Wine industry toasts a changing SA
December 9, 2004
By Ronnie Morris
Cape Town - The year 2004 will be remembered as the year when the historically white wine industry not only embraced the new South Africa but led the march to give a meaningful ownership stake to all through empowerment.
The first indication that dramatic moves were afoot was when Danie de Wet, the KWV chairman, announced in February that the company had entered into talks to sell a 25.1 percent stake to a black economic empowerment (BEE) consortium.
The company initially assumed the deal would be concluded in a short space of time, but it took more twists and turns than the Berg River.
The Food and Allied Workers' Union, with the support of labour federation Cosatu, opposed what it saw as a deal that would benefit only 14 individual shareholders to the exclusion of KWV workers, their families and the thousands of people who work on wine farms across three major regions.
It was touch and go whether KWV shareholders would sell 25.1 percent of their shares to allow Phetogo, a BEE consortium, to buy 112.4 million shares at R1.85 each.
In the end, the white knight that saved the company from having to issue new shares was Vinpro, the farmers' service organisation, which agreed to dilute its stake in KWV from 10 percent to 8 percent.
While the KWV model is seen as the template for broad-based empowerment, the Thandi project, a farm in Elgin where 134 black farm workers took ownership of a wine and fruit business, has been seen as a successful model of land reform and has been replicated in two other provinces. The model is being studied by US and Russian observers.
Retired neurosurgeon and wine farmer Paul Cluver donated 100ha of land to the farm workers. A further 100ha was leased from forestry parastatal Safcol at a nominal rate.
The workers planted 16ha of this land with apples, 12ha with pears and 4ha with plums, while grapes were cultivated on 14ha.
The business has three shareholders: the De Rust estate; the Cluver family business, which invested R3 million into the project; and the community of farm workers, comprised of former forestry workers and pensioners, who, through their pooled government grants of R16 000 each, hold the majority share of 70 percent.
The Thandi wine brand name is already well established in the UK, where supermarket groups Tesco and Sainsbury's pay premium prices.
Another successful BEE initiative in the wine industry was when Boschendal, the multiple award-winning wine estate outside Franschhoek, changed hands in a deal valued at R323 million. According to its managing director, Franco Barocas, this placed it in the forefront of BEE.
A 35 percent stake was bought by an international consortium of investors and an equal stake by South African investors. The rest was bought by a BEE consortium, Kovac Investments 608, of which former politician Chris Nissen is the chairman.
The international consortium of investors, Luxembourg-registered Citation Holdings, is led by Clive Venning.
However, all is not wine and roses. Wine farming is a capital- and labour-intensive business. For example, the start-up cost of farming 100ha is about R100 000.
According to land reform consultant Johan Hamman, when the government's land reform programme started in the mid-1990s it quickly became clear that the price of farmland in the Western Cape meant that a grant of R16 000 a person would buy virtually nothing, unless the Thandi example was followed.
In a paper, JM Maphutha of the Western Cape department of agriculture's directorate of farmer settlement, Riaan Nowers of the department's agricultural economics division and Nick Vink of Stellenbosch University's agricultural economics department found there was evidence that foreigners were bidding higher land prices.
"The research findings indicate that the level of foreign investment is not minimal and it exerts an upward pressure on land prices, resulting in a slowdown in land redistribution."
Information from the deeds office for the years 1998, 1999 and 2000 showed that black farmers, whether private, mortgaged finance, bequested or government assisted, recorded a very low number of transactions in those three years of 19, 13 and five, respectively.
In contrast, in 1998 there were 31 foreign buyers active in the land market in the Boland, and that increased by 15 percent in 1999 and 12.6 percent the following year.
The study found that mortgage-finance transactions with a total market value of R33.2 million distributed more land of superior quality and wealth to black farmers for the years in question, followed by a market value for cash transactions of R10.6 million.
Although government-assisted transactions redistributed more land than private cash transactions, the value of the land was lower at R1.2 million, thereby redistributing less wealth.
The high amount of land for the government was mainly due to the fact that some transactions were of an equity-sharing nature with commercial farmers. The poor performance of redistribution through land reform was inevitably attributed to the high land prices in the Boland region.
According to the study, foreign acquisition of land exceeded that redistributed by almost 60 percent. The total area purchased by previously disadvantaged people was 939ha, compared with 2 343ha by foreign buyers.
A study comparing South African wine production costs with those of Australia and France confirmed the South African wine industry's position as a pre-eminent player in the national economy.
The study, commissioned by Wines of SA, was undertaken by internationally respected wine business analyst James Herrick, who highlighted the high cost of capital in South Africa, even in a low inflationary environment.
With a lead time of at least three years before vines began to bear suitable crops, new wine farmers had no hope of financial survival without government support, the study said.
This was echoed in a survey conducted by PricewaterhouseCoopers, a professional services organisation, which found that financing in the wine industry was significantly below the norms set for other industries and was something that needed urgent attention.
Also, a means of discounting the extent to which fluctuations in the exchange rate impacted on the South African wine industry should enjoy urgent attention, said Frans Weilbach, the wine industry specialist partner.
Although the unique nature of the local wine industry called for a distinctive finance structure, attention should be paid to the existing structure to increase competitiveness in the international market, Weilbach said.
The wine industry's contribution to gross domestic product is R16.3 billion.
Total turnover of wine and associated alcoholic-based beverages, such as brandy, amounted to R10.7 billion, of which R3.2 billion was exported.
The wine industry provided direct and indirect employment to about 257 000 people in sectors ranging from primary agriculture to cellars, manufacturing, wholesale and retail. Wine tourism employed 59 000 people.
Johan van Rooyen, the chief executive of the South African Wine and Brandy company, said government approval of the wine industry development plan in December 2003 was the sector's most important development.
Equally important is the development of a BEE scorecard. While the parameters have not been finalised, its importance has been acknowledged and approved by all sectors in the industry.
The marketing of wine locally was treated as a priority and followed that of the generic marketing of brands over the past 20 years. Van Rooyen said local consumption had to increase and South Africa had to become known as a wine culture and not something that stopped at the Du Toits Kloof mountains.
Even with a global glut of wine and the strength of the rand, South Africa has become increasingly attractive.
Andre Morgenthal, the communications manager of Wines of SA, said the fact that the industry seemed to survive the strong rand showed it was buoyant.
The other positive development was the rise in quality of South African wines every year. "Our wines are really getting better and better every year. There's a real understanding of international quality standards."
This year three companies - Diageo, Heineken and Namibia Breweries - entered into a joint venture to form Brandhouse. It has established itself in the spirit cooler sector through Smirnoff Triple Spin and Archers Aqua.
It has brought back Baileys cream liqueur after a two-year absence to take on Amarula cream, which is the biggest spirit brand of wine and spirits producer Distell and is made from fermented berries of the marula tree.
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