The strong rand is hammering the competitiveness of SA manufacturing. The wine packaging industry is the latest to be hit.
The Simondium bottling plant of FirstCape Vineyards, the biggest exporter of SA wine to the UK, stands idle, with 25 workers laid off.
Two years ago, 30m bottles of wine were bottled locally by FirstCape. Today all of that business has gone offshore. The wine is exported in bulk and bottled in the UK, saving exporters up to R1/bottle in bottling and packaging charges at the current rand exchange rate.
But the UK’s gain is SA’s loss. It means 30m fewer glass bottles were sold by Consol Glass last year, 30m fewer screw caps were sold by MCG Industries, and more than 60m fewer labels were sold by Rotolabel.
Several other bottling plants are being closed or mothballed. Just outside Stellenbosch, The Company of Wine People is closing its plant and retrenching close on 70 people. Its volumes have halved in two years following the loss of two big accounts that have switched to bulk exports, according to sales and marketing director Chris O’Shea.
The losses across the main players in the packaging industry easily exceed R300m over the past 18 months, says Consol Glass sales and marketing director Dale Carolin.
He says Consol’s wine bottle sales have dived 20% over the past year because of the growing trend for wine exporters to shift out of glass bottles into bulk exports. Nampak Wiegand Glass reports the same experience and is considering retrenchments.
In 2005, only 32% of wine exports left SA in bulk format and it was typically low-value wine. But by June 2011, this had reached 45,6% — a rise of over 65m litres. Higher-value, branded products are increasingly going this route.
SA Wine Industry Information Systems (Sawis) estimates that for every 10m litres of wine displaced from bottles into bulk shipments, about 107 local jobs are lost.
Though wine producers express regret about the harm they are causing to the packaging industry, their decision to move into bulk exports is driven purely by economics. The main catalyst is the strength of the rand, which is currently 20% overvalued on some measures.
Many players also blame the rapid rise in other input costs common to all manufacturing processes, like annual electricity hikes of 25% and above-inflation wage demands.
Nampak Wiegand Glass’s wine bottle price increases have been well below 5% for the past two years. “Our costs are driven by electricity, transport and gas prices as well as labour increases,” says MD Stoney Steenkamp. “It’s clear we’ve under-recovered on our costs to assist the wine industry.”
SA wine exports are down 8,5% overall (in the year to June 2011 versus the year to June 2010). About half go to the UK, where the market is under huge pressure. Vat and excise duties on wine have been raised at a time when the economy is barely growing. Consumers have to be enticed to spend.
“I can’t increase my selling price to the UK consumer by 30% to compensate for the rand and on top of that add 10% to compensate for domestic input cost increases,” says FirstCape MD Kobus van der Vyfer. “I’d be out of business.”
The problem is that the rand has been strong for 28 consecutive months, he says. “For the first year you hope the rand will start to weaken and so we shifted in 2010 to exporting only about 40% of our wine in bulk. But two to three months ago [with the rand still strong] we had a serious discussion and decided to ship it all in bulk.”
The savings are straightforward. First, a producer needs to hire only half the container space on a ship to transport in bulk as opposed to shipping bottles, slashing the transport costs. Second, packaging material and glass bottles are cheaper in the UK and Europe because of the strong rand and inflation differential. On the other hand, bottling costs are higher there. However, the savings on the other items more than outweigh the latter, leading to net savings of around 30% currently.
FirstCape has mothballed rather than sold its bottling plant in case the rand weakens substantially at some point and domestic bottling becomes worthwhile again — but it isn’t expecting much to change over the next year or so.
SA’s second-biggest wine exporter into the UK, Constellation Wines (now Accord Wines SA), recently shifted 80% of its exports out of bottles into bulk format, knocking volumes to The Company of Wine People, which did its bottling. When the latter lost a contract with Spier for the same reason, it was no longer economical to keep the plant open.
Andre Barnard, national sales manager of MCG Industries, which manufacturers packaging and screw caps for the wine industry, says the shift to bulk exports has hit the firm’s bottom line and, if it continues, could threaten jobs.
“In previous years increases in input costs were offset by a weak rand but now we’re basically exporting jobs,” he says. “And it’s not just in the wine industry that SA is finding that it’s uncompetitive. This is a wake-up call for a lot of businesses in SA — that we have to focus on reducing input costs.”
But while cost-push factors are driving SA exporters’ behaviour, buying patterns in Europe are increasingly being driven by environmental considerations.
In 2007, the UK’s Waste & Resource Action Programme (Wrap) began to encourage the importation of bulk (as opposed to bottled) wine into the UK. The objective of this government-funded NGO is to reduce the transport emissions associated with New World wine imports and support the manufacture of standard green bottles in the UK.
Wrap estimates that bulk transport reduces CO² emissions by 2kg for every 100km travelled.
All well and good, says Carolin, but if the UK is so concerned about environmental factors, why aren’t they shipping their whiskey off in bulk? And then there’s the fact that with the big increase in bulk wine imports from places like SA, Australia and Chile, the UK glass industry has enjoyed volume sales growth of over 10% over the past year. If it’s growing, so are its emissions.
“The UK is driving its own beneficiation under the guise of an environmental campaign,” says Carolin. “What they’re doing would appear to be nothing more than the thinly veiled protectionism of the UK packaging industry. Its gain comes at the cost of de-industrialisation and loss of employment in the countries of wine production, most of which could be termed developing.”
The big UK supermarkets like Tesco don’t see it that way. “When we’re exporting in bulk they appreciate the environment-friendly factors as well as the fact that it means more job creation in the UK, so we get a few extra points in their books,” says FirstCape’s Van der Vyfer. “It’s a case of adapt or die.”
Wine has become a victim of the retail margin squeeze. The SA wine industry is going to have to look at its manufacturing competitiveness and diversify away from Europe towards faster-growing markets in Africa and Asia to prevent further attrition.
