Home > Liquor Industry, Wine > Bulk wine exports: the elephant in the SA wine industry room

Bulk wine exports: the elephant in the SA wine industry room

If you look closely at the picture above, you’ll see a prime example of the unity that is so sorely missing from the South African wine industry. It’s a tiny corner of the mammoth exhibition hall at the Cape Town International Convention Centre where Cape Wine 2012 is underway, and it is the place that has the most incredible buzz.

Beyond “Gran Wine Funk” on the back wall of the stand, there’s no branding, but if you look at the bottle back labels, you’ll see a sticker which says “Swartland Independent”, which in a way is a contradiction in terms, because what you experience here is the most incredible display of unity. Chatting to Penny Hughes who is pouring Nativo’s wines, a lovely white blend and an equally lovely red blend, it becomes clear why. “If David wasn’t here,” she says, gesturing at David Sadie standing behind the table, deep in discussion with somebody about one of his wines, “one of us would pour for him.” And that’s what sets this band of innovative clear thinking wine growers apart. They understand the need for presenting a united front to the marketplace, be it local or overseas.

Sitting chatting to Antonio Amorim, president of Amorim Cork in Portugal yesterday afternoon, I ask him for an opinion about what’s missing in our approach to market development. He pauses and reflects briefly: “You lack unity as an industry,” he says, “like the unity you’ll see in Australia and in New Zealand.” And this is coming from a man whose livelihood is dependent on winegrowers using his product to close their wines, talking about two countries who have embraced the enemy so to speak: screw-cap closures for so many of their wines.

I quiz him on that score. “Of course I’d like them to use cork instead of screw-cap, but that’s not my point. Take the Kiwi’s for example. They’re known for making great Sauvignon Blanc and they all insist that screw-cap is the right closure and they all do it. That’s unity, and I respect that, even if they aren’t using cork closures,” he says with a smile. And that’s the kind of unity that is so evident in this corner of the Cape Wine 2012 hall, with a constant stream of people walking up, engaging, tasting, talking, and doing business.

In September 2009 more or less (I’m open to correction on this date) Wines of South Africa (WOSA) CEO Su Birch launched the DNA Handbook of South African Wine, a significant initiative to build a unified brand identity for the South African wine industry. Australian wine consultant James Herrick was flown out to address the launch conference in Stellenbosch, and he made some very clear points. We cannot continue to be the cheap and cheerful bottle of wine on every British table; we must pursue the premium wine segment in our chosen overseas markets; we must relate compelling, believable and true stories about those premium class wines; and above all else, we need to present a united front to the world market.

The DNA Handbook of South African Wine was supposed to be the platform for that united front, which would enable the industry to walk in lockstep into the future with that united front. Whatever it cost to put it together was wasted, including the cost of the seminar and the cost of flying James Herrick out here to talk at the conference. Why? Because it was still born. If you Google DNA Handbook of South African Wine all you’ll come up with is a reference to an article I wrote in Bolander. It’s here if you want to read it.

Here’s a quote from James Herrick out of that story. “From the sheer logistics and cost exercise of meeting the world demand for wine, and with a lot of low cost producers in the world, there is a limit to the extent to which South Africa could continue to be efficient enough to meet that demand for low cost wine.

The countries that end up occupying that market for low cost wines will be the most efficient.  South Africa – because of distance, because of its farms, because of its cost of money, and because of its geography and topography – will have a hard time competing.

For the SA wine industry to survive it would help if it could move its production slowly towards the more premium end, because that’s where the margin is, and that’s where the value for the consumer is.”

Herrick also spoke of the need to leverage the unique story that underpins South African wine, something which Antonio Amorim also feels is an essential part of the sustainability of our industry. “You need to be selling your wine where consumers pay for differentiation, for the story you tell them about South Africa, about everything that your wine represent,” says Amorim.

And Tuesday morning, we all sat in the opening seminar of Cape Wine 2012 and watched the elephant in the room which everybody conveniently ignored until Amorim pointed out that fully 57% of our current wine exports leave our shores in bulk.

“As long as you continue to allow a good portion of your industry to be driven by the likes of UK supermarket chains, you’ll have great difficulty building brand presence in the premium sector of the world wine market,” reckons Amorim, and he would be right. With increasing demand for our wine to be shipped overseas and bottled there under a label that does nothing to build Brand SA, what are the chances that we can stem the haemorrhaging?

I’m not suggesting that all bulk wine exports are an abomination. Those producers who ship in bulk and bottle overseas under their own label at least still promote Brand SA, and the likes of KWV come to mind in this regard. Granted we end up losing local jobs, but with what amounts to vertical integration, such exports end up with better profitability because it is so much cheaper to ship in bulk and bottle overseas, rather than to ship bottled wine.

If you take a look at the state of our national vineyard, and there’s a story here which does just that, you’ll see that it has been declining in size since 2006, and the way things are going that trend is set to continue.

Granted, it has been accompanied by an increase in yield per hectare, but that trend is limited by the law of diminishing returns. There will come a time when producers can no longer squeeze more grapes out of a hectare without impacting quality, and when that happens, the price they get will decline beyond the point at which it is economically viable to continue to farm the vineyard. If they’ve not been replacing the 5% of their vineyard which they should be replacing each year – and many producers cannot afford to do so because of the price per ton they’re getting – the vineyards will either lie fallow, or be replaced with another crop.

So when WOSA’s Su Birch says that in 20 years’ time, we’ll have a national vineyard 150 000ha in extent and we’ll be exporting premium quality wine all over the world, I must question where those figures come from.

We live in a water-scarce environment, and it’s getting worse. We’ll have less, not more water going forward. Just replacing what we’ve got with water-savvy clones is difficult enough as it is, never mind growing our national vineyard by 50%. If we’re lucky, we’ll end up with half that  – 80 000 odd hectares – in twenty years’ time, the way things are going.

Chatting to Chris Mullineux, one of the Swartland Independent crew in that vibey corner of the hall, he points out that one of the conditions of membership is that you cannot ship more than 20% of your wine production in bulk. There are other criteria, like naturally produced wine, a varietal specification, an ageing regime specification, limitation on the use of new oak, viticulture guidelines, and bottling in specific shapes. It’s no AOC system, but it provides a set of guidelines that ensure that members of the group present a united front to the market, one that buyers and consumers can understand and tap into. And they’re not fighting with each other, cutting per ton prices to get the deal from the next guy.

Charles Banks of Terroir Capital spoke on Tuesday about his decision to buy Mulderbosch Vineyards in Stellenbosch. One of the reasons is that it was a cash-positive business producing wines that he knows will sell well into the US market – like the Steen op Hout Chenin, and the Chardonnay. If he thinks there’s a viable market for Stellenbosch wines in the US market, one which is notoriously difficult in which to establish a brand presence, then perhaps more local producers ought to take a leaf out of his book. And we’re not talking cheap and cheerful wines here. Rather, we’re talking wines that tap into the lower end of the premium segment, which is where we ought to be focussing our attention.

And as Antonio Amorim points out, we ought to be pushing for premium wine market share not only in the US, but in China, Russia and Brazil as well.

“Our vision is that South Africa will be recognised worldwide for producing premium quality distinctive wines in the world’s most biodiverse winelands, in an environmentally sensitive and ethically responsible manner,” is what Su Birch said way back when the DNA Handbook of South African wine was launched.

Three years later, how much closer are we to that dream?

  1. September 27, 2012 at 10:11 am

    Nice one Norman, bulk wine exports in general are doing us a lot of harm overseas. Lynne Ford

  2. Ernst Gouws
    October 2, 2012 at 4:49 pm

    Hi Norman.

    Thanks for the inquiry into these matters and I praise your reporting skills on the fact that you are asking questions and not pointing blame.

    If the people complaining about the bulk industry will be willing to finance the producers to substitute these transactions that would be incredible. Or if these same people can come up with a new strategy on how to generate the income lost from these transactions it would be even better.

    The wine industry is in survival mode. Bottle export figures fell during the last 3 years and bulk export figures rose (thank the pope) due to this (see SAWIS). This should say enough about the economics surrounding the situation. Had it not been for the outlet of being able to sell wine in bulk we would have seen more cellars close their doors than we had. And it is not like producers prefer exporting bulk seeing as to bottled wine delivers a much higher profit margin.

    There is also a major difference between bulk that goes into generic non-SA products and bulk that go into SA products. Non-SA generics make out only a percentage of the 57% and it would be better for the public to first do a complete investigation on those numbers before making common statements like the person above. Or before one your fellow bloggers shout across the floor of Cape Wine at me that “you bulk people are messing up the industry!” These kind of statements seem of the like that were made by people sitting around over lunch with the wine, and not the brain, reaching conclusions.

    I have bills to pay. And in November when my cellar is full of wine, because my importers did not order and the harvest is 3 months away, am I going to sell my wine for “X Rand” to an international destination or “X – R 6.00” per liter to the distillers?

    Hope you enjoy the view from within the industry and hopefully see you again soon!

    • October 2, 2012 at 6:32 pm

      Thank you for your comment, Ernst. As you say (and as I point out) bulk wine exports that lose Brand SA are more the problem, than those which are shipped in bulk and then bottled and labelled overseas under a local brand. Some of the KWV products come to mind, and unless I’m very much mistaken, SPier are also doing this with some of their entry level labels destined for the overseas market.
      It is the supermarkets in the UK that want to buy the wine in bulk, and then bottle it under their own label, with no reference to South Africa (or any other country of origin) that are the real threat.
      Nonetheless, I do understand your point that for the hard-pressed producer, it is a case of generating sufficient revenue to keep the cellar afloat, or to see it actually close it’s doors that culminates in them succumbing to temptation to accept the kind of prices for wine that do not allow for long term survival.
      I listened with interest to wine economist Mike Veseth on Saturday at the Nederburg Auction when he gave the keynote address. His key point was that globalisation has led to wine becoming commoditised. It is characterless, cheap, and could come from anywhere in the world, as long as it doesn’t cost a fortune. He cited Blue Nun and Two Buck Chuck as examples of this phenomenon.
      Although I found his suggested solution to our wine woes simplistic – he said we should use the braai tradition of South Africa as a marketing platform for our wines- his conclusions about where our wine industry is headed if we continue to sell an increasing proportion of our exports in non-Brand SA bulk are in my opinion, completely plausible.
      As I point out in my article on wine.co.za, the law of diminishing returns dictates that there is only so much our producers can do to leverage yield, while keeping production costs down. When we reach that point, and the supermarkets demand yet lower per litre prices which we cannot afford to grant, they will simply take their business elsewhere. Where will we be then? In the same place we’d be if we toughed it out right now, only it will take a bit longer.
      And let’s not forget that the view that producers who do not own their own vineyards are shielded from this, is an illusion.
      Unsustainable prices paid to primary producers will guarantee that those primary producers eventually go out of business and no longer grown grapes. Then what?

  3. Ernst Gouws
    October 3, 2012 at 10:40 am

    You make a good point Norman, but to tough it out you need financial backing and you only have financial backing to keep your cellar/farm afloat if you are a South African financial mogul and your winery is not your lifeline. There is just no such thing as toughing it out at the moment.
    Personally, I believe that seeing wine as a commodity is not a bad thing as there is a place for everything in this world and being able to trade in a commodity (with a focus on consistency) you lend stability to any industry as a whole. Large cooperative wineries that have a stable income can then afford smaller producers “to tough it out” in harsher times.
    I am also not 100% convinced by your diminishing returns statement, as current technology within viticulture can foresee large stable harvests of the like we see in the Northern Cape and ander-kant-die-berg.
    Being in the bulk industry myself, I can assure you that the wines that are leaving our shores intended for non-SA generics are not sold under cost price. We are not losing money on these transactions except that part of the profit margin that is lost between wine being sold in bulk and wine being sold in bottle form, something that I point out in my next paragraph is changing. Hence my reasoning that it is saving us.
    BUT… There is light in the tunnel for us. The wines we are discussing are leaving our shores almost solely intended for use in Europe (UK is actually only a percentage of it) and were it only for the European market we would definitely be doomed and I couldn’t agree with you more on where we heading to. However, the rising middle class in the emerging markets are picking up steam and are already proving a great source of income to many a South African producer. They have literally come as a saving grace. We have only touched the tip of the importing iceberg though and there is a very positive future for us here. I am mainly speaking of the East and Africa and have not even taken South America into account. And the number of wine consuming countries is Africa is still so limited I can’t help but getting really excited when I think about the possibilities here. Just as bottle wine exports fell and our bulk wine exports had to grow in turn, the emerging markets have already increased the former and the latter will decrease over time. Coupled with your views on the decrease of vineyards in SA, I think we are really heading somewhere great!
    To end off. The export of bulk wine for intended use in generic non-SA products was a product of unstable economic conditions within our industry. To make a judgement on this in a time where we were merely trying to survive as an industry would be unfair. We should by no means forget about it though and should it start causing damage to the industry in the future we should take another look at those numbers.

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