More SA producers packaging wines offshore, and others may follow
Wednesday, 8 March, 2006
Lynn Bolin
Offshore trend driven by uncompetitive local costs, leading to 2005’s sharp rise in bulk wine exports, reports Lynn Bolin.
Bulk wine exports from South Africa rose by a surprising 22.3% in 2005, to 90.587m litres from 74.063m litres in 2004, according to data from SAWIS. With packaged export wine volumes falling by 1.5% during the year, bulk wine comprised 32% of the total 282m litres of wine exported last year, versus 27.6% in 2004.
The steep rise in bulk wine exports is almost solely attributable to a move by some local producers and international importers to package their wines in the UK and Europe rather than South Africa, industry participants say, due largely to the high cost of packaging locally. Some of the country’s biggest producers — Distell, Western Wines, Winecorp, and Omnia -- have already considered, and are still considering, bottling some products offshore, they have told WineNews.
The implications for the local industry are potentially very serious, as they could lead to the loss of many bottling jobs and a deterioration in South Africa’s economies of scale for bottling (therefore pushing costs up further), as well as possibly undermining the quality and reputation of South African wine overseas.
There is already some overcapacity in the local bottling industry, bottlers like Winecorp and Omnia report, driven partly by the surge in bulk exports. Large UK supermarket groups--including Tesco’s and Morrisons—are moving their bottling activity worldwide to the UK, from South Africa and elsewhere, in an effort to improve quality control and obtain huge buying discounts from local suppliers.
Equally, some large German specialist wine importers and bottlers are packaging larger amounts of South African wine as the South African category continues to expand in that country.
Western Wines (now part of Canada’s Vincor), which owns the hugely successful Kumala brand, has moved the packaging of its smaller Intulo brand — a lower-priced sub-brand of Kumala — to the UK, confirms Operations Director James Reid. The volumes involved are less than 500,000 litres, he reports. More distressingly, Reid reveals, the company has examined the costs of moving the packaging of the entire Kumala range of over 3 million cases (more than 27m litres) to the UK to lower its costs further and take advantage of synergies with the group’s other businesses there. Although the company had no plans to do so for now, this would be reassessed in the future, he told WineNews.
‘We are not moving Kumala offshore at this stage, but we will continue to look at it,’ he said. ‘It would be quite a mission to move 3 million cases offshore. It’s all about economies of scale. Through the wider Vincor group we have greater buying power — for example, we source all of our corks as a group.’
The shift in bottling is part of the wider globalization of the wine industry -- giant Australian producer Jacobs’ Creek and some of the big Californian wine brands now bottle their wines in the UK, observed Reid.
Distell has also seriously considered bottling some of its products in Europe, and ‘may be forced to do so’, Distell CEO Jan Scannell revealed. However, like Kumala, it also does not have any immediate plans in this regard. Distell estimates packaging costs, including bottles, corks, capsules and labeling, to be approximately 1.00 euro per case of wine cheaper in Europe than South Africa. ‘We have a key message for South African packaging companies — packaging will move offshore if the costs don’t come down,’ said Scannell.
Winecorp CEO Vernon Davis reports that the company has been approached by its UK supermarket clients to bottle the own-label wines Winecorp produces for them in the UK, but it has not done so to date. ‘Some of the companies would like us to look into bottling in the UK,’ he said. ‘We are doing so, but this is a rather difficult option for Winecorp because we have a bottling facility that is already running at absolutely the lowest cost — it is barely holding its own. So if the lines move overseas, lots of people will lose their jobs. But at the same time, if we say ‘no’ to the clients we lose their business, which would have an even bigger impact on us.The temptation to package offshore is there, because when we negotiate with clients to get to an agreeable price point, they often quickly put on the table the option to package outside of South Africa, saying it would be more profitable. But it is not the responsible thing to do.’
Omnia’s Executive Director for Operations, Frans Albertyn, echoed this sentiment. The group is also under pressure from foreign clients to consider some offshore packaging, and its own preliminary cost study basically agrees with Distell’s savings of around 1.00 Euro per case. However, Omnia is undertaking an in-depth study of comparative costs along the entire supply chain, the results of which will be available shortly.
Omnia bottles about 2.6m cases at its Stellenbosch Bottling facility, and has also recently experienced a decline in contract bottling due to rising bulk exports, Albertyn confirmed. ‘We need a thorough understanding of all costs in the supply chain — our own and suppliers’ -- and where we can reduce these costs before we make any decisions. We must find a solution to halt the current exodus of bulk wine — it is to everyone’s benefit. We must form strategic supplier alliances to manage the costs together.’
He stressed that Omnia’s first philosophy was not to package abroad, given the implications for jobs and the loss of skills and capacity. The study would help point to the requisite balance between cost savings abroad and losses locally that could help determine how much, if any, packaging should be done offshore. ‘We would be exporting jobs and that is not in the interests of South Africa,’ he pointed out. ‘Plus there are other unquantifiable costs involved. Everyone in the value chain must therefore contribute to making the industry more competitive.
Packaging costs make up roughly 50% of the total cost of producing a bottle of wine, while glass bottle costs comprise about half of packaging costs.
In general, the wine companies believe the uncompetitive SA packaging costs are attributable to several factors, including higher glass, paper and printing costs locally than abroad due to smaller volume benefits in South Africa, less efficient factory production and less competition. There are also logistical and other, more hidden, costs that are adding to expenses across the value chain.
On top of this, freight costs are higher per litre shipping bottled wine versus bulk, while the European import tax (CCT) is also more on bottled wine than bulk.
Local glass producer Consol has a 75% share of the local glass packaging market, with the wine industry responsible for 25% of its sales. Dale Carolin, Consol’s head of sales and marketing, acknowledges that the rise in bulk wine exports is concerning, saying the company has been talking with the industry to help limit ‘cost-push’ pressures, while trying to balance between supporting the industry and managing its own costs. While Consol was not considering lowering the prices of its bottles, price increases had been below local inflation in recent years and this year would be in line with inflation, he commented.
‘The industry is under pressure on a number of variables, and we have been helping by minimizing the entry costs of bottles and carrying out a number of initiatives aimed at lowering the actual bottle cost — such as lightening them -- without compromising the aesthetic styling,’ Carolin said. ‘We are very sensitive to the challenges, and would much prefer bottling to stay in South Africa.’
Meanwhile, the quality implications of the move to offshore packaging are also of concern. Says Distell’s Scannell: ‘This is a very negative development, because some of the bulk wine exported is being blended with other wines of different origin. Under EU rules the producers can add wine from other places in Europe, up to 20% of the contents, and still be able to say the wine is from South Africa.’
He is concerned that these wines of dubious origin may significantly undermine the overall quality of the wine and damage South Africa’s reputation abroad. Su Birch, CEO of Wines of South Africa (WOSA), agrees. ‘There are real concerns over the quality aspects of bulk exports,’ she said. ‘There is no proof, but there are suspicions that some of the bulk wine bottled in Europe and sold in countries like the Netherlands may not be 100% South African. This certainly threatens the image of Brand South Africa overseas.’