1. the local wine industry is running the
risk of producing too low volumes
over the next three years, especially
with regard to the more expensive
wines – in other words, the category that
South Africa is hoping to increase in order
to boost its reputation overseas. This is
the opinion of Hein Koegelenberg, CEO of
La Motte, near Franschhoek.
In 2014, SA wine exports reached R8bn.
Whilethis figurewas slightly higherthan the
R7.9bn produced in 2013, according to data
in the Economic Survey of SA Agriculture,
which has been adjusted by Sars and SA
Wine Industry Information and Systems
(Sawis), volumes dropped 19.6% over the
same period.
In terms of agricultural products, SA’s
wine exports are only exceeded in value by
citrus exports.
Thedrop in production volumes (see box
on page 27) is, among others, attributed to
the removal of old vineyards at a greater
rate than new stock has been planted since
2006. This goes hand in hand with little
or no growth in the producer price of wine
grapes and the waning profitability of some
of the wine farmers.
In addition, the producers’ organisation
VinPro is expecting a year-on-year increase
Hein Koegelenberg
CEO of La Motte
Images:ByJacquesClaassen
By Jacques Claassen
Australia
22%
Italy
14%
France
13%
USA
12%
SouthAfrica
10%
Spain
9%
Chile
9%
NewZealand
6%
Argentina
2%
Germany
1%
Other
2%
SOURCE:JaneRobertson
andHeinKoegelenberg
MARKET SHARE
OF THE UK
WINE MARKET
TheUKistheworld’ssecond-
largestwineimporterandthe
biggestbuyerofSAwine
Vineyards in the Cape winelands.
Right: The South African wine industry is known for the strong development of its tourism market.
UNCORKINGPOTENTIAL:SAWINEINDUSTRY
GEARINGFOR
GROWTH
cover story wine industrycover story wine industry
24 finweek 26 November 2015 www.fin24.com/finweek finweek 26 November 2015 25@finweek finweek finweekmagazine
SINCE1994, THE SOUTH AFRICAN WINE INDUSTRY
HAS GROWN ITS EXPORTS BY MORE THAN700%.
COMBINED WITH IMPROVED PRODUCTIVITY PER HECTARE,
AND THE DEVELOPMENT OF A HEALTHY ON-FARM TOURISM
INDUSTRY, THE SECTOR LOOKS POISED FOR FURTHER GROWTH.
BUT IS IT CAPITALISING ON ITS OPPORTUNITIES?

2. Koegelenberg points out that the
average price point achieved for
a bottle of wine by SA in the UK
is only
£5.37while the average price point in this
market is
£6.34.
of10% in production costs to reach a level of
R45 519/ha. According to VinPro’s figures,
the net farming income of wine farmers
who were among the top third in 2015 was
R21 063/ha or more. The smaller harvest
expected in 2016, owing to less rain, could
negatively affect wine farmers’ profitability
even further.
How about SA’s exports?
In 2013, export volumes reached a high,
thanks to favourable local production
conditions. In addition, this could be
fully exploited due to the fact that some
European countries had smaller harvests.
However, in 2014 exports once again
dropped (see table below).
Dennis Matsane, a spokesperson for
SA’s largest wine company, Distell, points
out that the slight increase in the value of
wine exports in 2014 could be ascribed to a
reduction in bulk exports of 65% in 2013 to
57% in 2014 and therefore a concommitant
increase in exports of bottled wines.
Despite the fact that the number of hectares under wine grapes reached a high in 2006 and
has since dropped, there have been real increases in yields per hectare since 2006. In fact,
in 2014 South Africa’s wine production reached a record high for the fifth consecutive year.
This was thanks to favourable climatic conditions and improved production techniques.
A further ray of hope was that sales grew by 7.2% in the local market in 2014.
According to the latest available international list of rankings (2014 figures), South
Africa fills the eighth spot after Italy, France, Spain, the US, Argentina, Chile and Australia.
To put this in perspective, it is interesting to take note of a remark by Rico Basson, VinPro’s
executive director. He points out that Australia’s wine industry is twice the size of SA’s, but
that Australia’s stock levels are four times the size of SA’s.
Apartfromtheworld’sfourbiggestwineproducers,theabovementionedrankingisavery
goodindicationofwhoSA’sbiggestcompetitorsare,namelyAustralia,ChileandArgentina.
This data does, however, indicate
two bottlenecks:
■ The value of wine exports should in fact
have been quite a bit higher in 2014 given
the rand’s continued weakening since the
middle of 2012.
■The increase in exports of bottled wines in
2014 did not quite reach the expected price
points and hoped-for margins.
Rico Basson,executivedirectorofVinPro,
points out that importers are objecting to
passonthefull benefitoftheweakening rand
to SA wine producers. According to him, the
volumes exported by local roleplayers are
simply too small compared to those of our
major competitors, with the result that they
cannot flex their muscles in all cases when it
comes to price negotiations.
Koegelenberg points out that theaverage
price point achieved for a bottle of wine by
SA in the UK is only £5.37 (R116), while the
average price point in this market is £6.34
(R138). Data on the previous page gives
an indication of the various wine-exporting
countries in the UK market. Koegelenberg
says that France, with 44%, has the biggest
share of theChinese wine market, while the
market shares of Australia, Argentina and
Chile are 15%, 8% and 8% respectively. On
the other hand, SA’s share of the Chinese
wine market is only 2%, of which La Motte’s
brands represent one third.
Expected figures for 2015
Siobhan Thompson, CEO of Wines of
South Africa (Wosa), who is responsible
for exploiting international platforms for
SA’s wine exporters, is optimistic about
the country’s performance in its targeted
growth markets, among others China,
Japan, the US, Angola, Nigeria, Kenya,
Uganda, Tanzania and Ghana in 2015.
Export volumesto thesecountries increased
bydoubledigits in most cases. However,the
EU market, to which the bulk of SA wines is
exported, remains under pressure.
The total export volumes therefore
moved sideways in 2015. Although
Thompson is hoping foryear-on-yeargrowth
of 2% to 5%, she said at the beginning of
November that this kind of growth appears
to be highly unlikely.
A healthy balance between real export
volumes and export margins will, therefore,
clearly have to be found.
Brands and price categories
De Bruyn Steenkamp, KWV’s sales and
marketing director, says that SA has to have
several good global brands overseas in order
to be more sustainable and profitable.
Nevertheless, Koegelenberg reckons
that a complete turnaround to large global
brands, as happened in Australia, is also
not the ideal answer. Australian wines
Litres As % of total Litres As % of total 2014 2013 % change
y-o-y
Natural
wines (white
and red)
173 447 470 41.81 241 427 723 58.19 414 875 193 517 404 822 -19.8%
Fortified
wine
348 954 100 - - 348 954 282 755 +23.4%
Sparkling 7 473 395 100 - - 7 473 395 7 897 380 -5.4%
Total 181 269 819 42.88 241 427 723 57.12 422 697 542 525 584 957 -19.6%
Typeofwine Packaged Bulk Total exports (number of litres)
* 2015 figures not yet available
SOURCES: Department ofagriculture,forestryand fisheries; Directorate Food Safetyand QualityAssurance
have gained a reputation for being “cheap
and cheerful”, a trend that encouraged
Australian winemakersto cometo SAto look
at our achievements with a rich diversity of
estate, single vineyard and food wines.
SA does verywell in the small categoryof
top wines at theapexofthe pyramid. In fact,
SA’s yuppie winemakers, especially those
who have made a name for themselves
with the so-called Swartland Revolution,
are still drawing attention, and foreign wine
writers regard SA as an extremely exciting
wine country. (Thanks to a new generation
of innovative winemakers, the Swartland
area has become known for unique, more
complex wines in recent years that reflect
the character of the terrior.)The dilemma
with wines at the base of the pyramid that
find their way to overseas supermarkets, is
that the quality is in fact too good for this
category, but not good enough to move up,
says Steenkamp.
Several wine exporters agree that Wosa
is concentrating on only the top category,
while SA’s value-for-money retail category
Despite a decline in the growing of wine grapes, yields per hectare increased in the
past few years due to great emphasis on modern pruning techniques and cultivation
practices. Weather conditions were also favourable.
PACKAGED VS BULK WINE EXPORTS IN 2014*
Rico Basson
Executive director of VinPro
De Bruyn Steenkamp
Sales and marketing
director at KWV
Siobhan Thompson
CEO of Wines of South Africa
1994 2006 2013 2014
% change
(1994-2014)
Total wine grape area (ha) 84 030 102 146 99 680 99 463 18.4%
Producing vineyards 4 years
and older (ha)
74 267 89 426 91 972 92 047 23.9%
Tons pressed 1 020 337 1 301 579 1 498 243 1 519 708 48.9%
Total production (million litres) 804.4 1 013 1 156.9 1 181.1 46.8%
Localsalesofnatural,fortified
andsparklingwines(millionlitres)
365.5 337.4 368,0 394.6 8%
Export of natural, fortified and
sparkling wines (million litres)
50.7 271.7 525.6 422.6 733.5%
SIZE OF SA’SWINE INDUSTRY
cover story wine industrycover story wine industry
26 finweek 26 November 2015 www.fin24.com/finweek finweek 26 November 2015 27@finweek finweek finweekmagazine

3. is left to brand owners to drive their own
foreign sales.Theyalso agreethat thewines
in the middle category are the most difficult
to market.
Profitability
In general, wine grape producers in dry-land
production areas such as Stellenbosch and
Paarl are entering a more difficult phase
than those in irrigation areas such as the
Olifants River and Orange River valleys
as well as Robertson, but this is not true
in all cases. In fact, as far as profitability is
concerned, the Breedekloof and Worcester
districts are performing better than all the
others.Yet, wine farmers who fall under the
industry’s top third come from all nine wine
districts, despite major differences in yields
per hectare.
Basson reckons the profitability of wine
producers in all of SA’s wine districts was
moreorless the same in 2004.“Thechange
that has comeabout in the meantimetells a
storyofbusiness models,management skills
and marketing channels,” he says.
Consolidation, transformation
and further growth
According to Basson, diversification
possibilities on wine farms, especially with
certain citrus varieties, which yield excellent
net farming income,should not beforgotten.
The only alternative is consolidation, also
with regard to SA’s 559 wine cellars.
Afterthe acceptance of the free-market
system and the remodelling of KWV in1997,
real attempts were made to transform the
industry, also with regard to ownership and
land tenure. In addition, the industry drew
up a strategic plan in 2001 – Vision 2020
(see box with milestones). Unfortunately,
Vision 2020 was never truly implemented.
The SA Wine Industry Strategic
Excercise (Wise) did, however, come
into being in 2014. The general aim of
Wise is to ensure an adaptable, robust,
competitive and profitable international
SA wine industry. Those who drive it
realise that such changes require an
effective management process, which
includes creative stress, courage and the
necessary leadership.
Koegelenberg proposes, among others,
the following general solutions:
■ The inclusion of new, black farmers or
shareholders in the wine industry.
■ The inclusion of trade agreements by, for
example, the South African and Chinese
governments.
■ Making a concerted effort to build a
positive image for the South African wine
industry, the establishment of brands and
growth of wine tourism.
“We must start a new Distillers with
black farmers and/or shareholders, but
it should be an industry initiative. This is
how Dr Anton Rupert helped [white] wine
farmers in the 1960s when he established
Distillers and the Bergkelder.
“The Bergkelder system applied quality
control for the first estate brands in SA,
and also organised the blending, bottling,
packaging and distribution of these wines,”
says Koegelenberg.
Furthermore, he points out that China
has exempted Australia, New Zealand and
Chile from the first 20% of its import duties
of 47% on wine, while the full 47% is levied
on SA wines.
Koegelenberg believes that the industry
should reconsider its structures, especially
as far as marketing is concerned, and that
VinPro’s function should be extended – like
Australia’s Wine Institute – to become the
fully-fledged mouthpiece of the industry.
Afterthe transformation of KWV, a vacuum
was created that has not as yet been filled.
According to Basson, Koegelenberg’s
proposalsform part ofWise’scomprehensive
planning and projects. ■
editorial@finweek.co.za
SOME
MILESTONES
IN SA’S WINE
INDUSTRY
1659 The first wine is pressed in the Cape.
1886 Allvineyardsarereplantedafterthe
outbreakofPhylloxeravastatrix.
1918 The establishment of KWV to
stabilise the industry after large-scale
overproduction in the 1800s.
1922 Alto is established as a brand.
1925 Professor AI Perold cultivates the
truly South African cultivar, Pinotage.
1932 Chateau Libertas established as a
brand.
1957 Large-scale extensions of Chenin
blanc vineyards after a breakthrough with
cold fermentation.
1960 The production of 29m litres of
Lieberstein made it the biggest single
brand in the world.
1971 The establishment of the
Stellenbosch Wine Route – the precursor
to about 10 similar routes, as well as the
establishment of top restaurants and
accommodation on wine farms.
1973 Acceptance of SA’s leading Wine of
Origin legislation.
1975 The first Nederburg wine auction
helps SA in the sanctions era to showcase
the quality of its wines to foreigners.
1990 The lifting of sanctions against SA
after the release of Nelson Mandela.
1997 The government transforms KWV
into a company.
1999 The establishment of the marketing
body Wines of South
Africa (Wosa).
2001 The industry’s Vision 2020 report is
completed.
2003 VinPro is established (changed into
a company in 2008).
2008 Abrie Beeslaar of Kanonkop wins
the International Winemaker of the Year
award, which was also achieved by Günter
Brözel (1985), Beyers Truter (1991) and
Altus le Roux (2001).
Apart from consolidation,
which seems inevitable, the
SA wine industry will require
extensions to new vineyards
as well as the establishment
of stronger brands and more
efficient marketing. The
industry regularly attracts
local and foreign investors,
who buy farms and show
confidence in SA’s terroir,
infrastructure and talent. This
includes, for example, Indian
billionaire Analijt Singh's
R80m investment in three
wine farms in Franschhoek in
2013. For retail investors who
want exposure to the wine
industry, the options are JSE-
listed liquor company Distell,
and KWV, which is regarded
by Drinks International as one
of the most admired global
brands, KWV shares trade in
the over-the-counter market,
or indirect exposure can be
gained through investing
in its majority shareholder
Niveus Investments, which
is listed on the JSE. Niveus
was partially unbundled from
empowerment investment
group HCI in 2012.
INVESTING IN THE
INDUSTRY
“We must start a
new Distillers with
black farmers and/
or shareholders, but it
should be an industry
initiative. This is how
Dr Anton Rupert helped
[white] wine farmers
in the 1960s when he
established Distillers and
the Bergkelder.”KWV’s head office in Paarl
BREAKDOWN OF SHELF PRICE AT
R32.99 PER 750ML BOTTLE
17%Bottling & packaging
(R5.55)
22%Retail margin (R7.31)
19%Excise & VAT (R6.29)
27%Trading terms,
distribution, sales and
marketing cost, levies,
storage & interest
(R8.78)
Producer production
cost (R2.34)
Net Farm Income (NFI)
– Producer (R0.53)
7%
7%
2%
Wine
manufacturing
cost (R2.19)
SOURCE: VinPro
The SA wine industry
provides 290 000 people
with jobs. In this image
Wongalakhe Ngcenge is
taking a sample of a load
of Cabernet Sauvignon
grapes to register the
grade Brix (the sugar level)
before the load can be
delivered to a cellar.
cover story wine industrycover story wine industry
28 finweek 26 November 2015 www.fin24.com/finweek finweek 26 November 2015 29@finweek finweek finweekmagazine