South African wine industry upbeat about growth prospects in the medium run

Most wine executives are positive about the growth potential of the industry over the next two to three years. The slow recovery in the global economy and significant increases in the production cost of wine remain critical factors for delaying a quick turnaround in the South African wine industry, according to a report released by Professional Services Firm PwC.

“The results of PwC’s The South African wine industry: Insights survey 2012 may suggest the start of a financial recovery of wine businesses since the global recession, but the local wine industry is still facing a number of challenges in the short to medium term which will first have to be addressed before it can be confirmed,” says Frans Weilbach, PwC Director and Specialist Partner for the Wine Industry, South Africa.

The survey explores some of the issues facing local wine businesses, especially those regarding the financial results of producer cellars for the 2011 harvest and human resource management practices in the industry. Chief executives from various wine cellars were asked to share their views on the present state of the global and South African wine industry, the opportunities in and main challenges facing the global industry.

Views from chief executives
A significant percentage of chief executives are confident about the prospects for revenue growth in their businesses over the next two to three years.

The vast majority of executives however expect the global and local wine market to remain unchanged over the next 12 months, while 16% indicated that there may already be some improvement during this period. Executives identified the development of both new and existing markets as opportunities to grow their businesses in the next 12 months.

“It may come as little surprise that increasing energy costs are of major concern to the local wine industry, followed by the price of chemicals and packaging costs,” says Weilbach. Regulations and taxes remain an important concern over which wine businesses have limited control. Ageing vineyards and infrastructure are further areas that executives are to some extent worried about, while volatile exchange rates however continue to have a major effect on the successful development of foreign markets by wine businesses.

Red wine recorded a welcome growth in price per litre. The expectation in the next two to three years is also encouraging, with a large portion of respondents foreseeing further increases in average prices. However, the same cannot be said for white wine, where two-thirds of executives are expecting prices to remain flat in the immediate future.

Financial overview of producer cellars – 2011 harvest
The financial results recorded in the survey highlighted a number of issues facing producer cellars.
Despite a sluggish global market and other challenges facing grape producers during the year, the average producer made a profit, with net revenue per producing hectare rising above R30 000. In terms of average revenue per producing hectare, red cultivars have, for the first time since 2003, realised more than white cultivars. “Further respite is expected on producer level, with average net revenue per producing hectare for both red and white cultivars exceeding VinPro’s estimated average production cost per hectare,” says Weilbach.

Wine prices continued to growth, specifically in the R4.50 to R6.00 price bracket for red and R3.50 to R4.50 for white. Taking into account the effect of inflation, the average real selling price for wine by producer cellars have decreased for the first time in three years.

Weilbach says that major expense items such as electricity costs, labour and chemical expenses have continued to place profitability under significant pressure. “The lowest interest rates in almost 40 years are however easing the burden of finance costs on producer cellars.”

For the first time in five years, the average equity ratio decreased. “One of the main factors for this is a higher asset base due to, amongst others, a significant increase in the carrying value of inventory at year end.” Return on investment is also the lowest in the last 5 years. “This could also be indicative of producer cellars being sensitive to the financial position of primary producers, retaining minimal reserves,” continues Weilbach.

“The substantial increases in inventories, along with higher debtors and creditors, will require cellars to carefully consider and manage their working capital needs.”

Human resource management
Only a few cellars employ a large number of employees and therefore justify having internal human resources (HR) departments. HR activities are usually performed by either the financial manager or CEO. Although external human resource services providers are still widely used in the local wine industry, there is an increased need for cellars to develop their internal human resource capacities to drive more strategic functions, including performance management and succession planning.

Improved career opportunities seems to be the main reason (35%) for employees leaving organisations and it is interesting to note that there is a marked increase in better remuneration (from 8% to 23%) as a reason for staff turnover. Very few of the participating cellars indicated that they had succession plans in place and those that do exist are focussed at the senior management level.

Weilbach says: “Cellars must ensure that they retain staff by ensuring a promising career path, and market related remuneration. This will require attention to succession planning on an operational level and performance management systems, including incentives for high performers.”