Opinionista Michael Fridjhon 9 June 2014

Old Mutual Trophy Wine Show 2014: Top winning wine prices – subsidising consumers

Anyone who flies through the OR Tambo domestic terminal on a regular basis will have noted that the passenger-queuing arrangement has been changed. In the past it was possible to duck between the barricades if there was no one in the queue ahead of you. In fact, on the rare occasions when the security staff were actually alert and interested in being helpful, they could arrange a bypass so you could pretty much go directly to the scanning counter, as you still can, as far as I know, in the International terminal and at Cape Town.

Now (and at what cannot have been an insignificant cost) all this stainless steel barricading has been replaced with an utterly inflexible, passenger-unfriendly queue management system reminiscent of the set-up used to drive a herd of cattle to the dip (or probably the abattoir). You have to ask yourself why this was so important to someone in a decision-making position that, firstly, the money was invested and, secondly, the interests of passengers so clearly disregarded. Was it that the one half of the security area was accessible to the other (so if the queue was shorter on the one side you could nip across)? Was it bureaucratic intolerance of passengers ducking under the barricades and taking the shortest route to the scanner when the holding area was empty? Was it that orderliness is always more important than user-friendliness? If any or all of the above, why has the international section in Johannesburg, as well as Cape Town, been allowed to retain the old system? Is that a silly question – that a makeover at one or both of these places is imminent?

It’s difficult to imagine a less successful business model than a state-owned entity which enjoys a monopoly. The dual inefficiencies of bureaucracy and non-accountability come together in an environment which has no incentive at all to be responsive to its operating environment. Untrammelled power breeds little fascists with near-infinite resources at their disposal and no pressure at all to spend money wisely. It is in circumstances such as these that projects like the Gautrain achieve a 10 times initial budget cost over-run (from R3.5b to R35b) while failing to operate (at least for airport commuters) in the most important travel time slots of the day.

This is no less than you would expect of a government dominated by ideological non-capitalists (which doesn’t mean that most of the individuals are averse to a little profiteering for their own account). Empire-building and power games become the key focus of activity, rather than service and delivery. Salary bills rise because empires beget colonies which in turn beget outposts. Suddenly there’s no money for the actual job. The Johannesburg Road Agency has so many employees (it seems) that there’s one team to dig up the roads and another (which doesn’t seem to be aware of its place in the greater scheme of things) to close up and resurface; one to fix traffic lights knocked over by inconsiderate or inebriated motorists, and another to remove the damaged pole. There isn’t the money to fix the potholes or re-surface the roads.

This is not a model which anyone investing his/her own money would ever consider applying – or so you would think. However, a quick look at the top end of the South African wine industry presents a pretty close rival. Here you have the owners of trophy estates, those who have made their fortunes from being creative and astute capitalists. They have generally banked enough loot to treat their farms as incidental indulgences, rather than business units, and they would be the first to acknowledge that return on ego (to use GT Ferreira’s oft-quoted phrase) is more important than return on equity. They can – if they so wish – defend this logic by pointing out that the capital value of their properties typically escalates ahead of the costs curve. They can also argue that it’s a bit like a gracious country house – a home and an asset rather than a business.

Of course, like the state-funded SAA/Mango duo compared with Comair, they operate outside the ordinary laws of the economy and skew the arithmetic for the mere mortals battling to make a living from a more lived-in home and farm. They do not have to take account of the real costs of being in business. Accordingly they do not have to burden their product with a price structure which is aimed at ensuring a return on their overheads or their investment. In this they are not entirely alone. Those who have inherited estates can also disregard the cost of capital.

To see the effect of this disconnect from economic reality you need look no further than the latest crop of the country’s top rated wines, the laureates of the Old Mutual Trophy Wine Show 2014 (of which I was show chairman). Six of the 16 class winning wines at the competition retail for under R100, 8 for between R100 and R200 and only 2 for more than that. The show’s highest ranked white wine sells for under R80, its top red for R170. Only the Steenberg Magna Carta has been priced way out of line at R490 per bottle, a function as much of the marketing department’s understanding of how to position the wine as it is a statement of quality.

If you want to farm a quality vineyard in an economically sustainable way, you need to earn R6k – R8k per ton and harvest 6 – 8 tons per hectare. If your estate is in Stellenbosch, where property prices are high, you should add R10k per ton to account for the value of the land. That means a juice cost of around R25 per litre. In the case of the Mulderbosch Chardonnay (the show’s best white wine) you would need to factor in R15+ per litre for the barrel maturation – and this is a wine with only a light oaking. So far you’re at R40 per litre which is R30 per bottle, before finance and dry goods/packaging costs (add another R10). Then there’s distribution/wholesale (add R20) and you’re at R60 before you’ve allocated any profit margin for your effort and your risk. If your wine is on the retailer’s shelf at R76-50 (the Mulderbosch price at Makro) the one certainty in this equation is that you are subsidising your consumers.

What this tells us is that South Africa’s fine wine producers are constrained from actually making a real profit by the inertia of a business model which has been in place for some time. In the light of this the old joke about how to make a small fortune in the wine business (“start out with a large one”) is anything but funny. But at least the stupidity/insanity of winery owners benefits their customers. That makes the situation a far cry from what prevails in state-run monopolies, where the cupidity and incompetence of the fonctionnaire monopolists benefits a cosy coterie of contractors and colleagues at the expense of their customers. DM