THE wine industry - already suffering from a fragmented and competitive environment – can brace itself for further squeezes in the foreseeable future.

A recent wine industry survey by well known consulting firm PricewaterhouseCoopers came to the rather distressing conclusion that: “considering the effect of current economic pressures such as rising inflation, interest rates and fuel prices on consumer spending, producer cellars can expect margins to remain under pressure in the near future”.

This is the fifth (PwC) benchmarking survey of the SA wine industry, covering the 2007 wine-grape harvest for the industry’s producer cellar component. The participants in the survey are a combination of producer cellars from all the officially demarcated wine regions in South Africa.

PwC said producer cellars (which are mainly based in the Western Cape) handle approximately 80% of the total SA wine-grape harvest.

The survey confirmed a notable upward trend in the red cultivar production from 19% of the total tonnes harvested in 2003 to 34% in 2007. However, PwC reckoned the effect of the decreasing red wine prices are beginning to show and new plantings of these varieties are expected to stabilise in the near future. The average price that producer cellars realised for red wines decreased from more than R7 per litre in 2003 to below R5 in 2007, compared to a marginal increase in the prices for white wines over this period.

Although the cellars saw an increase in their average prices since 2003, this growth was less than inflation and also overshadowed by dramatic increases in input costs. (Also see article on page 10 ‘Wine exports soar’).

The amounts paid to the primary producers for their grapes followed the same trend. On average wine producers were earning less for their grapes at R1 623 per ton in 2007 compared to R1 697 per ton in 2003.

But the primary producers saw a marginal increase in their earnings per hectare from 2006 to 2007 - primarily the result of a better tonnage yield per hectare. The average earnings are however still only marginally higher than the estimated costs.

Frans Weilbach, a specialist partner at PwC’s Stellenbosch branch, said a high rate of annual participation of cellars in the survey made the results both highly representative and relevant.

He argued: “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, ensuring they remain relevant and competitive, and to keep abreast of industry trends.”

Weilbach said that in order to increase profitability under these circumstances, producer cellars would not only need to manage their costs better but also need to understand and optimise the drivers underlying to costs and income. He explained the advantage of this was evident in the positive effect that the increase in tonnage yield per hectare had on profitability on the farm. “It will, however, require balancing optimal quality and optimal yield in the future.”

Interestingly, the survey results were released only weeks before year to end June results from Distell (which incorporates the old Stellenbosch farmers’ Winery business) were published.

Distell – which is considered an astute marketer of liquor brands products – reported “profitable” volume growth of only 2% in the local wine market – which the company described as “fragmented” and “price-competitive”.

Distell MD Jan Scannell noted that in a climate of declining disposable income, it would be the strongest brands, supported by investment in infrastructure, marketing and service levels that would prevail.

At the time of going to press, results from KWV Limited were due for release. The Paarl-based wine and brandy group had already warned shareholders of a substantial jump in earnings for the year to end June – which presumably will be attributable to cost cutting initiatives and gains in the brandy portfolio rather than volume growth in lower margin wine sales. The PwC survey disclosed that profitability and margins as indicated by the survey respondents’ was one of the major factors affecting their businesses along with competition and branding and regulation.

Weilbach said although survey participants indicated that branding was the aspect they admire most in their competitors, the results indicate that the producer cellars still market the majority of their wines in bulk - having risen from an already high 83% in 2003 to the current level of 92%.

“This leaves them vulnerable for wine buyers and supermarkets that control the market.”

With regards to competition and branding, Weilbach said the wine industry continues to be dominated by a few large players.

He said these players reap the benefits of economies of scale and strong brand names. “Producer cellars should identify synergies and consider the use of partnerships and joint ventures for functions like marketing and administration. They should also investigate the potential benefits of vertical integration.”

Weilbach said the participants found themselves in an ever changing regulatory environment – including the new Co-operatives Act, a revised Companies Act and Black Economic Empower-ment (BEE).

He added that transformation of the wine industry had continued over the past five years with all participants now focussed on a BEE plan.

The PwC survey revealed that almost a quarter (24%) of participants has already implemented a BEE plan, while the balance busy with the process of formulation and implementation.