The fifth PricewaterhouseCoopers (PwC) benchmarking survey of the South African wine industry has recently been released. It covers the 2007 wine-grape harvest for the industry's producer cellar component - being those cellars that traditionally process grapes from a certain group of producers into wine and market it - with the previous four harvesting years presented as comparative figures.
The participants in the survey are a combination of producer cellars from all the officially demarcated wine regions in South Africa. Producer cellars handle approximately 80% of the total South African wine-grape harvest. Frans Weilbach Specialist Partner: Wine Industry, PricewaterhouseCoopers, Stellenbosch, says the high rate of annual participation of cellars in this survey makes the results both highly representative and relevant. "Pressure on the local as well as the international wine industry makes it increasingly important for South African enterprises to measure themselves against their peers, ensuring they remain relevant and competitive, and to keep abreast of industry trends."
The survey looks at various issues relevant to the broader industry - cultivar and product composition of the harvest; marketing composition of sales; financial yields; income statement and balance sheet analyses; employees, directors and black economic empowerment (BEE).
The survey confirms a notable upward trend in the red cultivar production from 19% of the total tonnes harvested in 2003 to 34% in 2007, However, the effect of the decreasing red wine prices are beginning to show and new plantings of these varieties are expected to stabilise in the near future. The average price that producer cellars realised for red wines decreased from more than R7 per litre in 2003 to below R5 in 2007, compared to a marginal increase in the prices for white wines over this period. Although the cellars saw an increase in their average prices since 2003, this growth was less than inflation and also overshadowed by dramatic increases in input costs.
The amounts paid to the primary producers for their grapes follow the same trend and on average producers are earning less for their grapes at R1,623 per ton in 2007 compared to R1,697 per ton in 2003. On the upside, the primary producers saw a marginal increase in their earnings per hectare from 2006 to 2007, primarily the result of a better tonnage yield per hectare. The average earnings are however still only marginally higher than the estimated costs.
Considering the effect of current economic pressures such as rising inflation, interest rates and fuel prices on consumer spending, producer cellars can expect margins to remain under pressure in the near future.
In order to increase profitability under these circumstances, producer cellars will not only need to manage their costs, but they will need to understand and optimise the drivers underlying to costs and income. The advantage of this is evident in the positive effect that the increase in tonnage yield per hectare had on profitability on the farm. It will however require balancing optimal quality and optimal yield in the future.
Profitability and margins was indicated by the survey respondents' as one of the major factors affecting their businesses along with competition and branding and regulation. Although survey participants indicated that branding is the aspect they admire most in their competitors, the results indicate that the producer cellars still market the majority of their wines in bulk, having risen from an already high 83% in 2003 to the current level of 92%. This leaves them vulnerable for wine buyers and supermarkets that control the market.
With regards to competition and branding, Weilbach says the wine industry continues to be dominated by a few large players, reaping the benefits of economies of scale and strong brand names. "Producer cellars should identify synergies and consider the use of partnerships and joint ventures for functions like marketing and administration. They should also investigate the potential benefits of vertical integration."
The participants find themselves in a ever changing regulatory environment with a new Co-operatives Act, a revised Companies Act and Black Economic Empowerment (BEE) to name a few. Weilbach says transformation of the wine industry has continued over the past five years, with all participants now focussed on a BEE plan. Almost a quarter (24%) of participants has already implemented a plan, while the balance is busy with the process of formulation and implementation.
Another pressing issue from a regulatory perspective for many producer cellars will be their choice of legal entity in which to conduct their business for the future. Over the next few months they need to respond to the changes in the new Co-operatives Act as well as amendments to the Companies Act, carefully considering the advantages and disadvantages the two pieces of legislation hold for their businesses. Their choice needs to be a reflection of the goals for their business for the future.
