Over the past five years, the South African wine industry has suffered through prolonged drought and draconian Covid restrictions, but despite a recent resurgence in domestic wine consumption, its profitability remains under severe pressure.
In fact, almost 40% of wine farmers were loss-making in 2022 — the final year of a detailed macroeconomic study of the domestic wine industry undertaken by FTI Consulting for wine industry umbrella body SA Wine.
The study, presented by FTI senior director Albertus van Niekerk in Stellenbosch last week, has flagged several other worrying trends.
Over the past decade (2013-2022), the total area under vines in South Africa has decreased 10%, leaving 56% of vines older than optimal fruit-bearing age compared with just 38% of vines in 2013.
Even more concerning is that wine farmers’ average annual production costs increased by a staggering 15.3% in 2022, more than double the average compound annual growth rate (CAGR) of 7.3% over the past decade.
The report attributes this to rapidly rising expenditure on fertiliser, chemical sprays, mechanisation, electricity and labour.
This helped to push the number of loss-making wine farms from 28% in 2018 to almost 40% in 2022. So, while farmers would have been able to cover their cash expenses, they would not have been able to replace capital items or reap any profits.
In fact, FTI Consulting estimates that in 2022 only 12% of wine farmers were profitable (earned more than the suggested net farm income required for economically sustainable production), a big drop from 20% in 2018.
These trends are putting downward pressure on the sector’s long-term growth trajectory.
“The South African wine industry has historically been able to balance out increases in production costs with an increase in yield,” says the report. However, “the potential to absorb production cost increases in this way is diminishing as vines are becoming older and consequently less productive”.
This explains the increased uprooting of vines as well as the escalating consolidation evident across the sector. Indeed, the number of primary grape producers has dropped 25% over the past decade to 2,487 in 2022, while the number of private cellars has declined from 493 to 458.
The trend towards mechanisation is continuing, with the number of hectares per worker on the rise. Even so, labour still constitutes almost a third of production costs, making it producers’ biggest cost item.
In 2022, labour costs were up 13.6% year on year. This was partly because there was a longer harvest period and strong vineyard foliage growth which required the employment of more workers. And, of course, while the total number of workers on more mechanised farms may be lower, the workers operating machines may earn more.
Climate patterns are also taking their toll.
Over the past decade, all South Africa’s wine-producing regions have registered net declines in vineyard area but the most severe attrition has, understandably, been in the more arid regions of the Northern Cape and the Klein Karoo.
In the Northern Cape, which has suffered prolonged periods of low profitability and unpredictable weather, 42.5ha of vines have been uprooted for every hectare of new vines planted on average over the past five years. In 2022, only about 5ha of vines were planted while almost 400ha were uprooted.
Longer-term production trends remain negative across the industry as a whole, with tons of grapes crushed declining by a CAGR of 0.9% over the past decade. Also down since 2019 is total capital formation which encompasses fixed investment, new capital equipment and repairs and maintenance.
Despite hurdles, the wine industry has shown remarkable resilience, but its outsize contribution is at risk of draining down the plughole of state failure
— What it means:
In 2022, the wine industry’s capital expenditure was just R1.37bn. This swells to R25.26bn when the capital spending of the industry’s suppliers is included, and R80.5bn when adding in all the broader induced economy-wide effects. However, in 2019 the industry’s total capital footprint was significantly higher, at R98bn.
Speaking at the report’s launch, SA Wine CEO Rico Basson described the industry’s plummeting profitability as “a big red flag” and lamented that players “just weren’t investing” because of factors ranging from climate change to policy uncertainty.
“We shouldn’t underestimate pre-election uncertainty,” he said, “I know of millions of rands of investment on hold because of [people adopting] a wait-and-see approach.”
Wine exports are also on a 10-year downward trajectory, declining by a CAGR of 3.9%.
Exports initially rebounded strongly after Covid, growing by 22% in 2021 year on year to 388Ml, driven by an easing of lockdown restrictions. However, the recovery was short-lived. In 2022, wine exports fell 5% to 369Ml, due largely to shipping constraints at Cape Town harbour.
“I want to cry sometimes when I see what needs to go out vs what can go out,” says Siobhan Thompson, CEO of Wines of South Africa.
While it is “heartening” that the industry offers world-class wines and diverse terroir, the environment is “very challenging” with much investment required in people and infrastructure, she adds.
In a separate presentation, Agricultural Business Chamber of South Africa chief economist Wandile Sihlobo said the mood in agriculture at present is as downbeat as at the start of Covid. The top three issues plaguing the sector are delays at the ports; deteriorating roads and rail infrastructure; and worsening municipal service delivery.
Vinpro chair Anton Smuts says producers are “hanging on for dear life”. While farmers are cutting costs to the bone, this can only take them so far. The important thing is to increase revenue “because that’s where profitability and sustainability lie”.
In the past, grape producers could always shift into citrus or stone fruit but now, because of delays at the harbours, “nothing is profitable”.
“We try to stay positive, but we expect producers to start leaving the industry and for the consolidation by big players to continue,” he says. “The wave is already at the top and is going to break — and break a lot of people.”
Fortunately, wine tourism is emerging as a vital lifeline for the industry. Five years ago, wine tourism contributed 14.7% of cellar turnover. By 2022, this had climbed to 17.3% overall, rising to 36.3% among the industry’s 400 small and micro wine cellars.
A separate wine tourism study by I and M Futureneer Advisors, referenced in the report, estimates that in 2022, wine tourism directly contributed R3.05bn to South Africa’s GDP (up from R2.4bn in 2019) and provided direct employment to 6,304 permanent workers (up from 5,809).
The wave is already at the top and is going to break — and break a lot of people
— Anton Smuts
The wine industry is also contributing more to GDP and the country’s tax revenue than ever before.
In 2019, the wine industry alone contributed R16.9bn to national GDP (in 2022 rands). By 2022, it had increased 13% in real terms to R19.1bn. This swells to an economy-wide impact of R56.5bn (0.9% of national GDP) once indirect and induced effects are counted, including the impact on consumption of workers spending their salaries.
However, in 2019, the industry generated an economy-wide impact of R63.4bn (1.1% of SA’s GDP) in real terms. The 11% decline is indicative of reduced spending, not in the wine industry itself but rather across the value chain in line with the country’s depressed economic performance.
In fact, the report reveals that the wine industry’s multipliers and efficiency ratios outshine those of the average domestic industry, making it an attractive sector for stimulating economic growth.
For instance, for every R1m of sales revenue in the wine industry, R1.57m of value is added to national GDP and 7.5 formal and informal jobs are supported, surpassing the national all-industry multipliers of 1.3 for GDP and 6.58 for employment.
In 2022, the wine sector supported 270,364 job opportunities across the entire economy (1.8% of national employment), of which about 245,000 jobs were in the Western Cape.
Similarly, in 2022 the sector contributed R19.3bn in tax, up from R17.9bn in 2019, mostly in excise taxes and VAT.
It helps that South Africans love a glass (or two) of wine. Wine consumption fell by 22% in 2020 year on year as Covid restrictions bit. It then rebounded at a CAGR of 20% to reach a record level of 453Ml by 2022. This was driven largely by the under R60/l category, though wine in the R100-R150/l bracket also achieved notable sales volume growth.
Sihlobo remains characteristically upbeat, saying the agriculture sector is poised for a good year of better grain yields, lower food inflation and subsiding disease outbreaks. Over the longer term, he rates the sector’s prospects as “fairly high”, but this assumes the country gets on top of its logistics crisis, allowing farmers to maximise export opportunities.
With so many hurdles to overcome, the wine industry has done well to grow as much as it has over the past five years. Just imagine what it could achieve if the government could fix the energy and logistics crises.
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