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Analysing Competitiveness Performance in the Wine

Industry: The South African case

Johan van Rooyen, Lindie Stroebel, Dirk Esterhuizen

Johan van Rooyen is a professor in Agricultural Economics at the University of Stellenbosch,

Stellenbosch, South Africa

Lindie Stroebel is the manager of Economic intelligence at the Agricultural Business Chamber and aPhD candidate at the University of the Free State, Pretoria, South Africa

Dirk Esterhuizen is an agricultural specialist at the United States Department of Agriculture, Foreign

Agricultural Services, and Pretoria, South Africa.

January 2010

Paper for the pre-AARES conference workshop on The Worlds Wine Markets by 2030: Terroir, Climate

Change, R&D and Globalization,Adelaide Convention Centre, Adelaide, South Australia, 7-9 February 2010.

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ANALYSING COMPETITIVENESS PERFORMANCE IN THE WINE INDUSTRY:

THE SOUTH AFRICAN CASE

Johan van Rooyen1, Lindie Stroebel2, Dirk Esterhuizen3

ABSTRACT

Competitiveness is defined as the ability to sustain trade in the local and globalenvironment. The RELATIVE TRADE ADVANTAGE (RTA) formula is firstly used tomeasure competitive performance in the South African wine industry since 1960. ThePORTER MODEL is then applied to analyse 2005 & 2008 views and opinions of South

African wine executives on factors enhancing and constraining competitiveness. Strategic

approaches to sustain competitiveness, based on these trends are identified.

KEYWORDS

SOUTH AFRICAN WINE INDUSTRYCOMPETITIVENESS ANALYSISWINE EXECUTIVE SURVEY 2005-2008PORTER ANALYSIS: 2005-2008WINE BUSINESS CONFIDENCESTRATEGIES TO SUSTAIN COMPETITIVENESS

1. INTRODUCTION

The paper explores trade competitiveness and competitive performance in the SouthAfrican wine industry. First, a definition of competitiveness is proposed. This is followed bya short background to the South Africa wine industry. The measurement and analysis ofcompetitiveness and business confidence in the wine industry is then discussed. Finally,strategies and mechanisms to create and sustain competitiveness in the South Africanwine industry are proposed.

(Wine) industries and firms are competitive when they are able to continue to tradeglobally, at qualities and prices that are as good as or better than their competitors; and

they are able to attract sufficient sources of capital, land, labour, technology andmanagement from other competing economic activities. Short-term efforts such asopportunistic price wars and cost cutting seldom sustain a competitive position. Long-term or sustained performances are therefore relevant in defining and analysingcompetitiveness as quoted above (Boehlje, 1996; Cho & Moon, 2002). In short, to be

1Johan van Rooyen is a professor in Agricultural Economics at the University of Stellenbosch, Stellenbosch, South Africa2Lindie Stroebel is the manager of Economic intelligence at the Agricultural Business Chamber and a PhD candidate at the University

of the Free State, Pretoria, South Africa3 Dirk Esterhuizen is an agricultural specialist at the United States Department of Agriculture, Foreign Agricultural Services, andPretoria, South Africa. The inputs of MS Yvette vd Merwe, South African Wine Industry Information Systems are acknowledged withappreciation.

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competitive in todays world is to continue to be in a position to trade successfully(Esterhuizen & Van Rooyen, 2008).

An analytical framework, developed by the authors to measure competitivenessperformance and to analyse the major constraints and enhancements, and to consider thebusiness confidence levels prevailing in the industry are applied in this article

(Esterhuizen, 2006; Van Rooyen and Esterhuizen,2007; and also based on the methodused by the World Competitive Report, IMD).

2. THE SOUTH AFRICAN WINE INDUSTRY AT A GLANCE

The wine industry contributed an estimated R20 billion (around US$ 1.6 billion) to SouthAfricas gross domestic product (GDP) in 2009. This figure rises to R23.5 billion whentourism is included. An amount of R4.2 billion per annum (2008) is contributed togovernment revenue via excise taxes. Producers income amounts to R3.32 billion in2008. The industry sustains about 275 000 job opportunities (including 20% through winetourism), although some of this is seasonal in nature. Investment capital is in excess ofR50 billion (US$5 billion).

In 2008, some 3,839 producers and 83304

cellars in South Africa mostly in the WesternCape province, with some in the Northern Cape and Free State produced 1,089 millionlitres of wine, brandy and grape juice concentrate from a harvest of 1,4 million tonnes ofgrapes, making South Africa the worlds 7thlargest wine producer. About 63 million litres ofdrinking wine were produced from this harvest, of which 38% was red and 62% was whitewine, compared to a yield of 12% red wine as late as 1995.

The wine industry entered the global marketplace as major shifts were underway inproduction and consumption. While global wine production has declined over the past twodecades, the share of wine production that is traded internationally has more thandoubled. This trend has opened up new opportunities for South African wine exports,provided that they are able to demonstrate a competitive edge in the world market.

South Africa produces 3.7% of the worlds wines and exports 54% of its wine production(411.8 million litres in 2008) to the value of R6.27 billion (US$385 million) per annum. TheUK (27%), Germany (17%) and the Netherlands (7%) are currently the major exportdestinations for South African wines. Per capita consumption of wine in South Africa is 7.5litres in comparison with 53.9 litres in France, 22.4 litres in Australia, 28.1 litres in

Argentina and 8.5 litres in the USA.

A summary of the most important statistics of the South African wine industry is shownbelow:

124,993ha cultivated (2008) 3,839 (2008) wine grape farmers 870 cellars (2009) 349 million vines of the vinifera varieties 1.4 million tonnes annual harvest (2008)

4Indications are that more than 170 new cellars were established since 2006.

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1.089 billion litres (2008) 70% used for the production of wine 1.7% of the worlds vineyards 7thlargest producer of wine in the world (2006) 54% of South African wine is exported 411.8 million litres exported in 2008

3. RESULTS AND ANALYSIS

3.1 MEASURING COMPETITIVENESS PERFORMANCE

Competitiveness based on trade performance, is measured by the application of theRelative Trade Advantage (RTA) formula (Balassa, 1989, and applications by Volrath,1991, ISMEA, 1999, Esterhuizen, 2006 and Esterhuizen and Van Rooyen, 1999, 2001,2004, 2006). In this quantitative method, it is argued that competitive advantage could beindicated by the trade performance of individual commodities, value chains and countriesin the sense that the commodity trade pattern reflects relative market costs as well asdifferences in non-price competitive factors, such as subsidies, government policies andother public support measures. The Relative Trade Advantage method allows for themeasurement of competitiveness under real world trade situations to include the realitiesof uneven economic playing fields, distorted economies and different trade regimes andare therefore most suited for measuring business based competitiveness status of anindustry and firm.

This method supports the above definition on competitiveness. To measure howcompetitive the wine industry in South Africa is, it is necessary to determine howsuccessful the industry traded its products over time in the local and global environmentrelative to other competitors.

This approach considers trade performance, i.e. the ability to continue to trade in acompetitive global environment and is based on the ratio of trade in wine (by country

A/firm A) vs the global trade in wine, relative to the ratio of trade (by country A/firm A).Data is drawn from FAOSTAT.

The long-term competitiveness index and the trends in competitiveness for the wineindustry in South Africa as measured by Relative Revealed Trade Advantage (RTA) areshown in Table 1. In Figure 1 the trend is illustrated. From this it is clear that South Africaswines are increasingly internationally competitive with a sustainable and positive trendsince 1990, with a high point in 2005. Recently some decline is being recorded to levels

just above 2002.

Table 1: The competitiveness index of the wine industry in South Africa(2000 2008) based on the Relative Revealed Trade Advantage (RTA)

Product RTA2008

RTA2007

RTA2006

RTA2005

RTA2004

RTA2003

RTA2002

RTA2001

RTA2000

Wine 4.55 4.42 4.74 5.84 5.36 4.96 4.31 3.76 4.05

Source: Own calculation based on data from FAOSTAT.

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Notes:Competitive (RTA > 1), marginal competitive (1 > RTA > -1), not competitive (RTA< -1); + Positive trend; -negative trend.

(1.00)

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1961

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1985

1987

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1993

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2007

Phase 1

Phase 2

Phase 3

Phase 4

Phase 5

Phase 6

Figure 1: The competitiveness of the wine industry in South Africa (1960 2008)

The impacts of the regulation period and political sanctions (from early 1990s) whenpolitical liberation and access to global markets was achieved, are dramatically captured inthe countries competitive performance, as well as recent events related to changingconsumer preferences and style changes, trade policies, exchange rate fluctuations andtechnological innovation and constraints in these.

A number of phases in competitiveness in the South African wine industry since 1960 areidentified and described i.e. a short recent history of the South African wine industry isgiven (Van Rooyen, 2007 and in interviews with prominent wine analysts, and industryseminars):

Phase 1 - Regulated competitiveness - 1970): During this period ( effectively starting inthe late 1930s), the South African wine industry was heavily regulated through varietalchoices and vine material, wine and wine grape production quotas, surplus removalschemes and price agreements. The KWV (Koperatiewe Wijnboere Vereniging),established in 1918, was granted statutory powers to regulate supply in the industry. This

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period was characterised by a focus on high volume production of relative lower qualitywines and an overall orientation towards brandy and fortified wine production (Ponte &Evert, 2007).

Phase 2 Constrained economic and political environment (1970-1990): Increasingpolitical pressures by the international environment during the 1970s and the imposing of

ante-apartheid sanctions brought the industry almost to a halt. Economic survival waspossible through occasional exports of large volumes of low quality wine to EasternEurope and domestic consumption (Vink, et al, 2004). One important innovation duringthis period was the introduction of the Wine of Origin scheme which brought local wineindustry regulations in line with those in European countries. Cultivar based and classicwines became more popular. Wine tourism and wine routes was also introduced.

Phase 3 Madiba Magic (1990-1995):With the release of Nelson (Madiba) Mandela in1990, the wine industry started with a remarkable period of activity and transformation.Economic sanctions were lifted, leading to international business exposure, access tointernational supply chains and increased investments. By 1997 the industry was fullyderegulated and operated in a free market environment. The Wine of Origin scheme wasmaintained and the environmentally Integrated production of Wine (IPW) programme waswidely implemented. International sales of South African wines increased from 20 millionlitres in 1992 to over 110 million litres (20% of the wine crop).

Phase 4 Facing competit ive reali ties (1996-2000): Despite increased sales (at relativelow prices) certain cracks started to appear in the South African wine success story.Renowned wine writers/wine judges called for changes in style and quality and led South

Africa to produce internationally accepted wines fruity, non-grassy, less tannins, greatconsistency, more quality reds (Le Roux, 2007). Australia also became a much moreaggressive player in the UK, South Africas most important market.

All this resulted in a range of innovations including the planting of improved grape varietiesand virus-free plant material; the terroir system was extended, together with cultivarspecific site solutions and the planting of more red varieties. Supply chain reliability alsobecame a major success factor. By the end of the 1990s, the South African wine industryagain responded positively, producing wines in the new world style, but with a distinctlySouth African character (SAWB, 2002). Exports rose from 110 million litres in 1997 to 141million litres in 2000 (26% of the wine crop).

Phase 5 Towards becoming a global player (2000 - 2005): The industry mobilised andjointly decided on a strategic course for excellence through the acceptance of Vision2020, the institution of the SA Wine Industry Council and the setting of a framework for apartnership with government through the Wine Industry Strategy Plan (WIP) in 2003. Thisphase records a sustained increase in exports, in particular to the UK, Netherlands andGermany. Brand development and promotion became noted business strategies, with aparticular effort by the wine industry to establish unique Brand SA properties for South

African wines, emphasising the great diversity and value for money of the wine. Variety isour nature with an increasing environmental focus and social responsibility (the WineTransformation Charter, 2006). Concepts such as integrity, authenticity and sustainabilitybecame key pointers in the industry (see the SA Wine Industry Directory, 2003-2008) as

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well as the notion of unique and typical South African wines (Pinotage-red; Chenin Blanc-white).

The impact of world market movements (e.g. Australia, 2007) fluctuating exchange ratesand the presentation of unique lifestyle experiences (wine + food + tourism + value formoney) became integrated in wine business strategies. Efforts to expand the local market

are also in progress. Since 2000, exports again increased to 271 million litres in 2005.

Towards a next phase? Phase 6 Operating in a constrained competitiveenvironment (2006 to current): Since the 2005 high point, the wine industry in South

Africa is in a declining phase in terms of competitiveness status i.e. relative to itscompetitors. This negative trend in competitiveness started around 2005 after the definitepositive trend in competitiveness which started in 2000. The main reasons for this declinein competitiveness can be found in the broader wine industry environment in whichbusinesses now operates. This constrained environment include factors like the increasein the value of the Rand, global warming/drought conditions and climatically fluctuations,increases in interest rates, high crime and corruption levels, lack of infrastructuremaintenance and export facilities, lack of skilled labour and governments inability toprovide sufficient regulatory and support services to the needs of the dynamic wineindustry in South Africa export sectors in general.

This downward trend in competitiveness is also in line with the findings of the WEF in theirGlobal Competitiveness Report and with the findings of the IMD in their WorldCompetitiveness Yearbook on South Africa. In the WEF's Global Competitiveness Index,South Africa dropped from 36th position in 2006/07 to 44th position in 2007/08 and iscurrently (2008/09) in the 45thposition. The IMD's World Competitiveness Yearbook for2007 showed a 12-place drop in South Africa's ranking, from 38th to 50th out of 55countries. In 2008 South Africa drop another three places to 53, however, in 2009 South

Africa gain 5 places and is now 48th out of 57 countries. In explaining South Africas drop inglobal competitiveness rankings, the five most problematic factors for doing business inSouth Africa were indentified to be: crime and theft, inefficient government bureaucracy,inadequately educated workforce, restrictive labour regulations and inadequate supply ofinfrastructure.

From this it can very well be concluded that the South African wine industry is nowoperating in a declining phase (phase 6?), as it may have utilised most of its currentcapacity to reach the previous high point, in 2005 and that restructuring to gain the edgeagain, will require a more conducive macro environment and general support infrastructureand growth-oriented government policy and support to facilitate sustainedcompetitiveness.

The international position:Wine trading (both at import and export levels) is one of the most dynamic and competitiveactivities in the agro-food environment. Since the late 1980s, the share of wine productionthat is traded internationally has nearly doubled and wine trade has brought major gains toparticipants in expanding countries, but pain to many traditional producers (Anderson,2004). A view of South African competitive performance measured by the RTA, incomparison with some other major wine trading economics is instructive. In Figure 2 thegeneral upward and relative middle position of South African is shown. The recent

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decline relative to other competitors is also shown. Countries with increasingperformances are Argentina, New Zeeland and the highly competitive Chile, after theirconsiderable decline from 2000 to 2005

Australia

Chile

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5.00

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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Argentina Australia Chile France Italy New Zealand Portugal Spain United States of America South Africa

France

New ZealandPortugal

ItalySpain

South Africa

Argentina

Figure 2: Trends in the competitiveness of selected wine producing countries (1990-

2007)

3.2 DETERMINANTS AND FACTORS OF COMPETITIVENESS IN THE SA WINEINDUSTRY

Determinants of competitiveness were identified by using survey date on the views ofSouth African wine executives on competitiveness, analysed by using the Porterframework (1990, 1998). The aim is to determine the key success factors that established

a competitive advantage and the constraints that impacted negatively on thecompetitiveness of the wine industry. Porters (1990, 1998) theory of competitiveadvantage is an effort to identify the many factors that influence competitiveness and toshow how they relate to each other and to the economic performance of a countrysindustries in a global economy. While the traditional and new trade theories provide theimportant explanation of the locality production and trade patterns, as well as their effectson economic welfare, the work of Porter aims at understanding the process of change andwhy particular sectors in particular countries have been more successful than others i.e.more competitive.

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3.2.1 THE WINE EXECUTIVE SURVEY:

The focus of this analysis will be at the firm level i.e. individual firms will be requested toparticipate in the data gathering process through questionnaires. Executive opinions willthus be gathered as this group take the responsibility for the success and failure of

strategy and operational action. Whereas the hard data in the previous section is used tomeasure competitiveness status over a specific period, the survey data measurecompetitiveness as it is perceived. The survey responses will reflect perceptions ofcompetitiveness and indications for the future by business executives who are dealing withlocal and global business situations. The WineExecutiveSurvey (WES) will offer manyunique measures and will capture the informed judgments of business leaders anddecision-makers in the wine industry of South Africa on issues that influence theirindustrys competitiveness.

In Table 2 and Figure 3 below, all the factors affecting the competitiveness in the wineindustry in South Africa in 2008 are indicated. These items were identified and ratedthrough responses from 46 executives in the wine industry [the Agricultural BusinessChambers Wine Executive Survey (WES, 2008)] to have an enhancing (rating of 7),constraining (1) or a neutral (4) impact on competitiveness.

The top 10 most enhancing and constraining factors for 2008, are listed in the table 2below. The top most constraining factors for the industry were identified to be theconfidence and trust in politicians, electricity suppliers, the cost of crime and thecompetence of personnel in the public sector. The top most enhancing factors for theindustry were identified to be the competition in the local market, international competition,the affordability of high quality products and the entry of new competitors.

Table 2: The top ten most constraining and enhancing determining factors for theSouth African wine industrys competitiveness, 2008.

Top 10 most constraining factor Top 10 most enhancing factors

Factor Rate Factor Rate

1 Trust/confidence in politicians 1.50 Competition in the local market 6.33

2

Electricity suppliers 1.67

International entry into the local

market 6.15

3 Cost of Crime 1.70 Affordable high quality products 6.15

4 Competence of personnel in the

public sector 1.91 Entry of new competitors 6.09

5 Quality of Unskilled Labour 2.46 Unique services & processes 5.43

6 Labour policy 2.46 Environmental awareness 5.35

7 Cost of Transport 2.48 Invest in staff 5.35

8 Administrative regulations in South

Africa 2.50

Efficiency of technology in production

processes 5.30

9 Cost of financing 2.59 Regulatory standards 5.28

10 Land reform policy 2.70 Availability of Unskilled labour 5.24

Source:Agricultural Business Chamber: Wine Executive Survey 2008

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Figure 3: Factors of competitiveness for the South African wine industrySource:Agricultural Business Chamber: Wine Executive Survey 2008

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3.2.2. THE PORTER ANALYSIS

According to Porter (1998) four broad sets of competitiveness attributes or determinants

must be considered. These are:

Factorconditions

: Factors of production, natural resources, level of production costssuch as the price of labour, capital, land, water, fuel, pesticides, machinery, thesupply chain, knowledge and infrastructure and all transaction costs, necessary tocompete in a given industry;

Market conditions

: The nature of demand for a product and service and the ability tocapture this demand through marketing and sales, for example, demandcomposition, demand size and information on trends in demand;

Related and supporting industries

: The presence or absence of supplier industriesand related industries that are internationally competitive;

Firm strategy, structure, and rivalry

: The conditions and environment governing howfirms are created, organised and managed, and the nature of domestic rivalry;

In addition, government

plays a vital role in orchestrating these determinants -influencing each either positively or negatively, through its policy-making andoperational inputs. Indeed, government policy and programmes, as a determinant ofan environment which is intended to enhance competitiveness must be viewed apartfrom the previous four determinants.

Finally there is the role of chance

. Chance/uncertain events are occurrences largelybeyond the power of firms (and often the national government) to influence. Eventssuch as wars, diseases, political decisions by foreign governments, large increasesin demand, shifts in world financial markets and exchange rates, discontinuity oftechnology can be described as chance events and would be exploitedopportunistically in a competitive manner by highly competitive industries.

In Table 3 the rating of determining factors for 2008, according to the Porter- framework isshown.

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Table 3: The rating of determinants of competitiveness in the South African wineindustry, 2008.

(i) Production factor conditions 3.67 (ii) Related & supporting industries 3,91

Quality of Unskilled Labour 2.46 Electricity suppliers 1.67

Cost of Transport 2.48

Collaboration with scientific research institutions in

R&D 3.50

Cost of financing 2.59 Telecommunication firms 3.50Availability of Skilled Labour 2.87 Suppliers of packaging material 3.63

Overall cost of doing business 2.93 Financial institutions 3.89

Labour administration cost 3.07 Transport companies 3.89

Cost of quality technology 3.11 Internet service providers 4.24

Quality of skilled labour 3.15 Specialised information technology services 4.28

Cost of skilled labour 3.59 Sustainability of local suppliers 4.30

Cost of using infrastructure 3.67 Status of scientific research institutions 4.37

Cost of Unskilled Labour 3.70 Quality of local suppliers 4.52

Efficiency of general infrastructure 4.11

Credit availability 4.63

Availability of quality technology 4.80

Quality of technology 5.00

Availability of water for industrial purposes 5.07

Availability of Unskilled labour 5.24

(iii) Firm strategy , structur e & rivalry 5,20 (iv) Government support & polic ies 3,30

Expenditure on R&D 3.78 Confidence/trust in politicians 1.50

Incentives for management 4.04 Competence of personnel in the public sector 1.91

Flow of information from the customers 4.20 Labour policy 2.46

Information flow from primary suppliers to your

company 4.57 Administrative regulations in South Africa 2.50

Substitutes of your companys product or services 4.78 Land reform policy 2.70

Continuous innovation 5.20 BEE policy 2.87

Regulatory standards 5.28 The tax system 3.04

Efficiency of technology in production processes 5.30 Political changes influence 3.91

Environmental awareness 5.35 Environmental regulations 4.09

Invest in staff 5.35 Trade policy 4.09

Unique services & processes 5.43 Macro-economic policy 4.26

Entry of new competitors 6.09 Competition law 4.33

International entry of the local market 6.15 Complying with environmental standards 5.20

Affordable high quality products 6.15

Competition in the local market 6.33

(v) Demand cond ition s 3,98 (vi) Chance factors 2,92

Growth in local market 3.30 Cost of Crime 1.70

Local market size 3.54 Cost of HIV/Aids 3.11

Local customers demand environmental friendly

products 3.89 Exchange rate 3.33

Internationalisation of local buyers 3.96 Global political developments 3.57

Speed of adoption of new products by local buyers 4.24

Local buyers concern of ethics 4.33

Sophistication of local buyers 4.57

Source: Agricultural Business Chamber: Wine Executive Survey 2008

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Comparing 2005 with 2008 (refer to Notes in Figure 4 below): In both 2005 and 2008WESs, the executives in the wine industry indicated that the chance related determinantsand the government support and policies were the most constraining factors to theircompetitiveness. However, in 2008, these two factors were rated higher.

Executives rated the production factor conditions, supporting industries anddemand/market conditions to have a fairly neutral impact on their competitiveness.However in 2008, these three factors, especially the production factor conditions wererated lower- more constraining- than in 2005.

The only factors rated by executives to have had an continued enhancing impact on thecompetitiveness of the South African wine industry is firm strategy, structure and localrivalry. It was however rated slightly higher in 2008, than in 2005. This supports the viewtaken in section 3.1 to explain the phase 6 situation above. Figure 4 below indicates thestatus, as viewed by industry executives, of the major determinants of competitiveness inthe South African wine industry in 2005 and 2008, respectively.

Figure 4: The status of the determinants of competitiveness in the South Africanwine industry- 2005-2008.Source:Agricultural Business Chamber: Wine Executive Survey 2005, 2008

Note 1: 2005 scale: 1 = Constraint 2 = Moderate 3 = EnhancementNote 2: 2008 scale: 1 = Constraint 4 = Moderate 7 = EnhancementNote 3: work in progress to align 2005 &2008 scales.

(i) Production factor conditions:

The average score in 2008 achieved for production factor conditions is 3,67 which meansthat on average the factor conditions in South Africa have a moderate, to slightlyconstraining effect on the wine industrys competitiveness.

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In 2005 the factor conditions were also rated as moderate, with quality of skilled labour,the high cost of capital and the high cost of doing business in South Africa mostconstraining. In 2008, the most constraining factors were rated to be quality of unskilledlabour, cost of transport and financing, availability of skilled labour and overall cost ofdoing business.

The factors that have an enhancing impact on the competitiveness of the wine industry inSouth Africa in both 2005 and 2008 are the availability/cost of unskilled labour and thecost, quality and availability of technology in South Africa.

In 2005 the location of the wine industry in South Africa in terms of the international marketwere considered to have the most enhancing effect, and in 2008 the availability of waterfor industrial purposes were considered to have the most enhancing impact.

(ii) Related and supporting industries:

The related and supporting industries, as a determinant of competitiveness in 2008, wererated 3,91, which states that the related and supporting industries also have moderate toslightly constraining impact on the South African wine industry in 2008. In 2005 this factorwere rated to have contributed positively and have a positive impact on the industryscompetitiveness.

The ongoing electricity crisis, experienced since 2008, constrained the industry largely andthe electricity supplies were rated to have the most constraining impact since 2005. Theonly enhancing factor in 2008, even though rather unconvincingly so, is the quality of localsuppliers. This however is also rated less than in 2005. All other factors had a moderateimpact only in 2008.

(iii) Firm strategy, struc ture and rivalry:

The third broad determinant of competitive advantage in an industry is the context in whichfirms are created, organized and managed as well as the nature of rivalry. With anaverage score of 5,20 for 2008, firm strategy, structure and rivalry as a whole, have astrong enhancing impact on competitiveness of wine businesses in South Africa. The onlyconstraining factor, even though only slight constraining is the expenditure on researchand development.

This determinant were also rated as enhancing in 2005, with the strong enhancing factors

the regulatory structures and standards in the industry, integrity systems, intense internalcompetition, entry of new competitors on a regular basis, the production of affordable highquality products, firm level investment in human resources, employment of qualitytechnology, the production of unique products, services and processes, the production ofenvironmental friendly products, and continuous technical innovation.

In 2008, the most enhancing factors were the ease of entry of new competitors,international entry into the local market, affordability of high quality products and the fiercecompetition in the local market.

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(iv) Government support and policies:

The wine industry in South Africa is highly regulated and legalised and to a large degreedependent on sound partnership arrangements with government. Government policy andsupport on matters related to export and trading, science and innovation, empowermentand transformation, tax and excise duties, natural resources such as land and water,

labour relations, financial arrangements to name some, impacts directly on this sensitiveand highly market orientated industry.

With an average score of 3,30 in 2008, government services, policies and support systemsare viewed to act in a constraining manner to the competitive success of the wine industryin South Africa. Similar findings were made in the Agricultural Business Chambers WineExecutive Survey in 2005.

In 2005, the major constraining factors were: burdensome administrative regulations, theimpact of legal change, the competence of personnel in the public sector, South Africastax systems impact on investment and risk-taking, South Africas resources policy (labour

and land) and clarity on BEE transformation policy and the scorecard system. In 2008, thetrust in the honesty of politicians, competence of personnel in the public sector, the currentimpact of the labour policies, administrative regulation in South Africa, the land reformprocess and unclear BEE policy and the tax system were considered the mostconstraining factors.

It is interesting to note that the South Africas environmental regulations were rated by thewine industry in South Africa in 2005 to have a positive impact on their competitiveness,while macro-economic policy, the current political climate and trade policy are providingmoderate enhancements. In 2008, again the compliance with environment standards isconsidered to enhance their competitiveness. The trade-, and macro-economic policies

and competition were once again considered to have a moderate impact, with BEE policyless concerning, inter alia due to the effort of the industry to draft a Wine TransformationCharter and Score Card to manage BEE initiatives. Government however have notformally sanctioned this charter yet

(v) Demand conditions:

In 2008, the demand conditions had a rating of 3,98, which indicate that the demandconditions has a moderate to slightly constraining effect on the South African wineindustrys competitiveness.

The Agricultural Business Chambers Wine Executive Survey (WES) in both 2005 and2008 indicated that the growth in the local market size is constraining the competitivenessof the wine industry in South Africa.

The issue of buyers of South African wine being knowledgeable, demanding and buyingenvironmentally friendly products and buyers being concerned over ethics and the integrityof production methods were perceived to have a moderate impact on the South Africanwine industrys competitiveness.

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(vi) Chance factors:

Chance events are occurrences that have little directly to do with circumstances in anindustry and are often largely outside the power of the firms or a country to influence.Chance events, however, are important because they create opportunities anddiscontinuities that could allow shifts in competitive performance. Chance events can

nullify the advantage of previously established competitors and create the potential that anew firm can supplant them to achieve competitive advantage in response to new anddifferent conditions (Porter, 1998).

For the wine industry of South Africa, the impact of the chance factors are considered themost constraining determining factors, as defined by Porter, to their competitiveness.

The cost of crime was rated to be the most constraining factor amongst the chance factorsin 2008, at a rate of 1,7. The cost of HIV/Aids was rated in 2008 to the second mostconstraining chance factor; in 2005 this was not rated as a constraining factor.

The fluctuation of the exchange rate and the global political/economic developments werealso rated to have highly constraining impacts, both in 2005 and 2008.

4. WINE BUSINESS CONFIDENCE RATINGS.

In 2007 the SA Wine Council initiated the construction of the Wine Business ConfidenceIndex as part of the development of a comprehensive industry intelligence system. Thisinitiative was carried over to SA Wine Industry Information & Systems (SAWIS) forimplementation. The construction of the index is done by the South African AgriculturalBusiness Chamber (ABC) and the methodology is similar to that developed and used bythe ABC to compile the well-known ABC/IDC Agribusiness Confidence Index for South

Africa. The Wine Business Confidence Index has reached its first year of relevantinterpretation since the base year was concluded. A rating of 50 is considered to beneutral.

In October 2007 the wine business confidence initiated at a fairly positive level of 56.2.The impact of the global economic slowdown, domestic constraints as referred to aboveand the financial crisis reflected on the overall confidence levels since. In April 2009, afterthe 2009 harvest, confidence was 10% lower (46.3), when compared to the same time ofthe previous year. However, the decision makers confidence remained relativelyunchanged since October 2008, during harvest preparation (46.1). A further slight upturnin confidence was perceived in October 2009, which reflects confidence during the

preparation phase for the 2010 harvest. The confidence increased somewhat to 47,4 inOctober 2009, which is 3 % higher than that of October 2008, and a mere 2% higher thanconfidence levels after the harvest of 2009 in April. Figure 5 below shows the confidencelevel of the wine business confidence index from October 2007 to October 2009. Althoughthis is recorded for too short a time to be conclusive, confidence ratings mirroredcompetitiveness ratings in phase 6 ( Fig 2).

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Figure 5: Wine Business Confidence Index for the South African wine industry fromOctober 2007 to October 2009Source:Agricultural Business Chamber (ABC) & SA Wine Industry Information & Systems(SAWIS)

The confidence index is constructed by measuring 10 sub-indices. When comparing theyear-on-year change, which specifically refers to the change in confidence betweenOctober 2008 and October 2009, which is the harvest preparation period in the wineindustry of South Africa, the economic growth was the biggest contributor to the slightupturn in confidence. The decrease in financing costs also contributed largely. It isrelevant to compare the confidence in the post harvest period (April 2009) to thepreparation phase for the following harvest, which was in October 2009. Again theexpectations of moderate economic growth in the country boosted the general purchasingpower of consumers, lifted business and investment confidence in the broader economyand promoted business growth accordingly. The decrease in financing costs, especiallyduring the harvest preparation phase, brought much relieve for the industry in the shorter

run.

Interestingly the confidence regarding employment also increased in the short run. On thedown side, capital investment decrease when compared to the same period of theprevious year. This could indicate that, in this slight upturn after the economic/financialcrisis, existing assets are being utilised, possibly with slightly more employees, beforefurther capital investments could be incurred in future.

Due to the stronger exchange rate and lower international demand, foreign earningsdecreased as the volume exported decreased. Wine executives found their market share

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to decrease, both when compared to the previous year and the post harvest period inApril.

Unfavourable weather conditions had a negative impact on confidence in the harvestpreparation phase in October 2009.

Table 4 below indicates the changes in the overall wine business confidence index as wellas that of the sub-indices used to compile the overall index.

Table 4: Changes in the overall wine business confidence index and its sub-indicesfor the South African wine industry

Year-on-year change Change between Post- and Pre-harvest

Turnover -6% Small decrease 1% Unchanged

Net operating income 3% Small increase 1% Unchanged

Employment 19% Increase 21% Increase

Capital investment -23% Decrease -15% Small decrease

Economic growth in SA 189% Huge increase 89% Large increaseVolume exports -38% Decrease -8% Small decrease

Agricultural condi tions 14% Increase -42% Decrease

Market share of the business -49% Decrease -45% Decrease

Debtor prov ision for bad debt -12% Decrease -11% Decrease

Financing costs -37% Decrease -25% Decrease

Overall Index 3% Small increase 2% Small increase

Source:Agricultural Business Chamber (ABC) & SA Wine Industry Information & Systems(SAWIS)

Regional differences: There have been significant differences between the confidencelevels in different wine producing areas in South Africa since October 2007. Most regionsshowed a gradual; decrease in confidence over this period, with the exception of theOrange River, Worcester and Breedekloof regions. The Orange River and the Klein Karooregions decision makers were the least confident during this period. The Malmesburyregion was very confident in the base year, but dropped significantly over the past year.The Worcester region was the most confident in October 2009, followed by the OrangeRiver and Olifants River regions. The Stellenbosch region showed a steady andconsistent decrease in confidence over the two year period of measurement. The Paarlregion also showed a consistent decrease, but had a slight upturn in October 2009. Thechanges for the different region, since October 2007, can be seen in the graph below

(Fig.6).

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Figure 6: The wine business confidence in dif ferent producing regions.Source:Agricultural Business Chamber (ABC) & SA Wine Industry Information & Systems(SAWIS)

Institutional differences: Different role players in the wine business industry alsoindicated the different confidence levels. Three different institutional groupings aredistinguished in the measurement of the wine business confidence index: Private cellars;producer cellars; and wholesalers. The private cellars, which confidence did droppedsignificantly since October 2008 are still the most confident group of role players in theindustry. Producers cellars indicated a consistent drop in confidence between October2007 and April 2009. Their confidence, however, increased significantly in October 2009.The wholesalers are overall the least confident in the industry. Their levels were, however,higher than those of the producer cellars in October 2007 and April 2009, respectively.Figure 7 below shows the confidence levels of wine executives representing differentgroup of role players within the wine industry.

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Figure 7: The wine business confidence for different groups of role players in thewine industrySource:Agricultural Business Chamber (ABC) & SA Wine Industry Information & Systems(SAWIS)

5. MAJOR DRIVERS IN THE SOUTH AFRICAN WINE INDUSTRY

It is clear from the above industry analysis, that renewal, innovation and the upgrading ofphysical and social infrastructure is required to enable the South African wine industry tosustain its general positive competitiveness trend since the early 1990s. Firm actionacross a broad front however will be required to confirm a positive trajectory. From the

above analysis a number of future drivers are listed:

(i) Product quality improvement and product integrity: The plantings since 1997/98,the quality upgrading of South African wines and the introduction of measures toeffectively establish production authentically and integrity and to combat for exampleillegal flavouring practices contributed substantially to the current position of strength.Initiatives and measures to enhance such industry level applications will be a futurebuilding block of success.

(ii) Brand SA roll-out: The ability to establish a unique Brand SA proposition forSouth African wines will assist in creating a differentiated playing field for South Africanwines. The industrys efforts to craft a unique and vibrant marketing message based on thediversity of the South African winelands (including social and biodiversity is in progressand provide exciting opportunities). Furthermore, the inclusion of biodiversity codes at farmand cellar levels in the Integrated Wine Production system gives substantiation to thisparticular drive; social and transformation codes will follow soon, with the gazetting of theWine Transformation Charter.

(iii) A sharper market segment focus: The exposure of wine producers and marketersto evolving preferences and the focus on doing-the-right-things right is driving the exportinitiative of South African wines. It is however clear that the increased understanding of the

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evolving market will be required to survive in a highly competitive global environment. Theselection of appropriate countries, market segments in particular and price points and aclear comprehension of the required business systems to operate successfully in theselected segment will be necessary to give operational effect to a Brand SA strategy.Market segmentation will be a key in this focus area with ethical and environmentalpositioning as an important competitive advantage for South African wines.

(iv) Cost effectiveness technology and business systems: South Africas wineproduction cannot position itself as a high volume-low unit cost producer. South Africanwines should thus rather focus on higher quality; higher value points in particular marketsegments. However, the South African wine industry will still be highly constrained byrelative high input cost systems. Technical efforts to increase yield per hectare (withoutcompromising on wine quality) and to reduce supply chain costs and time (delay) costs willrequire innovative R&D solutions and information systems.

(v) Social development and economic transformation: Successful Black EconomicEmpowerment (BEE) strategy will enhance political commitment and support to theindustry and create social stability and productive resource mobilisation. Theestablishment of entrepreneur oriented black business class and top level black businessleadership must be considered as a significant driver of the South African wine economy ofthe future. This will also impact positively on domestic market expansion of theconsumption of wines as a lifestyle activity amongst black professionals.

(vi) Driving the focus of the South African wines in the global arena: The SouthAfrican wine industry is strongly linked to global trends that need to be integrated into aSouth African strategy. The following should be noted:

Shifting demand (Consumers want more clarity on the nature and ethics of a product;and companies need customer loyalty); increasing retail power (supermarkets);increasing competition and creating brand value; reliable supply chain systems.

The world is looking for quality red wine. Premium red wine products that uplift theimage of a countrys wine industry in total are thus required.

Global business consolidation processes are underway - mergers and acquisitions andjoint ventures of wine companies to form bigger brands and to achieve greater marketaccess.

The settings of multi-national wine companies are expected and links with globalsupply chains are expected sooner than later in South Africa.

(vii) International trade agreements: The global trends and the use of concepts suchas Geographical Indicators and Traditional Expressions, to direct international traderegimes could be significant for global wine trade and South Africa is in a good position toexploit new opportunities but should also guard against the establishment of new tradeconstraining barriers.

(viii) Successful and proactive government and industry interaction to establishconfidence and an enhancing business and social environment: The wine industry,

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at a recent workshop on competitiveness, rated an open red telephone line togovernment as vital for a successful and performing wine economy. This partnership willbe required to focus on a number of activities. These include market development,regulation and export promotion; the active positioning of Brand SA by governmentagencies (NDA, dti, SAA, Tourism, etc), infrastructure expansion, in particular exportationfacilities, transportation networks, research support and technological innovation;

economic empowerment and transformation support; trade agreements and policydevelopment; combating crime; and the simplification of regulations and a reduction inbureaucratic red tape to name the main areas of concern.

6. CONCLUSION

It is important to measure and analyse trends in the competitiveness of an industry in orderto support the required country- and firm level strategising required to sustain and improveperformance. The analysis traces the improved competitive performance of the South

African wine industry and confirms the openness of the South African wine economywhere the exchange rate and other global impacts and trends play an important role incompetitiveness status.

South Africas wines are increasingly internationally competitive, with a sustainable andpositive trend since 1990. However recently this trend started to show a decline, whilebusiness confidence is also declining. To enable the wine industry to attain and sustainsuch positive trends, and to build the required confidence to compete in a tough globalenvironment, a multi-pronged strategic approach to sustainable growth and developmentare recommended focussing on five areas:

(i) the crafting of a strong and identifiable Brand South Africa proposition to portray theuniqueness of South Africa as a quality wine-producing region of excellence, adhering tosound social, environmental and business ethics;

(ii) The introduction of measures to counteract the negative impact of a fluctuatingexchange rate such as cost effective production processes, effective supply chains,increased productivity and unique marketing strategies;

(iii) The implementation and management of transformation through social capitaldevelopment and successful BEE activities;

(iv) The establishment of a sound industry/government partnership to create acompetitive framework in order to stimulate investment in infrastructure and developmentin the sector; and

(v) Increase funding for industry level initiatives, especially in market development andresearch and technological innovation.

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7. REFERENCES

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AGRICULTURAL BUSINESS CHAMBER (ABC), (2005). Wine Executive Survey (WES)2005

AGRICULTURAL BUSINESS CHAMBER (ABC), (2008). Wine Executive Survey (WES)2008

AGRICULTURAL BUSINESS CHAMBER (ABC) & SA WINE INDUSTRY INFORMATION& SYSTEMS (SAWIS), (2009), Wine Confidence Index data.

ANDERSON K (2006). CHELTENHAM, WEDWARD ELGAR. The worlds wine markets:Globalisation at work.

BOEHLJE, M. (1996). Industrialisation of Agriculture. What are the implications? Choices.First Quarter, 1996: 30-33.

BALASSA, B. (1989). Comparative advantage, trade policy and economic development.London, Harvester/Wheat sheaf.

CHO, D.S. & MOON, H.C. (2002). From Adam Smith to Michael Porter. Evolution ofCompetitiveness Theory. World Scientific, Singapore, New Jersey, London, Hong Kong.

ESTERHUIZEN, D. (2006). An inquiry into the competitiveness of the South Africanagribusiness sector.PhD-theses, University of Pretoria, Pretoria.

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PORTER, M.E. (1998). The competitive advantage of nations. London, Macmillan.

South African Wine & Brandy Company (SAWB) 2005. The Competitiveness of the SouthAfrican Wine Industry. www.sawb.co.za, Stellenbosch.

VOLRATH, T.L. (1991). A theoretical evaluation of alternative trade intensity measures ofrevealed comparative advantage. Weltwirtschaftliches Archive 127 (2): 265 280.

SOUTH AFRICAN WINE & BRANDY COMPANY (SAWB) (2002). Setting the strategiccourse for excellence. VR Graphics.

SOUTH AFRICAN WINE INDUSTRY INFORMATION & SYSTEMS (SAWIS), (2009)

SOUTH AFRICA WINE INDUSTRY DIRECTORY (2003-2008). A Winelands publication.ISBN 978-0-620-38730-9.

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THE WINE INDUSTRY TRANSFORMATION CHARTER (2006). The South African WineIndustry Council, Stellenbosch, July 2006.

VAN ROOYEN, C.J. (2007). Considering competitiveness in the wine industry. Keynotepaper, Bodegas Argentina, September 2007. Mendoza, Argentina.