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Strategic crossroad for SA wine industry – PwC

The recent PricewaterhouseCoopers (PwC) South African Wine Industry Insights Survey 2010 found that although average wine prices of producer cellars increased by 19% over three years, the increase in costs were almost double the increase in income over this period. Further pressure on costs per ton can be expected, as smaller crops were reported annually since 2008. Cellars seem unable to pass on the full effect of these cost increases to consumers.

Frans Weilbach, Wine Industry Specialist Partner at PricewaterhouseCoopers says, “Many wine businesses are at a strategic crossroad and going forward they will be forced to take a long-term view on how this narrowing margin is going to be effectively managed to ensure sustainability for all their stakeholders in the wine value chain.”

The survey explores issues facing local wine businesses and examines how organisations remain relevant and successful during challenging times. The participants consist of a combination of larger and smaller producer- and private cellars from all the officially demarcated regions in South Africa.

This year’s survey focused on three specific performance areas:

Financial overview of producer cellars – 2009 harvest
In terms of production, the results clearly confirmed the stabilisation of the red/white cultivar mix with red now representing approximately 33% of the national wine-grape harvest. The supply and demand for red wine is also becoming more synchronised, having a positive effect on red wine prices in general.

Producer cellars sell a major portion of their produce locally for consumption or to be exported by local buyers. As the Rand remains relatively strong against international currencies, a move towards direct export programmes is unlikely in the near future.

From a producer side, tonnage yield per hectare remains an important key performance indicator. Information on non-producing hectares also seems to indicate that producers are leaning toward higher yielding white varieties when it comes to recent plantings in order to improve profitability.

Weilbach continues, “A positive finding was that the 2009 harvest was the first since 2004 where the average revenue per hectare exceeded the average primary production costs per hectare, for both red and white cultivars.”

Supply chain activities
In collaboration with Stellenbosch University and the CSIR, this year’s survey for the first time reveals insight into the complexity of the wine cellars’ supply chains. Many locally focused wine cellars supply a substantial portion of the wine in bulk to a few large corporations. This practice reduces their outbound supply chain scope and complexity but also impacts margins.

Export-focused wine cellars’ supply chains are more complex and the need for specific capabilities to address the fierce competition in these markets has increased. Some wine cellars have implemented a supply chain approach in managing their business but this is still in the early stages of adoption.

The survey also reveals that the competitiveness of the local and global wine industry calls for enhanced supply chain performance in demand forecasting, service level, cost and inventory. These directly impact a cellars’ financial performance (related to revenue, expenses and assets). Due to established producer and cellar relationships, close cooperation might exist but the survey have found that information related to supply chain performance is not actively managed.

Human resource management

The 2010 insights survey includes industry related HR management practices within a variety of cellars and the performance management culture they demonstrate. It seems there is room for improvement in this arena as more than half of cellars have no dedicated HR capacity.

However, the survey shows that cellars have reported some success in this area as they have adequate recruitment and retention practices, skills development plans and fair performance evaluations using effective methods in place.

“Overall, it seems that employees receive fair, competitive compensation in the industry and employees have clear job descriptions which are complimented by the recognition of their contributions to the company. In order to improve their HR management practices, emphasis should be placed on communication between employees and employers as well as the implementation of training and skills development programmes,” concludes Weilbach.

Despite a relative good performance in the economic downturn, wine businesses still face many challenges from an economic, operational and regulatory perspective. “Every business is unique” says Weilbach “and it is important for cellars to evaluate their own performance and identify specific areas for improvement.”

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