The Cost Breakeven Point of Wine
DRAFT – FOR REVIEW ONLY
The Cost Breakeven
Point
Point of
of Wine
Wine
Tom Blok
February 2007
July 2006
Assignment
submitted
the Institute
of Cape
Masters
Assignment
submitted
to thetoInstitute
of Cape
Wine Wine
Masters
and
the
Cape
Wine
Academy
in
partial
requirement
for the
and the Cape Wine Academy in partial requirement for the
Cape
Wine
Master
qualification
Cape Wine Master qualification
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The Cost Breakeven Point of Wine
TABLE OF CONTENTS
ABSTRACT .................................................................................................................1
1.
INTRODUCTION..................................................................................................2
2.
UNDERSTANDING THE GLOBAL WINE SURPLUS CRISIS............................4
3.
4.
2.1
Understanding the Concept of ‘Wine Surplus’..............................................4
2.2
Is the current Surplus related to Wine Production? ......................................6
2.3
Decreasing Wine Consumption ....................................................................7
2.4
The Impact of the Surplus ............................................................................7
2.5
Surplus within the South African Wine Industry............................................9
UNDERSTANDING THE WINE REVENUE STREAM.......................................12
3.1
Understanding the Sales Value Chain .......................................................13
3.2
Understanding Wine Retail Price Segments ..............................................14
3.3
The Impact of the Supermarket Chains......................................................21
3.4
The Impact of Exports ................................................................................25
3.5
Bringing it all together.................................................................................26
UNDERSTANDING PRODUCT COSTING FOR WINE.....................................30
4.1
Accounting for Wine Costs .........................................................................30
4.2
The Cost of Grapes ....................................................................................33
4.4
Costs incurred during Secondary Production .............................................42
4.5
The Impact of Overhead Costs ..................................................................47
4.6
Bringing it all together.................................................................................49
4.7
Can a Cheaper Wine be Produced?...........................................................50
4.8
So what should wine cost? .........................................................................52
5.1
Trading Up to Higher Price Points ..............................................................55
5.2
Brand Management ....................................................................................56
5.3
Vertical Integration of the Supply Chain .....................................................57
5.4
Horizontal Consolidation across the Wine Industry ....................................58
5.5
Reducing Packaging Costs ........................................................................59
5.6
The Impact of Finance Charges .................................................................61
5.7
Greater Government Involvement ..............................................................62
6.
CONCLUSION ...................................................................................................64
7.
REFERENCE LIST ............................................................................................70
7.1
Specific References ...................................................................................70
7.2
Background Reading ..................................................................................73
The Cost Breakeven Point of Wine
ABSTRACT
With the reported surplus of wine available in both South Africa and other wineproducing countries increasing annually, there are widespread debates that retail
prices of wine are set to decrease exponentially over the next few years. This can
have serious repercussions to the South African wine industry if not managed
properly, as reduced prices will have a direct impact on the profitability and long-term
sustainability of wine producers. Specific aspects which have been addressed in this
paper include:
•
Understanding the reasons for the global surplus of wine, and the effect of
this surplus on global markets and South African producers.
•
Evaluating the profitability and sustainability of wine producers, taking into
account that large percentages of South African wine are sold in lower, nonpremium price segments.
•
Quantifying the numerous costs incurred in wine production, in order to
provide illustrative examples of the breakeven cost point. At the same time,
understanding how these costs compare to the revenue earned from selling
packaged wine.
•
Considering what practical, long-term solutions need to be evaluated to
address the specific issues that this research has highlighted.
This paper analyses and consolidates a number of research studies and articles that
have been done over recent years investigating various factors which influence the
profitability of a wine producer. It is aimed at providing an overall picture of the
issues that impede the profitability and the sustainability of South African wine
producers. A wine producer needs to be able to make informed decisions when
making and marketing wine. One of the key pieces of information needed is to
understand the cost breakeven point of wine.
Changes to the methods by which costs are managed, closer co-operation, and a
paradigm shift between all players in the wine value chain are necessary if the South
African wine industry wants to continue to play a leading role in the increasingly
competitive global wine market.
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The Cost Breakeven Point of Wine
1.
INTRODUCTION
The global wine industry is in crisis. We are drinking less wine than
ever, yet there is an overproduction of almost 60 million hectolitres –
mainly of supermarket-friendly branded wines that are forcing small
quality-minded independent wineries out of business. (Joseph, 2005,
p.28)
This is a typical example of media coverage when addressing the subject of the state
of the wine industry. During the past 3 years, a variety of references have been
made in the general and wine industry media to the overall surplus of wine which
exists and continues to grow around the world, as well as the impact that this is
having on the overall competitiveness of the industry.
Basic economic principles dictate that one of the primary impacts that a surplus of
any product will have is to put downward pressure on prices. The wine surplus is
already demonstrating this fact, with widespread evidence of exponential decreases
in the retail prices of wine. The crisis for wine producers is that at some point, the
prices that can be earned from sales of wine may decrease below what it costs to
produce the wine. The price point at which this occurs is the cost breakeven point of
wine. Once losses are incurred on sales of wine, questions need to be raised as to
the long-term sustainability of the wine producer. If a large number of producers are
influenced, there may also be repercussions for the industry as a whole.
With South Africa being the 8th largest producer of wine in the world (EuroWine,
2006), the domestic wine industry contributes an invaluable part to the economic
welfare of the Western Cape Province, the economy of South Africa and to the global
wine industry as a whole (Conningarth, 2004). The current global surplus can
therefore have a significant impact on the South African wine industry if not
effectively managed.
This research paper evaluates the current global surplus, with the overall objective of
considering what the typical cost breakeven point of wine is within a South African
context. This has been done by breaking the subject into four distinct components:
•
Understanding the nature of the global surplus, in order to evaluate whether
the surplus conditions which exist are short-term or long-term in nature. This
is important when considering what types of initiatives will be successful when
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The Cost Breakeven Point of Wine
addressing the problem and also to demonstrate the influence of the global
surplus on South African producers. Analysis is also done of the surplus
conditions which exist in South Africa.
•
Considering the typical retail price points that South African wine will achieve
in domestic and international markets. Factors that influence these price
points are also highlighted in order to understand the sensitivity of these
prices to the surplus conditions. Specific analysis is also done to determine
what part of the retail price is actually returned to the wine producer.
•
Creating a practical cost model against which to compare typical costs
associated with wine production, in order to determine what the cost of a
bottle of wine is. The question that must be answered is to what extent it is
possible to produce wine within the revenue constraints that are created by
the current reduced retail prices.
•
Evaluating various mechanisms that can be adopted as long-term solutions to
improve the profitability of wine sales. While there are a number of savings
that can be considered for each of the stages of wine production, these are
generally short-term savings that do not affect the long-term sustainability of
the producers.
The global wine surplus and its related impact on wine retail prices are economic
realities. The contents of this paper should provide information to a South African
wine producer that assists in understanding the nature of the current wine surplus. It
also provides practical steps that a producer should consider when managing a wine
cellar in times of surplus.
It is important to note that the majority of the statistics and data contained in this
paper are based on 2005 information. It is also only based on information that has
been made publicly available, as per the research requirements of the Institute of
Cape Wine Masters. The examples that are therefore contained in this paper are for
illustrative purposes. It is essential that the wine producer using this paper must
adapt the examples to specific numbers that are directly applicable to their own
circumstances.
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The Cost Breakeven Point of Wine
2.
UNDERSTANDING THE GLOBAL WINE SURPLUS CRISIS
The point of departure for this paper is to ensure that there is a common
understanding of what the factors are that contribute to the global wine surplus.
While it may be argued that this only provides background to the surplus problem, it
is important that any actions that are considered stemming from this research take
into account any possible long-term impacts that the current surplus may have.
2.1
Understanding the Concept of ‘Wine Surplus’
The definition of surplus per the Collins Concise Dictionary is “a quantity or amount
in excess of what is required”, or “being in excess; extra”. From a perspective of the
wine industry, a wine surplus can simply be defined as a state where the overall
production exceeds the overall consumption of wine. While this definition is easy to
understand, the biological nature of grape and wine production and the extent of the
global wine industry also need to be factored into this definition to demonstrate
practically what contributes to the global wine surplus. The calculation of a possible
surplus therefore needs to take four factors into account (EuroWine, 2005):
•
Domestic Demand: total consumption of wine within the producing country.
•
Total Demand: overall demand for wine from the producing country, which
therefore also includes all exports.
•
Production Potential: long-term average volume of wine that should be
produced from the vineyards in the producing country, taking local terroir and
growing conditions into account. The extent of overall vineyard plantings and
the average age of plantings also need to be considered in determining this
average.
•
Actual Production: the actual production in a given year, as this is affected by
the positive or negative climatic conditions that have an effect on a specific
growing season. The actual volume of wine produced in a given season may
show a substantial variation from the production potential in any given year
due to the seasonal conditions.
These four factors are shown on one graph below that has been adapted from
EuroWine (EuroWine, 2005) using European data. The graph clearly illustrates the
relative impact of each factor on a possible wine surplus.
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The Cost Breakeven Point of Wine
Production vs Demand
185
180
C
Million hl
175
170
A
165
B
160
155
150
95/96
96/97
97/98
98/99
99/00
00/01
01/02
Harvest
Production
Domestic Demand
Total Demand
Production Potential
Source : Eurowine, 2005
The graph demonstrates that there are three different components that contribute to
a wine surplus. Eurowine 2005 advises that it is important that these three
components are understood, as each could require a different course of action in the
way that it needs to be addressed:
•
A domestic surplus exists when there is an excess between production
potential and domestic demand within a producing country. A given
producing country’s dependence on exports is determined by the extent of
this surplus, which is indicated on the graph by arrow A. The more
dependent the country is on the exports of wine, the more exposed the
producers in the country are to the effects of the global surplus of wine.
•
The structural surplus is determined by the excess between production
potential and the total demand for the producing country’s wines, depicted on
the graph as arrow B. This is the area of most concern, as the only way in
which to reduce this surplus over the long-term is to either increase global
consumption of the country’s wine, or to reduce the production of wine so as
to balance the demand. As neither of these solutions can be achieved in the
short-term, it is imperative that measures be introduced to reduce this surplus
if forecasts indicate that this problem will persist in the longer term.
•
The seasonal surplus, illustrated by arrow C on the graph, is determined by
the variations between actual production in a given harvest and the long-term
production potential. While this creates a surplus in a given harvest that will
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The Cost Breakeven Point of Wine
require specific management interventions, it is important that no ‘knee jerk’
reactions are taken, as actual production in following seasons may result in a
seasonal deficit (Die Burger, 19 May 2004).
2.2
Is the current Surplus related to Wine Production?
The first component of the surplus equation to be considered is to determine to what
extent the current global surplus is related to existing seasonal or structural
production. When considering comments like “…more than 20 million hectolitres (2.6
trillion bottles) more wine is produced in 2004 than in 1980…” or “…in 2002, Australia
produced twice as much wine as they did just 6 years earlier …” published by Wine
International (Joseph, 2005), the immediate conclusion is that production potential is
growing.
This view is shared by Becket (2005) who reports that while the reported areas under
vine are decreasing in Old World territories, the overall plantings that have taken
place in the New World territories over the past three years are keeping the overall
area of vines relatively constant. The predictions going forward are that plantings will
continue and that the area under vine worldwide will reach 8 million hectares in the
foreseeable future, an overall increase of 150 000 hectares on the reported statistics
from 2003. This forecast seems to be contradicted by the information in the table
below taken from the Becket article (2005, p.30), which indicates that the global
surplus actually decreased from 2000 to 2003. Adverse climatic conditions,
especially in the Old World, resulted in significantly reduced harvests, with the
averages for all three years being below the five- and ten-year averages. These
decreases, however, were largely cancelled by similar growth in volumes in New
World countries such as Argentina, Chile and South Africa. This however points to
the fact that actual seasonal production and not structural production is the cause of
this decrease.
Table 1 : Global Wine Surplus
(000,000 hl)
264.1
2002
(Provisional)
258.1
2003
(Projected)
252.4 – 260.3
226.6
227.4
227.4
223.4 – 232.1
Surplus
53.4
36.7
30.6
20.3 – 36.9
% of Production
19.0
13.9
11.9
7.8 – 14.6
2000
2001
Wine Production
280.0
Wine Consumption
Source : OIV 2004
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The Cost Breakeven Point of Wine
The reported harvests for 2004 and the initial reports on harvests for 2005, clearly
show that this production trend has reversed significantly. Growing conditions
around the world were favourable in both years and all publications show significant
increases in actual production, thereby increasing the global surplus. Wine
International (Joseph, 2005) reports that the surplus will probably increase in the
foreseeable future due to the large areas under vine that are only now beginning to
come into production. The size of the current and likely future global wine surplus is
therefore difficult to determine, especially given the number of recently planted vines
in the New World that have yet to produce any wine. Convincing estimates,
however, place it at around 57 million hectolitres – the worst figure in history and
more than the annual production of all of France’s vineyards. (Joseph, 2005)
2.3
Decreasing Wine Consumption
Production is only one side of the surplus equation. There would not be a surplus if
growth in consumption matched the growth in production. The following quotes,
together with similar opening paragraphs of various published articles, illustrate that
this is not currently the case:
Today’s wine market is characterized by oversupply (Heijbroek, 2004, p.5)
Australia’s 20 million inhabitants don’t even manage to drink half of the wine they
produce. (Joseph, 2005, p.28)
The economic reality is that wine consumption is generally decreasing around the
world. Becket (2005, p. 30) reports that consumption is down almost 3% on 2002
levels in the European Union. The traditional wine drinking nations of France, Italy
and Spain show the most significant decreases, which are quantified as being more
than double the overall increases in consumption that are being shown in all other
countries around the world combined.
2.4
The Impact of the Surplus
The international over-supply of wine is a reality. It is seen to be a combination of the
structural surplus caused by the significant growth in the area under vine around the
world, accentuated by the significant seasonal surplus resulting from the 2004 and
2005 harvests. Wine producers need to take cognizance of this fact and manage
their business accordingly. The practical impact of this excess is made apparent in
the following quotes:
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The Cost Breakeven Point of Wine
•
As reported by Wine International (Joseph, 2005), 2005 saw Australia’s
biggest-ever harvest, which resulted in a surplus estimated to be nearly 2
million hectolitres. Growers in many regions simply left grapes unpicked
because there were no wineries to take them.
•
In 2006, at least 60 000 tons of grapes were not harvested in Australia,
compared to approximately 120 000 tons in 2005. (Die Burger, 9 May 2006)
•
It is estimated that wine producers (in Australia) will have about 190 million
litres of excess wine by June (2006), 80 percent of it red. This will probably
have the effect of lowering prices across the board for red wine priced below
$10 (Hunter Gordon, 2005)
•
The current global oversupply of wine is largely a relative concept. There are
many wines that are produced in volumes that will not come anywhere close
to satisfying market demand. According to Foulkes (2004), the problem is
rather that there is too much lower quality wine that blocks the systems.
•
Judged on the basis of basic economic laws, the wine industry is in one hell
of a mess. And the situation seems set to get a lot worse (Joseph, 2005)
•
Australian producers are considering converting surplus wine into ethanol, an
industrial type fuel. This is already being done in France, where 100 million
litres of wine was converted to ethanol during 2005 (Die Burger, 9 May 2006)
•
California dealt with its excess in 2002 and 2003 by introducing wines at
ludicrously low prices, such as Charles Shaw’s Two Buck Chuck and the
recent wave of cheaper US reds and whites that have recently begun to arrive
in Britain (Joseph 2005)
The immediate impact is that as competition for a share of the consumer market
increases, there will be significant downward pressure on wine prices. This in turn will
force wine producers to reduce prices on grapes. At some level, the wine and grape
prices will result in many producers in both the Old and New Worlds not being able to
survive financially. The impact will not only be felt by the wine and grape producers.
Beveragedaily.com (2003) clearly shows how general suppliers to the industry e.g.
cooperages, dry goods suppliers, etc. will also be directly impacted, as the overall
willingness to invest in wine production is set to decrease.
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The Cost Breakeven Point of Wine
A positive impact could be that wine producers will need to become more market
aware and ensure that they effectively market and sell their wine almost before the
wine is produced. More advertising and marketing spend by producers will create a
greater awareness of wine and should stimulate positive growth in consumption and
the associated trading in wine.
In an environment where a global surplus exists, it is essential that both the export
market and domestic markets are carefully managed. The current situation in Old
World countries such as France, Italy, Spain, Germany and Portugal is that both
domestic consumption and the overall share of the export market is decreasing,
making them even more exposed to the international surplus (Die Burger, 8 May
2006).
2.5
Surplus within the South African Wine Industry
South Africa, compared to several other New World countries, has generally been
less buoyant in expanding supply, partly due to the high cost of capital, and possibly
its traditional, more risk mitigating industry culture (Heijbroek, 2004). As a result,
South Africa does not appear to be too exposed to a structural surplus.
This statement is supported by the Production and Market Estimates for 2006 – 2010
prepared by SAWIS (2005). Although based on a number of assumptions which are
not repeated in this paper, the forecast which is displayed in the table below shows
that there is actually a structural deficit that exists for both red and white wine.
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The Cost Breakeven Point of Wine
Table 2 : Supply and Demand of South African Wine
Red Wine
Production
2005
(million litres)
2006
2007
2008
2009
2010
245.9
252.0
259.6
267.3
275.6
31.1
183.3
214.4
32.7
206.4
239.1
34.3
231.5
265.8
36.1
259.6
295.7
37.9
287.7
325.6
31.5
196.0
12.9
208.9
-6.2
202.7
-28.4
174.3
-50.0
124.3
White Wine
Production
703.7
730.8
756.1
779.7
802.0
Domestic Sales
Exports
Other Products **
Total Sales
271.9
151.7
355.1
778.7
273.3
163.1
362.1
798.5
274.6
173.5
365.4
813.5
275.9
183.9
383.4
843.2
277.1
194.2
391.4
862.7
-75.0
65.2
-67.7
-2.5
-57.4
-59.9
-63.5
-123.4
-60.7
-184.1
Domestic Sales
Exports
Total Sales
Shortage / Surplus
Stock 31 December
Shortage / Surplus
Stock 31 December
164.5
140.2
** The total demand for distilling, rebate and non-alcoholic wine products.
There are three major challenges that the forecast highlights, which the South African
wine industry as a whole will need to manage:
•
The large stock of red wine (164.5 million litres) in 2005 which has resulted
from the above-average 2004 and 2005 harvests is going to take time to
reduce to acceptable levels (Martin, 2006). Alternatives to traditional wine
sales will need to be considered as a standard increase in sales will not
alleviate the current situation in the short-term. These measures may include
considering using red wine as an alternate to white for distillation purposes,
thereby reducing shortage for white wine, or also to consider the economic
viability of wine-to-ethanol conversion.
•
The forecast is based on significant growth in both domestic and export
demand for natural wine. Given the international statistics on wine
consumption and related commentary that is provided in this paper, a great
deal of emphasis will need to be placed on consumer education within South
Africa to increase the domestic demand for wine. At the same time,
concerted and co-ordinated marketing efforts will need to be done
internationally to ensure that South Africa increases its share of the
international wine market.
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The Cost Breakeven Point of Wine
•
The deficit on white wine is only achieved taking the demand for other wine
products into account. The largest component of this “Other Product”
category is distilling and rebate wine. Caution must be expressed that this
segment of the alcoholic beverages market is also under global pressure
(Euromonitor International, 2006) and may not be able to meet these volume
requirements in the longer term.
These statistics demonstrate the fact that from a volume perspective, the South
African industry should be able to survive. The key issue that remains is that with
global wine prices being reduced and South Africa being very dependent on the
global market for export sales, the overall profitability of the South African industry
will be negatively influenced. This highlights the fact that South African producers
need to have a clear understanding of the factors influencing the retail prices which
can be achieved for South African wine, as well as the retail price point at which
production of South African wines is no longer profitable.
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The Cost Breakeven Point of Wine
3.
UNDERSTANDING THE WINE REVENUE STREAM
The previous section has highlighted the fact that there is significant pressure being
placed on wine retail prices due to the global oversupply of wine. The pressure of
the surplus in the wine market is a source of twofold concern for most wine producers
- there is general pressure on prices that can be maintained within the market, while
also demanding an answer to the question of whether the wine produced can or will
actually be sold.
In the introduction to this paper, the explanation was given that the cost breakeven
point of wine is that point where the revenue that can be earned from the sale of a
bottle of wine to a consumer is equal to the total costs that are incurred by a
winemaker to produce the same bottle. This chapter will provide insight into the
portion of the final retail price that is returned to the producer. This amount needs to
be compared to the production costs in order to determine the profitability of making
wine. As the revenue stream is an important part of determining the cost breakeven
point, various factors that impact significantly on the retail prices are also addressed
in this chapter.
Packaged Wine Available for Sale
Cellar Door
Sales
Wholesaler
Retailer
Wine Purchase by Consumer
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The Cost Breakeven Point of Wine
3.1
Understanding the Sales Value Chain
In order to understand the cost breakeven point of wine, it is essential that the wine
producer has a clear image of which factors contribute to the price of wine. One
mechanism with which to do this is to understand the typical supply chain that wine
will follow from the time that the wine is packaged and available for sale, up to the
point that the wine is purchased by the consumer. The diagram on the previous
page, adapted from Perrin & Lockshin (2001), has been constructed to provide a
visual image of this supply chain. Every intermediate step that the product takes
from leaving the cellar to being purchased by the consumer, will impact the portion of
the retail price that is actually earned by a wine producer.
Wine Distribution in South Africa
From a South African domestic sales perspective, the two most common routes to
the consumer is either for wine to be sold directly to the consumer by the producer
through cellar door sales or direct marketing, or for the producer to sell directly to the
wine retail stores, of which supermarkets form an integral part. Marketing agents
sometimes also play an intermediary role in this part of the sales chain.
While there are some wholesalers who operate within the domestic market, these
tend to be producing wholesalers who produce their own wine. For these producers,
wine is often purchased in bulk form and bottled under an own brand, or used as a
blending component.
Wine Distribution in International Markets
For export purposes, most market channels are increasingly complex, or are
particularly legislated e.g. the US market that requires a three tier distribution
structure. In these cases it is generally common to appoint an agent or wholesaler
within each market that the wine producer targets. Wine is then shipped in volume to
the wholesaler, who will then take responsibility for the distribution of the wine within
the given market. The positive attribute of this distribution channel is that it enables
larger volumes to be pushed into the market. The drawback is that each additional
player in the value chain takes a margin on the cost price, diluting the amount that
can be returned to the producer.
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The Cost Breakeven Point of Wine
3.2
Understanding Wine Retail Price Segments
Another important factor for the wine producer to understand is that the retail price of
wine is not very flexible, as wine is generally marketed and sold within specific retail
price segments, commonly referred to as price points (Jarvis & Goodman, 2004). It is
essential that the South African wine producer has a good understanding of the
various quality and price segments in both the domestic and international markets in
order to understand the prices which are actually achieved when selling wine.
Careful analysis of the price segments and countries in which the wine will be
marketed can be an important guide to the producer as to the styles of wines to
make, to evaluate what revenue can be earned, and to have a better idea as to the
maximum costs that should be incurred during production.
There are various studies that have been performed around the world aimed at
categorizing the wine market into various segments, each returning a wide range of
possible answers. One of the studies conducted by Ernst & Young Consulting
(Perrin & Lockshin, 2001) in 1999 and further used by the Comitee Interprofessionnel
des Vins du Languedoc (CIVL), a producers’ union in the south of France, was a
division of global wine competition broken down into four categories, named ‘basic
premium’, ‘popular premium’, ‘super premium’ and ‘ultra premium’.
Icon
Wine Quality Segm ents
Ultra Premium
Super Premium
Premium
Popular
Premium
Basic
l o w c o st p r i c e : U S D / b ot t l e
Source: Rabobank, 2003
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The Cost Breakeven Point of Wine
Countries like France and Australia have also invested heavily in studies aimed to
categorise the various market segments, in order to understand the nature of these
segments in more detail, as well as to analyse the competition that exists within in
each of the segments. The general consensus of these studies is that the wine
industry is characterized by a range of quality segments, each with its own trends,
price ranges, market requirements, distribution outlets and so forth (Heijbroek, 2003).
The graph on the previous page is published by Rabobank (Heijbroek, 2003) and
depicts a common analysis of wine quality segments. These categories are often
used within the European and United Kingdom markets when performing market
analysis. While the graph clearly illustrates that there are differences within the
various segments, based largely on the volume of wine available (the relative size of
the bubble) and the overall value per bottle, it is important that the producer
understands the related definitions that are associated to each of the segments.
The data below which is also taken from the same Rabobank study (Heijbroek, 2003)
includes a short description of what the characteristics of the wine should be in order
to be included in the specific market segment. These definitions are, however, very
generic and in most instances would allow for many of the wines retailed today to be
placed into a number of different segments.
Europe
Ex-winery
EUR / bottle
Europe
Consumer
EUR / bottle
>30
>150
Ultra premium
3.35 – 30
14 – 150
Super premium
2.25 – 3.35
7 – 14
In the higher price ranges: Image, cellaring potential,
complexity, well received by critics
Premium
1.65 – 2.25
5–7
Brand, recognition, origin, full body, more character,
rich, typical for single or two-varietal blend
Popular premium
1.10 – 1.65
3–5
Combination of character and accessible,
recognizable characteristics of variety, origin, brand
<1.10
<3
Category
Icon
Basic
Requirement
Long-term image (this takes time!), complexity,
cellaring potential, high scores among critics
Typical, varietal or good blend, more complexity,
typical character, origin, image, quality brand
Varietal, fruit, accessible, brand
Source : Rabobank 2003
Price Segmentation in Europe
Each of the quality segments depicted in the table above also has indicative price
points. The consumer prices that are highlighted are illustrative of continental
European off-trade prices (prices paid for wine that is not consumed on the
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The Cost Breakeven Point of Wine
premises), as on-trade prices (prices within a restaurant or hotel) can be at least
twice as high. It is however important to take into account that these are indicative
prices only and the category pricing and quality perception vary significantly from
country to country. In France and Spain, for instance, the popular premium segment
is considered to begin at around EUR 1.5 per bottle, whereas in the USA the
premium and popular premium segment generally begins above EUR 3. The number
5, albeit EUR 5 or £5 or $5 appears to be an important barrier in many markets – for
both retailers and consumers and is generally used as category distinction. It is
generally only above the 5 level where it is apparent that quality becomes more
important than volume. It is also the level at which volumes of wine sold drop
considerably. (Heijbroek, 2003)
Price Segmentation in Australia
A study performed in Australia in 2001 by the Wine Industry Journal (Perrin &
Lockshin, 2001) used the common terminology of ‘basic premium’, ‘popular
premium’, ‘super premium’ and ‘ultra premium’ as a starting point, and then did
market research amongst wineries, winemakers, exporters, retailers and journalists
to determine the existence of these categories within the Australian industry. The
general consensus achieved was that there are typically four categories of wines
within the Australian market.
•
Commercial Wines, which are generally packaged in large scale packaging
such as casks or ‘bag-in-a-box’, and which are very rarely intended for export.
Retail prices are generally less than A$8 – 10.
•
Semi-Premium Wines, often seen as the Australian wine industry’s strength,
with sensible prices and ‘good value for money’, with associated
improvements in quality. The majority of wines in this category are exported
and retail prices range from A$10 – A$ 15-20.
•
Premium Wines generally retail from A$20 – A$30-50. The price limit
between this category and super premium wines is often blurred and some
winemakers only talk about a hedonistic distinction that exists between the
two categories. They maintain, however, that it is important that the two
categories exist. Among the larger producers who have an extensive range
of products, the need to be able to categorise more expensive ranges in a
higher price segment is important.
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The Cost Breakeven Point of Wine
•
Super-Premium Wines, are often only used by the larger producing
companies with extensive ranges as marketing tools to allow for perceived
higher values. With price ranges that vary from >A$30 or >A$50, it is largely
dependent on the size of the winery as to where this category begins.
While these four categories are commonly used, there are parties that would argue
that a fifth category of ‘Exceptional Wine’ should be added to the top of the list to be
used for rare and expensive wines (very similar to Icon Wines used earlier on page
15). There are also parties that would prefer to only have three categories, with
premium and super premium wines being collated as the distinction between these
two categories is too blurred.
Price Segmentation in South Africa
Price segmentation within the South African market is differentiated between the
official descriptions that are used by the industry regulators and the terminology that
is used within the retail sector.
The official descriptors that are used to describe market segmentation use categories
that are referred to as High Priced (HP), Medium Priced (MP) and Low Priced (LP)
wines. While there could be significant price differences between these categories,
the differentiation is currently explained by the nature of the packaging used, rather
than a specific analysis of price:
•
High Priced (HP) wine refers to wine in glass or bottle packaging.
•
Medium Priced (MP) wine includes ‘Bag-in-a-Box’ and Tetrapak packaging.
•
Low Priced (LP) packaging includes foil bags and plastic bottling. It must be
noted that the use of foil bags (‘papsakke’) has recently been prohibited in
terms of liquor industry regulations, with resulting increases in ‘bag-in-a-box’
volumes.
Even with the category of HP wine, the pricing of wine in South Africa is very diverse,
with the type of still or sparkling wine which is sold being the major contributors to the
price segment. Examples to support this are taken from Euromonitor (2006):
•
In looking at the wine market as a whole, almost 50% of all white wine sold in
South Africa retails for under R10 for a 750 ml bottle. This is generally due to
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The Cost Breakeven Point of Wine
an extremely high volume of very poor quality wine that is typically consumed
by low-income groups in rural areas (Euromonitor International – South
Africa, 2006).
•
With medium- to higher-priced still wines, white wine is generally priced
significantly lower than the same quality red wine. This can be clearly seen
by the fact that an estimated 9% of red wine sold in 2005 costs more than
R50 per 750 ml bottle, compared to only 5% of white wine (Euromonitor
International – South Africa, 2006).
Data extracted from the Euromonitor International data service shows the volume of
wine that retails in various price segments in South Africa:
Table 3 : South Africa - Volume Sales of Wine by Price Segment
2004 – 05
(million litres)
Under R5
White Wine
Red Wine
46.2
Under R8
R5.01 to R10
44.5
R8.01 to R15
3.9
R10.01 to R15
42.7
R15.01 to R30
15.1
R15.01 to R25
24.9
R30.01 to R40
1.9
R25.01 to R50
10.7
R40.01 to R50
2.8
R50.1 and above
2.5
R50.01 and above
Total
8.9
177.9
Total
1.4
27.6
When considering this information, there is a clear distinction that wine sales in South
Africa can be categorized into three primary segments.
•
The very cheap white wine retailing for less than R10, as well as the cheap
red wine priced below R15 can generally be categorized as commercial and
bulk wine. These wines will normally not be destined for exports. For
purposes of this paper, these wines will be excluded from any evaluations.
•
The semi-premium category, making up in excess of 75% of the remainder of
the volume of wine sold, is the R10 – R 25 price level for white wine and the
R15 – R40 segments for red wine. Discussions with retailers have indicated
that these are typical price ranges for consumers buying ‘value-for-money’
wines. This is also supported by Maxwell (2006, p.30) who refers to similar
ranges for the domestic South African market. In using the volumes and
associated values within these categories depicted in the above table, an
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The Cost Breakeven Point of Wine
average price per bottle of R17.00 and R24.50 can be determined for white
and red wine respectively.
•
Volumes drop significantly in the price bands above these levels and this
category will be referred to collectively as the premium category. Prices in
this category are more closely aligned between white and red wine and return
an average price of approximately R45.00 per bottle.
Price Segmentation in the United Kingdom
A similar distinction can be made with regard to price bands for wine in the United
Kingdom market. The same Euromonitor data analysis has been performed for this
market:
Table 4 : United Kingdom - Volume Sales of Wine by Price Segment
2004 – 05
(million litres)
Under £4
White Wine
84.1
Under £4
Red Wine
53.6
£4.01 to £5.5
208.0
£4.01 to £5.5
184.9
£5.51 to £7
109.1
£5.51 to £7
117.9
£7.01 to £8
37.0
£7.01 to £8
35.2
£8.01 to £9.5
15.7
£8.01 to £9.5
21.0
£9.51 and above
16.3
£9.51 and above
Total
8.3
462.2
Total
428.9
For purposes of this market, the assumption is made that as wine is not produced in
the United Kingdom, sales of commercial and bulk wine will not skew the analysis.
The lower price classes are therefore reflective of wine of an acceptable quality that
is sold within normal retail distribution channels. This would therefore lead to two
general price categories. The fact that the same price bands are used when
comparing red and white wine also result in the average prices achieved within the
bands to be more comparable than what is apparent when using the South African
analysis:
•
The semi-premium category makes up 60% of the volume of wine sold and
represents the price bands under £5.50. The average price within this band
based on the volumes provided in the table is approximately £4.00 per bottle,
regardless of red or white wine.
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The Cost Breakeven Point of Wine
•
While there are still significant volumes in the price band from £5.51 – £7.00,
volumes decrease significantly above this price level. If all the price bands
above £5.50 are considered to be the premium category, the average price
per bottle is approximately £7.00.
Price Segmentation in the United States
The analysis of the United States market using the same Euromonitor data analysis
highlights similar trends to the South African data, with significant volumes of wine
being sold at prices below $2.99. These wines are typically the ‘Two Buck Chuck’,
‘Jug Wines’ and bulk wine, which for purposes of this analysis will be considered
commercial wines and excluded.
Table 5 : United States - Volume Sales of Wine by Price Segment
2004 – 05
(million litres)
White Wine
Under US$2.99
220.0
Red Wine
Under US$2.99
178.9
US$3 to US$6.99
262.9
US$3 to US$6.99
280.0
US$7 to US$9.99
134.2
US$7 to US$9.99
138.9
US$10 to US$13.99
49.2
US$10 to US$13.99
53.3
US$14 and above
36.5
US$14 and above
50.5
Total
702.8
Total
701.6
The two remaining price categories within the US market can therefore be described
as follows:
•
The semi-premium category makes up more than 80% of the volume of wine
sold and falls within the price band from $3.00 - $9.99. The average price
within this band is approximately $6.20 per bottle, regardless of it being red or
white wine.
•
The premium band starts at $10.00 a bottle and returns an average of
approximately $13.00 per bottle.
General Comment on Price Segments
Examples have been provided on price segmentation for four different markets, each
with different terminology and different pricing. While there is some commonality in
terms of the typical trends within each of these markets, it is important that producers
do a detailed analysis of the target price segments and markets in which they aim to
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The Cost Breakeven Point of Wine
sell their wine. This is made even more appropriate by the following explanation of
market segments from Rabobank (Heijbroek, 2003, p. 3):
It is therefore very apparent that the ultimate and clearest criterion for
quality is the value of the wine as perceived by the market and consumer.
From a market perspective, the producer has the ability to manage and
market the brand and image of the wine, which contributes significantly to
the perceived value of the wine, and is also where the concept of brand
value comes into its own. The overall value of the wine is determined by
what the consumer is prepared to pay for the wine, and is expressed in
the average price per bottle. This prompts the price distinctions in the
market, and so creates different quality and related price segments.
This definition, as well as the actual price data depicted in this section, also makes it
apparent that price differences between segments are NOT only a factor of the
volume of wine available for sale. The quality of the wine produced as perceived by
the consumer is an important factor affecting the overall price for which the wine will
retail. While price sensitivity and competition will be at its fiercest in the commercial,
semi-premium and lower priced premium wines, wines in the premium and higher
segments are generally less price sensitive, as the consumer will focus more on the
quality and reputation of the wine than on the price.
3.3
The Impact of the Supermarket Chains
While this chapter has focused on the impact of the global surplus on retail prices,
there is actually a second key factor that is putting pressure on wine prices
(Lockshin, 2003). The increased buying power that the large retail chains are
exerting on the overall supply chain (Heijbroek, 2004) is also resulting in price
reductions, as this route to market becomes increasingly important to the cellar as a
primary distribution outlet. The South African wine producer must understand the
impact that using the supermarket chains as a retail outlet may have on the wine
sales prices that are achieved.
The table below has been compiled from the country specific analyses of the
Alcoholic Drinks Business published by Euromonitor in 2006 for South Africa, the
United Kingdom and the United States (Euromonitor International, 2006). It shows
the relative volumes of off-trade wine sales by distribution channel. It clearly
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The Cost Breakeven Point of Wine
illustrates the dominant position that the supermarkets and discounters have on the
global wine industry.
Table 6 : Off-Trade Sales of Wine by Distribution Format – 2005
South Africa
United Kingdom
United States
%
%
%
Supermarkets
39.0
69.0
43.5
Other Food Stores
5.6
8.5
6.6
Discounters
41.0
2.0
10.1
Specialists
8.0
14.3
22.1
Direct Sales
4.4
6.1
2.2
Other
2.0
0.1
15.6
Total
100.0
100.0
100.0
Many people would argue that this is a good position to be in as it enables significant
consolidation of the wine distribution channel. It should therefore allow for efficient
and profitable management of wine sales. There are three important factors that
need to be understood when considering what the impact of this dominant position is
on the profitability of wine sales.
Retail Price Points within the Supermarket Channel
Firstly, consideration must be given to the fact that more than 50% of the wine sales
in the United Kingdom for the year to March 2005 made across multiple supermarket
stores were priced below £3.00 (Schmitt, 2005). Given the overall volume of wine
that is moved through this channel, the significance of this average price becomes
enormous. This simple statistic becomes even more terrifying when considering the
distribution of this amount within the value chain: £1.71 represents Value Added Tax
(VAT) and Customs and Excise taxes, approximately £0.95 will go to retailer and
wholesaler margins, which leaves only 34 pence that will go to the producer to
harvest, make, bottle, close and ship the wine to the United Kingdom.
The impact of fixed retail price points in the supermarket distribution channel is
clearly illustrated in the graph below, where due to the drive on volumes, almost 80%
of wine is sold for an average price of less than £4, and more than 90% is sold for
less than £5. Producers and retailers have been reported to make the comment:
“…you cannot sell any significant volumes at prices over £5 pounds, and you cannot
make any significant margins at prices below this level...” (Schmitt, 2005, p. 26).
Page 22
The Cost Breakeven Point of Wine
Wines Sales by Supermarket by Price Band
25.7%
Under £2.79
25.0%
£2.79 - £2.99
13.0%
£3.00 - £3.49
19.3%
£3.50 - £3.99
6.4%
£4.00 - £4.49
5.7%
£4.50 - £4.99
1.4%
£5.00 - £5.49
2.0%
£5.50 - £5.99
£6.00 - £6.49
0.3%
0.5%
£6.50 - £6.99
0.5%
£7.00 - £7.99
£8.00 - £8.99
0.1%
£9.00 - £9.99
0.1%
£10.00 or more
0.1%
Source; TN5 (52 w/e 27.03.05)
Volume Drivers within the Supermarket Chain
The second factor is that the primary aim of supermarkets and discounters is to be a
volume business, where success is measured by the increases in product volumes
that are passed through the store (Bolin, 2005). There is also a greater emphasis on
wine as one component of a ‘basket of products’, with less emphasis being placed on
the overall contribution that wine as a product in its own right would have in a
specialist environment. This leads to increased use of sales techniques for wine that
will either encourage increased volume buying, or entice more people to visit the
store. The mechanics for a wine promotion vary from supermarket to supermarket.
These are some of the more common techniques that are used in the United
Kingdom (Gold, 2006):
•
Buy 2 get 1 free
•
2 for £10.00
•
3 for £10.00
•
15% off
•
£1.00 off per bottle
The effect of these promotions is significant, with the ‘£1.00 off’ or ‘3-for-the-price-of2’ deals tending to generate 10 to 20 times the normal weekly sales level, and the
‘half-price’ deal resulting in more than 100 times the normal weekly sales level, and
enticing more customers to the store (Schmitt, 2005) . Regardless of the nature of
the discounting used, the important factor to take into account is that these discounts
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The Cost Breakeven Point of Wine
are ultimately factored into the average price which the consumer pays per bottle,
and most often comes predominantly at the suppliers’ expense.
It is also essential for a producer who wishes to use the supermarket channel as a
route to market to be able to produce the volumes of wine that will be able to support
this distribution channel continuously. These wines are generally known to be ‘easy
drinking’ and ‘value-for-money’, but quality cannot be lacking. There is also a
requirement of ongoing consistency of the product, as this volume of wine is closely
linked to a brand image that is created by the producer. In contrast to this,
experience will show that it becomes increasingly more difficult to produce a quality
wine when winemaking is done on a large scale, and the consistency of the wine
needs to be maintained through varietal and vintage blending. Because of this, the
end product is most often not at the same level of quality that a small scale producer
would be able to achieve with the same grapes.
Cost Drivers within the Supermarket Chain
With the expanding number of producers, the related brands on the market, and the
general state of oversupply, it is not only the decreasing prices paid for the wine that
impact on the profitability of the wine. Gold’s analysis of the English Wine Market
(Gold, 2006) shows that there are also a number of direct costs that need to be
incurred in order to obtain and maintain a listing and shelf space with a retailer. The
materiality of these costs is an important factor to consider when distributing wine
through the supermarket channel and should be considered as a specific category of
marketing and distribution costs (discussed further on page 47). These costs
include:
•
Listing Fees: normally a ‘once-off’ payment, or an annually negotiated
amount, to get the wine on the shelf within the supermarket.
•
Distribution Fees: transport costs are paid to the supermarket to distribute the
wine from the supermarket’s central warehouses to the various stores.
•
Advertising Fees: these can be a page or section of the store magazine, or
in-store advertising where advertising material is placed within the store.
•
Space or Gondola Fees: this fee is paid to have the wine prominently
displayed within the store e.g. the end of an aisle, or on a separate display
stand.
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The Cost Breakeven Point of Wine
•
Club Card and Research Fees: any costs incurred by the retailers to attract
customers to provide research information are passed on to the producers.
3.4
The Impact of Exports
Questions can be raised at this point as to why there is so much emphasis placed on
the wine quality segments and related price points across different markets outside
South Africa, as well as using examples of supermarket prices in the United
Kingdom. The concept of a domestic surplus was introduced in section 2.1, which
explained that the larger the domestic surplus is, the more dependent the country is
on exports to utilise this surplus. When evaluating the annual SAWIS statistics on
the extent of the South African Wine Industry (2006), the dependency that the South
African wine industry has on exports is apparent.
Table 7 : South African Wine Production vs. Domestic Consumption vs.
Exports – 2004/05
Natural Wine
2004
2005
2004 / 2005
Million Litres
Million Litres
Trend
Production
696.788
628.483
90.20%
Domestic Consumption
308.707
301.093
97.53%
Exports
265.762
279.871
105.31%
The Production and Market estimates for 2006 – 2010 also published by SAWIS
(2005) further illustrate this dependency on export markets (refer to page 10).
Domestic consumption of wine is forecast to be largely constant year on year,
whereas the export requirements are increasing at rates of 12% and 6% for red and
white wine respectively.
While it is known that the South African wine industry has been very successful in
major export markets over the last ten years (Heijbroek, 2004) (the UK and the
Netherlands in particular), the pressure on the industry is to maintain these market
positions against the increasing competition that is being experienced due to the
global surplus. Countries like Australia, Spain, Italy, Argentina and Chile have
always been considered as major threats to South Africa due to the volume of wine
that is already produced in these countries. New threats to South Africa’s market
share may also come from China, as Chinese producers are beginning to produce
significant volumes of wine at improving levels of quality (Murray Brown, 2005). The
surplus experienced by the French producers as a result of increased global
competition and reduced domestic consumption is leading to a major change in
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The Cost Breakeven Point of Wine
marketing strategies for many French wines. This situation is becoming a greater
challenge to South Africa’s market share.
With this as background, it becomes essential for South African producers to have a
clear understanding of export conditions for wine and the sustainable profitability that
can be expected. The additional factor that producers wishing to export need to take
into account is that South African business is generally exposed to a volatile
exchange rate, where a number of economic factors that are not related to or
controlled by the wine industry can cause significant variations in the exchange rates
between the South African Rand and major international currencies. Where
profitability margins are already small, even a small variation in the exchange rate
could mean the difference between making a profit or loss on the sale of a case of
wine.
Wines of South Africa (WOSA) is putting an increased effort into improving the
overall market share of South African wines across a number of the key export
markets. These include the United Kingdom, which remains the most important
export market for South African wines, the United States of America, Holland,
Germany and Scandinavia (WOSA, 2005).
Producers that are best positioned to tap into the export markets will generally be
best positioned for longer term sustainability, as decreasing domestic consumption
will also result in increased price competition within the local market as well. In
order to be able to work within the export markets, a great deal of emphasis needs to
be placed on having attractive brands that can be positioned at various price points
within the market, having sufficient volumes in order to maintain market share and
also having the sustainable financial power to support these brands. (Heijbroek,
2004)
3.5
Bringing it all together
With all the information that has been provided in this chapter, what remains is to
provide an example showing how to determine what the typical amount is that will be
returned to the producer, as this must be higher that the cost breakeven point of the
wine produced in order for the producer to be profitable. In order to determine this
amount, we need to work backwards through the distribution chain and determine
which amounts will typically be deducted from the retail price per bottle in order to
calculate the amount accruing to the producer.
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The Cost Breakeven Point of Wine
•
Retail Price: The full amount paid for the bottle of wine by the consumer.
Care must be taken to determine the impact of any discounts or special offers
on the overall price per bottle.
•
Sales Tax: Tax legislation pertaining to sales needs to be analysed by country
in which the sale will take place. In South Africa and the United Kingdom,
Value Added Tax (VAT) is used. This is an inclusive tax i.e. the price on the
label is the final price paid for the product and includes the tax amount. The
current VAT rates for South Africa and the UK are 14% and 17.5%
respectively. In contrast, the USA applies a general sales tax which is not
included on the label price, but is added to the price at the point-of-sale
(Euromonitor International, 2006).
•
Retailer Margins: The margins added to the cost price by the retailers vary
from product to product and from country to country. Euromonitor’s country
reports for 2005 (Euromonitor International 2006) indicate that average markups for off-sales of wine were 50.0%, 24.0% and 36.5% for South Africa, UK
and USA respectively. Discussions with various retailers in South Africa have
demonstrated that a 50% retailer margin is only achieved in very few,
specialist wine shops. A typical average retail margin in South Africa is
approximately 35% percent.
•
Wholesaler and Agent Margins: As explained above, wholesalers are not
generally used within the South African distribution channel and are therefore
not being considered for this part of the example. For purposes of the UK
and USA, Euromonitor (2006) indicates that the average mark-ups for wine
were 24.0% and 26.0% respectively. Where marketing agents are used to
support domestic wine sales, their margins should be factored into the
calculation in this section.
•
Customs and Excise Duties: Duties form a substantial price component for all
alcoholic beverages, and as such, could form the subject of a paper on its
own. From an excise perspective, the South African government generally
follows a policy of excise normalization which aims to bring South Africa
excise taxes in line with those charged overseas. At the same time it is
attempting to increase the cost of alcoholic drinks in order to deter overconsumption (the concept of sin taxes) (Euromonitor International, 2006).
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The Cost Breakeven Point of Wine
The South African excise tax rate for 2005 for unfortified wine products is
140.52 cents per litre (as published by the South African Revenue Services).
This was increased to 158,09 cents per litre in March 2006. Wines exported
from South Africa are not subject to the local excise tax.
Wines imported into the UK are subject to import duties equivalent to the local
excise on wine products at a rate of £167.72 per hectolitre, or £1.6772 per
litre. Excise and import duties on wine in the USA are very complex, with
different requirements and rates that apply in the different states within the
USA. Federal or national excise duties vary from $1.07 - $3.30 per litre for
wine, depending on the type of wine and the alcohol content. On top of this,
the average State excise duty amounts to $0.19 per litre and there are also
import duties which vary from $0.084 - $0.198 per litre (Euromonitor
International, 2006).
•
Once all these amounts are deducted, the remaining amount will normally be
accrued to the producer. The only additional factor that will influence this
amount will be the specific exchange rate that applies to this transaction.
For purposes of this paper, the following assumptions have been applied:
•
We divide the market into two broad price categories: a semi-premium wine
that is typically produced for distribution through a supermarket chain and a
premium wine that will sell through a specialist retailer. The average prices
determined in the previous sections are used as illustrative prices in each of
these categories (refer to pages 18, 19 and 20). It is also important to note
that white and red wines are considered as one price category in this example
for the United Kingdom and the United States, as the price segment
similarities explained earlier return similar average retail prices.
•
Our producer will sell wine in South Africa, with distribution going directly to
the retailers, the United Kingdom and the United States of America.
Distribution in both export markets will be done using a wholesaler or agent.
The following table can be constructed using the specific data provided in the
paragraphs above. It clearly shows the distribution of the retail price per bottle of
wine and the final value returned to the producer.
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The Cost Breakeven Point of Wine
Table 8 : Analysis of the Split of Retail Price between Intermediaries
Retail Price
South Africa
(Rand)
Semi-Premium
Premium
White
Red
17.00
24.50
45.00
United Kingdom
(Pounds)
SemiPremium
Premium
United States
(Dollars)
SemiPremium
Premium
4.00
7.00
6.20
13.00
Sales Tax
-2.09
-3.01
-5.53
-0.60
-1.04
0.00
0.00
Retail Margin
-3.87
-5.57
-10.23
-0.66
-1.15
-1.66
-3.48
0.00
0.00
0.00
-0.53
-0.93
-0.94
-1.97
-1.05
-1.05
-1.05
-1.26
-1.26
-2.29
-2.29
Net Amount to Producer
9.99
14.87
28.19
0.96
2.62
1.32
5.27
Exchange Rate (Rand : 1)
(Illustrative)
1.00
1.00
1.00
11.50
11.50
6.50
6.50
Amount to Producer
9.99
14.87
28.19
11.00
30.09
8.56
34.26
Wholesale Margin
Customs and Excise
The table makes it clear that the costs and taxes that are incurred between the final
packaged product being available for sale and the retail price have a significant
impact on the amount paid to the producer per bottle of wine. These costs are
generally fixed amounts per bottle, regardless of the volume of wine produced or the
relative size of the winery. However, the extent to which they are incurred can be
influenced by careful management of the distribution network that is used. Costs will
increase in line with the overall complexity of the distribution network required to
retail the wine.
A further conclusion is that any wine producer will need to perform a careful analysis
of the countries, market segments and price bands in which he wants to compete
prior to producing wine. Production decisions impacting on the cost of production
can only be effectively taken if this information is freely available. The following
chapter of this paper will examine the cost decisions in more detail and allow for a
comparison between the revenue generated and the costs incurred.
Page 29
The Cost Breakeven Point of Wine
4.
UNDERSTANDING PRODUCT COSTING FOR WINE
The previous chapter has highlighted what portion of the retail price of a bottle of
wine accrues to the producer. It also explained certain of the other key factors that
have a significant influence on retail prices in general. With these answers, the
question that is raised is to what extent a wine producer can affect the cost of
production to ensure that the overall cost is within the return that will be generated.
This research has shown that there is very little information published on the costs of
making wine. This is partly due to the lack of any standards used for maintaining
accounting and cost information, but also due to the underlying fear of producers that
disclosing costs will impact on the competitiveness of the cellar. Because of this lack
of published information, this chapter will provide insight into which costs are incurred
by the producer in making and bottling wine. It will also provide a simple framework
that can be implemented by a wine producer to determine the typical cost of a bottle
of wine. In order to determine overall profitability, these costs will also be compared
to the revenue earned for the producer.
4.1
Accounting for Wine Costs
When considering wine production from an accounting perspective, wineries use
accounting information in the same way as any other business in any other industry,
with the primary focus being to determine the overall financial performance of the
business. However, an important differentiation is that a modern winery should also
be able to use its accounting systems to determine the costs of the various stages of
wine production (Sulley, Lease & Dal Poggetto, 2004). This concept of “product
costing” has a significant impact on the valuation of inventory, as well as the overall
cost of goods sold. It therefore has a direct influence on the accuracy of financial
reporting. More importantly, product costing has a direct effect on management
decisions regarding pricing, inventory levels and general profitability.
Understanding cost centres
To understand wine product costing, the wine production process needs to be
analysed and broken down into a series of steps that are logical and to which costs
that are incurred can be directly or indirectly associated. When considering the
overall production of wine at a macro level, the process could be subdivided into the
following main activities:
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The Cost Breakeven Point of Wine
•
Grape production, which explains all the viticultural activities that take place,
including the establishment of vineyards, all the activities through the various
seasons such as pruning, canopy and pest control, up to the point of harvest.
•
Primary production, or bulk wine making, which addresses all the vinicultural
activities that take place in the cellar from the point of receiving the grapes at
the crusher, through fermentation, up to the point where the bulk wine is
available in storage tanks.
•
Secondary production, that accounts for the further vinicultural activities that
take place in order to prepare the wine in a format which is suitable for selling
to the consumer. These would include extended barrel ageing for premium
quality wines, as well as all the packaging and bottling activities that take
place in the cellar.
The degree of granularity that needs to be achieved when defining these steps will
be determined by the level of cost analysis and subsequent cost control that the
winery management team would like to achieve. The overall objective is to identify
and segregate costs that can be managed separately. Once these activities have
been identified, they become the basis for defining cost centres (an accounting term
used to explain how costs associated with the specific activity are accumulated). The
best recommendation to determine what cost centres are required is “Thinking like a
winemaker” (Sulley, Lease & Dal Poggetto, 2004).
Informal discussions held with financial managers and accounting staff from a
number of different wineries have demonstrated that there are no industry standards
that are adhered to when determining which cost centres need to be created. This is
also supported by the SAWIS report on Information Technology published in 2004
(2004), which clearly shows that few accounting systems used within the industry are
actually used for cellar management and product costing. Most of these kinds of
activities are being performed on spreadsheets outside of core financial systems.
There are a number of different cost elements that impact on the overall cost of wine.
While a jumbled list of these elements could be prepared, structure needs to be
provided to the costs in order for benchmarking to be done. In order to work towards
a common breakeven cost point for purposes of this paper, a suggested process flow
and distinct activities have been created. Elements from the study performed by
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The Cost Breakeven Point of Wine
Perrin and Lockshin in their article in the Wine Industry Journal (2001) have also
been included. The key elements of the proposed value chain are:
•
Grape Production, which covers all the processes in place to produce and
deliver grapes to the cellar.
•
Primary Wine Production, which addresses the processes used to convert
grapes into bulk wine in a tank form from which an initial sales transaction
could take place.
•
Secondary Wine Production, which addresses the secondary winemaking
processes and enables wine to be sold in forms other than bulk wine. In
simplistic terms, these include wood ageing, cellaring and packaging /
bottling.
•
Marketing, Sales and Distribution and other Administrative and Overhead
costs which address the processes to sell the bottled wine, and to run an
efficient business operation around the production facilities.
This process flow, from the point of origination to the point of having packaged
product available for sale, is set out schematically in the diagram on the following
page. More details on each stage are set out in the remaining sections of this
chapter.
Understanding direct costs, indirect costs and cost drivers
Within each of the sections explaining costs, references will be made to direct costs,
indirect costs and cost drivers. Davidson (2003) explains these concepts as follows:
•
Direct costs are those incurred in direct relation to the activity that is being
performed e.g. pesticide costs can be directly attributed to the vineyard based
on the expenses incurred from a spraying program. These costs can be
subdivided to a level where costs can be directly associated to a block of
vines within the vineyard if this level of granularity is needed. These direct
costs are generally also related to specific cash costs that are incurred on a
day-to-day basis.
•
Indirect costs, in contrast, are those that cannot be directly attributed to the
specific activity. These costs are generally accumulated and allocated to the
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The Cost Breakeven Point of Wine
activity in a predefined ratio e.g. interest charges will be incurred by the
winery as a whole and may then be allocated to specific stages of the process
based on the total capital amounts invested.
•
Cost drivers are the key measures within each activity that play a direct role in
determining the unit costs that are allocated to a specific activity e.g. the
extraction of wine per ton of grapes will have a direct impact on the cost per
litre of wine produced.
Analysing Wine Production Costs
Grape Production
Grape Purchase
Bulk Wine
Purchase
Wine Making
(conversion of grapes to bulk wine)
Bulk Wine Available for Sale
Wood Ageing
Bottling and
Packaging
Packaged Wine Available for Sale
4.2
The Cost of Grapes
Grapes form the primary raw material for wine production. While all costs relating to
viticultural processes are accounted for within the category of grape production,
significant differences in costs are identified when considering that grapes are
sourced in three different methods in the South African wine industry:
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The Cost Breakeven Point of Wine
•
Wineries that are registered as estates own their vineyards. A standard
regulation is that all the grapes that go into the “Estate” branded wine must be
sourced from these vineyards. A number of the estates also have separate
labels that use purchased grapes in the same way that private cellars and
producing wholesalers do.
•
Private cellars and producing wholesalers, generally purchase grapes from
grape producers. These transactions take place ‘at arms length’. Market
forces such as supply and demand and the quality of the grapes have a direct
impact on the cost per ton that is incurred.
•
Producer Cellars, or the traditional co-operative cellars, purchase grapes from
their members. While standard prices are agreed before every harvest, the
overall price per ton of grapes is finally determined by the overall profitability
of the cellar for a given harvest season. The major purpose of the producer
cellar is to return this profit to its members in the ratio of tons delivered to the
cellar. This distribution is made in the form of the final price per ton that the
member receives for his grapes.
Costs relating to owned vineyards
In order to determine the costs of grapes related to owned vineyards, the total input
costs need to be determined. In a 2005 study conducted by Vinpro (Van Wyk, 2005)
on the production costs for wine grapes, the overall cost per hectare was determined
as being an average amount of R20 643. This amount was made up of two
components, the first being direct cash expenses of R15 010 comprising the
following categories of costs:
•
Direct Costs: fertilizers, pest and herbicide control, and repairs and binding
material.
•
Labour: the permanent work force, seasonal labour for pruning and
harvesting, and the cost of supervision.
•
Mechanisation Costs: fuel, repairs, spare parts, and transport hired in for
seasonal peaks.
•
Maintenance Costs: expenses on the fixed infrastructure that is created on
the farm.
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The Cost Breakeven Point of Wine
•
General Expenses: water and electricity, rates and payroll taxes, and
administrative expenses.
The second component was a provision for renewal of R5 633 per hectare which is
calculated to allow for ongoing, sustainable farming. While this does not represent
cash expenditure in a given year, this long-term savings amount includes provisions
for the replacement and renewal of vines, upgrades to the farm infrastructure, as well
as replacement of loose assets.
Once the cost per hectare is determined, the next logical step is to calculate what the
cost per ton of grapes harvested will be. Vinpro (2005) compares the cost of
R20,643 per hectare to the average yield per hectare across the industry as a whole.
This yield amounts to 13.79 tons per hectare based on Vinpro statistics. The
resulting calculation shows that the average cost for grapes is R1 497 per ton.
Stellenbosch
Paarl
Olifantsrivier
Worcester
Breedekloof
Klein Karoo
Robertson
Oranjerivier
Average
Table 9 : Production Costs for Wine Grapes (2005)
Direct Costs
3 183
1 928
2 056
2 893
3 027
2 058
2 381
1 439
2 426
Labour
9 231
7 350
4 288
6 224
5 712
5 157
5 748
5 410
6 590
Mechanisation
3 196
2 392
3 118
3 235
2 884
3 007
2 414
2 966
2 852
Fixed Improvements
941
772
761
747
708
533
666
443
738
General Expenses
2 657
2 073
3 084
2 671
1 760
3 024
2 314
2 121
2 403
Provision for Renewal
5 746
4 881
6 492
5 722
5 216
5 740
5 749
6 128
5 633
Total Expenses
24 954
19 396
19 799
21 492
19 307
19 519
19 272
18 507
20 643
Average Area Planted
109.01
87.64
42.21
72.95
87.64
25.31
64.36
17.01
72.66
6.88
9.11
20.72
13.78
15.41
16.18
13.89
26.63
13.79
3 627
2 129
956
1 560
1 253
1 206
1 387
695
1 497
Average Yield
(tons per hectare)
Total Expenditure
(Rand per Ton)
Source : Vinpro
This cost is the average for the industry as a whole. The table below extracted from
the Vinpro study clearly reflects that there are significant variations in these costs
when looking at different grape growing regions, with the most significant cost
contributors explaining the variations being labour, direct costs and the differences in
yield per hectare. These have a significant influence on the cost per ton.
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The Cost Breakeven Point of Wine
While the average cost is R1,497 per ton, the range of costs varies from a low end of
R695 per ton from the Orange River district, to a high end of R3,627 per ton from
Stellenbosch, The significance of this range becomes even more apparent when
converting this value to a cost per 750ml bottle, with the range being from 69.5 cents
to 362.7 cents per bottle using an average extraction of 750 litres of wine per ton of
grapes. This extraction can be considered to be high and includes all grape varieties
and quality segments. Wine producers focusing on premium segment wines
recommend that this average should be closer to 650 litres per ton.
The first cost driver that is highlighted when determining the cost per bottle is the cost
per hectare of grapes. While it can be argued that these input costs are very similar
across all vineyards, scientific farming techniques would require that these costs be
recorded and managed at a vineyard level to allow for sound cost management
decisions.
There are four important factors to note within these cost categories that are not
taken into account in this calculation.
•
No provision is made for the cost of land. While this is correct in determining
the minimum costs related directly to wine, consideration must be given to the
fact that unless the farming land was obtained without cost e.g. inheritance,
the cost of the land would need to be factored into the overall cost structure
as a return on investment would be required, or interest charges would be
incurred to finance the purchase.
•
No interest costs are factored into the overall costing. Even if the cost of land
is not taken into account, the establishment costs of the vineyard will entail a
significant cash outlay before any return on these costs can be realized.
Vinpro (Van Wyk, 2005) determined that the average establishment costs of
vineyards amount to approximately R65 000 per hectare. If interest is
calculated at 8% per year, this requires that an additional R5,200 of interest
costs should be factored into the overall cost model.
•
There is no profit or remuneration factor that has been included to remunerate
the owner of the property. According to the SAWIS industry statistics
released in 2006, there were a total of 4 360 primary wine producers or grape
farmers in South Africa, who deliver grapes to 581 wine producing cooperatives, private wine cellars or producing wholesalers. In the case of an
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The Cost Breakeven Point of Wine
estate or private cellar with its own vineyards, this remuneration would need
to be factored into the required profitability of the cellar as a whole. However,
as the majority of grape producers do not make their own wine, this
remuneration factor also needs to be considered. In a presentation done by
Vinpro to the Cape Wine Producers in January 2006 (Van Wyk, 2006), the
average living expenditure required by a typical grape farmer amounts to
approximately R20,000 per month, or R240,000 per year. When converted to
an amount per hectare, additional costs of between R2,220 and R14,000 per
hectare need to be added, depending on the average size of the farm.
•
Discussions with Vinpro as well as Stellenbosch and Paarl grape producers
have indicated that the costs illustrated here may be conservative, as they are
based largely on the bulk producing regions. Their experience demonstrates
that establishment costs can amount to as much as R135,000 per hectare for
quality vineyards before any return will be realised, and that the annual cost
of R20,643 should only be considered as a baseline. Premium quality
vineyards’ operating costs are often significantly higher.
The second cost driver that has a significant impact on the cost of wine is the yield
per hectare. This is already clearly illustrated in the table on page 35 which shows
the cost per ton of grapes across the different grape growing regions. While this is
one differentiator, mention must be made that yields between white and red grape
varieties can also differ significantly and should therefore also be taken into
consideration. The industry averages for yields per ton are 18.1 tons per hectare for
white grapes and 8.6 tons per hectare for red grapes (PricewaterhouseCoopers
2004). The table below indicates how the difference in yields per hectare between
red and white grapes, as well as the wine extraction differences between red and
white wine, have a significant impact on the overall input cost per litre, regardless of
the costs per hectare. Grape costs for wine made from red grapes is calculated as
332.9 cents per litre, compared to white wine at 148.4 cents per litre.
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The Cost Breakeven Point of Wine
Table 10 : Converting Grape Costs to Litre Equivalent
Cost per Hectare
(Rand)
Yield per Hectare
(tons)
Cost per Ton
(Rand)
Extraction per Ton
(litres)
Cost per Litre
(cents)
Red Grapes
20,643
White Grapes
20,643
Average
20,643
8.6
18.1
13.8
2 400
1 140
1 497
721
768
750
332.9
148.4
199.6
If the interest costs at R5,200 per hectare that are not included in the standard cost
of R20,643 per hectare are also taken into account, the cost per litre increases to
416.8 and 185.9 cents for red and white wine respectively, with an industry average
of 249.9 cents.
Costs related to Purchased Grapes
As explained in the introduction to this section, differentiation needs to be made
when considering grape purchases for Private Producers and Producing Wholesalers
as compared to grapes purchased by Producer Cellars from their members.
Based on SAWIS statistics for 2005 (SAWIS, 2005), the average price for grapes
purchased, excluding producer cellars, was R3 593 per ton, or R3 864 and R3 103
per ton for red and white grapes respectively. What is important to note when
considering these prices is that all the previous factors of land ownership, interest
and remuneration are already factored into the prices agreed between the farmer and
the wine producer and therefore do not have to be considered as part of the cost
decision.
When using the same formula as described in the previous section for converting
these amounts to cents per litre, the result is 535.9 and 404.0 cents for red and white
wine respectively, as is depicted in the table below. These amounts increase to
545.1 and 459.8 cents per litre respectively when only considering the “Big 8’
varietals, which make up 85% of the volume of grapes purchased. In all of these
examples, it is clear that the grape producer receives an acceptable return on the
typical costs that are incurred to produce these grapes when comparing these prices
to the input costs that were explained in the previous section.
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The Cost Breakeven Point of Wine
Table 11 : Grape Costs from Private and Non-Producer Cellars – 2005
Cost per Ton
(Rand)
Extraction per Ton
(litres)
Cost per Litre
(cents)
Red Grapes
All
“Big 5”
Varietals
3 864
3 930
White Grapes
All
“Big 3”
Varietals
3 103
3 531
Average
All
“Big 8”
Varietals
3 593
3 802
721
721
768
768
750
750
535.9
545.1
404.0
459.8
479.1
506.9
These costs need to be compared to the revenue realized by members of producer
cellars (the traditional co-operative cellars), where the cost per ton of grapes is
largely determined by the overall profitability of the cellar for a given harvest season.
The SAWIS statistics on grape prices for 2005 for producer cellars (first estimates)
was again used as the basis for this determination (SAWIS, 2005). In significant
contrast to the grape prices illustrated above, the average rand per ton realized by
members of producer cellars amounts to R1 307 per ton, or R1 752 and R1 156 for
red and white varietals respectively. Using the same extraction rates, the costs for
red and white wine are then calculated as 243.0 and 150.5 cents respectively.
Table 12 : Grape Costs from Producer Cellars - 2005
Cost per Ton
(Rand)
Extraction per Ton
(litres)
Cost per Litre
(cents)
Red Grapes
All
“Big 5”
Varietals
1 752
1 896
White Grapes
All
“Big 3”
Varietals
1 156
1 399
Average
All
“Big 8”
Varietals
1 307
1 595
721
721
768
768
750
750
243.0
263.0
150.5
182.2
174.3
212.7
This comparison of the primary input costs of grapes illustrates why producer cellars
are able to produce wine at a substantially cheaper cost per litre. However, when
comparing the revenue earned per ton of grapes compared to the average costs per
ton that were determined earlier in this section, concern must be expressed as to the
long-term sustainability of farmers that deliver primarily to the producer cellars.
Input cost per ton
Table 13 : Producer Profitability
Red Grapes
White
Grapes
2 400
1 140
(excluding interest and profit)
Return per ton
Net income per ton
(Rand)
Average
1 497
1 752
1 156
1 307
-648
16
-190
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The Cost Breakeven Point of Wine
These prices practically illustrate one of the harsh realities of the current global
surplus. A large percentage of the wine produced by the producer cellars is typically
marketed within the commercial and semi-premium segments. The grape and wine
surplus has its maximum effect of competition and prices in these segments and is
generally driving retail prices down. The private cellars and producing wholesalers
are forced to carry these reduced prices themselves, which is then reflected in the
profitability of the cellar. In the case of the producer cellars, the reduced prices and
resulting reduction in profitability is manifested in lower prices that are paid to
members for their grapes.
4.3
Costs of Primary Production
The next phase of the production process is to convert grapes brought into the cellar
into wine in a bulk or tank format. These primary production costs are therefore
normally associated with crushing, fermentation and immediate storage of the bulk
wine. While each of these activities could be recorded as a separate cost centre in a
winery to allow for improved cost and yield control, all these costs are accumulated
for purposes of this paper.
A specific distinction is made in most wineries between primary or bulk wine
production and secondary or bottled wine production due to the large volumes of
South African wine that are sold in bulk. Industry averages on the extent of bulk wine
sales from Producer Cellars are depicted on the graph below, extracted from the
PricewaterhouseCoopers benchmarking survey (2005).
Composition of Producer Cellar Sales : 2004
Red: Bulk, 19%
Red: Bottled, 14%
White; Bottled, 26%
White: Bulk, 41%
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The Cost Breakeven Point of Wine
Where no specific sales contracts are closed for the sale of bottled wine, the
management team has the alternative of sourcing bulk contracts, where wine is sold
by the litre without taking ageing and bottling costs into account. Transport costs
and import duties associated with bulk wine are significantly lower than bottled wine
(Boothman, 2005 and Cran, 2006), which result in this often being a cheaper
distribution chain. There are also an increasing number of retailers and supermarket
chains in export markets such as the United Kingdom that are creating their own
brands and use blends of imported, bulk wines to produce these brands (Die Burger,
3 April 2006).
The PricewaterhouseCoopers benchmarking survey for producer cellars (2005)
illustrates that the average primary production cost for this category of producers
amounts to R553 per ton. This includes overhead costs which can be attributed
directly to this part of the production process. The four largest cost elements making
up more than 50% of this total are labour (20%), chemicals and filtration materials
(13%), depreciation representing a provision for replacement (13%) and finance and
interest charges (11%).
While the average price amounts to R553 per ton, the overall tonnage processed by
the cellar is a significant driver in determining the cost per ton. It must be noted that
this amount is based on producer cellar statistics, as these are the only published
values that could be found. There are currently 65 registered producer cellars
according to SAWIS statistics (2006), which typically account for more than 75% of
the total volume of grapes crushed. The size of these production facilities will
therefore tend to be far larger than those that will be used by estates or private
cellars. As such, certain economies of scale will be achieved that will result in the
R553 per ton that is reported here being at the lower end of the cost range. The
PricewaterhouseCoopers survey report (2005) also provides an analysis by relative
cellar size which illustrates how the economies of scale can have a significant overall
saving on the cost per litre.
Table 14 : Primary Production Cost Variations by Producer Size
Costs / ton
(Rand)
Extraction
(Litres)
Cost per litre
(cents)
< 10,000
644
Tonnage Processed
10 000 – 25 000
> 25,000
Industry
657
434
553
756
738
782
760
85.2
89.0
55.5
72.8
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The Cost Breakeven Point of Wine
The Vinpro analysis of grape production costs (2005) in the various regions showed
significant variations in total costs between the different grape growing regions. In a
similar theme, the PricewaterhouseCoopers’ benchmarking survey (2005) also
shows significant variations in average primary production costs between the various
producer cellar regions. In analyzing the detail statistics, these differences can be
attributed to the huge size of the operations in the bulk producing regions, once again
highlighting the economies of scale that can be realized.
Table 15 : Primary Production Cost Variations by Region
Costs / ton
(Rand)
Extraction
(Litres)
Cost per litre
(cents)
Klein
Karoo
Northern
Regions
Robertson
358
946
775
780
85.2
45.9
660
Western
Cape
Worcester
Industry
839
433
553
666
758
779
760
142.0
110.7
55.6
72.8
For purposes of this paper, discussions were held with staff from various cellars and
the survey team from PricewaterhouseCoopers to determine what level of production
could be used as a standard to take into account that an illustrative primary
production cost per litre needs to be determined. As the Western Cape producer
cellars are among the smaller of the producer cellars and have similar input costs as
most Western Cape wineries would have, this cost of 110.7 cents per litre will be
used for calculations in this section. This cost has also been compared to the WOSA
study on the cost competitiveness of the South African wine industry performed by
Wineprophet (2004), where the primary production cost range was determined to be
between 50 and 250 cents per litre.
4.4
Costs incurred during Secondary Production
Secondary production, or bottled wine production, addresses all the processes that
are followed to repackage bulk wine into a format that can be sold directly to
consumers. While there are a number of micro stages that can be considered, the
two dominant secondary processes within the South African wine industry are wood
ageing and bottling of wine:
•
Wood ageing refers to the processes associated with barrel ageing of wines.
While this is generally only done for premium red wines and certain premium
white wines, the overall cost impact of this activity is significant in relation to
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The Cost Breakeven Point of Wine
the overall cost of wine. These costs should therefore be considered
separately from other costs.
•
Bottling and packaging costs refer to the processes where the bulk wine is
packaged in forms suitable for consumer distribution and retail. For practical
considerations, costs associated with bottling will form the foundation of the
costing model for this paper. Large volumes of South African wine are also
sold in alternative and cheaper packaging forms such as ‘bag-in-a-box’ or
‘tetrapak’ cartons, both of which are gaining in popularity for commercial and
semi-premium wines sold on the domestic market.
Wood Ageing
Wood ageing explains the process by which wine will be pumped into barrels or other
containers which will allow wood contact and left to age for an extended period of
time. A known industry fact is that wood ageing contributes significantly to the overall
cost of wine and therefore needs to be carefully evaluated. The cost drivers which
need to be examined are the cost of the wood that is used and the cost that is
associated with the time that the wine spends in the barrel rather than being bottled
and sold directly.
The cost of incorporating wood ageing is best illustrated through an example using
data provided by one of the cellars interviewed. In this example, wine will be aged in
224-litre barrels.
The average cost per barrel delivered to wineries amounts to R6,000.
Barrels are commonly used for three to four years for quality wine making
purposes, after which they are only used for storage purposes. The common
allocation of barrel costs to wine must therefore take this period into account.
The technique favoured by cellars is to allocate costs per year, on a 3 : 2 : 1
basis, with 50% of the cost being allocated to wine in the first year, 33% in the
second and 17% in the last year of primary use. The cost of using the barrel
can now easily be expressed in a usage cost per litre.
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The Cost Breakeven Point of Wine
1st Fill
6000
2nd Fill
3000
3rd Fill
1000
Value at End of Year
3000
1000
0
Value utilized for the year
3000
2000
1000
Volume per barrel (Litres)
224
224
224
1339.3
892.9
446.4
Cost Price per Barrel /
Value at Beginning of Year
(Rand)
Value of usage per litre
(cents per litre)
The next consideration is to determine what mix of barrels is used in the
production of specific wines. For example, the winemaker may use 40% new
or 1st fill, 40% 2nd fill and 20% 3rd fill barrels for 18 months for a premium
quality Cabernet Sauvignon, compared to a mix of 50% 1st fill and 50% 3rd fill
barrels for 6 months for a premium Chardonnay. If this is converted into a
value for the wine, the following results are achieved.
Value of use per litre
Barrel Usage per Varietal
- Cabernet Sauvignon
- Chardonnay
Value of Barrel Usage
- Cabernet Sauvignon
- Chardonnay
(cents per litre)
1st Fill
1339.3
2nd Fill
892.9
3rd Fill
446.4
40%
50%
40%
-
20%
50%
100%
100%
535.7
669.7
357.2
-
89.3
223.2
982.2
892.9
Total
The final factor to take into account when considering wood ageing is that
there is a barrel investment that is made that will only be available for
distribution and sale at a future date. As done with vineyard establishment
costs, the interest charge associated with this period needs to be specifically
calculated. A wine which will have a longer wood ageing should therefore
have a higher interest charge associated with the wine. If for example we
consider the above and assume that the Cabernet Sauvignon will be barrel
aged for 18 months before bottling, compared to the Chardonnay that will only
have 6 months in barrels, the following calculation on interest charges needs
to be made.
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The Cost Breakeven Point of Wine
Cabernet
Sauvignon
Chardonnay
Period of
Barrel
Ageing
(months)
Interest
Rate
Barrel
Costs
Interest
18
8%
982.2
117.9
1100.1
6
8%
892.9
35.7
928.6
(Cents per
litre)
Total Cost
(Cents per
litre)
The costs of R11.00 and R9.29 returned by this example illustrate the relative cost
component that barrel ageing has on the overall cost of premium wine. Regardless
of the expense, barrels remain the most popular wood ageing mechanism for
premium wines. The use of cheaper wood ageing alternatives such as staves and
wood chips can also be considered by winemakers, but are more often used on
wines that are destined for distribution as semi-premium or value-for-money wines.
Bottling and Packaging
Packaging is an essential part of the product, as the bottle and its packaging need to
appeal to the consumer. While all bottles tend to look the same, a well designed
label can be the final influence that will result in the bottle being selected from the
supermarket shelf (Young, 2005). When evaluating the costs associated with bottling
and packaging, they also need to be segmented between the costs associated with
the bottling process i.e. the costs relating to getting the wine into the bottle, and the
costs associated with the packaging material or dry goods.
Direct costs relating to the bottling process, excluding the dry goods, are largely
negligible and relate mainly to the costs of filtration and the labour costs that are
incurred during bottling. An important overhead cost that should however be factored
into the cost calculation is the bottling losses that occur during this process. Due to
the nature of the wine making process, there are sediment deposits that make up the
overall volume of a tank or barrel of wine. These solids settle during the wine making
process and are not extracted from the tank during bottling, thereby making it
impossible for the full contents of the tank to be bottled. This implies that the total
cost that has been incurred up until this point in the production process now needs to
be reallocated across the smaller volume of wine actually being bottled.
For example: a bulk tank containing 10,000 litres of wine at a total cost of R50,000 is
bottled, resulting in 9,600 litres of bottled wine. While the bulk wine has a cost of R5
per litre, the bottled wine has a cost, excluding packaging material, of R5.21 per litre
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The Cost Breakeven Point of Wine
(R50,000 ÷ 9 600 litres). This increase in cost is a quantified example of the bottling
loss.
The quantification of the bottling loss is largely dependent on the efficiency of the
overall cellar operations and is therefore very difficult to quantify in real terms. This
explains the very wide range of 87 – 435 cents per litre that is used in the WOSA
analysis (Wineprophet, 2004). Discussions with various wine producers indicate that
the bottling loss for smaller production cellars could be as high as 4% - 6% of the
bulk volume. A 4% bottling loss will result in the cost per litre increasing by a factor
of approximately 4.2%. This statistic is contested by larger, commercial bottling
operations that indicate that the average annual loss across a range of volumes is
approximately 1.2%. It remains essential that this cost is quantified and factored into
the cost of production.
Dry goods or packaging materials are another significant component of the total cost
(Boothman, p.22). For purposes of this example, focus will only be given to bottling
and packaging costs related to the use of standard 750 ml bottles. The following are
some of the most important direct costs that are taken into account, together with an
indicative amount based on quotations received from vendors:
Cents per Bottle
•
Bottle Cost: The cost of the bottle that is purchased. The cost per
249.0
bottle can vary significantly based on the style and quality of the
bottle selected, as well as on the volume of bottles purchased from
the supplier. Unlike European markets, there are only a few
vendors that can provide bottles in the South African market, which
does contribute to higher costs.
•
Label Cost: All wine that is certified has to be labelled in terms of
122.0
the relevant regulations and generally consists of a front and back
label. The cost per label can also vary significantly, based on the
quality and design of the label, as well as the volume of labels that
are printed.
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The Cost Breakeven Point of Wine
Cents per Bottle
•
Closures: Closures that are used for premium wines are
188.0
traditionally still the cork, although stelvin (‘screwtop’) closures are
gaining in popularity across a broad range of wines. Cheaper cork
or synthetic closures are widely used for commercial and semipremium wines.
•
Capsules: Capsules are used to finish the presentation of the bottle
35.3
by covering the cork. While cheaper plastic capsules can be used
for commercial and semi-premium wines, producers often use a
more expensive capsule to enhance the look of the bottle.
•
Carton Packaging: All wine is packaged in cartons to facilitate
36.3
storage, handling and distribution. Packaging normally consists of
the outer carton, as well as inner partitions to prevent abrasion of
the bottles and labels inside the carton.
•
4.5
Total Dry Goods Costs (cents per bottle)
590.6
The Impact of Overhead Costs
Overhead costs describe the costs that are incurred within the winery operations that
cannot be attributed to a specific activity within the production process. These costs
will normally be incurred at fixed levels regardless of the total volume of wine that is
produced in a given year. These costs can normally be associated with two main
areas of activity: advertising, marketing and distribution costs and the administrative
and infrastructure overheads.
Marketing, advertising and distribution
Infrastructure to advertise and market the wine that is produced is normally created
within the winery based on the long-term average volumes of wine that are expected
to be made. This infrastructure will consist of people tasked with the sales activities,
as well as the logistic network, brand advertising and other related marketing
activities. Once this infrastructure is created, these costs are generally repetitive in
nature. Not incurring these expenses will probably result in the wine producer losing
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The Cost Breakeven Point of Wine
market share and sales opportunities. Because of this, the decision as to what the
annual total investment in marketing and advertising will be is a strategic decision
that the winery management team needs to take. The Deloitte 2004 Benchmarking
Survey (2005) of the wine industry reported the sales, advertising and marketing
expenses to be as much as 13.9% of revenue for smaller cellars, going down to 7%
for larger cellars as better economies of scale are achieved and the advertising costs
are spread over a larger volume of wine.
Using the Deloitte statistics, this percentage of marketing spend will result in a typical
cost of R4.32 per bottle for a smaller cellar (revenue of less than R25 million),
compared to R1.34 per bottle for a larger cellar (revenue of up to R90 million). This
amount is comparable to the PricewaterhouseCoopers Producer Cellar (2005) survey
which shows a total spend of R1.05 per bottle for the smaller producer cellars with a
capacity of less than 10,000 tons. However, the true economies of scale that can be
achieved by spreading advertising and marketing expenditure of significantly higher
volumes is realized when compared to the cost of less than 45 cents per bottle that is
reported for large cellars.
Administrative and other overheads
The administrative and other overhead costs are the final ‘bucket’ in the winery into
which all other expenses that are incurred which cannot be related to a specific
activity within the operational processes, are allocated. A modern winery that applies
sound financial management techniques will focus on ensuring that these costs are
minimized by effectively identifying all overhead costs and asking the difficult
questions as to what value each of the costs actually contributes to the production
cycle.
Typical costs that remain in the overhead category include financial, accounting,
legal and professional costs, general administrative expenses, and any occupancy
expenses such as rents paid or general maintenance costs. As with marketing
expenses, these costs are normally fixed in relation to the overall size of the winery,
and will only change significantly if the overall capacity of the winery were to change.
There are therefore also significant economies of scale that can be achieved if the
same costs are spread over a larger volume of wine.
In quantifying these amounts, the Deloitte survey (2005) shows relative overhead
cost percentages of 24.8% of revenue for smaller cellars, going down to 15.0% for
Page 48
The Cost Breakeven Point of Wine
larger cellars. This converts to a range of R7.71 per bottle for smaller cellars, going
down to R2.79 per bottle for larger cellars.
4.6
Bringing it all together
This section has provided a South African wine producer with the information that
needs to be used when determining the cost of each of the stages of a typical wine
production process. To demonstrate the use of this framework, a typical cost per
bottle is illustrated if these costs are brought together in one calculation.
For purposes of this example, assume that similar quantities of three wines - a barrelaged red wine, a barrel aged white wine, and a tank fermented white wine - are being
made by a large private winery using grapes purchased specifically for these wines.
All three wines will be bottled in the same packaging.
Table 17 : Illustrative Costs of Producing a Bottle of Wine
White Wine
Red Wine
Tank
Aged
Aged
Grape costs
404.0
404.0
535.9
Primary production
110.7
110.7
110.7
Bulk Wine
514.7
646.9
514.7
(cents per litre)
Secondary production : wood ageing
Costs before bottling
514.7
928.6
1 443.3
1 100.1
1 747.0
Secondary production : bottling loss (2%)
Costs before dry goods
10.5
393.9
29.5
1 104.6
35.6
1 337.0
Packaging costs
Costs before overheads
590.6
984.5
590.6
1 695.2
590.6
1 927.6
Overheads
- Advertising and Marketing
- Administrative expenses
134.0
279.0
134.0
279.0
134.0
279.0
1 397.5
2 108.2
2 340.6
(cents per litre)
(cents per 750 ml bottle)
(cents per 750ml bottle)
Cost per Bottle
This cost per bottle now needs to be compared to the typical revenue earned by the
producer that was calculated in the previous chapter (refer to page 29). Domestic
sales returned average amounts of R9.99 and R14.87 for semi-premium white and
red wines, and an average of R28.19 for premium wines. The conclusion that can
immediately be made is that the profitability of this winery will be determined by what
segment of the market the wines resulting from the illustrated production process will
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The Cost Breakeven Point of Wine
be sold in, as this segment will have a major impact on the average retail price that
can be achieved. If this production process results in premium wines being
produced, an acceptable profit margin should be achieved on all three these
products. However, in the event of any of these three wines not being sold in this
segment, this product will be sold at a significant loss which will have an impact on
the overall profitability of the winery.
4.7
Can a Cheaper Wine be Produced?
A further question to be considered with regard to costs is, to what extent costs could
potentially be reduced if the wine producer knows that the wine will not be able to be
sold in the premium segments. This is best answered by using a comparative
example. Data used previously for red wine production has been updated in the
following table to illustrate how typical cost savings can be achieved in order to
reduce overall costs.
Table 18 : Illustrative Cost Savings from Wine Production
Red Wine
Saving
Original
Adapted
Grape costs
535.9
332.9
203.0
Primary production
110.7
110.7
0.0
Bulk Wine
646.9
443.6
203.3
(cents per litre)
Secondary production : wood ageing
Costs before bottling
1 100.1
1 747.0
330.0
773.6
770.1
973.4
Secondary production : bottling loss
Costs before dry goods
35.6
1 337.0
15.8
592.0
19.8
745.0
Packaging costs
Costs before overheads
590.6
1 927.6
383.0
975.0
207.6
952.6
134.0
279.0
134.0
279.0
0.0
0.0
2 340.6
1 388.0
952.6
(cents per litre)
(cents per 750 ml bottle)
(cents per 750ml bottle)
Overheads
- Advertising and Marketing
- Administrative expenses
Cost per Bottle
The possible savings amount to R9.52 per bottle, which would allow for some level of
profitability to be achieved. Savings measures that have been introduced in this
example include:
Page 50
The Cost Breakeven Point of Wine
•
If production costs of grapes cannot be reduced, an alternative supply of
grapes should be sourced. With the general oversupply of grapes currently
available, and the poor prices that producer cellar members are receiving,
grapes are easy to source at reasonable prices. For purposes of this
example, typical costs relating to own vineyard costs have been applied.
•
Wood ageing is achieved through a combination of older barrels, with larger
volumes of wine being exposed to stave ageing in the stainless steel storage
tanks. While this will not provide the same concentration of wood flavours,
this wine will typically be sold as semi-premium, where wines that are easier
drinking and more fruit driven are more readily sold.
•
A cheaper bottle, closure and capsule are used. The overall product is also
then marketed as a semi-premium wine. Alternate packaging forms could
also be considered.
This example also demonstrates a number of key aspects of cellar management that
must be highlighted:
•
The winemaker needs to have a clear understanding of the quality potential of
the wine that can be made from the grapes which he has available in a given
harvest season, as well as what the expected retail price range will be in
which the wine will eventually be sold. The decisions that need to be taken to
apply a more cost-effective production process need to be taken before the
harvest begins if they are to be effective.
•
It is essential that management has a clear and accurate picture of both the
total and unit costs associated with each activity within the winery, and to
what extent the drivers that result in these costs can be managed i.e. what
alternatives are available for each activity, and at what cost.
•
The winemaking processes applied within the cellar infrastructure must be
adaptable to take into account the quality of wine which needs to be
produced. Without this flexibility, the total cost of the wine produced will not
allow for acceptable levels of profitability when taking the revenue potential of
the wine into account.
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The Cost Breakeven Point of Wine
•
If operating costs cannot be managed sufficiently, emphasis will then need to
be placed on managing the total overhead costs, by reducing the overall
supporting infrastructure that was previously created, as these costs generally
make up a substantial part of the overall cost.
While this would appear to be taking sound business processes and applying them in
reverse order, the reality of the international wine market is that the global surplus of
wine and the influence of fixed price points within the supermarket channel, will keep
the retail prices of wine low for the foreseeable future. In order for wine producers to
survive, more focus will need to be placed on cost management to ensure that the
winery operates within the constraints of the total revenue that can be earned from
the wine.
4.8
So what should wine cost?
The concepts, returns and costs that have been discussed in this paper can be
brought together in a consolidated calculation to illustrate how the minimum retail
price points of wine should be determined in order to cover the costs that are
incurred. Table 19 below has been prepared to demonstrate the typical production
and retailing costs of a white and red single varietal wine, excluding any profit
margins accruing to the producer. These costs, all of which can be referenced to the
examples found in this paper, are further compared between a typical commercial or
semi-premium wine made by a producer cellar and a premium wine produced by a
private cellar in order to illustrate the broad range of cost breakeven points that need
to identified and managed.
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The Cost Breakeven Point of Wine
Table 19 : Illustrative Calculation of Selling Prices (excluding margin)
Grape Costs
Primary Production
Bulk Wine
Producer Cellar
White
Red
182.2
72.8
255.0
263.0
72.8
335.8
Secondary production : Wood ageing
Costs before bottling
255.0
Secondary production : Bottling Loss (2%)
Costs before dry goods
Private Producer
White
Red
459.8
110.7
570.5
545.1
110.7
655.8
330.0
665.8
570.5
1,100.1
1,755.9
5.2
195.2
13.6
509.6
11.6
436.6
35.8
1,343.8
Packaging
Costs before overhead
383.0
578.2
383.0
892.6
590.6
1,027.2
590.6
1,934.4
Overheads
- Marketing
- Administration / Other
134.0
279.0
134.0
279.0
134.0
279.0
134.0
279.0
Production cost per Bottle
991.2
1,305.6
1,440.2
2,347.4
Producer Profit Margin
991.2
1,305.6
1,440.2
2,347.4
Excise duty
Retailer Margin
VAT
105.4
383.8
207.2
105.4
493.8
266.7
105.4
540.9
292.1
105.4
858.5
463.5
1,687.6
2,171.4
2,378.6
3,774.8
Minimum Retail Price
Table 19 clearly shows how the minimum retail points are calculated. For purposes
of this example, the minimum price levels range from R17 – R24 for the white wine,
compared to R22 – R38 for the red. What is also illustrated by the example is the
impact that grape sourcing, secondary production decisions in the use of wood, and
the selection of packaging can have on the overall cost breakeven point for a specific
category of wine.
There are two further factors that need to be factored into this calculation when
considering that minimum prices should provide a sustainable economic base for all
stakeholders in the value chain. These factors, explained below, are taken into
account for the calculation in Table 20:
•
The first example does not include any profit margin for the wine producer.
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The Cost Breakeven Point of Wine
•
The producer cellar example above uses the prices typically paid to the
members, without considering the actual costs that are incurred by these
grape farmers.
Table 20 : Illustrative Calculation of Selling Prices (including margin)
Grape Costs
Primary Production
Bulk Wine
Producer Cellar
White
Red
185.9
72.8
258.7
416.8
72.8
489.6
Secondary production : Wood ageing
Costs before bottling
258.7
Secondary production : Bottling Loss (2%)
Costs before dry goods
Private Producer
White
Red
459.8
110.7
570.5
545.1
110.7
655.8
330.0
819.6
570.5
1,100.1
1,755.9
5.3
198.0
16.7
627.2
11.6
436.6
35.8
1,343.8
Packaging
Costs before overhead
383.0
581.0
383.0
1,010.2
590.6
1,027.2
590.6
1,934.4
Overheads
- Marketing
- Administration / Other
134.0
279.0
134.0
279.0
134.0
279.0
134.0
279.0
Production cost per Bottle
994.0
1,423.2
1,440.2
2,347.4
149.1
1,143.1
213.5
1,636.7
216.0
1,656.2
352.1
2,699.5
105.4
437.0
236.0
105.4
609.7
329.3
105.4
616.6
332.9
105.4
981.7
530.1
1,921.4
2,681.1
2,711.1
4,316.7
Producer Profit Margin
Excise duty
Retailer Margin
VAT
Minimum Retail Price
The results of these examples demonstrate that any domestic retail prices of below
R20 or R27 per bottle for white and red wines respectively should be challenged, as
it may imply that long-term sustainability may be impacted. In comparing the two
examples, it also becomes clear that as the quality of the product increases and the
quantities that are produced decrease accordingly, these cost breakeven points
could increase exponentially. While it must be noted that economies of scale,
sourcing and production decisions may have a significant impact on the overall cost
structure of a specific wine, the fact that so many variables need to be managed
emphasizes the importance of effective record keeping in the cellar, and the
preparation of accurate management information to support marketing decisions.
After all, a small percentage difference in costs can be the difference between a profit
or loss on any specific product.
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The Cost Breakeven Point of Wine
5.
MECHANISMS TO IMPROVE PROFITABILITY
This paper has demonstrated that the global surplus of wine will have a direct impact
on retail prices, especially within the commercial and semi-premium segments of the
market. These reduced prices have a direct impact on the revenue earned by the
wine producer, and often drop below the cost breakeven point of wine. While wine
can be produced to still provide some profitability at these lower price points, it is
apparent that typical cost structures within the South African wine industry are high,
and indicate that profitability can only be guaranteed by producing wine that will sell
within the premium segments.
There are only two ways in which the wine producer can improve the overall
profitability of the cellar – either increase the overall revenue that is earned, or find
mechanisms by which the costs incurred can be reduced. While the chapter on cost
management provided some short-term solutions, this section will examine some of
the longer-term mechanisms which need to be considered by producers and the
industry as a whole.
5.1
Trading Up to Higher Price Points
The analysis done in this paper clearly shows that South African wines will only
provide marginal returns if we continue to sell the bulk of our wines in the commercial
and semi-premium price categories. In order for acceptable margins to be earned by
all the participants in the wine supply chain, the demand for South African wine in
higher price points must be increased (Atkin, 2003). This requirement has also been
recognized by WOSA in their marketing strategy for 2005, with one of the key
objectives for the year being to increase the volume of wine sold in the ‘over 5’
category (WOSA, 2005). The associated risk with this strategy is that there is a
much smaller volume of wine sold in this category.
Euromonitor (2006) also suggests that a key factor in the growth of South African
wine and its expansion into higher price points will be the move towards wine brands,
together with a focus on educating consumers, particularly the emerging black
consumer of wine. The emergence of wine brands will make it easier for distributors
to promote their products and to create consumer loyalty. This will help those
consumers that are not well educated regarding different wine variants to pick a wine
based on its brands. If this strategy is successful, the likely effect will be increased
wine sales.
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The Cost Breakeven Point of Wine
5.2
Brand Management
One of the biggest criticisms of the South African wine industry is the degree of
fragmentation that exists – both in terms of the number of independent wine
producers as well as the total number of wine brands that are available. Historically,
wines were typically branded according to the wine estate from which they originated.
It is only recently that wine brands are being created across a range of producers.
This should make the marketing of wine easier and create more customer loyalty to a
brand.
Euromonitor reports that South Africa had three entries in the Top 20 Wine Brands in
the United Kingdom based on volume sales during 2005 – Kumala, Namaqua and
Arniston Bay (Euromonitor International, 2006). While this is exceptional for South
Africa in terms of the marketing value that is created for ‘Brand South Africa’ (SAWB,
2005), all three these brands are typically aimed at the semi-premium segment,
which does result in some critics slating South Africa as only being able to produce
wine for the the under £5 segment. Namaqua, at an average price of £2.97, is
amongst even the lower priced segment (Schmitt, 2005). Three important points
must be stressed with regards to brand management:
•
Brands have a large, associated investment. The marketing, advertising and
selling effort that goes into first creating the brand, and then the continued
support of the brand, requires a level of continuous investment. As was seen
from the allocation of overheads, this then further requires that a continuous
volume of product needs to be produced to ensure that an acceptable cost
per bottle is maintained.
Given the large investment, wine producers must have a clear strategy as to
what returns are required on the investment in brand costs. An interesting
case study to consider is Westcorp Wines in Vredendal: Westcorp currently
has two branded wines in the UK market – Namaqua and Goiya. While both
wines are doing well in terms of volumes, the question that is raised is, why
have two brands in the same market that both require ongoing support? This
only leads to duplicate brand and advertising spend.
•
Due to the high volumes of wine that are sold in support of the brand image
that is created, this segment of the market remains highly competitive. It will
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The Cost Breakeven Point of Wine
continue to put ongoing strain on the retail price points that can be achieved.
Any cost fluctuations, be they within the producers’ control i.e. grape or
production costs, or through supply chain costs i.e. excise duties, shipping
charges, etc., will often have to be absorbed by the producer as any changes
in price may result in volume decreases (Gold, 2006).
•
The fact that our key brands are generally associated with large volumes,
production techniques tend to favour the production of a consistent, average
quality wine, rather than focusing on the premium quality that will enable wine
to be retailed in a higher price point.
A possible strategy to consider is to have similarly branded products that can
be retailed at incremental price points. A case study illustrating this could be
Durbanville Hills with a semi-premium wine like the Durbanville Hills range,
moving up to the premium Durbanville Hills Rhinofields range, and the
Durbanville Hills single vineyard range in the ultra premium range. Once a
consumer knows the quality associated with the brand, the natural
progression will be to trade up within the range for special occasions, thereby
increasing demand at higher price points.
Labuschagne (2004, p. 2) stresses that it is essential that wine brands must first be
successfully created within the domestic market, prior to the wine being exported.
Successes have shown that a wine with a strong domestic brand image and an
annual turnover of at least 5 000 cases per year, will be more sustainable than a
wine label which is only sold internationally. This statement is supported by those
producers that clearly link domestic and export brands, as well as producers who
focus on wine tourism as a route to market. In contrast, Kumala and FirstCape
(South Africa’s leading bottled export wines in the UK) have traditionally had very
little or no domestic sales. Kumala has only been marketed domestically in the last 2
to 3 years, and FirstCape has never been sold domestically.
5.3
Vertical Integration of the Supply Chain
The current analysis of the supply chain shows that there are typically four layers that
exist – the grape farmer, the wine producer, the wholesaler and the retailer, with a
marketing agent often being a fifth category. While this multi-layered approach is
legislated in some countries like the United States, it must be recognized that each
intermediary in the supply chain currently adds a profit margin. This substantially
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The Cost Breakeven Point of Wine
increases the overall cost of the wine to the consumer, or reduces the profitability of
the producer and / or grape farmer, depending on the price sensitivity of the wine
(Werner, 2006).
One mechanism that can be considered to reduce these costs is to vertically
integrate the supply chain, with the wholesaler and producer becoming one
company, often also purchasing the vineyards that are needed for grape supply.
Where this is not possible, closer co-operation between all the players in the supply
chain must lead to improved optimization (Bannon, 2004). There are a number of
management techniques e.g. process optimisation, cost benchmarking studies, value
chain analysis, etc. that can be applied to identify where optimization and cost
reduction are possible. From a South African perspective, these need to be
considered against the backdrop of the current draft of the new liquor licensing
legislation that is proposing to enforce a distinct segregation between producers,
wholesalers and retailers.
Recent legislative changes in the USA that have removed barriers to direct marketing
will provide greater access for cross state border wine sales within the USA, and may
result in changes to the current legislated 3-tiered distribution system (Cutler, 2005).
This in turn should lead to lower prices, and greater competition amongst producers.
(Euromonitor International, 2006)
5.4
Horizontal Consolidation across the Wine Industry
While vertical integration will address inefficiencies within the supply chain, horizontal
consolidation across the industry can result in producers managing a far larger
portfolio of brands and volume of wine (Euromonitor International, 2006). This will
allow significant efficiency gains to be realized, and to place the merged organization
in a more competitive position when marketing the wine. Examples can include:
•
Marketing costs per bottle can be decreased if the marketing and sales team
is responsible for distribution of a portfolio of wines, rather than for only one
brand.
•
Logistics costs can be decreased if a higher volume of wine is shipped. While
large volumes cannot always be achieved for one wine only, consolidating a
shipment across a portfolio of wines can result in significant volume
discounts.
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The Cost Breakeven Point of Wine
•
With winery throughput being an important driver of primary production costs
per bottle, maximizing the use of the facilities across a number of wines can
create efficiencies in this area.
•
General winery overheads per bottle will also decrease if the maximum
volume of wine is moved through the cellar. Back office consolidation may
also result in individual costs per winery decreasing, thereby improving
efficiencies (Hammond, 2004).
One of the best examples of how global consolidation is taking place is Constellation
Brands, which now holds almost 200 global brands, including the Kumala brand from
South Africa (Woodard, 2006). Having critical mass in terms of size provides
Constellation with a stronger negotiation position, and therefore should attract more
shelf space within the retail chains at better price points. (Die Burger, 2006). Another
example of large scale consolidation is the acquisition of Southcorp Wines by the
Foster’s Group Ltd., which also transforms this group into a more formidable spirits
and wine manufacturer. (Euromonitor International, 2006).
5.5
Reducing Packaging Costs
Packaging costs typically make up 20 – 30% of the overall cost of a bottle of wine,
and as a result, even a small reduction of these costs can result in a significant
improvement to the profitability of the wine. It is also a well known fact that the
packaging ‘makes the sale’ in the majority of consumer purchasing decisions. Carter
(2005) suggests six strategies that can assist in reducing packaging costs:
•
The concept and design of packaging is an essential component that
contributes to marketing STP – segmenting your customers, targeting the
attractive segments, and positioning your wine. It is essential that your
packaging decisions are carefully aligned with the marketing strategy of your
wine.
•
Evaluate your packaging design, before starting production. Enough pilot
studies should be done with consumer groups to ensure that the packaging
design will get the attention of the buyer, and portray the right message of
where the wine is positioned, in order to improve your chances of a sale.
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•
Standardise your packaging portfolio to ensure that you maximize the
efficiencies of this process. Significant savings on design and bottling setup
costs can be achieved by using standard capsules, cartons and labels. An
example used is of a major South African wine group that had 26 different
back labels for one range of wines, compared to another that moved from 54
carton sizes to three by using only three bottle sizes.
•
Managing your packaging inventory is essential, including proofs, tooling,
plates and artwork, as the number of variants that exist accumulates over
time as every season’s labelling may be slightly different. If not properly
managed, wrong information could be used, resulting in unnecessary costs.
All this information should be properly catalogued, made accessible and easy
to retrieve.
•
Global best practice is driving the concept of supplier “single sourcing”,
whereby the number of suppliers per product that are used is reduced i.e. one
bottle supplier, one cork supplier, etc. This allows improved collaboration and
partnerships to develop for the benefit of both parties, which should result in
better prices and service for the producer, and guaranteed business for the
supplier. One of the benefits of single sourcing is quality and product
consistency (Van Mieghem, 1995).
•
Supplier relationships must be managed on an ongoing basis, as long-term
relationships that exist between the cellar and the suppliers are often based
more on trust than on specific service level agreements, and therefore may
be abused. Suppliers should be evaluated and benchmarked on price, quality
and service, and gaps that exist need to be actively managed.
Another technique that is often applied for domestic sales from small and mid-sized
wine producers is to try and clear excess stocks of wine as unlabelled wines. As the
labeling and capsules of the bottle are expensive items, significant savings can be
achieved. This selling approach started in the Australian wine industry, and has
resulted in growth of specialist ‘cleanskin’ (unlabelled) retailers. This practice is
growing within the South African wine industry, with a number of cellars selling
unlabelled wines on special offer in order to clear excess stock.
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The Cost Breakeven Point of Wine
5.6
The Impact of Finance Charges
One of the significant cost items on the income statement of South African wine
producers is Interest and Finance Charges. The Deloitte benchmarking study
(Deloitte, 2005) shows this amount as being as high as 8% of total revenue for
smaller producers, and between 1 and 5% for larger producers. This paper has also
demonstrated that the delayed nature of wine production results in interest being a
significant overall component of the cost of wine.
The underlying issue that needs to be addressed is the financing structure that is
applied to a wine producer. The PricewaterhouseCoopers survey (2005) illustrates
that the ratio of own capital to borrowed capital is 22 : 78, and a ratio of current
assets to current liabilities of 1.16 : 1, both of which are far lower than generally
accepted ratios. All borrowed capital has an associated finance charge. In the South
African context, although interest rates are currently lower, the cost of borrowed
capital is significantly higher than the international norm.
One of the ways in which this can be addressed is to look for external investments,
thereby increasing the level of own capital (Franson, 2005). In the current economic
environment in South Africa, possible investments through black economic
empowerment partnerships, or the drive to consolidation of the industry, should
provide such opportunities (Du Plessis, 2005). The large scale investments that are
required will only be made in an environment where the investors are provided with a
substantial return. Because these investments are often in the form of equity capital,
this return needs to be in terms of the overall profitability of the cellar (Huneeus,
2005). The global competitiveness of the industry is currently so high that the
possibility of attracting large scale investment is generally low. Investments that are
made are done more for ‘romantic’ reasons, than for a prospective return.
Rabobank (Heijbroek, 2004) reports that South Africa has hardly been involved in
foreign investments, or been directly impacted by the international consolidation
process which is taking place. Many of the consolidators of the wine industry have
travelled to South Africa, but so far have not made a major move. Rabobank’s
observations as to why this is happening include:
•
The fragmented industry structure that exists, as many of the wine producers
are too small to be attractive for the major consolidators. Most of the leading
companies are only 1 million cases strong, a few with over 2 million cases.
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The Cost Breakeven Point of Wine
•
There are no strong brands in the premium segment (Eur 5 to 7), which is
generally the segment which most investors find attractive. Most producers
have too broad a range of brands, which are hard to maintain or to work from.
•
South Africa is particularly strong in the popular premium segment (Eur 3 – 5)
which is an important segment of the South African industry. The major
consolidators, however, mainly invest in the premium segment where the
margins allow for higher investments.
•
Uncertainty as to the political risks that exist in South Africa and the general
impact of currency risk as the South African Rand remains volatile.
•
Possibly a lack of understanding of South Africa’s position in the global wine
portfolio, and the long-term strategy as to where South Africa will continue to
play.
5.7
Greater Government Involvement
There are growing sentiments within the South African wine industry that greater
government involvement is necessary if the industry is going to be sustainable in the
long-term (SAWB, 2005). The current assistance in the form of the SMEDP
programmes and wine exhibition incentives are not sufficient (MediaVision, 2006).
The global competitive pressures, the high cost of capital in what is a capital
intensive industry and the overall effect of taxation on the wine supply chain make it
almost impossible for new and small producers to survive financially without
enhanced government support. In France and other European Union countries,
start-up farmers are subsidized, and there are various control measures put in place
by government to monitor and manage the industry as a whole (Bolin, 2006).
While greater financial involvement by the government could be beneficial in the
short-term, subsidisation is generally not a long-term solution (Die Burger, 23 July
2004). The risk to the industry is that subsidisation may mask the real profitability
issues that are experienced and which must be controlled. Anson (2006) reports that
as many as 89% of Languedoc farmers in France face financial difficulty as the
European Union is reducing the overall subsidy base paid to farmers. If subsidization
is introduced, it must be done on a basis that will ensure that the producers can be
weaned off the subsidy within a short period of time. Mercer (2006) and Styles
(2006) report on the changes that are being proposed by the European Union, who
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The Cost Breakeven Point of Wine
have acknowledged that the current situation of using subsidies and legislation is not
sustainable. Proposed measures, many of which are controversial, include:
•
Removing the ‘crisis distillation’ subsidies that are used to finance the
transformation of surplus wine into industrial alcohol. Instead of this, each
producing country will receive a fixed fund which can be used as it sees fit.
•
Abolishing the permissible activity of chaptalisation (adding sugar to grape
must before fermentation), which will have wide-reaching consequences for
producers in the cooler regions such as Champagne, Burgundy and
Germany.
•
Providing grubbing-up incentives to reduce the total area under vine, and
ensure that uncompetitive producers are removed from the industry sector. A
total area of 400,000 hectares of vines could be impacted.
•
Changes to legislation regarding the labelling of European wines, allowing
table wine producers to state grape variety and vintages on the bottle. This
will further contribute to the simplification of the current Geographical
Indication systems that are applied.
The possible solutions described in this chapter are all applicable to the South
African wine industry. In most instances, the success of these solutions will be
determined by the South African wine industry’s ability to co-operate and implement
these solutions as an industry initiative. There are already indications that countries
competing against South Africa are considering similar solutions (AWBC, 2005) –
and the country that first introduces a consolidated solution to the market is sure to
achieve success, with the followers having to face increased global competition.
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The Cost Breakeven Point of Wine
6.
CONCLUSION
The aim of this research paper was to evaluate the current global surplus, with the
overall objective being to consider what the typical cost breakeven point of wine is
within a South African context. The research has however demonstrated that it is not
possible to determine one standard cost breakeven point that can serve as a single
industry benchmark across all categories of wine, as the calculation of the cost
breakeven point is going to be greatly influenced by the volume of wine produced,
the quality of wine that is made, and the distribution channels that the producer will
follow to sell the wine. What can be concluded is that it is essential that every wine
producer should do this calculation for every product produced in order to enhance
the quality of management decisions.
The research does indicate that the minimum domestic retail points for white and red
wines will be approximately R17 and R22 respectively in order to cover the direct
costs. It can also be shown that retail prices below R20 and R27 for white and red
wine are not sustainable in the larger term.
The research has also shown that the producer needs to have a good understanding
of the various cost and revenue drivers that impact on the calculation of the cost
breakeven point of wine, as well as in-depth knowledge of how global and domestic
industry conditions impact these drivers.
The Global Surplus
The global wine surplus is an economic reality. The important realisation is that the
current surplus state is not just a simple case of wine production exceeding demand there are three factors that have contributed to this over-supply:
•
There is a structural surplus that exists around the world that is caused by the
extent of new vineyard plantings. This is especially true of the New World
territories where exponential increases in production capability have been
noted. New plantings in non-traditional territories such as China also impact
the structural surplus.
•
A greater contributor to the current surplus is the extensive seasonal oversupply which is the result of record harvests in 2004 and 2005 in most wine
producing countries. This seasonal variation has resulted in inventory levels
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The Cost Breakeven Point of Wine
of wine increasing to a point where normal sales patterns are likely to take
more than 5 years to utilise the surplus.
•
Consumption of wine is decreasing in a number of key wine drinking markets,
especially the traditional markets of France, Italy and Spain. While the USA
and the UK report wine sales increasing at the cost of beer, these increases
are not yet making up for the decreases in the overall consumption of wine.
From a South African perspective, it is essential that local wine producers understand
the various contributing factors to the global wine surplus, while also having a clear
picture of the South African wine production and demand forecasts. This information
is essential to being able to make long-term strategic decisions on how to manage
the cellar through the existing global surplus. As such, one of the recommendations
to the South African wine industry stemming from this research is to place more
emphasis on the ongoing development of the SAWIS forecasting model that is shown
on page 10, in order for an industry-accepted model to be published regularly. It is
essential for all wine producers to understand both the South African and global
forecasts in order to have the relevant information available on which to base
management decisions.
In using the existing forecast data, the South African industry is not facing a structural
surplus. In contrast, forecasts indicate that South Africa will soon be in a position
where there will be significant shortages of wine, especially white wine. Grape
producers must take cognisance of this when taking a long-term view to planning
vineyard plantings. Grubbing up of vines and replanting to different varietals are only
short-term solutions that are reacting to current price levels and may not provide the
correct long-term solution.
The South African wine industry’s most immediate challenge is to find a cost-effective
solution to address the current high inventory levels of wine – mostly red wine – that
have resulted from previous harvests. International examples of how these have
been dealt with include distillation and wine-to-ethanol conversion. An important fact
to note is that these initiatives are normally driven by the industry or by government
and not by individual wine producers.
The Impact on Retail Prices
The global surplus is resulting in retail prices of wine being driven down as the global
supply of wine exceeds demand. With South Africa being very dependent on the
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The Cost Breakeven Point of Wine
global market for export sales, wine producers are directly exposed to this effect of
the surplus. The result is that the overall profitability of the South African wine
industry will be negatively influenced by the reduced global retail prices.
A more important conclusion to make from the information provided in this paper is
that the current surplus is only one of the contributing factors resulting in average
wine prices decreasing. The impact that the supermarket and discount chains have
on the average prices of wine is possibly even more significant than the impact that
the surplus is having – the surplus conditions merely accentuate this fact. The fact
that this route-to-market will continue to grow as the primary route to the consumer is
the crux of the retail pricing issue. Supply and demand are only contributing factors
to determining price. The price points at which wine will be sold will be determined
by the pricing strategies adopted by the particular retail chain. The exposure that a
wine producer has to retail prices will therefore largely be influenced by the volume of
wine that is distributed through the retail chains. It is important that the South African
producers realise that there is little flexibility in retail price points within the
supermarket sector – any changes that occur in cost structures will generally have to
be absorbed by the producer themselves.
A significant conclusion is the fact that the nett amount that is returned to the wine
producer is generally only a percentage of the final price paid by the consumer. The
complexity and competitiveness of the distribution mechanisms that exist and the
high levels of taxation and levies which apply to alcoholic beverages result in only a
percentage of the price accruing to the producer. A useful area of research may be
to perform a detailed analysis of the total extent of taxations on the wine distribution
chain and to actively engage the Department of Finance and South African Revenue
Services in realising the impact that this has on the wine industry.
Wine Production Costs
This paper has clearly identified that there is a lack of consistency when determining
wine production costs. While most producers can provide an indication of what their
total costs are, a great deal more emphasis needs to be placed on developing
standards for wine cost management that can be applied consistently across the
industry.
When performing an analysis of typical costs incurred by the average wine producer,
it is clear that the cost structures that exist within the South African industry are of
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The Cost Breakeven Point of Wine
such a nature and amount that mainly wines that are retailed at premium price points
will provide an acceptable and sustainable return on investment to all the players in
the wine distribution chain. This conclusion is shared by Su Birch of Wines of South
Africa (WOSA, 2005), based on a high-level study of the competitiveness of the
South African wine industry. As such, the South African wine industry needs to focus
more on the production and marketing of premium and luxury wines. While a number
of producers of commercial and semi-premium wines may take exception to this
statement, it is essential that wine production costs are carefully analysed to
determine where specific savings could be achieved to also allow sustainable returns
to be generated from lower priced wines.
While specific, short-term savings can be realised on certain cost elements which
contribute to the overall cost of a bottle of wine and which will bring the total costs to
a level below the revenue generated per bottle, these savings will generally detract
from the quality of the wine produced. Consequently the wine will have to be
marketed as a semi-premium or commercial wine at price points which will often not
allow an acceptable level of profitability.
A further conclusion is that it is becoming imperative that wine producers adopt a
‘produce-to-market’ approach – the wine producer will need to perform a careful
analysis of the countries, market segments and price bands in which he wants to
compete prior to producing wine. Production decisions impacting on the cost of
production need to be managed effectively within the constraints of the revenue that
will be generated from the sale of the wine.
Possible Improvements in Profitability
While individual wine producers can introduce short-term savings in production costs
based on specific circumstances, the long-term sustainability of producers will best
be served by long-term solutions which need to be considered, evaluated and
implemented by the industry as a whole. Certain of the key points that need to be
considered include:
•
Introducing an industry strategy to drive the ‘trading up’ concept. This needs
to ensure that a large volume of South African wine is retailed within premium
price points. While WOSA has initiated this strategy (WOSA, 2005), a more
concerted industry effort will be required to make this a reality.
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The Cost Breakeven Point of Wine
•
The industry needs to consolidate. The existing fragmentation is contributing
to an increase in production costs and is not achieving possible efficiencies
that can be realised through economies of scale. The fragmentation within
the industry also inhibits consolidation and investment. This results in
inadequate financing structures and high interest charges.
•
The South African wine industry must develop more global brands which can
compete successfully on all the international markets, especially within the
premium segment. While certain brands and producers are well established
in specific markets, too much South African branded wine is sold in the
commercial and semi-premium price points. This leads consumers to
assume that we are not able to provide wine at the level of quality required for
the higher price segments.
In conclusion, the global wine surplus and its related impact on wine retail prices are
economic realities. This situation is likely to continue affecting the South African
producers in the short- to medium-term. While South Africa’s industry forecasts
indicate that we may soon be in a position where we will again begin to show
shortages of wine - especially white wine – the reality of the global surplus and our
internal cost structures may result in it becoming cheaper to import wine – especially
in bulk – than to produce a local equivalent. The global competitiveness of the
industry is resulting in wine producers who aim to provide wine to the international
market realizing more and more that significant changes are necessary if they want
to compete against the other New World producers who are also faced with the same
challenges (Die Burger, 1997).
Producers are fast realising that the ‘romantic’ perceptions that used to exist of the
wine industry are being replaced by the harsh realities that the industry is a very
competitive marketplace. The contents of this paper should provide a South African
wine producer with more information that will assist in understanding the nature of
the current wine surplus, while also providing some practical advice on managing a
wine cellar in times of over-supply. It also provides the wine producer with the
practical steps that need to be considered when determining a specific cost
breakeven point of wine.
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The Cost Breakeven Point of Wine
Project Foresight
Project Foresight is an information management project that is currently being
performed on behalf of the South African Wine Industry Council. The ultimate
objective is to promote co-operation and process alignment between all the players
in the wine value chain. Specific deliverables extracted from the project charter
include:
•
A strategic long-term foresight, “Wine Industry Futures” which will cover longterm trends and foresight on subjects that support decisions in the South
African Wine industry.
•
A supply and demand based Information Communication Protocol which will
improve information sharing.
•
An Information Exchange system that will promote information systems
alignment within the South African Industry. This will also be aligned to the
industry role players such as VinPro, SAWIS and WOSA.
The outcomes of this project were not available at the time of publication of this
paper. More information may be obtained by contacting the South African Wine
Industry Council in Stellenbosch.
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The Cost Breakeven Point of Wine
7.
REFERENCE LIST
The reference list has been categorised into two sections to facilitate ease of use.
The first, ‘Specific References’ contains all publications that have been directly
referenced within the text of this paper. The ‘Background Reading’ lists a number of
additional references that were read as part of the research for this paper and
provide valuable background and contextualisation.
7.1
Specific References
Anson, J. (2006): 89% in Languedoc face financial difficulties: report, Decanter.com,
23 June
Atkin, T. (2003): Target Practice, Harpers, 23 May, p. 23 – 26
Australia & New Zealand Grapegrower & Winemaker (2005): Wine industry strategic
management or another ‘bust’?, July No 498
Australian Wine and Brandy Corporation (2005) : Wine Brand Australia “our key to
export success”, December
Bannon, A.L. (2004): Navigating the Channels of Distribution, Wines & Vines, June,
p. 63 – 66)
Becket, N. (2005): ‘Time and Tide’, Harpers, 13 May, p. 30 – 41
Birch, S (2006) : International Markets, WOSA, January
Bolin, L (2005): State wants to help local wine industry, Business Day, 5 April
Boothman, P. (2005): Dry Goods – The Bad and the Ugly, Drinks Business, October
V39, p. 22 – 24
Botha, A (2006) : Volhoubaarheid & Finansiele Posisie, Vinpro Inligtingsdag, 19
January
Carter, M. (2005): Six strategies to reduce packaging costs, Practical Winery &
Vineyard, September, p. 55, 56, 70
Conningarth Consultants (2004): The Macroeconomic Impact of the Wine Industry on
the Western Cape, SAWIS, September
Cran, D. (2006): All at sea, Harpers Supplement : Logistics, March, p. 8 – 10
Cutler, L. (2005): The Dynamics of Distribution, Wine Business Monthly, August, p.
44 – 49
Davidson, D. (2003): Do you know your cost of production?. The Australia & New
Zealand Grapegrower & Winemaker, February, p. 17 – 18
Deloitte (2005): Annual Financial Benchmarking Survey for Australian Wine Industry
– Vintage 2004
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Deloitte (2005): Challenges facing the wine industry, www.deloitte.com, 9 May
Deloitte (2005): Winning Strategies in the Wine Industry – A New Vintage
Die Burger (2006): Aussies wil oorskot-wyn in brandstof ombrou, 9 May
Die Burger (2006): Franse spook om wynbedryf in ere te herstel, 8 May
Die Burger (2006): Wynskou vir besoekers ‘wys gehalte, 3 April
Du Plessis, C. (2005): ‘Gefragmenteerd en kwesbaar vir surplus’, Wineland, January,
p. 22 - 23
Euromonitor International (2006): Alcoholic Drinks in the UK, April
Euromonitor International (2006): Alcoholic Drinks in the US, April
Euromonitor International (2005) : The World Market for Wine, September
EuroWine (2006): South Africa – Fast-growing wine production and exports,
February, p. 20
EuroWine (2005): Viticulture and the reality of surplus production, February p.34 – 41
Foulkes, O. (2004): Te veel minderwaardige wyne ‘verstop die stelsel’, Die Burger,
14 September 2004, p. 8
Franson, P. (2005): Trends in Wine Industry Financing, Wine Business Monthly, p.
60 – 61
Gold, B.J. (2006): The English Wine Market, Institute of Cape Wine Masters, March
Hammond, C. (2004): Branching out, Wine & Spirit International, May, p. 54 – 55
Heijbroek, A. (2004): The South African wine industry – Between past and future,
Rabobank International, May
Heijbroek, A. (2003): Wine is Business – Major Drivers reshaping the wine industry,
Rabobank International, January
Huneeus, A, (2005): Consolidation and the Future of Small, Premium Wineries, Wine
Business Monthly, December 2005
Hunter Gordon, K. (2005): Slow down in exports to cause Australian red wine glut,
BeverageDaily.com, 13 January
Jarvis & Goodman (2004): What price points are effective for small wineries?, The
Australian & New Zealand Grapegrower & Winemaker, August, p.109 – 112
Joseph, R. (2005): Surplus to requirements, Wine International, July, p. 28 – 32
Labuschagne, M. (2004): Eèrs die SA mark …, Die Burger, 18 August 2004, p. 2
Page 71
The Cost Breakeven Point of Wine
Lockshin, L. (2003): Quality has its shelf price, Harpers, 16 May, p. 22
Losh, C. (2005): UK market : South Africa, Wine & Spirit International, May, p.42
Martin, G. (2006) Voorraadvlakte, Vinpro Inligtingsdag, 19 Januarie
Maxwell, K. (2006): Are retailers killing the domestic market with aggressive pricing?
Wineland, July, p. 30 – 31
MediaVision (2006): Wine industry at crossroads – seeks government support,
www.wine.co.za, 22 February
Mercer, C. (2006): French government unveils wine rescue plan,
www.BeverageDaily.com, 30 March
Murray Brown, R. (2005): Chinese whispers, Wine International, July, p. 60 – 64
Perrin & Lockshin (2001): Australian Wine Segmentation and Distribution of Costs,
Wine Industry Journal V16 No5, September – October, p. 147 – 150
PricewaterhouseCoopers (2004): Benchmarking in the South African Wine Industry :
Producer Cellars – 2003 Harvest
PricewaterhouseCoopers (2005): Prestasiemeting in die Suid-Afrikaanse Wynbedryf :
Produsentekelders – 2004 Oes
SAWB (2005): An Inquiry into the Competitiveness of the South African Wine
Industry, October
SAWIS (2006): 2005 Grape Prices
SAWIS (2006): Producer Cellar Grape Prices 2003, 2004 & 2005
SAWIS (2005): Production and Market Estimates 2006 – 2010, November
SAWIS (2004) : South African Wine Industry IT Survey 2004, September
SAWIS (2006): South African Wine Industry Statistics 2006
SAWIS (2005): South African Wine Industry Statistics 2005
Schmitt, P. (2005): Free .99, Drinks Business, May, p. 24 – 30
Styles, O. (2006): EU plans radical overhaul of wine sector, Decanter.com, 22 June
Styles, O. (2004): French Winemakers say outlook is bleak, Decanter.com, 22 June
Sully, Lease & Dal Poggetto, (2004): Analyzing Wine Production Costs, Practical
Winery & Vineyard, November/December, p. 51 – 60
Valentine, D (2005) : Wine industry strategic management or another ‘bust’?,
Australia & New Zealand Grapegrower & Winemaker, July No 498
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The Cost Breakeven Point of Wine
Van Mieghem, T. (1995) : Implementing Supplier Partnerships: How to Lower Costs
and Improve Service, Prentice Hall
Van Wyk, G. (2005): Production Costs & Target Income – Wine Grapes, Vinpro
Van Wyk, G. (2006): Financial Position of Wine Grape Producers, Vinpro, 19 January
Werner, G. (2006): How do partner? Harpers Supplement Logistics, March, p. 4 – 6
Woodard, R. (2005): Gently does it, Wine & Spirit International, July, p. 46 - 47
Woodard, R. (2006): Three Men, a Dog and Global Domination, Harpers, 17
February, p. 16
Wines of South Africa (2004): Is the South Africa Wine Industry cost competitive?
November
Wines of South Africa (2004): SA Wine Industry best suited to premium wines, study
shows, November
Wines of South Africa (2005): Marketing Business Plan 2005
Wines of South Africa (2005): SA Poised to Capitalise on the US Wine Market, set to
become the world’s biggest, February
www.beveragedaily.com (2003): Not a barrel of laughs, 16 December, No. 5
Wynboer Technical Yearbook (2005) : Producer profitability under serious pressure,
p. 6 – 7
Young, M. (2005): Wrapping and Moving, DBEurope, July/August, p. 32 – 36
7.2
Background Reading
Australia & New Zealand Grapegrower & Winemaker (2005): Positive outlook for
winegrape production to 2006-7, March No 494, p.10
Bolin, L (2005): KWV MD sees more price pressures, yet aims for double-digit
growth, www.wine.co.za, 14 June
Bolin, L (2006): SA wine industry needs bigger economies of scale: Origin CEO
www.wine.co.za, 08 May
Bowen, R (2003) : Australia from the Vineyard to the bottle, Oenologists Italian
Association, Sorrato, 30 March
Brand, N. (2004): Kommer oor rand wat winste knou, Die Burger, 18 October, p. 12
Brand, N. (2004): Uitvoerders van SA wyn ‘sal vorentoe meer sukkel’ , Die Burger, 2
April, p. 1
Brand, N. (2004): Wêreldwye wyn-oorskot, Die Burger, 24 September, p. 6
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Brand, N. (2005): SA wynverkope in Amerika styg met 40%, Die Burger, 24
February, p.37
Brand, N. (2005): Wynbedryf in Australië adverteer heelwat meer, Die Burger, 16
May, p. 13
Brand, N. (2005): Sterk rand ‘dissiplineer’ wynbedryf, Die Burger, 3 October 2005
Brand, N. (2006): Te veel wyn gee hoofpyn, Die Burger, 2 January 2006
Brand, N. (2006): Minder wyn uitgevoer, Die Burger, 7 February
Brand, N. (2006): Wêreld stroom na Kaapse wynskou, Die Burger, 30 March
Brand, N. (2006): Kumala dalk in Constellation se kelder, Die Burger, 6 April
Caldwell, C. (2006): Do trade shows really boost your distribution, Australia & New
Zealand Grapegrower & Winemaker, February, p. 56 – 57
Davidson, D. (1992): A guide to growing winegrapes in Australia
Drinks Bulletin (2004): E&T takes charge of home distribution, V19 No 12, 6 July
Die Burger (1997): SA wynbedryf sê wêreld stryd aan, 3 July, p. 19
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December
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November 2005
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