Wine, one of the great South African export stories of the past decade, is beginning to lose its fragrance.
Most South African wines are now being exported at a loss as profit margins tumbled from the giddy heights of 2001, when the rand traded at R18 to the pound and R12 to the United States dollar. Wine farms, once the hottest real-estate market in the country, cranked up production to meet expected demand. Today, wine farmers are fetching about R2 500 a ton for grapes, half that of five years ago.
Though grapes are cheaper, other input costs such as labour and transport have rocketed. Wine exporters used to count on a gross profit margin of about 100% on a R25 bottle sold in the United Kingdom market. Today, that margin is wafer-thin at about 15% and that’s before deducting overheads. The biggest culprit in all this is the strong rand.
“Few South African wines are being exported at a profit today,” says wine consultant and journalist Michael Fridjhon. “The only wines making any kind of profit are those at the premium end.”
Andre Morgenthal, spokesperson for Wines of South Africa, says once established in the overseas markets it is difficult for producers to switch markets on account of exchange-rate fluctuations. “A lot of producers were riding the exchange rate when it was in their favour, but when it turned, it hurt them.”
Despite this, the volume of wine exports is expected to grow up to 13% this year, on top of the 14-fold increase in exports over the past 12 years. Last year the industry exported about 280-million litres, against just 20-million litres 12 years ago.
Exports continue to grow despite the disappearing margins because wine producers have spent the past decade fighting for shelf space in overseas supermarkets and are loath to give this up. Many operated on the belief that the rand would weaken, which it didn’t.
Fridjhon says wine farmers and producers did splendidly when the rand was at R18 to the pound, but didn’t bank on a current rand price of about R11 to the pound. Growers feel particularly aggrieved that their grapes are worth so much less today than five years ago and some blame the big wine producers such as KWV and Winecorp, though Fridjhon disputes this. “The truth is that growers have had 10 great years. In the past they were protected by the big producers such as KWV, but now they are exposed to the forces of the free market.”
Statistics from Wines of South Africa show the total wine crop is up 7% to 905-million litres over the past decade. About two-thirds of this goes into wine for drinking, with the remaining third equally split between fruit juices, spirits and “rebate wine” used in the making of brandy and other alcoholic drinks.
Of the total wine for drinking crop, roughly 45% is now exported. The balance of about 300-million litres is sold into the domestic market, which shows no signs of growth. Annual per capita consumption in South Africa is about seven litres, well below figures for Europe and the US. Industry leaders are now looking at developing a stronger wine culture in South Africa.
Wine producers have invested so much effort building their export markets over the past decade, that they have neglected the domestic market and they are beginning to lose hope that a softer rand will come to their rescue. Their best hope in the short term is to increase sales into the domestic market, particularly to the emerging black middle class.