Country Analysis: South Africa

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Executive summary

Globalization is not a new phenomenon for the wine industry in South Africa, since wine-producing countries and those consuming have been doing business together for many years. Nevertheless, since the 1990s the production of wine and its consumption has highly been competitive. Before the 90s wine was localized and consumers mainly consumed what was locally available or imports coming from neighboring countries. However, presently competitive situation and consumption of wine have changed drastically and rapidly in the recent past. For instance, worldwide wine exports on the global market have increased to 25% down from 15% in the 90s (Anderson and Wittwer 2001) In 2004 there was an increase to 26% and it is expected to increase in the future creating business opportunities for those companies which deal in wine (Anderson and Wittwer, 2001). This new global access is redefining how wine is being produced and consumed and opening international trade in South Africa which is highly acceptable.

This paper is going to analyze critically wine business in South Africa in a global context, and give detailed information of the business analysis; the main issues the paper will examine, South Africa profile and country analysis, the wine industry in South Africa, Country Attractiveness, and opportunities, economic changes, social and cultural changes, country threats or political problems among other issues, the paper then will give recommendations based on the findings of the study.

Introduction

South Africa is a nation with pride that has a history that dates back to 1652, the year Jan van Riebeeck and his party settled in the country being the first Europeans to settle in South Africa at Cape of Good Hope. Today, South Africa is among the most developed states in Africa. The country has an advanced national transport infrastructure, good communications, and a healthy economic and social organization. However, the country faces some challenges in labor, political social, and economic problems. The country has a population of about 45 million people which provides a strong consumer base for the wine industry. This has ensured that the domestic wine market share continues to increase, also increasing South Africa’s perspective for selling its finest wines globally. In general South Africa, the wine industry is growing and the prospects for international companies getting into a joint venture or opening overseas branches in the country are favorable. With globalization and liberalization of markets, it has increased international trade in the country.

Wine Industry

South African wines are well known for their uniqueness coming from soils that have not been disturbed for centuries. The wines also reflect the diverse culture of winegrowers and winemakers. South Africa is well known for its wine industry global and it is among the top countries in the wine industry in the world. However, the industry only has a few big firms which account for around 75% of the overall wine sales in the market. Though, several other small firms account for the remaining 25%. Thus the prospect of new players entering the market and being successful is high because the competition in the industry is not at a cutthroat level, but it is competitive(Murchie, 2007).

Though South Africa has an old history of wine production the industry is still young and has not matured. As (Murchie, 2007) points out South Africa has an older wine industry, yet it has immature wine business culture. The industry experts observe that the wine industry in South Africa still has the potential of supporting many players since the consumer base is large and the market has not been exhausted. Tied closely to this is the technological advancement that is taking place on the international market encouraging wine firms to try new technologies in winemaking techniques (Williams 1995). Globalization and free-market policies in South Africa also play part in attracted new players in the industry(Murchie, 2007).

Different Products

South Africa is known to produce more white wine compared to redone. The white wine grapes are extensively planted in a different range of “international” varieties some of the verities of wine produced in South Africa includes:

Chenin Blanc; is the greatest grape which is mostly planted and bottled as “steen” it is flexible and can be produced in different styles which include oak-aged, which is long-lived dessert wines, this variety alone accounts for approximately 50% of white wine produced in South Africa.
Colombard; has claimed a lot of fame as cognac base wine, but in South Africa, it is produced as fruity and normally as dry white wine.
Muscadelle and Muscat d’Alexandarie; are fortified dessert wines, that have flowery aromatics.
Pinot noir; this is not produced in large volumes but has a fine taste of Hamilton Russell, pinot noir is red wine.
Cabernet Sauvignon; this has been traditionally premium red wine from South Africa, it is bottled in various tastes some ripe and balanced and others a bit weedy and herbal and it is among the best in the world.
Pinotage; this is related to pinot noir and it is originally South African and it produces both super fruity and vibrant quaffing reds. This produces a seriously robust and oak-aged red wine (Chefs Help, 2007).

342 years of wine history

For more than 300 years South Africa has been producing wine and the vineyard has increased in terms of size and variety. The history of wine began in 1652 when Jan van Riebeeck who was the leader of the Cape colony tentatively planted a vine at the base of the mountain table. Thirty years later a French man Hugenots who was running away from persecution arrived at the Cape bringing another expertise in making wine at the Cape. Even though van Riebeeck started wines at the Cape it is Simon van der Stel who planted and built Constantia in 1686. The years that followed saw several visitors arriving at the Cape. By 1904 vineyard planting had increased by three folds. Chenin blanc is the most planted vine plant and has double since 1960, today Vineyards are being planted in other regions and the size of the vineyard has continued to increase, the quality of the vineyard has also been improved over the years and currently, the quality of grapes being harvested is much higher than before (Chefs Help, 2007).

Great region for wine

South Africa has great regions which produce wines; some of the most popular regions are;

Stellebosch region is a home for many traditional high-quality red wines particularly “Bordeaux blends” and cabernets. This is a big area that has different climatic conditions and soils. However, the Atlantic Ocean provides moderation. This region has a high concentration of wine estates, some of the well-established wine estates are Warwick, Thelema, and Meerlust (Anderson and Wittwer, 2001).

Constantia

This is a chilly coastal region on the outskirts of Cape Town; this region is the most famous historically in South Africa. It produces a lot of dessert wines which are thought to have given emperor Napoleon solace when he was in exile. Klein Constantia estate in 1986 revitalized this style through producing “Vin de Constantia” which is compared to of the best wines in the world (Anderson and Wittwer, 2001).

Walker bay

This is a chilly upland coastal region that is small and new in terms of the production of wine in South Africa, yet some of the most exhilarating wines in South Africa come from this region for example chardonnays and pinots noir. Producers in this area are using fresh French oak barrels and conservative winemaking to produce wine which is believably Burgundian in approach (Anderson and Wittwer, 2001).

Robertson

This is another sizzling inland region that has lime-rich soils which are well suitable for white wines range especially the chardonnay (Anderson and Wittwer, 2001).

Country analysis; Political and legal changes

South Africa is a multiparty country with a parliamentary system where powers are shared between parliament and the president. The president is the head of state. The South Africa government is committed to the free market economy and privatization to create a good investment climate, to this, the government has undertaken a strategy of Growth, Employment and Redistribution (GEAR) which is a neo-liberal strategy meant to cover economic growth between 1996 and 2000. The strategy has had diverse success, it has brought high discipline in financial markets and macroeconomic steadiness but it has not delivered in other areas such as employment as formal employment has increasingly reduced. South Africa has taken trade liberalization policies which have continued from the 1990s and have greatly reduced the tariff rate to only 7% as of 2002 from 20% in 1990. These economic efforts coupled with the implementation of World Trade Organization (WTO) regulations and the role South Africa played in the Doha Development Round reflect how the country encourages a free market economy. The government took the policy of neo-liberal strategy which advocated for liberalizing the market and privatizing government-owned corporations and deregulating the capital sector to attract foreign investors and increase the economic growth of the country (McKeever Institute, 2006).

South Africa has been producing wine for the last 300 years and their wine illustrates an incredible blending of old and new wines in the world system. thus, in south Africa wine is well known and highly consumed both local and international, they have some of the well respected and exceptionally fine wine that has attained international prominence (McKeever Institute, 2006).

The country has vast land on which vineyards are contracted, it is estimated that vineyards cover 230, 000 acres/93, 000 hectares stretching between Table Mountain in the west and Mossel Bay in the Eastern Cape. More land is available for expansions of vineyards and building wineries. South Africa is ranked as the seventh produce of wine in the world and the industry is consolidating as viewed by the mergers taking place among wine industries. Wine consummation remains high in the country and the size of the vineyard is estimated to be over 100, 000 hectares currently and expected to increase. Though, the country has a high concentration winery (reported to be highest in the world. It has been noted that the wine industry of South Africa only represents 3% of the total global wine market (McKeever Institute, 2006).

Economic changes

The country has a two-tiered economy, that is rivaling developed countries, it has a good fundamental infrastructure. It is a productive and industrialized economy which reflects is characterized by developing countries(Vardy, 2006).

The GDP of the country is reported to be $213 billion as in 2002
The real GDP growth rate was 3.7 in 2004
Unemployment rate 27.8 % (Vardy, 2006)

The government of South Africa needed to make some changes in the economic and social structure after gaining independence in 1994 to initiate economic development. The reduction of employment in the formal sector is making the informal sector have an increased number of people employed in the sector which is estimated to have gone up to 45% alone by 2004. Economic inequalities have continued to increase from 1995, by then 40% of the population accounted for the overall income and 40% of total income was commanded by 10% of the population who are the richest. Social changes undertaken since independence seem to be benefiting a small number of African minorities while the large population still experiences social-economic difficulties (Vardy, 2006).

South Africa’s domestic wine consumption was estimated to be around 0.5 billion liters by 2004. The population of 46 million people provides a ready market as the rate of local consumption is high. At the same time, the volume of the exports is increasing and from 2000 to 2004 it increased by 64 %. (Vardy, 2006)

Despite The continuous efforts to empower black people and the showing of improvement of the black middle class and efforts of social mobility, the wealth of the country still is unequally distributed about the racial lines. Despite that, the country has undertaken some reforms in budgetary and public finance management which has increased accountability and transparency (Vardy, 2006).

Social and cultural changes

Western Cape remains vital because the region is the most important in wine production and it has a rich history as being the starting point of producing wine in South Africa. The region also is highly cosmopolitan having different races settled there. The region thus is highly culturally diverse as compared to other regions. South Africans have a long tradition of making wine and wine in the country is taken as a social drink to enjoy. The long apartheid history highly contributed to South Africans taking wine as a solace.

Country Threats or Political Problems

The post-apartheid government of South Africa has made outstanding progress in maintaining the country’s harmonious move to democracy. Programs to promote and improve the basic social services in the country are underway. Better education and business opportunities are increasing. However, the government remains with the challenge of improving security, which is a big issue in the country. The rate of violence in South Africa is very high and this is a big threat to business investors(Moulton and Lapsley, 2004). The transport and telecommunication sector is highly modernized and efficient in most of the urban areas. South Africa has a good road and rail network

Railroads comprise 20,384 km linking 6 countries and 9 provinces. Highway network totals of 358,596 km providing faster movement (Moulton and Lapsley, 2004).

Wine industry observers in South Africa feel that the industry has the potential of being robust and more competitive. In South Africa many winery firms seem to depend on undertaking long term financing approach to finance their operations thus it takes a little bit longer for them to start realizing profits. A new winery firm will have to get arable land through purchasing it, there is long-term financial assistance available from the authorities where the firm can access though will have to repay with interest (Moulton and Lapsley, 2004).

There are several private wine estates which number over 70 though the number is increasing and also big cooperatives which are spread all over the wine areas of which around 5 thousand framers belong. In the south, the K.W.V which is a cooperative for the wine farmers is the one that deals with planted research and marketing of the wine. Though, it is working with other private enterprises to improve the quality of wine being produced.

Drawbacks for international trade

One of the shortcomings of carrying out business in South Africa, especially when it applies to the alcoholic industry, is the complex and dissemination of the government bureaucracy which deals which alcoholic trade and in particular importation of alcohol to the country. The high number of government entities and government-quasi officials who have jurisdiction or semi jurisdiction over tariffs, licensing, tariffs, quality control, and verification of origin is a bit confusing. Though, the government of South Africa is undertaking some steps to slowly remove the remaining controls in the industry to make it more attractive and business-friendly (Moulton and Lapsley, 2004).

Recommendation

For a company that wants to start a business in South Africa, it is important that it first carries out market research and analysis of the industry before undertaking further steps. The company also has to be prepared to invest in buying land which will be more profitable in the long run than purchasing grapes from farmers. It is much easy to have a joint venture business in the country than a company exporting its wine to South Africa as there is a lot of bureaucracy involved in the import/ export business in the country.
On the other hand, the government should avail land easily to foreign investors so that more wine companies may invest in the industry since the industry still has a big market that has not been exploited yet.
The government should give more incentive by reducing the interest rates and time spend on allocating such arable land to private developers.
K.W.V should work closely with private investors in the industry to develop the industry to greater levels. Areas of cooperation will include research and marketing which remains very important factors for the growth of the industry

Conclusion

The wine industry in South Africa has developed over many years but the industry in terms of the global market is still young. Though South Africa is among the top produces of wine in the world it has not taken fully the advantages available on the global market. The political situation in the country is stable and the government has tried to liberalize the market through undertaking policies that encourage a free market economy, but it needs to remove the remaining controls and improve security and social amenities to attract more investors to the country. It is true that that the industry still has the potential to expand and the challenges lie on the government and create a more attractive business environment.

References

Anderson K., N and Wittwer G. (2001): Globalization and the world’s wine markets: Overview, Discussion Paper No. 0143, Centre for International Economic Studies, Adelaide University, Australia
Chefs Help (2007): South Africa Wines; Web.
Department for International Business (2006): Country Profiles: South Africa; Web.
McKeever Institute (2006): South Africa: Economic Policy Analysis; Web.
Moulton K. and Lapsley J. (2004): Marketing Strategies, Successful Wine Marketing, Gaithersburg, Maryland: Aspen Publication, Inc.
Murchie, A (2007): A People to People Visit: South Africa; The Gale Group Inc.
Vardy, N (2006): South Africa Economy Overview from the Global Investor’s Perspective; Web.
Wild, J. J. et al (2006): International Business, Prentice Hall, 3rd edition,

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