The real extent of the impact of the Credit Crunch not known to SA wineries yet

“Some South African wineries are already feeling the impact of the global and local economic downturns” says Frans Weilbach, Wine Industry Specialist Partner at PricewaterhouseCoopers in Stellenbosch.

“But in many cases, the real extent thereof will only be known in the long run due to the longer turnover cycle of wine compared to other products.”

Weilbach makes  these observations in the release of the sixth PwC benchmarking survey of the South African Wine Industry, covering the 2008 wine-grape harvest for the industry’s producer cellars component (being those cellars that traditionally process grapes from a certain group of producers into wine and market it).

The survey shows that the percentage of red wine produced stabilised over the past number of seasons, and for 2008, it was again recorded at 34% of the total harvest. This presumably brings an end to the rapid increase since the early 2000’s, which was the result of the relatively high demand and prices paid for red wine, as well as the accompanying increased planting of red vines during those years. The average price that producer cellars realised for red wines decreased from more than R7 per litre in 2003, to below R5 per litre in 2007, with a marginal increase during 2008.

On the other hand, the prices realised for white wines showed a steady increase over the past number of years. Together with the higher yield per hectare recorded for white wines; some white varieties seem to regain their earlier popularity. Taking into consideration the continued pressure on profit margins of wine cellars, Weilbach says that cellars must in addition to cost management, continue to focus on and balance key performance drivers like yield per hectare and quality in order to optimise sustained profitability.

In general, production cost increases were in line with inflation, whilst interest rate hikes added further pressure on the bottom line for most producer cellars. Decreases in the cost of finance and further expected reductions, should bring some relief in the ensuing season.

Looking at the total 2008 South African wine grape harvest, more than 1.4 million tons of grapes were pressed, producing just over 1 billion litres of product. The participating producer cellars processed nearly 80% of their harvest into drinking wine (compared to about 66% in 2004). This seems to be the right trend for sustainability in the long-term, but should always be weighed against possible cash flow advantages of other products.

With the expected downturn in consumer spending, it seems that wine cellars continue to sell more wine in a bulk, rather than in a packaged format. Although this may be the safer option on the short term, wineries should consider the long term feasibility of this strategy.

Weilbach says that apart from the economic environment, the regulatory environment continues to challenge role players in the local industry and recent changes include the new Companies Act (anticipated effective date 1 July 2010), the Cooperatives Act (effective May 2007), legislation and practice codes on Broad Based Black Economic Empowerment (BBBEE), various changes in tax legislation, and the draft King III report on Corporate Governance.  Wine cellars should consider the new provisions, not only to ensure compliance, but also to make the most of potential opportunities.

Participants in the PwC survey are a combination of producer cellars from all the officially-demarcated wine regions in South Africa. Weilbach says the high rate of annual participation of cellars in this survey makes the results both highly representative and applicable. “Pressure on the local as well as the international wine industry makes it increasingly important for South African enterprises to measure themselves against their peers and to keep abreast of industry trends. And the current global economic downturn requires an even greater focus on competitiveness.”