Making money in the age of cheap wine

By Jamie Goode | 7th February 2019

In an age of cheap wine, it's difficult to make money out of making the stuff. And this is one of the problems that many producers in South Africa are experiencing at the moment. Everyone is telling them that in order to be more profitable they should charge more for their wines. But they can only charge what their customers are willing to pay.

Here in the UK we are used to buying wine pretty cheaply. The supermarkets have used discounting wine as a way of getting people into stores. As well as price promotions on specific wines, periodically many of them will offer a 25% discount over their entire range when you buy 6 bottles or more. They are not in the business of giving wine away, so what this tells you is that their margins are sufficient to be able to shift wine at reduced prices and still make some money. And with the latest round of tax increases, if you buy a wine at £6, how much of that has been spent on the wine? Not a great deal: the supermarket will have paid around a pound for that bottle.

I try a lot of supermarket wines for my newspaper column, and you can still buy some nice, perfectly drinkable wines for £6 or even £5, including wines from South Africa. That's good news for the consumer: after all, even inexpensive wine is one of the more expensive items in our shopping trolleys, and it is good that people who are on relatively tight budgets can share a bottle over dinner. But, have you ever thought: what do these low prices mean for those who are involved in making wine?

It takes quite a bit to produce a bottle of wine. We're focusing here on South Africa, but similar considerations would apply to other countries. First of all, there is growing the grapes. If you have owned vineyard land for generations, some of the costs here will already have been met, but you will still need staff to pass through the vineyards pruning the vines in winter, then through the growing season they will need to remove shoots that are growing where they shouldn't, then pass through and drop any surplus crop (too many grapes can cause issues with ripening or can lower quality), remove leaves in the fruit zone to reduce disease pressure and allow a bit of sunlight to aid ripening, and then to harvest. And while South Africa's wine lands have a relatively dry growing season the vines will also need to be sprayed to protect against disease. And there are weeds to control too, with herbicide (the bad way, but cheaper) or by mowing and tilling the soil. Also, if your vineyard is visited by lots of birds you can lose the crop, so bird netting would then be needed. And it will probably need some irrigation, too. Labour in South Africa is relatively cheap; in other countries many of these tasks are mechanized to save costs. Those who don't own their own vineyards will generally make a contract with a farmer to do this work and then they will buy the grapes are a pre-arranged price per ton. The price paid depends on the quality of the vineyard, and the predicted yields.

If all has gone well and you end up with grapes, then you'll need a winery to make the wine in. There's a problem with wineries. They are generally expensive to build and kit out, and most of the equipment and a fair bit of the space is only used for a few weeks of the year, during vintage time. Compare this with a brewer, who can make a new beer every couple of weeks and keep all the expensive kit in continuous use. Wine doesn't make a lot of sense in this regard.

If you are making expensive wine, the chances are you will need some barrels to age it in. These are usually made in France, and are fiendishly expensive. Barrels also have a finite life, and many producers will replace a third of theirs every year because they want the flavour and structure that new oak brings. Some wines are released relatively young, but many will be in the winery for a year or more before release. This ties up capital and takes up space. When it is time to bottle the wine, more money is needed to buy bottles and closures (screwcaps are cheap; natural cork of good quality is very expensive), and then you need to pay someone to bottle the wine or own an expensive bottling line yourself, and then you have your wine, ready to sell. Wine doesn't sell itself so you will normally need to pay a slice to an agent, and also have some sort of marketing budget. Glass is heavy and breakable, so transport also costs a lot of money. Some wineries sell in bulk, and then the wine is shipped in tank to, for example, the UK, where it is bottled at one of the major bottling plants. But while this is good for the environment in cutting the carbon footprint of the wine, it takes away jobs in South Africa, and so this social capital must also be considered.

So, you can see, making wine cheaply is hard. Sadly, many South African producers are struggling to make money, especially at the bottom end of the market. If they raise their prices, the supermarkets will just look elsewhere: in a market where there is an over-supply of cheap wine, someone else will be more desperate, and the supermarket wine buyers are just doing their job. They've been asked to source this many litres of wine at this price and this quality, and they know what their customers are prepared to pay. If their range begins to look expensive compared with their competitors, then they will lose customers. Customers are pretty price sensitive, and while a jump from £5 to £7 doesn't look like much to many of us, it's a huge difference for most supermarket shoppers.

So what can be done? It would be nice to think that the supermarkets and discounters could voluntarily stop competing on price with wine, and commit to raising the quality - and paying a fair price for it. It would also be nice to think that they could see this as a partnership, where the success of the producer in South Africa is part of their success in selling wine. Unfortunately, commercial pressures make this difficult. Also, increasing volumes of wines are being sold under what is known as private label, or BOB (buyer's own brand), which makes it difficult to take the other route to higher prices, which is building a well recognize and trusted brand. This creates a sort of vicious circle, where low prices make it hard for producers to invest, and therefore quality is gradually eroded, resulting in still lower prices.

As consumers, though, we are in charge of how we spend our money. I think, as much as we are able to, we should avoid chasing the latest discount or promotion, and reward South African producers by buying their branded wines. By doing this we are supporting all those who work in the industry, and – after all – financial sustainability is one of the vital aspects of sustainable wine growing.