A prominent South African businessman was apparently asked what his return on investment was on his multimillion rand wine farm in the Stellenbosch region.
His answer was probably the most honest I have ever come across when he said: “The return on ego was fantastic, but the return on investment was terrible!”
The influx of investment in the wine industry from sources outside of the business seems to be one of its downfalls at the moment, not only in South Africa, also in Australia and New Zealand.
Literally hundreds of new “boutique wine estates” have jumped up all across the Western Cape and even beyond the traditional wine–producing regions, as far away as Langkloof in the Eastern Cape. Open Platter’s wine guide and count how many estates there are. While enjoying your next glass of wine, I will ask you to have a moment of silence (between sips, of course) for the South African wine producer.
Firstly, in the age where turnaround time of stock is paramount to business success, the poor wine producer is in a bad situation. Even with the dawn of “easy drinking” style wines, you are at best still drinking cash flow of at least a year. With heavier styled red wines you are drinking cash flow of as much as three years ago.
And competition is worse than ever. We are literally swimming in a global sea of wine. The global yearly disparity between supply and demand is in the region of 5 billion litres. To put it into perspective, it represents about three and a half times Australia’s entire production of wine.
What seems to be evident is that unless wine producers and exporters do not find new consumers to drink their wine, they are in for a tough time. These new consumers will only be found in developing countries like China, India and perhaps even Africa, where consumers have preferred beer until now.
The view of industry insiders is that quality is an absolute entry level requirement. Gone are the days where you sold your wine if you had better quality than your neighbour.
For a wine producer to make it, he must be able to offer products that (1) exhibit desirable and pleasurable characters; (2) represent no risk, real or perceived, to the individual or the environment; (3) offer potential benefits to the consumer or environment; and (4) offer a very competitive quality-price ratio while remaining profitable for producers. A tall order.
Furthermore, our industry has lost a lot of its competitive edge due to the appreciation of our currency over the past two years. If we try to compete with Argentina (which has a pegged currency to the US dollar), we are roughly 40% to 47% less competitive for the last two years than our Argentinean counterparts.
Our position is amplified by the fact that the agricultural producer price index is in the region of 11% a year. A prominent magazine wrote recently that a waiter’s tip when he opens a bottle of wine in a restaurant is more than the producer’s profit for that bottle of wine.
In short, the opportunity to get a fantastic bottle of wine has never been better. If you are a wine lover with the overwhelming urge to make your own wine on your own little boutique estate, take a deep breath and wait for the feeling to pass.
If you are a wine producer fighting for survival at the moment – we drink to you and will do as often as is humanly possible.