m. porter on corporate strategy and competitiveness sa wine cluster

Michael Porter on Corporate Strategy and Competitiveness

Group Project: South African Wine Cluster

4 September 2011

Prof. David Duffill

Team Members:

Anne Naper, Ettiene Tukker, Joel Malahay, Peter Dahlvik and Simbarashe Samapundo

Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster

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Table of Contents

1. Introduction ............................................................................................................................................ 4

2. South Africa (SA) – Overview ............................................................................................................... 5

2.1 History ........................................................................................................................................ 5

2.2 Wine Production in SA ............................................................................................................... 6

2.3 Demographics ............................................................................................................................. 7

3. Country Assessment – SA National Diamond Analysis ........................................................................ 7

3.1 Factor (Input) Conditions............................................................................................................ 8

3.2 Context for Firm Strategy and Rivalry ..................................................................................... 10

3.3 Demand Conditions .................................................................................................................. 10

3.4 Related and Supporting Industries ............................................................................................ 10

4. Cluster Assessment – SA’s Wine Cluster Diamond ............................................................................. 11

4.1 Factor (Input) Conditions.......................................................................................................... 12

4.2 Context for Firm Strategy and Rivalry ..................................................................................... 13

4.3 Demand Conditions .................................................................................................................. 13

4.4 Related and Supporting Industries ............................................................................................ 14

5. How well is the Cluster Doing on a Global Basis ................................................................................ 15

5.1 Grape Producers, Wine Cellars and Wineries .......................................................................... 15

5.1.1 SA’s Exports ............................................................................................................... 16

5.2 Wholesalers ............................................................................................................................... 22

5.3 Manufacturers of Wine-Making Equipment ............................................................................. 22

5.4 Institutions for Collaboration (IFCs) ........................................................................................ 22

5.5 Universities and Research Institutes ......................................................................................... 22

5.6 Financing .................................................................................................................................. 23

5.7 Packaging .................................................................................................................................. 23

5.8 Capsules, Closures and Labelling ............................................................................................. 23

5.9 Events........................................................................................................................................ 23


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5.10 Wine Tourism ........................................................................................................................... 24

5.11 SA’s Wine Industry Global Competitiveness and Global Trends ............................................ 24

6. How can SA’s Wine Cluster do Better ................................................................................................. 26

6.1 Logistics .................................................................................................................................... 28

6.2 Labour, Communities and Institutional & Political Framework .............................................. 28

6.3 SA Wine Industry Strategy ....................................................................................................... 29

6.4 Opportunities/Factors Affecting SA’s Wine Value Chain ....................................................... 29

6.4.1 Research, Development and Expenditure (RD&E) .................................................... 29

6.4.2 Yield per Hectare ........................................................................................................ 30

6.4.3 Supply Chain Performance ......................................................................................... 31

7. Summary and Recommendations ......................................................................................................... 32

8. Appendix A .......................................................................................................................................... 33

9. Appendix B ........................................................................................................................................... 34

10. References ............................................................................................................................................ 35


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1. Introduction

‘A cluster is a geographically proximate group of interconnected companies and associated institutions in a

particular field, linked by commonalities and complementarities. The geographic scope of a cluster can

range from a single city or state to a country or even a network of neighbouring countries’ (Porter,

1998:199).

South Africa’s wine industry is geographically located and concentrated in the Western Cape Province. In

this area, a cluster of interrelated companies and institutions that depend on and benefit from the wine

industry has developed. During the last 10 years South Africa’s wine exports has increased substantially,

placing SA as the ninth largest wine export country in 2009 (Indian Wine Academy, 2010).

Using diamond and value chain model assessments and cluster map evaluation, the current state of

competitiveness in the South African wine cluster was analysed. It is viewed that South Africa’s wine

industry is well positioned, for example in terms of location and climate conditions, while the ongoing

development of the wine industry is threatened by factors such as low education, crime and corruption.


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2. South Africa (SA) – Overview

2.1 History

In the 17th century, the Dutch began setting up refreshment points for passing ships at the Cape of Good

Hope (close to Cape Point as per Figure 2.1), constituting the start of trade in the Cape area. The traded

products included fabric and wine (alcohol), which were traded in exchange for land and meat.

Figure 2.1: SA’s wine producing areas

Referring to SA’s history timeline (Figure 2.2), vast diamond resources attracted diggers to the northern

centre of SA (Kimberly) in the 1860s. In 1880, the first Boer war broke-out where the British were


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defeated allowing a re-establishment of SA’s independence. However, in the second Boer war (1899) the

British succeeded in colonizing SA.

SA only became an independent republic in 1961 and a democracy in 1994. The National Party’s (NPs)

imposition of apartheid laws in 1948 resulted in SA losing out on international and domestic opportunities

over the next 40 years. It was not until 1976 when black youths fought for their freedom and democratic

change started. It all came together when Nelson Mandela was released from prison by President de Klerk

(NP) in 1990. Mandela’s approach to join hands and work together for a better future for all South

Africans made him a world-renowned icon and peacemaker; opening opportunities to SA (e.g. SA hosted

the 1995 Rugby World Cup and 2010 FIFA World Cup Soccer).

Figure 2.2: History of SA

2.2 Wine Production in SA

During the 1650s the first vineyard was planted and the first wine was produced in the Western Cape, with

wine exports (to Europe) starting in 1788 (Figure 2.2). As depicted in Figure-2.1, the wine industry is

concentrated in the Western Cape Province with various production areas (e.g. 3 – Cape Agulhas, 12 –

Overberg, 13 – Paarl, 16 – Stellenbosch, 23 - Worcester), highlighted in colour. The Western Cape

Province with its varying landscapes, weather patterns and differing soil types produces a wide range of

quality wines. The Orange River district for example, with its warm, dry climate and limestone soil, makes

it the leading white wine producing area. On the other hand, the red wines are produced in the Paarl and


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Stellenbosch regions, where the soil is mostly granite from the mountain slopes. A majority of the wine-

making workforce are farm workers which only need low-level education to perform their daily tasks.

2.3 Demographics

SA has a population of 50 million, of which approximately 25% is unemployed and 40% lives in poverty.

These negative statistics have resulted in a rise in crime and corruption, adversely impacting SA’s

competitiveness. The government is internationally viewed as one of the root causes of SA’s poor service

delivery and corruption. Furthermore, government’s plans to nationalise the mines and banks may lead to

foreign direct investment (FDI) being diverted elsewhere.

In 2009 (Table 2.1), SA had a GDP of $287 billion (world ranking, henceforth WR: 32nd), which was

higher than Finland and just below Denmark. Moreover, among the Sub-Saharan countries, SA had the

highest GDP and the 3rd highest per capita GDP – contributing to 0.7% of world GDP.

Table 2.1: 2009 GDP data of SA compared to other countries

30 Argentina 310 65 Mauritius 6'800 18 Australia 1.17

31 Denmark 309 66 Botswana 6'400 19 Taiwan 0.99

32 South Africa 287 67 Costa Rica 6'300 20 Poland 0.98

33 Thailand 264 68 Bulgaria 6'200 21 Netherlands 0.95

34 Finland 238 69 South Africa 5'800 22 Saudi Arabia 0.86

23 Argentina 0.81

24 Thailand 0.77

25 South Africa 0.70

26 Egypt 0.68

Source: WEF (2010)

GDP% of world contributionPer nation (US$ billions) Per capita (US$)

3. Country Assessment – SA National Diamond Analysis

SA is one of only three African countries (the other two being Namibia and Mauritius) who are in stage 2

(of 3) of their development, which is primarily efficiency-driven and not factor-driven like the rest of the

African countries (WEF, 2010). As a result, SA remains the most competitive Sub-Saharan African


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country. A summary of SA’s national diamond analysis, and the strengths and weaknesses is given in

Table 3.1.

Table 3.1: SA national diamond analyses

3.1 Factor (Input) Conditions

SA has good logistics infrastructure including ports (e.g. Cape Town and Port Elizabeth), international

airports (e.g. Johannesburg and Cape Town), nationwide highways, railroad networks, and

telecommunications systems/networks (e.g. MTN and Vodacom). Globally, SA’s air transport, railroad,

road and port infrastructure was ranked in the top 50 in 2010 (WEF, 2010). SA is also resource-rich,

accounting for a majority of global production of gold (50%), platinum (80%) and diamonds (50%). In

2009, SA’s mining sector overtook the agriculture sector to become the largest export sector in the country.

In 2010, SA was the 25th largest economy in the world (WEF, 2010). SA’s financial sector was among the

few in the world to withstand the 2008 financial crisis, thus maintaining the availability of financial/capital


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resources. Notably, SA currently is rated 2nd with regard to providing access to credit (World Bank/IFC,

2011), and overall, SA’s financial sector was globally ranked in the top ten in 2010 (WEF, 2010).

The national diamond analysis also shows a number of competitive weaknesses related to the factor (input)

conditions. For example, SA is known for having a high crime rate (i.e. hijackings-theft, murder, rape etc.)

which is compounded further by the ineffective and thinly spread police force. In terms of business costs as

a result of crime and violence, and reliability of police services, SA was ranked 137th and 104th in 2010,

respectively (WEF, 2010). According to the United Nations world crime rankings, SA has the highest

number of rapes, murders with firearms, and manslaughter per capita (UN, 2011).

The wine industry is labour intensive and employs roughly 270’000 people – consisting of unskilled

(58%), semi-skilled (29%) and skilled (13%) labour. Although labour productivity increasd annually by

6% during 2005-2009 (SAWIS, 2009), the prevalence of HIV (17.8% of the population is infected -

UNICEF, 2009:1) has a negative effect on productivity – resulting in SA being globally ranked second

from the bottom at 138th in 2010 with regard to the impact of HIV on business (WEF, 2010). Moreover,

Southern Africa accounts for more than 50% of the people infected with HIV – potentially having a

negative impact on the domestic workforce and output efficiency (i.e. the health of SA’s workforce

currently has a world ranking of 127th).

Although energy supply is reliable (including an abundance of hydroelectric, nuclear and coal based

sources) in comparison to Sub-Saharan Africa, SA was only globally ranked 94th (2010) in terms of quality

of energy supply. There are also unresolved issues on land reform which may impact the wine industry,

and issues pertaining to labour market inefficiency (WR: 97th) (WEF, 2010: 302-303).


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3.2 Context for Firm Strategy and Rivalry

In terms of ease of doing business, SA is ranked 34th out of 183 economies (World Bank/IFC, 2011).

According to the WEF (2010:303), SA’s judicial system is considered independent (WR: 44th), intellectual

property protection is enforced (WR: 27th) and investor protection enforcement is strong (WR: 10th). On

the other hand, trade barriers in the form of import tariffs exist to protect certain local clusters (e.g. car

assembly and wine industry). The trade unions (e.g. COSATU) are powerful and politicized which has

resulted in rigid hiring and firing practises (WR: 135th), inflexible wage determination (WR: 131st) and

poor cooperation in labour-employer relations (WR: 132nd).

3.3 Demand Conditions

SA’s products have preferential access to the very important US markets (via the African Growth and

Opportunity Act), British markets (via its Commonwealth of Nations membership), and SA is also a

leading member of the regional bloc (Southern Africa Development Community). SA’s products have

enhanced their profile by virtue of government’s Proudly SA brand campaign and the demand created by

the 50 million-strong population (coupled with high, buyer sophistication) cannot be ignored [WR: 29th in

2010 (WEF, 2010)].

3.4 Related and Supporting Industries

Tourism is booming, having grown by 15.1% in 2010 compared to a global average increase of 6.7%. This

growth is partly aided by the profile SA garnered from successfully hosting international sporting events

such as the 2010 FIFA world cup soccer. Despite this increase and success, SA remains 34th as a tourist

destination worldwide (SATSRU, 2011).

Despite having scientific research institutions, funding is small compared to its international competitors

(e.g. France, Australia). Furthermore, attainment of higher education still poses a challenge with an


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enrolment rate of only 15%. A major concern is the quality of the education system which was globally

ranked 130th in 2010 (WEF, 2010). The 88% adult literacy rates are relatively high for Sub-Saharan Africa

(only Zimbabwe and the Seychelles have a higher rate at 91.2% and 91.8%, respectively) and

consequently, SA had a low world ranking of 129th (UNDP, 2007:1).

On the other hand, there are positive factors which enable SA to be ranked 54th on the global competitive

list (WEF, 2010: 302, 303). These positive factors are corroborated in various fields such as intellectual

property security (WR: 27th), accountability of private institutions (WR: 3rd), financial market development

(WR: 9th), and auditing and reporting standards (WR: 1st). Furthermore, other valued areas include

innovation (WR: 44th), science and research centres (WR: 29th) and business sophistication (WR: 38th). In

terms of cluster development, SA is globally ranked 39th, making SA attractive in terms of domestic supply

and consumer attractiveness.

4. Cluster Assessment – SA’s Wine Cluster Diamond

A summary of SA’s wine cluster diamond is shown in Table 4.1. The strengths and weaknesses listed for

each factor are briefly discussed below.


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Table 4.1: SA’s cluster diamond

4.1 Factor (Input) Conditions

SA has a Mediterranean-like wine growing climate. This, together with the differing soil types and hilly

terrain of the Western Cape Province provide ideal conditions for growing high-quality wines. SA has an

abundant, productive and low cost labour-force, however with a high unemployment rate of 24% in 2009

(STATSSA, 2010:30). Funding is readily available in terms of availability of financial services and

financing through local equity markets. Furthermore, venture capital availability is fairly good, and overall,

SA is globally ranked 2nd in terms of “ease of getting credit” (DoingBusiness, 2011:2).

In terms of weaknesses, SA has the highest crime rate (Heuni, 2010:9), and coupled with the HIV

pandemic this negatively impacts labour productivity. When the apartheid regime (a system of racial

segregation) fell in 1994, “Land Restitution” was one of the promises made by the ANC (African National

Congress). As a result, SA has a lot of land reform programmes, such as the Recapitalisation, Land Rights


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Management and Tenure Reform programmes (RDLR, 2010:1). The land reform programmes have

contributed to political conflicts and it is debatable whether the land reform programmes have been

successful. SA also has problems with government bureaucracy and corruption, and as a result SA is

ranked 49th in terms of irregular payments and bribes (WEF, 2010:303).

4.2 Context for Firm Strategy and Rivalry

Although SA has access to the US markets through the African Growth and Opportunity Act, it is still

ranked very low at 149th out of 183 economies (DoingBusiness, 2011:2) in terms of trading across borders.

SA has powerful trade unions; the largest being COSATU with approximately 1.8 million member workers

(COSATU, 2011:1). The trade unions are involved in organising strikes and have given workers

considerable power in relation to their employers, and as a result SA is ranked 34th out of 183 countries in

terms of “ease of doing business” (DoingBusiness, 2011:2).

SA has a relatively strong and independent justice system, ranked 44th in terms of judicial independence

(WEF, 2010:303). According to the National Treasury (2010:2, 7), tax revenue has increased at an annual

average of 11.36% (during 2005-2009) due to inflation, high economic growth, high commodity prices,

improvements in tax administration, and tax compliance. As a result SA is ranked 24th in terms of “paying

taxes” – the tax on profits is effectively 24.3% (DoingBusiness, 2011:2).

SA’s wine has a strong brand that symbolizes quality and has received international awards, such as the

prestigious “International Wine Challenge”, “Berliner Wein Trophy” and “Decanter World Wine Awards”

(WOSA, 2011:1).

4.3 Demand Conditions

SA is a member of the Southern African Development Community (SADC) – an organization with a

membership of 15 states working towards regional integration. Their mission includes promoting


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sustainable and equitable economic growth (SADC, 2011:1).

The volatility of the SA Rand (R) has a direct impact on SA’s wine industry, specifically exports. The IMF

ranks SA as number one among 32 countries in terms of currency volatility. PricewaterhouseCoopers

report on SA’s Wine Industry (2010:15) highlights the industry’s dependency on exports (Table 4.2)

Almost 50% of production is exported, thus the exchange rate remains a crucial factor in the industry’s

profitability.

Table 4.2: SA’s total wine exported

4.4 Related and Supporting Industries

Wines of South Africa (WOSA) are a non-profit organization which provides support to the South African

wine industry and promotes South African wines exported to key international markets (WOSA, 2011:1).

The organization was established in 1999 and has more than 360 exporters in its database. SA also has a

strong tradition of research and is now one of the new world leaders in terroir research (WOSA, 2011:1),

although funding is low compared to its international competitors (e.g. France).

The ‘National Tourism Sector Strategy’ works towards getting SA on the list of the world’s top 20 travel


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destinations by 2020. SA has an established wine tourism industry, which includes wine tours, wine tasting

and wine farm weddings. The importance of tourism is corroborated by SA’s Minister of Tourism who

defined wine tourism as “one of the fastest-growing and most lucrative sectors of the global tourism

market” (WOSA, 2011:1).

5. How well is the Cluster Doing on a Global Basis

SA’s current wine cluster is illustrated in Figure 5.1.

Figure 5.1: SA’s wine cluster

5.1 Grape Producers, Wine Cellars and Wineries

In 2010, there were approximately 3600 grape farmers in SA, however as depicted in Table 5.1, only 10%

have the capacity to produce wine in excess of 1000 tons per year. There are more than 570 wine cellars

which crush grapes, and 100 bulk wine buyers, of which 60% are wholesalers and 40% are exporters

(Floris, 2011).


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Table 5.1: SA’s grape farmers’ production capacity

5.1.1 SA’s Exports

As depicted in Figure 5.2, SA’s agricultural sector is the 7th largest contributor to world exports – larger

than tourism and closing in on transportation and logistics.

Figure 5.2: SA’s global export share (all industries)

Moreover, the agriculture sector breakdown depicted in Figure 5.3 shows that wine is placed 8th on the

global export contribution list – higher than spirits.


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Figure 5.3: SA’s global export share - agricultural products (US$ Millions)

This 8th placement is corroborated further in Figure 5.4 which indicates a steady growth in wine exports

from 140 million litres in 2000 and close to 400 million litres in 2011.

Figure 5.4: SA’s total wine exports 2000-2011 (litres)

The average bottle of wine in a British supermarket typically costs around R40.50/£4.05 whereas SA’s

estate-bottled wine sells at around R45/£4.50. This price difference is one of the reasons why SA exports


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wine in bulk and bottled – meaning that bulk exports can be sold for a cheaper price when packed abroad.

Germany has been the largest bulk wine export market since 2006, with Britain growing by 19% to 37.7

million litres in bulk wine sales compared to 2005. In 2008, Britain was the world’s largest bottled export

country and accounted for approximately 34% (Table 5.2) of annual exporting, followed by Sweden

(13.6%), Netherland (9.8%) and Germany (8%) (Calwinexport 2011:10).

Table 5.2: Bottled wine exports by country

As depicted in Figure 1 (Appendix A), SA supplied 2.92% of the world’s wine production in 2009 (WR:

7th), but only accounted for 1.81% of the acreage available to produce wine (WR: 14th) i.e. limited acreage

is available, while production increases at a steady rate. Compared to all other nations SA’s total acreage

had a strong growth of 16.7%. The only other nation with a similar increase was China at 15%. As a result

of the poor world vineyard acreage, global acreage decreased by 1.4%. As depicted in Figure 2 (Appendix

A), SA accounts for 1.46% of total world wine consumption by volume, increasing at 0.4% per year (WR:

13th); while global wine consumption decreased by 1.57%. As depicted in Figure 3 (Appendix A), although

SA had a 16.93% decrease in global wine production, it was still globally ranked 9th while global wine

production fell by 6.85%. These production issues should be addressed if SA’s wine industry wants to

compete and have a competitive edge over their close rivals Chile, France, Italy, Australia, New Zealand

etc. (Figure 5.10).

As depicted in Table 5.3, SA’s total 2010 wine production was around 780 million litres, slightly down


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from 2009 but higher than 2008. Furthermore, exports reduced in volume and percentage; from 53.4%

(2008), 48.3% (2009) and 47.5% (2010) [Floris, 2011].

Table 5.3: SA’s wine production and exports 2008-2010

Moreover, as depicted in Table 5.4, the number of primary wine producers declined over the last 19 years

by 23%.

Table 5.4: SA’s decline in primary wine producers and cellars

This decline was the result of producers being bought out to produce wines under a specific name of cellar

(i.e. brand), increasing the power of larger producers and reducing the power of minor producers. Although

this resulted in a decrease in cellars by 19% (Table 5.4), growth in cellars which crush grapes is still

increasing. The steady growth rate in SA’s wine production over the past years has resulted in the wine

industry contributing approximately 2.2% of the country’s GDP in 2009, with an estimated

macroeconomic impact of R26.2/£2.6 billion, supported further with wine tourism accounting for

R400/£40 billion. The grape and wine production of SA during 2000-2008 is on a growing trend as

depicted in Table 5.5 and Figure 5.5.


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Table 5.5: SA’s – annual wine production (millions of litres)

Figure 5.5: SA’s total wine exports 2000-2011 (litres)

Grapes crushed (Figure 5.6) and grape yields (Figure 5.7) also depict a similar trend during 2000-2008,

while wine exports (Figure 5.5) indicate a steady growth over the same period. However, this growth has

been declining after 2008, as depicted in Table 5.4, Figures 5.6 and 5.7.

Figure 5.6: SA’s grapes crushed 2000–2011


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Figure 5.7: SA’s wine grape yield 2000–2011 (litres)

Moreover, as shown in Figure 5.8, red wine has declined from around 40 million litres to 35 million litres

– but counteracting this decline – it can be seen in the same figure that white wine has increased from 65

million litres to approximately 70 million litres.

Figure 5.8: SA’s Red and White Wine Production (millions of litres)


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5.2 Wholesalers

SA’s certified bulk and bottled wine is sold through more than 100 wholesalers, who also take care of

marketing and distribution. Certain wholesalers (“producing wholesalers”) also produce wine from their

own grapes (Wood & Kaplan, 2008).

5.3 Manufacturers of Wine-Making Equipment

Various kinds of machinery and hardware are used to produce wine, and as a result numerous wine

equipment manufacturers were established, for example (SA Wine, 2011):- barrels: All Things Wine and

Columbit, boilers/burners: A.J. Thompson and Interbar Technology, blenders: Mixtec and Vintec,

stainless steel tanks: Dantech Services and Grotto Manufacturing, washing systems (pumps, spray nozzles)

for barrels and tanks: Autrex and CDS Group, equipment for water/effluent treatment: Clean Catchment

Concepts and HWT, filtration equipment: Columbit and solid liquid filtration consultants, and vineyard

equipment: African Composite Solutions and Eitan Machinery.

5.4 Institutions for Collaboration (IFCs)

SA’s wine cluster has several IFCs (each one described in Appendix B) that associate and collaborate with

wine producers, for example; ARC, WOSA, SAWIS, VinPro, SAWB, Wine & Spirit Board, Winetech and

SASEV.

5.5 Universities and Research Institutes

Academic research has played an important role in the development of SA’s wine industry. For example,

the Stellenbosch University features the Institute for Wine Biotechnology, providing training and research

for the national and international wine industry (Institute for Wine Biotechnology, 2011), the Elsenburg

Agricultural College provides wine farmers with agricultural expertise and training (Department of

Agriculture, 2011), and the Nietvoorbij Institute for Viticulture and Oenology is part of the Agricultural

Research Council (ARC) and conducts research in various areas of the wine making process (ARC, 2010).


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5.6 Financing

While still mainly locally financed, in recent years SA has opened up to foreign investors; thus

experiencing a number of foreign investments. For example, in 2010, a Californian investment group

bought Mulderbosch Vineyards, a producer of premium brand wine (Hamza, 2009).

5.7 Packaging

The wine cluster includes many producers of equipment and products related to the packaging of wine, for

example, Columbit and CDS Group (SA Wine, 2011). Table 5.6 shows the ratio of different containers

used for packaging SA wine. The total volume of wine sold in containers increased by roughly 14.6

million litres (5.1%). Clearly, with almost a 50% market share in terms of packaging, glass bottles are still

the preferred container for wine. Since 2005, glass, plastic and bag-in-box containers have all increased

their market share (Floris, 2011).

Table 5.6: SA’s Wine production and exports (2008-2010)

5.8 Capsules, Closures and Labelling

The wine cluster also includes many producers of corks and screw caps (e.g. Boland Mobile Bottling &

Labelling and All Things Wine), and label producers like Boland Labelling and Coastal Labels (SA Wine,

2011).

5.9 Events

Being traditionally more beer drinkers, wine drinking is promoted to South Africans, specifically the black


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middle class, by arranging events such as wine festivals (Siphugu & Terry, 2011).

5.10 Wine Tourism

SA’s tourism industry is one of its top-five hard currency income sources, attracting overseas visitors to

the Cape shores due to a weaker and affordable Rand-currency and a unique African experience that is

appealing to the modern world. Cape Town is well-known for tourism and tourist attractions such as Table

Mountain, generally attracting around 0.86% of global tourism and making SA the second largest tourism

destination in Africa. More importantly, in the context of this project, Cape Town is the place where SA’s

wine industry is established – having over 15 wine routes with over two-thousand wines to sample and

test. Approximately 50 thousand people work in SA’s wine tourism sector, facilitating in wine tours/routes

of which the Stellenbosch route is the oldest one and features more than 300 wineries (SA-Venues, 2011).

5.11 SA’s Wine Industry Global Competitiveness and Global Trends

As depicted in Figure 5.9, SA’s wine industry declined and remained flat during 1960-1990 as a result of

constrained/regulated competitiveness, economic and political environments. However, during 1990-2005,

SA’s wine industry experienced significant growth due to democratic transformation (initiated by F.W. de

Klerk and Nelson Mandela). SA’s local wine industry was forced to change and compete internationally

and as a result adopted ‘Vision 2020’ (SA’s Wine Industry Strategic Plan). Recently, according to Rooyen,

et al. (2010:4-6), since 2005 (high point in SA’s wine industry), SA’s wine industry is in a declining phase

in terms of competitiveness status (phase 6).


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Figure 5.9: SA’s wine industry growth/decline phases (1960-2008)

This decline is corroborated by the trends shown in Figure 5.10 which depicts SA’s declining

competitiveness compared to its competitors (e.g. France, Italy); with increasing competition from

Argentina, New Zealand and Chile. According to Rooyen, et al. (2010:6), SA’s decline in competitiveness

can be found in its broader wine industry environment in which the businesses now operates. These

constraining environmental factors include the increase in the value of the Rand, global warning/drought

conditions and climatic fluctuations, increases in interest rates, high crime and corruption levels, lack of

maintenance in infrastructure and export facilities, lack of skilled labour, and government’s inability to

provide sufficient regulatory and support services to the needs of the dynamic wine industry of SA –

export sectors in general.


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Figure 5.10: Trends in competitiveness of wine producing countries (1990-2007)

6. How can SA’s Wine Cluster do Better

By monitoring and analysing SA’s wine value chain for strengths, weaknesses, opportunities and threats,

the stakeholders can more easily manage the risks, improve profitability and compete internationally.

Winetech (Figure 6.1) is one of the major proponents to improving the SA wine value chain, and providing

a sustainable basis of forefront technology and human resources in order to strengthen international

competitiveness and profitability.” (Winetech, 2011).


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Figure 6.1: Winetech organogram

The primary and support activities of SA’s wine value chain (Figure 6.2) are analysed through Winetech’s

technical expert committees who are responsible for identifying and prioritising research needs, and

evaluating the merits, progress and funding of research projects (Winetech, 2011). The development of

SA’s wine cluster has directly resulted in the development and enhancement of SA’s wine value chain.

Figure 6.2: SA’s wine value chain


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6.1 Logistics

According to Wineland (2000), “The ideal to create a market-driven, globally competitive SA wine

industry is the real driving force for implementing a comprehensive and coherent logistics system that

serves the whole industry.” The three main focus areas include:

i) Quality assurance e.g. Wine/Spirit Board certifies all SA’s wines.

ii) Real-time management information systems or MIS e.g. SA’s wine MIS was established to collect,

process and disseminate industry information.

iii) Applying regulatory frameworks to ensure international market requirements are met. For example,

SA was involved in developing the GS1 (Global Language of Business) system, standards and

guidelines (i.e. numbering and bar coding from grape grower to the retailer), in conjunction with

global wine industry leader, France. Emanating from the GS1 System was the need for traceability

tools such as bar coding systems and RFID systems – an opportunity for SA’s IT sector to get

involved.

6.2 Labour, Communities and Institutional & Political Framework

Referring to the value chain (Figure 6.2), Winetech’s training programme involves training and developing

labour, communities, institutions and political frameworks through educational institutions (e.g.

universities), creators of technology (e.g. students in research), transferors of technology (e.g. consultants),

and practitioners of technology (e.g. wine-makers). By involving the various institutions, Winetech gains

access and participates in syllabus development, training support, professional services, appropriation of

bursaries, development of existing manpower potential, tutoring, and recruiting and screening of students.

The emphasis on improving human capital in SA’s wine industry is further corroborated in the

PricewaterhouseCoopers report on SA’s Wine Industry (2010:10), which identifies training and skills

development as one of the areas needing improvement, the other being employee-employer

communication.


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6.3 SA Wine Industry Strategy

Vision 2020 was initiated by Winetech in 1999 which lead to the formation of the SA Wine and Brandy

(SAWB) Company in 2002, with its key objective of implementing the Vision 2020 strategic outline. The

Wine Industry Plan (WIP) was prepared by SAWB through consultation with various stakeholders (e.g.

wine producers, labour, cellars, and relevant government departments). The WIP was approved on 31st

October 2003 by the Minister of Agriculture and Land Affairs as the strategic framework for cooperation

and action in the SA wine industry (WOSA, 2009:1). According to a presentation by CSIR from Vinova

(2007:12), the objectives of WIP will include achieving/improving international competitiveness, shifting

from production-driven to market-driven wine industry, improve/implement business intelligence and

information systems, improve performance of value/supply chain and logistics management, continuous

innovation and human development, focus on preferred regions and terroir-based production, enhance

ethical trade and social responsibility, and transformation.

6.4 Opportunities/Factors Affecting SA’s Wine Value Chain

6.4.1 Research, Development and Expenditure (RD&E)

According to an Australian government report (2011: 2), the GWRDC invests an average of R140/$20

million a year in RD&E (one of SA’s competitors as per Figure 5.10) - with the objective of improving

profitability, sustainability and competitiveness. Similarly, SA’s wine industry (Winetech) received

funding at an annual average of R27.3/$3.9 million during the period 1999-2010 (Table 6.1) in addition to

the recently implemented (2009) annual tax credit from the South African Revenue Services on all

operating expenditure actually incurred. For comparison, France receives around R110/€11 billion each

year from the EU in the form of agricultural support, approximately R380/€38/$54 million of the funding

went to wine producers in 2008 (French-Property, 2010: 1).


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Table 6.1: SA’s wine research and development funding

Source: Winetech (2010)

Clearly, the significantly lower RD&E annual spend and financing/funding in comparison to Australia

($16.1 million lower) and France ($50.1 million lower), places SA at a disadvantage. As emphasised in

Winetech’s 2010 Annual Report (2010: 39), in the last 7 years (2004-2010) funding has been flat - in an

inflationary surrounding, with an increase in RD&E and technology transfer demand; it is difficult for

SA’s wine industry to be competitive.

6.4.2 Yield per Hectare

Wine production per hectare during 2004-2008 was dominated by Italy (56/ha), France (50/ha) and Spain

(30/ha); even though SA produced a higher yield of 75ha (Table 6.2). Potential reasons for this may be

that, for example in France, the yield per hectare (ha) has an inverse relationship to the quality of wine (the

lower the yield the higher the quality). As a result, high quality wine-producing regions had a maximum

permitted yield per hectare (Morss Global Finance, 2008: 1). Alternatively, other contributing factors may

include production efficiencies, climate and soil.


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Table 6.2: Wine production by country per hectare

6.4.3 Supply Chain Performance

Although SA’s logistics and supply chain system is well established, 42% of SA’s wine supply chain

functions consider their overall export performance as lower than their international competition (Table

6.3), and another 42% consider themselves “equal to their competition” in terms of meeting stakeholder

requirements (e.g. lead time, service strategy) - highlighting further room for improvement. Lastly, SA’s

wine industry should consider improving its domestic wine consumption market (WR: 100th, outranked by

juice, beers and spirits) which may trigger additional cluster growth and development.

Table 6.3: SA’s overall logistics/supply chain performance compared to international competition


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7. Summary and Recommendations

The terrain and soil of the Western Cape Province provides ideal conditions for wine-making, and SA

today belongs to the top nine wine producers in the world by volume.

Wine-making in SA goes back to the 17th century. With time, as wine-making skills improved, a number of

companies in related industries were established in the Cape to support the wine producers. Institutions,

universities and RD&E centres started to collaborate with the wineries; with the objective to improve

quality and increase production volumes. The South African wine cluster was formed.

The cluster has helped the South African wine industry experience tremendous growth and development

during the last couple of decades. With the possibility to produce large volumes of high-quality wines,

exports have tripled since 2000, now constituting around 50% of the total production. However, despite a

number of advantages such as climate, terrain and low labour costs; the competitiveness of South Africa’s

wine industry has declined after 2005.

The five actions identified as the most crucial measures to be considered to ensure the future well-being

and sustainability of SA’s wine cluster include (i) restricting the strength of the SA currency, (ii)

improving maintenance in infrastructure and export facilities, (iii) improving labour skills, (iv) reform

governmental regulations and support services, and (v) reducing crime and corruption.


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8. Appendix A

Source for Figures 1-3: Wine Institute (2010)

Figure 3: World wine production by country

2006 - 2009 and % change 2009/2006 Liters (000)

Country 2006 2007 2008 2009 % of total liters

2009

% change

2006/2009

World Total 28,729,000 27,128,800 27,173,900 26,759,900 100.0 (6.85)

France 5,302,500 4,654,700 4,280,600 4,700,000 17.6 (11.4)Italy 5,460,000 4,918,100 5,047,000 4,650,000 17.4 (14.8)Spain 4,367,900 4,207,000 4,190,900 3,800,000 14.2 (13.0)United States 2,438,300 2,510,800 2,431,500 2,777,200 10.4 13.9Argentina 1,539,600 1,504,600 1,470,000 1,210,000 4.5 (21.4)Australia 1,325,000 955,000 1,237,000 1,171,000 4.4 (11.6)Chile 844,800 828,000 869,000 987,000 3.7 16.8Germany 899,500 1,036,300 999,100 928,000 3.5 3.2South Africa 939,800 851,600 763,300 780,700 2.9 (16.9)

Figure 2: World wine consumption - Ranked by consumption

2006 - 2009, % change 2009/2006, % change 2009/2008

Country/Territory 2006 2007 2008 2009

% change

2009/2006

% change

2006/2008

% of world consumption 2009

World Consumption 23,871,620 23,969,918 18,194,466 17,926,094 (1.57) (2.07) 100.00

France 3,394,900 3,034,900 2,973,300 2,913,800 (14.2) (2.0) 12.40United States 2,633,745 2,752,068 2,761,887 2,752,140 4.5 (0.4) 11.71Italy 2,733,200 2,368,500 2,616,600 2,450,000 (10.4) (6.4) 10.43Germany 2,021,000 2,013,600 2,013,600 2,011,800 (0.5) (0.1) 8.56China 1,327,900 1,394,300 1,464,000 1,537,200 15,8 5.0 6.54United Kingdom 1,193,600 1,224,900 1,245,4000 1,266,00 6.1 1.7 5.39Russia 1,060,000 1,113,000 1,168,700 1,145,200 8.0 (2.0) 4.87Spain 1,365,800 1,339,100 1,216,800 1,127,100 (17.5) (7.4) 4.80Argentina 1,110,300 1,116,600 1,067,700 1,029,200 (7.3) (3.6) 4.38Romania 258,400 524,200 546,400 509,700 97.3 (6.7) 2.17Australia 458,300 483,400 481,600 493,100 7.6 2.4 2.10Portugal 470,216 452,400 457,000 455,000 (3.2) (0.4) 1.94South Africa 340,700 355,700 356,200 341,900 0.4 (4.0) 1.46

(Liters 000) and % of world consumption - 2009

Figure 1: World vineyard acreage by country

2006 - 2009 and % change 2009/2006 Acres (000)

Country 2006 2007 2008 2009 % of total

acreage 2009

% change

2006/2009

World Total 18,178,969 18,174,171 18,194,466 17,926,094 100.0 (1.4)

Spain 2,805,151 2,861,055 2,865,200 2,724,700 15.2 (2.9)France 2,056,561 2,129,724 2,096,285 1,966,510 11.0 (4.8)Italy 1,850,300 1,771,055 1,741,331 1,712,607 9.6 (7.4)China 1,042,769 1,091,357 1,122,100 1,200,000 6.7 15.1Turkey 1,269,674 1,197,471 1,192,972 1,200,000 6.7 (5.5)United States 937,179 936,509 937,399 943,750 5.3 0.7Iran 778,365 778,365 778,365 778,365 4.3 0.0Argentina 551,117 558,067 559,802 560,000 3.1 1.6Portugal 549,867 550,045 550,292 536,270 3.0 (2.5)Chile 444,780 449,722 449,722 449,722 2.5 1.1Romania 470,216 463,631 479,468 441,153 2.5 (6.2)Australia 390,600 430,487 427,718 402,639 2.2 3.1Egypt 363,904 369,056 380,425 385,000 2.1 5.8Moldova 346,896 341,655 337,227 337,000 1.9 (2.9)South Africa 278,524 284,165 321,230 325,000 1.8 16.7


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9. Appendix B

Description of SA wine IFCs


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