, Basson says about 170m litres will be packaged (bottles and boxes) and 150m litres will be branded bulk, exported by major suppliers such as Distell for bottling in Europe. The 180m litre balance will find its way into the "grey" bulk spot market, he says.

"The situation has opened a short-term opportunity for SA to shift volume and, on average, bulk exports should be profitable because of the weak rand," says Basson. "But I don't think many bulk markets are sustainable." His concern is echoed by Van der Merwe.

One of these bulk markets is Russia, which Sawis reports has increased imports of SA wine from 11,2m litres last year to 46m litres this year. In the latest 12-month period, bulk exports accounted for 97% of the total and made Russia SA's third-largest export market after the UK and Germany.

Exports to Spain and Italy also rose from a negligible 250000l in the 12 months to June last year to 28,5m litres for the same period this year. France increased its imports from SA from 10m litres to 24m litres. Virtually all exports to the three countries were in bulk form.

Russia is buying wine from SA to distil into vodka, says Pendock. Spain, where wine production fell 300m litres in 2012, is traditionally Russia's biggest bulk supplier. A sizeable portion of exports to Italy is destined to become balsamic vinegar, says Wolf. France is using large quantities of SA wine to produce brandy, Van der Merwe says.

Exports not stable

Wolf's concern is that the bulk exports could end abruptly. "It has happened in the past," says Wolf. "I also question whether all wine for bulk exports will actually be sold."

There are signs the demand is winding down. "Bulk prices are flattening out and even falling," says Wolf.

A recovery in European production, in particular France, where the agricultural ministry forecasts a 13% (520m litre) rise in wine output in 2013, is apparently driving down prices. Dutch bank Rabobank notes: "In Europe, strained supply after the light harvest in 2012 appears to be easing." Exports from Australia, New Zealand and Argentina have also fallen this year, the bank says.

Basson believes the normal level of SA's bulk wine exports is around 50% or even as low as 40% of total exports. If an adjustment were to happen fast, SA could again face a rising wine surplus.

The domestic market, which accounts for about 30% of production, is unlikely to help as its growth has been stagnant for a decade. According to the OIV, domestic volume fell 0,7% a year between 2002 and 2012. Per capita consumption fell 20% to seven litres a year.

In the year to May domestic volume growth was about 1%, says Van der Merwe. This is not going to sustain vibrant growth in the industry. The message is that export growth of packaged wine and SA-branded quality bulk wine is vital.

Post-1994, SA was the "new kid on the block", says Basson and achieved significant export growth into the UK, Germany and Sweden. In 2012 the three countries absorbed just short of half SA's total wine exports.

But, says Basson, growth momentum into these traditional export markets has stalled, making the opening up of new export markets vital. Between 2008 and 2012 exports to the UK, Germany and Sweden fell by a combined 2,5%.

Wines of SA's (Wosa) chief executive Su Birch says SA has laid a solid foundation to grow its quality-branded wine exports. "The industry has put seven years of work into improving quality and has made quantum leaps," says Birch. "SA wines are receiving awesome reviews in the world's top wine magazines."

A positive factor was a 5% increase in packaged wine exports in the first five months of this year. "It was the first increase in years," says Basson.

Despite this, Basson and others believe SA is failing badly to make big inroads into the broader world export market, especially the largest wine market, the US. "Our exports to the US are insignificant," says Basson.

US market lagging

In the 12 months to June, SA exported 22m litres of wine to the US, its eighth-largest market. The US Wine Institute reports sales of 3,2bn litres in the US in 2012 worth US35bn. A third of that was imported wine.

"SA is not as successful as its New World competitors in the US," says Basson. "SA is the cheapest supplier but is not getting a volume benefit."

"Being cheap is not always a good strategy," says Michael Brain, owner of The Hope of Constantia wine estate. "Cheap wines drag SA's image down," he says.

"Selling in the US is all about brands" Brain says. "Brands count big time. People buy brands and you must put advertising dollars behind your brands."

Basson says that while Wosa markets SA wines generically, it is up to individual estates to market their brands. Here the problem is a fragmented producer sector. "There are more than 600 exporters to 20 countries," says Basson. "It's too many. Small operators without big marketing spend ability will struggle."

"Scale is critical," agrees Wolf. "There are continuing discussions on consolidation and working together in export markets."

It is easier said than done. "Getting co-ordination and focus is a big challenge," says Basson. Kurt Moore, chief executive of the Liquor Brand Owners Association, agrees. "We sit on the Wosa board and find it hard to get consensus on where the focus should be," he says.

Though the outlook for exports is clouded, wine farmers are taking advantage of cash flow from this year's bonanza to invest. "We are seeing investment in vineyard replacement and equipment, in particular huge investment in mechanisation," says Basson.

This has partly been prompted by wage strikes in the Western Cape last year. "Farmers want to reduce risk and increase productivity," says Basson.

Wage increases have made this more feasible. "Pre-strike mechanisation accounted for about 50% of the harvest using 420 harvesters," says Basson. "It will be at 60% in two years." One harvester replaces 100 workers.

There is also a trend towards reducing hectorage and offsetting this by planting higher-yielding vines, says Basson.

It is all bad news for jobs in a farming sector that employs 35,000 full-time and seasonal workers.

"The solution," Basson says, "lies in growing exports and achieving higher prices. Even a rand a litre rise in average export prices would make a big difference," he adds.

Source: Financial Mail via I-Net Bridge