Retailing wines for under R30 in South Africa is only possible for factories…

I have been researching much broader sales coverage by selling the wines through the large grocer chains for one of our projects. These chains already sell a very significant % of all off-premise wines in South Africa. The reality is that the vast majority of wines sold via these retailers sell below R30 per 750ml bottle and that the volumes above R30 are a very small % of wines sold.

While doing the homework on this potential channel I met with a number of people in retail and in the channel serving the large retailers. I have to say they were very professional, open and honest gentleman. I think they run lean, efficient organizations.

If you want to deal with the large retailers, you need to be able to serve them the way they need to be served, which means working with one of the specialist retail distributors.

Getting the wines onto the shelf and then into a trolley is a fairly complex process with a number of moving parts:

You need to physically get the wines from your winery to the retail outlets, which typically involve sending palettes of wine to the regional distribution warehouses. From there they have to move to the stores once ordered. Invoices need to be made out, delivery notes have to be signed, payments have to be collected and remitted, minus fees, to the winery.

In order to get onto the shelves in the first place you need a vast sales force to call on the retailers and their specific stores, negotiate some placements and ‘facings’. You made need to contribute to the retailer’s broadsheet adds and have capacity to keep some level of presence in the various regions as brand owner.

The retail distribution sales organization will need to work closely with the retailer to ensure that the wines are well promoted and keep moving off the shelves fast enough, or else the wines are returned to the winery.

All of this costs a lot of money! If we use the example of a wine retailing for R29.95 (inc VAT), we find the following layers of fees and costs:

  • Store margin required: 18% = R5.39 which yields a trade price of R21.54 excluding 14% VAT
  • Logistics costs of 12%: R2.59 per bottle of 750ml wine
  • The cost of the distribution sales force at 10%:  R2.15
  • The retail group will typically expect a further ‘trading terms discount of 7.5% at statement time: R1.62
  • In addition, the retailer would like to run so-called ‘cycle deals’ whereby they put the wine on promotion and that will typically cost 5%: R1.08
  • And the retail group will typically take a 2.5% settlement if they pay you this century: R0.54
  • So, the total (ex VAT) to get the wine to the store, support the sales process and collect the money is R7.97, or 37% of the trade price.

Result is the winery receives R13.57 (ex VAT) for the wines sold through the retailer.

Now lets consider the wine costs (ex VAT):

  • Current bottle price is R2.74 after massive increases this year
  • Stelvin closure R0.90
  • Labels could run from R0.50 at low end to R1.50 for high quality label
  • Bottling costs (including filters) R0.65 per bottle
  • Labeling costs R0.50
  • Box and inserts to protect bottles R0.75 per bottle
  • Sub total of R6.00 to R7.00 for the packaging depending on quality – say R6.50
  • R1.46 to SARS for customs & excise

    This leave a grand total of R21.54 less R7.97, less R6.50, less R1.46 = R5.61 for the wine itself, if absolutely no profit is made!  A wine factory, producing huge volume, will obviously be able to get better prices on the packaging side.

    That works out to about R7.50 per liter of wine that is 100% ready for bottling (protein stable, sterile filtered and cold stablised). And at that level there is NO profit, nor funds for the broadsheets or your own sales & marketing organization!

    Bulk wine prices are climbing well above the R7.50 per liter levels at present and a winery can get the R7.50+ with no cash outlay required for packaging, dealing with sales force, taking production risk, the whole channel to market etc.

    One could thus deduct that wines costing well below R5.00 per liter have to be used for retail wines at this price point. The higher quality, higher price bulk-wines will find other, lower risk, less costly routes to market offering more attractive cash flow options.

    With total South African wine exports up 17% for the year to April 2009, on the back of more than double the growth in the prior year, I predict that we are heading for interesting times in the local wine industry. Costs have gone up dramatically over the last few years, but local wine retail price points have lagged significantly.

    I predict that getting a half decent quaff, at less than R30 in the large retailers, may become a thing of the past quite soon!

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    2 Responses to Retailing wines for under R30 in South Africa is only possible for factories…

    1. Ross Sleet says:

      Interesting article Dana. The broad summary is that you need to invest in your brands below R30 and try and reap your investment above R30, not easy in this market place!

      Regards

      Ross

    2. Dana Buys says:

      Good point Ross, the problem I see is that the likely cost of grapes & wine is moving up and there is no extra plantings coming online anytime soon.

      To what extent should wineries invest in brands at a price point that is not profitable? Does it really help the higher price, much lower volume brands?

      The industry needs to increase the customers’ willingness to pay – ie the price points needs to move up!

      I remain a firm believer in the need for a South African generic wine marketing effort – that is something that may be able to help improve the price points in time.

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