Reaching a higher altitude

While we at Silkbush Mountain Vineyards know our craft and quality of wines, we now have a collection of prestigious wine awards to support our claims. Fifteen medals have been awarded to the Silkbush Wines! Included in these, are awards from Ultra Value Wines, Michelangelo Awards and the Gold Wine Awards. We are particularly proud of the Silkbush Altitude taking yet another Gold at the 2019 Vitis Vinifera Awards.

We are also happy that our very own Kingsbury Cottage, was awarded best Countryside Holiday Home Accommodation in Worcester in the first ever annual sa-venues.com Guests’ Choice Awards!

Selling More South African Wine Overseas (Part 3)

Captain of 2016 South African Rugby 7 team with Michaela Stander, Wines of South Africa representative, in Hong Kong

Hong Kong, as a former British trading colony, has a long history of familiarity with English, and recent affinity for French wine. A high cost, seaside city of 7.1 million, populated with 92% aging Han Chinese (and 4% largely Filipino and Indonesian foreign domestic helpers), HK’s main role today is to serve about 55-60 million visitors/year, of which 75% are from mainland China. Wines of South Africa (WOSA) has an experienced market representative, Ms. Michaela Stander, stationed in Hong Kong. She is highly capable, well respected, and knows the market and its participants quite well. In Michaela’s considered opinion, HK has major value as a cultural/style trend setter for the rest of the PRC as well as much of Asia. Today, unfortunately, RSA wine reportedly has (at most) a 1.5% market share in HK, and therefore its visibility is minimal.

Above all else, Hong Kong for the past 7 years has been ranked the least affordable city in the world. Home prices have nearly tripled over the past 10 years. Twenty years ago HK’s GDP was 18% of China’s; now it is 3%. It’s port, once the world’s busiest, has slipped to fifth place. Older hotels are being converted into offices due to escalating rents: in Central, leasing office space is about $16/sq. ft per MONTH, up 6% from a year ago and expected to go 10% higher. The Central office vacancy rate is a very low 1.8%, due in largest part mainland China firms opening HK offices. Prime rents are double those of London’s West End and Mid-town Manhattan, already fifth and sixth in the world. (With an increasing cost of living, we believe many locals will like to enjoy more affordable, high quality wine, and those in the food and beverage industry can favorably influence the tourist contingent as well.)

Not surprisingly, the French recognize Hong Kong is as a key Champagne market. In 2016, Hong Kong ranked second in Asia and 14th worldwide among export markets for Champagne. How to make headway against the French wine dominance, therefore, and increase RSA wine market share in HK, and its visibility is the key question. With 80% of the HK population transient at any given time, gaining attention is a major challenge (for any wine region other than France).  Certainly people on vacation or business are not spending much time absorbing local media offerings. Therefore, it appears to us that the approach must be via restaurants, hotel bars, upscale retail outlets, and perhaps coordination with Internet travel agencies.

Over the past six months, according to Wine Intelligence, 48 per cent of Chinese imported wine drinkers bought wine online, with eCommerce “vital” to Chinese wine trade, driven by recommendations and lower prices. An optimal long term approach to the Chinese wine consumers unfamiliar with RSA wines may be first through Internet contact with their “influencers,” such as PRC based bloggers/journalists, who then encourage HK consumer visits to include specific “imported wine tasting rooms/venues,” and thereby encouraging continuing consumer wine sales made via online purchasing/eCommerce. None of this will be easy, or initially profitable, but little in business is.

All else aside, HK has some attractive aspects insofar as entering the Chinese wine market. First, since 2008, there are no tariffs, import duties, or Value Added Tax (VAT)on wine. Since the combination of these costs approaches 50% in the PRC, it is relatively inexpensive to import to Hong Kong, and no country has an advantage over another. Secondly, there are no country-specific labeling laws such as apply in mainland China so that is an advantage for low volume, marketing startups. On the other hand, temperature controlled warehousing is expensive and HK is quite warm most of the year as it is only 17 degrees North of the Equator.

Not explicitly considered heretofore is the value of increased HK/Chinese tourism to the RSA Winelands and how it might be promoted in HK (and nearby Macau). Tourism increases are difficult to inspire and gauge but potentially very significant for South Africa. In conjunction with a proposal to promote retail awareness of RSA wine in HK, perhaps others will suggest ways to promote travel to the Mother Country and measure increased tourism. Developing a base line of flights to Johannesburg from HK and other PRC cities, and then measuring the annual increase in traffic, if there is one, might be a viable approach.

Further, if West Cape Tourism is willing to do any advertising in HK, and via the Internet, there may be possible tie ins with a proposed HK wine tasting program and with, for example, www.Ctrip.com , China’s biggest online travel site.  Important to note, Ctrip.com is challenging Priceline.com  to become the world’s largest travel platform. Notably, Ms. Jane Jie Sun, Ctrip.com’s CEO, has been quoted as saying that after the Chinese buy a house and a car, they want to travel. There must be real potential for increasing Chinese “wine tourism” to the Cape Winelands and the rest of South Africa, and promoting such awareness in Hong Kong’s transient population might be the best start.

Any discussion of HK without considering Macau/ Macao, the former Portuguese colony 40 miles across the water from HK, would be an oversight. Macau is a Special Administrative Region of China, just like HK but much smaller; with a population of 650,900 living in an area of 30.5 km2 (11.8 sq mi), it is the most densely populated region in the world.  However, because Macao is the only place in Greater China where it’s legal to operate a casino; accordingly, gambling and tourism became the largest sectors of Macao’s economy and Tourist arrivals in 2016 exceeded 30 million. Since 2006, its gaming revenue has been the world’s largest.

Macau is among the world’s richest regions, and as of 2015 its GDP per capita by purchasing power parity is higher than that of any country in the world, according to the World Bank. Further, there are no sales taxes, import tariffs, or Value Added Tax (VAT) in Macau. Accordingly, Macau may have perhaps 50% or greater the potential for wine sales as exists in HK.

 

Selling More South African Wine Overseas (Part 2)

In Part 1 of this series, we discussed the problems that RSA wine faces in trying to increase its miniscule (.25%) market share in the United States (US).  To mix an old metaphor, “in the US the dogs are not eating the RSA dog food”. Unfortunate, but true. That aside, the major market potential that beckons most strongly is Peoples Republic of China (PRC or just China) and to a far lesser degree, certain other Asian countries, such as Japan, Vietnam, and Singapore, to name three). Reportedly over 70% of the growth in expected international wine sales will be in this Asian area for the next 10 or more years. Of course, this potential is known by all wine producing regions in the world, and the resulting competition is and will continue to be intense.

Far and away, the greatest market potential for substantial wine sales growth lies with China. The number of Chinese drinkers consuming imported wine more than doubled from 19 million to 48 million people between 2011 and 2017 alone, according to a study by consultants Wine Intelligence. At present, only 4% of the total alcoholic beverages consumed annually in China are wines, and no more than 64% of total wine consumed is domestically produced. As a point of reference, in the US roughly 70% of the wine consumed is domestically produced. Further, only 33% of the US adult population drinks wine, and one third of wine drinkers (say 11- 12% of the population) drink almost 90% of wine consumed. On basis of these numbers, tripling the number of wine drinkers (from 4% to 12%) in China appears long term realistic. China is clearly in its infancy as a wine consuming country, but that status can change reasonably quickly, as it has for autos, fashionable clothing, travel and many other luxury goods. (Long term may be more like 5-10 years, not 20 or more …)

Per the internationally respected OIV, as of 2015 China’s per capita consumption of wine was 1.4 liters/year, the lowest of 21 wine drinking nations reported, and yet China was also the 5th greatest wine consuming nation at 17.25 million hl/year. If in perhaps the next 10 years, per capita wine consumption in China doubles (to 2.4 L/yr per capita), reflecting a 7.2% annual growth rate, a conservative expectation based on growth rates of recent years, and the fact it would still be well less than comparable Japan’s per capita consumption is 3.2 L/yr, China’s total annual consumption would be 34.5 million hl/yr, greater than the entire US consumption and make it the largest wine consuming nation in the world. Even if total wine imports did nothing more but hold a 33% (if not greater) present market share, imported wine sales would be 11.5 million hl, or almost 16.7 million nine liter cases. From any standpoint, this is a lot of wine.

An exceptionally astute discussion of the Chinese wine market (other than a typo in its headline) was published by June 28, 2017, by Jim Boyce, publisher of the Grape Wall of China. (See: http://www.grapewallofchina.com/2017/06/28/les-miserables-rvfs-annaul-china-wine-tasting-is-a-reality-check/ From his vantage point in Beijing, Boyce has been publishing the Grape Wall newsletter for the past 10 years and he always provides great insight into murky areas. For example, “Last year, China imported 625 million liters of bulk and bottled wine, according to China customs, while local production was listed at 1.1 billion liters. That gave imports a 36 percent share.” But further, he states “… local production is overstated and, in turn that imports now have half or more of the market.” If so, domestic wine production and the total wine being consumed in China is somewhat overstated and the per capita consumption as well.

While China is growing their domestic wine production (almost all Cabernet Sauvignon), imported wine represents close to 100% of the perceived “quality” wine market. Accordingly, wine drinkers will start with inexpensive, lower quality domestic wine and then aspire and graduate to more expensive, higher quality imports. So the big questions that standout are: if the consumption of wine in China grows by at least a 7.2% annual rate, how much of the increased consumption will be imported and which wine producing regions will increase their sales most substantially? How might RSA wines fare, and (especially Silkbush) how can our brother African wineries and we obtain a larger sliver of this exciting market?

Increased wine sales in China will be strongly influenced by wine education, wine region awareness, and ultimately brand awareness, both for domestic and imported wines. But for imported wines, tax policies and absolute pricing will have significant roles as well. Both former colonies of Hong Kong and Macau scrapped tariffs on wines in 2008, while in mainland China, imported wines are subject to excise tax, tariff and VAT that roughly adds up to almost 50% of the wine’s import value.

We were pleased to see the recent announcement by COFCO Wine & Spirits, the second largest Chinese wine importer, that they would soon import the Boschendal and Tall Horse brands of DGB, a very large South African producer. In 2016, China imported 9.6 million liters of bottled South African wine, making it the sixth largest RSA destination in the world.

Nevertheless, due to the disparate tax arrangements, there is a major incentive to smuggle wine from Hong Kong into the PRC. In June 2017, Chinese Customs announced the arrest of 29 suspects and confiscation of 490 tons of contraband worth US $33.8 million. Another case involving four smuggling rings and 1,800 tons of wine is ongoing. Since smuggled wine would not be in the reported numbers, this would suggest the consumption of total imported wine in China may be somewhat underreported.

Note further, because vast quantities of average quality bulk wine are available on world markets for less than $1/liter, it is reasonable to assume many domestic Chinese wineries will import and blend foreign wines into their products, improving their overall quality with relatively low investment cost. Because there is no 14% tariff on Chilean wine, reportedly 86% of the 49.1 million liters of bulk wine that were imported to China in 2016 came from Chile. Depending on how fast and to what extent bulk importation/blending occurs, the market for bottled/branded imported wines may be slower than otherwise anticipated. (Point of fact: the country’s bulk wine importation grew 29.99% in value year-on-year, first five months of 2017, to US$53.3 million, while its volume climbed 7.5% to 60.4 million liters.)

Not only does the Chinese wine market potential dwarf all other international markets, the international demand for wine in most other countries is expected to remain flat at best. A regarded study reports that in 1975, the average French citizen’s wine consumption was 100 liters per year. In 2016, the numbers were shockingly lower, with average consumption at only 47 liters per person, with an expectation to go down to 43.63 liters in 2020. Consumption levels of red wine have reportedly gone down over 12% over the past three years alone. Worldwide wine consumption has grown 0.4%, with 266 million hectoliters consumed in 2016. The message to wineries that have growth aspirations is clear: get into selling wine in China, sell more locally to loyal friends and customers, or acknowledge your aspirations are unrealistic and get out of the business entirely.

 

 (We will discuss Hong Kong wine aspects and its significance at length in the next part of this series.)

 

Selling South African (RSA) Wines Overseas (Part 1)

One can grow the greatest grapes, and make the greatest wine, but ultimately the wine must be sold, drunk, appreciated, and hopefully more of it purchased. While we have been making surprisingly good headway in getting the Silkbush brand established in South Africa and some adjoining countries, we don’t anticipate such sales to ever approach the level possible in certain major foreign markets. Under the guidance of and with the exceptional business relationships developed by our lead US importer, Ms. Selena Cuffe, we are starting, finally, to get some recognition and sales in major US markets, especially New York and Illinois. However, our shipments to the US have been in multiple pallet loads (56-70 cases of 12 bottles); in August 2017 we will bring in our first full container, of 700 9 liter cases.

Since 1994, RSA wine quality has risen quite steadily to very high levels. Extensive replanting of vineyards has taken place, and wine making technology and training has improved dramatically. Accordingly, the acceptance, and more recently, the sustained accolades of the international wine journalist community have been attained. Despite these achievements, the penetration of foreign wine markets with consumer sales of RSA branded wines has not kept pace. In the US, bottled RSA wine sales have remained at approximately 1 million cases/year for over 10 years, while the total USA wine market continues to grow, presently more than 399 million cases per year, including sparkling wine, and that over 14% alcohol. Annual US wine sales growth, however, has slowed to about 2.5% to 3%+ in recent years, which does not make things easier and many more US wineries are created annually. (Total US wineries, which exist in all 50 states, is fast approaching 10,000.) With more US producers in the market every year, and extensive local promotional efforts by US wineries, many large US grocery store chains no longer carry any selections from RSA; retail distribution has shrunk in numerous areas. Imported wines constitute 33% of US wine sales, but clearly those sales proceeds are largely going to other wine producing regions of the world. (RSA wine share of US market is a meager 1/4 of 1%!)

In general, there are three significant stumbling blocks for all imported wines in the US. The bureaucratic and legal issues that all wineries, be they domestic or foreign, have in attempting to gain market share in the US are relatively well known. The first, and very significant hurdle, is that the 21st Constitutional Amendment (in 1933) permitted each US State to establish its own rules and regulations for the sale of alcoholic beverages. This ugly stepchild of the repeal of Prohibition and then widespread religious antipathy to “demon rum,” created a legal compliance nightmare that continues up to the present. What is legal in one state may represent a felony in another, and small producers, in attempting to comply with the labyrinth of multiple state rules, often find it prohibitively expensive and time consuming. The second hurdle is the ever-consolidating distribution system of interstate wholesalers. Some thirty years ago there were almost as many US distributors as wineries; now there are about 10,000 domestic wineries and little more than 300 distributors. And fewer than 10 giant wholesalers sell over 90% of the bottled wine in the US! Obtaining attention of capable distributors is very difficult for all wineries.

Thirdly, the advantage of having a depreciated Rand, when pricing export wines, is not helpful when it comes to the expense of personnel required to represent RSA wines in the US. Any continuing promotional marketing programs (while funded in Rand but paid in Dollars) must be well thought out and justified. Further still, maintaining a RSA wine sales presence sufficient to sell in the US is no easy undertaking. New York is seven time zones to the west of Cape Town, and 40 degrees north of the Equator, versus 33 degrees south for Cape Town. Almost all Cape producers must fly to Jo’berg to get a nonstop flight to New York or Atlanta; the minimum travel time of 24 hours, just to the US eastcoast, and resulting jet lag impacts are very real. (The author can attest to this as he has made close to 40 round trips over the past 23 years from the US to RSA.) Accordingly, since few producers want to make the expensive and exhausting trip (and recovery) more than once a year, if that, relatively few RSA wineries have a personal presence in the US. Therefore, “Brand South Africa,” the overall presence of all RSA wineries in the US is limited.

Because we do not anticipate significant change, if any, in these conditions, we do not hold much hope for increased RSA wine sales in the US wine market (albeit the largest in the world) for many years.

Nevertheless, the purpose of this wide-ranging discussion is not to dwell on the marginalized role of RSA wine in the US wine market, but also to observe on some alternatives for selling more RSA wine in other foreign markets. We will address these market potentials as we continue this series.

New Silkbush Accolades!

As our friends in Texas oft say, “If you are telling the truth, you ain’t bragging!” So on that note, we want to brag, er, tell the truth about our recently released Silkbush wines. Below are the two recent accolades our Silkbush wines have received in South Africa. Further, I would like to expand on our recent Michelangelo awards a bit.

  1. This 20-year-old Michelangelo International Wine Awards competition is the largest, most competitive in South Africa. This year, there were 1,829 entries. Silkbush entered just three wines: Viognier, Sauvignon Blanc, and our proprietary red blend, Altitude and gold medaled with two of them.
  2. We don’t know how many Viognier entries there were but six other highly regarded wineries entered wines that won three Golds and three Silvers. These included the Saronsberg, Anura, and Lourensford cellars. But Silkbush beat them all with our Double Gold Viognier!
  3. Our Sauvignon Blanc received a Gold Medal, one of 271 given out, representing under 15% of the total entries in the competition. Certainly all Gold winners were highly deserving, as virtually no wineries enter ordinary wines since the competition is known for being highly competitive, and 75% of the judges are wine experts from overseas. (No hometown favoritism!)
  4. Altitude, our red blend, while a terrific wine, in my opinion is perhaps a young A- today, composed of five 2014 vintage red cultivars, and was competing against a great many excellent red wines of older vintages. Give it another year, and we expect it to be a sold A, Gold Medal qualifier, if not better.
  5. Lastly, while we did not enter our excellent Pinotage, the Flagstone 2014 Writer’s Block Pinotage was one of 18 Platinum winners, requiring a score of at least 96. For the past 12 years, Flagstone Writer’s Block Pinotage has come from 100% Silkbush grapes, and almost always is chosen as one of the Absa Top Ten Pinotages. The other championship awards for this wine in other competitions are manifold, and a record of which honestly few other wineries can only dream.
  6. Silkbush Pinotage is a superb wine, normally priced at retail at about 50% that of Writer’s Block. However, we will likely import the Pinotage only when we know we have retail demand for commercial quantities. Sadly, the US wine market for Pinotage is still in its early stages, no matter how high the quality.

 

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