Michael Fridjohn: September 2005

There is no doubt that the Cape wine industry is in the midst of an epic crisis. Unhappily in this it is not alone. There are parts of France where business is so bad that even the European Union's generous agricultural policy will fail to keep growers afloat. And the European situation will get worse with Spain's production increasing threefold compared with the 1990s.

With so much cheap wine coming to market within the EU, and hundreds of millions of litres of appellation controlée French wine destined for distillation, the plight of the Cape's wineries seems petty in comparison. However, the knock-on effect of the European glut will be that market share gains in the EU will come at an unaffordable price as long as the Rand remains relatively strong.

South Africa's difficulties have less to do with poor wine quality, and more to do with mismanagement of the last boom. A quick glimpse of the latest industry statistics reveals that red grape prices were peaking even when the Rand was at its weakest. This means that, notwithstanding the recent strengthening of the Rand, the writing was on the wall for growers hoping to bank the kind of money they had been earning at the end of the last decade. This trend is confirmed by an analysis of the white grape prices. This reveals (once again notwithstanding the strengthening of the Rand) that most white varieties have actually increased in price over the past few years. Sales of white grapes to private cellars for the period 2000 to 2004 shows that Chenin Blanc has almost doubled in price and Sauvignon Blanc and Chardonnay are up almost a third.

Even the more efficient wineries confess that when the Rand/Pound exchange rate is less than R12/£1, there is no profit in the price levels enjoyed by the majority of Cape wines in the UK. In other words, the weaker currency up to 2002 encouraged producers to accept UK supermarket price points that undervalued their wines. Now it is very difficult to ratchet this up - especially when the all-powerful buyers have so much choice at their disposal.

Still, it seems that most of this country's producers are more willing to pursue foreign fantasies than their long established domestic market. The overseas business comes (of course) with its own chimera - the limitless demand of the untapped market. There is some truth in this. If Cape wine merely doubles its presence in the US it will still have less than 5% of one of the world's most powerful consumer markets. If it doubles its presence in the UK, it will still be smaller than the Australian juggernaut which a mere 20 years ago began its drive to take over the minds and wallets of the British wine drinker.

The situation however is not quite this simple. The other producers of the world have also worked this out, and the ease with which we might now grow market share is compromised both by the strength of the competition and the costs of gaining access to these markets. We will have to increase our investments merely to hold a position in the presence of the concerted efforts of the other international players. Over time, we will show growth, though not at the rate of the past decade. We have been filling a gap; now, to grow, we have to elbow out some quite professional competitors, many of whom slipstream into these markets behind multinationals who have become not merely the foot soldiers but also the General Staff of the game.

The Cape wine industry should learn a lesson from its erstwhile nemesis - South African Breweries - who financed their international expansion out of their domination of the local market. Consumers here already have a relationship with the brands, know how to pronounce the names, and every year in the New South Africa thousands of new well-heeled wine drinkers enter the market.

The game is getting tougher and every marketing Rand spent must buy real value. Until producers ditch their delusions and invest shoe leather in the domestic trade, they are squandering precious resources.