Michael Porter on Corporate Strategy and Competitiveness

Group Project: South African Wine Cluster

4 September 2011 Prof. David Duffill

Team Members: Anne Naper, Ettiene Tukker, Joel Malahay, Peter Dahlvik and Simbarashe Samapundo

Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster

Table of Contents
1. 2. Introduction ............................................................................................................................................ 4 South Africa (SA) Overview ............................................................................................................... 5 2.1 2.2 2.3 3. History ........................................................................................................................................ 5 Wine Production in SA ............................................................................................................... 6 Demographics ............................................................................................................................. 7

Country Assessment SA National Diamond Analysis ........................................................................ 7 3.1 3.2 3.3 3.4 Factor (Input) Conditions............................................................................................................ 8 Context for Firm Strategy and Rivalry ..................................................................................... 10 Demand Conditions .................................................................................................................. 10 Related and Supporting Industries ............................................................................................ 10

4.

Cluster Assessment SAs Wine Cluster Diamond............................................................................. 11 4.1 4.2 4.3 4.4 Factor (Input) Conditions.......................................................................................................... 12 Context for Firm Strategy and Rivalry ..................................................................................... 13 Demand Conditions .................................................................................................................. 13 Related and Supporting Industries ............................................................................................ 14

5.

How well is the Cluster Doing on a Global Basis ................................................................................ 15 5.1 Grape Producers, Wine Cellars and Wineries .......................................................................... 15 5.1.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 SAs Exports ............................................................................................................... 16

Wholesalers ............................................................................................................................... 22 Manufacturers of Wine-Making Equipment ............................................................................. 22 Institutions for Collaboration (IFCs) ........................................................................................ 22 Universities and Research Institutes ......................................................................................... 22 Financing .................................................................................................................................. 23 Packaging .................................................................................................................................. 23 Capsules, Closures and Labelling ............................................................................................. 23 Events........................................................................................................................................ 23 Page 2 of 39

Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster 5.10 Wine Tourism ........................................................................................................................... 24 5.11 SAs Wine Industry Global Competitiveness and Global Trends ............................................ 24 6. How can SAs Wine Cluster do Better ................................................................................................. 26 6.1 6.2 6.3 6.4 Logistics .................................................................................................................................... 28 Labour, Communities and Institutional & Political Framework .............................................. 28 SA Wine Industry Strategy ....................................................................................................... 29 Opportunities/Factors Affecting SAs Wine Value Chain ....................................................... 29 6.4.1 6.4.2 6.4.3 7. 8. 9. Research, Development and Expenditure (RD&E) .................................................... 29 Yield per Hectare ........................................................................................................ 30 Supply Chain Performance ......................................................................................... 31

Summary and Recommendations ......................................................................................................... 32 Appendix A .......................................................................................................................................... 33 Appendix B ........................................................................................................................................... 34

10. References ............................................................................................................................................ 35

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster

1. Introduction
A cluster is a geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities. The geographic scope of a cluster can range from a single city or state to a country or even a network of neighbouring countries (Porter, 1998:199).

South Africas wine industry is geographically located and concentrated in the Western Cape Province. In this area, a cluster of interrelated companies and institutions that depend on and benefit from the wine industry has developed. During the last 10 years South Africas wine exports has increased substantially, placing SA as the ninth largest wine export country in 2009 (Indian Wine Academy, 2010).

Using diamond and value chain model assessments and cluster map evaluation, the current state of competitiveness in the South African wine cluster was analysed. It is viewed that South Africas wine industry is well positioned, for example in terms of location and climate conditions, while the ongoing development of the wine industry is threatened by factors such as low education, crime and corruption.

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster

2. South Africa (SA) Overview

2.1 History

In the 17th century, the Dutch began setting up refreshment points for passing ships at the Cape of Good Hope (close to Cape Point as per Figure 2.1), constituting the start of trade in the Cape area. The traded products included fabric and wine (alcohol), which were traded in exchange for land and meat.

Figure 2.1: SAs wine producing areas Referring to SAs history timeline (Figure 2.2), vast diamond resources attracted diggers to the northern centre of SA (Kimberly) in the 1860s. In 1880, the first Boer war broke-out where the British were Page 5 of 39

Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster defeated allowing a re-establishment of SAs independence. However, in the second Boer war (1899) the British succeeded in colonizing SA.

SA only became an independent republic in 1961 and a democracy in 1994. The National Partys (NPs) imposition of apartheid laws in 1948 resulted in SA losing out on international and domestic opportunities over the next 40 years. It was not until 1976 when black youths fought for their freedom and democratic change started. It all came together when Nelson Mandela was released from prison by President de Klerk (NP) in 1990. Mandelas approach to join hands and work together for a better future for all South Africans made him a world-renowned icon and peacemaker; opening opportunities to SA (e.g. SA hosted the 1995 Rugby World Cup and 2010 FIFA World Cup Soccer).

Figure 2.2: History of SA 2.2 Wine Production in SA

During the 1650s the first vineyard was planted and the first wine was produced in the Western Cape, with wine exports (to Europe) starting in 1788 (Figure 2.2). As depicted in Figure-2.1, the wine industry is concentrated in the Western Cape Province with various production areas (e.g. 3 Cape Agulhas, 12 Overberg, 13 Paarl, 16 Stellenbosch, 23 - Worcester), highlighted in colour. The Western Cape Province with its varying landscapes, weather patterns and differing soil types produces a wide range of quality wines. The Orange River district for example, with its warm, dry climate and limestone soil, makes it the leading white wine producing area. On the other hand, the red wines are produced in the Paarl and

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster Stellenbosch regions, where the soil is mostly granite from the mountain slopes. A majority of the winemaking workforce are farm workers which only need low-level education to perform their daily tasks.

2.3

Demographics

SA has a population of 50 million, of which approximately 25% is unemployed and 40% lives in poverty. These negative statistics have resulted in a rise in crime and corruption, adversely impacting SAs competitiveness. The government is internationally viewed as one of the root causes of SAs poor service delivery and corruption. Furthermore, governments plans to nationalise the mines and banks may lead to foreign direct investment (FDI) being diverted elsewhere.

In 2009 (Table 2.1), SA had a GDP of $287 billion (world ranking, henceforth WR: 32nd), which was higher than Finland and just below Denmark. Moreover, among the Sub-Saharan countries, SA had the highest GDP and the 3rd highest per capita GDP contributing to 0.7% of world GDP. Table 2.1: 2009 GDP data of SA compared to other countries
Per nation (US$ billions) 30 Argentina 310 31 Denmark 309 32 South Africa 287 33 Thailand 264 34 Finland 238 65 66 67 68 69 GDP Per capita (US$) Mauritius 6'800 Botswana 6'400 Costa Rica 6'300 Bulgaria 6'200 South Africa 5'800 % of world contribution 18 Australia 1.17 19 Taiwan 0.99 20 Poland 0.98 21 Netherlands 0.95 22 Saudi Arabia 0.86 23 Argentina 0.81 24 Thailand 0.77 25 South Africa 0.70 26 Egypt 0.68

Source: WEF (2010)

3. Country Assessment SA National Diamond Analysis

SA is one of only three African countries (the other two being Namibia and Mauritius) who are in stage 2 (of 3) of their development, which is primarily efficiency-driven and not factor-driven like the rest of the African countries (WEF, 2010). As a result, SA remains the most competitive Sub-Saharan African

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster country. A summary of SAs national diamond analysis, and the strengths and weaknesses is given in Table 3.1. Table 3.1: SA national diamond analyses

3.1

Factor (Input) Conditions

SA has good logistics infrastructure including ports (e.g. Cape Town and Port Elizabeth), international airports (e.g. Johannesburg and Cape Town), nationwide highways, railroad networks, and telecommunications systems/networks (e.g. MTN and Vodacom). Globally, SAs air transport, railroad, road and port infrastructure was ranked in the top 50 in 2010 (WEF, 2010). SA is also resource-rich, accounting for a majority of global production of gold (50%), platinum (80%) and diamonds (50%). In 2009, SAs mining sector overtook the agriculture sector to become the largest export sector in the country.

In 2010, SA was the 25th largest economy in the world (WEF, 2010). SAs financial sector was among the few in the world to withstand the 2008 financial crisis, thus maintaining the availability of financial/capital Page 8 of 39

Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster resources. Notably, SA currently is rated 2nd with regard to providing access to credit (World Bank/IFC, 2011), and overall, SAs financial sector was globally ranked in the top ten in 2010 (WEF, 2010).

The national diamond analysis also shows a number of competitive weaknesses related to the factor (input) conditions. For example, SA is known for having a high crime rate (i.e. hijackings-theft, murder, rape etc.) which is compounded further by the ineffective and thinly spread police force. In terms of business costs as a result of crime and violence, and reliability of police services, SA was ranked 137th and 104th in 2010, respectively (WEF, 2010). According to the United Nations world crime rankings, SA has the highest number of rapes, murders with firearms, and manslaughter per capita (UN, 2011).

The wine industry is labour intensive and employs roughly 270000 people consisting of unskilled (58%), semi-skilled (29%) and skilled (13%) labour. Although labour productivity increasd annually by 6% during 2005-2009 (SAWIS, 2009), the prevalence of HIV (17.8% of the population is infected UNICEF, 2009:1) has a negative effect on productivity resulting in SA being globally ranked second from the bottom at 138th in 2010 with regard to the impact of HIV on business (WEF, 2010). Moreover, Southern Africa accounts for more than 50% of the people infected with HIV potentially having a negative impact on the domestic workforce and output efficiency (i.e. the health of SAs workforce currently has a world ranking of 127th).

Although energy supply is reliable (including an abundance of hydroelectric, nuclear and coal based sources) in comparison to Sub-Saharan Africa, SA was only globally ranked 94th (2010) in terms of quality of energy supply. There are also unresolved issues on land reform which may impact the wine industry, and issues pertaining to labour market inefficiency (WR: 97th) (WEF, 2010: 302-303).

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster 3.2 Context for Firm Strategy and Rivalry

In terms of ease of doing business, SA is ranked 34th out of 183 economies (World Bank/IFC, 2011). According to the WEF (2010:303), SAs judicial system is considered independent (WR: 44th), intellectual property protection is enforced (WR: 27th) and investor protection enforcement is strong (WR: 10th). On the other hand, trade barriers in the form of import tariffs exist to protect certain local clusters (e.g. car assembly and wine industry). The trade unions (e.g. COSATU) are powerful and politicized which has resulted in rigid hiring and firing practises (WR: 135th), inflexible wage determination (WR: 131st) and poor cooperation in labour-employer relations (WR: 132nd).

3.3

Demand Conditions

SAs products have preferential access to the very important US markets (via the African Growth and Opportunity Act), British markets (via its Commonwealth of Nations membership), and SA is also a leading member of the regional bloc (Southern Africa Development Community). SAs products have enhanced their profile by virtue of governments Proudly SA brand campaign and the demand created by the 50 million-strong population (coupled with high, buyer sophistication) cannot be ignored [WR: 29th in 2010 (WEF, 2010)].

3.4

Related and Supporting Industries

Tourism is booming, having grown by 15.1% in 2010 compared to a global average increase of 6.7%. This growth is partly aided by the profile SA garnered from successfully hosting international sporting events such as the 2010 FIFA world cup soccer. Despite this increase and success, SA remains 34th as a tourist destination worldwide (SATSRU, 2011).

Despite having scientific research institutions, funding is small compared to its international competitors (e.g. France, Australia). Furthermore, attainment of higher education still poses a challenge with an

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster enrolment rate of only 15%. A major concern is the quality of the education system which was globally ranked 130th in 2010 (WEF, 2010). The 88% adult literacy rates are relatively high for Sub-Saharan Africa (only Zimbabwe and the Seychelles have a higher rate at 91.2% and 91.8%, respectively) and consequently, SA had a low world ranking of 129th (UNDP, 2007:1).

On the other hand, there are positive factors which enable SA to be ranked 54th on the global competitive list (WEF, 2010: 302, 303). These positive factors are corroborated in various fields such as intellectual property security (WR: 27th), accountability of private institutions (WR: 3rd), financial market development (WR: 9th), and auditing and reporting standards (WR: 1st). Furthermore, other valued areas include innovation (WR: 44th), science and research centres (WR: 29th) and business sophistication (WR: 38th). In terms of cluster development, SA is globally ranked 39th, making SA attractive in terms of domestic supply and consumer attractiveness.

4. Cluster Assessment SAs Wine Cluster Diamond

A summary of SAs wine cluster diamond is shown in Table 4.1. The strengths and weaknesses listed for each factor are briefly discussed below.

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster Table 4.1: SAs cluster diamond

4.1

Factor (Input) Conditions

SA has a Mediterranean-like wine growing climate. This, together with the differing soil types and hilly terrain of the Western Cape Province provide ideal conditions for growing high-quality wines. SA has an abundant, productive and low cost labour-force, however with a high unemployment rate of 24% in 2009 (STATSSA, 2010:30). Funding is readily available in terms of availability of financial services and financing through local equity markets. Furthermore, venture capital availability is fairly good, and overall, SA is globally ranked 2nd in terms of ease of getting credit (DoingBusiness, 2011:2).

In terms of weaknesses, SA has the highest crime rate (Heuni, 2010:9), and coupled with the HIV pandemic this negatively impacts labour productivity. When the apartheid regime (a system of racial segregation) fell in 1994, Land Restitution was one of the promises made by the ANC (African National Congress). As a result, SA has a lot of land reform programmes, such as the Recapitalisation, Land Rights Page 12 of 39

Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster Management and Tenure Reform programmes (RDLR, 2010:1). The land reform programmes have contributed to political conflicts and it is debatable whether the land reform programmes have been successful. SA also has problems with government bureaucracy and corruption, and as a result SA is ranked 49th in terms of irregular payments and bribes (WEF, 2010:303).

4.2

Context for Firm Strategy and Rivalry

Although SA has access to the US markets through the African Growth and Opportunity Act, it is still ranked very low at 149th out of 183 economies (DoingBusiness, 2011:2) in terms of trading across borders. SA has powerful trade unions; the largest being COSATU with approximately 1.8 million member workers (COSATU, 2011:1). The trade unions are involved in organising strikes and have given workers considerable power in relation to their employers, and as a result SA is ranked 34th out of 183 countries in terms of ease of doing business (DoingBusiness, 2011:2).

SA has a relatively strong and independent justice system, ranked 44th in terms of judicial independence (WEF, 2010:303). According to the National Treasury (2010:2, 7), tax revenue has increased at an annual average of 11.36% (during 2005-2009) due to inflation, high economic growth, high commodity prices, improvements in tax administration, and tax compliance. As a result SA is ranked 24th in terms of paying taxes the tax on profits is effectively 24.3% (DoingBusiness, 2011:2).

SAs wine has a strong brand that symbolizes quality and has received international awards, such as the prestigious International Wine Challenge, Berliner Wein Trophy and Decanter World Wine Awards (WOSA, 2011:1).

4.3

Demand Conditions

SA is a member of the Southern African Development Community (SADC) an organization with a membership of 15 states working towards regional integration. Their mission includes promoting Page 13 of 39

Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster sustainable and equitable economic growth (SADC, 2011:1).

The volatility of the SA Rand (R) has a direct impact on SAs wine industry, specifically exports. The IMF ranks SA as number one among 32 countries in terms of currency volatility. PricewaterhouseCoopers report on SAs Wine Industry (2010:15) highlights the industrys dependency on exports (Table 4.2) Almost 50% of production is exported, thus the exchange rate remains a crucial factor in the industrys profitability. Table 4.2: SAs total wine exported

4.4

Related and Supporting Industries

Wines of South Africa (WOSA) are a non-profit organization which provides support to the South African wine industry and promotes South African wines exported to key international markets (WOSA, 2011:1). The organization was established in 1999 and has more than 360 exporters in its database. SA also has a strong tradition of research and is now one of the new world leaders in terroir research (WOSA, 2011:1), although funding is low compared to its international competitors (e.g. France).

The National Tourism Sector Strategy works towards getting SA on the list of the worlds top 20 travel Page 14 of 39

Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster destinations by 2020. SA has an established wine tourism industry, which includes wine tours, wine tasting and wine farm weddings. The importance of tourism is corroborated by SAs Minister of Tourism who defined wine tourism as one of the fastest-growing and most lucrative sectors of the global tourism market (WOSA, 2011:1).

5. How well is the Cluster Doing on a Global Basis

SAs current wine cluster is illustrated in Figure 5.1.

Figure 5.1: SAs wine cluster 5.1 Grape Producers, Wine Cellars and Wineries

In 2010, there were approximately 3600 grape farmers in SA, however as depicted in Table 5.1, only 10% have the capacity to produce wine in excess of 1000 tons per year. There are more than 570 wine cellars which crush grapes, and 100 bulk wine buyers, of which 60% are wholesalers and 40% are exporters (Floris, 2011).

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster Table 5.1: SAs grape farmers production capacity

5.1.1 SAs Exports As depicted in Figure 5.2, SAs agricultural sector is the 7th largest contributor to world exports larger than tourism and closing in on transportation and logistics.

Figure 5.2: SAs global export share (all industries) Moreover, the agriculture sector breakdown depicted in Figure 5.3 shows that wine is placed 8th on the global export contribution list higher than spirits.

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster

Figure 5.3: SAs global export share - agricultural products (US$ Millions) This 8th placement is corroborated further in Figure 5.4 which indicates a steady growth in wine exports from 140 million litres in 2000 and close to 400 million litres in 2011.

Figure 5.4: SAs total wine exports 2000-2011 (litres) The average bottle of wine in a British supermarket typically costs around R40.50/4.05 whereas SAs estate-bottled wine sells at around R45/4.50. This price difference is one of the reasons why SA exports Page 17 of 39

Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster wine in bulk and bottled meaning that bulk exports can be sold for a cheaper price when packed abroad. Germany has been the largest bulk wine export market since 2006, with Britain growing by 19% to 37.7 million litres in bulk wine sales compared to 2005. In 2008, Britain was the worlds largest bottled export country and accounted for approximately 34% (Table 5.2) of annual exporting, followed by Sweden (13.6%), Netherland (9.8%) and Germany (8%) (Calwinexport 2011:10). Table 5.2: Bottled wine exports by country

As depicted in Figure 1 (Appendix A), SA supplied 2.92% of the worlds wine production in 2009 (WR: 7th), but only accounted for 1.81% of the acreage available to produce wine (WR: 14th) i.e. limited acreage is available, while production increases at a steady rate. Compared to all other nations SAs total acreage had a strong growth of 16.7%. The only other nation with a similar increase was China at 15%. As a result of the poor world vineyard acreage, global acreage decreased by 1.4%. As depicted in Figure 2 (Appendix A), SA accounts for 1.46% of total world wine consumption by volume, increasing at 0.4% per year (WR: 13th); while global wine consumption decreased by 1.57%. As depicted in Figure 3 (Appendix A), although SA had a 16.93% decrease in global wine production, it was still globally ranked 9th while global wine production fell by 6.85%. These production issues should be addressed if SAs wine industry wants to compete and have a competitive edge over their close rivals Chile, France, Italy, Australia, New Zealand etc. (Figure 5.10).

As depicted in Table 5.3, SAs total 2010 wine production was around 780 million litres, slightly down Page 18 of 39

Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster from 2009 but higher than 2008. Furthermore, exports reduced in volume and percentage; from 53.4% (2008), 48.3% (2009) and 47.5% (2010) [Floris, 2011]. Table 5.3: SAs wine production and exports 2008-2010

Moreover, as depicted in Table 5.4, the number of primary wine producers declined over the last 19 years by 23%. Table 5.4: SAs decline in primary wine producers and cellars

This decline was the result of producers being bought out to produce wines under a specific name of cellar (i.e. brand), increasing the power of larger producers and reducing the power of minor producers. Although this resulted in a decrease in cellars by 19% (Table 5.4), growth in cellars which crush grapes is still increasing. The steady growth rate in SAs wine production over the past years has resulted in the wine industry contributing approximately 2.2% of the countrys GDP in 2009, with an estimated macroeconomic impact of R26.2/2.6 billion, supported further with wine tourism accounting for R400/40 billion. The grape and wine production of SA during 2000-2008 is on a growing trend as depicted in Table 5.5 and Figure 5.5.

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster Table 5.5: SAs annual wine production (millions of litres)

Figure 5.5: SAs total wine exports 2000-2011 (litres) Grapes crushed (Figure 5.6) and grape yields (Figure 5.7) also depict a similar trend during 2000-2008, while wine exports (Figure 5.5) indicate a steady growth over the same period. However, this growth has been declining after 2008, as depicted in Table 5.4, Figures 5.6 and 5.7.

Figure 5.6: SAs grapes crushed 20002011

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster

Figure 5.7: SAs wine grape yield 20002011 (litres) Moreover, as shown in Figure 5.8, red wine has declined from around 40 million litres to 35 million litres but counteracting this decline it can be seen in the same figure that white wine has increased from 65 million litres to approximately 70 million litres.

Figure 5.8: SAs Red and White Wine Production (millions of litres) Page 21 of 39

Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster 5.2 Wholesalers

SAs certified bulk and bottled wine is sold through more than 100 wholesalers, who also take care of marketing and distribution. Certain wholesalers (producing wholesalers) also produce wine from their own grapes (Wood & Kaplan, 2008).

5.3

Manufacturers of Wine-Making Equipment

Various kinds of machinery and hardware are used to produce wine, and as a result numerous wine equipment manufacturers were established, for example (SA Wine, 2011):- barrels: All Things Wine and Columbit, boilers/burners: A.J. Thompson and Interbar Technology, blenders: Mixtec and Vintec, stainless steel tanks: Dantech Services and Grotto Manufacturing, washing systems (pumps, spray nozzles) for barrels and tanks: Autrex and CDS Group, equipment for water/effluent treatment: Clean Catchment Concepts and HWT, filtration equipment: Columbit and solid liquid filtration consultants, and vineyard equipment: African Composite Solutions and Eitan Machinery.

5.4

Institutions for Collaboration (IFCs)

SAs wine cluster has several IFCs (each one described in Appendix B) that associate and collaborate with wine producers, for example; ARC, WOSA, SAWIS, VinPro, SAWB, Wine & Spirit Board, Winetech and SASEV.

5.5

Universities and Research Institutes

Academic research has played an important role in the development of SAs wine industry. For example, the Stellenbosch University features the Institute for Wine Biotechnology, providing training and research for the national and international wine industry (Institute for Wine Biotechnology, 2011), the Elsenburg Agricultural College provides wine farmers with agricultural expertise and training (Department of Agriculture, 2011), and the Nietvoorbij Institute for Viticulture and Oenology is part of the Agricultural Research Council (ARC) and conducts research in various areas of the wine making process (ARC, 2010). Page 22 of 39

Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster 5.6 Financing

While still mainly locally financed, in recent years SA has opened up to foreign investors; thus experiencing a number of foreign investments. For example, in 2010, a Californian investment group bought Mulderbosch Vineyards, a producer of premium brand wine (Hamza, 2009).

5.7

Packaging

The wine cluster includes many producers of equipment and products related to the packaging of wine, for example, Columbit and CDS Group (SA Wine, 2011). Table 5.6 shows the ratio of different containers used for packaging SA wine. The total volume of wine sold in containers increased by roughly 14.6 million litres (5.1%). Clearly, with almost a 50% market share in terms of packaging, glass bottles are still the preferred container for wine. Since 2005, glass, plastic and bag-in-box containers have all increased their market share (Floris, 2011). Table 5.6: SAs Wine production and exports (2008-2010)

5.8

Capsules, Closures and Labelling

The wine cluster also includes many producers of corks and screw caps (e.g. Boland Mobile Bottling & Labelling and All Things Wine), and label producers like Boland Labelling and Coastal Labels (SA Wine, 2011).

5.9

Events

Being traditionally more beer drinkers, wine drinking is promoted to South Africans, specifically the black

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster middle class, by arranging events such as wine festivals (Siphugu & Terry, 2011).

5.10 Wine Tourism SAs tourism industry is one of its top-five hard currency income sources, attracting overseas visitors to the Cape shores due to a weaker and affordable Rand-currency and a unique African experience that is appealing to the modern world. Cape Town is well-known for tourism and tourist attractions such as Table Mountain, generally attracting around 0.86% of global tourism and making SA the second largest tourism destination in Africa. More importantly, in the context of this project, Cape Town is the place where SAs wine industry is established having over 15 wine routes with over two-thousand wines to sample and test. Approximately 50 thousand people work in SAs wine tourism sector, facilitating in wine tours/routes of which the Stellenbosch route is the oldest one and features more than 300 wineries (SA-Venues, 2011).

5.11 SAs Wine Industry Global Competitiveness and Global Trends As depicted in Figure 5.9, SAs wine industry declined and remained flat during 1960-1990 as a result of constrained/regulated competitiveness, economic and political environments. However, during 1990-2005, SAs wine industry experienced significant growth due to democratic transformation (initiated by F.W. de Klerk and Nelson Mandela). SAs local wine industry was forced to change and compete internationally and as a result adopted Vision 2020 (SAs Wine Industry Strategic Plan). Recently, according to Rooyen, et al. (2010:4-6), since 2005 (high point in SAs wine industry), SAs wine industry is in a declining phase in terms of competitiveness status (phase 6).

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster

Figure 5.9: SAs wine industry growth/decline phases (1960-2008) This decline is corroborated by the trends shown in Figure 5.10 which depicts SAs declining competitiveness compared to its competitors (e.g. France, Italy); with increasing competition from Argentina, New Zealand and Chile. According to Rooyen, et al. (2010:6), SAs decline in competitiveness can be found in its broader wine industry environment in which the businesses now operates. These constraining environmental factors include the increase in the value of the Rand, global warning/drought conditions and climatic fluctuations, increases in interest rates, high crime and corruption levels, lack of maintenance in infrastructure and export facilities, lack of skilled labour, and governments inability to provide sufficient regulatory and support services to the needs of the dynamic wine industry of SA export sectors in general.

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster

Figure 5.10: Trends in competitiveness of wine producing countries (1990-2007)

6. How can SAs Wine Cluster do Better

By monitoring and analysing SAs wine value chain for strengths, weaknesses, opportunities and threats, the stakeholders can more easily manage the risks, improve profitability and compete internationally. Winetech (Figure 6.1) is one of the major proponents to improving the SA wine value chain, and providing a sustainable basis of forefront technology and human resources in order to strengthen international competitiveness and profitability. (Winetech, 2011).

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster

Figure 6.1: Winetech organogram The primary and support activities of SAs wine value chain (Figure 6.2) are analysed through Winetechs technical expert committees who are responsible for identifying and prioritising research needs, and evaluating the merits, progress and funding of research projects (Winetech, 2011). The development of SAs wine cluster has directly resulted in the development and enhancement of SAs wine value chain.

Figure 6.2: SAs wine value chain

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster 6.1 Logistics

According to Wineland (2000), The ideal to create a market-driven, globally competitive SA wine industry is the real driving force for implementing a comprehensive and coherent logistics system that serves the whole industry. The three main focus areas include: i) Quality assurance e.g. Wine/Spirit Board certifies all SAs wines.

ii) Real-time management information systems or MIS e.g. SAs wine MIS was established to collect, process and disseminate industry information. iii) Applying regulatory frameworks to ensure international market requirements are met. For example, SA was involved in developing the GS1 (Global Language of Business) system, standards and guidelines (i.e. numbering and bar coding from grape grower to the retailer), in conjunction with global wine industry leader, France. Emanating from the GS1 System was the need for traceability tools such as bar coding systems and RFID systems an opportunity for SAs IT sector to get involved.

6.2

Labour, Communities and Institutional & Political Framework

Referring to the value chain (Figure 6.2), Winetechs training programme involves training and developing labour, communities, institutions and political frameworks through educational institutions (e.g. universities), creators of technology (e.g. students in research), transferors of technology (e.g. consultants), and practitioners of technology (e.g. wine-makers). By involving the various institutions, Winetech gains access and participates in syllabus development, training support, professional services, appropriation of bursaries, development of existing manpower potential, tutoring, and recruiting and screening of students. The emphasis on improving human capital in SAs wine industry is further corroborated in the PricewaterhouseCoopers report on SAs Wine Industry (2010:10), which identifies training and skills development as one of the areas needing improvement, the other being employee-employer communication.

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster 6.3 SA Wine Industry Strategy

Vision 2020 was initiated by Winetech in 1999 which lead to the formation of the SA Wine and Brandy (SAWB) Company in 2002, with its key objective of implementing the Vision 2020 strategic outline. The Wine Industry Plan (WIP) was prepared by SAWB through consultation with various stakeholders (e.g. wine producers, labour, cellars, and relevant government departments). The WIP was approved on 31st October 2003 by the Minister of Agriculture and Land Affairs as the strategic framework for cooperation and action in the SA wine industry (WOSA, 2009:1). According to a presentation by CSIR from Vinova (2007:12), the objectives of WIP will include achieving/improving international competitiveness, shifting from production-driven to market-driven wine industry, improve/implement business intelligence and information systems, improve performance of value/supply chain and logistics management, continuous innovation and human development, focus on preferred regions and terroir-based production, enhance ethical trade and social responsibility, and transformation.

6.4

Opportunities/Factors Affecting SAs Wine Value Chain

6.4.1 Research, Development and Expenditure (RD&E) According to an Australian government report (2011: 2), the GWRDC invests an average of R140/$20 million a year in RD&E (one of SAs competitors as per Figure 5.10) - with the objective of improving profitability, sustainability and competitiveness. Similarly, SAs wine industry (Winetech) received funding at an annual average of R27.3/$3.9 million during the period 1999-2010 (Table 6.1) in addition to the recently implemented (2009) annual tax credit from the South African Revenue Services on all operating expenditure actually incurred. For comparison, France receives around R110/11 billion each year from the EU in the form of agricultural support, approximately R380/38/$54 million of the funding went to wine producers in 2008 (French-Property, 2010: 1).

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster Table 6.1: SAs wine research and development funding

Source: Winetech (2010) Clearly, the significantly lower RD&E annual spend and financing/funding in comparison to Australia ($16.1 million lower) and France ($50.1 million lower), places SA at a disadvantage. As emphasised in Winetechs 2010 Annual Report (2010: 39), in the last 7 years (2004-2010) funding has been flat - in an inflationary surrounding, with an increase in RD&E and technology transfer demand; it is difficult for SAs wine industry to be competitive.

6.4.2 Yield per Hectare Wine production per hectare during 2004-2008 was dominated by Italy (56/ha), France (50/ha) and Spain (30/ha); even though SA produced a higher yield of 75ha (Table 6.2). Potential reasons for this may be that, for example in France, the yield per hectare (ha) has an inverse relationship to the quality of wine (the lower the yield the higher the quality). As a result, high quality wine-producing regions had a maximum permitted yield per hectare (Morss Global Finance, 2008: 1). Alternatively, other contributing factors may include production efficiencies, climate and soil. Page 30 of 39

Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster Table 6.2: Wine production by country per hectare

6.4.3 Supply Chain Performance Although SAs logistics and supply chain system is well established, 42% of SAs wine supply chain functions consider their overall export performance as lower than their international competition (Table 6.3), and another 42% consider themselves equal to their competition in terms of meeting stakeholder requirements (e.g. lead time, service strategy) - highlighting further room for improvement. Lastly, SAs wine industry should consider improving its domestic wine consumption market (WR: 100th, outranked by juice, beers and spirits) which may trigger additional cluster growth and development. Table 6.3: SAs overall logistics/supply chain performance compared to international competition

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster

7. Summary and Recommendations

The terrain and soil of the Western Cape Province provides ideal conditions for wine-making, and SA today belongs to the top nine wine producers in the world by volume.

Wine-making in SA goes back to the 17th century. With time, as wine-making skills improved, a number of companies in related industries were established in the Cape to support the wine producers. Institutions, universities and RD&E centres started to collaborate with the wineries; with the objective to improve quality and increase production volumes. The South African wine cluster was formed.

The cluster has helped the South African wine industry experience tremendous growth and development during the last couple of decades. With the possibility to produce large volumes of high-quality wines, exports have tripled since 2000, now constituting around 50% of the total production. However, despite a number of advantages such as climate, terrain and low labour costs; the competitiveness of South Africas wine industry has declined after 2005.

The five actions identified as the most crucial measures to be considered to ensure the future well-being and sustainability of SAs wine cluster include (i) restricting the strength of the SA currency, (ii) improving maintenance in infrastructure and export facilities, (iii) improving labour skills, (iv) reform governmental regulations and support services, and (v) reducing crime and corruption.

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster

8. Appendix A
Figure 1: World vineyard acreage by country
2006 - 2009 and % change 2009/2006 Acres (000) Country World Total Spain France Italy China Turkey United States Iran Argentina Portugal Chile Romania Australia Egypt Moldova South Africa 2006 18,178,969 2,805,151 2,056,561 1,850,300 1,042,769 1,269,674 937,179 778,365 551,117 549,867 444,780 470,216 390,600 363,904 346,896 278,524 2007 18,174,171 2,861,055 2,129,724 1,771,055 1,091,357 1,197,471 936,509 778,365 558,067 550,045 449,722 463,631 430,487 369,056 341,655 284,165 2008 18,194,466 2,865,200 2,096,285 1,741,331 1,122,100 1,192,972 937,399 778,365 559,802 550,292 449,722 479,468 427,718 380,425 337,227 321,230 2009 17,926,094 2,724,700 1,966,510 1,712,607 1,200,000 1,200,000 943,750 778,365 560,000 536,270 449,722 441,153 402,639 385,000 337,000 325,000 % of total acreage 2009 100.0 15.2 11.0 9.6 6.7 6.7 5.3 4.3 3.1 3.0 2.5 2.5 2.2 2.1 1.9 1.8 % change 2006/2009 (1.4) (2.9) (4.8) (7.4) 15.1 (5.5) 0.7 0.0 1.6 (2.5) 1.1 (6.2) 3.1 5.8 (2.9) 16.7

Figure 2: World wine consumption - Ranked by consumption

2006 - 2009, % change 2009/2006, % change 2009/2008 and % of world consumption - 2009 (Liters 000) Country/Territory World Consumption France United States Italy Germany China United Kingdom Russia Spain Argentina Romania Australia Portugal South Africa 2006 23,871,620 3,394,900 2,633,745 2,733,200 2,021,000 1,327,900 1,193,600 1,060,000 1,365,800 1,110,300 258,400 458,300 470,216 340,700 2007 23,969,918 3,034,900 2,752,068 2,368,500 2,013,600 1,394,300 1,224,900 1,113,000 1,339,100 1,116,600 524,200 483,400 452,400 355,700 2008 18,194,466 2,973,300 2,761,887 2,616,600 2,013,600 1,464,000 1,245,4000 1,168,700 1,216,800 1,067,700 546,400 481,600 457,000 356,200 2009 17,926,094 2,913,800 2,752,140 2,450,000 2,011,800 1,537,200 1,266,00 1,145,200 1,127,100 1,029,200 509,700 493,100 455,000 341,900 % change 2009/2006 (1.57) (14.2) 4.5 (10.4) (0.5) 15,8 6.1 8.0 (17.5) (7.3) 97.3 7.6 (3.2) 0.4 % change 2006/2008 (2.07) (2.0) (0.4) (6.4) (0.1) 5.0 1.7 (2.0) (7.4) (3.6) (6.7) 2.4 (0.4) (4.0) % of world consumption 2009 100.00 12.40 11.71 10.43 8.56 6.54 5.39 4.87 4.80 4.38 2.17 2.10 1.94 1.46

Figure 3: World wine production by country

2006 - 2009 and % change 2009/2006 Liters (000) % of total Country World Total France Italy Spain United States Argentina Australia Chile Germany South Africa 2006 28,729,000 5,302,500 5,460,000 4,367,900 2,438,300 1,539,600 1,325,000 844,800 899,500 939,800 2007 27,128,800 4,654,700 4,918,100 4,207,000 2,510,800 1,504,600 955,000 828,000 1,036,300 851,600 2008 27,173,900 4,280,600 5,047,000 4,190,900 2,431,500 1,470,000 1,237,000 869,000 999,100 763,300 2009 26,759,900 4,700,000 4,650,000 3,800,000 2,777,200 1,210,000 1,171,000 987,000 928,000 780,700 liters 2009 100.0 17.6 17.4 14.2 10.4 4.5 4.4 3.7 3.5 2.9 % change 2006/2009 (6.85) (11.4) (14.8) (13.0) 13.9 (21.4) (11.6) 16.8 3.2 (16.9)

Source for Figures 1-3: Wine Institute (2010) Page 33 of 39

Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster

9. Appendix B
Description of SA wine IFCs

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Michael Porter on Corporate Strategy and Competitiveness Group Project: South African Wine Cluster

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