Analysis of the South African Wine Industry

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The South African Wine Industry

Competitors:

Many of the large South African ‘players’ in the industry have begun to carve out US growth.  Despite exports decreasing by 3million cases, shipments to the US rose by 17%.  Distell and its ‘Two Oceans’ label are the largest exporters of premium wine in SA and intend to reach a critical mass in the US through a major volume driver.  

Industry experts state that SA does not need a huge new brand but rather a critical mass on the volume side to help drive the category. SA needs to develop its own unique styles rather than try to compete against the likes of Chile as they lack in vineyard scale. Elegant new styles of Pinotage are what have been exciting consumers who are willing to pay a premium for wines, which they view as fantastically good-value when compared to France.  

Climate:

A number of acute water shortages took place in the Western Cape over the last few years, driven predominantly by changing weather patterns and rapid urbanization which is a concern. In the long-term, wineries won’t be able to expand their volumes, however, can definitely look at using their energies to improving their quality.

This year’s harvest was “short, intense and an exceptionally difficult year from a logistical point of view,” owing to such weather conditions. Distell’s crop was 8% lower than the annual average, while SA as a whole expected a rise of 1.4% to 1.28 million tons for the year. Last year, wine production slipped by 3% and stocks continued to decline, having now dropped by 22% since 2007.

Part III – International Operations Strategy

After analyzing the internal and external environment, Hill provides a simple but clear framework for an international operations strategy that we can suggest for W&W to consider in their final decision making process. The options below fit W&W’s corporate culture, goals and are what we believe to be the logical steps towards choosing the right country for production.  

Where:

The Western Cape of SA boasts the ideal location for producing premium pinot noir wines, due its climate, soil type and experienced workforce.  It is also within close proximity to a major port with ever increasing transport links.  A considerable barrier; is the high shipping and packaging costs when compared to European producers.  

Why:

Despite this, there is still an argument to expand production from SA due to it’s reputation in new world wines which can justify a slightly higher price to accommodate extra costs.  W&W can take advantage of government encouragement through the support of wine exporting.  

Many networks have already been established, providing a number of location specific advantages in terms of grape harvest and reputation. For relatively low risk, there is much potential for W&W to tap into. SA is experienced in ‘green wines’, which could prove to be a vital part of diversifying W&W along with building a solid reputation.

What:

The most suitable mode of entry for W&W considering that it isn’t ‘yet’ a large international business. We suggest a joint venture, due to this being their first international expansion; experience and know-how is key and it would be irresponsible to become involved without greater consideration. W&W will therefore have access to local partner’s knowledge, risk sharing and also it is much more politically acceptable. It is established that SA generally find it very difficult to achieve economies of scale in the supermarket wine sales.  Therefore, by utilizing existing supply chains and bringing in new ideas, W&W have the potential to become successful if their choice of partner is correct.

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OLI Paradigm

Ownership Advantages:

W&W can develop key experience, knowledge and know-how.  Gaining an understanding of what best practice for manufacturing and transporting SA wine will enable the production of a substantially higher yield and amount of wine than they could in the US.  Looking forward to creating sustainable supply chains and developing future networks for when W&W wish to expand even more.

Location Advantages:

W&W stand to become more profitable through the current market imperfections of the SA market.  SA boasts excellent and plentiful ...

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