Many small South African wine exporters could be forced to shut down their operations entirely if the exchange rate of the rand does not weaken within the next six months. This is according to Dr Willem Barnard, managing director of KWV, one of South Africa’s largest wine and spirits producers, and a director of the South African Wine and Brandy Company (SAWB), the wine industry representational body.
Barnard warned that the rapid and sharp appreciation of the rand against the US dollar, euro and sterling over the past six months was making some export categories unprofitable and seriously threatening the viability of the country’s wine
exporters, particularly small, niche “negociants” who do not own their own
farms or grapes or even sell locally, but whose business consists of buying up
wine and blending it into their own branded products to fulfill a specific
target market overseas.
“Those without deep pockets will be unable to wait out the situation,” he said. “In the next six months I believe some smaller exporters will vanish from the scene if there is no relief (via rand depreciation).”
Since mid-January 2003, the rand has appreciated by 20% against the dollar, from just over R9 per dollar to a current level of around R7,2 per dollar. In January 2002 the rand was trading at R12,5 per dollar, representing a 42% appreciation over the past 17 months.
Wine exporters are in a unique position in that they have spent much time and effort in building up brands to fit certain price points (categories) in each offshore market with their importers, and as a result, the price for each brand is fixed — they are unable to raise their retail prices even as the rand strengthens against various foreign currencies. With the return in foreign currency terms shrinking all the time, profit margins are eroded drastically, even to the point of becoming completely unprofitable.
“In the wine industry producers must plan at least three to five years ahead for positioning their products and supplying their customers,” Barnard explained. “With such volatility in the rand, planning becomes impossible. If something is not done soon on the political side to manage the situation, I’m very scared we will see the start of another volatile, unstable period in the economy.
“For now, it’s clear to see that it is a steal for offshore investors to invest their funds here with such a high interest rate differential — once this narrows then there is a risk of capital flight and a rapidly weakening rand — we may have to cope with even more volatility.”
Barnard said that even KWV as a large exporter, particularly as one with negligible sales in South Africa, was suffering from the unexpected rand strength. At current levels the rand was between 10-15% stronger than even the company’s own very conservative budget estimates. Although sales had continued to be strong, the diminished returns from overseas sales was having a very negative impact on its bottom line.
“If we want to continue with our long-term growth plan offshore, we must remain committed to our customers there,” he elaborated. “We are building brands and loyalty to those brands, and thus must serve the markets and consumers for better or worse. This means we will pay a serious price in terms of bottom-line results when the rand appreciates as it has-our turnover has fallen 20% in foreign currency terms in the past six months (directly in line with the rand’s rise).”
Although unlisted, KWV’s shares trade over the counter via PSG. In line with the ex-cooperative’s recent restructuring, the public can now buy and sell the counter freely, when previously trade was restricted to cooperative members and wine farmers.
According to Barnard, KWV’s share price is currently trading at around 85 cents, a “very cheap” level compared to its usual range of between R1 and R1,20. – I-Net-Bridge