Wine in Focus vodcast | Ep 3 | The industry's contribution to South Africa

Podcast transcript: scroll to the areas that interest you

LM: Lerato Motshologane, Investec for Business, trade finance specialist and Discover Wine founder
RB: Rico Basson, chief executive officer of SA Wine
VdR: Victor dos Reis, Investec Leverage Finance, senior transactor

• 00:00: Introduction and welcome of guests

  LM: Welcome to Wine in Focus, an Investec Focus Radio vodcast series to awaken not only your appreciation of South Africa's world class wines, but the diverse people behind the resilient industry that contributes R56.5 billion to our economy. Investec is the proud sponsor of the Trophy Wine Show and the Trophy Spirit Show, and in this five-part series, we want to awaken your senses to what our local industry has to offer.

  I'm Lerato Motshologane, a trade finance specialist at Investec Business Banking, founder of Discover Wine and your host. In this episode, we'll be taking the pulse of the South African wine industry and market. We will look at its growth prospects and whether exporters can mitigate potential US trade tariffs. We'll also explore what's behind the influx of foreign investment into the Western Cape winelands.

  Let's meet my guests. Joining me today at Grande Roche, in the heart of the Paarl Winelands, is Rico Basson and Victor dos Reis. Welcome both, and thank you for joining me for Investec's Wine in Focus.

  All: Thank you. Thank you for the invite. 

• 01:10: SA Wine’s economic footprint – Beyond the glass

  LM: Ah, it's such a pleasure to have you both, and let's kick off by getting a sense of how the local wine industry is fairing. I mentioned earlier that it contributes R56.5 billion to our economy annually, which is just 1% shy of our GDP. And interestingly, the amount of wine being produced, year on year, is declining, but wine sales are up. Rico, is there room for the industry to contribute more?

  RB: Well, I think the other number that goes with the GDP number is job creation. So, it is a sector that employs 270 000 people. And unlike what a lot of people believe those are not only based in the Western Cape where the winelands are, wine is actually a national asset, if you look at consumption retail...

  So, it's agricultural based—we need the vineyards to produce the products—but those big numbers are made up out of the domestic market, exports of about 10 billion, tourism of about 9 billion, and then, overall the rest of the value chain. I always say, let's just look a little bit beyond the wine glass. We tend to romanticise the product and that's fantastic, but I think one needs to understand the importance of that farmer, and the workers, and the community they live in, and they've got an investment that needs to go for 25 years. You plant a vine, it's 25 years later. So, we tend to brush a little bit about the value chain, but we've got close to 86 000 hectares of vineyards, 3000 growers, 80 000 workers, just on that primary site. Then it goes into processing: 500 wineries—a lot of them have got restaurants—and then further down distribution, export, and tourism.

  So, it is probably one of the most complex value chains. But if you look at our decline on production, it's very much in sync with what you would see all over the world. And lately we've seen so many headlines talking about a next generation not drinking and  farmers finding other more profitable produce like citrus and nuts to go into.

  So, my answer is that success for the wine industry does not lie necessarily in the number of hectares, or the number of litres, it is value growth, or as we would say, price point growth, internationally, as well as domestically. And so our whole strategy is built on value, it is built on aspects of market access. And we say market access, we think international, but also domestically. We think about regulation, government's ability to create stability. So, yeah, focus on value. And I think in that sense, in a very tough economy, we are holding our own. 

• 04:10: The multiplier effect – Careers across the wine economy

  LM: Yes, and, and I love that you mentioned that because the wine industry doesn't just encompass the production of wine, you know, there's associated sectors, the ones you've just mentioned. Can you give us an idea of how many direct and indirect jobs are created? What does that look like?

  RB: Every one job that you create on a wine farm, the chain creates 10 others. Which is significant. And what you find with wine is that it's got a higher multiplier, as the economists would call it, higher than agriculture, but significantly higher than the South African economy. So if you look at some of the presidential goals, if you look at the master plans that we are busy with, it is both. It is the economy and most certainly those jobs. Not necessarily always the lowest end. We've just done an exercise on career pathing across this chain, and thus far we've got 127 possible career paths.

  Which is not only on farm, it is into things like graphic design, data, logistics. And, if you work that back then into education and even schooling, it does become a place where there's opportunity and where we can attract talent. So it is significant. The inverse is also true, once you have this very same investment environment or regulation that's very uncertain like we have now, you do not see those multipliers. And I think when we touch on the symbiosis between private sector and government, the importance of getting confidence, when you look at investment, is so, so important. And, we need growth, no matter what we say, unless we see significant growth and add value and more sustainability, it's a tough place, and I’ve been wanting to say that as well.

  VdR: Rico, can I just ask a question? I mean, in terms of the premiumisation of South African wines, right, or South African agriculture, in all honesty, I mean, South African wines play a crucial role in that. When you look at, like, wine tourism and the impact of that, it's almost like getting a South African brand, a national brand out there, and that's what's key, right?

  RB: Absolutely. We sell a million bottles of wine every day of the year, all over the world, and that is a million opportunities to have little ambassadors of South Africa out there. And I think that's the role that we create, but one needs to also take cognisance that it is not only the premium stuff, it is also the way we can cater for different consumer groupings, making sure that you can sell a basket, the fact that you've got wine in a box does not mean that it's low quality. It is part of being more sustainable. But yeah, it is a fantastic asset for South Africa and we work hard to make sure it stays that. 

• 07:10: Wine tourism – Driving local growth

  LM: That's amazing, you know, we need jobs in this country, so to know that the industry is contributing to that, I think is phenomenal. But one can't talk about the wine industry without talking about wine tourism, you know? And Rico, how important is wine tourism to the Western Cape, and the country at large?

  RB: If I say significant, perhaps, it is the one subsegment that at the moment is still growing at exponential rates, something you'll know doesn't come often when you look at the economy. We are really world class, it's been built over years; we need to watch what we do because others are catching up. But the reason why it's so important is that a lot of the wine that is tasted on your Trophy Show and elsewhere, comes from very small farms.

  We tend to think that wine business is big. There are big ones, but of the 520 wineries, 400 are small, and for them a direct sale to a tourist is worth gold. So, overall, wine tourism contributes about 17%, if we look at all the wineries. But for the small ones, it's about 44%. And so we've got a big, big drive to take the current GDP figure of about 9.7 billion up to north of 10–12 billion.

  And I think it's possible, if we work with partners like yourself; we look at the new airport that is planned… Our biggest problem with tourism is that we need to create a bigger share of the wallet but we also need to spread that wallet, because we cannot take more people up Table Mountain, but we can take a lot more people to Darling and to Worcester and I think that's what we are trying to get some dispensation. 

• 09:05: Expanding the experience – Attracting more tourists

  LM: What are SA Wine's plans to attract even more wine tourism?

  RB: What we've done, and you cannot get away from it, wine tourism doesn't stand on its own, it’s part of tourism. And so a lot of the work that we do is we… We've got a good idea as to how bookings are being made, when they arrive it's too late, so we do work with the likes of Wesgro on direct flights with United Airlines, Delta, seeing if we can get those long haul flights straight into Cape Town.

  But the biggest misperception is that we think all tourists are foreigners; 66% of our tourists are locals. And that's why you see this evolution almost of offerings: you've got wine and golf for Investec, but you've got wine and family, and you've got wine and dogs, and you've got so many things around that.

  So, whilst we know that a tourist spends about two days on a wine farm out of 12, we try to push them to two and a half days, but it's the experience. And, I think that's what we're trying to do, to get that offering and a lasting experience.

  We are just scratching the surface of consumer data. But then your point is, how do we tap into Uber? How do we tap into the Kruger Park? How do we tap into airlines? And I think the real synergy, we'll probably find in those subsegments, and not only in the on-farm experience. But that is again great for the economy.

• 10:43: The tariff threat – Challenges in the US market

  LM: I hate to be this person, but I think we now need to deal with the tariff elephant in the room. Last year, the US market experienced the largest slump in demand, and with the potential impact of the trade tariffs, this market could face an even more greater threat. Rico, how serious of a threat is it?

  RB: Any loss of market at this stage is something that we can't afford. In our case, our exposure to the US market is fairly small. It is about, I think, 4% of our total exports, but it is the world's biggest wine consumption market. It is, for a reason, a market that everybody wants to play in. And again, I think it's not only the numbers or the tariffs, it is the uncertainty.

  And I can see it, as we speak, how exporters just don't know what to do. Should they keep on shipping and risk that that product is returned or should they stop? Because if you stop, you've worked 30 years on getting on shelf; somebody else will displace you.

  So I think my answer is again, we’re not unique, it's a global thing. But it won't, it will not play out as we hope it will in a straight trade. What will happen is that everybody is up against higher cost, that wine will now re-route.

  And one of the places that we see growth is in Africa, and I do foresee that a lot of that French wine will end up in what we call our backyard. So I think it's more complex than just looking at the potential loss.

  VdR: I was just looking this morning at the proposed tariffs, the American trade tariffs. And, I was looking… The South African is sitting at 30%, hopefully. I mean, they anticipate that coming into effect now, according to... it's on the 9th of July, right.

  You've got the competitors, as Rico was saying, so mostly EU, so it's like, France, Italy, Spain… So that tariff for the EU currently is 20%. So there's obviously a benefit there from an EU perspective. And then the other competitors would be Australia and Chile, right? And they're both sitting at 10% tariffs, right?

  So, that I think would be, on the face of it, prejudicial to South African winemakers. My bigger concern, strangely enough, isn't the direct impact, but the indirect impact. When people start looking for alternative markets, that means the entire market's looking for alternative markets.

  Right. So your concern would be what does the market dynamic do and how does that then impact, you know, the South African wine industry? Which is why I think Rico's view on almost, well, you've gotta decide what you're good at and which niche you want to play in, and make sure that you're profitable playing in a particular niche, as opposed to just selling volumes.

  I think that's the key kind of criteria is, you know, how do you make this business sustainable? How do you make the wine making business sustainable, as opposed to, is it just purely a volume game? Or is it a value game in there that you then...

  RB: The crisis has got two sides at 10% or at 30%, our competitors will just come in lower. But I do think it is a fantastic opportunity for us and government to switch into new markets. Something where the political will, if I may say that has been a little bit lacking, and that's the Africa opportunity.

  VdR: I mean, Stephen Koseff always used to say, don't waste a good crisis. And I think that's, and strangely enough, if you think about, I mean, COVID five years ago was, by far, more potentially prejudicial to South African businesses.

  And the businesses that have survived and have continued, are, you know, they're resilient, they're innovative, and they're nimble, and therefore they've survived. So I think Rico's 100% right. I think that, you know, don't waste it. There's countless opportunities. You've just gotta be creative around it. 

• 14:40: Diversifying markets – Where to next?

  LM: Outside of the US, which other markets, and I know you've mentioned that Africa is obviously growing, that demand is growing, but who are the other players, you know, outside of America?

  RB: UK, Germany, Netherlands, Belgium, those are very important markets for us. Canada is a fantastic market for premiumisation. But then within Africa and, and there again, we need to make sure that the African trade agreement is not only implemented, but that the non-tariff aspects, which is the cost, cross border aspects… And then it's East, and this East is not necessarily China; East for us would be places like Japan, could even be Singapore, Vietnam. Because we are not big, we are not shifting big volumes. We probably will look at these niche countries, and shift there. But for now, 70% Europe, UK, the market understands us; we understand the market. And it's tough, but we'll make it work. 

• 15:43: Infrastructure matters and collaboration counts

  LM: You know, I love that we took the conversation in this direction, because my next question was going to be about our ports and our railways. There have been some challenges, especially in our railways. How has that impacted the wine industry?

  RB: I think the sector is ready to go into partnerships. I think in all fairness to Transnet, there's been really positive signs of how we can do this, but it's really about three elements: it is the infrastructure, it is the port service delivery, and then it's the reputation, and how we deal with international shipping lines. And so while we broad brush, we also need to speak about all three of those components, otherwise, we'll find ships just pass us. We've done a lot of work on things like carbon footprints, on shipping in lighter glass—750ml bottles we all dream about will be lighter in future—but I think as a country we are really leading innovation. But we cannot get away from... Those containers need to go out in four, five days. The ships cannot hang around forever and ever. So yes, we know Cape Town has had wind for 400 years, but there is equipment that can also derisk that element. So I think we need to be fair in our criticism but also collectively work hard in solutions.

  LM: Victor would you like to add anything to that?

  VdR: Well, I mean, recently we ran through our coverage team in Joburg, a couple of conferences. One was the Economic Reforms Conference, and I mean, in that auditorium we had members—private sector and public sector—covering a couple of the big infrastructure players. So, dealt with electricity, dealt with rail, dealt with ports, roads, and there's a couple of things that I took away from it. One was the sheer size of the issues that we're dealing with, but also the counter to that was, you know, there's certain things that you can do quite quickly to get a very good benefit.

  I mean, if you look at what's happened with Eskom in the last two, three years, I don't think people would've anticipated Eskom being where is at the moment. What also kind of stood out to me is that as long as private and public sector work closely together, you know, you can see quick uptick in benefits, so it does require a big collaborative effort.

  So, on a national scale, I was absolutely enthused at how public and private were working together. There was an openness to communication and transparency, which is fantastic. I mean, if you look at the region, I know that we were the initial funder of the, I think, the airport access initiative, which was essentially talking to what Rico was talking about earlier, is getting international tourists directly into Cape Town because that's essentially one way to grow the local economy. I think they've doubled the number of international flights into Cape Town International. And, I know that there's a lot more initiatives run by the provincial government, especially with the Port Authority, and there've been definite, definite improvements there.

  I know that the broader agri sector is engaging closely with the port authorities, and what's critical there is that you can't just get ports right, or you can't just get roads right, or you can't just get rail right. It requires almost like a holistic view, because if you get certain pockets, there's a bottleneck somewhere else.

  So, what's really good is that there's a lot of engagement now, and I think that's gotta be positive for the ongoing region and wine within the region. 

• 19:27: Foreign investment – A global vote of confidence

  LM: I'm loving all this positive talk and how we're progressing. But, despite some of the challenges that the industry faces, what is the substantial foreign direct investment, you know, with 25% of SA wineries now being foreign owned? You know, we've seen that quite a number of farms in the winelands are owned by foreign investors.

  RB: We need, in wine, we need FDI, and we need it not only for the reason of the investment, for wine there's something that we don't have, and that is distribution. And so when you have a global multinational, like we've lately seen with the French investing in Stellenbosch, that does bring global distribution. It does mean we can scale brands and they actually do, where they invest, make a material difference in that society as well.

  If you think back, without mentioning too many names, think about Delaire Graff, you think about the recent acquisition in Stellenbosch, Ken Forrester, Le Bonheur, Kleine Zalze. They are not here because we're special only, they are here for commercial reasons. And we fit, partly, if you speak to them, the one thing they will say is our resources, our people are the biggest assets why they would invest. And what they can bring to the table is that economy of scale. And, therefore, yes, I think we should embrace that investment. There's obviously always a counter side to that, but for now, I think it is something that we need from a policy perspective to embrace and build global brands.

  If you look at New Zealand, who is probably the single best example of Sauvignon Blanc in the world, of their fourth, of their five biggest brands, four of them are American owned. And that is why they're so successful in the very same US that we've been speaking about. So it's global. We need it, and we need to make it work.

• 21:40: What drives global investment in SA Wine?

  LM: What do you think drives this interest? I know you mentioned, you know, the people and those aspects, but you know, can you tell us in more detail what's driving the interest from Europe or other countries to invest in our farms?

  RB: I think it's... And I don't think the answer is as simple as one or two things because I think, number one, we offer very much the same terroir, climates and a long history of making quality product. That's the one thing. I think a lot of our winery brands are still fairly small and can be scaled easily with the right level of capital. I think we bring… and I see how South Africans are being taken up in these new companies, into senior positions. I think we've got entrepreneurship, we've got that tenacity.

  And then, apart from the beauty, it's the tourism part as well. So I actually think the investment is a lot more than just wine. It is about having strategic assets all over the world. And, for us, again, it's part of being global and a global player.

  VdR: I mean, we've also seen, I mean, I can't give you figures off the back, but that there's big institutional investors that are investing across the world in proper arable land.

  When we talk about future food security, I mean it's big players in the States, in Canada and Australia, and I can only imagine that South Africa's gotta be, you know, on their list of… because we've got such good, you know, farmland, we've got fantastic resources, we've got fantastic people and fantastic technology.

  So, to me, it makes good sense for, you know, an investor to look here. And we like, I mean, like Rico was saying there's perfect examples already in the last couple of years. 

• 23:32: Regional growth and new opportunities

  LM: You know, Victor, Rico's mentioned imports and as a trade finance specialist at Investec for Business and Investec Business Banking, that word import just, you know, gets me so excited because we've got a phenomenal import solution, a full import solution that Investec Business Banking offers. Victor, where does Investec see opportunity for growth in the industry and in the region, in the winelands.

  VdR: Well, look, I mean, we've kind of touched on it a bit, but I think the region has a couple of core growth opportunities that we see. One is obviously agri, and secondary agri, and everything that goes with that. Obviously the wine industry is a component of that and anything that kind of touches downstream on that. So, processing, you know, logistics, manufacturing, you know, even like your labelling, your canning, your bottles.

  But attached to that, we've got a very sophisticated financial sector. We've got business services sector, IT, communications, massive, massive in the region and we definitely see growth in that. And the other component that really, really excites us is that there's a really vibrant tech environment or sector in the Western Cape. And I think we provide solutions that are globally scalable. So that's where we see opportunity. That's why we want to play and that's why we're so enthused. 

• 24:58: Looking ahead – A 10-year vision for SA wine

  LM: Amazing. A final question to you both. Where would you like to see the South African wine industry in the next decade? You know, what's the vision?

  RB: Look, I think it it'll be a far smaller industry, from number of players in all likelihood, which is a global phenomenon that we will see these consolidations and they may or may not be… have international content. I think it will be a significantly higher value business. I think we need to dream that tourism needs to double up and, it is possible, if we apply our minds, in 10 years from now, our ports should be world class. We shouldn't be number 348, but in the Top 50. And I see a sector that leads the world on sustainability. We have got the ability to not only prove the world that we are leading adaptation. But there's one thing where we are leading, and that is our social focus.

  And this goes beyond just compliance, people—and Lerato, I'll keep on saying it—we need to celebrate the people that work in the sector and in general in sectors, far more than the accolades we give to the wine. And I think we are gonna achieve that. And I think that is our real secret weapon, is our people.

  LM: Amazing, Victor?

  VdR: Like I probably see it twofold. One is I'd love to see a really profitable, sustainable wine-related industry and sector. I think that'll be crucial to South Africa. And I'd also like almost a… just this brand ambassador role that they play. It's almost like that's gotta be the key, that's gotta showcase what South Africa is. And I, that would be fantastic if we show what South Africa has to offer and the quality that we have to offer. So I think that's what I'd be looking for. 

• 26:58: A toast to progress and looking ahead

  LM: Gentlemen, I think you've summed it up all nicely. Thank you so much for joining me today, and thank you for sharing your insights and thoughts with us. I think we can toast to this one.

  All: Absolutely. Cheers. Thank you, Victor. Cheers. Thanks. In the eyes, in the eyes, as always. Cheers.

  LM: Thanks for listening to this episode of Wine in Focus, brought to you by Investec Focus Radio SA. In our next episode, we will be chatting to two trailblazing women winemakers, Praisy Dlamini and Kiara Scott. These two young leaders have incredibly inspiring stories to share, and I can't wait to bring them onto the series.

  If you're interested in watching the video of this discussion, check out the YouTube channel. You can find all the episodes of the series at Investec.com/wineinfocus or wherever you get your podcasts. If you enjoyed this episode, please rate it, leave a comment, and forward it to your friends and colleagues.

• Disclaimer

  Focus and its related content is for informational purposes only. The opinions featured on the site are not to be considered as the opinions of Investec and do not constitute financial or other advice. The information presented is subject to completion, revision, verification and amendment.