Home > Provenance, Wine > Is the grass really greener?

Is the grass really greener?

Does it make sense to pursue potentially problem-fraught off-shore markets for South African wine,  when one of the largest US wine producers is entering our local market aggressively?

The Gallo Family Vineyards Cabernet Sauvignon, which is expected to retail at R49.95 per bottle.

About 100 people, mostly from wine estates in the area, sat and listened to a Wines of South Africa (WOSA) organised seminar in Stellenbosch last Wednesday about export opportunities into Angola and Nigeria. Neither of these markets is particularly large at present, but growth over the last couple of years appears to have been substantial.

Angola for instance, with an estimated population of around 19 million, has seen annual per capita wine consumption grow from 2.3 litres in 2003 to a projected 12.2 litres next year. Compared to most of the rest of the world, including South Africa, that’s pretty attractive growth. Even France has seen a dramatic decline in wine consumption, from a high of around 55 litres in 2006 to an estimated 48 litres in 2010. South Africa has seen a decline from 7.94 litres in 2008 to an estimated just under 7 litres this year. Whilst the numbers do differ significantly, the magnitude of consumption decline is pretty much the same at about 12-13%.

The picture gets more interesting when one looks at retail wine prices in Angola, which have risen from €1.23 in 2003 to €2.19 in 2009. At current exchange rates, that’s from around R12 (2003) to R20 (2009) a bottle. Now, with the excises, imposts, duties and “back-scratching” amounting to 60% – according to one of the speakers at the WOSA conference – of the cost of the wine, that makes the landed cost around R8 per bottle.  Not terribly much in there from the producer, now is there?

There are also logistical issues to contend with in exporting to Angola, and for that matter to the rest of Africa, but of course there are logistics companies that specialise in smoothing the path of the would be exporter (for a suitable fee, of course), and one such company took the opportunity to shamelessly promote itself under the guise of an Angolan wine market review at the WOSA conference.

Whilst Angola might present opportunities for the heavily resourced big players, Nigeria is a horse of a very different colour. As one delegate was heard to comment about the Nigerian market “Just as I thought – a bloody nightmare!”

Meanwhile, back at the ranch, the largest family owned US winery – it produces 75 MILLION 12 bottle cases per annum – is about to assault the entry level sector of the local wine market.

Barefoot Pinot Grigio - one of the accessible, easy drinking Californian wines E&J Gallo is introducing to the local entry level market ... at R30 a bottle.

A relatively small group of wine media gathered in Paternoster, as guests of E&J Gallo Winery last Monday night to hear how this Napa Valley based family owned winery plans to enter the local market. By early October, three wines, expected to retail at around R30 per bottle will be available on well known supermarket shelves.

This will be followed by two further wines shortly thereafter, priced at just under R50 a bottle. Not content with a piece of the wine market, Gallo will also be releasing a brandy – Gallo distils the largest selling brandy in the US – at a shade under R100 per bottle.

Question is, how is it possible for a US wine producer to enter the local market with credible wines – and credible they largely are – at that price point? Simply because it owns every aspect of the production process. Gallo makes its own bottles, labels, corks, capsules, screw caps and boxes at its enormous factory in Modesto, California. Oh, and it also makes the wine, by the way, and the volumes are staggering. Gallo produces around 70% of what the entire local industry makes in a given year, so this is no small fry business.

Doubtless the margins are tight, although the Gallo marketing executive who did the presentation on Monday evening, made it clear that the strategy was not to enter the local market with a loss leader, build share then jack up the price.

And this is also no knee jerk attempt to try to find additional market share for this enormous company that is the single biggest exporter of Californian wine, exporting to 90 countries around the world. Five years of market research presaged this decision.

Question is will the wines sell in the local market? One local marketing executive reckons that “the buy South African” imperative will engender loyalty, but admitted that if the target market is seen to be the as yet largely untapped emergent “Black Diamond” middle class, the allure of an American wine at between R30 and R50 a bottle might prove to be irresistible.

The wines in question, a dry Pinot Grigio, a sweet white Zinfandel, and a Merlot (R30 a bottle), and a sweetish Chardonnay and a fruit driven Cabernet (R49.95 a bottle) are clearly built for the America palate.  Considering the potential size of the local market for Gallo, it is highly unlikely that wines will be crafted specifically for the local palate. But if one considers that one of the largest selling local wines is a sweet rosè, then it follows that there is a market for wines which Zelma Long, an acknowledged US wine industry commentator, described at a WOSA conference last year as “uncomplicated and approachable with bright fruit”. Every one of the wines presented on Monday night fell cleanly into this category, and the brandy is at least as good as any local product in the R100 to R120 price bracket.

One school of thought suggests that the local industry simply does not have the economies of scale which will allow it to compete on price with the likes of a juggernaut like E&J Gallo, but there is an historical precedent which suggests that it may well be able to do so.

In 1959, the then Stellenbosch Farmers Winery introduced the semi-sweet Lieberstein, which by 1964 topped 32-million litres in production, making it the single biggest selling wine in the world that year.

What does a behemoth the likes of E&J Gallo know about the local entry level wine market, that our local large scale producers seem to have missed?

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