The wine industry in South Africa is not only gaining exposure and credibility internationally, but also becoming an indispensable element of the country’s export earnings. The viniculture industry, centred on the Western Cape, has been increasingly piquing the interest of investors as South African wine products gain new markets globally. There are nonetheless several challenges remaining, from labour considerations to access in the country’s most well-established markets. The local industry seems to be well set for growth: total grape harvest in 2012 rose by nearly 8% to reach 1.39m tonnes. This translated into a production level of 872.2m litres, an increase of 41m litres on 2011 levels. South Africa is now the eighth-largest global wine producer, accounting for 3.8% of global production. At the same time, however, there has been some consolidation in the sector. The area under vines has dropped from 102,146 ha in 2006 to 100,568 ha in 2011. There are now 3527 primary grape growers in the country. Nonetheless, given the prominence of the industry, it is unsurprising that foreign interest in investment in the sector has been growing. Accolade, E. & J. Gallo and Fosters Wineries, three leading global producers and wine distributers, have entered the country and now have South African wine in their portfolio.
In 2011 wine was among the country’s largest exports by value behind citrus fruits and maize, generating revenue of R5.7bn ($694.8m), according to the Department of Agriculture, Forestry and Fisheries. It has been a steady climb towards the top of the country’s export rankings. Wine exports experienced an almost unrelenting annual increase between 1996 and 2008, jumping from 99.9m litres in the former year to 407.3m litres in the latter year, according to Wines of South Africa (WOSA), a non-governmental organisation that supports the domestic wine industry. Between 1996 and 2008 red wine grew as a share of production from 18% to 44%, according to the Department of Agriculture, Forestry and Fisheries. With such growth in local supply of red wine, the domestic market moved into a condition of significant oversupply. Wine consumption per capita fell from 9 litres in 2001 to 7.03 litres in 2010, according to South Africa Wine Information and Systems. As such, producers began aggressively promoting red wines abroad. Further, with difficult economic conditions, South African consumers have been trading down and becoming more price conscious. As such, producers have once again been looking to build revenues in international markets.
Despite the residual effects of the global financial crisis still causing problems in many of the country’s traditional wine markets, 2012 was a record year for South African wines, beating the previous peak of 2008 and reaching an export volume of 415m litres up from 350.6m in 2011. As recently as six years ago, the UK accounted for 50% of South Africa’s wine exports. However, this has been changing dramatically in the last half decade. The UK accounted for 22% of exports in 2011, a share it held jointly with Germany. The next biggest export destinations are Sweden and the Netherlands.
The EU remains a critical market for South African wine. Yet according to Matome Mbatha, a marketing manager at WOSA, export destinations are changing. “There is a substantial shift in where our wines and fruits are going. We want to maintain our position in Europe and grow in the US, but in terms of demand and accessibility, we are looking at Africa, the Middle East and East Asia,” he told OBG. In regards to African markets, the promotional body is looking at Nigeria, Angola, Kenya, Uganda and Zambia. The key factors for these targets are their “political stability and economic growth”, according to Mbatha. However, in these markets there are also trade barriers, tariff and non-tariff, to be overcome for South African wines to gain a foothold. Angola, Nigeria and Kenya all have high tariff barriers, at 15%, 20% and 25%, respectively, in 2010.
However, Mbatha is confident of the potential in these markets. “One of the encouraging trends is the demand for packaged wines in emerging markets. Here it is about status and value. Angola, for example, has gone from a bulk market to a packaged market,” he said. As such, this will help to build revenue for the local industry. In traditional markets, there is a move towards bulk buying and bottling, a trend that sees potential revenue leak out of the local wine industry. Part of WOSA’s strategy is to focus on building market share for higher-value wines in emerging markets. For example, Brazil has a particularly protectionist regime, but the local market presents opportunities for South African producers. In Brazil, 80% of wine produced is entry-level wine and only 20% is fine wine, according to Mbatha. As such, South African producers may have an opportunity in this market with higher-value products.
Tariff barriers for entry into the EU and the US, two of South Africa’s main markets are not necessarily as big an obstacle as they are elsewhere. As of 2010, the highest tariff for entry into the EU for grape wines exported by South Africa was $159.91 per tonne. However, for many countries including the UK, a preferential tariff of 0% was applied to South African wine. According to the 2002 Agreement on Trade in Wine, which is applied as part of the overall Total wine exports, 2000-11 Trade, Development and Cooperation Agreement between South Africa and the EU finalised in 2000, South Africa has a duty-free quota for the EU market of 35.3m litres of wine, increasing by 6.72m litres per year between 2002 and 2011. Elsewhere, the highest US tariff imposed in 2010 on South African wine, under the terms of preferential access for Africa Growth and Opportunity Act countries, was $84 per tonne, which came to an estimated equivalent of 2.45%, according to the International Trade Centre’s Market Access Map.
However, for these traditional markets, non-tariff barriers are perhaps as crucial as payable duty and quotas. Negotiations over the Agreement on Trade in Wine with the EU was protracted and fraught, largely as a result of EU concerns over the use of name labelling that denoted a certain geographic location, such as sherry, port, ouzo or grappa. While such styles accounted for a minimal share of South African exports, the country agreed to forego the use of such names.
However, a major barrier to market entry is the EU requirement that all wine entering the union must meet the International Organisation of Vine and Wine regulations on permitted substances and technical processes used in wine making. As such, there is some dispute over what constitutes natural wine and the level of manipulation through additives that is acceptable in wine production. With another round of trade negotiations opening up between the EU and the Southern Africa Development Community (SADC), South African wine has become a thorny issue once again. At the time of writing, negotiations are ongoing for preferential access for South African wines under the terms of the new Economic Partnership Agreement being discussed between the EU and the SADC. WOSA is also hoping that local wine producers can benefit from the increasing footprint of South African retailers on the continent. Shoprite, Pick ‘n’ Pay and Woolworths, three South African retail brands, have all looked to expand within Africa, which could have a key impact on growing new markets for local producers. “We are in talks with Shoprite Checkers and Woolworths to carry our wines locally and regionally,” Mbatha said.
Furthermore, the Californian investment group, Terroir Capital, bought the Mulderbosch winery in Stellenbosch in 2010 as well as Fable Wines in September 2010. In 2012 the company brought the marketing of its new Mulderbosch brand in-house in the US in a bid to increase its presence there. “We are making a huge investment in Mulderbosch, and we want to communicate that directly to the market,” Charles Banks, the owner of Terroir Capital, told Shanken News Daily, adding that the goal is for the brand to sell 150,000 cases in the US within five years.
However, for the wine industry, the issue of labour and strikes has developed into a reputational challenge. The British newspaper, The Guardian, polled its readers on the prospect of boycotting South African wines in January 2012, with 59% in support of the idea. While raising the minimum wage for agricultural workers from R69 ($8.41) to R105 ($12.80) averted the strikes, it has placed a new cost burden on producers.