Ses'fikile Launch

Michael Fridjohn, 18 September 2006

MORE than a decade into a postapartheid democratic era, the Cape wine
industry is battling with transformation and empowerment issues. At one
level this is hardly surprising. Many less complex sectors of the economy
have failed to come up with a perfect paradigm.

Perhaps more important, wine - insofar as it is part of the wider question
of agriculture - is struggling to find a way to address the fraught issue of
land.

The elapse of time has not simplified the question of land ownership. On the
contrary, it has become increasingly clear that grape production - without
the added value of a wine brand - is one of the riskiest sectors within
the trade. This was not the case in the immediate post-1994 period.

With soaring international demand for Cape wine , growers held the key to
the value chain and upped their prices. Higher land values followed.

Bull markets don't last forever. The fashion which put South African wine
on the world map moved on, the rand stopped its precipitous decline, and the
balance of plantings shifted from an oversupply of white cultivars to a
surplus of reds. Between 2002 and 2006, for example, shiraz availability
increased more than threefold while the market price of grapes fell more
than 60%.

In the same time, however, the costs of farming the land have increased by
at least the rate of inflation. The market has become more discriminating
about the fruit that it buys.

While older vineyards theoretically produce the best grapes, SA's virus
problems compel growers to replant more often than our competitors. All of
this produces a set of numbers which makes land ownership look like very bad
business.

If you are growing fruit for the top end of the market, you will incur a
replanting cost of more than R120000 a hectare every 10 years. It will cost
you about R20000 a year to farm each hectare for a yield of between six and
eight tons.

With selling prices at R2500 a ton, you would be lucky to break even, even
if your land is debt-free. If, however, you have to pay for it - even on the
never-never, which characterises so many empowerment-transformation deals -
your running costs will absorb your income.

It is not surprising that there have been very few empowerment transactions
involving a share of land ownership - and even fewer at current exchange
rates.

Some of the earlier deals have survived and one or two appear to be
flourishing - an indication of great mentoring by the former sole owners and
good timing in terms of catching the post-1994 boom before it petered out.

Probably the best of these examples is Thandi - set up as a joint venture
between Paul Cluver (of the eponymous winery), his workers, SA Forestry and
their employees. Its wines are good, there has been a regular demand -
fuelled in part by the commitment of the UK supermarkets, who have shown
this and other such ventures great support. As important, the expectations
of the joint venture's shareholders have remained realistic.

Recently a consortium led by Gauteng premier Mbhazima Shilowa launched a
wine called Epicurean, having sourced the bulk material from the Rupert
cellars. They recognised that they were best able to add value at the
marketing and branding side of the business. Accordingly, they selected
their product and established a different business model - one which is not
vastly different from how wine wholesalers operate the world over.

This model is now being repeated in a project called Ses'fikile - 100% owned
by black women. The wine is vinified at Flagstone, though the Ses'fikile
partners have participated in the production and one of them is learning
wine -making. They have given up their jobs as teachers to take on the
marketing and sales of their three wine ranges.

Flagstone provides infrastructural and logistical support in what is hoped
will be an arm's-length relationship.

Both Epicurean and Ses'fikile optimise the relationship between the brand
owners and the marketplace, at the same time avoiding the trap of investing
in underperforming assets.

In the current trade - and pretty much for the foreseeable future - grape
supply will exceed demand. Why have the burden of land ownership when your
interest lies in the wine , itself a product one remove from pure
agriculture?

This new brand ownership model may not satisfy the demand for land reform in
Western Cape, but it could prove a lot smarter for the shareholders.

As long as they are able to obtain a real consumer franchise, their position
would be the same as that of Kumala - SA's biggest-selling international
wine brand - no bricks and mortar, just a guaranteed route to market.

Michael Fridjhon