SA’s wine industry remains positive about growth prospects despite challenges, according to PwC report

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Wine businesses are indeed anxious when looking into the future. Volatile exchange rates, increasing input-costs, as well as the recent labour-related difficulties experienced in the Western Cape are only some of the daily challenges faced.

“Despite these challenges, the results of PwC’s ‘The South African wine industry: Insights survey, 2013’ have highlighted a number of positive findings and opportunities,” says Frans Weilbach, PwC Agribusiness Industry Leader. These finding include amongst others things that the bigger harvest kept cellar costs per ton under control.

The survey explores some of the issues facing local wine businesses, especially those regarding the financial results of producer cellars for the 2012 harvest, human resource management practices in the industry and the wine supply chain. It also includes the views of chief executives on  opportunities and the challenges facing the industry.

Views from chief executives

“It is encouraging to note that 43% of executives expect the local wine industry to improve over the next 12 months,” says Weilbach. Furthermore, respondents’ confidence in growing their organisations’ revenues has increased from 81% being ‘very’ or at least ‘somewhat confident’ to almost all executives expecting revenue growth over the next 12 to 36 months. “Given recent labour-related issues experienced in the agri-sector, as well as persistent increases in energy costs, it is not surprising to see labour and electricity as the expenses that executives are most concerned about over the next 12 to 36 months,” he adds.

The majority of executives have identified North America and Asia as the most important geographical markets to expand and grow their businesses. “Currently, as with most other sectors, expansion into Africa is also being considered.”

Wine businesses are still looking to the Government to play a more supportive role in the industry. “Executives indicated they would like the Government to consider alternative methods to charge and collect excise duty, as well as easing the tax and regulatory burden,” says Weilbach.

Businesses are expecting white wine production to increase over the next three to five years, and red wine production to remain relatively unchanged. The expectation for wine prices in the next two to three years is also encouraging, with a large portion of executives foreseeing increases in average prices.

Financial overview of producer cellars – 2012 harvest

Despite the recent economic uncertainty, an increase in national crop size and higher yield per ton has kept cellar costs per ton under control and has resulted in higher net revenues per ton. White cultivars remain at the forefront of grape production edging on 70% of the total wine crop.

The drink wine component of the 2012 crop has decreased in favour of rebate wine and distilling wine. “This could be indicative of cellars opting to sell off surplus volumes rather than to increase working capital levels by carrying stock,” says Weilbach.

Cash flows for 2012 were more favourable than in prior years, with stock turnover remaining at levels seen in the past combined with a quicker recovery of debtors.
An increase in the return on investment to 11% is positive in the light of low interest rates.

Human resource management

“Encouragingly, more cellars are exploring the implementation of a dedicated HR function, which could see the focus change from transactional activities to strategic activities and succession planning,” says Weilbach.

Most survey participants (93%) have  implemented a skills development programme aligned to their business strategy. The majority of training programmes are aimed at the operational level. This is often due to the need to comply with regulations such as health and safety and the Black Economic Empowerment (BEE) scorecard. Just over half of cellars indicated that they incentivise their employees for outstanding performance.

In determining remuneration levels, a minority of cellars (26%) tend to make use of market movements, while 20% are guided by union negotiations and 17% are driven by the financial position of the organisation.

More than half of respondents said that they provide bonus or incentive schemes to employees. Of this group, 32% of cellars indicated that senior and top management are eligible for incentives and 18% of operational staff.

Wine supply chain

Research teams from Stellenbosch University and the CSIR worked together in gaining insight into the wine industry’s supply chain activities. Many cellars still view supply chain management as a cost element. A proper investment in the principles applicable to supply chain management, continued measurement against these principles and knowledge sharing will assist cellars to understand supply chains better and improve focus on the right areas.

Weilbach concludes: “A number of regulatory changes will affect cellars over the next financial year, with the introduction of the Tax Administration Act and the Government’s proposal to place a ban on advertising in the liquor industry. It also remains to be seen if the fast approaching 2014 local and national elections will have an effect on government policy and regulation in agriculture, and in particular, the wine industry.”

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Sanchia Temkin
Senior Manager, PwC South Africa
Tel: +27 (0)11 797 4470
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