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29 Mar 2016
Posted by trevor

(Currency) Swings & Roundabouts

Over the past 20 years exports of South African wine have risen dramatically from 20 million litres to 500 million litres, as Rico Basson, CEO of VinPro, the industry representative body informed the audience at the annual information day in Cape Town in January. While that might seem to paint a rosy picture, the truth is that the lion’s share of that wine is shipped in bulk format, with just 35% of the total being exported in bottle.

Part of the reason for that is cost: South Africa might contribute R36 billion or 1.2% of GDP but it can’t compete on labour, bottles and other materials – so large clients opt instead to receive wines in bulk and bottle in the United Kingdom, still SA’s largest wine trading partner.

How is the recent devaluation of the Rand versus the Pound, Euro and Dollar likely to affect supply and demand for South African wine? On the face of it, it’s likely to make South African wines more attractive and competitive.

As British Master of Wine Richard Bampfield wrote in a recent blogpost after visiting SA last month: “The Cape’s wines offer astonishing value for money in export markets at present owing to the weakness of the rand. However, it would be foolish to take short-term advantage and establish South Africa as a low cost producer in the bulk sector. Similarly, it’s short-sighted to use the currency advantage to try to position South Africa’s premium wines in a lower category than they merit. Far better surely to use the current situation to improve returns for both producers and sellers and build a larger fund to boost South Africa’s image as a premium wine producer.”

South Africa is riding the crest of a wave in terms of interest, particularly in the UK. Our wines are gaining increasing critical acclaim – but they have long been seen as undervalued. The majority of wines sold into the UK retail at less than £7! When the exchange rate was R18 to the pound in 2015, it meant a bottle sold for R120. That’s increased to R160 – and already wine farmers have had clients demand discounts…purely because of the exchange rate!

“But we’ve been squeezed for years by UK buyers,” said one producer. “This is the first time in a decade we’ve had a bit of breathing space. And another problem is that some of our input costs – like barrels – are in Euro.” French oak barrels cost just shy of 1 000 Euro – or around R17 000. “I’m only buying four barrels this year – but that’s still R60 000 worth!”

Head of Wines of South Africa, Siobhan Thompson, added that the exchange rate hit the industry body hard as well. “In terms of marketing and promotional budgets to support international brand building – budgets will be devalued by between 25 to 30% due to the forex conversion, which means either far less brand building or having to inflate marketing and promotional budgets by that amount to achieve the plan.”

One positive Thompson highlighted however, was that while a weak rand could lead to greater exports, one massive opportunity was the chance to grow wine tourism, an industry which is already worth R6 billion.

“SA is now a very cost effective tourist destination,” Thompson added, “and the more wine tourists we can attract and immerse into our winelands the better.” She said these visitors then became ambassadors who returned home and promoted Brand South Africa. “Each tourist equates to 12 jobs in South Africa. Wine tourism helps grow our wine image and also helps get consumers into SA wine.”

This was a point made anecdotally by Somerset West wine retailer Paula Leahy. “We’ve seen our foreign visitors increase their spend dramatically, in the past two months. We have a lot of swallows spend 4 to 6 months in Somerset West escaping the European winter. They now come into the shop and aren’t afraid of buying wines that cost R500 to R1 000 a bottle – by the case! They are loving the fact that the exchange rate has allowed them to trade up.”

Fiona McDonald is the former Editor of Wine Magazine and serves as a taster on numerous international competitions, including the International Wine Challenge and the International Wine & Spirit Competition.