Innovation and performance improvement in the ...

Int. J. Technology and Globalisation, Vol. 1, Nos. 3/4, 2005

381

Innovation and performance improvement in the South African wine industry Eric Wood* and David Kaplan Graduate School of Business University of Cape Town, Portswood Road Greenpoint, 8000, South Africa Fax: +27 21 406 1456 E-mail: [email protected] E-mail: [email protected] *Corresponding author Abstract: South Africa’s wine industry was ill-prepared for the highly competitive, brand-conscious consumer markets it encountered on re-entry into international markets. The bulk of production was basic quality wine. Wine marketing expertise was concentrated among smaller independent wine producers and a few large wholesalers. The paper examines innovation in different segments of the industry and the extent to which it is being effectively supported by networking and knowledge exchange. Most producers have significantly improved quality and product ranges. But many producers are weak in the area of marketing, though some segments have achieved considerable success in this area. Respected institutions to support marketing and brand development and knowledge exchange between producers contribute to ongoing improvement in this area. Keywords: innovation; performance improvement; wine industry; industry networks; South Africa. Reference to this paper should be made as follows: Wood, E. and Kaplan, D. (2005) ‘Innovation and performance improvement in the South African wine industry’, Int. J. Technology and Globalisation, Vol. 1, Nos. 3/4, pp.381–399. Biographical notes: Eric Wood focuses on entrepreneurship, innovation and international business. David Kaplan’s primary areas of interest are innovation and innovation policy.

1

Introduction

Since re-entry into international markets in the early 1990s, South Africa’s wine industry has undergone dramatic change. Absolute growth in export volumes has been rapid. However, growth has been below that of major New World competitors, including Australia and Chile. In the late 1990s, key players in the industry began a wide-ranging strategy process to improve international competitiveness. Emerging from the process was a vision for an ‘innovation-driven, market-directed’ industry (SAWB, 2003a,p.18).

Copyright © 2005 Inderscience Enterprises Ltd.

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E. Wood and D. Kaplan

This paper evaluates the recent progress of South African wine producers toward international competitiveness. Based largely on an extensive set of interviews, particular attention is given to the nature of innovation and the interactions between individual producers and key institutions in supporting the efforts of individual players to achieve competitiveness. The implications for likely future industry performance are assessed. Section 2 provides a brief review of the major changes in the global wine market. The next two sections deal with the South African wine industry as a whole. Section 3 assesses the progress of the South African wine industry over the last decade while Section 4 examines the role of the key industry-wide institutions that provide marketing, technical and research support to South African wine producers. Section 5 outlines a conceptual framework for understanding innovation in this industry. Section 6 describes these different industry segments and reviews their changing strategies and performance. Section 7 examines the role of innovation and industry networks in relation to each of the different segments. The conclusion provides a summary of developments and looks at overall future prospects for the industry.

2

Key developments in the global wine market

The most significant change in North American and European markets has been the shift in consumer wine purchasing from specialist outlets to supermarkets. The supermarket share, by volume, grew strongly during the 1990s, and by 1999 exceeded 50%. Closely allied to this shift has been the growing importance of brands. Brands have provided a crucial point of reference for inexperienced wine consumers. Staff in the supermarket channel are not equipped to advise customers on wine selection. At the same time, there has been considerable consolidation in the industry, internationally. The branding and volume capabilities of the leading global wine firms, together with their ability to produce consistent product, matched the requirements of the supermarket channel. Having few large suppliers also reduced supermarket procurement costs. The growing importance of branding and the strength of global wine brands significantly increased competition, particularly among producers of less distinctive wines. The growing strength of the supermarket channel has put pressure on other retail channels. This has meant changes in strategy for other channels, e.g., specialist wine outlets. Increasing diversity in the needs of different market channels has, in turn, increased pressure on exporters to align all aspects of their operation to the particular needs of their chosen market niches and channels. With regard to consumer demand, there has been a shift away from table or basic wines toward premium wines where growth rates have been rapid. This has been allied with heavy discounting of low quality wines. There has also been a marked shift away from Old World to New World wines. During the 1990s, the French share of the UK wine market fell from 43% to 27% while that of New World wines increased from 3% to 34%. This is attributed to a number of factors including ‘easy-to-drink’ New World wines, which proved popular with inexperienced consumers, significant investment in brand building, and a more concentrated industry structure to support such investment (Rabobank International, 2003).

Innovation and performance improvement

3

383

Key developments in the South African wine industry over the last decade

The early 1990s saw the end of over 30 years of regulation of wine production in the form of a quota system. Under this system, the area under vines by each producer was prescribed and grape prices were set based on volume, irrespective of variety and quality. This favoured white wine production which accounted for over 80% of wine output. The quota system was intended to limit surplus production in a constrained domestic market and to keep prices artificially high. It was administered centrally by the KWV, a cooperative, until 1997. With the exception of a few leading estates, all wine farmers were required to be members of the KWV. In addition, the majority of grape growers belonged to local cooperatives and were required to sell all of their produce through their cooperatives. The quota system created incentives for grape growers to maximise grape yields per hectare, and this came at the expense of quality. Some producers, particularly those outside of the cooperative system, chose to produce quality wine. But the bulk of grape and wine production was of poor quality. The system effectively maintained high prices of poor quality grapes. The ending of the quota system in the early 1990s led to widespread changes in production. This included a shift toward varietals for which global demand was increasing (SAWB, 2003b). Thus, the share of red wine production more than doubled between 1995 and 2002 from 13 to 28% (SAWIS, 2003). There was extensive new planting and re-planting and this was concentrated on noble varieties. The extent of this planting activity is illustrated by vineyard age. In 2002, 37% of the 110 000 vineyards were less than eight years old (SAWIS, 2003). Terroir considerations and particularly soil analysis played a major part in planting decisions and this was supported by widespread use of viticulture consultants, local research and technology transfer institutions. The term terroir refers to planting varieties that are best suited to a particular climactic, geographical and soil conditions and adopting viticulture and winemaking processes that enhance the particular characteristics of that fruit. South Africa’s winemaking regions are unusual in terms of biodiversity. There is scope for a great variety of wines of distinctive character, which are a reflection of the region in which they were grown and made. Changes in vineyard practices were also widespread as the focus shifted to improving grape quality. Overall, improvement in quality and reliability of wines resulted in South Africa developing a growing reputation for premium wines (Rabobank International, 2004). In 1992, South Africa accounted for 3% of world wine production and less than 0.3% of world wine exports. Exports grew from 20 to 177 million litres between 1992 and 2002, increasing as a share of table wine production from 2.4% in 1992 to 32.3% in 2002. Table wine production increased from 426.6 to 567.2 million litres or 33% over this period (SAWIS, 2003). In terms of percentage increase in volumes, South African wine exports grew more rapidly over the decade 1992–2002 than other new world producers (see Table 1). However, South African growth was from a low base. Australia and Chile had significantly larger absolute increases in export volumes.

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Table 1

Export volumes of selected New World producers Australia

Chile

1992 (m litres)

88

74

2002 (m litres)

453

355

23

282

177

1992–2002 (m litres)

365

281

16

135

157

∆ 1992–2002 (%)

415

380

229

91

785

Note:

NZ 7*

USA

RSA

147

20

* Estimated figures Sources: Australian Bureau of Statistics (2002); Chilevid (2004); New Zealand Wine (2004); Wine Institute (2004); SAWIS (2003)

Growth in the value of New World wine exports was even more dramatic than growth in volumes. As shown in Table 2, Australia, Chile, New Zealand, and South Africa all exhibited very large increases in export values. Table 2

Export values of selected New World producers Australia

Chile

1992 ($ m)

263

2002 ($ m)

2250

1992–2002 ($ m)

1987

498

206

367

256

∆ 1992–2002 (%)

756

453

516

203

853

Note:

NZ

USA

RSA

110*

40

181

30*

608

246

548

286*

* Estimated figures Sources: Australian Bureau of Statistics (2002); Chilevid (2004); New Zealand Wine (2004); Wine Institute (2004); Rabobank International (2003; 2004)

What is most significant however is the ratio of increases in value to increases in volume. For Australia, New Zealand and the USA, export value growth substantially exceeded export volume growth – by more than 80% in each case. In the case of South Africa too, export value increased more rapidly than export volume, but the difference was much smaller at 9%. Even Chile, which is closer to South Africa, has a higher ratio with export value growth exceeding volume growth by 19%. Clearly, average export prices for South African wine grew at a less rapid rate during the 1990s than for Australia, New Zealand, the USA as well as Chile. South African wine producers have found it more difficult to enter the higher-priced export segments. In 2003, in South Africa’s most important export market – the UK, only 5.2% (by volume) of SA wine retailed above the £5 ($3.20) entry level for super-premium wines (AC Nielsen, 2004). By contrast, this segment accounts for 12.9% of the UK market as a whole and was estimated to account for nearly 20% for Australian wine volume in that market (AC Nielsen, 2004). South Africa is accordingly perceived internationally as a producer of cheap wines (Rabobank International, 2003). Similarly, few South African wine brands had a strong presence in international markets. None of the world’s top 20 brands were South African. In the UK, South Africa’s most important wine export market, only one South African brand appeared in the top ten. The top ten South African brands account for 2.5% of UK wine sales (AC Nielsen, 2004). Potential to invest in individual brands is limited. The proportion of South African wine sales accounted for by the country’s four largest producers is 27%


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– the lowest of all the New World producing nations (Rabobank International, 2004). There are more than ten times as many growers in South Africa by comparison with Australia with combined production below that of Australia (SAWIS, 2003; Rabobank International, 2003). This also limits the accumulation of marketing management capacity. Only a small minority of South African producers had any significant experience in the marketing of wine internationally (SAWB, 2003b). The relative weakness of South Africa’s position and the extent of the competitive challenge from dynamic New World producers became clear to the local industry during the 1990s (SAWB, 2003a). In 1999, the Wine Industry Network for Expertise and Technology (Winetech), initiated Vision2020, an industry-wide process to develop a future strategy for the industry. In view of the industry’s history of racial and language divisions, the process appears to have been remarkably inclusive drawing in over 1500 people from all stakeholder groups in the industry. The outcome of the process was broad-based recognition of the need to shift away from a production and commodity emphasis, building an industry that is “innovation-driven, market-directed and highly profitable, dominant in selected global market niches … (reflected) good citizenship and social responsibility” (SAWB, 2003a,p.18). The South African Wine and Brandy Company (SAWB) was formed to implement this vision and, in part, to fill the void with the termination of the coordination function that KWV had played in the industry. The SAWB mirrors its stated purpose, incorporating divisions focusing on basic and applied research, international market development as well as social and political transformation. There is an explicit commitment to enhancing competitiveness of the industry through innovation in every aspect of the industry. Wines of South Africa (WOSA), the SAWB’s arm responsible for developing of the South African wine brand internationally, has focused its attention on expanding the volume of export wines being retailed in super-premium segments internationally.

4

The role of industry wide institutions in marketing, technical and research support

Industry wide institutions are in place to enhance the marketing of South African wines abroad and to provide technical support to the industry.

4.1 Institutions to support marketing In the latter part of 2000, Wines of South Africa (WOSA) was given primary responsibility for the promotion of South African wines internationally. WOSA acts on behalf of over 320 South African wine exporters. It is a fully independent non-profit entity and is recognised by government as the export council for the wine industry. The CEO was recruited from the private sector and has extensive experience in international marketing. In pursuit of its mandate, WOSA performs a number of functions on behalf of the industry. It coordinates industry exhibits at major wine shows, reducing the cost of trade show participation to individual industry players. It increases the international visibility of local producers by exposing the industry to wine and lifestyle journalists. WOSA holds

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the bi-annual Cape Wine trade exhibition, attracting over 500 international trade visitors and works closely with the Western Cape Tourism Board to advance Cape wine tourism. It holds regular marketing seminars for members, bringing international wine buyers and wholesalers to the country to communicate changing international market needs, demands and opportunities. Finally, WOSA has established importer committees in the UK, USA and Canada. These importer committees help drive the strategy for South African wine in those markets. Over 70% of private respondents interviewed (see below) said that they had used WOSA’s services in some way and all but one of these indicated that they viewed WOSA’s contribution as important and beneficial. Several of the producers interviewed had little or no experience selling wines internationally, and yet demonstrated extensive knowledge about segmentation of foreign markets that they were considering and articulated a clear vision for the pricing segments that they wished to target and their positioning strategies within those segments. In all cases, their comments were clearly in accord with the thrusts of WOSA’s marketing strategy. WOSA’s reputation and capacities have been enhanced by a unique international success it achieved in 2003. A certain volume of EU wine imports from South Africa (42 million litres) was exempt from import duty under the terms of the South African -European Union Free Trade Agreement. The benefit of this duty exemption went largely to supermarkets. Through the efforts of WOSA, the UK supermarkets agreed to pool those resources and gave control to WOSA for the further promotion of South African wine within the UK. The South African Wine Industry Information and Systems (SAWIS) is another industry body, which provides important services to industry players to assist in their marketing activities. It is also a not-for-profit company originally established to manage the industry’s Wine of Origin system. It collects, processes and disseminates detailed statistics on production and prices. It makes available data on price movements in other producing countries that serve as a critical guide in market negotiations and strategic planning.

4.2 Institutions to provide technical support Technical support is provided through the (partially) state-funded science council for the agricultural industry – the Agricultural Research Council (ARC). ARC Infruitec-Nietvoorbij, the largest of the ARC’s 13 institutes, has ten divisions, seven of which are directly involved in wine research (Wineland, 2003). These include soil science, disease management, pest management, post-harvest with an emphasis on yeasts, sustainable rural livelihoods, and technology management and transfer. Research is carried out at experimental farms in different areas, thus ensuring that different soils and climates are examined. A further three divisions provide technical support. The key coordinating role in wine research is played by the Wine Industry Network for Expertise and Technology (Winetech). Like WOSA, Winetech is under the control of the South African Wine and Brandy Company. It is the hub of an extensive network encompassing all aspects of the industry, the universities and ARC Infruitec-Nietvoorbij.


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The highest structure in Winetech is a Board. The Board has five representatives drawn from the following ‘constituencies’ – trade, cellars or winemakers, wine producers and labour. Winetech allocates funding to research projects on a competitive bidding basis. Applicants for research funding submit proposals, which are channelled through four core committees: 1

viticulture

2

training

3

technology transfer

4

oenology.

These committees then judge applications in terms of core programmes including: •

combating vine virus

•

optimal grape composition

•

terroir identification and utilisation

•

grapevine and wine biotechnology.

Winetech has established a system of sub-committees, which then advise the core committees. Representatives of industry comprise over 80% of the membership of these sub-committees. Therefore, industry has the major role in determining the actual funding priorities and the allocation of funds. Much attention is paid to the dissemination of the research to the end-user. Winetech requires that wherever possible, funded research projects must be presented to the end-users and published in at least one academic and one popular magazine. Winetech also sponsors the journal of the South African Society for Oenology and Viticulture. In addition, research is frequently published in a popular farmer’s magazine – in 2003, 37 research projects were published. Winetech has a website and produces regular ‘brochures’. Finally, there are a large number of meetings organised with the industry as well as ‘road shows’ to demonstrate new technological advances. Interviews with producers indicated that the majority regularly read Winetech research findings. Winetech’s funding derives principally from the same export levy, which is used to fund WOSA. In 2003, this levy provided Winetech with an income of $1.5 million. In addition, the Wine Industry Business Support Company (BUSCO), a company established by the industry to support its further development, provided a little over $0.8 million in 2003. Strong industry representation at every level ensures that the research projects do directly serve the perceived needs of the local wine industry. The emphasis placed on actively communicating the research through a variety of channels, formal and informal, ensures widespread dissemination. However, the total research effort is very small – of the order of $3.5 million per annum or around 0.5% of industry turnover. This compares with $15 million (0.9% of turnover) in Australia as far back as 1997 (Marsh and Shaw, 2000). The limited resources available resulted in a number of the top researchers being attracted to relocate elsewhere, mainly to Australia and Canada.

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5


The scope and distribution of innovation activity in the wine industry

In view of the critical and increasing importance of branding and marketing activities in wine, any discussion of innovation in the wine industry must centrally incorporate these aspects of the wine value chain. This is particularly important in view of the historical weakness of South African wine marketing by comparison with leading New World producers. Wine is an industry where radical innovation, either in terms of process or in terms of product, is of limited significance. Incremental changes tend to be rapidly diffused. For the individual players, the key lies in understanding precisely what the intended consumer requires and aligning all aspects of production, distribution and marketing in order to comply very precisely with changing consumer requirements. Without the close alignment of the different stages, innovation in any one stage, even if technically successful, is not likely to find favour with consumers and will therefore have a very limited or even negligible impact on the firm’s returns. The ability to align the different aspects of the operation will have a direct impact on a producer’s ability to compete effectively in their target segments. Similarly, success in entering new market segments successfully depends on the ability to align the requisite innovations in all aspects of the operation. The tight link between market and all other stages leads to the adoption of a multi-dimensional view of innovation activity that includes viticulture, winemaking, through to marketing, sales and distribution. This approach to innovation is consistent with the framework developed by North and Smallbone (2000). Like other wine producing regions, the South African wine industry exhibits varying degrees of vertical integration among the players. A significant number of firms are narrowly focused on one aspect of the value chain such as grape-growing, winemaking, or distribution. By contrast, a substantial number of smaller producers engage in most aspects of the wine value chain from grape-growing to distribution and even retailing. The majority of wine producers rely on other companies for some aspects of their marketing, distribution and retailing, particularly for accessing foreign markets. The degree of vertical integration and the effectiveness with which knowledge is exchanged within the value chain will have an important bearing on the intensity and degree of success in innovation activity. Interactions between actors are not limited solely to ‘vertical’ relationships within the value chain. Horizontal exchanges between similar types of producers or linkages between private firms and public institutions may play a crucial role in diffusing knowledge in the industry and thereby, supporting innovation (Giuliani, 2003; Visser, 2003; Mytelka and Boertzen, 2004). A variety of different theoretical frameworks and analytical approaches have been utilised to evaluate such interactions. The most commonly used conceptual frameworks include value systems, networks and clusters. These frameworks tend to emphasise the nature or quality of interactions as the primary indicator of their level of sophistication and as a guide to the likelihood of sustainable innovation activity emanating from those actors. The approach adopted here is not to detail and evaluate the full extent and quality of networking activity or establish the degree to which the South African wine industry can be said to constitute a cluster. Our goal is more limited, namely to examine interactions between different actors in the industry only insofar as they relate specifically to


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innovation activity. For this reason, the analysis is not based in a formal conceptual framework for inter-firm interactions. The analytical framework for the paper is the innovation framework proposed by North and Smallbone (2000). The rest of this paper briefly examines attempts by the different categories of South African wine producers to reposition themselves in the market and, in particular, to penetrate higher priced export markets. The data are drawn from over 24 interviews held with three industry institutions and a random sample of 17 wine producers or wine companies across different segments in the South African industry between April and June 2004. This involved a 2–3 hour interview plus follow-up telephone calls to complete the required information. The focus of the interviews was on the innovation activities within individual companies, the impact of innovation on performance, and the role of industry networks in supporting innovation activity within the industry. The 17 firms account for slightly less than 10% of the total South African wine sales. This built upon a larger survey in 2003 involving a random sample of 41 interviews with 20 wine producers or wine companies and seven representatives of industry associations, research organisations or other industry institutions. Together, the full sample comprised 35 producers and wine companies accounting for roughly 40% of total South African wine sales in 2003. The results of the earlier survey are consistent with the more recent one. The results from the sample of 17 interviews can, with confidence, therefore, be regarded as indicative of the industry as a whole and the paper is informed by data drawn from these interviews. The wine industry consists of a number of distinct ‘segments’, each of which has a different structure and focus. The interview data are presented, therefore, for each segment of the industry.

6

The different industry segments – their changing strategies and performance

There are four different groupings or segments within the South African wine industry. Their differing structure and focus have significant impacts upon firm strategy and innovation activity.

6.1 The industry segments Wine estates and non-estate wine farms are small producers of quality wines. A wine estate grows grapes, makes wine and bottles it on a single property. Non-estate wine farms make wines in a cellar off-site or buy in grapes from other growers. Their number has increased rapidly and by 2003, there were over 80 wine estates and over 260 non-estate wine farms. Together, they account for around 17% of certified wine production (SAWIS, 2003). There is reason to believe that the circumstances of new entrant may differ from longer-established wine farms. Two categories were distinguished: 1

Established producers: wine estates and non-estate wine farms that were producing wine prior to the beginning of 1994.

2

New producers: wine estates and non-estate wine farms that were established since the beginning of 1994.

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Two other groups of firms are focused on a more limited range of activities within the wine supply chain. 1

Cooperative producers: there are 66 cooperative producers that make and sell wine on behalf of grape growers. In 2003, they accounted for roughly two-thirds of the total grape crush and over 20% of production of certified wine. Their primary focus, historically, was on basic wines sold in bulk. However, many cooperatives also produce some quality wine. South Africa’s top wine brands in international markets include some owned by cooperatives (Rabobank International, 2004).

2

Wholesalers: there are estimated to be 104 wholesalers operating in the South African wine industry. This group accounts for the sale of 62% of certified wine (SAWIS, 2003). The primary function of the wholesaler in the supply chain is marketing, sales and distribution. Thirteen wholesalers, including some of the largest ones, buy in grapes and make their own wine in addition to buying wine in bulk or bottled form. These are referred to in the industry as ‘producing wholesalers’. The remaining wholesalers are not involved in wine production.

6.2 Changing strategies Figure 1 provides an overview of how the 17 firms interviewed have changed their business activity in the period 1994 to 2004. The predominance of new activity is evident in the wholesaling and the marketing of bottled wine. Figure 1

Changes in value chain activities between 1994 and 2004 Wholesalers 1

2

New producers 3

4

5

6

7

Coops 8

9

10

11

Established producers 12

13

14

15

16

17

Grape growing Wine making Wholesaling bulk wine Wholesaling bottled wine Retailing Marketing bottled wine Launched into activity 1994-2003 Launched into activity before 1994

The established producers retained their traditional broad involvement across the value chain. While the former cooperatives continued to produce wine for bulk sale, they have begun to market their own bottled wine. The new producers all produce and market their own wines although two did not own any vineyards or cellars. The two wholesalers engaged in marketing, but were not directly involved in viticulture or winemaking themselves.


391

6.3 The performance of the different segments For the sample as a whole, there was more than a five-fold increase in sales of bottled wines between 1998 and 2003 (see Table 3). The established producers had the lowest increase. Nevertheless, they doubled sales. The highest increases were among the cooperatives and new producers, but both were off a small base. The wholesalers grew sales by five fold and did so off a substantial base. They dominate sales growth in absolute terms. Table 3

Change in bottled and bulk volume of production Average bottled volume 1998 (cases)

Average bottled volume 2003 (cases)

Total bottled volume increase 1998 – 2003 (%)

250 000.0

1 250 000.0

400.0

1630.2

13 021.4

698.7

Cooperatives

5000.0

63 333.3

1166.7

Established producers

8866.7

18 133.3

104.5

33 573.2

168 930.4

403.2

Wholesalers New producers

All

For the sample, the share of production for export increased from 31 to 45% between 1998 and 2003 (see Figure 2). The export share of the cooperatives increased the most, but off a low base. From a relatively high base, the export intensity of new producers increased by 25%. Established wine producers more than doubled their export share. The wholesalers retained their exclusive focus on export markets. Figure 2

Changes in the average export share of total sales between 1998 and 2003

Average export share of bottled wine (%)

100.0

1998

90.0

2003

80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Wholesalers

New producers

Cooperatives


All producers

392


Table 4 illustrates the top-of-the-range prices. The cooperatives had the lowest average top-of-the-range price, roughly a third of that for established producers, new producers and wholesalers. This is not surprising in view of their previous focus on bulk wine production and recent entry into the wholesaling of bottled wine. Cooperatives achieved reasonable price increases on top-of-the-range bottled wines, off a low base. Established producers also generated strong increases on average – well ahead of the new producers. The average price of top-of-the-range wines of the new producers in 2003 is similar to that of the established producers. The average top-of-the-range price increases for the wholesalers were significantly higher than for other groups. Table 4

Top-of-the-range prices and price changes Price 2003 ($)

Price ∆ 1998–2003* (%)

Wholesalers

19.4

33.3

New producers

15.4

2.2

Cooperatives Established producers Note:

7

5.8

5.8

17.4

5.1

* Annualised, real price changes

Innovation activity in the different segments

7.1 Established wine producers 7.1.1 Product and production innovation Three producers (firms 13, 14, 15 in Figure 3) significantly increased top-of-the-range pricing within their top price segments between 1998 and 2003. With assistance from local consultants, these had significantly improved quality and altered their product ranges. The remaining two established producers had only managed to maintain nominal prices and saw declines in their real prices. They had not introduced new products and did not indicate significant improvements in quality. Figure 3

Wine price segments in 1998 and 2003 by type of organisation Wholesalers

New producers

Coops


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

33

na

27

3

1.9

-2

-12

na

na

6

5

na

20

11

7

-5

-7

Icon Ultra-premium Super-premium Premium Basic Price ∆ 1998-2003* (%) * Annualised, real price changes Entered segment after 1998 Entered segment prior to 1998 Exited segment after 1998


393

All the established producers engaged in extensive production innovation, largely in the area of viticulture. In two market-focused producers, new plantings and re-plantings represented the majority of all vines. Replanting was so extensive in one of these that production had been halted for two years. Replanting appears to have been largely motivated by the growing appreciation of the local terroir and the need for improved grape quality. The number of varieties were rationalised with an increasing focus on a limited number of noble varieties. Most of the established producers were actively engaged in exchanging production knowledge. This occurred through viticulture and viniculture forums, a root stock association, two varietal associations, the Winetech research network, and Elsenburg, a training institute with vineyards and cellars. Engagement with research initiatives under Winetech was limited to a minority of firms – generally, the more successful firms. The most important source of new knowledge was private consultants used by all these producers, but more so by the more successful firms.

7.1.2 Marketing innovation Two distinct approaches to marketing strategy were observed. The firms that had achieved price increases focused explicitly on a limited number of geographical markets and clearly-defined market segments. All the producers in this group had strong local market positions, built upon long-established brands with substantial direct consumer sales, enjoying relatively high-margins. These ‘market-oriented’ producers relied extensively on local and international consultants. They were well-informed about major international market trends and what appealed to buyers in their market segments. They actively utilised the services of WOSA. These ‘market-oriented’ producers had faced difficulties in keeping up with market demand for their product. Great care was taken in the selection of foreign agents. They selected agents who understood their wine, valued its South African origin and were able to exploit it effectively. A number of the market-oriented producers significantly increased the resources committed to marketing. The priority was media coverage and close relationships with agents or retail representatives to keep abreast of key developments. The remaining established producers demonstrated little clarity around market segmentation and product positioning. The key deficiency in these firms lay in the quality of their marketing expertise and they had not used marketing consultants. They exhibited vagueness around where to focus their innovation efforts in either markets or products.

7.1.3 Summary A distinctive gap between established producers occurred with regard to the introduction of new products at the upper end of the market and the consequent investments in marketing and branding. The more successful established wineries were those that had greater resources available for innovation, due to previous strong direct consumer sales and/or equity investment. As a consequence, they had more capacity to utilise external consultants, particularly in defining product strategy. Consulting expertise was viewed as essential in order to give the necessary confidence in their innovation investment. The more successful, established producers were also more engaged with the industry-wide institutions engaged in marketing. They were similarly more engaged with industry-wide

394


institutions offering technical and research support and were likely to invest more heavily in vineyard improvements. The weaker firms lacked clarity regarding product and marketing strategy. Although they made significant investments to improve production, the returns have been limited.

7.2 New producers 7.2.1 Product and production innovation The new producers pursued quality and distinction in their top wines as their main innovation priority. To be one of the top South African producers in at least one varietal was the goal for these new producers. With one exception, the new producers did not achieve strong price growth, because they had adopted a premium pricing strategy at the outset. In order to limit capital outlay, there was a strong emphasis on flexible production arrangements. Some producers owned no vineyards. They paid growers to produce grapes, leased vineyard space, or traded consulting services in exchange for vineyard space. New producers paid close attention to the varietals favoured by their terroir. Planting was limited to noble varieties and most of the producers focused their brand around one or two varietals. They paid attention to the finer details of viticulture particularly pruning, suckering and canopy management. For the top of the range wines, several producers emphasised distinctiveness and a willingness to be innovative in winemaking, for example utilising wild yeasts. New producers consulted international magazines and journals; journeyed abroad to meet with top producers; obtained work experience with wineries abroad, and undertook regular comparison with top-rated wines from other countries They also made extensive use of the technology transfer and training activities of organisations such as Elsenburg and ARC Infruitec-Nietvoorbij.

7.2.2 Marketing innovation All producers were highly market-oriented and attempted to increase brand awareness. They sought high ratings in expert wine guides and to win awards to achieve low cost coverage and promotion. Most new producers made extensive use of WOSA’s services particularly for participation in trade fairs and marketing seminars. The new producers were also inclined to share information regarding markets and market channels with each other.

7.2.3 Summary The new producers tend to be highly innovative, seeking creative solutions in the areas of both production and marketing. However, new producers face two particular weaknesses. The first is limited capital resources. The second is brand weakness. Given the small volumes of their output, combined with limited resources, these problems are unlikely to disappear.


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7.3 Cooperatives 7.3.1 Product and production innovation The most important change for the cooperatives has been the shift to producing bottled wine. The market focus for all of the cooperatives was wines in the basic and lower premium segments. An attempt by one of the cooperatives to enter the lower super-premium segment failed with no sales realised. Traditionally, cooperatives have been responsible for winemaking and growers for grape production. The cooperatives have now focused on raising grape quality. They have employed two distinct, but related mechanisms – namely contractual changes and the provision of viticulture expertise. Some cooperatives have changed their legal status to that of private company with grape-growing members as shareholders. In addition, the contractual agreement changed such that growers were no longer obliged to sell all their produce to their cooperative and the cooperative was no longer obliged to purchase. This should have two effects. On the one hand, it is likely to limit the ability of cooperatives to pay growers below the market level for their grapes. On the other hand, it should free cooperatives from an obligation to purchase poor quality grapes. Together these should improve incentives for growers to raise quality. Complementing changes in contractual relations with the growers, the cooperatives have employed full-time viticulturalists to offer more support to their growers. They focus attention on pruning, suckering and canopy management. All of the cooperatives had extensive networks to support their innovations in production, including both local and overseas sources. There was some use of external consultants, but less so than with other producers. There was strong emphasis among cooperatives on the importance of local research institutes. It is difficult to quantify the impacts of the changes, but there are clear indications of substantive improvements in quality.

7.3.2 Marketing innovation Apart from the relative newness of their wine labels, the cooperatives face inherent challenges regarding brand development. Given the basic quality of their product, there is little scope for the relatively low cost form of media coverage via wine journalism. They lack an ‘estate’ character and history and, thus, the potential for traditional brand association. In stark contrast to the established and new producers, none of the cooperatives communicated a clear brand concept or well-defined target consumer segment. Each of the cooperatives has financial constraints, limiting marketing budgets. The preferred channels are supermarkets, both domestically and abroad, and specialist liquor outlets domestically. The weakness of these cooperatives in terms of branding is likely to limit their success in their primary retail channel, the supermarkets, for which their marketing mix appears to be poorly matched (Wine Intelligence, 2003). Not surprisingly, the cooperatives emphasised that initial attempts to sell internationally had not yielded the anticipated results. All of the cooperatives had entered into marketing alliances and joint ventures to expand sales volumes. It is too early to assess, but there may be reasons for questioning their likely impact. Most of the alliances were with other cooperatives, some of which may also lack the requisite marketing capabilities. One respondent from a private winery referred to marketing collaborations between cooperatives as the ‘blind leading the blind’.

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7.3.3 Summary There are positive signs of improvements in the quality of grape production. However, the position of cooperatives remains weak. The lack of strong market focus or clear branding suggests limited capabilities in the marketing area. The expectation that a multitude of marketing alliances would make up for shortcomings may prove to be misplaced. The priority is to draw in better marketing expertise, perhaps initially, specialist consultants. Marketing inadequacies have limited the impact of the substantive gains made in the quality of production.

7.4 Wholesalers 7.4.1 Product and production innovation Following considerable international success in its premium wine range, wholesaler ‘1’ introduced new products in the super-premium and ultra-premium price segments between 1998 and 2003. The other wholesaler had launched their own bottled wine brand three years previously. Prior to that, they only marketed bulk wine. The wholesalers in our sample were not directly involved in grape growing or winemaking. Nevertheless they have been responsible for some important changes in supply chain arrangements. The largest wholesaler had recently established a team focused exclusively on managing relationships with suppliers. This was driven by an increasing need to build trust to ensure both continuity of supply as well as production of the right kind of wines. This wholesaler promotes understanding of market needs by taking suppliers overseas. Purchase is dependent on meeting tight product specifications. However, detailed prescriptions regarding viticulture and viniculture practices are avoided. At the same time, in developing closer working relationships with suppliers, the wholesaler has spread its risks by increasing the number of suppliers, thus increasing the number of wine producers receiving guidance from a top international wine marketing firm and enabling them to supply good quality wines to international markets. Some of the current suppliers to this marketing firm have indeed introduced their own brands successfully in international markets. One of these was in the top ten South African brands in the UK in 2004. One of the chief challenges facing wholesalers is their ability to source enough top quality wine for their products in super- and ultra-premium price segments. The investment required to make a fine wine is so large and the payback so long, that producers are unlikely to be willing to sell under a competing brand without long-term purchasing guarantees. Such guarantees are unlikely to be forthcoming from a wholesaler for a product as unpredictable as wine. So far, the response to this has been the acquisition of estates, which then produce exclusively for the wholesaler. On the part of the other wholesaler, there had been little change in its supply relationships. It has long-term links with a few suppliers and formalised this as a joint venture. This does not involve any significant collaboration around production.

7.4.2 Marketing innovation Wholesaler ‘1’, is the most innovative and successful firm in the sample. In a short span of time, it has built the leading South African wine brand, displaying clear recognition of its own strengths and weaknesses and strongly engaging in network activity to address weaknesses.


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For wholesalers, international success depends on mastering the supermarket channel. Wholesaler ‘1’ achieved this in one overseas market. The firm invested heavily in advertising – over $3.5 million per year in their main market, focused on a single brand. In less than eight years, this wholesaler became the top South African wine brand in the UK and seventh in the UK brand rankings by sales value. Global sales of this brand are more than double the next largest South African wine brand. Key to success has been careful market segmentation both in guiding product and marketing strategy. In 2002, a new CEO was recruited from a major international competitor. An initiative of the new CEO was the introduction of products into super- and ultra-premium segments under the same brand – the so-called ‘ladder’ strategy. Wholesaler ‘2’ also achieved rapid growth in bottled wine sales, though well below the other wholesaler. This firm did not have the financial resources to invest heavily in advertising or to manage relationships with the foreign supermarket buyers directly. Instead, they relied on an agent. Further expansion of sales was likely to depend on increased marketing expenditure. One of the primary concerns of wholesaler ‘1’ was to seek to extend the media coverage of South Africa’s top wine estates and non-estate wine farms. Despite their considerable marketing expense, this firm was the most committed of all in our sample in promoting the generic South African wine brand. It played an active role in WOSA activities, both locally and overseas and established links with a small number of fine wine producers whose products complemented theirs and marketed these products on their behalf as beneficial for their own product range. Historically, strong wine brands among South African wholesalers were held by producing wholesalers that have a range of different wine brands in addition to other liquor products. The rise to prominence of a small number of wholesalers like wholesaler ‘1’, which are focused on the management of a single brand or limited number of international wine brands, is an important innovation in the industry and addresses the need for additional marketing capability.

7.4.3 Summary It is hard to underestimate the importance of the contribution of wholesaler ‘1’. Their wine brand, though less than eight years old, is unquestionably the strongest South African brand and the strongest challenge to the big Australian and US brands. Its considerable international success has demonstrated to other South African wine producers the true value of good marketing and brand management. Strength evidently arises from expertise in international brand management and the ability to focus resources on developing a single brand or limited number of brands. Just as important, it has demonstrated the value of cooperation with other producers. The wholesaler with the requisite international brand management expertise, therefore, represents a highly promising model for addressing the shortcomings around marketing on the part of the South African cooperative sector and some of the independent producers.

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Conclusion

The South African wine industry has undergone significant changes over the past decade. Success has been most evident in the production of bottled wines and in the substantial increase in export volumes, albeit from a low base. By comparison with other New World producers, growth in export value has been less impressive. South African producers have had limited success in the export of quality wines. The interviews revealed a diversity in performance between the different industry segments and, indeed, considerable diversity within each industry segment. In the main, South African producers have been quite effective at innovation in product and production, for example, in introducing new varieties that are in demand, particularly in export markets, and in improving the quality of output. An under-resourced but relatively effective network of technical support and research closely aligned to industry needs has aided these processes. The network is most intensively used by less well resourced producers, with better resourced producers more inclined to additionally employ private sector consultants to access the required expertise. The critical constraint on performance throughout the industry is not in the technical or research areas, nor in grape-growing or in winemaking, but in marketing. The marketing constraint is being alleviated through the growing capacities of WOSA, an effective organisation which has gained considerable legitimacy across the industry, the rise of new brand-focused wine wholesalers that have developed close relations with a number of producers, and growing networking and sharing of knowledge of export markets between at least some local producers. However, the impact of these developments has been uneven as between the different segments that make up the wine industry and indeed within each segment. The key differentiating factor lies in marketing capacity. Within the industry, it is the new breed of brand-focused wholesalers that has made the most important contribution in terms of building the South African brand and demonstrating that local producers can take on the large US and Australian brands. Moreover, the successful wholesalers have spurred and supported product and production changes among their suppliers in order to secure the precise product that the consumer requires. Combined with a well-functioning and focused set of marketing and technological institutions, these changes suggest that there is considerable scope for the South African wine industry to improve its position in global markets. This will depend critically on improving marketing capacities and training among a larger number of wine producers. While ongoing attention certainly does need to be given to enhancing technical support and technological research, gains from any further advancement of technological and innovation capacities in the industry will depend critically on accompanying changes in marketing capacities.

Acknowledgement The authors wish to thank John Orford and David Cooper for their assistance in gathering data for this paper.


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