The Squeaky barrel - Vol. 6 - Black Elephant Vintners

The Squeaky barrel – Vol. 6

11 March 2024

Vol. 6 – WOSA CEO Q1 Update
Transparency is crucial to promote progress and understanding in the world. At our end, we strive to achieve the same in the wine industry.Below is the latest report from the CEO of Wine of South Africa (WOSA). It provides valuable insights into the challenges and opportunities we face globally and locally in our industry.It is lengthy but touches on most of what we have focussed on now.Enjoy.

WoSA CEO Newsletter – Q1 2024
There’s been a lot said and written about the woes facing the South African wine industry. Trading is tough, no question about it. And the situation is compounded by port incapacity and congestion. As if that’s not enough, the unpredictable weather is putting pressure on harvesting schedules.  But we cannot afford defeat. Quite literally. Hand wringing isn’t going to help us. If anything, it obscures the attention we should be giving to what is going right.  We must play to our strengths: our well-designed eco and social codes of conduct; our resilience in adapting to climate change; our resourcefulness in responding to structural changes in the global wine market; our imaginative winemaking and the value gains we are steadily and consistently attaining in some key markets.  

Reading between the lines
By now you will know the top-line details of South Africa’s export performance in 2023, reflecting a year-on-year decline of 11% (in US$) in value and 17% in volume.  The situation is certainly not unique to South Africa. Most major wine-producing countries have had to weather their own export slumps. Setting aside the anomalies in purchasing patterns prompted by Covid (when sales spiked for a while), the general decline is not a new phenomenon.  The US, the world’s biggest wine consumption market, saw a volume drop of 3% last year. This was its third consecutive annual decline. Chinese wine consumption peaked in 2012 and has been falling since 2017 (well before the punitive tariffs were imposed on Australia). By 2022 the market had fallen to one third of its peak. The UK wine market is also in decline, as is the case in so many European markets.
The analysts attribute the global contraction to several developments impacting consumers. Chief amongst them is high inflation (exacerbated by geo-political tensions) but declining disposable incomes; the rising impact of the anti-alcohol lobby; growing abstention amongst younger adult consumers, and a move towards moderation in alcohol consumption*; as well as the trend towards greater drinking versatility. (Consumers drink across the spectrum of alcoholic beverage categories, so that wine is now competing with spirits, hard seltzers, ready-to-drink options, cocktails et al.) And while all this is going on, the trade is having to manage its own slow-moving inventory and find ways to avoid tying up cash in stock. That means less buying.   

Drinking less but better
What is also becoming clearer is that consumers who are drinking wine, are drinking less but better. That has important implications for us. Without wanting to be unduly optimistic, we can see the way our higher-priced wines are benefitting. In the UK, our biggest export market but also a shrinking one, South African wine still managed to deliver a 4% (US$) growth in value in 2023. The average per litre price of packaged wine grew 12%, with bulk rising by 9%. * According to IWSR data, 64% of consumers across the top 10 markets are now claiming to be moderating their alcohol consumption.  
While South Africa did see volume declines in many markets last year, we are encouraged by the clear upward trend in per litre prices (US$) achieved, notably in our packaged wines. This proved to be the case in the US (+7%) in China, (+15%); Germany; (+10%); and The Netherlands (+9%). The premiumisation in all these markets points to our moving in the right direction, both in terms of profitability and reputation. 

Context
We also cannot always look at the export data in isolation. If you looked at our country-by- country performance, you would have noticed that exports to Belgium showed exceptional value and volume growth in 2023. Yet, at the same time there was a significant drop in bulk wine exports to The Netherlands. As there is virtually no more bulk bottling happening in The Netherlands, we are assuming that the bulk wine intended for this market is now being bottled in Belgium before making its way to other markets. The 8,4% increase in excise taxes imposed this year in The Netherlands on still and sparkling wines may complicate the issue further for this market. The Royal Association of Dutch Wine Merchants (KVNW) thinks shoppers may cross over into bordering nations such as France or Germany, to avoid the tax. 

Structural changes
There are undoubtedly significant structural changes occurring within the global wine sector. Lower-priced, budget and mass-market wines are proving the most vulnerable to changing consumer preferences. As it confronts this new reality, California is being urged to uproot 12 000 vineyard ha, while some are calling for growers in Washington state to cull over 4 000 ha. In France, Gérard Bancillon, President of the Association of Wines with a Protected Geographical Indication (IGP), is calling for 100 000 ha to go. You will have read about French farmers, wine growers amongst them, who have taken to the streets in protest, demanding Government financial aid. Spain is also experiencing protests, Recently, in Riverland, Australian wine farmers took to their tractors to protest the unsustainably low prices paid for their grapes, owing to low demand. In some cases, they’ve been paid as little as a third of their production costs by grape buyers.  That doesn’t make ingesting the news of our own industry any more palatable, I know. Recent research shows that in 2022, a mere 12% of South African wine farmers were profitable, down from 20% in 2018.  The message is clear. Trading at the bottom of the market is not working. Not for South Africa. Not elsewhere.  But some changes occurring in the global market are working in our favour. The increasing global shift away from reds to whites suits our national vineyard composition that is 55% planted to whites.  Felicity Carter, writing for Meininger’s International noted recently that a report on the global white wine market by Fact.MR, found sales of white wine increased globally by nearly 5% to the end of 2022, to a total value of US$39bn. It expects the market to keep on expanding, to reach around US$67bn by the end of 2033. In the UK, white wines have become the alcoholic beverage of choice. At the same time, white wines accounted for 35% of China’s total wine imports last year with our whites and all our bubblies showing excellent double-digit value growth in that market.  In all our key markets we’re capitalising on the trend. In Sweden, our exports remained stable despite the country’s contraction in wine sales. This was thanks largely to our white and sparkling offerings. And we remain the best-performing non-European producing country.   Whites are also our strong suit in Canada, notably in Quebec.  The demand for fresh, lighter-bodied wines isn’t just benefitting our varietal and blended whites, our sparkling and Cap Classique wines. It’s also proving an advantage for so many of our reds from Pinot Noir to Cinsau(l)t and Grenache, as well as the Mediterranean-style blends. As we showcase more of our lighter-bodied wines at ProWein next month and on other international platforms, we are confident of further gains. 

Tourism
We know from news reports that around 317 000 two-way international passengers travelled through the Cape Town International Airport’s international terminal last December. This is the highest monthly total ever recorded and it brought an estimated R1.9bn in foreign direct tourism spend to the Western Cape that month. More good news from a SAWIS-commissioned study reflects growth in wine tourism’s economic impact. Comparing 2022 with 2019 (before Covid), it showed that wine tourism directly contributed R3bn to national GDP in 2022 (2019: R2,4bn), while the direct, indirect and induced contribution to GDP reached R9,3bn (R7,2bn). In addition, the direct, indirect and induced impact on employment was a 10% job increase from 2019 to 2022. As Claire Bisseker pointed out in the Financial Mail: “The wine industry is also contributing more to GDP and the country’s tax revenue than ever before.” She also highlighted how “the wine industry’s multipliers and efficiency ratios outshine those of the average domestic industry, making it an attractive sector for stimulating economic growth. “For instance, for every R1m of sales revenue in the wine industry, R1,57m of value is added to national GDP and 7,5 formal and informal jobs are supported, surpassing the national all-industry multipliers of 1,3 for GDP and 6,58 for employment.” These developments are good for both the country and for wine branding. Judging by the record number of international visits over the current summer season, we should see the economic impact of wine tourism strengthening even more. If the Cape Winelands Airport starts handling international traffic from 2027, as is anticipated, we have even more reason to be optimistic. International visitors are mostly from the UK, USA, Germany, The Netherlands and Eastern and Central Africa. WOSA is active in all these regions. 

New opportunities in Canada?
From 2026, Ontarians will be able to purchase beer, wine, cider and seltzers at convenience stores, big-box outlets, some gas stations, and more supermarkets instead from LCBO exclusively. This will be the Canadian state’s largest expansion of consumer choice and convenience since Prohibition’s end in 1927. The liberalisation means there will be up to 8 500 new stores where alcohol products can be purchased. Something for producers in that market to consider. 

ProWein
Next month at ProWein in Dusseldorf, we shall most definitely play to our strengths. South Africa is the world’s biggest producer of Fairtrade-accredited wines and this year we plan to emphasise the point. We’ll be introducing the many thousands of delegates to fresh, finessed wines across the spectrum of red, white, rosé and sparkling wines in traditional (but lower weight) bottles and new packaging formats. There will be lower-alcohol wines to try. Wines from established and new regions featuring mainstream and lesser-known, more climate-resilient varieties.All in all, we’ll show how resourceful and adaptable we are while respecting the land and the people who work it. Or, to put it the way Simon Woolf did in his blog, The Morning Claret. Paraphrasing economist and activist Jeremy Rifkin, he wrote: “Resilience means working in harmony with nature, rewilding, reusing, trying to get our heads around the fact that the earth will always win. And that we might just be a temporary fixture.” 

Siobhan Thompson
WoSA Chief Executive Officer

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