The Wine Industry of South Africa. A Sector Report

Table of contents

I Introduction: An old country with a new face
I.1 Republic of South Africa
I.2 History of the South African wine industry

II Situation Analysis: Wine is booming, just as South Africa
II.1 Global wine market situation
II.2 South African wine market situation
II.3 Domestic production and international competition

III Marketing mix: It’s not all about price anymore
III.1 Product
III.2 Price
III.3 Place
III.4 Promotion

IV SWOT analysis of the South African wine industry
IV.1 Strengths
IV.2 Weaknesses
IV.3 Opportunities
IV.4 Threats

V INFORMATION and advice for foreign investors

VI Conclusion: To cut a long story short

VII BIBliography

I Introduction: An old country with a new face

I.1 Republic of South Africa

South Africa, officially known as the Republic of South Africa, lies at the Southern tip of the African continent.

It has a surface of 1 221 037 m² and borders on Namibia, Botswana, Zimbabwe, Mozambique and Swaziland in the North as well as on Lesotho in its interior.¹ The Atlantic Ocean lies at the Western coast whereas the Indian Ocean lies at Eastern one.

The total population of South Africa amounts to 46.4 mn inhabitants.²

Approx. 75% of them are Black-Africans, another 15% are whites, the balance are Colored (either of Asian origin or half-caste). Afrikaans and English are two official languages of the very secular country.³

South Africa’s capital city is Pretoria with 526 000 inhabitants, located in the Northeast of the country, quite near to Johannesburg.

South Africa’s biggest city is Cape Town (855 000 inhabitants), followed by Durban (716 000) and Johannesburg (713 000).⁴

South Africa is a federal republic that is currently reigned by President Thabo Mbeki. But the most famous person in South African history is the former president, Nelson Mandela.

South Africa’s colonial past begins with the invasion of the Dutch in 1652. In 1795, British troops occupied the country and declared it a crown colony. From 1948 onwards, the black population had to face Apartheid (strict racial segregation) and formed resistance by founding the African National Congress party (ANC). One of the main activists, Nelson Mandela, was kept in prison for 27 years and released in 1990, following an instruction of the prime minister at the time, Frederik Willem de Klerk. It was also these two men, who fought for a democratic South Africa in the following and awarded the Nobel Peace Prize in 1993. Since 1996, there has been a new a constitution, guaranteeing equal rights to everybody, which is still valid today.⁵

The climate in South Africa is subtropical and, for the most part, semi-arid and maritime. The Western Cape region is also an area with winter rain, which is very helpful for vine-growing. The temperatures vary between 22° in January and 11° in July.⁶ Along the Cape of Good Hope runs the “Gulf Stream” which brings cold maritime currents to Western Cape region. Together with the high mountains in these areas, a mild climate, ideal to viticulture, is composed. Warm summers and mild winters result in ideal conditions for this emerging industry sector.⁷

Its economy is mainly based both on agriculture, i.e. corn, fruits, sugar cane, wine and cattle, and on mineral resources like gold, coal, iron ore, diamonds, platinum and antimony. There is only little industry, chiefly machinery, chemical products, oil and coal products, foodstuffs, iron and steel as well as paper.⁸ However, the services sector has been the most important one in the last years.

Main trading partners are Germany, the United States, the United Kingdom, Switzerland, Japan, and China.

Main export goods are gold and other noble metals, precious and semi-precious stones and chemical industry products, whereas main import goods are transport machines and vehicles, petroleum products, electronic products and foodstuffs.⁹

The currency of South Africa is the Rand, currently standing at about 8.175 R/€.

I.2 History of the South African wine industry

Although South Africa was not very famous for its beverages, esp. its wines, for long times and has gained fame in recent years only, the heritage of its vine-growing culture goes back to the mid of the 17th century.

European settlers, predominantly from The Netherlands, started to plant first seedlings in the Cape region.

It was Jan van Riebeeck, founder of the Cape colony, who brought the seedlings along from Europe in 1655. Some four years later, the first South African wine was ready to be drunk.¹⁰

However, as the Dutch were not too experienced with viticulture, real development took place only when French Huguenots settled in that region in the end of the 17th century.¹¹

In the mid of the 18th and the beginning of the 19th century, these wines (e.g. the very sweet Constantia wines) were very popular all around Europe, particularly in the royal houses.¹² But afterwards, the demand shrank to nearly zero. In 1973, viticulture was resumed in the African country. However, the wines were boycotted by the rest of the world due to the Apartheid problems within the country.¹³

Only from 1990 onwards, South African wine industry is recovering and nowadays belongs to the so-called “New World wines”, which also include products from Chile, Argentina, Australia, New Zealand and the United States (California).

II Situation Analysis: Wine is booming, just as South Africa

II.1 Global wine market situation

In 2002 and 2003, the total wine production of the whole world lay below average at estimated 26 bn litres¹⁴ (1997: 25 bn litres; 1999: 28.1 bn litres; 2000: 28.0 bn litres; 2003: 27 bn litres)¹⁵,¹⁶. The global total wine consumption amounted to 22.9 bn litres in 2003¹⁷,¹⁸ (1996: 5.711 mn gallons, synonymic with 21.616 bn litres; 1999: 5.822 mn gallons, tantamount to 22.036 bn litres).¹⁹

The global sales lay at 25.42 bn litres in 2001 and the global per capita consumption at 4.2 litres.²⁰,²¹

The main force in wine-producing and consuming region in the world remains Western Europe; mainly supplying their own domestic markets, yet, also exporting primarily to Western Europe and North America, regions which are home to the most developed wine cultures.²²

Italy leads global wine consumption (14% of global sales went to Italy) and France is considered to be and remain the most valuable world market for wine products (14% of world value sales).

High sales figures occur in Germany, the United States, China, Great Britain and Japan as well. Among these, China is the most important one as it shows the highest growth rates.²³ However, currently the United Kingdom, and partly also The Netherlands, form the major market for so-called “New World wines” from Argentina, Chile, Australia and, of course, South Africa as well. This is accompanied by an increasing sophistication on the British wine market.²⁴

Moreover, the new demand in India is predominantly driven by the wines from Australia and South Africa as well.²⁵

Generally, it can be recorded that wine consumption is highest in the wine-producing countries. National tastes, the status of the wine culture and its position in the country’s culture and life-style are decisive to wine’s general performance in a country. Indeed, the most developed wine cultures of the world can be found in Europe.²⁶ Even in the traditionally more beer-drinking countries of Northern Europe, wine is still on the advance.²⁷

Another important issue in the industry is the growing correlation between wine and tourism. Traditionally applying to Western European countries like France and Spain, this is more and more becoming a topic in “New World wine” countries like Australia, alongside Chile, Argentina, New Zealand and South Africa.²⁸

II.2 South African wine market situation

Currently, South Africa is the 7th biggest wine producer of the world with 956 mn hectolitres in 2003 with a growth rate of 14.61% compared to the year before.²⁹,³⁰ Other figures tell about position no. 10 in the world wine production with a share of 2.5%.³¹ In contrast with the production volume, the producers’ income grew by even 24.37% to a record R 2.597 bn.³² And the peak still hasn’t been achieved so far, as many industry surveys foresee.

The consumption in the Cape Republic lay at about 348.7 mn litres in 2003, representing an increase of 10.02% compared to 2002.³³ With these figures, South Africa commutes from 12th to 20th place among all wine-consuming countries all over the world. Within the past 30 years, the per capita consumption figure nearly quadrupled to 9.2 l in 2004 (rank no. 30 in the world).³⁴

Domestic sales shrank by 9.65% to 366.7 mn litres in 2003. At the time, wine had a market share of approx. 12.3% among all alcoholic beverages sold in South Africa.

In 2002, this figure lay at 14.0%. These two figures seem negative at first sight. But they explain the recent shift towards export business in the industry. Thus, the domestic market is not supplied to full saturation but provided with 46mn litres of imported wines, esp. from Mediterranean Europe.³⁵

After Apartheid boycott times with a yearly export volume of 51 mn litres, the number quintupled to 235 mn litres.³⁶ Even Chile with its early and very successful wine exports history has been shaken off.³⁷ Main export destinations of Cape wine are Great Britain (44.4 mn litres in 2000), The Netherlands (19.4 mn l), the Scandinavian countries (9.3 mn l), Germany (7.8 mn l) and the US (2.1 mn l). Other emerging markets are China, Japan and India. A grand total of 140.8 mn litres of the Cape wine have been exported in the mentioned year. Two years later, 239.5 mn litres have been exported to various destinations all around the world, accounting to an increase of 10.02%.³⁸ In 2004, that position showed even 266.5 mn litres.³⁹ Exports is becoming a more and more important task in South African wine industry as the export rate lay at 25.8% in 2000⁴⁰ and at 33.6% 3 years later.⁴¹

The vine-growing areas can all be found in Western South Africa, mainly along the coast and at the Cape of Good Hope. The sum of all areas amounts to 110 200 ha. The most famous and oldest vineyard is Stellenbosch, located very near to the Cape.

Abbildung in dieser Leseprobe nicht enthalten

Abbildung (modifiziert): http://www.weinschenker.nl/atlas/za.jpg

II.3 Domestic production and international competition

Wine production has been quite an important economic factor in South Africa for long times. The significance of this industry sector to the nation’s economy can be derived from the wine industry’s share of 8.2% of the Western Cape region’s gross geographic product.⁴² The Western Cape region with its 4 mn people and its 15% share on the national GDP⁴³ is considered to be among the strongest economic regions in the country, which possessed an overall GDP of $ 182 bn in 2003.⁴⁴ About 92% of the bulk wines are located in the Western Cape region, with lots of small-scale farming and intergenerational transfer of land (inheritance).⁴⁵ The total direct capital stock is estimated at R 13.4 bn.⁴⁶ The GDP/capital ratio of the wine industry is 0.46, equalling the economy’s average of 0.47.⁴⁷

Some 257 000 people are employed by this sector; both directly (farm labourers) and indirectly (in packaging, retailing or tourism industry). Other reports show even figures around 350 000 people.⁴⁸ Wage levels are very low, even compared to other sectors within South Africa. A “minimum wages” legislation did not lead to employment annihilation as it was predicted before.⁴⁹ However, on-farm labour productivity is comparatively low as overall skills of the workers are as well. The labour/capital ratio for the wine industry is 5.51. That is higher than the economy average of 5.04 which suggests that capital is being effectively applied with regard to job creation.⁵⁰

The excise duties amount to R 3.23 per litre of sparkling wine and to R 2.32 per litre of fortified wine. The Value-Added Tax rate lies at 14%. Along with the increase in producers’ income rose the state revenue as well.

In the last ten years many European wine producers, esp. from Germany and Switzerland, have immigrated to South Africa helping the country with job-creation, modernization of production techniques (cellars, barrels, farms, facilities) and bringing along investment capital.⁵¹

Wine tourism is also becoming a more and more important topic among South African vine-growers because as much as 43% of all tourists to South Africa visit the wine lands with an added value of R 3.5 bn to the tourism industry.⁵²

[...]

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¹ http://www.cia.gov/cia/publications/factbook/geos/sf.html

² http://www.auswaertiges-amt.de/www/de/laenderinfos/laender/laender_ausgabe_html?type_id=24&land_id=162

³ http://www.cia.gov/cia/publications/factbook/geos/sf.html

⁴ Microsoft Encarta Encyclopaedia 1999 (Plus Version) à ”Südafrika“

⁵ Microsoft Encarta Encyclopaedia 1999 (Plus Version) à ”Südafrika“

⁶ Diercke Weltatlas, westermann Verlag, Braunschweig, 1996

⁷ http://www.eno-worldwine.com/Magazinartikel/Portraits-Reportagen/Reportagearchiv/Reportage%202002%20Südafrika-I.htm

⁸ Microsoft Encarta Encyclopaedia 1999 (Plus Version) à ”Südafrika“

⁹ Microsoft Encarta Encyclopaedia 1999 (Plus Version) à ”Südafrika“

¹⁰ http://www.eno-worldwine.com/Magazinartikel/Portraits-Reportagen/Reportagearchiv/Reportage%202002%20Südafrika-I.htm

¹¹ http://www.eno-worldwine.com/Magazinartikel/Portraits-Reportagen/Reportagearchiv/Reportage%202002%20Südafrika-II.htm

¹² http://www.kapweine.ch/kapweine/kapreport.pdf

¹³ http://www.eno-worldwine.com/Magazinartikel/Portraits-Reportagen/Reportagearchiv/Reportage%202002%20Südafrika-I.htm

¹⁴ http://www.vinography.com/vinitaly/1311-GBCS9%20Statistiche%20CT%20-%20excerpt.pdf

¹⁵ http://library.wosa.co.za/admin/documents/Operating%20Environment.doc

¹⁶ http://www.austrian.wine.co.at/downloads/doku2004/doku2004_kap_4.1_4.7.pdf

¹⁷ http://www.ernestopauli.ch/Wein/Weinschule/Weinproduktion%20weltweit.htm

¹⁸ http://www.austrian.wine.co.at/downloads/doku2004/doku2004_kap_4.1_4.7.pdf

¹⁹ http://www.findarticles.com/p/articles/mi_m3488/is_11_81/ai_79354835/pg_2

²⁰ http://library.wosa.co.za/admin/documents/Global%20Wine%20Trends.doc

²¹ http://library.wosa.co.za/admin/documents/Regional%20Wine%20Trends.doc

²² http://library.wosa.co.za/admin/documents/Corporate%20Strategies.doc

²³ http://library.wosa.co.za/admin/documents/Global%20Wine%20Trends.doc

²⁴ http://library.wosa.co.za/admin/documents/Major%20Market%20Profiles.doc

²⁵ http://library.wosa.co.za/admin/documents/Global%20Sector%20Overview.doc

²⁶ http://library.wosa.co.za/admin/documents/Operating%20Environment.doc

²⁷ ibidem

²⁸ http://library.wosa.co.za/admin/documents/Operating%20Environment.doc

²⁹ http://www.eno-worldwine.com/Magazinartikel/Portraits-Reportagen/Reportagearchiv/Reportage%202002%20Südafrika-I.htm

³⁰ http://www.sawis.co.za/SAWISPortal/DesktopDefault.aspx?tabindex=0&tabid=1 à SAWIS-Booklet 2004.xls

³¹ http://www.tips.org.za/events/sectorworkshop2004/wine.pdf

³² http://www.sawis.co.za/SAWISPortal/DesktopDefault.aspx?tabindex=0&tabid=1 à SAWIS-Booklet 2004.xls

³³ ibidem

³⁴ ibidem

³⁵ ibidem

³⁶ http://www.manager-magazin.de/life/genuss/0,2828,293484,00.html

³⁷ ibidem

³⁸ http://www.sawis.co.za/SAWISPortal/DesktopDefault.aspx?tabindex=0&tabid=1 à SAWIS-Booklet 2004.xls

³⁹ http://www.sawis.co.za/SAWISPortal/DesktopDefault.aspx?tabindex=0&tabid=1 à wineexports.gif

⁴⁰ http://www.sa-weine.de/weinfuehrer/statistiken_4.html

⁴¹ http://www.sawis.co.za/SAWISPortal/DesktopDefault.aspx?tabindex=0&tabid=1 à SAWIS-Booklet 2004.xls

⁴² http://www.wosa.co.za/statistics.asp

⁴³ http://www.fdimagazine.com/news/fullstory.php/aid/166/Get_ready_for_the_good_times.html

⁴⁴ http://www.auswaertiges-amt.de/www/de/laenderinfos/laender/laender_ausgabe_html?type_id=24&land_id=162

⁴⁵ http://www.tips.org.za/events/sectorworkshop2004/wine.pdf

⁴⁶ ibidem

⁴⁷ ibidem

⁴⁸ http://www.sawis.co.za/SAWISPortal/DesktopDefault.aspx?tabindex=0&tabid=1 à SAWIS-Booklet 2004.xls

⁴⁹ http://www.tips.org.za/events/sectorworkshop2004/wine.pdf

⁵⁰ ibidem

⁵¹ http://www.kapweine.ch/sa/sa.asp

⁵² http://www.capegateway.gov.za/eng/pubs/news/2004/nov/92649