by Andrew Chalk
The COVID-19 pandemic could hardly have come at a more difficult time for the South African wine industry. The country had come off several years of uneven electricity supply from a creaking national power grid, a long drought that had at one point left Cape Town with sufficient supplies for only one week of drinking water. When ample rains and belated improvements to the power grid came, along with a new President, the industry seemed poised for a turnaround.
Then COVID-19 hit. I got to hear the effect on the industry as seen through the lens of a premium South African winery, Simonsig, and its winemaker and owner, Johan Malan, in a Zoom call this week. Also on the call was Dennis Kreps, CEO of Quintessential Wines, Simonsig’s U.S. importer/representative. Family-owned Quintessential was co-founded with his father, Steve Kreps in 2002. They import and represent over 56 wineries from their base in the town of Napa, California. Some come from literally down the road in the Napa wine appellation. Other’s from as far afield as Argentina, South Africa, and New Zealand. In 2020, Wine Enthusiast awarded Quintessential ‘Importer of The Year’. One interesting fact: Simonsig was the first wine that Quintessential represented. Having both sides on the Zoom call provided a unique opportunity to hear about the effect of the unprecedented pandemic on a long-term business relationship. In what respects was COVID-19 most disruptive and how did they alter their businesses to adjust?
IN SOUTH AFRICA
The pandemic in South Africa led the government to impose strict lockdowns, as many jurisdictions did in the U.S. In the first lockdown, which started at the end of March and lasted five weeks, the government imposed a total ban on alcohol sales through stores. Wine exports were also banned. This eliminated a lot of income for Simonsig which relied on exports for 65% of its sales. A ban on international travellers eliminated a lot of the tasting room visitors and the lockdown eliminated all but ‘a trickle’ of domestic visitors. Essentially, South Africa’s wineries had no sales except for the miniscule online sector (which has nonetheless, in the case of Simonsig, grown 900% during the pandemic).
When the ban on exports was lifted in April, Simonsig had a lot of wine ready to export. But so did everybody else. And other South African industries had their products ready to export as well. The result was a massive backlog at the ports that prevented effectively getting the economy back to pre-COVID output.
Asked why the government took the action against wine that it did given that there seemed to be no rationale banning exports, Malan said that he felt that in the immediate shock of coronavirus the government policy was confused. On the other hand, the ban on sales had stronger foundations - sales would be accompanied by congregation in bars and lack of social distancing. However, he continued, one could also argue that alcohol, along with tobacco, were singled out as they were not politically popular with the government. As of today, wine can be sold Monday to Thursday, but not Friday and Saturday. Restaurants can sell wine on all days of the week, but are subject to a 10pm curfew.
Domestic 2020 Q2 sales were down over 20% Remarkably, export Rnd (rand) sales were up 6%. Volume was down, so organic premiumization took place. Malan is grateful to their global supporters.
IN CALIFORNIA
In California, Quintessential was dealing with U.S. results of the pandemic. Restaurant wine sales took the direct route to zero (or close). Simonsig U.S. on-premise sales had been 70% of their U.S. total so they took a big hit (on-premise sales of Simonsig were down 65% versus 2019). Quintesential’s on-premise sales staff were switched to off-premise or online sales. Regular, in person, meetings with distributors ceased due to domestic travel restrictions. As in a lot of companies, Zoom calls became a daily feature. Kreps had specific deadlines to get product to distributors and the shipment delays from South Africa made those unattainable. Containers ran three to five weeks behind schedule. Fortunately, there was enough inventory to cover the gap. Quintessential focused on accounts that could sell Simonsig wines, many in New York and New Jersey. The campaign-like approach actually led to the remarkable outcome of a 25% increase in Simonsig sales over 2019 by the end of 2020.
THE EFFECT OF TARIFFS
I raised the issue of the U.S. tariffs on European wines on Simonsig sales. My thought was that higher prices for European wine would lead consumers to switch to other wine, South African among them. This is what economists call the substitution effect. Kreps points out that this spring will be the test of that. Sales in 2020 don’t qualify because the tariff regulations imposed in October 2019 had two loopholes. First, they only applied to wine up to 14% alcohol, so European producers could ship table wines just above this and avoid them. Second, foreign wine shipped over in tanks and bottled in the U.S. was exempt.
Tariff rule modifications in January 2021 eliminated these loopholes. Kreps expects consumers to see the European sticker shock starting in April. Past economic research suggests that the substitution effect is very strong for wine. Kreps sees Simonsig Chenin Blanc being popular with U.S. wine drinkers who drink European white wines.
SOUTH AFRICA’S USP (UNIQUE SELLING PROPOSITION)
Malan emphasizes the range of high-quality wines coming out of South Africa. Kreps agrees and at the moment sees chenin blanc and pinotage as leading the pack. He sees a focus on uniqueness as the right sales approach. He bases that on the success he sees at consumer tastings of Simonsig chenin blanc and pinotage with most price points between $13 and $25 in the U.S. retail market.
Both sides of this business relationship are hopeful that vaccines will get life closer to normality in 2021. Either way, they intend to persevere together to keep this 19-year business relationship on track.