Diversification in Wine Industry

I recently read an article by Anine Vermeulen in the Engineering News of 15 November 2013. In this article she quotes Karin de Villiers, the winemaker and director of Klein Roosboom, as saying that “Winemakers’ biggest potential for growth, lies in diversifying their businesses.”

“They should open tasting rooms, restaurants and bed and breakfasts to attract people to their farms. There are few winemakers who can still survive by producing grapes alone,” she states.”

To say that I was flabbergasted would be an understatement!

I only have one major question: On what planet does Karin live? To open tasting rooms and doing all the rest that she suggests, is not being innovative anymore. Every second wine estate, if not more, already has a tasting room. Restaurants are a dime a dozen. Bed & breakfast establishments also exceed the demand!

Wine estates should now really become innovative. Those that will take refuge in Karin’s suggestions will be playing catch-up and will only contribute to the congestion.

Why am I saying that? Let’s look at the facts.

There are firstly too many wineries for the low demand growth over the last 15 years. Although growth has been about 24%, only 2% of that growth has been local! We therefore have a stagnating local market. In addition, we have not yet succeeded in gaining a meaningful foothold in any of the major markets in the world, including the USA and China (with the exception of Hein Koegelenberg in China). This is in spite of a 42% growth in our export markets.

My view is that this growth is due to the poor harvests other wine growing regions have had the past year or 2. The moment these countries have their production up to par again, South African wine will suffer. Obviously we could be fortunate and some of the new growth can be kept due to wine shoppers getting used to the South African quality!

In addition, a further good reason for the current benefit we are experiencing from our export markets is the deterioration of the Rand against the Euro and the $. However, to build a business by betting on both the weak harvests somewhere in the world, and the weak Rand, is not a clever move!

Currently there are very close to 600 (582) wineries. About 20 years ago in 1991, there were about 212. With the very low local growth in consumption, this is an accident waiting to happen. We need a consolidation of significant proportions to avoid a catastrophe. And we need it fast! This is also already taking place, as the case of the recent amalgamation of Wellington Wynkelder, Wamakersvallei and Bovlei Cellar shows. Although they are wine co-operatives, it will not be long before we see private wine cellars also consolidating.

To make things worse, our wine is seen as cheap by the markets abroad. Some of our winemakers think this is a bad situation, whilst others think we should work with this perception and exploit it to our benefit. We need to address this issue somehow, and tasting rooms and restaurants will not help!

Building wine tasting rooms and restaurants will therefore only prolong the agony, if that is all you will be doing. Diversification needs to be radical and wineries should think about consolidating their activities, as is already happening! Others, like a Backsberg, are looking at other additional crops such as blueberries, and leveraging the farms with a platform as business model. Obviously the respective planks of your platform needs to be successful in their own right, as cross-subsidisation will not be sustainable on the long run.

So what is our challenge?

We have to make wine that the world would like to drink. We should educate the new wine drinkers in the new large markets such as China. But we should stop making wine for “anyone with enough money to buy our wine”. It would help to develop wine drinker profiles and then make wine for these personalities! Marketing gurus and brand builders need to step up and provide guidance as to the road ahead. Now is not the time to be timid.

Wineries need to look at educating the South African market as to the benefits of wine drinking. Instead of having wine seen as intimidating, we should position responsible wine drinking as sexy and sophisticated. We have a significant number of wineries that are doing excellently by just focusing on their wine brands. So it is doable!

Most of all, wineries in South Africa need to sit down as an industry and collectively discuss ways to be innovative in a meaningful manner. We did try to do this towards the end of the 1990’s, but not a lot has happened! We need to develop ways of tapping into markets with good growth potential, such as Eastern Europe, Africa and China, as Brand South Africa. Yes, I know that is what WOSA is about. Somehow, however, I am not sure it is working though.

Let’s take Africa. Economists tell us that this continent will have the largest number of middle class consumers in the next 30 years in the world, exceeding that of even both China and India. And it is also the economists that tell us that the middle class in China will triple from 200 million to 600 million over the next 10 years! Surely we can tap into that?!

I must confess that I do like the regional wine marketing that is taking place in South Africa. Robertson and Franschoek stand out in this regard. But once we get the visitors in the region, it will still be good wine that will sell. And the local market growth is not sufficient to consume the available wine! Not without getting the growing Black Diamond segment to drink wine in far larger numbers!

So, we still get back to the issue of too many wineries, and a too a strong dependence on the foreign markets to absorb the South African production. And as much as I like visiting the already large number of wine tasting rooms and restaurants, more of them will not solve the problem! We need to view our wineries as businesses and develop business models that are defendable and sustainable, and keep them aligned with the needs and wants of the global wine industry!

Therefore, if you are struggling with your winery, and you need to look at building tasting rooms and restaurants as your saving grace, maybe you are asking the wrong question. The more relevant question is, “Should I be in this wine business at all?!”

 

http://www.engineeringnews.co.za/article/sa-wine-industry-affected-by-economy-diversification-suggested-2013-11-15

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