Opinionista Michael Fridjhon 30 July 2013

An incredibly long tail…

What do South Africa's gold miners have in common with the country's wine producers? The answer is that neither are making money at present, and mostly when they do, they recover only on running costs, and not on capital investment.

For those in the know, this is as much news as President Clinton’s predilection for dark-haired interns. But while the gold industry can hope for a higher gold price, and dream of less acrimonious negotiations with the unions, the Cape’s wine producers don’t have the luxury of deep pockets and institutional shareholders. It seems they depend on a crypt full of saints to keep them out of the clutches of the banks.

The fact that there are so few bankruptcies and liquidations in the winelands is as much evidence of miraculous intervention as anything which has persuaded the Roman Curia to contemplate beatification. Since the Rand’s last great trough in 2002 the Rand revenue of wine exports has declined while the impact of domestic and imported inflation has eroded nominal profit margins. The arithmetic is simple and inescapable. In 2002 the average price of a bottle of SA Wine in the UK – our major export market – was about ?4-00, yielding about ?1-30 for the producer. At an exchange rate of R19-00 to ?1-00 this meant R25-00 for every bottle sold abroad. Ten years later the average price of a bottle of SA wine in the UK was ?4.25, of which producers only received about ?0-95 or R12-50. In the meantime input costs had more or less doubled. You don’t need to be a C.A. to work out what this means in terms of general wine industry viability.

While off-shore trades aren’t everything, they do represent about 50% of the industry’s sales. If they’re worth about 25% of their 2002 value in real terms, then either producers were earning obscene amounts of money 10 years ago, or exports are a non-essential component in the mix – or both. There’s no doubt that before domestic inflation eroded margins and the Rand was weak, exporters made very good money. At current rates, however, the best that can be said is that bulk wine is at least leaving the system at a more or less break-even price. This in turn means that producers can nudge up their domestic prices without a massive stock overhang in the market. In this they are much luckier than their Australian counterparts, whose tungsten-plated currency affords them no relief.

But producers still have to sell their wines here profitably and this is where the Curia should be focusing its attention. Exports may provide a cost effective way of managing domestic market pricing but they don’t get goods to consumers. Twenty years ago there were fewer than 200 production cellars in South Africa. Today there are over 700 – and some 8,000 different labels (SKUs) available for sale. Anyone who buys the annual Platter Guide on a regular basis will know that in that time it’s gone from being a pocket-sized book to a reasonably dangerous brick – a function of the literally thousands of new wines which have flooded the market.

However, evidence of this same growth in brands is not to be found on the retailer’s shelves. The trade is dominated by a half a dozen chains and multiples – Makro, Ultra, Picardi, Tops, Checkers and Pick & Pay. Even the most sumptuously laid out of any of these operations is unlikely to stock more than 1,800 SKUs, and most have less than 1,000. A high percentage of what is on the shelf has some brand value – in other words, to a lesser or greater extent the average supermarket selection is made up of known value items (KVIs). It’s a fair assumption that there’s a substantial overlap in the listings of all the major players. This means that combining the KVIs as well as the more exotic offerings it would be hard to get to a total on-shelf number of more than 3,000 SKUs – a number confirmed by adding together the total number of wines carried by the various trade distributors.

So here is where we get to the real evidence of miraculous intervention in the wine industry: how are the other 5,000 labels being sold? There can be no doubt that they are finding a market: except for the occasional cellar shutdown and even more occasional insolvency, it’s business as usual in the Cape winelands.

Internet sales account for some of the trade, but even the biggest online vendor – Cybercellar – doesn’t handle anything like this volume and – amazingly – deals mainly in KVIs. Cellar-door sales also help, so does the so-called mail-and-rail. There’s a theory that many of the new start-ups have their own networks, friends of friends of the owner, but there’s only so much wine you can move at the wine industry equivalent of a tupperware party.

There’s no easy, credible and all-embracing answer to the question. The wine industry has an incredibly long tail, and despite years of recession and declining bottled wine exports, it doesn’t get any shorter. Instead, like Topsy, it grows and grows. Most producers seem to keep on surviving. Come summer they have grapes on their vines and space in their cellars to crush and age the new vintage. The pipeline doesn’t appear to need a state-funded roto-rooter (a not inaccurate description of what the KWV used to do up to the end of the 1990s) to push out any blockages. Forget about Mother Teresa and Lucia Santos: if you’re looking for evidence of divine intervention in the affairs of men, you need go no further than the incredibly long tail of the Cape wine industry. DM


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