Nedbank Chief Economist Dennis Dykes
Vinpro Info 2009 day ltr: Harald, Ray, Jos, Allan, Dennis, Marthinus
It's not that bad
26 January 2009 by Kim Maxwell
The wine and agricultural outlook isn't entirely gloomy for 2009, as producers at VinPro's recent information day were told.
Kim Maxwell passes on some advice.
If packed-to-capacity Lord Charles hotel ballroom seats last week were any indication, a good number of VinPro's 5,000 producer members are very concerned about the wine retail and agriculture business during 2009. Unless it was the Veritas-winning wines served at lunch that lured them to attend.
While the messages from economists, retailers and political analysts weren't gushing with optimism, the South African wine industry can expect some brighter lights ahead. As usual, those who think outside the box in terms of branding and relationship building should be able to avoid the financial skids.
Nedbank's chief economist Dennis Dykes kicked off by reminding just how seriously the 2008 financial crisis had impacted the global economy - US employment falling by 2.6m, it's biggest drop since 1945; the Bank of England cutting interest rates to their lowest levels since the bank was founded in 1694, and December 2008 US retail sales showing their strongest fall on record. Significant factors included the collapse of shipping during the last quarter of 2008, and decreased Chinese exports, relevant because China has previously been heralded as a retail saviour.
"We've not seen anything like this in history," Dykes said sombrely, but added that governments do know what to do. "The bad news is that a quick recovery is unlikely. We think there will be some semblance of normality towards late 2009, but improvement for the economy will probably only happen in 2010."
Dykes says the South African wine industry will experience a squeeze on export prices with volumes severely affected, because capital flow will be more restricted and the Rand will remain vulnerable. But he's upbeat about South Africa weathering the storm better than many global competitors, thanks to our banking and financial sectors not being directly affected. Also because local companies aren't heavily borrowed in foreign currencies and the country isn't showing high external debt. The Rand is actually acting as a buffer, without the usual negative effects. Agriculture is in a positive position because we aren't experiencing drought - let's hold thumbs - and the economy has the psychological benefit of hosting Soccer World Cup 2010 and related activities.
When the Reserve Bank meets next in February 2009, Dykes predicts the market will see an aggressive interest rate cut. Overall, he reckons the global trading environment is very serious and recovery will take some time. But the South African economy, while taking a down cycle in the short term, should look better than many counterparts over the long run.
British wine consultant Allan Cheesman added a gloomy wine export perspective to the picture, joking that the audience could be suicidal after listening. "For the first time I can recall, the British wine market is in decline in volume and value," he said, pointing to predictions of 600,000 job losses for 2009. But the UK nevertheless represents a 140m 9-litre case market, where Rosé, with an 11 percent market share, is one of few categories that is growing.
Jokingly referring to himself as a "company alcoholic for 36 years" the former Sainsbury's wine director said troubled exporters could discount wines if need be, provided it doesn't cheapen the brand. "Don't be cheap, but be at or near the lowest cost producer in a category", was his advice, considering that over 50 percent of wine in the UK is sold on promotion or discounted prices, and that 54 percent of South African wine is sold in this manner. Alcohol is traditionally the third most profitable product in a store after greeting cards after all. Producers should place more emphasis on building brands and building relationships within the supply chain, to win business during challenging times. They should also focus on the years ahead because wine won't slow down over the long term. Says Cheesman: "The old approach of 'I've grown it, you sell it" just won't work. A consumer-led, focused brand strategy that reduces the clutter will. Think: help me, educate me, make choosing wine easy for me."
You would think that recessionary times might be driving Brits to drink yet the British on-trade (20 percent of the wine market) is in serious decline thanks to 35 pubs closing per week. "An attack on the bastion of British way of life" is how Cheesman puts it. This means the British supermarket bigwigs are even more powerful (Tesco and Sainsbury's hold a 52 percent market share) and likely to apply a more aggressive margin squeeze on SA exporters during 2009. On the upside, Cheesman says independent wine shops, convenience stores and petrol stations are showing a glimmer of light for wine sales, as are Internet or mail order direct wine sales. Phew...
Sobering up about the South African domestic market, Ray Edwards, who developed the successful "Tops at Spar" wine retail outlets for South Africa, said the group's 391 liquor stores showed an optimistic 61 percent growth for December 2008. "Maybe we're all just drinking a lot, or maybe the liquor industry is recession-proof," he quipped.
Still, some interesting Spar research shows that the average TOPS booze shopper visits weekly and takes only 1 minute 42 seconds to select a wine. During that time, 54 percent browsed only one category of wine, and 38 percent left without buying anything. Only 12 percent of wine consumers actively read the front label and few ever read the "Drink with chicken or grilled fish" vague nonsense found on most back labels. Many shoppers only buy a bottle at a time, and stick to the bigger brands they know while moving within that company's brand stable. Very few consumers shift their brand during tight times.
Spar uses the 2m rule: if you can't read the cultivar and vintage 2m away from the shelf, it's a problem. Edwards says increased entertaining at home during the recession will emphasise the value of having a visible brand. Look at Nederburg, which showed double-digit volume increases through changing their front label. Alternatively convert consumers into brand advocates - think of Stormhoek - by using the web or media or word of mouth. "Above all," he says, "if launching a new wine product, make sure it deserves shelf space. Tailor it to the market, research and support it and you will sell it."
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