10443352 South Africa Wine

Home , Dutch wine, New World wine, South African wine

www.rabobank.com The South African wine industry

Between past and future Title The South African wine industry

Author Arend M.A. Heijbroek

Date May 2004

Copyright No part of this publication may be reproduced in any form by print, photo print, microﬁlm or any other means without written permission of Rabobank.

Disclaimer Neither Rabobank, or other legal entities in the group to which it belongs, accept any liability whatsoever for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection herewith.

Contact adress Rabobank International for this publication F&A Research and Advisory Telephone + 31 30 216 1178 Fax + 31 30 216 1920 E-mail [email protected] Website www.rabobank.com/far

2RabobankThe South African wine industry Contents

Introduction

1 South Africa in international perspective 5 1.1 South Africa at a glance 7 1.2 Vineyards and vines 8 1.3 Production and exports 10 1.4 Exports compared 11 1.5 The wine 12 1.6 Exchange rates 14 1.7 Recent events: 2003 is the proof of the pudding 15 1.8 Conclusions and outlook 16

2 Industry structure 18 2.1 The South African industry structure 18 2.2 Foreign investments 20 2.3 The international industry structure compared 21

3 SWOT for South Africa 22 3.1 Conclusions 22

4 Strategic options 24

Rabobank The South African wine industry 3 4RabobankThe South African wine industry Introduction

The global wine industry is consolidating; Today’s world wine market is characterised by oversupply and the increased mainly in Australia and US buying power of the large retail chains, which has resulted in a pressure on prices and margins.Those companies with attractive brands, the ﬁnancial power to support them as well as with strong distribution power or partners in export markets are best positioned. As a result, a consolidation process is taking place in the industry, largely driven by wine companies in the US and Australia and some spirits companies.

South Africa emerged on The South African wine industry has been very successful in major export the global scene … markets, the UK and the Netherlands in particular, over the last ten years. Compared with several other New World countries, however, it has been less buoyant in expanding supply, partly due to the cost of capital, and possibly its traditional more risk-mitigating industry culture.

... however: so far hardly involved In addition, South Africa has hardly been involved in foreign investments and the in the global consolidation international consolidation process, which could give individual companies and the industry as a whole a new boost. Many of the consolidators of the wine industry have been travelling to SA, but so far have not made a major move. In our observation this is due to: • A Fragmented industry structure; companies are too small to be attractive for the major consolidators. Most of the leading companies are only 1 million cases strong, a few with over 2 million cases. • No strong brands in the attractive premium segment (EUR 5 to 7). Most companies have too broad a range of brands, which are hard to maintain or to work from. • South Africa is particularly strong in the popular premium (EUR 3 – 5) segment, which is a highly important segment of the industry.The major consolidators, however, mainly invest in the premium segment, where the margins allow for higher investments. • Political and currency risk • Possibly a lack of understanding of South Africa’s position in the global wine portfolio.

One of the unique features of the South African industry is the large demand for grapes for the brandy and grape juice industry. In the past in particular this had a strong impact on the industry, and continues to confuse statistics.

Rabobank The South African wine industry 5 Interest for South Africa is growing Despite these limitations it appears that the interest for the South African wine industry as a potential partner is growing, and this could leverage the positive momentum for the South African wine industry, with high growth rates in major markets. In turn, it is also important for the South African wine industry to get involved in the international consolidation process, to gain access to cheaper capital in order to build strong brands and increase distribution power with stronger foreign partners.

6RabobankThe South African wine industry 1 South Africa in international perspective

1.1 South Africa at a glance Economy is growing, …not shown South Africa has experienced major changes over the last 15 years. A radical shift in alcoholic beverage consumption in government, as took place in the early 1990s, often has major shock waves on the economy of a country. Figure 1.1 shows a certain hesitation in the growth of GDP per head between 1990 and 1994, after which there was a surge and there has been fairly steady growth since. GDP is forecast to grow by another 17% between 2003 and 2008.These changes seem to have had little impact on the consumption of alcoholic beverages, which even seems to have peaked in years of some recession. Consumption of all alcoholic beverages has shown slow decline over the last few years.

Figure 1.1 South Africa: GDP and alcoholic beverage consumption litres per head GDP USD per head PPP

70 14000

60 12000

50 10000

40 8000

30 6000

20 4000

10 2000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Beer consumption Wine consumption Sprits consumption GDP USD per head PPP

Source: Rabobank, World drink trends, 2004

Figure1.2 South African wine supply balance 2003, (million litres)

Production 956 Imports 107 Total availability 1,063 Brandy,juice,etc. 315 Drink wine production 703 Exports 232 Domestic market 348

Source: SAWIS, 2003

Rabobank The South African wine industry 7 South Africa now represents 2.1% of global wine production and 2.7% of global trade. A fairly large share of wine grape production is either distilled, or sold as grape juice. About one third of the wines produced is exported.

Brandy and juice production The production of brandy and grape juice absorbs about one third of the overall is worthy of special note production of wine grapes, which .has a large impact on the overall industry structure as well as on the production of grapes.This may confuse the picture an outsider has of the industry. So a clear distinction should be made between total production and the production of drinking wine. In years of shortage, cheap wine is imported - largely from Argentina - for both distillation and domestic consumption, mainly in the lower price ranges.

1.2 Vineyards and vines The original industry Before the shift in government in 1994 the wine industry was highly regulated, mainly supply driven including the varieties that could be planted. Exports were minor and production of wine, brandy and juice responded to domestic demand.The large domestic brandy market had a major impact on the planted varieties, and farmers tended to be supply- driven, with a focus on high yields.

The industry has shifted As a result, the quality – which includes yields – and varieties planted did not fully to market requirements meet the fast increasing demand in the export markets. As the matter of fact, the current range still represents a unique portfolio when compared to some competitors (see ﬁgure 1.3), with 61% still white varieties, part of which is mainly for the brandy market.This includes the 11,756 hectares of Sultana, about the same acreage as for Sauvignon Blanc and Chardonnay together. Excluding the Sultana acreage, the split between red and white is 44/56; about the same ratio as for exports. A large share of Chenin Blanc and Colombard goes into rebate wine.

Figure 1.3 South Africa: grape varieties (2002) South Africa: grape varieties

Others 11% Chenin blanc 17% Cinsaut 3%

Merlot 6%

Sultana 11% Pinotage 7%

Shiraz 8% Colombard 11%

Cabernet 12% Sauvignon 7% Chardonnay 7%

Source: SAWIS, 2004

8RabobankThe South African wine industry Level of new plantings modest In 2002 some 16% of the acreage was less than four years old and therefore hardly when compared with others productive.The increase in grape area and share of new plantings is relatively low when compared to other New World wine countries.The fragmented industry structure and the high costs of capital have resulted in more modest planting over the last ten years. Chile and Australia, for instance, did not have the same capital constraint as South Africa has experienced (ﬁgure 1.4) and in Chile, the share of new hectares stood at 24% in 2002, due to heavy plantings in the late 1990s.

Figure 1.4 Grape area of new wine countries 1,000 hectares

175

150

125

100

1990 1992 1994 1996 1998 2000 2002

AustraliaChile South Africa

Source: Food and Agriculture Organization of the United Nations, 2004

1.3 Production and exports Production focus has shifted Within the New World wine countries, South Africa has a production share of 9% from distillation to drink wine and an export share of 13.7%.Total wine production increased by 11% from 857.4 million litres in 1991 to 955.6 million litres in 2003. Drinking wine production increased by 77% from 396.4 million litres in 1991 to 703.4 million litres in 2003, indicating a clear shift from production for distillation to drinking wine.

Figure 1.5 South African wine supply balance million litres

800

600

400

200

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Production Distillation, juice Drink wine Domestic market/stocks Exports

Source: SAWIS, 2004

Rabobank The South African wine industry 9 South Africa: growth is in The growth of drinking wine production is sizeable, but modest when compared drinking wine production to Chile (160%) and Australia (200%) between 1991 and 2002.

Figure 1.6 Wine production of major New World countries million hl

5 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

South AfricaChile Australia US

Source: Food and Agriculture Organization of the United Nations, Rabobank International estimates, 2004

Exports: fast growth, but from low base Exports of South African wine increased by 200% between 1995 and 2002, more than Chile (+169%) and the US (+107%), which both started their export boom some ﬁve years earlier, but less than the export machine Australia (+327%). Exports have boomed particularly over the last there years without having reached the levels of these competitors.

Figure 1.7 New World wine exports million hl

1 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

New Zealand Australia Argentina

South Africa Chili US

Source: Food and Agriculture Organization of the United Nations, Rabobank International estimates, 2004

10 Rabobank The South African wine industry Was faster increase possible? The question arises whether South Africa could have expanded faster.The fragmented structure of its wine industry, the scarcity of capital and the large domestic demand for grapes for the spirits and juice industry must certainly have been a barrier for complete export dedication (see also chapter 2 on the industry structure). As a result exports represent some 33% of drinking wine production, lower than Australia (50%) or Chile (60%). Exports in recent years, however, indicate that while South Africa may have been later on the global markets than others, it has now found the way and won its own place in that market.

1.4 Exports compared The average export price Figure 1.8 shows that South Africa has been able to increase export volumes fast level is disappointing since the early 1990s, but in line with many other suppliers it has not been able to maintain its price points. Nevertheless, its average export prices are about the lowest of the major exporters, and about half of the average export price for Australian wine.The lack of premium brands is certainly a barrier to surpassing certain price points in the export markets.The low average USD export price in 2002, however, may also be explained by the drop in the Rand value in that period; in 2002 South African producers were able – and in some cases forced – to cut their export prices quoted in foreign currency, while maintaining reasonable quotes in Rands (see also paragraph 1.6).The ﬁrst ﬁgures for 2003 indicate that the UK and Dutch markets are allowing for some price adjustments, which were much needed because of the surge of the Rand (see also paragraph 1.7).

Figure 1.8 The export volumes and prices of major wine-exporting countries

Average Average Average Average Annual Average annual export price annual export price volume export price volumes (UDS/case) volumes (UDS/case) (m cases) (UDS/case) (m cases) (m cases) period 91-95 91-95 96 - 2000 96 - 2000 2002 2002

Argentina 7,9 4,90 12,7 10,07 13,7 8,84 Australia 11,2 19,27 22,3 29,38 52,4 24,29 Chile 10,5 12,51 36,2 12,87 38,2 15,79 France 126,4 32,48 166,8 32,37 170,8 31,61 Germany 29,9 15,01 25,9 16,40 26,4 14,96 Italy 151,9 10,10 164,8 13,70 168,7 15,35 New Zealand 0,8 26,81 2,1 29,42 2,8 44,72 Portugal 21,6 20,73 23,2 22,26 23,0 20,93 South Africa 5,6 13,26 12,9 14,37 23,4 12,23 Spain 81,7 10,07 92,8 12,82 100,2 12,13 USA 13,1 13,40 25,7 17,59 29,6 17,82

Source: Source: Food and Agriculture Organization of the United Nations, Rabobank International calculations, 2004 One case = 12 bottles of 0.75 litres.

Rabobank The South African wine industry 11 Average export prices, no average wines The following points should be noted when comparing average export prices. • Prices may stipulate the average, but no-one drinks average wine Low average prices in general indicate a high share of bulk exports, as is in the case in Italy, Spain and Chile. • The ﬁgures for France include champagne • New Zealand is a very small exporter of high quality white wine, Sauvignon Blanc in particular • For several years Australia has hammered home the need to raise quality, and consumers are evidently willing to pay for this quality. However, when wine becomes too expensive, access to some price-sensitive markets may become difﬁcult. As an example, Australia’s position in Germany is marginal. Spain and Italy export large volumes of bulk wine to Germany, among other destinations.

Export destinations UK and the Netherlands are key markets 64% of exports go to the UK and the Netherlands where it is second (16%) only to France (46%) in import share. South Africa has no real position in the US yet, which is an important and proﬁtable export destination for competitors such as Australia, Italy, France and Chile.

Figure 1.9 Export destinations for South Africa and Chile compared % of volume, 2002 South Africa Chile

Others 21% USA 21%

Other 31%

UK 45.3% Belgium 4%

Denmark 4%

UK 20% Germany 7.5% Japan 4% Ireland 4% Sweden 4% Canada 6% Netherlands 17.2% Denmark 5% Germany 5%

Source: SAWIS and Viñas de Chile, 2004

Focus on two markets: good or bad? The focus on two major export destinations – the UK and the Netherlands - is more or less comparable with Australia, where nearly 2/3 of all exports go to two countries, the UK and US. Chile, for instance, has a much broader spread in destinations. A strong focus has clear advantages. A high market share in a speciﬁc market builds a position of strength and does not dilute attention and marketing capacity. However, risk, including currency risk, increases along with the risk of shifting preference to other suppliers.

12 Rabobank The South African wine industry 1.5 The wine The wine has made great progress As with most New World wine countries, South Africa has made considerable improvements in quality over the last decade. From a traditional supply driven approach, largely catering to the demand of the domestic brandy and juice industry, the major companies are now focusing on the requirements of the export markets. As with all countries, it needs to ﬁnd its own style and carve a unique position in the consumer mindset.

…. the best of two worlds South African wine is often described as having the advantage of both the Old and the New World.This could mean less overwhelming fruit and sweetness of other New World suppliers but more of the structure and elegance of the Old World. South African wines appeared to be the star performer at the International Wine & Spirits Competition in 2003, taking 5 of the 20 gold medals, more than any other country.This highlights an imbalance between the potential high quality of the South African wines and the perception in the export markets of South Africa as a producer of cheap wines.

Pinotage or ….? The competitive advantage of the wines from South Africa is often discussed.The Pinotage variety is certainly a point of distinction, like Tempranillo in Spain and Zinfandel in California. Good quality Pinotage is certainly attractive.Too much of the Pinotage, however, is made from basic quality, which will hardly add to the competitive strength of the country. Increasingly Sauvignon Blanc is regarded South Africa’s big secret, its style lying somewhere between that of New Zealand and France. Shiraz and good quality Chenin Blanc are other assets which are worthy of further market recognition.

Advantage of different terroirs One other feature of the country is its many different terroirs, soil types and climate zones, within a comparatively small region, which results in a broad range of wine styles.The range is less homogeneous and therefore more adventurous than other suppliers on the world market.

Price points are increasing, Attempts to raise the quality proﬁle of South African wines is starting to bear fruit but strong premium brands still lacking with the average price of a 750ml bottle in the UK going up 5.7% to GBP 4.75 in 2003, while the average price for all wines dropped by 2.9%. South Africa’s value share of the UK retail wine market grew by 12% in 2003. Nevertheless, South Africa still lacks strong brands in the premium segment.

Overall image is very good Finally it must be mentioned that the image of South Africa is very good, for instance as a tourist destination, which is crucial for a wine exporter, and adds attraction to its wines. In addition Cape cuisine menus add ﬂavour to the leading restaurants of the world.

Rabobank The South African wine industry 13 1.6 Exchange rates The exchange rate is a challenge Volatile exchange rates require more and more attention in the international wine industry, in particular when they have an impact on competitiveness.

Argentina and to a certain degree Chile are good examples of countries whose exports beneﬁt from weakness against the US dollar. Argentina experienced a major fall in the value of its currency in 2002 and now trades at about one third of its original US dollar value while the Chilean peso is today also weaker in US dollar terms than it was in early 2001, despite the weakness of the dollar.

Remarkably a lot of currencies follow roughly the same exchange rate patterns against the US dollar, such as the euro, pound sterling and Australian and New Zealand dollars, all of which have gained in value in the last few years, with the NZD gaining most.

South Africa has benefited from a weakening currency in 2002 in particular, which allowed it to be very competitive in the UK and the Netherlands. Since then, however, the surge in the rand against the US dollar has put the development of its exchange rate nearly on a par with the currencies of some of its major competitors in the New World, Australia in particular, and is presenting an increasing challenge. Most of these countries have gained between 5% and 20% against the dollar. Had South Africa’s domestic inflation – which results in increasing costs – remained on a par with its competitors, it would not have lost much of its competitiveness. On the positive side, inflation is on the way down but is still too high for the time being.

Figure 1.10 Exchange rate indexes vs USD for the major wine producing currencies

January 2001 – March 2004. (1 Januari 2000 = 100)

400

350

300

250

200

150

100 jul. 03 jul. 02 jul. 01 jul. 00 jan. 04 jan. 03 jan. 02 jan. 01 jan. 00 okt. 03 okt. 02 okt. 01 okt. 00 apr. 03 apr. 02 apr. 01 apr. 00

Argentina Mexico Australia

Brazil South Africa Europe/UK

Chile Canada New Zealand

Source: Bloomberg, Rabobank International calculations, 2004

14 Rabobank The South African wine industry 1.7 Recent events: 2003 is the proof of the pudding 2003 has broken new records In addition to its gold medal haul at the International Wine & Spirits Competition, 2003 has once again proven further growth opportunities; 1. In the UK the off-trade volume share increased to 9.6%, and the value share to 9.3%, while all European suppliers lost market share. South Africa has three brands in the top 20 and is now the ﬁfth largest supplier in the market, with the prospect of fourth spot in a few years time, if supply is available. In the UK on- trade South Africa gained 5.6% value share and 5.4% volume share. UK buyers appear to be very positive about South Africa’s growth prospects and most of them are in the process of enlarging their listings. 2. South Africa almost doubled the amount of wines it sold for more than £5 in the UK last year, moving 291,000 cases in 2003 compared with 154,000 the previous year. 3. In the Netherlands South Africa has a clear second position, where it beneﬁts from the commonalties in language. Dutch consumers understand and appreciate the Afrikaans labels.The off-trade volume share increased from 13.6% to 15.6%, whereas the value share even increased to 17.2%. It has two brands in the top 8. 4. Exports to Germany are up 24% in bottled wine, 18% in bulk. German consumers seem to be picking up South African wine, partly supported by tourism, attractive price points, and the (re)launch of attractive brands 5. Sweden saw an increase of packaged sales by 126%.

1.8 Conclusions and outlook The industry has gained The South African wine industry has shown considerable growth over the last ten its own position years, and has gained a strong position in a few export markets. As a result its wines are indispensable to an international assortment.The industry aims to sell 500,000 cases a year by the end of 2005 above £5 per bottle. South Africa also intends achieving a 13.5% value share of the entire UK market by the end of next year, as well as ﬁght for an average retail price of £4.16 per bottle.

…. but has not yet exploited This growth, however, has not been as astonishing as its two main competitors, all opportunities Australia and Chile, partly due to historical reasons, partly through capital constraints. As a result, the impression emerges that the South African wine industry has not been able to fully exploit the market opportunities.The very small presence in the proﬁtable US market is a clear example of this. It is in particular here where synergies can be realised through international partnerships.

Rabobank The South African wine industry 15 Figure 1.11 South Africa: production and demand: recent trends and forecast

million litres

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Drinking wine production Domestic martket/stocks Exports

Source: SAWIS/WOSA, 2004

South Africa is heading Total production of wine, as well as the production of drinking wine, is expected for a shortage of wine to remain fairly stable up to 2008.Exports are expected to increase by a conservative average of 10% per year to 366 million litres in 2008, or more if available.This will give South Africa a shortage in supply for the domestic market and the production of brandy, both which markets are forecast to expand slowly over the coming years. In other words, a lack of supply, in particular in the premium segment, appears to be a major limitation for further growth of the industry. Given the proven track record of the industry, this presents investors with an opportunity.

… which has advantages In the current market situation it appears attractive for wine companies to be and disadvantages short in supply to avoid a need-to-sell situation, which generally has a strong negative impact on prices. In the longer term a shortage in supply, in particular in the attractive premium segment (EUR 5 to 7), makes an industry vulnerable, with the risk of becoming cornered in less attractive markets or segments. Further growth in these segments, however, can only be realised when supported with strong brands in a competitive market.The current industry structure limits the opportunities to build such brands.

Other drivers for further growth include: 1. Tourism, whose growth into South Africa remains ahead of world ﬁgures, with wine tourism potentially huge.The wine lands /golf course investments are exploding. 2. New premium areas such as Elgin and Elim are delivering high quality wines. There are still many places like these, awaiting development. 3. The New BEE charter will ensure that government plays a more positive and proactive role in the industry in future.

16 Rabobank The South African wine industry 2 Industry structure

2.1 The South African industry structure Number of small wineries expanding fast In 2003 South Africa had 4,435 grape growers, 506 wine companies (up 169 since 1999) and 97 bulk wine buyers.The fast growth of the number of wineries indicates the industry dynamics, but growth centres on very small private wine cellars. Some 92 of the private cellars are registered estates, such as Groot Constantia Estate. Most estates are small producers of super and ultra premium wines.

Figure 2.1 South Africa: Wine cellars structure 2003

Private tonnes of grapes wine Producing crushed Total cellars Co-ops traders

1 to 100 224 219 - 5 100 to 500 107 106 - 1 500 to 1000 50 48 1 1 1000 to 5000 70 51 14 5 5000 to 10000 19 - 19 - more than 10000 36 - 32 4 Total 506 424 66 16

Source: SAWIS, 2004

The industry leader so far The largest wine company is Distell, a merger between Stellenbosch Farmers mainly in the domestic market Winery and Distillers. Distell is mainly a spirits company, which in the past produced some 45 million cases of wine, 2/3 of which was distilled into brandy. The wine division produces many brands, estimated at 15 million cases of wine, part of which is bulk and bag-in-the-box wine. Distell is increasingly focusing on export markets, and wants to export 3.3 million cases in 2006.

The second group dedicated The second largest company is Western Wine, with its successful brand Kumala, towards exports which surpassed the export volumes of the original export monopolist KWV.The next group consists of a range of companies, all around or just over one million cases of production. Some of these companies are only active in the export market. Each of these companies has a few attractive elements, but is not strong enough to compete with the global giants, partly due to a weak balance sheet structure.

Rabobank The South African wine industry 17 Figure 2.2 South Africa: the major wine companies

Wine production Exports Company (m cases) (m cases) Remarks

Distell 15 1.5 Major wine brand Nederburg. 1.1 m cases premium plus wines Western wines 2.4 2.4 Brand: Kumala; 2 million cases KWV 2.3 2.3 Co-op. Major brands: KWV, Cathedral cellar Baarsma 1.6 1.6 Dutch wine trader DGB 1.3 1 Brands Bellingham, Douglas Green, etc. Winecorp 1.3 1.2 Major brand Spier Coppoolse Finlayson 1.3 1.3 Mainly private label Vinfruco 1.2 1.2 Part of Unifruco; major brand Arniston Bay; 0.85 million cases Swartland 1.2 1.0 Co-op Stellenbosch Vineyards 0.9 0.9 Major brands: Helderburg, Versus and Welmoed Westcorp 0.9 0.9 Co-operative wineries Vredendal and Spruitdrift. Brands Namaqua (0.5 m cases), and Goiya (0.3 m cases).

Source: Rabobank estimates, based on industry sources, 2004

2.2 Foreign investments Limited foreign investments Several of the major global wine companies have looked at South Africa regularly, but so far very few have made a clear move. Pernod Ricard and Baarsma are some of the few exceptions with early and major investments. Stellenbosch Vineyards has the only foreign joint venture with one of the major global wine companies, Hardy's, now Constellation. Golden Kaan is an example of a well-prepared joint brand development, which sold over 150,000 cases the ﬁrst six months after introduction, and sales of some 2 million cases planned in 2006. Most foreign investments today are small-scale investments in estates for the quality segment, such as made by several wine houses from Bordeaux. As such, the Bordeaux investments are an indication or even recognition of South Africa’s terroir, but this is unlikely to result in the large premium brands the industry needs.

18 Rabobank The South African wine industry Figure 2.3 Foreign ownerships or joint ventures

Owner country SA company Main brands cases

Pernod Ricard France Long Mountain Long Mountain 0,2 m Baarsma Netherlands Baarsma SA Lyngrove, private labels 1.6 m Western Wines UK Western Wines SA Kumala 2 m

Joint Ventures

Constellation Australia Stellenbosch Vineyards Shamwari B. de Rothschild France Rupert family Vigneron 30,000 Racke Germany KWV Golden Kaan 150.000 Coppoolse Netherlands Finlayson Private labels 1 m

Source: Rabobank International, based on industry sources, 2004

2.3 The international industry structure Strong premium wine The industry structure partly explains the limitations of South Africa: on the one companies are lacking hand the important co-ops, producing large volumes of basic and popular premium wine, on the other hand the small estates with high quality wine. Though several popular premium brands exists (EUR 3 to 5), selling over one million cases, there are no companies with over one million cases of premium wine (EUR 5 to 7), which is the most attractive market segment for the international wine companies to invest in.

Figure 2.4 Consolidation level in international perspective average size top-4 (million USD)

USA 900

800

700

600

500 Australia 400 France-wine France-champagne 300 Spain 200 Italy Chile Argentina 100 South Africa

0 20 40 60 80 100 market share top-4 (volume %)

Source: Rabobank International calculations, 2004

Rabobank The South African wine industry 19 The leading companies are small Looking at a comparison of the consolidation level with some of the competing countries, it can be seen that the four largest wine companies in South Africa together hold a market share of some 28%.This level of consolidation is higher than in Europe, but lower than in other New World countries.Western Wines, the second largest wine company, represents only 3% of drinking wine production. High market shares and therefore market power that could enable South Africa suppliers to be an indispensable component in export markets are important assets for international investment decisions.

The other issue is the comparative size of the company. Other than Distell, we estimate the other leading companies to have revenues averaging between some USD 15 and 40 million, well below the size of the leading companies in competing countries. Both market share and size limit opportunities in export markets.

20 Rabobank The South African wine industry 3 SWOT for South Africa

Figure 3.1 SWOT for South Africa

Strengths Weaknesses

• Ideal climate, with different regions • Highly fragmented industry structure; no clear consolidators. • Overall good image • No strong companies or brands in the premium segment; in • Different wine styles; elements of both Old and New World; the UK only 2.5% sold above GBP 5 per bottle • Attractive varieties, Pinotage, Sauvignon Blanc, Chenin Blanc, • Only 2 brands with over 1 million cases, only in popular Shiraz premium • Strength of the basic and popular premium wines, as well as • Not enough red super and ultra premium estate wines • Not consistent enough to customers • Low-cost producer; land and labour is inexpensive • Too many ‘me-too’ brands • Strong position in a few markets like UK and NL • Image: for many consumers producer of cheap wines • Less in a need-to-sell situation (which means price • Hardly in the US discounting) than some of its competitors • Capital is scarce and expensive • Flexibility • Not involved in the global consolidation process

Opportunities Threats

• Internal consolidation; build strong companies • Fluctuations of the Rand; both with respect to imports of • Develop strong premium brands, possibly as a trade up of equipment, as well as exports results in uncertain margins present popular premium brands, or trade down – and size up • Continued oversupply on the world market from other New - of estates World suppliers; pressure on margins • Increase market share in key markets • Global consolidation in the industry; risk of being excluded • Copy in the Netherlands the Australian model for the UK form the most attractive markets by the leading global wine • Access to US, and Canada companies • Access to some emerging markets (Asia) • Risk of being trapped in the value-for-money segment • Develop on-trade distribution in export markets • Uncertainty with investors with respect to SA politics • Get involved in the global consolidation process; as a result better access to capital, knowledge and markets • Wine tourism

3.1 Conclusions: The ingredients for further growth of the South African wine industry are there, but for the time being it is not fulﬁlling its potential: • In the basic segment South Africa has opportunities with a decent quality wine in emerging markets, as well as private label wines in price sensitive markets, such as Germany • In the popular premium segment opportunities exist for the further strengthening of the current brands (by creating brand ladders, for instance),

Rabobank The South African wine industry 21 the development of new attractive brands and the establishment of new markets • New initiatives in the premium segment should get a strong boost in volume, branding power and distribution power • Many of the wine estates lack the distribution power to develop a successful on-trade distribution in export markets, and could beneﬁt from strong international partners • The lack of direct involvement and foreign investment of the leading global wine companies has somewhat prevented the full beneﬁt of growth opportunities

The strength of an industry or company can be leveraged; weaknesses can be overcome by changing strategy.The same applies for opportunities and threats. Some issues may have elements of both strengths and weaknesses.The ﬂexibility of the South African wine industry, for instance, is one example. It can develop Buyers Own Brands, which are very important in some markets,- , and can distil excess wine into brandy. Both of these activities reduce the supply pressure. On the other hand, this may result in companies being less ambitious to build and support strong brands of their own. For South Africa in particular it appears that large investments and strong international partners are required to allow the industry access to attractive segments and markets.

South Africa: more unique than others? The SWOT for South Africa has of course much in common with other, New World countries, each of which is unique in its own right and has gained its own deserved place on the retail shelves.This is also true for South Africa.

Since wine is associated with pleasure and life style, a good national image is very important. As a favoured tourist destination, the image of South Africa is good amongst consumers.

In addition, the supply pressure is somewhat lower than in other markets; the wine supply balance can easily be adjusted by increases or reductions in wine imports.

22 Rabobank The South African wine industry 4 Strategic options

Strategies: access to growth opportunities The way forward for the South African wine industry is to acquire a stronger competitive position of individual wine companies in the international market. In order to fully comply with the key success factors of the global wine industry, this should include access to: • Sufﬁcient capital to generate enough supply of premium wines, and to build strong brands • The increasing distribution power of multinational wine companies, with a full range of wines with direct access to the leading retail chains as a result • Markets, which are now hard to enter, such as the US • The best market and consumer information • The latest innovation trends

The related strategies can be executed alone or with partners in different formats. Given the current size of most South African wine companies, cooperation with national or international partners seems the route to go for many players.

Strategic options for South African 1 Internal improvements wine companies include: Individual companies, understanding the market dynamics, continue to optimise their branding strategy. Each company, however, has limited financial resources to really make powerful brands overseas.This is certainly the case for co-ops, which generally plough back profits to their members, diluting the financial capacity to expand and make long-term investments in export markets.

2 Consolidate in South Africa For many South African wine companies this may seem the preferred route. Even then, however, at best 2-3 million case companies would emerge, with mainly popular premium wines, and current limitations (brands, ﬁnancial resources, time, etc.) remain.Therefore: this will take more time than anticipated, possibly more than the market will allow.

3 Seek an international partner This seems to be the fastest route to success, though it may seem daunting for individual wine companies, both South African and foreign. Such a process should be based on a good understanding of the position of both parties.The first partnership can create its own momentum: the first investor can select the best company; the best grapes are picked first.This will trigger further consolidation; many investors have a me-too strategy.

Rabobank The South African wine industry 23 The leading wine companies: The leading wine companies around the world cannot neglect the wines of need to invest in South Africa? South Africa.The industry has proven that its position in a representative international wine portfolio is warranted. In other words, any global wine business should have South African brands in its portfolio, either on the distribution or production side.

Options for international International partnerships could be established according to several different wine companies models: 1 Establishment of a joint distribution company A joint distribution company can bring together suppliers with an attractive range of similar wines from different countries, based on a strong and innovative business plan. Customers would be attracted by a full range of attractive wines.This is a strategy employed by a few premium independent family owned wine companies. 2 Brand development as a Joint Venture Development of attractive brands in a joint venture between a South African wine company and a strong distributor in an export market can be very successful. Examples are Golden Kaan and Shamwari.The success of the Australian brand [yellow tail] is also based on such a partnership. 3 Acquisition of a South African wine company Foreign investments can be very attractive for the South African wine industry. For the investors the ideal South African partner that meets the requirements in terms of size and branding power have not yet been found. It is, however, still possible to be the ﬁrst to build a strong South African premium brand with a local partner now mainly active in the popular premium segment. Such a premium brand is still currently absent in the international assortment.

Successful strategies; Choosing the right model is related to the quality segment and the strategy of select the right model … both partners. Foreign companies would generally be more reluctant to invest abroad in the popular premium segment, and possibly even in the premium segment, whereas such investments are more easily made in high quality segments with lower volumes and higher margins.

… as well as the right timing In any strategy the right timing plays a crucial role. Investments too early would increase risk, as the market is not yet there; investments too late could mean missing out on the best deals already done by competitors, or a signiﬁcant rise in the value of companies having already occurred.The question for the South African industry is whether it can afford to move more slowly than international competitors to strengthen its position in export markets.

24 Rabobank The South African wine industry