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South African Wines Seek To Carve Out US Growth

May 17, 2011

Wine exports from South Africa, the world’s seventh-largest wine producer, declined by nearly 7% last year, slipping below 2008 levels. But some South African brands are achieving growth despite tough conditions. In the U.S., which remains largely untapped, top South African wine player Distell aims to make its Two Oceans label the major volume driver in a category that sorely needs critical mass.

While South Africa’s overall wine exports fell in 2010—due primarily to a 3-million-case plunge in its biggest market, the U.K.—shipments to the U.S. market rose by 17%. But volumes in the U.S. remain small at around 1 million cases, as the category has yet to gain traction with consumers. “The U.S. market share for South African wines remains flat and the category is stationary, without a lot of movement or growth,” says Carina Gous, international wine director for Distell, which has sales of $1.7 billion annually, around two-thirds of that in South Africa. South African bottled wine imports in the U.S. have hovered around the 1-million-case mark for the past three years, according to Impact Databank.

Distell has been present in the U.S. for years through its premium-positioned Nederburg and Durbanville Hills wine brands (imported by Dreyfus, Ashby and Aveníu Brands respectively). Now it’s making a push in the $7 to $10 range with Two Oceans (handled by Aveníu), aiming to “build it into the main South Africa brand in the U.S.,” according to Gous. Focusing on U.S. wine-consuming areas like the Northeast, Southeast, California and Illinois, Two Oceans is outpacing the category but is still in the process of extending its reach across the country.

Distell isn’t the first to try moving South African wines into the U.S. mainstream. E&J Gallo introduced its Sebeka label in 2007, selling 200,000 cases the first year at a similar price point to Two Oceans. But since its initial strong showing, Sebeka has endured double-digit declines. One marketer making gains within the category is Alabama-based Vineyard Brands, whose Man Vintners and Vinimark wines have seen double-digit volume growth in recent years. Vineyard Brands also handles the Fairview and Spice Route brands, which combine for around 60,000 cases.

While a strong South African rand has squeezed margins, South African producers continue to hold the line on pricing in order to maintain market share, while seeking to over-deliver on the price-quality ratio. “Our South African portfolio has held steady, even if it’s under the same pricing pressures faced by all premium wines,” says Peter Morales, president of importer 57 Main Street, whose South African labels include Vergelegen, Gary Player, Peter Andrew, Tumara and others. “Consumers are seeking the best quality-value ratio they can find, and thus they’ll continue to explore Southern Hemisphere wines.”

Despite efforts to build the category in overseas markets, vineyard investment in South Africa is waning. Erhard Wolf, general manager of grape and wine supply for Distell, recently told Bloomberg News that the local industry could face a grape shortage within five years because of a continuing net decline in vineyard area. According to the South Africa Wine Information Systems (SAWIS) trade group, about 5,000 hectares (12,355 acres) of vineyards have been removed without replacement annually since 2005.

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

Still, investment in the category could rise quickly if the economy picks up and Distell’s efforts with Two Oceans come to fruition. As Ken Forrester, a top South African Chenin Blanc producer who ships around 30,000 cases to the U.S. annually, tells Shanken News Daily sister publication Wine Spectator, “We don’t need a massive Yellow Tail-type brand—look what Cloudy Bay did for New Zealand. But we do need critical mass on the volume side to help drive the category.”

One strength of the South African wine category is a remarkably diverse varietal range, which includes Chardonnay, Cabernet Sauvignon, Chenin Blanc, Syrah and other Rhone varietals. “Many consumers are still in discovery mode about South African wines,” Morales adds. “They’ve heard good things and have had good experiences with the wines. But retail and restaurant access for quality offerings certainly can improve in this market.”

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