The Long Road to Getting a Better Deal for South African Wine Producers through Better Prices

Some 360 years after wine was first made at the Cape, the low prices commanded by South African producers is finding the industry questioning its own economic sustainability.

In order to survive, the industry has to unlock value by raising wine prices. Harry Melck from the Institute of Cape Wine Masters and a Chartered Accountant, writes that the matter of raising prices is easier said than done.

One of the features of the wine world is not only the fluidity of the contents in the bottle, but also that of the topics and debates between those with an interest in and a love for the industry. In South Africa, one particular topic has raged for the past few years, namely the generally low prices commanded by local wine producers. Wine consumers may not find the debate aimed at encouraging higher prices for South African made wines alluring. But for the country’s producers and the Cape wine industry at large it has become imperative to seek ways of attracting more capital into the industry through the raising of prices for its wines.

No industry-body agenda excludes the price issue, and nor should it. The industry is peddling backwards economically with the majority of grape-growers and wine producers seeing the prices paid for their wine and grapes remaining the same or possibly getting minimal increases, while input costs such as labour, fuel, electricity and freight increase handsomely. Farmers are going out of business and vineyards are being ripped out to plant more lucrative crops.

When looking at the prices at which wine is sold in South Africa and what people are prepared to pay, however, one sees an agriculture sector that finds itself at the lower-end of a business model it has itself created. Consider that of the 387.2m litres of still wine (fortified and sparkling excluded) sold at retail prices in South Africa in 2018, the following: 191m litres was sold at below R30 a litre. Another 127.1 litres produced commanded between R30 and R48 a litre. 

This makes for disturbing reading once the calculator has done its work: Of South Africa’s total wine production of still wine in 2018, a startling 318.1m litres was sold at below R48 a litre. About the category of wine represented here, one can lead your own conclusion. Think cheap, and not necessarily cheerful.

Industry bodies see premium wine pricing at between R48 and R72 a litre. Of this, only 27m litres was sold last year. Paying between R72 and R108 for a litre of wine makes one a purchaser of super premium South African wine, of which 23m litres is taken of the shelves annually. And then anything above R108 a bottle is ultra-premium, which sold 19m litres in 2018.

Another way to consider these numbers is that wine in its totality makes up 15% of the South African beverage drinking market. So if we use the ultra-premium category (4.9% of wine) then wines over R108 litre represent 0.7% of the country’s total alcoholic beverage market. For many producers and industry pundits, especially those proposing a rise in prices through the mantra of South African wine is too cheap, this can come as a reality check: less than 1% of those who drink alcohol in the country are prepared to spend it on wine costing more than, roughly, R100 a bottle. For some discerning wine drinkers, this price-point is about as entry-level as entry can get.

Take the other spectrum into consideration where only 15% of wine drinkers appear willing to pay over R48 for a litre of wine, and those asking for higher prices will be reminded that one can only charge what a customer is willing to pay. Especially for a non-essential consumable product such as wine.

But what of the higher end, the ultra-premium sector where South Africa has a number of world-class wines out-scoring and out-classing big names from France, Spain, Italy and the USA? Here our wines are deemed as laughably cheap in the fine wine category. Consider the R600 on-release-price for a bottle of Kanonkop Paul Sauer 2015, a 100pt rated wine by international wine critic Tim Atkin, to an average 3rd growth Bordeaux such as Calon Segur for over R2000 bottle? Why are the high-end wines, aimed at more discerning wine drinkers with cash to spend, not leading the way in the pricing game by increasing the figures on their price-tags?

With the recent drought resulting in significantly lower yields (15% down for the last two years) and with the increase in international recognition for our premium wines, prices of wines should be going up significantly – above inflation at least. What we are seeing, however, is that wine producers are not able to increase their prices above the average because of the over-supply of brands at each price point. 

The majority of those producers who “stick their head above the pulpit” and increase the price of their wines out of line with the rest at that price category risk their customers moving to their competitors who have toed the price line. There are just too many substitutes in the form of quality wines with terroir and winemaking integrity to choose from. 

Obviously, as the price points increase then there is a smaller percentage of people buying these wines. But the problem of an over-supply of brands, which leads to the inevitable under-cutting of prices to compete for a slice of the pie, is found throughout the local wine industry. It is commonly agreed that there are over 8 000 wine SKUs (stock-keeping units) aimed at a small percentage of the beverage drinking market. For the majority of those wine drinkers, when it comes to deciding what to buy, the choice merely causes confusion and anxiety. That is why you find a few brands that make the majority of sales – the ones that pop up at every braai and the ‘short tail of retail’. Even for the discerning and knowledgeable wine drinker the choice of wines is not an easy one to navigate and there are not enough days in the year to try them all. 

Plus, consumers who are prepared to spend more on alcohol find the premium wine market a difficult beast to navigate. Grape varieties, vintages, regions, appellations, price points – the list goes on and can only open up the uninformed to being humiliated by not knowing the product. Smirnoff Triple Distilled, for example, is clean, sexy and simple to understand. And you can mix it as you wish with creative mixers. 

Will the growing black middle class not gain on the slack premium wine sales, allowing us to get out of the red? This could well be the case. If you speak to some of the hospitality people there is a large percentage of black middle to upper class wine drinkers that have emerged, especially in Johannesburg, particularly around Sandton. 

Whether this is enough to take up the slack in the premium market, I don’t know. But the signs exist and one can only hope that some of the huge volumes sold at bargain-basement prices are to consumers destined for status at the higher end. For anyone embarking as a newbie on the wine drinking path there is generally an order in which the taste-buds acquire the taste of wine. This typically starts with a sweeter style wine and then progresses to drier before the consumer is even interested in varietal or regional differences. 

New wine drinkers need to be taken on this journey and in my mind it is only the large wholesaler producers that are able to do this as they have a catalogue of wines on their books that transverse the categories and price points.

So while proposing and advocating an increase in wine prices for the greater economic good of the industry might be a compelling and worthy cause, making this happen is going to require a shifting of various ingrained current realities of South African society. Saying that the products deserve better pricing is the easy part. Our wines are, at every price point, comparable in quality to what any other reputable wine-producing country can offer. South Africa is not for nothing known as “the most exciting wine country in the world”.

The translating of these songs of praise into worthy remuneration and growth in the value of the premium sector will require a rethinking of the total category in terms of the offering as well as the perception of South African wine. Whether this can be done by an industry willing – or forced – to sell the majority of its product at the almost criminally low price at which 85% of it is offered, is ground for some true soul searching. We’ve been seeing this movie for decades, but nothing has changed – although momentum is starting.



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