Are local winemakers shooting themselves in the foot?
09 February 2016
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Well, thanks for joining me for another episode of Old Mutual Live Wine edition. I’m Jenny Crwys–Williams . Well what does the future hold for us in terms of the price of South African wine. There is no doubt they are going up. But by how much and why? Listen to what wine farmer and businessman Ken Forrester had to say, about the cost of a bottle of wine.
Ken Forrester: South African wines, a long history of the co-ops and the wholesalers, the old Stellenbosch wineries and distiller’s corporations and union wines. South African wines were sold and delivered on the back of trucks that were paid for by Bols Brandy and Bells Whisky and Smirnoff Vodka to be quite blunt.
Those wines were never really charged at the full distribution cost of what it really cost. But the concept was “Oh we’ve got a truck, it’s going out, put wine on it. It doesn’t cost us for the distribution, it’s already paid for”. Essentially South African wine trades at a discount, even in today’s world.
South Africans whether they want to believe it or not are able to buy the very best value in wines in the world, I think. I mean to go out and spend R100 on a bottle of wine in this country you can do very, very well for yourself. That same R100 translated into Pounds or Dollars, does not guarantee you drinkable wine.
Pricing wines in South Africa
JCW: So I mean Michael Fridjhon himself was ratting about this and just saying that unless we get used to paying higher prices for our wine, we are not going to have many wine farmers left. You yourself have just brought out a wine that is not far off R700 a bottle.
KF: Well our wines, currently we just brought out a wine which is selling in duty free retailing at R1250 a bottle and flying off the shelves, I’m happy to say.
JCW: Which one was that, Ken?
KF: That’s the Dirty Little Secret.
JCW: The Dirty Little Secret, yes.
KF: You know I just think that we’re very, very fortunate in South Africa to have this opportunity to drink wines which are so very, very good and the market holds the price. I mean it’s just as soon as you go over a price point, that the public really think that they’re having a tough time. They’re just unaware that in Australia, in New Zealand, if you go to a bottle store in Australia you really have to spend $25 to $30 to get nice wine. There’s R300 without blinking an eyelid.
Now if we had to spend R300 to buy a bottle of average wine, I mean we’d be shocked and rightly so. But the rest of the world is quite used to that. But the kind of benchmark translates something as simple. Like if you use one of our brands, our entry level Chenin Blanc translated into Dollars retails on the shelf at $10, $11, $12 depending on where you are in US. It sells out of our tasting room at R50 a bottle and yet you have to pay $12, R180 a bottle.
In the UK it trades at £8 or £9 a bottle, so you’re R180 a bottle in the UK. That’s just when you normalise the… you take the transport costs, you pay the duties, you add the margin for the distributor, the margin for the retailer and suddenly that’s a normal price, that’s not an abnormal price. That’s what entry level wines cost. Now if we were faced with the thought that entry level wines in this country were R180 a bottle we’d all be badly horrified. Would the industry survive? I ask?
JCW: Well I suppose it is exactly the same thing that’s happened to electricity. We’ve had it so cheap for so long that we resent any, I mean any increase in electricity. People moan and bemoan and go on strike and burn tyres and do everything because we get so cross about it. But the reality is that there has to be a slow catch up or else there’s no electricity.
KF: You see I’ve often pondered the thought that this kind of array of wine competition plethora if you like, the wine competitions in this country. What if we had a wine competition or we had an overriding rule for wine competitions, which wine competitions would be brave enough to say “We’re not judging any wines under R100 a bottle”. Because then suddenly you’re looking at a completely different class of wine.
You’ve already filtered if you like, 50% of the market. To Michael Fridjhon’s point of we’re not paying enough to sustain the industry, the reality is in a R30, R40, R50 bottle of wine, the price that you’re paying for grapes is not enough to sustain the replanting of grapes on that same vineyard for the next 20 years. I can guarantee you that those vineyards that those wines are coming from now will not be vineyards in 20 years’ time.
If for example, a judging competition were to say “In order to protect the farmers, we’re not judging anything under R100 a bottle, so if you’re making wine it has to be at R100 a bottle”. That way at least the farmer’s getting sufficient, the primary producer is getting paid enough to ensure the sustainability and longevity of this industry.
A Romanée-Conti doesn’t come cheap
JCW: Then coming back to our starting point and “The Judgement of Paris”, a Romanée-Conti doesn’t come cheap, those vineyards don’t come cheap.
JCW: The horses walking through the vineyards and whatever, they do not come cheap. So you’re making the same point that you’ve got to have quality in order to make quality.
KF: Yes, no I’m afraid that’s the reality.
JCW: Ken, what an absorbing discussion. No, no, no I fully understand and maybe we can explore that a little bit more on another occasion. Ken Forrester, thank you so much.
KF: Yes, the interesting thing is that when you look at the prices at the time, you know this is 40 years ago. If you have a look at the Stag’s Leap Cabernet, was selling at $7.49 in Chicago, in a retail store. In the same store the wine which it beat, the Chateau Mouton Rothschild was selling for $25.
JCW: Yes, so it says everything.
Are South African wine prices sustainable?
Jenny Crwys-Williams: That was Ken Forrester. So after that I went along to chat to wine guru Michael Fridjhon and he’s been writing about wine and the costs of South African wines in particular for some time. Liquid investments, raising wine price will sustain quality, well, will it and how high is high? Michael Fridjhon has been writing about the price of wines for some considerable time, what is going on there? I’m sitting opposite Michael Fridjhon.
Michael Fridjhon: Well, we all don’t want to pay more than we have to. So the cheaper it is, if it tastes okay, the more we’re inclined to say well, this is wonderful, look what I got for R20 a bottle, R30 a bottle or R40 a bottle. But you do have to ask yourself, I think it was the campaign against Nike long ago, about these shoes were made by little hands.
You have to say to yourself: Is this value chain respecting all the components of that value chain? Since the beginning of the value chain for wine or the grapes themselves. You need to say to yourself: What is a sustainable amount to keep those vineyards going and there is extensive research.
The wine industry itself has an organisation called VinPro and they have accountants who literally cost what it costs to produce grapes. Then produce wine per region throughout South Africa. It’s an extraordinary document. One of the things it shows is that somewhere between 70-80% of all wine in this country is not really being produced sustainably. Some cases it’s because the farmers themselves are bad accountants.
So, they are making money on the annual running cost of the vineyard, but they’ve not factored into those calculations the land cost and rather more importantly, they haven’t factored in the vineyard renewals costs. So that when the life of that vine comes to an end. They won’t have the capital available to replant the vineyard.
How the vineyard expanse of South Africa is shrinking
When that happens, they’re going to have to pull it out. They’ll either turn it into pasture or into wheat land we’re seeing this. We’re seeing a shrinking vineyard expanse for South Africa, down 5-10% in the last 20 years. What we are going to lose will firstly be the old vines which potentially produce the better fruit. What we’re also gaining is an increasingly and disproportionately high amount of virus infected vineyard. In other words vineyards that cannot produce the best possible grapes because ideally the farmer would be pulling out those vines and replanting, but he doesn’t have the capital to do so.
We’re not only not going to have enough old vines in the long term. But the vineyards that we do have are the ones we should be getting rid of. But the farmers don’t have the money to replace those vineyards. What, you may say, is a sustainable amount? It’s a hard question because it depends on the variety, on the method of farming and on the yield.
When you get down to old bush vines, which are the most desired of all of these things, 2.5 to 5 tons per hectare is the most you can expect to get from old vines. The rough farming cost of a hectare of vineyard is, call it R50 000 a year, that’s a very rough number. Depending on your spray regime, depending on the cost of harvesting and bush vines are harder to harvest. They have to be hand-harvested and it’s tough work, but say R50 000.
If you’re getting five tons, you need to get R10 000 a ton, simply to break even on your farming costs. That doesn’t provide for the R300 000– R400 000 you will have to spend on replanting that vineyard when the time comes. If you’re getting 2.5 tons per hectare, the arithmetic is R20 000. Very few of these fabulous old vineyards see their fruits sold for that kind of money.
In fact the producers, the Rock Stars, the highly talented people who are going to the farmers who have got these old vines and who are paying them more than the co-op was paying them five years ago, are still not paying them a sustainable amount.
But a further question which we do need to touch on is if the farmer isn’t recovering enough money, you can be absolutely sure that the vineyard workers are not getting paid a decent wage. When you finally get unrest in the winelands, as an example, when you find that the wine industry is incapable of transformation, demographic transformation in terms of ownership. It’s because what BEE investor would go into a business that is intrinsically unsustainable at the current levels being paid for the fruit?
50% or more of all South African wine is on shelf at R40 a bottle or less, of which, roughly, R20 goes into the dry goods, the logistics and the excise, leaving you with R20 for retailer margins, distributor margins, price of fruit. It’s not a lot of money for the farmer and it’s certainly not enough money for the people working in the vineyards.
How to make affordable wine
JCW: So, the Old Mutual Trophy Wine of the Year, which was selling for R35 a bottle, for the Chenin Blanc, it falls into that category?
MF: It falls into that category and how do they do that? That comes from an area which is reasonably prolific crops, so they have a high yield, it’s not from old vines. They’re getting 10-15 tons per hectare. They are farming mechanically, they are presumably harvesting mechanically.
It’s being done, but it’s being done places where you can have long rows of vines where the vines themselves are relatively youthful. Where everything can finally be done by machine, which means that the labour component which we should be seeing in our wine production isn’t there. In that particular case, it’s simply the way it is.
JCW: So, Michael, I’ve been noticing bottles of wine, for instance Ken Forrester who started this conversation, his little Dirty Little Secret is selling for close on R1 000 a bottle. If you look at some of the wines coming from the Swartland, they’re more than that. Those are hectic prices when you compare it to what somebody said to me the other day: I’m not prepared to pay more than R130 for a bottle of wine.
MF: Well, R130 for a bottle of wine is a fairly decent price all round. You do have to understand, and I don’t know what Ken is paying for the fruit that he’s getting for Dirty Little Secret, but even if he’s paying R40 000 a ton, it’s an infinitesimal amount of the final price of the bottle of wine.
At R21 000 a ton, you’re going to be getting your fruit at R30 a litre, that’s R22.50 for the bottle of wine. Asking people, or insisting that the producers pay the growers more, is not going to have a massive inflationary effect on the final price of a bottle of wine.
When the fruit is R7 000 a ton, which is already above the industry average, that’s R10 per litre, it’s not a lot of money. If you doubled that, it would be R20 a litre. A bottle of wine is three-quarters of a litre, so your price would go up from R7.50 per bottle for the fruit component to R15, an increase of R7.50. Your R130 bottle of wine can easily sustain that.
When you get up to the kinds of prices that are paid for Dirty Little Secret and the Rock Star wines from the Swartland, pricing is part of the marketing message. It’s not in any kind of way the measure of the cost of producing that product, no matter how brilliant your packaging. No matter how heavy your nowadays politically incorrect heavyweight bottle is. No matter how expensive your corks may be. No matter what you pay for your fruit. You are going to battle to get a production cost over R100 to R120 a bottle, no matter how you argue it.
JCW: How fascinating. I’m going to watch this with huge amounts of interest. Michael Fridjhon, thanks very much indeed. To get these podcasts and stream live, visit dogreatthings.co.za.