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Analysis of the South African Wine Industry

Many of the large South African ‘players’ in the industry have begun to carve out US growth. Despite exports decreasing by 3million cases, shipments to the US rose by 17%. Distell and its ‘Two Oceans’ label are the largest exporters of premium wine in SA and intend to reach a critical mass in the US through a major volume driver. Industry experts state that SA does not need a huge new brand but rather a critical mass on the volume side to help drive the category.

SA needs to develop its own unique styles rather than try to compete against the likes of Chile as they lack in vineyard scale. Elegant new styles of Pinotage are what have been exciting consumers who are willing to pay a premium for wines, which they view as fantastically good-value when compared to France. Climate: A number of acute water shortages took place in the Western Cape over the last few years, driven predominantly by changing weather patterns and rapid urbanization which is a concern.

In the long-term, wineries won’t be able to expand their volumes, however, can definitely look at using their energies to improving their quality. This year’s harvest was “short, intense and an

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exceptionally difficult year from a logistical point of view,” owing to such weather conditions. Distell’s crop was 8% lower than the annual average, while SA as a whole expected a rise of 1. 4% to 1. 28 million tons for the year. Last year, wine production slipped by 3% and stocks continued to decline, having now dropped by 22% since 2007. Part III – International Operations Strategy

After analyzing the internal and external environment, Hill provides a simple but clear framework for an international operations strategy that we can suggest for W&W to consider in their final decision making process. The options below fit W&W’s corporate culture, goals and are what we believe to be the logical steps towards choosing the right country for production. Where: The Western Cape of SA boasts the ideal location for producing premium pinot noir wines, due its climate, soil type and experienced workforce. It is also within close proximity to a major port with ever increasing transport links.

A considerable barrier; is the high shipping and packaging costs when compared to European producers. Why: Despite this, there is still an argument to expand production from SA due to it’s reputation in new world wines which can justify a slightly higher price to accommodate extra costs. W&W can take advantage of government encouragement through the support of wine exporting. Many networks have already been established, providing a number of location specific advantages in terms of grape harvest and reputation. For relatively low risk, there is much potential for W&W to tap into.

SA is experienced in ‘green wines’, which could prove to be a vital part of diversifying W&W along with building a solid reputation. What: The most suitable mode of entry for W&W considering that it isn’t ‘yet’ a large international business. We suggest a joint venture, due to this being their first international expansion; experience and know-how is key and it would be irresponsible to become involved without greater consideration. W&W will therefore have access to local partner’s knowledge, risk sharing and also it is much more politically acceptable.

It is established that SA generally find it very difficult to achieve economies of scale in the supermarket wine sales. Therefore, by utilizing existing supply chains and bringing in new ideas, W&W have the potential to become successful if their choice of partner is correct. OLI Paradigm Ownership Advantages: W&W can develop key experience, knowledge and know-how. Gaining an understanding of what best practice for manufacturing and transporting SA wine will enable the production of a substantially higher yield and amount of wine than they could in the US.

Looking forward to creating sustainable supply chains and developing future networks for when W&W wish to expand even more. Location Advantages: W&W stand to become more profitable through the current market imperfections of the SA market. SA boasts excellent and plentiful resources, low production costs and current political conditions that are favorable for the wine exporter. As W&W grow, there is an un-tapped work force available, especially under new policy reform to allow SA black population to work in the industry.

This could prove to be a competitive advantage that can justify their higher prices through ethical practices. Internalization Advantages: A joint venture with a SA wine manufacturer enables a new capacity and grants the opportunity to gain new knowledge in the mass production of wine. W&W will have the option to do this in the short term, develop such competencies and begin to produce on their own. Through an initial joint venture, W&W have the opportunity to increase profit margins, accelerate revenue growth, expand into new markets, gain financial support and develop unique company benefitting skills.

Most Beneficial Role of Factory A joint venture with a source factory whose primary purpose should still be low-cost production but also with a broader strategic role in comparison with an offshore factory. Utilizing the local knowledge and experience of its SA managers; enabling risk limitation whilst not causing upset or a cultural clash with its employees. By giving an extra part of control to the SA factory; W&W will not have to rely on an educated guess, allowing for an exciting future and the potential to expand from an international strategy, even further to a global wine company.

Part V – Supply Chain Management The wine industry is exposed to a new set of global demands including the quality of products, services and people by the choice of the international consumer. W&W should look to encompass more than being fast and cost effective, the best supply chains are also agile, adaptable and ensure that all company interests stay aligned. Without these attributes, W&W international future would most likely be bleak, which is why W&W’s choice of suppliers is essential.

Agility – One of the main ways to achieve an agile response lies upstream of the company, in the quality of rationalized supplier relationships, which can be achieved in SA. By reducing complexity and forging strong relationships with suppliers, W&W will be able to become agile. There needs to be an exchange of information on demand and inventory levels along with collaborative working relationships across the entire chain. W&W could incorporate an emergency delivery service via a logistics provider if demand begins to suddenly increase, providing customer satisfaction over the standard cheaper delivery.

Adaptability – Not only a requirement for success but an enabler of profitable growth by shortening the time needed to respond to customer demands. W&W should look to build stocks of finished products in order to help rapidly service the market needs especially being such a distance from the US. These stocks will then be potentially life saving for W&W if there is a bad harvest. Alignment – The supply chain strategy should represent W&W corporate strategy and drive alignment throughout the supply chain on objectives and aspirations from the grape farmers to senior managers through clear communication.

This must be handled sensitively in SA to make sure that everyone involved understands. Must focus to match production with consumption, despite wine production requiring long lead times and weather conditions. There must be a process in place to constantly review and evaluate the entire supply chain, always looking ahead such as reducing carbon-based costs. W&W twin objectives for supply chain management are that it should be at the lowest possible cost and in a way that best serves the customers needs.

A large factor could be reducing costs through efficiency and the smallest reduction can have a profound impact on revenue. If at all possible, W&W should focus on both upstream suppliers and downstream customers in order to become fully adapted. Production Capabilities – In regards to the above information, we suggest that W&W should aim to produce above demand. As demand is highly likely to fluctuate, W&W do not want to damage their reputation by delaying orders especially due to the distance between SA and the USA.

Through information collected from a series of reports documenting supply chain competitiveness in the SA wine industry shows some clear possibilities for W&W including; becoming internationally competitive requires an enterprising and innovative manner by applying best practices at every link (please see figure overleaf). Growth in export volumes depends on the degree to which W&W image is received, every link should be client driven along with being structured to follow information from the market.

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