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Point of Wine

July 2006

Assignment submitted to the Institute of Cape Wine Masters and the Cape Wine Academy in partial requirement for the

Cape Wine Master qualification

Assignment submitted to the Institute of Cape Wine Masters and the Cape Wine Academy in partial requirement for the

Cape Wine Master qualification

Tom Blok February 2007

The Cost Breakeven Point of Wine


TABLE OF CONTENTS ABSTRACT .................................................................................................................1 1. INTRODUCTION..................................................................................................2 2. UNDERSTANDING THE GLOBAL WINE SURPLUS CRISIS............................4

2.1 Understanding the Concept of ‘Wine Surplus’..............................................4

2.2 Is the current Surplus related to Wine Production? ......................................6

2.3 Decreasing Wine Consumption....................................................................7

2.4 The Impact of the Surplus ............................................................................7

2.5 Surplus within the South African Wine Industry............................................9

3. UNDERSTANDING THE WINE REVENUE STREAM.......................................12 3.1 Understanding the Sales Value Chain .......................................................13

3.2 Understanding Wine Retail Price Segments ..............................................14

3.3 The Impact of the Supermarket Chains......................................................21

3.4 The Impact of Exports ................................................................................25

3.5 Bringing it all together.................................................................................26

4. UNDERSTANDING PRODUCT COSTING FOR WINE.....................................30 4.1 Accounting for Wine Costs .........................................................................30

4.2 The Cost of Grapes ....................................................................................33

4.4 Costs incurred during Secondary Production.............................................42

4.5 The Impact of Overhead Costs ..................................................................47

4.6 Bringing it all together.................................................................................49

4.7 Can a Cheaper Wine be Produced?...........................................................50

4.8 So what should wine cost?.........................................................................52

5.1 Trading Up to Higher Price Points..............................................................55

5.2 Brand Management....................................................................................56

5.3 Vertical Integration of the Supply Chain .....................................................57

5.4 Horizontal Consolidation across the Wine Industry ....................................58

5.5 Reducing Packaging Costs ........................................................................59

5.6 The Impact of Finance Charges .................................................................61

5.7 Greater Government Involvement ..............................................................62

6. CONCLUSION ...................................................................................................64 7. REFERENCE LIST ............................................................................................70

7.1 Specific References ...................................................................................70

7.2 Background Reading..................................................................................73


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ABSTRACT With the reported surplus of wine available in both South Africa and other wine-

producing countries increasing annually, there are widespread debates that retail

prices of wine are set to decrease exponentially over the next few years. This can

have serious repercussions to the South African wine industry if not managed

properly, as reduced prices will have a direct impact on the profitability and long-term

sustainability of wine producers. Specific aspects which have been addressed in this

paper include:

• Understanding the reasons for the global surplus of wine, and the effect of

this surplus on global markets and South African producers.

• Evaluating the profitability and sustainability of wine producers, taking into

account that large percentages of South African wine are sold in lower, non-

premium price segments.

• Quantifying the numerous costs incurred in wine production, in order to

provide illustrative examples of the breakeven cost point. At the same time,

understanding how these costs compare to the revenue earned from selling

packaged wine.

• Considering what practical, long-term solutions need to be evaluated to

address the specific issues that this research has highlighted.

This paper analyses and consolidates a number of research studies and articles that

have been done over recent years investigating various factors which influence the

profitability of a wine producer. It is aimed at providing an overall picture of the

issues that impede the profitability and the sustainability of South African wine

producers. A wine producer needs to be able to make informed decisions when

making and marketing wine. One of the key pieces of information needed is to

understand the cost breakeven point of wine.

Changes to the methods by which costs are managed, closer co-operation, and a

paradigm shift between all players in the wine value chain are necessary if the South

African wine industry wants to continue to play a leading role in the increasingly

competitive global wine market.


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1. INTRODUCTION

The global wine industry is in crisis. We are drinking less wine than

ever, yet there is an overproduction of almost 60 million hectolitres –

mainly of supermarket-friendly branded wines that are forcing small

quality-minded independent wineries out of business. (Joseph, 2005,

p.28)

This is a typical example of media coverage when addressing the subject of the state

of the wine industry. During the past 3 years, a variety of references have been

made in the general and wine industry media to the overall surplus of wine which

exists and continues to grow around the world, as well as the impact that this is

having on the overall competitiveness of the industry.

Basic economic principles dictate that one of the primary impacts that a surplus of

any product will have is to put downward pressure on prices. The wine surplus is

already demonstrating this fact, with widespread evidence of exponential decreases

in the retail prices of wine. The crisis for wine producers is that at some point, the

prices that can be earned from sales of wine may decrease below what it costs to

produce the wine. The price point at which this occurs is the cost breakeven point of

wine. Once losses are incurred on sales of wine, questions need to be raised as to

the long-term sustainability of the wine producer. If a large number of producers are

influenced, there may also be repercussions for the industry as a whole.

With South Africa being the 8th largest producer of wine in the world (EuroWine,

2006), the domestic wine industry contributes an invaluable part to the economic

welfare of the Western Cape Province, the economy of South Africa and to the global

wine industry as a whole (Conningarth, 2004). The current global surplus can

therefore have a significant impact on the South African wine industry if not

effectively managed.

This research paper evaluates the current global surplus, with the overall objective of

considering what the typical cost breakeven point of wine is within a South African

context. This has been done by breaking the subject into four distinct components:

• Understanding the nature of the global surplus, in order to evaluate whether

the surplus conditions which exist are short-term or long-term in nature. This

is important when considering what types of initiatives will be successful when


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addressing the problem and also to demonstrate the influence of the global

surplus on South African producers. Analysis is also done of the surplus

conditions which exist in South Africa.

• Considering the typical retail price points that South African wine will achieve

in domestic and international markets. Factors that influence these price

points are also highlighted in order to understand the sensitivity of these

prices to the surplus conditions. Specific analysis is also done to determine

what part of the retail price is actually returned to the wine producer.

• Creating a practical cost model against which to compare typical costs

associated with wine production, in order to determine what the cost of a

bottle of wine is. The question that must be answered is to what extent it is

possible to produce wine within the revenue constraints that are created by

the current reduced retail prices.

• Evaluating various mechanisms that can be adopted as long-term solutions to

improve the profitability of wine sales. While there are a number of savings

that can be considered for each of the stages of wine production, these are

generally short-term savings that do not affect the long-term sustainability of

the producers.

The global wine surplus and its related impact on wine retail prices are economic

realities. The contents of this paper should provide information to a South African

wine producer that assists in understanding the nature of the current wine surplus. It

also provides practical steps that a producer should consider when managing a wine

cellar in times of surplus.

It is important to note that the majority of the statistics and data contained in this

paper are based on 2005 information. It is also only based on information that has

been made publicly available, as per the research requirements of the Institute of

Cape Wine Masters. The examples that are therefore contained in this paper are for

illustrative purposes. It is essential that the wine producer using this paper must

adapt the examples to specific numbers that are directly applicable to their own

circumstances.


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2. UNDERSTANDING THE GLOBAL WINE SURPLUS CRISIS The point of departure for this paper is to ensure that there is a common

understanding of what the factors are that contribute to the global wine surplus.

While it may be argued that this only provides background to the surplus problem, it

is important that any actions that are considered stemming from this research take

into account any possible long-term impacts that the current surplus may have.

2.1 Understanding the Concept of ‘Wine Surplus’ The definition of surplus per the Collins Concise Dictionary is “a quantity or amount

in excess of what is required”, or “being in excess; extra”. From a perspective of the

wine industry, a wine surplus can simply be defined as a state where the overall

production exceeds the overall consumption of wine. While this definition is easy to

understand, the biological nature of grape and wine production and the extent of the

global wine industry also need to be factored into this definition to demonstrate

practically what contributes to the global wine surplus. The calculation of a possible

surplus therefore needs to take four factors into account (EuroWine, 2005):

• Domestic Demand: total consumption of wine within the producing country.

• Total Demand: overall demand for wine from the producing country, which

therefore also includes all exports.

• Production Potential: long-term average volume of wine that should be

produced from the vineyards in the producing country, taking local terroir and

growing conditions into account. The extent of overall vineyard plantings and

the average age of plantings also need to be considered in determining this

average.

• Actual Production: the actual production in a given year, as this is affected by

the positive or negative climatic conditions that have an effect on a specific

growing season. The actual volume of wine produced in a given season may

show a substantial variation from the production potential in any given year

due to the seasonal conditions.

These four factors are shown on one graph below that has been adapted from

EuroWine (EuroWine, 2005) using European data. The graph clearly illustrates the

relative impact of each factor on a possible wine surplus.


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Production vs Demand

150

155

160

165

170

175

180

185

95/96 96/97 97/98 98/99 99/00 00/01 01/02

Harvest

Mill

ion

hl

Production Domestic Demand Total Demand Production Potential

Source : Eurowine, 2005 The graph demonstrates that there are three different components that contribute to

a wine surplus. Eurowine 2005 advises that it is important that these three

components are understood, as each could require a different course of action in the

way that it needs to be addressed:

• A domestic surplus exists when there is an excess between production

potential and domestic demand within a producing country. A given

producing country’s dependence on exports is determined by the extent of

this surplus, which is indicated on the graph by arrow A. The more

dependent the country is on the exports of wine, the more exposed the

producers in the country are to the effects of the global surplus of wine.

• The structural surplus is determined by the excess between production

potential and the total demand for the producing country’s wines, depicted on

the graph as arrow B. This is the area of most concern, as the only way in

which to reduce this surplus over the long-term is to either increase global

consumption of the country’s wine, or to reduce the production of wine so as

to balance the demand. As neither of these solutions can be achieved in the

short-term, it is imperative that measures be introduced to reduce this surplus

if forecasts indicate that this problem will persist in the longer term.

• The seasonal surplus, illustrated by arrow C on the graph, is determined by

the variations between actual production in a given harvest and the long-term

production potential. While this creates a surplus in a given harvest that will

C

B A


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require specific management interventions, it is important that no ‘knee jerk’

reactions are taken, as actual production in following seasons may result in a

seasonal deficit (Die Burger, 19 May 2004).

2.2 Is the current Surplus related to Wine Production? The first component of the surplus equation to be considered is to determine to what

extent the current global surplus is related to existing seasonal or structural

production. When considering comments like “…more than 20 million hectolitres (2.6

trillion bottles) more wine is produced in 2004 than in 1980…” or “…in 2002, Australia

produced twice as much wine as they did just 6 years earlier …” published by Wine

International (Joseph, 2005), the immediate conclusion is that production potential is

growing.

This view is shared by Becket (2005) who reports that while the reported areas under

vine are decreasing in Old World territories, the overall plantings that have taken

place in the New World territories over the past three years are keeping the overall

area of vines relatively constant. The predictions going forward are that plantings will

continue and that the area under vine worldwide will reach 8 million hectares in the

foreseeable future, an overall increase of 150 000 hectares on the reported statistics

from 2003. This forecast seems to be contradicted by the information in the table

below taken from the Becket article (2005, p.30), which indicates that the global

surplus actually decreased from 2000 to 2003. Adverse climatic conditions,

especially in the Old World, resulted in significantly reduced harvests, with the

averages for all three years being below the five- and ten-year averages. These

decreases, however, were largely cancelled by similar growth in volumes in New

World countries such as Argentina, Chile and South Africa. This however points to

the fact that actual seasonal production and not structural production is the cause of

this decrease.

Table 1 : Global Wine Surplus

(000,000 hl) 2000 2001 2002

(Provisional) 2003

(Projected) Wine Production

Wine Consumption

Surplus

% of Production

280.0

226.6

53.4

19.0

264.1

227.4

36.7

13.9

258.1

227.4

30.6

11.9

252.4 – 260.3

223.4 – 232.1

20.3 – 36.9

7.8 – 14.6

Source : OIV 2004


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The reported harvests for 2004 and the initial reports on harvests for 2005, clearly

show that this production trend has reversed significantly. Growing conditions

around the world were favourable in both years and all publications show significant

increases in actual production, thereby increasing the global surplus. Wine

International (Joseph, 2005) reports that the surplus will probably increase in the

foreseeable future due to the large areas under vine that are only now beginning to

come into production. The size of the current and likely future global wine surplus is

therefore difficult to determine, especially given the number of recently planted vines

in the New World that have yet to produce any wine. Convincing estimates,

however, place it at around 57 million hectolitres – the worst figure in history and

more than the annual production of all of France’s vineyards. (Joseph, 2005)

2.3 Decreasing Wine Consumption Production is only one side of the surplus equation. There would not be a surplus if

growth in consumption matched the growth in production. The following quotes,

together with similar opening paragraphs of various published articles, illustrate that

this is not currently the case:

Today’s wine market is characterized by oversupply (Heijbroek, 2004, p.5)

Australia’s 20 million inhabitants don’t even manage to drink half of the wine they

produce. (Joseph, 2005, p.28)

The economic reality is that wine consumption is generally decreasing around the

world. Becket (2005, p. 30) reports that consumption is down almost 3% on 2002

levels in the European Union. The traditional wine drinking nations of France, Italy

and Spain show the most significant decreases, which are quantified as being more

than double the overall increases in consumption that are being shown in all other

countries around the world combined.

2.4 The Impact of the Surplus The international over-supply of wine is a reality. It is seen to be a combination of the

structural surplus caused by the significant growth in the area under vine around the

world, accentuated by the significant seasonal surplus resulting from the 2004 and

2005 harvests. Wine producers need to take cognizance of this fact and manage

their business accordingly. The practical impact of this excess is made apparent in

the following quotes:


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• As reported by Wine International (Joseph, 2005), 2005 saw Australia’s

biggest-ever harvest, which resulted in a surplus estimated to be nearly 2

million hectolitres. Growers in many regions simply left grapes unpicked

because there were no wineries to take them.

• In 2006, at least 60 000 tons of grapes were not harvested in Australia,

compared to approximately 120 000 tons in 2005. (Die Burger, 9 May 2006)

• It is estimated that wine producers (in Australia) will have about 190 million

litres of excess wine by June (2006), 80 percent of it red. This will probably

have the effect of lowering prices across the board for red wine priced below

$10 (Hunter Gordon, 2005)

• The current global oversupply of wine is largely a relative concept. There are

many wines that are produced in volumes that will not come anywhere close

to satisfying market demand. According to Foulkes (2004), the problem is

rather that there is too much lower quality wine that blocks the systems.

• Judged on the basis of basic economic laws, the wine industry is in one hell

of a mess. And the situation seems set to get a lot worse (Joseph, 2005)

• Australian producers are considering converting surplus wine into ethanol, an

industrial type fuel. This is already being done in France, where 100 million

litres of wine was converted to ethanol during 2005 (Die Burger, 9 May 2006)

• California dealt with its excess in 2002 and 2003 by introducing wines at

ludicrously low prices, such as Charles Shaw’s Two Buck Chuck and the

recent wave of cheaper US reds and whites that have recently begun to arrive

in Britain (Joseph 2005)

The immediate impact is that as competition for a share of the consumer market

increases, there will be significant downward pressure on wine prices. This in turn will

force wine producers to reduce prices on grapes. At some level, the wine and grape

prices will result in many producers in both the Old and New Worlds not being able to

survive financially. The impact will not only be felt by the wine and grape producers.

Beveragedaily.com (2003) clearly shows how general suppliers to the industry e.g.

cooperages, dry goods suppliers, etc. will also be directly impacted, as the overall

willingness to invest in wine production is set to decrease.


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A positive impact could be that wine producers will need to become more market

aware and ensure that they effectively market and sell their wine almost before the

wine is produced. More advertising and marketing spend by producers will create a

greater awareness of wine and should stimulate positive growth in consumption and

the associated trading in wine.

In an environment where a global surplus exists, it is essential that both the export

market and domestic markets are carefully managed. The current situation in Old

World countries such as France, Italy, Spain, Germany and Portugal is that both

domestic consumption and the overall share of the export market is decreasing,

making them even more exposed to the international surplus (Die Burger, 8 May

2006).

2.5 Surplus within the South African Wine Industry South Africa, compared to several other New World countries, has generally been

less buoyant in expanding supply, partly due to the high cost of capital, and possibly

its traditional, more risk mitigating industry culture (Heijbroek, 2004). As a result,

South Africa does not appear to be too exposed to a structural surplus.

This statement is supported by the Production and Market Estimates for 2006 – 2010

prepared by SAWIS (2005). Although based on a number of assumptions which are

not repeated in this paper, the forecast which is displayed in the table below shows

that there is actually a structural deficit that exists for both red and white wine.


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Table 2 : Supply and Demand of South African Wine

(million litres) 2005 2006 2007 2008 2009 2010 Red Wine Production

245.9 252.0 259.6 267.3 275.6

Domestic Sales Exports

31.1 183.3

32.7 206.4

34.3 231.5

36.1 259.6

37.9 287.7

Total Sales 214.4 239.1 265.8 295.7 325.6 Shortage / Surplus

31.5

12.9

-6.2

-28.4

-50.0

Stock 31 December 164.5 196.0 208.9 202.7 174.3 124.3 White Wine Production

703.7 730.8 756.1 779.7 802.0

Domestic Sales Exports Other Products **

271.9 151.7 355.1

273.3 163.1 362.1

274.6 173.5 365.4

275.9 183.9 383.4

277.1 194.2 391.4

Total Sales 778.7 798.5 813.5 843.2 862.7 Shortage / Surplus

-75.0

-67.7

-57.4

-63.5

-60.7

Stock 31 December 140.2 65.2 -2.5 -59.9 -123.4 -184.1 ** The total demand for distilling, rebate and non-alcoholic wine products. There are three major challenges that the forecast highlights, which the South African

wine industry as a whole will need to manage:

• The large stock of red wine (164.5 million litres) in 2005 which has resulted

from the above-average 2004 and 2005 harvests is going to take time to

reduce to acceptable levels (Martin, 2006). Alternatives to traditional wine

sales will need to be considered as a standard increase in sales will not

alleviate the current situation in the short-term. These measures may include

considering using red wine as an alternate to white for distillation purposes,

thereby reducing shortage for white wine, or also to consider the economic

viability of wine-to-ethanol conversion.

• The forecast is based on significant growth in both domestic and export

demand for natural wine. Given the international statistics on wine

consumption and related commentary that is provided in this paper, a great

deal of emphasis will need to be placed on consumer education within South

Africa to increase the domestic demand for wine. At the same time,

concerted and co-ordinated marketing efforts will need to be done

internationally to ensure that South Africa increases its share of the

international wine market.


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• The deficit on white wine is only achieved taking the demand for other wine

products into account. The largest component of this “Other Product”

category is distilling and rebate wine. Caution must be expressed that this

segment of the alcoholic beverages market is also under global pressure

(Euromonitor International, 2006) and may not be able to meet these volume

requirements in the longer term.

These statistics demonstrate the fact that from a volume perspective, the South

African industry should be able to survive. The key issue that remains is that with

global wine prices being reduced and South Africa being very dependent on the

global market for export sales, the overall profitability of the South African industry

will be negatively influenced. This highlights the fact that South African producers

need to have a clear understanding of the factors influencing the retail prices which

can be achieved for South African wine, as well as the retail price point at which

production of South African wines is no longer profitable.


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3. UNDERSTANDING THE WINE REVENUE STREAM The previous section has highlighted the fact that there is significant pressure being

placed on wine retail prices due to the global oversupply of wine. The pressure of

the surplus in the wine market is a source of twofold concern for most wine producers

- there is general pressure on prices that can be maintained within the market, while

also demanding an answer to the question of whether the wine produced can or will

actually be sold.

In the introduction to this paper, the explanation was given that the cost breakeven

point of wine is that point where the revenue that can be earned from the sale of a

bottle of wine to a consumer is equal to the total costs that are incurred by a

winemaker to produce the same bottle. This chapter will provide insight into the

portion of the final retail price that is returned to the producer. This amount needs to

be compared to the production costs in order to determine the profitability of making

wine. As the revenue stream is an important part of determining the cost breakeven

point, various factors that impact significantly on the retail prices are also addressed

in this chapter.

Packaged Wine Available for Sale

Wholesaler

Retailer

Wine Purchase by Consumer

Cellar Door Sales


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3.1 Understanding the Sales Value Chain In order to understand the cost breakeven point of wine, it is essential that the wine

producer has a clear image of which factors contribute to the price of wine. One

mechanism with which to do this is to understand the typical supply chain that wine

will follow from the time that the wine is packaged and available for sale, up to the

point that the wine is purchased by the consumer. The diagram on the previous

page, adapted from Perrin & Lockshin (2001), has been constructed to provide a

visual image of this supply chain. Every intermediate step that the product takes

from leaving the cellar to being purchased by the consumer, will impact the portion of

the retail price that is actually earned by a wine producer.

Wine Distribution in South Africa From a South African domestic sales perspective, the two most common routes to

the consumer is either for wine to be sold directly to the consumer by the producer

through cellar door sales or direct marketing, or for the producer to sell directly to the

wine retail stores, of which supermarkets form an integral part. Marketing agents

sometimes also play an intermediary role in this part of the sales chain.

While there are some wholesalers who operate within the domestic market, these

tend to be producing wholesalers who produce their own wine. For these producers,

wine is often purchased in bulk form and bottled under an own brand, or used as a

blending component.

Wine Distribution in International Markets For export purposes, most market channels are increasingly complex, or are

particularly legislated e.g. the US market that requires a three tier distribution

structure. In these cases it is generally common to appoint an agent or wholesaler

within each market that the wine producer targets. Wine is then shipped in volume to

the wholesaler, who will then take responsibility for the distribution of the wine within

the given market. The positive attribute of this distribution channel is that it enables

larger volumes to be pushed into the market. The drawback is that each additional

player in the value chain takes a margin on the cost price, diluting the amount that

can be returned to the producer.


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3.2 Understanding Wine Retail Price Segments Another important factor for the wine producer to understand is that the retail price of

wine is not very flexible, as wine is generally marketed and sold within specific retail

price segments, commonly referred to as price points (Jarvis & Goodman, 2004). It is

essential that the South African wine producer has a good understanding of the

various quality and price segments in both the domestic and international markets in

order to understand the prices which are actually achieved when selling wine.

Careful analysis of the price segments and countries in which the wine will be

marketed can be an important guide to the producer as to the styles of wines to

make, to evaluate what revenue can be earned, and to have a better idea as to the

maximum costs that should be incurred during production.

There are various studies that have been performed around the world aimed at

categorizing the wine market into various segments, each returning a wide range of

possible answers. One of the studies conducted by Ernst & Young Consulting

(Perrin & Lockshin, 2001) in 1999 and further used by the Comitee Interprofessionnel

des Vins du Languedoc (CIVL), a producers’ union in the south of France, was a

division of global wine competition broken down into four categories, named ‘basic

premium’, ‘popular premium’, ‘super premium’ and ‘ultra premium’.

Source: Rabobank, 2003

Wine Quality Segments

l ow c ost pr i c e : US D/ bot t l e

Basic

Icon

Ultra Premium

Super Premium

Premium Popular Premium


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Countries like France and Australia have also invested heavily in studies aimed to

categorise the various market segments, in order to understand the nature of these

segments in more detail, as well as to analyse the competition that exists within in

each of the segments. The general consensus of these studies is that the wine

industry is characterized by a range of quality segments, each with its own trends,

price ranges, market requirements, distribution outlets and so forth (Heijbroek, 2003).

The graph on the previous page is published by Rabobank (Heijbroek, 2003) and

depicts a common analysis of wine quality segments. These categories are often

used within the European and United Kingdom markets when performing market

analysis. While the graph clearly illustrates that there are differences within the

various segments, based largely on the volume of wine available (the relative size of

the bubble) and the overall value per bottle, it is important that the producer

understands the related definitions that are associated to each of the segments.

The data below which is also taken from the same Rabobank study (Heijbroek, 2003)

includes a short description of what the characteristics of the wine should be in order

to be included in the specific market segment. These definitions are, however, very

generic and in most instances would allow for many of the wines retailed today to be

placed into a number of different segments.

Category

Europe Ex-winery

EUR / bottle

Europe Consumer

EUR / bottle

Requirement

Icon >30 >150 Long-term image (this takes time!), complexity, cellaring potential, high scores among critics

Ultra premium 3.35 – 30 14 – 150 Typical, varietal or good blend, more complexity, typical character, origin, image, quality brand

Super premium 2.25 – 3.35 7 – 14 In the higher price ranges: Image, cellaring potential, complexity, well received by critics

Premium 1.65 – 2.25 5 – 7 Brand, recognition, origin, full body, more character, rich, typical for single or two-varietal blend

Popular premium 1.10 – 1.65 3 – 5 Combination of character and accessible, recognizable characteristics of variety, origin, brand

Basic <1.10 <3 Varietal, fruit, accessible, brand Source : Rabobank 2003

Price Segmentation in Europe Each of the quality segments depicted in the table above also has indicative price

points. The consumer prices that are highlighted are illustrative of continental

European off-trade prices (prices paid for wine that is not consumed on the


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premises), as on-trade prices (prices within a restaurant or hotel) can be at least

twice as high. It is however important to take into account that these are indicative

prices only and the category pricing and quality perception vary significantly from

country to country. In France and Spain, for instance, the popular premium segment

is considered to begin at around EUR 1.5 per bottle, whereas in the USA the

premium and popular premium segment generally begins above EUR 3. The number

5, albeit EUR 5 or £5 or $5 appears to be an important barrier in many markets – for

both retailers and consumers and is generally used as category distinction. It is

generally only above the 5 level where it is apparent that quality becomes more

important than volume. It is also the level at which volumes of wine sold drop

considerably. (Heijbroek, 2003)

Price Segmentation in Australia A study performed in Australia in 2001 by the Wine Industry Journal (Perrin &

Lockshin, 2001) used the common terminology of ‘basic premium’, ‘popular

premium’, ‘super premium’ and ‘ultra premium’ as a starting point, and then did

market research amongst wineries, winemakers, exporters, retailers and journalists

to determine the existence of these categories within the Australian industry. The

general consensus achieved was that there are typically four categories of wines

within the Australian market.

• Commercial Wines, which are generally packaged in large scale packaging

such as casks or ‘bag-in-a-box’, and which are very rarely intended for export.

Retail prices are generally less than A$8 – 10.

• Semi-Premium Wines, often seen as the Australian wine industry’s strength,

with sensible prices and ‘good value for money’, with associated

improvements in quality. The majority of wines in this category are exported

and retail prices range from A$10 – A$ 15-20.

• Premium Wines generally retail from A$20 – A$30-50. The price limit

between this category and super premium wines is often blurred and some

winemakers only talk about a hedonistic distinction that exists between the

two categories. They maintain, however, that it is important that the two

categories exist. Among the larger producers who have an extensive range

of products, the need to be able to categorise more expensive ranges in a

higher price segment is important.


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• Super-Premium Wines, are often only used by the larger producing

companies with extensive ranges as marketing tools to allow for perceived

higher values. With price ranges that vary from >A$30 or >A$50, it is largely

dependent on the size of the winery as to where this category begins.

While these four categories are commonly used, there are parties that would argue

that a fifth category of ‘Exceptional Wine’ should be added to the top of the list to be

used for rare and expensive wines (very similar to Icon Wines used earlier on page

15). There are also parties that would prefer to only have three categories, with

premium and super premium wines being collated as the distinction between these

two categories is too blurred.

Price Segmentation in South Africa Price segmentation within the South African market is differentiated between the

official descriptions that are used by the industry regulators and the terminology that

is used within the retail sector.

The official descriptors that are used to describe market segmentation use categories

that are referred to as High Priced (HP), Medium Priced (MP) and Low Priced (LP)

wines. While there could be significant price differences between these categories,

the differentiation is currently explained by the nature of the packaging used, rather

than a specific analysis of price:

• High Priced (HP) wine refers to wine in glass or bottle packaging.

• Medium Priced (MP) wine includes ‘Bag-in-a-Box’ and Tetrapak packaging.

• Low Priced (LP) packaging includes foil bags and plastic bottling. It must be

noted that the use of foil bags (‘papsakke’) has recently been prohibited in

terms of liquor industry regulations, with resulting increases in ‘bag-in-a-box’

volumes.

Even with the category of HP wine, the pricing of wine in South Africa is very diverse,

with the type of still or sparkling wine which is sold being the major contributors to the

price segment. Examples to support this are taken from Euromonitor (2006):

• In looking at the wine market as a whole, almost 50% of all white wine sold in

South Africa retails for under R10 for a 750 ml bottle. This is generally due to


Page 18

an extremely high volume of very poor quality wine that is typically consumed

by low-income groups in rural areas (Euromonitor International – South

Africa, 2006).

• With medium- to higher-priced still wines, white wine is generally priced

significantly lower than the same quality red wine. This can be clearly seen

by the fact that an estimated 9% of red wine sold in 2005 costs more than

R50 per 750 ml bottle, compared to only 5% of white wine (Euromonitor

International – South Africa, 2006).

Data extracted from the Euromonitor International data service shows the volume of

wine that retails in various price segments in South Africa:

Table 3 : South Africa - Volume Sales of Wine by Price Segment

2004 – 05 (million litres)

White Wine Red Wine Under R5 46.2 Under R8 1.4

R5.01 to R10 44.5 R8.01 to R15 3.9

R10.01 to R15 42.7 R15.01 to R30 15.1

R15.01 to R25 24.9 R30.01 to R40 1.9

R25.01 to R50 10.7 R40.01 to R50 2.8

R50.01 and above 8.9 R50.1 and above 2.5

Total 177.9 Total 27.6

When considering this information, there is a clear distinction that wine sales in South

Africa can be categorized into three primary segments.

• The very cheap white wine retailing for less than R10, as well as the cheap

red wine priced below R15 can generally be categorized as commercial and

bulk wine. These wines will normally not be destined for exports. For

purposes of this paper, these wines will be excluded from any evaluations.

• The semi-premium category, making up in excess of 75% of the remainder of

the volume of wine sold, is the R10 – R 25 price level for white wine and the

R15 – R40 segments for red wine. Discussions with retailers have indicated

that these are typical price ranges for consumers buying ‘value-for-money’

wines. This is also supported by Maxwell (2006, p.30) who refers to similar

ranges for the domestic South African market. In using the volumes and

associated values within these categories depicted in the above table, an


Page 19

average price per bottle of R17.00 and R24.50 can be determined for white

and red wine respectively.

• Volumes drop significantly in the price bands above these levels and this

category will be referred to collectively as the premium category. Prices in

this category are more closely aligned between white and red wine and return

an average price of approximately R45.00 per bottle.

Price Segmentation in the United Kingdom A similar distinction can be made with regard to price bands for wine in the United

Kingdom market. The same Euromonitor data analysis has been performed for this

market:

Table 4 : United Kingdom - Volume Sales of Wine by Price Segment


White Wine Red Wine Under £4 84.1 Under £4 53.6

£4.01 to £5.5 208.0 £4.01 to £5.5 184.9

£5.51 to £7 109.1 £5.51 to £7 117.9

£7.01 to £8 37.0 £7.01 to £8 35.2

£8.01 to £9.5 15.7 £8.01 to £9.5 21.0

£9.51 and above 8.3 £9.51 and above 16.3


For purposes of this market, the assumption is made that as wine is not produced in

the United Kingdom, sales of commercial and bulk wine will not skew the analysis.

The lower price classes are therefore reflective of wine of an acceptable quality that

is sold within normal retail distribution channels. This would therefore lead to two

general price categories. The fact that the same price bands are used when

comparing red and white wine also result in the average prices achieved within the

bands to be more comparable than what is apparent when using the South African

analysis:

• The semi-premium category makes up 60% of the volume of wine sold and

represents the price bands under £5.50. The average price within this band

based on the volumes provided in the table is approximately £4.00 per bottle,

regardless of red or white wine.


Page 20

• While there are still significant volumes in the price band from £5.51 – £7.00,

volumes decrease significantly above this price level. If all the price bands

above £5.50 are considered to be the premium category, the average price

per bottle is approximately £7.00.

Price Segmentation in the United States The analysis of the United States market using the same Euromonitor data analysis

highlights similar trends to the South African data, with significant volumes of wine

being sold at prices below $2.99. These wines are typically the ‘Two Buck Chuck’,

‘Jug Wines’ and bulk wine, which for purposes of this analysis will be considered

commercial wines and excluded.

Table 5 : United States - Volume Sales of Wine by Price Segment


White Wine Red Wine Under US$2.99 220.0 Under US$2.99 178.9

US$3 to US$6.99 262.9 US$3 to US$6.99 280.0

US$7 to US$9.99 134.2 US$7 to US$9.99 138.9

US$10 to US$13.99 49.2 US$10 to US$13.99 53.3

US$14 and above 36.5 US$14 and above 50.5


The two remaining price categories within the US market can therefore be described

as follows:

• The semi-premium category makes up more than 80% of the volume of wine

sold and falls within the price band from $3.00 - $9.99. The average price

within this band is approximately $6.20 per bottle, regardless of it being red or

white wine.

• The premium band starts at $10.00 a bottle and returns an average of

approximately $13.00 per bottle.

General Comment on Price Segments Examples have been provided on price segmentation for four different markets, each

with different terminology and different pricing. While there is some commonality in

terms of the typical trends within each of these markets, it is important that producers

do a detailed analysis of the target price segments and markets in which they aim to


Page 21

sell their wine. This is made even more appropriate by the following explanation of

market segments from Rabobank (Heijbroek, 2003, p. 3):

It is therefore very apparent that the ultimate and clearest criterion for

quality is the value of the wine as perceived by the market and consumer.

From a market perspective, the producer has the ability to manage and

market the brand and image of the wine, which contributes significantly to

the perceived value of the wine, and is also where the concept of brand

value comes into its own. The overall value of the wine is determined by

what the consumer is prepared to pay for the wine, and is expressed in

the average price per bottle. This prompts the price distinctions in the

market, and so creates different quality and related price segments.

This definition, as well as the actual price data depicted in this section, also makes it

apparent that price differences between segments are NOT only a factor of the

volume of wine available for sale. The quality of the wine produced as perceived by

the consumer is an important factor affecting the overall price for which the wine will

retail. While price sensitivity and competition will be at its fiercest in the commercial,

semi-premium and lower priced premium wines, wines in the premium and higher

segments are generally less price sensitive, as the consumer will focus more on the

quality and reputation of the wine than on the price.

3.3 The Impact of the Supermarket Chains While this chapter has focused on the impact of the global surplus on retail prices,

there is actually a second key factor that is putting pressure on wine prices

(Lockshin, 2003). The increased buying power that the large retail chains are

exerting on the overall supply chain (Heijbroek, 2004) is also resulting in price

reductions, as this route to market becomes increasingly important to the cellar as a

primary distribution outlet. The South African wine producer must understand the

impact that using the supermarket chains as a retail outlet may have on the wine

sales prices that are achieved.

The table below has been compiled from the country specific analyses of the

Alcoholic Drinks Business published by Euromonitor in 2006 for South Africa, the

United Kingdom and the United States (Euromonitor International, 2006). It shows

the relative volumes of off-trade wine sales by distribution channel. It clearly


Page 22

illustrates the dominant position that the supermarkets and discounters have on the

global wine industry.

Table 6 : Off-Trade Sales of Wine by Distribution Format – 2005

South Africa %

United Kingdom %

United States %

Supermarkets 39.0 69.0 43.5

Other Food Stores 5.6 8.5 6.6

Discounters 41.0 2.0 10.1

Specialists 8.0 14.3 22.1

Direct Sales 4.4 6.1 2.2

Other 2.0 0.1 15.6

Total 100.0 100.0 100.0

Many people would argue that this is a good position to be in as it enables significant

consolidation of the wine distribution channel. It should therefore allow for efficient

and profitable management of wine sales. There are three important factors that

need to be understood when considering what the impact of this dominant position is

on the profitability of wine sales.

Retail Price Points within the Supermarket Channel Firstly, consideration must be given to the fact that more than 50% of the wine sales

in the United Kingdom for the year to March 2005 made across multiple supermarket

stores were priced below £3.00 (Schmitt, 2005). Given the overall volume of wine

that is moved through this channel, the significance of this average price becomes

enormous. This simple statistic becomes even more terrifying when considering the

distribution of this amount within the value chain: £1.71 represents Value Added Tax

(VAT) and Customs and Excise taxes, approximately £0.95 will go to retailer and

wholesaler margins, which leaves only 34 pence that will go to the producer to

harvest, make, bottle, close and ship the wine to the United Kingdom.

The impact of fixed retail price points in the supermarket distribution channel is

clearly illustrated in the graph below, where due to the drive on volumes, almost 80%

of wine is sold for an average price of less than £4, and more than 90% is sold for

less than £5. Producers and retailers have been reported to make the comment:

“…you cannot sell any significant volumes at prices over £5 pounds, and you cannot

make any significant margins at prices below this level...” (Schmitt, 2005, p. 26).


Page 23

Wines Sales by Supermarket by Price Band

0.1%

0.1%

0.1%

0.5%

0.5%

0.3%

2.0%

1.4%

5.7%

6.4%

19.3%

13.0%

25.0%

25.7%

£10.00 or more

£9.00 - £9.99

£8.00 - £8.99

£7.00 - £7.99

£6.50 - £6.99

£6.00 - £6.49

£5.50 - £5.99

£5.00 - £5.49

£4.50 - £4.99

£4.00 - £4.49

£3.50 - £3.99

£3.00 - £3.49

£2.79 - £2.99

Under £2.79

Volume Drivers within the Supermarket Chain The second factor is that the primary aim of supermarkets and discounters is to be a

volume business, where success is measured by the increases in product volumes

that are passed through the store (Bolin, 2005). There is also a greater emphasis on

wine as one component of a ‘basket of products’, with less emphasis being placed on

the overall contribution that wine as a product in its own right would have in a

specialist environment. This leads to increased use of sales techniques for wine that

will either encourage increased volume buying, or entice more people to visit the

store. The mechanics for a wine promotion vary from supermarket to supermarket.

These are some of the more common techniques that are used in the United

Kingdom (Gold, 2006):

• Buy 2 get 1 free

• 2 for £10.00

• 3 for £10.00

• 15% off

• £1.00 off per bottle

The effect of these promotions is significant, with the ‘£1.00 off’ or ‘3-for-the-price-of-

2’ deals tending to generate 10 to 20 times the normal weekly sales level, and the

‘half-price’ deal resulting in more than 100 times the normal weekly sales level, and

enticing more customers to the store (Schmitt, 2005) . Regardless of the nature of

the discounting used, the important factor to take into account is that these discounts

Source; TN5 (52 w/e 27.03.05)


Page 24

are ultimately factored into the average price which the consumer pays per bottle,

and most often comes predominantly at the suppliers’ expense.�

It is also essential for a producer who wishes to use the supermarket channel as a

route to market to be able to produce the volumes of wine that will be able to support

this distribution channel continuously. These wines are generally known to be ‘easy

drinking’ and ‘value-for-money’, but quality cannot be lacking. There is also a

requirement of ongoing consistency of the product, as this volume of wine is closely

linked to a brand image that is created by the producer. In contrast to this,

experience will show that it becomes increasingly more difficult to produce a quality

wine when winemaking is done on a large scale, and the consistency of the wine

needs to be maintained through varietal and vintage blending. Because of this, the

end product is most often not at the same level of quality that a small scale producer

would be able to achieve with the same grapes.

Cost Drivers within the Supermarket Chain With the expanding number of producers, the related brands on the market, and the

general state of oversupply, it is not only the decreasing prices paid for the wine that

impact on the profitability of the wine. Gold’s analysis of the English Wine Market

(Gold, 2006) shows that there are also a number of direct costs that need to be

incurred in order to obtain and maintain a listing and shelf space with a retailer. The

materiality of these costs is an important factor to consider when distributing wine

through the supermarket channel and should be considered as a specific category of

marketing and distribution costs (discussed further on page 47). These costs

include:

• Listing Fees: normally a ‘once-off’ payment, or an annually negotiated

amount, to get the wine on the shelf within the supermarket.

• Distribution Fees: transport costs are paid to the supermarket to distribute the

wine from the supermarket’s central warehouses to the various stores.

• Advertising Fees: these can be a page or section of the store magazine, or

in-store advertising where advertising material is placed within the store.

• Space or Gondola Fees: this fee is paid to have the wine prominently

displayed within the store e.g. the end of an aisle, or on a separate display

stand.


Page 25

• Club Card and Research Fees: any costs incurred by the retailers to attract

customers to provide research information are passed on to the producers.

3.4 The Impact of Exports Questions can be raised at this point as to why there is so much emphasis placed on

the wine quality segments and related price points across different markets outside

South Africa, as well as using examples of supermarket prices in the United

Kingdom. The concept of a domestic surplus was introduced in section 2.1, which

explained that the larger the domestic surplus is, the more dependent the country is

on exports to utilise this surplus. When evaluating the annual SAWIS statistics on

the extent of the South African Wine Industry (2006), the dependency that the South

African wine industry has on exports is apparent.

Table 7 : South African Wine Production vs. Domestic Consumption vs.

Exports – 2004/05 Natural Wine 2004

Million Litres 2005

Million Litres 2004 / 2005

Trend Production 696.788 628.483 90.20%

Domestic Consumption 308.707 301.093 97.53%

Exports 265.762 279.871 105.31%

The Production and Market estimates for 2006 – 2010 also published by SAWIS

(2005) further illustrate this dependency on export markets (refer to page 10).

Domestic consumption of wine is forecast to be largely constant year on year,

whereas the export requirements are increasing at rates of 12% and 6% for red and

white wine respectively.

While it is known that the South African wine industry has been very successful in

major export markets over the last ten years (Heijbroek, 2004) (the UK and the

Netherlands in particular), the pressure on the industry is to maintain these market

positions against the increasing competition that is being experienced due to the

global surplus. Countries like Australia, Spain, Italy, Argentina and Chile have

always been considered as major threats to South Africa due to the volume of wine

that is already produced in these countries. New threats to South Africa’s market

share may also come from China, as Chinese producers are beginning to produce

significant volumes of wine at improving levels of quality (Murray Brown, 2005). The

surplus experienced by the French producers as a result of increased global

competition and reduced domestic consumption is leading to a major change in


Page 26

marketing strategies for many French wines. This situation is becoming a greater

challenge to South Africa’s market share.

With this as background, it becomes essential for South African producers to have a

clear understanding of export conditions for wine and the sustainable profitability that

can be expected. The additional factor that producers wishing to export need to take

into account is that South African business is generally exposed to a volatile

exchange rate, where a number of economic factors that are not related to or

controlled by the wine industry can cause significant variations in the exchange rates

between the South African Rand and major international currencies. Where

profitability margins are already small, even a small variation in the exchange rate

could mean the difference between making a profit or loss on the sale of a case of

wine.

Wines of South Africa (WOSA) is putting an increased effort into improving the

overall market share of South African wines across a number of the key export

markets. These include the United Kingdom, which remains the most important

export market for South African wines, the United States of America, Holland,

Germany and Scandinavia (WOSA, 2005).

Producers that are best positioned to tap into the export markets will generally be

best positioned for longer term sustainability, as decreasing domestic consumption

will also result in increased price competition within the local market as well. In

order to be able to work within the export markets, a great deal of emphasis needs to

be placed on having attractive brands that can be positioned at various price points

within the market, having sufficient volumes in order to maintain market share and

also having the sustainable financial power to support these brands. (Heijbroek,

2004)

3.5 Bringing it all together With all the information that has been provided in this chapter, what remains is to

provide an example showing how to determine what the typical amount is that will be

returned to the producer, as this must be higher that the cost breakeven point of the

wine produced in order for the producer to be profitable. In order to determine this

amount, we need to work backwards through the distribution chain and determine

which amounts will typically be deducted from the retail price per bottle in order to

calculate the amount accruing to the producer.


Page 27

• Retail Price: The full amount paid for the bottle of wine by the consumer.

Care must be taken to determine the impact of any discounts or special offers

on the overall price per bottle.

• Sales Tax: Tax legislation pertaining to sales needs to be analysed by country

in which the sale will take place. In South Africa and the United Kingdom,

Value Added Tax (VAT) is used. This is an inclusive tax i.e. the price on the

label is the final price paid for the product and includes the tax amount. The

current VAT rates for South Africa and the UK are 14% and 17.5%

respectively. In contrast, the USA applies a general sales tax which is not

included on the label price, but is added to the price at the point-of-sale

(Euromonitor International, 2006).

• Retailer Margins: The margins added to the cost price by the retailers vary

from product to product and from country to country. Euromonitor’s country

reports for 2005 (Euromonitor International 2006) indicate that average mark-

ups for off-sales of wine were 50.0%, 24.0% and 36.5% for South Africa, UK

and USA respectively. Discussions with various retailers in South Africa have

demonstrated that a 50% retailer margin is only achieved in very few,

specialist wine shops. A typical average retail margin in South Africa is

approximately 35% percent.

• Wholesaler and Agent Margins: As explained above, wholesalers are not

generally used within the South African distribution channel and are therefore

not being considered for this part of the example. For purposes of the UK

and USA, Euromonitor (2006) indicates that the average mark-ups for wine

were 24.0% and 26.0% respectively. Where marketing agents are used to

support domestic wine sales, their margins should be factored into the

calculation in this section.

• Customs and Excise Duties: Duties form a substantial price component for all

alcoholic beverages, and as such, could form the subject of a paper on its

own. From an excise perspective, the South African government generally

follows a policy of excise normalization which aims to bring South Africa

excise taxes in line with those charged overseas. At the same time it is

attempting to increase the cost of alcoholic drinks in order to deter over-

consumption (the concept of sin taxes) (Euromonitor International, 2006).


Page 28

The South African excise tax rate for 2005 for unfortified wine products is

140.52 cents per litre (as published by the South African Revenue Services).

This was increased to 158,09 cents per litre in March 2006. Wines exported

from South Africa are not subject to the local excise tax.

Wines imported into the UK are subject to import duties equivalent to the local

excise on wine products at a rate of £167.72 per hectolitre, or £1.6772 per

litre. Excise and import duties on wine in the USA are very complex, with

different requirements and rates that apply in the different states within the

USA. Federal or national excise duties vary from $1.07 - $3.30 per litre for

wine, depending on the type of wine and the alcohol content. On top of this,

the average State excise duty amounts to $0.19 per litre and there are also

import duties which vary from $0.084 - $0.198 per litre (Euromonitor

International, 2006).

• Once all these amounts are deducted, the remaining amount will normally be

accrued to the producer. The only additional factor that will influence this

amount will be the specific exchange rate that applies to this transaction.

For purposes of this paper, the following assumptions have been applied:

• We divide the market into two broad price categories: a semi-premium wine

that is typically produced for distribution through a supermarket chain and a

premium wine that will sell through a specialist retailer. The average prices

determined in the previous sections are used as illustrative prices in each of

these categories (refer to pages 18, 19 and 20). It is also important to note

that white and red wines are considered as one price category in this example

for the United Kingdom and the United States, as the price segment

similarities explained earlier return similar average retail prices.

• Our producer will sell wine in South Africa, with distribution going directly to

the retailers, the United Kingdom and the United States of America.

Distribution in both export markets will be done using a wholesaler or agent.

The following table can be constructed using the specific data provided in the

paragraphs above. It clearly shows the distribution of the retail price per bottle of

wine and the final value returned to the producer.


Page 29

Table 8 : Analysis of the Split of Retail Price between Intermediaries

South Africa (Rand)

United Kingdom (Pounds)

United States (Dollars)

Semi-Premium White Red

Premium Semi- Premium Premium Semi-

Premium Premium

Retail Price 17.00 24.50 45.00 4.00 7.00 6.20 13.00

Sales Tax -2.09 -3.01 -5.53 -0.60 -1.04 0.00 0.00

Retail Margin -3.87 -5.57 -10.23 -0.66 -1.15 -1.66 -3.48

Wholesale Margin 0.00 0.00 0.00 -0.53 -0.93 -0.94 -1.97

Customs and Excise -1.05 -1.05 -1.05 -1.26 -1.26 -2.29 -2.29

Net Amount to Producer 9.99 14.87 28.19 0.96 2.62 1.32 5.27 Exchange Rate (Rand : 1) (Illustrative) 1.00 1.00 1.00 11.50 11.50 6.50 6.50

Amount to Producer 9.99 14.87 28.19 11.00 30.09 8.56 34.26

The table makes it clear that the costs and taxes that are incurred between the final

packaged product being available for sale and the retail price have a significant

impact on the amount paid to the producer per bottle of wine. These costs are

generally fixed amounts per bottle, regardless of the volume of wine produced or the

relative size of the winery. However, the extent to which they are incurred can be

influenced by careful management of the distribution network that is used. Costs will

increase in line with the overall complexity of the distribution network required to

retail the wine.

A further conclusion is that any wine producer will need to perform a careful analysis

of the countries, market segments and price bands in which he wants to compete

prior to producing wine. Production decisions impacting on the cost of production

can only be effectively taken if this information is freely available. The following

chapter of this paper will examine the cost decisions in more detail and allow for a

comparison between the revenue generated and the costs incurred.


Page 30

4. UNDERSTANDING PRODUCT COSTING FOR WINE The previous chapter has highlighted what portion of the retail price of a bottle of

wine accrues to the producer. It also explained certain of the other key factors that

have a significant influence on retail prices in general. With these answers, the

question that is raised is to what extent a wine producer can affect the cost of

production to ensure that the overall cost is within the return that will be generated.

This research has shown that there is very little information published on the costs of

making wine. This is partly due to the lack of any standards used for maintaining

accounting and cost information, but also due to the underlying fear of producers that

disclosing costs will impact on the competitiveness of the cellar. Because of this lack

of published information, this chapter will provide insight into which costs are incurred

by the producer in making and bottling wine. It will also provide a simple framework

that can be implemented by a wine producer to determine the typical cost of a bottle

of wine. In order to determine overall profitability, these costs will also be compared

to the revenue earned for the producer.

4.1 Accounting for Wine Costs When considering wine production from an accounting perspective, wineries use

accounting information in the same way as any other business in any other industry,

with the primary focus being to determine the overall financial performance of the

business. However, an important differentiation is that a modern winery should also

be able to use its accounting systems to determine the costs of the various stages of

wine production (Sulley, Lease & Dal Poggetto, 2004). This concept of “product

costing” has a significant impact on the valuation of inventory, as well as the overall

cost of goods sold. It therefore has a direct influence on the accuracy of financial

reporting. More importantly, product costing has a direct effect on management

decisions regarding pricing, inventory levels and general profitability.

Understanding cost centres To understand wine product costing, the wine production process needs to be

analysed and broken down into a series of steps that are logical and to which costs

that are incurred can be directly or indirectly associated. When considering the

overall production of wine at a macro level, the process could be subdivided into the

following main activities:


Page 31

• Grape production, which explains all the viticultural activities that take place,

including the establishment of vineyards, all the activities through the various

seasons such as pruning, canopy and pest control, up to the point of harvest.

• Primary production, or bulk wine making, which addresses all the vinicultural

activities that take place in the cellar from the point of receiving the grapes at

the crusher, through fermentation, up to the point where the bulk wine is

available in storage tanks.

• Secondary production, that accounts for the further vinicultural activities that

take place in order to prepare the wine in a format which is suitable for selling

to the consumer. These would include extended barrel ageing for premium

quality wines, as well as all the packaging and bottling activities that take

place in the cellar.

The degree of granularity that needs to be achieved when defining these steps will

be determined by the level of cost analysis and subsequent cost control that the

winery management team would like to achieve. The overall objective is to identify

and segregate costs that can be managed separately. Once these activities have

been identified, they become the basis for defining cost centres (an accounting term

used to explain how costs associated with the specific activity are accumulated). The

best recommendation to determine what cost centres are required is “Thinking like a

winemaker” (Sulley, Lease & Dal Poggetto, 2004).

Informal discussions held with financial managers and accounting staff from a

number of different wineries have demonstrated that there are no industry standards

that are adhered to when determining which cost centres need to be created. This is

also supported by the SAWIS report on Information Technology published in 2004

(2004), which clearly shows that few accounting systems used within the industry are

actually used for cellar management and product costing. Most of these kinds of

activities are being performed on spreadsheets outside of core financial systems.

There are a number of different cost elements that impact on the overall cost of wine.

While a jumbled list of these elements could be prepared, structure needs to be

provided to the costs in order for benchmarking to be done. In order to work towards

a common breakeven cost point for purposes of this paper, a suggested process flow

and distinct activities have been created. Elements from the study performed by


Page 32

Perrin and Lockshin in their article in the Wine Industry Journal (2001) have also

been included. The key elements of the proposed value chain are:

• Grape Production, which covers all the processes in place to produce and

deliver grapes to the cellar.

• Primary Wine Production, which addresses the processes used to convert

grapes into bulk wine in a tank form from which an initial sales transaction

could take place.

• Secondary Wine Production, which addresses the secondary winemaking

processes and enables wine to be sold in forms other than bulk wine. In

simplistic terms, these include wood ageing, cellaring and packaging /

bottling.

• Marketing, Sales and Distribution and other Administrative and Overhead

costs which address the processes to sell the bottled wine, and to run an

efficient business operation around the production facilities.

This process flow, from the point of origination to the point of having packaged

product available for sale, is set out schematically in the diagram on the following

page. More details on each stage are set out in the remaining sections of this

chapter.

Understanding direct costs, indirect costs and cost drivers Within each of the sections explaining costs, references will be made to direct costs,

indirect costs and cost drivers. Davidson (2003) explains these concepts as follows:

• Direct costs are those incurred in direct relation to the activity that is being

performed e.g. pesticide costs can be directly attributed to the vineyard based

on the expenses incurred from a spraying program. These costs can be

subdivided to a level where costs can be directly associated to a block of

vines within the vineyard if this level of granularity is needed. These direct

costs are generally also related to specific cash costs that are incurred on a

day-to-day basis.

• Indirect costs, in contrast, are those that cannot be directly attributed to the

specific activity. These costs are generally accumulated and allocated to the


Page 33

activity in a predefined ratio e.g. interest charges will be incurred by the

winery as a whole and may then be allocated to specific stages of the process

based on the total capital amounts invested.

• Cost drivers are the key measures within each activity that play a direct role in

determining the unit costs that are allocated to a specific activity e.g. the

extraction of wine per ton of grapes will have a direct impact on the cost per

litre of wine produced.

Grape Production

Wine Making(conversion of grapes to bulk wine)

Bottling and Packaging

Packaged Wine Available for Sale

Wood Ageing

Bulk Wine Available for Sale

Grape Purchase

Bulk Wine Purchase

Analysing Wine Production Costs

4.2 The Cost of Grapes Grapes form the primary raw material for wine production. While all costs relating to

viticultural processes are accounted for within the category of grape production,

significant differences in costs are identified when considering that grapes are

sourced in three different methods in the South African wine industry:


Page 34

• Wineries that are registered as estates own their vineyards. A standard

regulation is that all the grapes that go into the “Estate” branded wine must be

sourced from these vineyards. A number of the estates also have separate

labels that use purchased grapes in the same way that private cellars and

producing wholesalers do.

• Private cellars and producing wholesalers, generally purchase grapes from

grape producers. These transactions take place ‘at arms length’. Market

forces such as supply and demand and the quality of the grapes have a direct

impact on the cost per ton that is incurred.

• Producer Cellars, or the traditional co-operative cellars, purchase grapes from

their members. While standard prices are agreed before every harvest, the

overall price per ton of grapes is finally determined by the overall profitability

of the cellar for a given harvest season. The major purpose of the producer

cellar is to return this profit to its members in the ratio of tons delivered to the

cellar. This distribution is made in the form of the final price per ton that the

member receives for his grapes.

Costs relating to owned vineyards In order to determine the costs of grapes related to owned vineyards, the total input

costs need to be determined. In a 2005 study conducted by Vinpro (Van Wyk, 2005)

on the production costs for wine grapes, the overall cost per hectare was determined

as being an average amount of R20 643. This amount was made up of two

components, the first being direct cash expenses of R15 010 comprising the

following categories of costs:

• Direct Costs: fertilizers, pest and herbicide control, and repairs and binding

material.

• Labour: the permanent work force, seasonal labour for pruning and

harvesting, and the cost of supervision.

• Mechanisation Costs: fuel, repairs, spare parts, and transport hired in for

seasonal peaks.

• Maintenance Costs: expenses on the fixed infrastructure that is created on

the farm.


Page 35

• General Expenses: water and electricity, rates and payroll taxes, and

administrative expenses.

The second component was a provision for renewal of R5 633 per hectare which is

calculated to allow for ongoing, sustainable farming. While this does not represent

cash expenditure in a given year, this long-term savings amount includes provisions

for the replacement and renewal of vines, upgrades to the farm infrastructure, as well

as replacement of loose assets.

Once the cost per hectare is determined, the next logical step is to calculate what the

cost per ton of grapes harvested will be. Vinpro (2005) compares the cost of

R20,643 per hectare to the average yield per hectare across the industry as a whole.

This yield amounts to 13.79 tons per hectare based on Vinpro statistics. The

resulting calculation shows that the average cost for grapes is R1 497 per ton.

Table 9 : Production Costs for Wine Grapes (2005)

Ste

llenb

osch

Paa

rl

Olif

ants

rivi

er

Wor

cest

er

Bre

edek

loof

Kle

in K

aroo

Rob

erts

on

Ora

njer

ivie

r

Ave

rage

Direct Costs 3 183 1 928 2 056 2 893 3 027 2 058 2 381 1 439 2 426

Labour 9 231 7 350 4 288 6 224 5 712 5 157 5 748 5 410 6 590

Mechanisation 3 196 2 392 3 118 3 235 2 884 3 007 2 414 2 966 2 852

Fixed Improvements 941 772 761 747 708 533 666 443 738

General Expenses 2 657 2 073 3 084 2 671 1 760 3 024 2 314 2 121 2 403

Provision for Renewal 5 746 4 881 6 492 5 722 5 216 5 740 5 749 6 128 5 633

Total Expenses 24 954 19 396 19 799 21 492 19 307 19 519 19 272 18 507 20 643

Average Area Planted 109.01 87.64 42.21 72.95 87.64 25.31 64.36 17.01 72.66

Average Yield

(tons per hectare)

6.88 9.11 20.72 13.78 15.41 16.18 13.89 26.63 13.79

Total Expenditure

(Rand per Ton)

3 627 2 129 956 1 560 1 253 1 206 1 387 695 1 497

Source : Vinpro This cost is the average for the industry as a whole. The table below extracted from

the Vinpro study clearly reflects that there are significant variations in these costs

when looking at different grape growing regions, with the most significant cost

contributors explaining the variations being labour, direct costs and the differences in

yield per hectare. These have a significant influence on the cost per ton.


Page 36

While the average cost is R1,497 per ton, the range of costs varies from a low end of

R695 per ton from the Orange River district, to a high end of R3,627 per ton from

Stellenbosch, The significance of this range becomes even more apparent when

converting this value to a cost per 750ml bottle, with the range being from 69.5 cents

to 362.7 cents per bottle using an average extraction of 750 litres of wine per ton of

grapes. This extraction can be considered to be high and includes all grape varieties

and quality segments. Wine producers focusing on premium segment wines

recommend that this average should be closer to 650 litres per ton.

The first cost driver that is highlighted when determining the cost per bottle is the cost

per hectare of grapes. While it can be argued that these input costs are very similar

across all vineyards, scientific farming techniques would require that these costs be

recorded and managed at a vineyard level to allow for sound cost management

decisions.

There are four important factors to note within these cost categories that are not

taken into account in this calculation.

• No provision is made for the cost of land. While this is correct in determining

the minimum costs related directly to wine, consideration must be given to the

fact that unless the farming land was obtained without cost e.g. inheritance,

the cost of the land would need to be factored into the overall cost structure

as a return on investment would be required, or interest charges would be

incurred to finance the purchase.

• No interest costs are factored into the overall costing. Even if the cost of land

is not taken into account, the establishment costs of the vineyard will entail a

significant cash outlay before any return on these costs can be realized.

Vinpro (Van Wyk, 2005) determined that the average establishment costs of

vineyards amount to approximately R65 000 per hectare. If interest is

calculated at 8% per year, this requires that an additional R5,200 of interest

costs should be factored into the overall cost model.

• There is no profit or remuneration factor that has been included to remunerate

the owner of the property. According to the SAWIS industry statistics

released in 2006, there were a total of 4 360 primary wine producers or grape

farmers in South Africa, who deliver grapes to 581 wine producing co-

operatives, private wine cellars or producing wholesalers. In the case of an


Page 37

estate or private cellar with its own vineyards, this remuneration would need

to be factored into the required profitability of the cellar as a whole. However,

as the majority of grape producers do not make their own wine, this

remuneration factor also needs to be considered. In a presentation done by

Vinpro to the Cape Wine Producers in January 2006 (Van Wyk, 2006), the

average living expenditure required by a typical grape farmer amounts to

approximately R20,000 per month, or R240,000 per year. When converted to

an amount per hectare, additional costs of between R2,220 and R14,000 per

hectare need to be added, depending on the average size of the farm.

• Discussions with Vinpro as well as Stellenbosch and Paarl grape producers

have indicated that the costs illustrated here may be conservative, as they are

based largely on the bulk producing regions. Their experience demonstrates

that establishment costs can amount to as much as R135,000 per hectare for

quality vineyards before any return will be realised, and that the annual cost

of R20,643 should only be considered as a baseline. Premium quality

vineyards’ operating costs are often significantly higher.

The second cost driver that has a significant impact on the cost of wine is the yield

per hectare. This is already clearly illustrated in the table on page 35 which shows

the cost per ton of grapes across the different grape growing regions. While this is

one differentiator, mention must be made that yields between white and red grape

varieties can also differ significantly and should therefore also be taken into

consideration. The industry averages for yields per ton are 18.1 tons per hectare for

white grapes and 8.6 tons per hectare for red grapes (PricewaterhouseCoopers

2004). The table below indicates how the difference in yields per hectare between

red and white grapes, as well as the wine extraction differences between red and

white wine, have a significant impact on the overall input cost per litre, regardless of

the costs per hectare. Grape costs for wine made from red grapes is calculated as

332.9 cents per litre, compared to white wine at 148.4 cents per litre.


Page 38

Table 10 : Converting Grape Costs to Litre Equivalent Red Grapes White Grapes Average Cost per Hectare (Rand)

20,643 20,643 20,643

Yield per Hectare (tons)

8.6 18.1 13.8

Cost per Ton (Rand)

2 400 1 140 1 497

Extraction per Ton (litres)

721 768 750

Cost per Litre (cents)

332.9 148.4 199.6

If the interest costs at R5,200 per hectare that are not included in the standard cost

of R20,643 per hectare are also taken into account, the cost per litre increases to

416.8 and 185.9 cents for red and white wine respectively, with an industry average

of 249.9 cents.

Costs related to Purchased Grapes As explained in the introduction to this section, differentiation needs to be made

when considering grape purchases for Private Producers and Producing Wholesalers

as compared to grapes purchased by Producer Cellars from their members.

Based on SAWIS statistics for 2005 (SAWIS, 2005), the average price for grapes

purchased, excluding producer cellars, was R3 593 per ton, or R3 864 and R3 103

per ton for red and white grapes respectively. What is important to note when

considering these prices is that all the previous factors of land ownership, interest

and remuneration are already factored into the prices agreed between the farmer and

the wine producer and therefore do not have to be considered as part of the cost

decision.

When using the same formula as described in the previous section for converting

these amounts to cents per litre, the result is 535.9 and 404.0 cents for red and white

wine respectively, as is depicted in the table below. These amounts increase to

545.1 and 459.8 cents per litre respectively when only considering the “Big 8’

varietals, which make up 85% of the volume of grapes purchased. In all of these

examples, it is clear that the grape producer receives an acceptable return on the

typical costs that are incurred to produce these grapes when comparing these prices

to the input costs that were explained in the previous section.


Page 39

Table 11 : Grape Costs from Private and Non-Producer Cellars – 2005

Red Grapes White Grapes Average All

Varietals “Big 5” All


Varietals “Big 8”

Cost per Ton (Rand)

3 864 3 930 3 103 3 531 3 593 3 802


721 721 768 768 750 750


535.9 545.1 404.0 459.8 479.1 506.9

These costs need to be compared to the revenue realized by members of producer

cellars (the traditional co-operative cellars), where the cost per ton of grapes is

largely determined by the overall profitability of the cellar for a given harvest season.

The SAWIS statistics on grape prices for 2005 for producer cellars (first estimates)

was again used as the basis for this determination (SAWIS, 2005). In significant

contrast to the grape prices illustrated above, the average rand per ton realized by

members of producer cellars amounts to R1 307 per ton, or R1 752 and R1 156 for

red and white varietals respectively. Using the same extraction rates, the costs for

red and white wine are then calculated as 243.0 and 150.5 cents respectively.

Table 12 : Grape Costs from Producer Cellars - 2005

Red Grapes White Grapes Average All



Varietals “Big 8”

Cost per Ton (Rand)

1 752 1 896 1 156 1 399 1 307 1 595


721 721 768 768 750 750


243.0 263.0 150.5 182.2 174.3 212.7

This comparison of the primary input costs of grapes illustrates why producer cellars

are able to produce wine at a substantially cheaper cost per litre. However, when

comparing the revenue earned per ton of grapes compared to the average costs per

ton that were determined earlier in this section, concern must be expressed as to the

long-term sustainability of farmers that deliver primarily to the producer cellars.

Table 13 : Producer Profitability

Red Grapes White Grapes

Average

Input cost per ton (excluding interest and profit)

2 400 1 140 1 497

Return per ton 1 752 1 156 1 307

Net income per ton (Rand)

-648 16 -190


Page 40

These prices practically illustrate one of the harsh realities of the current global

surplus. A large percentage of the wine produced by the producer cellars is typically

marketed within the commercial and semi-premium segments. The grape and wine

surplus has its maximum effect of competition and prices in these segments and is

generally driving retail prices down. The private cellars and producing wholesalers

are forced to carry these reduced prices themselves, which is then reflected in the

profitability of the cellar. In the case of the producer cellars, the reduced prices and

resulting reduction in profitability is manifested in lower prices that are paid to

members for their grapes.

4.3 Costs of Primary Production

The next phase of the production process is to convert grapes brought into the cellar

into wine in a bulk or tank format. These primary production costs are therefore

normally associated with crushing, fermentation and immediate storage of the bulk

wine. While each of these activities could be recorded as a separate cost centre in a

winery to allow for improved cost and yield control, all these costs are accumulated

for purposes of this paper.

A specific distinction is made in most wineries between primary or bulk wine

production and secondary or bottled wine production due to the large volumes of

South African wine that are sold in bulk. Industry averages on the extent of bulk wine

sales from Producer Cellars are depicted on the graph below, extracted from the

PricewaterhouseCoopers benchmarking survey (2005).

Composition of Producer Cellar Sales : 2004

Red: Bottled, 14%Red: Bulk, 19%

White; Bottled, 26%White: Bulk, 41%


Page 41

Where no specific sales contracts are closed for the sale of bottled wine, the

management team has the alternative of sourcing bulk contracts, where wine is sold

by the litre without taking ageing and bottling costs into account. Transport costs

and import duties associated with bulk wine are significantly lower than bottled wine

(Boothman, 2005 and Cran, 2006), which result in this often being a cheaper

distribution chain. There are also an increasing number of retailers and supermarket

chains in export markets such as the United Kingdom that are creating their own

brands and use blends of imported, bulk wines to produce these brands (Die Burger,

3 April 2006).

The PricewaterhouseCoopers benchmarking survey for producer cellars (2005)

illustrates that the average primary production cost for this category of producers

amounts to R553 per ton. This includes overhead costs which can be attributed

directly to this part of the production process. The four largest cost elements making

up more than 50% of this total are labour (20%), chemicals and filtration materials

(13%), depreciation representing a provision for replacement (13%) and finance and

interest charges (11%).

While the average price amounts to R553 per ton, the overall tonnage processed by

the cellar is a significant driver in determining the cost per ton. It must be noted that

this amount is based on producer cellar statistics, as these are the only published

values that could be found. There are currently 65 registered producer cellars

according to SAWIS statistics (2006), which typically account for more than 75% of

the total volume of grapes crushed. The size of these production facilities will

therefore tend to be far larger than those that will be used by estates or private

cellars. As such, certain economies of scale will be achieved that will result in the

R553 per ton that is reported here being at the lower end of the cost range. The

PricewaterhouseCoopers survey report (2005) also provides an analysis by relative

cellar size which illustrates how the economies of scale can have a significant overall

saving on the cost per litre.

Table 14 : Primary Production Cost Variations by Producer Size

Tonnage Processed < 10,000 10 000 – 25 000 > 25,000 Industry

Costs / ton (Rand)

644 657 434 553

Extraction (Litres)

756 738 782 760

Cost per litre (cents)

85.2 89.0 55.5 72.8


Page 42

The Vinpro analysis of grape production costs (2005) in the various regions showed

significant variations in total costs between the different grape growing regions. In a

similar theme, the PricewaterhouseCoopers’ benchmarking survey (2005) also

shows significant variations in average primary production costs between the various

producer cellar regions. In analyzing the detail statistics, these differences can be

attributed to the huge size of the operations in the bulk producing regions, once again

highlighting the economies of scale that can be realized.

Table 15 : Primary Production Cost Variations by Region Klein

Karoo Northern Regions

Robertson Western Cape

Worcester Industry

Costs / ton (Rand)

660 358 946 839 433 553

Extraction (Litres)

775 780 666 758 779 760

Cost per litre (cents)

85.2 45.9 142.0 110.7 55.6 72.8

For purposes of this paper, discussions were held with staff from various cellars and

the survey team from PricewaterhouseCoopers to determine what level of production

could be used as a standard to take into account that an illustrative primary

production cost per litre needs to be determined. As the Western Cape producer

cellars are among the smaller of the producer cellars and have similar input costs as

most Western Cape wineries would have, this cost of 110.7 cents per litre will be

used for calculations in this section. This cost has also been compared to the WOSA

study on the cost competitiveness of the South African wine industry performed by

Wineprophet (2004), where the primary production cost range was determined to be

between 50 and 250 cents per litre.

4.4 Costs incurred during Secondary Production Secondary production, or bottled wine production, addresses all the processes that

are followed to repackage bulk wine into a format that can be sold directly to

consumers. While there are a number of micro stages that can be considered, the

two dominant secondary processes within the South African wine industry are wood

ageing and bottling of wine:

• Wood ageing refers to the processes associated with barrel ageing of wines.

While this is generally only done for premium red wines and certain premium

white wines, the overall cost impact of this activity is significant in relation to


Page 43

the overall cost of wine. These costs should therefore be considered

separately from other costs.

• Bottling and packaging costs refer to the processes where the bulk wine is

packaged in forms suitable for consumer distribution and retail. For practical

considerations, costs associated with bottling will form the foundation of the

costing model for this paper. Large volumes of South African wine are also

sold in alternative and cheaper packaging forms such as ‘bag-in-a-box’ or

‘tetrapak’ cartons, both of which are gaining in popularity for commercial and

semi-premium wines sold on the domestic market.

Wood Ageing Wood ageing explains the process by which wine will be pumped into barrels or other

containers which will allow wood contact and left to age for an extended period of

time. A known industry fact is that wood ageing contributes significantly to the overall

cost of wine and therefore needs to be carefully evaluated. The cost drivers which

need to be examined are the cost of the wood that is used and the cost that is

associated with the time that the wine spends in the barrel rather than being bottled

and sold directly.

The cost of incorporating wood ageing is best illustrated through an example using

data provided by one of the cellars interviewed. In this example, wine will be aged in

224-litre barrels.

The average cost per barrel delivered to wineries amounts to R6,000.

Barrels are commonly used for three to four years for quality wine making

purposes, after which they are only used for storage purposes. The common

allocation of barrel costs to wine must therefore take this period into account.

The technique favoured by cellars is to allocate costs per year, on a 3 : 2 : 1

basis, with 50% of the cost being allocated to wine in the first year, 33% in the

second and 17% in the last year of primary use. The cost of using the barrel

can now easily be expressed in a usage cost per litre.


Page 44

1st Fill 2nd Fill 3rd Fill Cost Price per Barrel / Value at Beginning of Year (Rand)

6000 3000 1000

Value at End of Year

3000 1000 0

Value utilized for the year

3000 2000 1000

Volume per barrel (Litres)

224 224 224

Value of usage per litre 1339.3 892.9 446.4 (cents per litre)

The next consideration is to determine what mix of barrels is used in the

production of specific wines. For example, the winemaker may use 40% new

or 1st fill, 40% 2nd fill and 20% 3rd fill barrels for 18 months for a premium

quality Cabernet Sauvignon, compared to a mix of 50% 1st fill and 50% 3rd fill

barrels for 6 months for a premium Chardonnay. If this is converted into a

value for the wine, the following results are achieved.

1st Fill 2nd Fill 3rd Fill Total Value of use per litre

1339.3 892.9 446.4

Barrel Usage per Varietal - Cabernet Sauvignon - Chardonnay

40% 50%

40%

-

20% 50%

100% 100%

Value of Barrel Usage - Cabernet Sauvignon - Chardonnay

535.7 669.7

357.2 -

89.3 223.2

982.2 892.9

(cents per litre)

The final factor to take into account when considering wood ageing is that

there is a barrel investment that is made that will only be available for

distribution and sale at a future date. As done with vineyard establishment

costs, the interest charge associated with this period needs to be specifically

calculated. A wine which will have a longer wood ageing should therefore

have a higher interest charge associated with the wine. If for example we

consider the above and assume that the Cabernet Sauvignon will be barrel

aged for 18 months before bottling, compared to the Chardonnay that will only

have 6 months in barrels, the following calculation on interest charges needs

to be made.


Page 45

Period of Barrel Ageing

(months)

Interest Rate

Barrel Costs

(Cents per litre)

Interest Total Cost (Cents per

litre)

Cabernet Sauvignon

18 8% 982.2

117.9 1100.1

Chardonnay 6 8% 892.9 35.7 928.6 The costs of R11.00 and R9.29 returned by this example illustrate the relative cost

component that barrel ageing has on the overall cost of premium wine. Regardless

of the expense, barrels remain the most popular wood ageing mechanism for

premium wines. The use of cheaper wood ageing alternatives such as staves and

wood chips can also be considered by winemakers, but are more often used on

wines that are destined for distribution as semi-premium or value-for-money wines.

Bottling and Packaging

Packaging is an essential part of the product, as the bottle and its packaging need to

appeal to the consumer. While all bottles tend to look the same, a well designed

label can be the final influence that will result in the bottle being selected from the

supermarket shelf (Young, 2005). When evaluating the costs associated with bottling

and packaging, they also need to be segmented between the costs associated with

the bottling process i.e. the costs relating to getting the wine into the bottle, and the

costs associated with the packaging material or dry goods.

Direct costs relating to the bottling process, excluding the dry goods, are largely

negligible and relate mainly to the costs of filtration and the labour costs that are

incurred during bottling. An important overhead cost that should however be factored

into the cost calculation is the bottling losses that occur during this process. Due to

the nature of the wine making process, there are sediment deposits that make up the

overall volume of a tank or barrel of wine. These solids settle during the wine making

process and are not extracted from the tank during bottling, thereby making it

impossible for the full contents of the tank to be bottled. This implies that the total

cost that has been incurred up until this point in the production process now needs to

be reallocated across the smaller volume of wine actually being bottled.

For example: a bulk tank containing 10,000 litres of wine at a total cost of R50,000 is

bottled, resulting in 9,600 litres of bottled wine. While the bulk wine has a cost of R5

per litre, the bottled wine has a cost, excluding packaging material, of R5.21 per litre


Page 46

(R50,000 ÷ 9 600 litres). This increase in cost is a quantified example of the bottling

loss.

The quantification of the bottling loss is largely dependent on the efficiency of the

overall cellar operations and is therefore very difficult to quantify in real terms. This

explains the very wide range of 87 – 435 cents per litre that is used in the WOSA

analysis (Wineprophet, 2004). Discussions with various wine producers indicate that

the bottling loss for smaller production cellars could be as high as 4% - 6% of the

bulk volume. A 4% bottling loss will result in the cost per litre increasing by a factor

of approximately 4.2%. This statistic is contested by larger, commercial bottling

operations that indicate that the average annual loss across a range of volumes is

approximately 1.2%. It remains essential that this cost is quantified and factored into

the cost of production.�

Dry goods or packaging materials are another significant component of the total cost

(Boothman, p.22). For purposes of this example, focus will only be given to bottling

and packaging costs related to the use of standard 750 ml bottles. The following are

some of the most important direct costs that are taken into account, together with an

indicative amount based on quotations received from vendors:

Cents per Bottle

• Bottle Cost: The cost of the bottle that is purchased. The cost per

bottle can vary significantly based on the style and quality of the

bottle selected, as well as on the volume of bottles purchased from

the supplier. Unlike European markets, there are only a few

vendors that can provide bottles in the South African market, which

does contribute to higher costs.

249.0

• Label Cost: All wine that is certified has to be labelled in terms of

the relevant regulations and generally consists of a front and back

label. The cost per label can also vary significantly, based on the

quality and design of the label, as well as the volume of labels that

are printed.

122.0


Page 47

Cents per Bottle

• Closures: Closures that are used for premium wines are

traditionally still the cork, although stelvin (‘screwtop’) closures are

gaining in popularity across a broad range of wines. Cheaper cork

or synthetic closures are widely used for commercial and semi-

premium wines.

188.0

• Capsules: Capsules are used to finish the presentation of the bottle

by covering the cork. While cheaper plastic capsules can be used

for commercial and semi-premium wines, producers often use a

more expensive capsule to enhance the look of the bottle.

35.3

• Carton Packaging: All wine is packaged in cartons to facilitate

storage, handling and distribution. Packaging normally consists of

the outer carton, as well as inner partitions to prevent abrasion of

the bottles and labels inside the carton.

36.3

• Total Dry Goods Costs (cents per bottle) 590.6 4.5 The Impact of Overhead Costs Overhead costs describe the costs that are incurred within the winery operations that

cannot be attributed to a specific activity within the production process. These costs

will normally be incurred at fixed levels regardless of the total volume of wine that is

produced in a given year. These costs can normally be associated with two main

areas of activity: advertising, marketing and distribution costs and the administrative

and infrastructure overheads.

Marketing, advertising and distribution Infrastructure to advertise and market the wine that is produced is normally created

within the winery based on the long-term average volumes of wine that are expected

to be made. This infrastructure will consist of people tasked with the sales activities,

as well as the logistic network, brand advertising and other related marketing

activities. Once this infrastructure is created, these costs are generally repetitive in

nature. Not incurring these expenses will probably result in the wine producer losing


Page 48

market share and sales opportunities. Because of this, the decision as to what the

annual total investment in marketing and advertising will be is a strategic decision

that the winery management team needs to take. The Deloitte 2004 Benchmarking

Survey (2005) of the wine industry reported the sales, advertising and marketing

expenses to be as much as 13.9% of revenue for smaller cellars, going down to 7%

for larger cellars as better economies of scale are achieved and the advertising costs

are spread over a larger volume of wine.

Using the Deloitte statistics, this percentage of marketing spend will result in a typical

cost of R4.32 per bottle for a smaller cellar (revenue of less than R25 million),

compared to R1.34 per bottle for a larger cellar (revenue of up to R90 million). This

amount is comparable to the PricewaterhouseCoopers Producer Cellar (2005) survey

which shows a total spend of R1.05 per bottle for the smaller producer cellars with a

capacity of less than 10,000 tons. However, the true economies of scale that can be

achieved by spreading advertising and marketing expenditure of significantly higher

volumes is realized when compared to the cost of less than 45 cents per bottle that is

reported for large cellars.

Administrative and other overheads The administrative and other overhead costs are the final ‘bucket’ in the winery into

which all other expenses that are incurred which cannot be related to a specific

activity within the operational processes, are allocated. A modern winery that applies

sound financial management techniques will focus on ensuring that these costs are

minimized by effectively identifying all overhead costs and asking the difficult

questions as to what value each of the costs actually contributes to the production

cycle.

Typical costs that remain in the overhead category include financial, accounting,

legal and professional costs, general administrative expenses, and any occupancy

expenses such as rents paid or general maintenance costs. As with marketing

expenses, these costs are normally fixed in relation to the overall size of the winery,

and will only change significantly if the overall capacity of the winery were to change.

There are therefore also significant economies of scale that can be achieved if the

same costs are spread over a larger volume of wine.

In quantifying these amounts, the Deloitte survey (2005) shows relative overhead

cost percentages of 24.8% of revenue for smaller cellars, going down to 15.0% for


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larger cellars. This converts to a range of R7.71 per bottle for smaller cellars, going

down to R2.79 per bottle for larger cellars.

4.6 Bringing it all together This section has provided a South African wine producer with the information that

needs to be used when determining the cost of each of the stages of a typical wine

production process. To demonstrate the use of this framework, a typical cost per

bottle is illustrated if these costs are brought together in one calculation.

For purposes of this example, assume that similar quantities of three wines - a barrel-

aged red wine, a barrel aged white wine, and a tank fermented white wine - are being

made by a large private winery using grapes purchased specifically for these wines.

All three wines will be bottled in the same packaging.

Table 17 : Illustrative Costs of Producing a Bottle of Wine

White Wine Red Wine Tank Aged Aged

Grape costs 404.0 404.0 535.9 Primary production 110.7 110.7 110.7 Bulk Wine (cents per litre)

514.7 514.7 646.9

Secondary production : wood ageing - 928.6 1 100.1 Costs before bottling (cents per litre)

514.7 1 443.3 1 747.0

Secondary production : bottling loss (2%) 10.5 29.5 35.6 Costs before dry goods (cents per 750 ml bottle)

393.9 1 104.6 1 337.0

Packaging costs 590.6 590.6 590.6 Costs before overheads (cents per 750ml bottle)

984.5 1 695.2 1 927.6

Overheads - Advertising and Marketing - Administrative expenses

134.0 279.0

134.0 279.0

134.0 279.0

Cost per Bottle 1 397.5 2 108.2 2 340.6 This cost per bottle now needs to be compared to the typical revenue earned by the

producer that was calculated in the previous chapter (refer to page 29). Domestic

sales returned average amounts of R9.99 and R14.87 for semi-premium white and

red wines, and an average of R28.19 for premium wines. The conclusion that can

immediately be made is that the profitability of this winery will be determined by what

segment of the market the wines resulting from the illustrated production process will


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be sold in, as this segment will have a major impact on the average retail price that

can be achieved. If this production process results in premium wines being

produced, an acceptable profit margin should be achieved on all three these

products. However, in the event of any of these three wines not being sold in this

segment, this product will be sold at a significant loss which will have an impact on

the overall profitability of the winery.

4.7 Can a Cheaper Wine be Produced? A further question to be considered with regard to costs is, to what extent costs could

potentially be reduced if the wine producer knows that the wine will not be able to be

sold in the premium segments. This is best answered by using a comparative

example. Data used previously for red wine production has been updated in the

following table to illustrate how typical cost savings can be achieved in order to

reduce overall costs.

Table 18 : Illustrative Cost Savings from Wine Production

Red Wine Original Adapted Saving

Grape costs 535.9 332.9 203.0 Primary production 110.7 110.7 0.0 Bulk Wine (cents per litre)

646.9 443.6 203.3

Secondary production : wood ageing 1 100.1 330.0 770.1 Costs before bottling (cents per litre)

1 747.0 773.6 973.4

Secondary production : bottling loss 35.6 15.8 19.8 Costs before dry goods (cents per 750 ml bottle)

1 337.0 592.0 745.0

Packaging costs 590.6 383.0 207.6 Costs before overheads (cents per 750ml bottle)

1 927.6 975.0 952.6

Overheads - Advertising and Marketing - Administrative expenses

134.0 279.0

134.0 279.0

0.0 0.0

Cost per Bottle 2 340.6 1 388.0 952.6 The possible savings amount to R9.52 per bottle, which would allow for some level of

profitability to be achieved. Savings measures that have been introduced in this

example include:


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• If production costs of grapes cannot be reduced, an alternative supply of

grapes should be sourced. With the general oversupply of grapes currently

available, and the poor prices that producer cellar members are receiving,

grapes are easy to source at reasonable prices. For purposes of this

example, typical costs relating to own vineyard costs have been applied.

• Wood ageing is achieved through a combination of older barrels, with larger

volumes of wine being exposed to stave ageing in the stainless steel storage

tanks. While this will not provide the same concentration of wood flavours,

this wine will typically be sold as semi-premium, where wines that are easier

drinking and more fruit driven are more readily sold.

• A cheaper bottle, closure and capsule are used. The overall product is also

then marketed as a semi-premium wine. Alternate packaging forms could

also be considered.

This example also demonstrates a number of key aspects of cellar management that

must be highlighted:

• The winemaker needs to have a clear understanding of the quality potential of

the wine that can be made from the grapes which he has available in a given

harvest season, as well as what the expected retail price range will be in

which the wine will eventually be sold. The decisions that need to be taken to

apply a more cost-effective production process need to be taken before the

harvest begins if they are to be effective.

• It is essential that management has a clear and accurate picture of both the

total and unit costs associated with each activity within the winery, and to

what extent the drivers that result in these costs can be managed i.e. what

alternatives are available for each activity, and at what cost.

• The winemaking processes applied within the cellar infrastructure must be

adaptable to take into account the quality of wine which needs to be

produced. Without this flexibility, the total cost of the wine produced will not

allow for acceptable levels of profitability when taking the revenue potential of

the wine into account.


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• If operating costs cannot be managed sufficiently, emphasis will then need to

be placed on managing the total overhead costs, by reducing the overall

supporting infrastructure that was previously created, as these costs generally

make up a substantial part of the overall cost.

While this would appear to be taking sound business processes and applying them in

reverse order, the reality of the international wine market is that the global surplus of

wine and the influence of fixed price points within the supermarket channel, will keep

the retail prices of wine low for the foreseeable future. In order for wine producers to

survive, more focus will need to be placed on cost management to ensure that the

winery operates within the constraints of the total revenue that can be earned from

the wine.

4.8 So what should wine cost? The concepts, returns and costs that have been discussed in this paper can be

brought together in a consolidated calculation to illustrate how the minimum retail

price points of wine should be determined in order to cover the costs that are

incurred. Table 19 below has been prepared to demonstrate the typical production

and retailing costs of a white and red single varietal wine, excluding any profit

margins accruing to the producer. These costs, all of which can be referenced to the

examples found in this paper, are further compared between a typical commercial or

semi-premium wine made by a producer cellar and a premium wine produced by a

private cellar in order to illustrate the broad range of cost breakeven points that need

to identified and managed.


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Table 19 : Illustrative Calculation of Selling Prices (excluding margin) Producer Cellar Private Producer

White Red White Red Grape Costs 182.2 263.0 459.8 545.1 Primary Production 72.8 72.8 110.7 110.7 Bulk Wine 255.0 335.8 570.5 655.8 Secondary production : Wood ageing - 330.0 - 1,100.1 Costs before bottling 255.0 665.8 570.5 1,755.9 Secondary production : Bottling Loss (2%) 5.2 13.6 11.6 35.8 Costs before dry goods 195.2 509.6 436.6 1,343.8 Packaging 383.0 383.0 590.6 590.6 Costs before overhead 578.2 892.6 1,027.2 1,934.4 Overheads - Marketing - Administration / Other

134.0 279.0

134.0 279.0

134.0 279.0

134.0 279.0

Production cost per Bottle 991.2 1,305.6 1,440.2 2,347.4 Producer Profit Margin - - - - 991.2 1,305.6 1,440.2 2,347.4 Excise duty Retailer Margin VAT

105.4 383.8 207.2

105.4 493.8 266.7

105.4 540.9 292.1

105.4 858.5 463.5

Minimum Retail Price 1,687.6 2,171.4 2,378.6 3,774.8 Table 19 clearly shows how the minimum retail points are calculated. For purposes

of this example, the minimum price levels range from R17 – R24 for the white wine,

compared to R22 – R38 for the red. What is also illustrated by the example is the

impact that grape sourcing, secondary production decisions in the use of wood, and

the selection of packaging can have on the overall cost breakeven point for a specific

category of wine.

There are two further factors that need to be factored into this calculation when

considering that minimum prices should provide a sustainable economic base for all

stakeholders in the value chain. These factors, explained below, are taken into

account for the calculation in Table 20:

• The first example does not include any profit margin for the wine producer.


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• The producer cellar example above uses the prices typically paid to the

members, without considering the actual costs that are incurred by these

grape farmers.

Table 20 : Illustrative Calculation of Selling Prices (including margin)

Producer Cellar Private Producer White Red White Red

Grape Costs 185.9 416.8 459.8 545.1 Primary Production 72.8 72.8 110.7 110.7 Bulk Wine 258.7 489.6 570.5 655.8 Secondary production : Wood ageing - 330.0 - 1,100.1 Costs before bottling 258.7 819.6 570.5 1,755.9 Secondary production : Bottling Loss (2%) 5.3 16.7 11.6 35.8 Costs before dry goods 198.0 627.2 436.6 1,343.8 Packaging 383.0 383.0 590.6 590.6 Costs before overhead 581.0 1,010.2 1,027.2 1,934.4 Overheads - Marketing - Administration / Other

134.0 279.0

134.0 279.0

134.0 279.0

134.0 279.0

Production cost per Bottle 994.0 1,423.2 1,440.2 2,347.4 Producer Profit Margin 149.1 213.5 216.0 352.1 1,143.1 1,636.7 1,656.2 2,699.5 Excise duty Retailer Margin VAT

105.4 437.0 236.0

105.4 609.7 329.3

105.4 616.6 332.9

105.4 981.7 530.1

Minimum Retail Price 1,921.4 2,681.1 2,711.1 4,316.7

The results of these examples demonstrate that any domestic retail prices of below

R20 or R27 per bottle for white and red wines respectively should be challenged, as

it may imply that long-term sustainability may be impacted. In comparing the two

examples, it also becomes clear that as the quality of the product increases and the

quantities that are produced decrease accordingly, these cost breakeven points

could increase exponentially. While it must be noted that economies of scale,

sourcing and production decisions may have a significant impact on the overall cost

structure of a specific wine, the fact that so many variables need to be managed

emphasizes the importance of effective record keeping in the cellar, and the

preparation of accurate management information to support marketing decisions.

After all, a small percentage difference in costs can be the difference between a profit

or loss on any specific product.


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5. MECHANISMS TO IMPROVE PROFITABILITY

This paper has demonstrated that the global surplus of wine will have a direct impact

on retail prices, especially within the commercial and semi-premium segments of the

market. These reduced prices have a direct impact on the revenue earned by the

wine producer, and often drop below the cost breakeven point of wine. While wine

can be produced to still provide some profitability at these lower price points, it is

apparent that typical cost structures within the South African wine industry are high,

and indicate that profitability can only be guaranteed by producing wine that will sell

within the premium segments.

There are only two ways in which the wine producer can improve the overall

profitability of the cellar – either increase the overall revenue that is earned, or find

mechanisms by which the costs incurred can be reduced. While the chapter on cost

management provided some short-term solutions, this section will examine some of

the longer-term mechanisms which need to be considered by producers and the

industry as a whole.

5.1 Trading Up to Higher Price Points The analysis done in this paper clearly shows that South African wines will only

provide marginal returns if we continue to sell the bulk of our wines in the commercial

and semi-premium price categories. In order for acceptable margins to be earned by

all the participants in the wine supply chain, the demand for South African wine in

higher price points must be increased (Atkin, 2003). This requirement has also been

recognized by WOSA in their marketing strategy for 2005, with one of the key

objectives for the year being to increase the volume of wine sold in the ‘over 5’

category (WOSA, 2005). The associated risk with this strategy is that there is a

much smaller volume of wine sold in this category.

Euromonitor (2006) also suggests that a key factor in the growth of South African

wine and its expansion into higher price points will be the move towards wine brands,

together with a focus on educating consumers, particularly the emerging black

consumer of wine. The emergence of wine brands will make it easier for distributors

to promote their products and to create consumer loyalty. This will help those

consumers that are not well educated regarding different wine variants to pick a wine

based on its brands. If this strategy is successful, the likely effect will be increased

wine sales.


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5.2 Brand Management One of the biggest criticisms of the South African wine industry is the degree of

fragmentation that exists – both in terms of the number of independent wine

producers as well as the total number of wine brands that are available. Historically,

wines were typically branded according to the wine estate from which they originated.

It is only recently that wine brands are being created across a range of producers.

This should make the marketing of wine easier and create more customer loyalty to a

brand.

Euromonitor reports that South Africa had three entries in the Top 20 Wine Brands in

the United Kingdom based on volume sales during 2005 – Kumala, Namaqua and

Arniston Bay (Euromonitor International, 2006). While this is exceptional for South

Africa in terms of the marketing value that is created for ‘Brand South Africa’ (SAWB,

2005), all three these brands are typically aimed at the semi-premium segment,

which does result in some critics slating South Africa as only being able to produce

wine for the the under £5 segment. Namaqua, at an average price of £2.97, is

amongst even the lower priced segment (Schmitt, 2005). Three important points

must be stressed with regards to brand management:

• Brands have a large, associated investment. The marketing, advertising and

selling effort that goes into first creating the brand, and then the continued

support of the brand, requires a level of continuous investment. As was seen

from the allocation of overheads, this then further requires that a continuous

volume of product needs to be produced to ensure that an acceptable cost

per bottle is maintained.

Given the large investment, wine producers must have a clear strategy as to

what returns are required on the investment in brand costs. An interesting

case study to consider is Westcorp Wines in Vredendal: Westcorp currently

has two branded wines in the UK market – Namaqua and Goiya. While both

wines are doing well in terms of volumes, the question that is raised is, why

have two brands in the same market that both require ongoing support? This

only leads to duplicate brand and advertising spend.

• Due to the high volumes of wine that are sold in support of the brand image

that is created, this segment of the market remains highly competitive. It will


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continue to put ongoing strain on the retail price points that can be achieved.

Any cost fluctuations, be they within the producers’ control i.e. grape or

production costs, or through supply chain costs i.e. excise duties, shipping

charges, etc., will often have to be absorbed by the producer as any changes

in price may result in volume decreases (Gold, 2006).

• The fact that our key brands are generally associated with large volumes,

production techniques tend to favour the production of a consistent, average

quality wine, rather than focusing on the premium quality that will enable wine

to be retailed in a higher price point.

A possible strategy to consider is to have similarly branded products that can

be retailed at incremental price points. A case study illustrating this could be

Durbanville Hills with a semi-premium wine like the Durbanville Hills range,

moving up to the premium Durbanville Hills Rhinofields range, and the

Durbanville Hills single vineyard range in the ultra premium range. Once a

consumer knows the quality associated with the brand, the natural

progression will be to trade up within the range for special occasions, thereby

increasing demand at higher price points.

Labuschagne (2004, p. 2) stresses that it is essential that wine brands must first be

successfully created within the domestic market, prior to the wine being exported.

Successes have shown that a wine with a strong domestic brand image and an

annual turnover of at least 5 000 cases per year, will be more sustainable than a

wine label which is only sold internationally. This statement is supported by those

producers that clearly link domestic and export brands, as well as producers who

focus on wine tourism as a route to market. In contrast, Kumala and FirstCape

(South Africa’s leading bottled export wines in the UK) have traditionally had very

little or no domestic sales. Kumala has only been marketed domestically in the last 2

to 3 years, and FirstCape has never been sold domestically.

5.3 Vertical Integration of the Supply Chain The current analysis of the supply chain shows that there are typically four layers that

exist – the grape farmer, the wine producer, the wholesaler and the retailer, with a

marketing agent often being a fifth category. While this multi-layered approach is

legislated in some countries like the United States, it must be recognized that each

intermediary in the supply chain currently adds a profit margin. This substantially


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increases the overall cost of the wine to the consumer, or reduces the profitability of

the producer and / or grape farmer, depending on the price sensitivity of the wine

(Werner, 2006).

One mechanism that can be considered to reduce these costs is to vertically

integrate the supply chain, with the wholesaler and producer becoming one

company, often also purchasing the vineyards that are needed for grape supply.

Where this is not possible, closer co-operation between all the players in the supply

chain must lead to improved optimization (Bannon, 2004). There are a number of

management techniques e.g. process optimisation, cost benchmarking studies, value

chain analysis, etc. that can be applied to identify where optimization and cost

reduction are possible. From a South African perspective, these need to be

considered against the backdrop of the current draft of the new liquor licensing

legislation that is proposing to enforce a distinct segregation between producers,

wholesalers and retailers.

Recent legislative changes in the USA that have removed barriers to direct marketing

will provide greater access for cross state border wine sales within the USA, and may

result in changes to the current legislated 3-tiered distribution system (Cutler, 2005).

This in turn should lead to lower prices, and greater competition amongst producers.

(Euromonitor International, 2006)

5.4 Horizontal Consolidation across the Wine Industry While vertical integration will address inefficiencies within the supply chain, horizontal

consolidation across the industry can result in producers managing a far larger

portfolio of brands and volume of wine (Euromonitor International, 2006). This will

allow significant efficiency gains to be realized, and to place the merged organization

in a more competitive position when marketing the wine. Examples can include:

• Marketing costs per bottle can be decreased if the marketing and sales team

is responsible for distribution of a portfolio of wines, rather than for only one

brand.

• Logistics costs can be decreased if a higher volume of wine is shipped. While

large volumes cannot always be achieved for one wine only, consolidating a

shipment across a portfolio of wines can result in significant volume

discounts.


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• With winery throughput being an important driver of primary production costs

per bottle, maximizing the use of the facilities across a number of wines can

create efficiencies in this area.

• General winery overheads per bottle will also decrease if the maximum

volume of wine is moved through the cellar. Back office consolidation may

also result in individual costs per winery decreasing, thereby improving

efficiencies (Hammond, 2004).

One of the best examples of how global consolidation is taking place is Constellation

Brands, which now holds almost 200 global brands, including the Kumala brand from

South Africa (Woodard, 2006). Having critical mass in terms of size provides

Constellation with a stronger negotiation position, and therefore should attract more

shelf space within the retail chains at better price points. (Die Burger, 2006). Another

example of large scale consolidation is the acquisition of Southcorp Wines by the

Foster’s Group Ltd., which also transforms this group into a more formidable spirits

and wine manufacturer. (Euromonitor International, 2006).

5.5 Reducing Packaging Costs Packaging costs typically make up 20 – 30% of the overall cost of a bottle of wine,

and as a result, even a small reduction of these costs can result in a significant

improvement to the profitability of the wine. It is also a well known fact that the

packaging ‘makes the sale’ in the majority of consumer purchasing decisions. Carter

(2005) suggests six strategies that can assist in reducing packaging costs:

• The concept and design of packaging is an essential component that

contributes to marketing STP – segmenting your customers, targeting the

attractive segments, and positioning your wine. It is essential that your

packaging decisions are carefully aligned with the marketing strategy of your

wine.

• Evaluate your packaging design, before starting production. Enough pilot

studies should be done with consumer groups to ensure that the packaging

design will get the attention of the buyer, and portray the right message of

where the wine is positioned, in order to improve your chances of a sale.


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• Standardise your packaging portfolio to ensure that you maximize the

efficiencies of this process. Significant savings on design and bottling setup

costs can be achieved by using standard capsules, cartons and labels. An

example used is of a major South African wine group that had 26 different

back labels for one range of wines, compared to another that moved from 54

carton sizes to three by using only three bottle sizes.

• Managing your packaging inventory is essential, including proofs, tooling,

plates and artwork, as the number of variants that exist accumulates over

time as every season’s labelling may be slightly different. If not properly

managed, wrong information could be used, resulting in unnecessary costs.

All this information should be properly catalogued, made accessible and easy

to retrieve.

• Global best practice is driving the concept of supplier “single sourcing”,

whereby the number of suppliers per product that are used is reduced i.e. one

bottle supplier, one cork supplier, etc. This allows improved collaboration and

partnerships to develop for the benefit of both parties, which should result in

better prices and service for the producer, and guaranteed business for the

supplier. One of the benefits of single sourcing is quality and product

consistency (Van Mieghem, 1995).

• Supplier relationships must be managed on an ongoing basis, as long-term

relationships that exist between the cellar and the suppliers are often based

more on trust than on specific service level agreements, and therefore may

be abused. Suppliers should be evaluated and benchmarked on price, quality

and service, and gaps that exist need to be actively managed.

Another technique that is often applied for domestic sales from small and mid-sized

wine producers is to try and clear excess stocks of wine as unlabelled wines. As the

labeling and capsules of the bottle are expensive items, significant savings can be

achieved. This selling approach started in the Australian wine industry, and has

resulted in growth of specialist ‘cleanskin’ (unlabelled) retailers. This practice is

growing within the South African wine industry, with a number of cellars selling

unlabelled wines on special offer in order to clear excess stock.


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5.6 The Impact of Finance Charges One of the significant cost items on the income statement of South African wine

producers is Interest and Finance Charges. The Deloitte benchmarking study

(Deloitte, 2005) shows this amount as being as high as 8% of total revenue for

smaller producers, and between 1 and 5% for larger producers. This paper has also

demonstrated that the delayed nature of wine production results in interest being a

significant overall component of the cost of wine.

The underlying issue that needs to be addressed is the financing structure that is

applied to a wine producer. The PricewaterhouseCoopers survey (2005) illustrates

that the ratio of own capital to borrowed capital is 22 : 78, and a ratio of current

assets to current liabilities of 1.16 : 1, both of which are far lower than generally

accepted ratios. All borrowed capital has an associated finance charge. In the South

African context, although interest rates are currently lower, the cost of borrowed

capital is significantly higher than the international norm.

One of the ways in which this can be addressed is to look for external investments,

thereby increasing the level of own capital (Franson, 2005). In the current economic

environment in South Africa, possible investments through black economic

empowerment partnerships, or the drive to consolidation of the industry, should

provide such opportunities (Du Plessis, 2005). The large scale investments that are

required will only be made in an environment where the investors are provided with a

substantial return. Because these investments are often in the form of equity capital,

this return needs to be in terms of the overall profitability of the cellar (Huneeus,

2005). The global competitiveness of the industry is currently so high that the

possibility of attracting large scale investment is generally low. Investments that are

made are done more for ‘romantic’ reasons, than for a prospective return.

Rabobank (Heijbroek, 2004) reports that South Africa has hardly been involved in

foreign investments, or been directly impacted by the international consolidation

process which is taking place. Many of the consolidators of the wine industry have

travelled to South Africa, but so far have not made a major move. Rabobank’s

observations as to why this is happening include:

• The fragmented industry structure that exists, as many of the wine producers

are too small to be attractive for the major consolidators. Most of the leading

companies are only 1 million cases strong, a few with over 2 million cases.


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• There are no strong brands in the premium segment (Eur 5 to 7), which is

generally the segment which most investors find attractive. Most producers

have too broad a range of brands, which are hard to maintain or to work from.

• South Africa is particularly strong in the popular premium segment (Eur 3 – 5)

which is an important segment of the South African industry. The major

consolidators, however, mainly invest in the premium segment where the

margins allow for higher investments.

• Uncertainty as to the political risks that exist in South Africa and the general

impact of currency risk as the South African Rand remains volatile.

• Possibly a lack of understanding of South Africa’s position in the global wine

portfolio, and the long-term strategy as to where South Africa will continue to

play.

5.7 Greater Government Involvement There are growing sentiments within the South African wine industry that greater

government involvement is necessary if the industry is going to be sustainable in the

long-term (SAWB, 2005). The current assistance in the form of the SMEDP

programmes and wine exhibition incentives are not sufficient (MediaVision, 2006).

The global competitive pressures, the high cost of capital in what is a capital

intensive industry and the overall effect of taxation on the wine supply chain make it

almost impossible for new and small producers to survive financially without

enhanced government support. In France and other European Union countries,

start-up farmers are subsidized, and there are various control measures put in place

by government to monitor and manage the industry as a whole (Bolin, 2006).

While greater financial involvement by the government could be beneficial in the

short-term, subsidisation is generally not a long-term solution (Die Burger, 23 July

2004). The risk to the industry is that subsidisation may mask the real profitability

issues that are experienced and which must be controlled. Anson (2006) reports that

as many as 89% of Languedoc farmers in France face financial difficulty as the

European Union is reducing the overall subsidy base paid to farmers. If subsidization

is introduced, it must be done on a basis that will ensure that the producers can be

weaned off the subsidy within a short period of time. Mercer (2006) and Styles

(2006) report on the changes that are being proposed by the European Union, who


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have acknowledged that the current situation of using subsidies and legislation is not

sustainable. Proposed measures, many of which are controversial, include:

• Removing the ‘crisis distillation’ subsidies that are used to finance the

transformation of surplus wine into industrial alcohol. Instead of this, each

producing country will receive a fixed fund which can be used as it sees fit.

• Abolishing the permissible activity of chaptalisation (adding sugar to grape

must before fermentation), which will have wide-reaching consequences for

producers in the cooler regions such as Champagne, Burgundy and

Germany.

• Providing grubbing-up incentives to reduce the total area under vine, and

ensure that uncompetitive producers are removed from the industry sector. A

total area of 400,000 hectares of vines could be impacted.

• Changes to legislation regarding the labelling of European wines, allowing

table wine producers to state grape variety and vintages on the bottle. This

will further contribute to the simplification of the current Geographical

Indication systems that are applied.

The possible solutions described in this chapter are all applicable to the South

African wine industry. In most instances, the success of these solutions will be

determined by the South African wine industry’s ability to co-operate and implement

these solutions as an industry initiative. There are already indications that countries

competing against South Africa are considering similar solutions (AWBC, 2005) –

and the country that first introduces a consolidated solution to the market is sure to

achieve success, with the followers having to face increased global competition.


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6. CONCLUSION The aim of this research paper was to evaluate the current global surplus, with the

overall objective being to consider what the typical cost breakeven point of wine is

within a South African context. The research has however demonstrated that it is not

possible to determine one standard cost breakeven point that can serve as a single

industry benchmark across all categories of wine, as the calculation of the cost

breakeven point is going to be greatly influenced by the volume of wine produced,

the quality of wine that is made, and the distribution channels that the producer will

follow to sell the wine. What can be concluded is that it is essential that every wine

producer should do this calculation for every product produced in order to enhance

the quality of management decisions.

The research does indicate that the minimum domestic retail points for white and red

wines will be approximately R17 and R22 respectively in order to cover the direct

costs. It can also be shown that retail prices below R20 and R27 for white and red

wine are not sustainable in the larger term.

The research has also shown that the producer needs to have a good understanding

of the various cost and revenue drivers that impact on the calculation of the cost

breakeven point of wine, as well as in-depth knowledge of how global and domestic

industry conditions impact these drivers.

The Global Surplus The global wine surplus is an economic reality. The important realisation is that the

current surplus state is not just a simple case of wine production exceeding demand -

there are three factors that have contributed to this over-supply:

• There is a structural surplus that exists around the world that is caused by the

extent of new vineyard plantings. This is especially true of the New World

territories where exponential increases in production capability have been

noted. New plantings in non-traditional territories such as China also impact

the structural surplus.

• A greater contributor to the current surplus is the extensive seasonal over-

supply which is the result of record harvests in 2004 and 2005 in most wine

producing countries. This seasonal variation has resulted in inventory levels


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of wine increasing to a point where normal sales patterns are likely to take

more than 5 years to utilise the surplus.

• Consumption of wine is decreasing in a number of key wine drinking markets,

especially the traditional markets of France, Italy and Spain. While the USA

and the UK report wine sales increasing at the cost of beer, these increases

are not yet making up for the decreases in the overall consumption of wine.

From a South African perspective, it is essential that local wine producers understand

the various contributing factors to the global wine surplus, while also having a clear

picture of the South African wine production and demand forecasts. This information

is essential to being able to make long-term strategic decisions on how to manage

the cellar through the existing global surplus. As such, one of the recommendations

to the South African wine industry stemming from this research is to place more

emphasis on the ongoing development of the SAWIS forecasting model that is shown

on page 10, in order for an industry-accepted model to be published regularly. It is

essential for all wine producers to understand both the South African and global

forecasts in order to have the relevant information available on which to base

management decisions.

In using the existing forecast data, the South African industry is not facing a structural

surplus. In contrast, forecasts indicate that South Africa will soon be in a position

where there will be significant shortages of wine, especially white wine. Grape

producers must take cognisance of this when taking a long-term view to planning

vineyard plantings. Grubbing up of vines and replanting to different varietals are only

short-term solutions that are reacting to current price levels and may not provide the

correct long-term solution.

The South African wine industry’s most immediate challenge is to find a cost-effective

solution to address the current high inventory levels of wine – mostly red wine – that

have resulted from previous harvests. International examples of how these have

been dealt with include distillation and wine-to-ethanol conversion. An important fact

to note is that these initiatives are normally driven by the industry or by government

and not by individual wine producers.

The Impact on Retail Prices The global surplus is resulting in retail prices of wine being driven down as the global

supply of wine exceeds demand. With South Africa being very dependent on the


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global market for export sales, wine producers are directly exposed to this effect of

the surplus. The result is that the overall profitability of the South African wine

industry will be negatively influenced by the reduced global retail prices.

A more important conclusion to make from the information provided in this paper is

that the current surplus is only one of the contributing factors resulting in average

wine prices decreasing. The impact that the supermarket and discount chains have

on the average prices of wine is possibly even more significant than the impact that

the surplus is having – the surplus conditions merely accentuate this fact. The fact

that this route-to-market will continue to grow as the primary route to the consumer is

the crux of the retail pricing issue. Supply and demand are only contributing factors

to determining price. The price points at which wine will be sold will be determined

by the pricing strategies adopted by the particular retail chain. The exposure that a

wine producer has to retail prices will therefore largely be influenced by the volume of

wine that is distributed through the retail chains. It is important that the South African

producers realise that there is little flexibility in retail price points within the

supermarket sector – any changes that occur in cost structures will generally have to

be absorbed by the producer themselves.

A significant conclusion is the fact that the nett amount that is returned to the wine

producer is generally only a percentage of the final price paid by the consumer. The

complexity and competitiveness of the distribution mechanisms that exist and the

high levels of taxation and levies which apply to alcoholic beverages result in only a

percentage of the price accruing to the producer. A useful area of research may be

to perform a detailed analysis of the total extent of taxations on the wine distribution

chain and to actively engage the Department of Finance and South African Revenue

Services in realising the impact that this has on the wine industry.

Wine Production Costs This paper has clearly identified that there is a lack of consistency when determining

wine production costs. While most producers can provide an indication of what their

total costs are, a great deal more emphasis needs to be placed on developing

standards for wine cost management that can be applied consistently across the

industry.

When performing an analysis of typical costs incurred by the average wine producer,

it is clear that the cost structures that exist within the South African industry are of


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such a nature and amount that mainly wines that are retailed at premium price points

will provide an acceptable and sustainable return on investment to all the players in

the wine distribution chain. This conclusion is shared by Su Birch of Wines of South

Africa (WOSA, 2005), based on a high-level study of the competitiveness of the

South African wine industry. As such, the South African wine industry needs to focus

more on the production and marketing of premium and luxury wines. While a number

of producers of commercial and semi-premium wines may take exception to this

statement, it is essential that wine production costs are carefully analysed to

determine where specific savings could be achieved to also allow sustainable returns

to be generated from lower priced wines.

While specific, short-term savings can be realised on certain cost elements which

contribute to the overall cost of a bottle of wine and which will bring the total costs to

a level below the revenue generated per bottle, these savings will generally detract

from the quality of the wine produced. Consequently the wine will have to be

marketed as a semi-premium or commercial wine at price points which will often not

allow an acceptable level of profitability.

A further conclusion is that it is becoming imperative that wine producers adopt a

‘produce-to-market’ approach – the wine producer will need to perform a careful

analysis of the countries, market segments and price bands in which he wants to

compete prior to producing wine. Production decisions impacting on the cost of

production need to be managed effectively within the constraints of the revenue that

will be generated from the sale of the wine.

Possible Improvements in Profitability While individual wine producers can introduce short-term savings in production costs

based on specific circumstances, the long-term sustainability of producers will best

be served by long-term solutions which need to be considered, evaluated and

implemented by the industry as a whole. Certain of the key points that need to be

considered include:

• Introducing an industry strategy to drive the ‘trading up’ concept. This needs

to ensure that a large volume of South African wine is retailed within premium

price points. While WOSA has initiated this strategy (WOSA, 2005), a more

concerted industry effort will be required to make this a reality.


Page 68

• The industry needs to consolidate. The existing fragmentation is contributing

to an increase in production costs and is not achieving possible efficiencies

that can be realised through economies of scale. The fragmentation within

the industry also inhibits consolidation and investment. This results in

inadequate financing structures and high interest charges.

• The South African wine industry must develop more global brands which can

compete successfully on all the international markets, especially within the

premium segment. While certain brands and producers are well established

in specific markets, too much South African branded wine is sold in the

commercial and semi-premium price points. This leads consumers to

assume that we are not able to provide wine at the level of quality required for

the higher price segments.

In conclusion, the global wine surplus and its related impact on wine retail prices are

economic realities. This situation is likely to continue affecting the South African

producers in the short- to medium-term. While South Africa’s industry forecasts

indicate that we may soon be in a position where we will again begin to show

shortages of wine - especially white wine – the reality of the global surplus and our

internal cost structures may result in it becoming cheaper to import wine – especially

in bulk – than to produce a local equivalent. The global competitiveness of the

industry is resulting in wine producers who aim to provide wine to the international

market realizing more and more that significant changes are necessary if they want

to compete against the other New World producers who are also faced with the same

challenges (Die Burger, 1997).

Producers are fast realising that the ‘romantic’ perceptions that used to exist of the

wine industry are being replaced by the harsh realities that the industry is a very

competitive marketplace. The contents of this paper should provide a South African

wine producer with more information that will assist in understanding the nature of

the current wine surplus, while also providing some practical advice on managing a

wine cellar in times of over-supply. It also provides the wine producer with the

practical steps that need to be considered when determining a specific cost

breakeven point of wine.


Page 69

Project Foresight

Project Foresight is an information management project that is currently being

performed on behalf of the South African Wine Industry Council. The ultimate

objective is to promote co-operation and process alignment between all the players

in the wine value chain. Specific deliverables extracted from the project charter

include:

• A strategic long-term foresight, “Wine Industry Futures” which will cover long-

term trends and foresight on subjects that support decisions in the South

African Wine industry.

• A supply and demand based Information Communication Protocol which will

improve information sharing.

• An Information Exchange system that will promote information systems

alignment within the South African Industry. This will also be aligned to the

industry role players such as VinPro, SAWIS and WOSA.

The outcomes of this project were not available at the time of publication of this

paper. More information may be obtained by contacting the South African Wine

Industry Council in Stellenbosch.


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7. REFERENCE LIST The reference list has been categorised into two sections to facilitate ease of use.

The first, ‘Specific References’ contains all publications that have been directly

referenced within the text of this paper. The ‘Background Reading’ lists a number of

additional references that were read as part of the research for this paper and

provide valuable background and contextualisation.

7.1 Specific References Anson, J. (2006): 89% in Languedoc face financial difficulties: report, Decanter.com, 23 June Atkin, T. (2003): Target Practice, Harpers, 23 May, p. 23 – 26 Australia & New Zealand Grapegrower & Winemaker (2005): Wine industry strategic management or another ‘bust’?, July No 498 Australian Wine and Brandy Corporation (2005) : Wine Brand Australia “our key to export success”, December Bannon, A.L. (2004): Navigating the Channels of Distribution, Wines & Vines, June, p. 63 – 66) Becket, N. (2005): ‘Time and Tide’, Harpers, 13 May, p. 30 – 41 Birch, S (2006) : International Markets, WOSA, January Bolin, L (2005): State wants to help local wine industry, Business Day, 5 April Boothman, P. (2005): Dry Goods – The Bad and the Ugly, Drinks Business, October V39, p. 22 – 24 Botha, A (2006) : Volhoubaarheid & Finansiele Posisie, Vinpro Inligtingsdag, 19 January Carter, M. (2005): Six strategies to reduce packaging costs, Practical Winery & Vineyard, September, p. 55, 56, 70 Conningarth Consultants (2004): The Macroeconomic Impact of the Wine Industry on the Western Cape, SAWIS, September Cran, D. (2006): All at sea, Harpers Supplement : Logistics, March, p. 8 – 10 Cutler, L. (2005): The Dynamics of Distribution, Wine Business Monthly, August, p. 44 – 49 Davidson, D. (2003): Do you know your cost of production?. The Australia & New Zealand Grapegrower & Winemaker, February, p. 17 – 18 Deloitte (2005): Annual Financial Benchmarking Survey for Australian Wine Industry – Vintage 2004


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Deloitte (2005): Challenges facing the wine industry, www.deloitte.com, 9 May Deloitte (2005): Winning Strategies in the Wine Industry – A New Vintage Die Burger (2006): Aussies wil oorskot-wyn in brandstof ombrou, 9 May Die Burger (2006): Franse spook om wynbedryf in ere te herstel, 8 May Die Burger (2006): Wynskou vir besoekers ‘wys gehalte, 3 April Du Plessis, C. (2005): ‘Gefragmenteerd en kwesbaar vir surplus’, Wineland, January, p. 22 - 23 Euromonitor International (2006): Alcoholic Drinks in the UK, April Euromonitor International (2006): Alcoholic Drinks in the US, April Euromonitor International (2005) : The World Market for Wine, September EuroWine (2006): South Africa – Fast-growing wine production and exports, February, p. 20 EuroWine (2005): Viticulture and the reality of surplus production, February p.34 – 41 Foulkes, O. (2004): Te veel minderwaardige wyne ‘verstop die stelsel’, Die Burger, 14 September 2004, p. 8 Franson, P. (2005): Trends in Wine Industry Financing, Wine Business Monthly, p. 60 – 61 Gold, B.J. (2006): The English Wine Market, Institute of Cape Wine Masters, March Hammond, C. (2004): Branching out, Wine & Spirit International, May, p. 54 – 55 Heijbroek, A. (2004): The South African wine industry – Between past and future, Rabobank International, May Heijbroek, A. (2003): Wine is Business – Major Drivers reshaping the wine industry, Rabobank International, January Huneeus, A, (2005): Consolidation and the Future of Small, Premium Wineries, Wine Business Monthly, December 2005 Hunter Gordon, K. (2005): Slow down in exports to cause Australian red wine glut, BeverageDaily.com, 13 January Jarvis & Goodman (2004): What price points are effective for small wineries?, The Australian & New Zealand Grapegrower & Winemaker, August, p.109 – 112 Joseph, R. (2005): Surplus to requirements, Wine International, July, p. 28 – 32 Labuschagne, M. (2004): Eèrs die SA mark …, Die Burger, 18 August 2004, p. 2


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Lockshin, L. (2003): Quality has its shelf price, Harpers, 16 May, p. 22 Losh, C. (2005): UK market : South Africa, Wine & Spirit International, May, p.42 Martin, G. (2006) Voorraadvlakte, Vinpro Inligtingsdag, 19 Januarie Maxwell, K. (2006): Are retailers killing the domestic market with aggressive pricing? Wineland, July, p. 30 – 31 MediaVision (2006): Wine industry at crossroads – seeks government support, www.wine.co.za, 22 February Mercer, C. (2006): French government unveils wine rescue plan, www.BeverageDaily.com, 30 March Murray Brown, R. (2005): Chinese whispers, Wine International, July, p. 60 – 64 Perrin & Lockshin (2001): Australian Wine Segmentation and Distribution of Costs, Wine Industry Journal V16 No5, September – October, p. 147 – 150 PricewaterhouseCoopers (2004): Benchmarking in the South African Wine Industry : Producer Cellars – 2003 Harvest PricewaterhouseCoopers (2005): Prestasiemeting in die Suid-Afrikaanse Wynbedryf : Produsentekelders – 2004 Oes SAWB (2005): An Inquiry into the Competitiveness of the South African Wine Industry, October SAWIS (2006): 2005 Grape Prices SAWIS (2006): Producer Cellar Grape Prices 2003, 2004 & 2005 SAWIS (2005): Production and Market Estimates 2006 – 2010, November SAWIS (2004) : South African Wine Industry IT Survey 2004, September SAWIS (2006): South African Wine Industry Statistics 2006 SAWIS (2005): South African Wine Industry Statistics 2005 Schmitt, P. (2005): Free .99, Drinks Business, May, p. 24 – 30 Styles, O. (2006): EU plans radical overhaul of wine sector, Decanter.com, 22 June Styles, O. (2004): French Winemakers say outlook is bleak, Decanter.com, 22 June Sully, Lease & Dal Poggetto, (2004): Analyzing Wine Production Costs, Practical Winery & Vineyard, November/December, p. 51 – 60 Valentine, D (2005) : Wine industry strategic management or another ‘bust’?, Australia & New Zealand Grapegrower & Winemaker, July No 498


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Van Mieghem, T. (1995) : Implementing Supplier Partnerships: How to Lower Costs and Improve Service, Prentice Hall Van Wyk, G. (2005): Production Costs & Target Income – Wine Grapes, Vinpro Van Wyk, G. (2006): Financial Position of Wine Grape Producers, Vinpro, 19 January Werner, G. (2006): How do partner? Harpers Supplement Logistics, March, p. 4 – 6 Woodard, R. (2005): Gently does it, Wine & Spirit International, July, p. 46 - 47 Woodard, R. (2006): Three Men, a Dog and Global Domination, Harpers, 17 February, p. 16 Wines of South Africa (2004): Is the South Africa Wine Industry cost competitive? November Wines of South Africa (2004): SA Wine Industry best suited to premium wines, study shows, November Wines of South Africa (2005): Marketing Business Plan 2005 Wines of South Africa (2005): SA Poised to Capitalise on the US Wine Market, set to become the world’s biggest, February www.beveragedaily.com (2003): Not a barrel of laughs, 16 December, No. 5 Wynboer Technical Yearbook (2005) : Producer profitability under serious pressure, p. 6 – 7 Young, M. (2005): Wrapping and Moving, DBEurope, July/August, p. 32 – 36 7.2 Background Reading Australia & New Zealand Grapegrower & Winemaker (2005): Positive outlook for winegrape production to 2006-7, March No 494, p.10 Bolin, L (2005): KWV MD sees more price pressures, yet aims for double-digit growth, www.wine.co.za, 14 June Bolin, L (2006): SA wine industry needs bigger economies of scale: Origin CEO www.wine.co.za, 08 May Bowen, R (2003) : Australia from the Vineyard to the bottle, Oenologists Italian Association, Sorrato, 30 March Brand, N. (2004): Kommer oor rand wat winste knou, Die Burger, 18 October, p. 12 Brand, N. (2004): Uitvoerders van SA wyn ‘sal vorentoe meer sukkel’ , Die Burger, 2 April, p. 1 Brand, N. (2004): Wêreldwye wyn-oorskot, Die Burger, 24 September, p. 6


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Brand, N. (2005): SA wynverkope in Amerika styg met 40%, Die Burger, 24 February, p.37 Brand, N. (2005): Wynbedryf in Australië adverteer heelwat meer, Die Burger, 16 May, p. 13 Brand, N. (2005): Sterk rand ‘dissiplineer’ wynbedryf, Die Burger, 3 October 2005 Brand, N. (2006): Te veel wyn gee hoofpyn, Die Burger, 2 January 2006 Brand, N. (2006): Minder wyn uitgevoer, Die Burger, 7 February Brand, N. (2006): Wêreld stroom na Kaapse wynskou, Die Burger, 30 March Brand, N. (2006): Kumala dalk in Constellation se kelder, Die Burger, 6 April Caldwell, C. (2006): Do trade shows really boost your distribution, Australia & New Zealand Grapegrower & Winemaker, February, p. 56 – 57 Davidson, D. (1992): A guide to growing winegrapes in Australia Drinks Bulletin (2004): E&T takes charge of home distribution, V19 No 12, 6 July Die Burger (1997): SA wynbedryf sê wêreld stryd aan, 3 July, p. 19 Die Burger (2003): Wynverkope daal skerp na goedkoop wyn duurder word, 18 December, p. 21 Die Burger (2004): Wat gemaak met die wyn?, 17 March, p. 2 Die Burger (2004): Wyn-kopseer, 4 May, p. 10 Die Burger (2004): Wynbedryf nie oor voorraadvlak besorg, 19 May, p. 2 Die Burger (2004): Franse gaan ingryp om wynbedryf te help, 23 July, p. 6 Die Burger (2004): Nuwe wynlande stook markuitbreiding, 13 August, p. 3 Die Burger (2005): Ondersoek kom oor mededingendheid van plaaslike wyne oorsee, 24 February, p. 37 Donaldson, A (2004): More gloom on the glut, though opportunity still knocks, Australia & New Zealand Grapegrower & Winemaker, November Euromonitor International (2002): The World Market for Wine, April Euromonitor International (2005): Alcoholic Drinks in South Africa, September EuroWine (2005): Australia invests heavily in promotion, September, No 25, p. 28 – 29 EuroWine (2006): Fear of New Surplus Production Fades, January, No 27 p.53 Gallagher, L. (2006): Parallel importing, National Liquor News, March, p. 63


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Genis, A. (2006): ‘Boeremarkte’ vir wynbedryf, Landbou Weekblad, 26 April Harpers Supplement (2005): Word is Bond, Harpers Supplement : Logistics, June, p. 18 – 19 Holt, Quelch & Taylor, E.L. (2004): How global brands compete, Harvard Business Review, September, p. 68 - 75 Hotel & Restaurant (2006): More consolidation looms for wine merchants, Hotel & Restaurant, April, p. 38 Hotel & Restaurant (2006): No price cuts to drive wine sales, says Distell, Hotel & Restaurant, April, p. 37 Houchins, C (2005) : Direct Shipping Analysis : The Struggle for Rational Distribution, Wine Business Monthly, October, p. 43-45 Huang, M. (2006): Eliminate the Middleman? Harvard Business Review, p. 33 - 43 Impact Databank (2005): Consumers Trade Up on Domestic Wine as Imports Compete on Price, August, p. 11 – 14 Impact International (2005): Oversupply, Industry Consolidation Pressure Mid-Range Aussie players, v35 n19, p. 4 – 21 Impact International (2005): Difficulties Grow for French Wine Industry, Spurring Consolidation, March V35 No 5-6, p.1,6,40-41 Jacobides, M.G. and Winter, S.G. (2005): The co-evolution of capabilities and transaction costs: explaining the institutional structure of production, Strategic Management Journal, p. 395 – 413 Koutroumanidis, T. (2005): A fuzzy classification system and time series modeling of wine production data in EU, Bulletin de L’O.I.V., p. 59 – 77 Landman, J.P. (2004): Byt van globalisering al hewiger in ryk lande, Die Burger, 2 March 2004, p. 14 Losh, C. (2003): Supply and Demand, Wine & Spirit International, September, p. 27 – 28 MacDonald, F & Eedes, C (2006) : You be the judge, Wine Reader Poll 2006, Wine, June, p. 38 – 49 Manifold, A (2005): America 2005 – boom or bust?, Australia & New Zealand Grapegrower & Winemaker, March No 495 Manifold, A (2005): Success in the long run, Australia & New Zealand Grapegrower & Winemaker, January No 492 Maxwell, K. (2006) : The future is niche, www.wine.co.za, 6 April


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McLarty, R. (2005): The essentials of value chain implementation in small and medium sized enterprises, Strategic Change, Jan – Feb, p. 45 – 58 McNamara, G. (2002): Competitive positioning within and across a strategic group structure: The performance of core, secondary and solitary firms, Strategic Management Journal, October, p. 161 – 181 MediaVision (2005): Australia and SA wine industries pledge closer co-operation, www.wine.co.za, 22 August Mercer, C. (2005): Australia teaches Old World how to sell wine, BeverageDaily.com, 18 May Moscove, Crowningshield & Gorman : Cost Accounting with Managerial Applications National Agricultural Marketing Council (2002): Study to examine the impact of the production and sale of cheap wine in South Africa, November Newton, T. (2002): Premium wine production from small to large cellars, The Australian & New Zealand Grapegrower & Winemaker, November, p. 66 Rieger, T. (2006): Cellar Operations, Vineyard & Winery Management V32, January, p. 64 – 80 SAWB (2005): South African Wine Industry Strategy Plan SAWIS (2006): Wine Industry Information, March SAWIS (2006): Wine Industry Information, April Sexton, J.D. (2006): Scaling New Heights, Market Watch, April, p. 81 – 86 Stuparyk, M. (2005): Consumers Trade Up on Domestic Wine as Imports Compete on Price, 1 & 15 August, p. 1 – 14 Sullivan, G. (2004): All Systems Go!, Drinks Business, August, p. 50 – 52 Valentine, D (2005) : AWBC reports solid results in ‘challenging year’, Australia & New Zealand Grapegrower & Winemaker, January No 492 Van Wyk, M. (2005): Challenges facing the wine industry, Deloitte, May Vigario, F. (1989) : Managerial Accounting and Finance in South Africa, M&V Publications Warbuton, S. (2005): In expansion mode, Drinks International, May, p. 66 Ward, C. (2005): Battling the Behemoth, Market Watch, September, p. 64 – 67 Weber, E.A., Klonsky, K.M. and De Moura, R.L. (2003): Sample Costs to Establish a Vineyard and Produce Wine Grapes, University of California Cooperative Extension Willemse, J. (2006): Verbruiker kom eerste, Landbou Weekblad, 13 April


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Wine Business Insider (2006) Wines Under $6 Dominate Marketplace, V16, No 15 April, p. 2 – 3 WineBiz.com (2006): Australian wine will get cheaper, 18 January 2006 WineBiz.com (2006): Australia: Grape grower calls for vine removal consideration, 2 June 2006 WineBiz.com (2005): Wine producers have every reason to be optimistic following a sharp rise in consumption, 7 September WineBiz.com (2005): Winemaker withholds payments to grape growers, 23 September WineBiz.com (2005): Growers ‘deserted’ in wine glut, 29 September WineBiz.com (2005): US: Grape harvest may exceed expectations, 29 September WineBiz.com (2005): Large 2005 crop masks coming shortages, 30 September WineBiz.com (2005): Australia: Wine prices to fall, 24 October 2005 WineBiz.com (2006): China: Wine customer or competitor? WineBiz.com (2006): Australian wine makers battle as UK shipments rise, 16 May 2006 WineBiz.com (2006): Brown Brothers chairman forecasts better days, 25 May 2006 World Drinks Online (2004): Fosters looking to reduce wine costs, No 208, 19 February, p.7 World Drinks Report (2004): Consolidation gathers pace in South Africa, World Drinks Report n217, p. 3 World Drinks Report (2004): Labatt in drive to cut costs in Canada, World Drinks Report No 22, September 16 www.just-drinks.com (2005): Australia: Grape glut here to say, figures claim, 22 December www.just-drinks.com (2005): Australia: Grape surplus “could last five years”, 25 November 2005


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