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November 28^th 2006

Cape Crisis

by Michael Fridjhon

South Africa recently witnessed the sale of its most successful international brand – Kumala – to Constellation. This news, though, did not even make page seven of the business section in South Africa. This is principally because the brand has never had a local owner, nor...

...have many consumers ever seen a bottle. Kumala was the creation of the British company Western Wines, designed entirely for foreign markets. However, when Kumala´s sales drop - as they have recently when Constellation chose margin over volume - South Africa´s export efforts appear to lose momentum. This situation has been exacerbated by Australia´s wine surpluses: the retail clout of the Antipodean big brands is displacing Cape wine in the English supermarkets and undermining attempts to gain enhanced visibility in the States. Now should be the time for the exporters´ association (WOSA) to apply a strategy aimed at gaining and consolidating market in the northern hemisphere. Unfortunately, much of the money designated for this purpose has been misdirected in a governance scandal affecting the South African Wine Industry Trust (SAWIT).

SAWIT was the result of a protracted negotiation between the Minister of Agriculture in the first ANC government, Derek Hanekom, and the KWV over the latter´s desire to convert from a co-operative into a company. Since the KWV had enjoyed statutory powers under successive apartheid governments, Hanekom argued, some of its assets belonged to the industry as a whole. KWV agreed to pay SAWIT the sum of R369m (?40m) over a ten year period. The money was to be used to fund the transformational needs of the industry.

Roughly half of this settlement was intended to provide for generic export promotion and technical research. From 1998 until 2003 the trustees complied with this arrangement. Then, in a curious deal in which KWV´s trustees were not required to recuse themselves from voting, a new board decided to dedicate about two thirds of the total fund to the purchase, by a largely well-heeled black syndicate, of KWV shares. This gave KWV valuable Black Economic Empowerment (BEE) credentials and a preferred status with the government.

In the meantime, the consortium which benefited from the SAWIT money has fallen apart. It transpires that a significant portion of SAWIT´s total investment may actually be lost. Without these funds, core elements of the Cape wine industry´s development strategy will be compromised.

The South African wine industry has never had to assume responsibility for the management of its affairs. In the era of KWV´s statutory powers the wine farmers simply abdicated strategic direction to the organisation´s board of directors. In the initial post-KWV era, levies imposed on producers together with the SAWIT fund financed generic activities. With roughly 50% of its budgeted income lost, perhaps permanently, the industry is grievously under-resourced.

This crisis could not come at a worse time. Although producers have profited from the substantial devaluation of the Rand since May 2006, most are still not yet recovering the real costs of their exports. In a saturated market, local consumption continues to decline. There is little chance of wine producers agreeing to the kind of increase in levies that would be necessary to replace the SAWIT funding.

Many have been hovering on the verge of bankruptcy since early 2002, when the exchange rate topped R19 to the £. Earlier this year, when the local currency was hovering at just over R10 to the £, it was estimated that between 40% and 50% of the growers were technically insolvent. At around R14 to the £, they may be breathing more easily, but few would be happy to contemplate the kind of investment the industry should be making if South Africa is to emulate Australia and become a real force in the important wine markets the world.

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