The South African wine industry has been severely weakened with the onset of COVID-19. The R49 billion-a-year industry has been affected in numerous ways, from export restrictions, to the national ban on the sale of alcohol, which has recently been reinstated. According to Vinpro the contribution of the wine industry to the GDP for the SA economy exceeds R49 billion annually and creates roughly 300 000 jobs directly and indirectly. These figures include a R7.5 billion excise and VAT contribution to SARS as per 2019. As SA’s second biggest agricultural export-orientated value chain, wine earns more than R9 billion worth of foreign revenue each year through exports of roughly 50% of total production, with the other 50% sold locally. The recent easing of export restrictions has been well received given the above but the renewed ban on local sales promises to only further exacerbate the industry’s plight.
As part of the due diligence behind this short piece Imani Development spoke to Wines of Southern Africa (WOSA), SA wine producer’s body Vinpro’s enterprise development team and the COO of their affiliated transformation unit, Wendy Peterson. Additionally, we spoke to Nadine Smith of Wesgro, the manager of export development for the Western Cape province, by far the main wine region of the country. Through these key informant and expert interviews we were able to source the following statistics, information, and projections that further elucidate the actual and potential impact of COVID-19 on the industry and those adjacent to it.
To summarise the impact of COVID-19 on the industry through to the end of June 2020 the following information is salient:
- Approximately 80 wineries and 350 wine-grape producers will lose their businesses;
- More than 14,000 jobs lost;
- Industry suffered a direct loss of R3 Billion;
- More than 25% of Wineries and 40% of Grape Producers with cellars are not planning capital investment in their businesses at all in the next 12 months;
- There is approximately 100 million litres of surplus wine (equating to R500 million approximately at current prices);
- Severe financial strain on empowerment projects with approximately 30% of BOB’s (Black owned brands) and BOF’s (Black owned farms) indicating that their businesses will not survive the current COVID-19 challenges;
- South African wine exports could decrease cumulatively between 41% and 72% in the next 3 years due to the temporary export restrictions, lost sales, and the market share the SA wine industry stands to lose;
- 64% drop in SA Wine tourism;
- 45% of tourism jobs impacted;
- Cash flow challenge for the industry from May – August 2020 – which will now extend far beyond August given the extended ban on local sales;
- Serious downward pressure on wine price/litre as stock levels increase and the next harvest is only 7 months away;
- Farm gate income can be down as much as 30% .
- Exports, Lower diesel price, interest rates, weak exchange rate
Although the exporting of wine is again permissible the industry is still facing distribution and logistics issues, as their closest and historical port for export – Cape Town has significant cargo backlogs, machinery breakdowns and a shortage of the 20-foot flexi containers which the wine industry uses to transport their consignments. This is partially being caused by and further exacerbated by the fact that both MSC and ONE (multinational logistics and shipping companies) have removed Cape Town from their main Europe shipping line, and CMA CGM has begun charging extra to deliver cargo to the port , as the delays are currently estimated at around twelve days. “It’ll take at least two to three months to get completely back on schedule at Cape Town,” a representative of an SA based freight forwarding association said.
The most recent development that has further disadvantaged the SA wine industry is the second nationwide ban on the sale of alcohol, which came into immediate effect on the evening of Sunday the 12th of July. The industry was given no warning of this ban and it has created additional obstacles for the industry as it precludes it from selling its surpluses and delayed and or diverted exports on the domestic market as a last resort. It has also significantly affected the levels of trust between the industry and the government.
To parsimoniously explain the challenge the industry is facing:
The 2021 harvest is 7 months away and SA cellars are already at full capacity with a backlog of orders, the industry is currently incapable of selling to the local market and, as described above, there are many distribution and logistics issues hindering the industry from transporting their products across borders and to foreign markets and even if they do these markets are already awash with wine from Europe, Argentina, Chile, and Australia.
As a result, it is almost certain that SA produced wine and wine in general will become significantly cheaper, meaning the industry’s recovery will take even more time and be a difficult process to finance with significantly less revenue being generated.
Vinpro’s members, at this stage, are looking at selling 100 million litres (R500 million ex cellar) of bulk wine in an effort to relieve the pressure on stock levels. In light of the next harvest commencing within the next 7 months, the urgency to sell this wine within the next two to four months is clear given the need for relief to the industry due to the COVID crisis and also the potential negative impact of higher stock levels on the coming harvest’s prices. The pricing structure of the industry has been an issue for the SA wine industry for a while and only in the last two or three years has a sustainable pricing structure been achieved. Accordingly, special care must be taken to prevent the situation where the wine ends up as South African branded wine in traditional South African export markets. This would undermine all the work the industry has done to achieve a sustainable price for its wine in these markets.
The industry is currently in the process of conducting a stock taking exercise to determine the exact composition of the available wine stocks. This exercise should be completed by 31 July.
What can be done in the short-term to respond to the plight of the SA wine industry? We have asked this question to WOSA, Vinpro, Wesgro’s transformation unit, and other industry specialists and the most common response was a request to urgently assist the industry find markets and buyers for all the excess wine it has, or alternatively its grape concentrate, hand sanitiser, grape juice, and base wine (base wine is a type of still wine produced in the first stage of fermentation during the production of sparkling wines and brandies). Not only does it have excess wine because of all the constraints on exporting their products and the sporadic closure and opening of the domestic market, but SA wine producers also had a significantly larger harvest in 2020 – 8.2% larger than in 2019 .
By assisting the industry to reduce the backlog of wine sales responsibly, one would contribute to the following potential outcomes;
- Job retention on a large scale;
- Measurable trade volumes into new markets;
- Noteworthy interim relief for cash flow (by converting inventory into cash), which by extension would free up commercial credit for other industries;
- Increasing the prospects for partnerships between emerging and existing brand owners as a catalyst for economic transformation (in keeping with local government objectives);
- Lowering the risk that some of the gains made in ethical compliance and socio-economic transformation will be erased;
- Preventing long term reputational damage owing to the dumping of product at a low cost in traditional markets and then building on the results in a recovery phase.
For those concerned about the nature of the industry it is important to note that two thirds of the world’s Fairtrade wine is produced in SA and it is widely known to be the most traceable wine in the world. Additionally, the industry has also made significant progress in terms of ethical compliance via the Wine Industry Ethical Trade Association (Wieta), transformation at farm level, development of talent and the support and development of Black Owned Enterprises. Add to this the global recognition that has been earned by the sector for its world class environmental sustainability and wine of origin scheme, and you have an industry that is taking seriously Environmental, Social, and Governance (ESG) considerations and in many instances goes beyond these requirements.
Noting this progress – both in terms of transformation and the ethically, environmentally, and socially responsible number of producers – it is important to preserve it, as unfortunately COVID-19 and the lockdown threatens to halt and potentially reverse this progress. In terms of transformation, as communicated already 30% of BOBs and BOFs are likely to fail. This translates into:
- 20 BOBs and 19 BOFs shutting down
- Of these BOBs approximately 12 are women owned and of these BOFs between 5 and 6 are women owned.
Accordingly, targeting these emergent BOBs and BOFs for assistance is critical to ensure the transformation progress made in the last ten years is not lost.
Currently, we do not have information on market share loss, as it is too early to declare permanent market share loss, but Vinpro have said they are watching that space and could make estimates available by the end of July 2020. This market analysis and related estimates would allow us to know whether market share/ shelf space has been permanently affected, and in which markets. Should the impact be significant, as our key experts and key informants anticipate: we suggest that those looking to support the wine industry in the medium-term intervene to assist the wine sector in regaining its lost market share and or help it find novel markets for its wine.
This could be done by working with Vinpro and WOSA’s country managers in the various export markets.
In terms of the novel markets those looking to support the wine industry would need to consider compliance and ethical standards and the market access they grant. Our recommendation for those looking to assist in this area is to support ethical production and trading, gender inclusivity, and black empowerment through standards and certification related technical assistance.
This is something that can be costly for producers, especially emerging producers and brands. For example, Weita certification requires an extensive audit (200 checks including the latest PPE checks) and on average costs farmers R30 000 to remedy their non-conformities. The most common and constraining non-conformity is the presence of asbestos on farms (usually used as the roofing material for farm workers homes). This is an expensive non-conformity to remedy, costing approximately R 150 000 to replace the roofing material on one average size house . Assistance with the certification and actually attaining compliance is therefore something the sector needs it if is to access novel markets, particularly emerging BOFs and BOBs given the associated costs and technically intensive nature of remedying some of the non-conformities.
Furthermore and importantly, the role that the SA wine industry plays in tourism in Southern Africa is critical, as wine farms and estates often serve as the starting points for travel packages that see travellers going into the region Namibia and Botswana in particular but also Mozambique, Lesotho, and Eswatini. We argue that an intervention to increase the exports of an in need trade in goods industry has benefits that extend to the wine industry’s adjacent trade in services industry (tourism and hospitality) that has also been uniquely and severely weakened by COVID-19. Based on our data and analysis, the indirect benefits of supporting the wine industry would have significant employment multiplier effects in the South African tourism and hospitality industries and beyond. For example, and based on PwC calculations, for every R1 million spent in the SA tourism sector, five jobs (one skilled, two semi-skilled and two unskilled) are sustained. The same R1 million in expenditure results in an added R1.26 million to the economy (directly) and an additional R350 000 added due to downstream linkages (indirectly). This shows the critical importance that tourism has for development within South Africa. We are confident that this would apply more broadly to the region as the SACU+M sectors have very similar multiplier effects.
Chad Capon is a Development Consultant at Imani Development. He holds a Masters in International Political Economy from the University of Cape Town (Summa Cum Laude). His interest and expertise lie in the Political Economy of Sub-Saharan Africa (SSA). Chad is particularly interested in the informal sector and regional integration, and the important role they play in SSA’s political, social and economic dynamics. He has experience in community development, migration and trade capacity building projects, and has worked with intergovernmental organizations such as the African Union, SADC, The New Development Bank, various other BRICS institutions and The Foreign Commonwealth Office.
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 Jansen., Carolize. “Concern at growing Covid impact on Port Elizabeth & Durban: Productivity at all South Africa’s port terminals currently well below norm.” URL: https://www.freshplaza.com/article/9232871/productivity-at-all-south-africa-s-port-terminals-currently-well-below-norm/ [Accessed 08/07/2020]
 The indications at this stage suggest that the available wine consist of mainly 2019/2020 dry white wines, of which some might be cultivar wines like Chenin blanc.
“Smith, Carin. “SA wine prices set to fall as bulk producers race against time”. News24 URL: https://www.news24.com/fin24/companies/agribusiness/sa-wine-prices-set-to-fall-as-bulk-producers-race-against-time-20200516 Accessed: 15/07/2020.
 Interview with Phillip Bowes of Vinpro 14/07/2020 at 15H00
 According to the Wine and Agricultural Industry Ethical Trade Association (Wieta), product sourced from certified suppliers has grown from 30% of total production in 2013 to more than 65% in 2020
 “The 2018 tourism sector contribution towards GDP in Botswana was 19.3%, Lesotho 11.5%, eSwatini 12.1%, Namibia 12.4% and South Africa 13.4%”. Ngatane, Nthakoana. “SACU: COVID-19 COSTING MEMBER STATES