Take a hard-nosed investment banker out of the toughest business environment there is and transplant him to the gentler, quirkier world of winemaking, and what do you get? Some great wine but not, as yet, a clear idea of how to make a consistent profit.
By Alan Beattie
As one of the founders of FirstRand, one of South Africa’s most successful merchant banks, G.T. Ferreira was used to ROE, meaning return on equity. “But in the wine industry ROE means return on ego,” he says. “That is absolutely all you get.”
Killer middle ground
In South Africa, where high interest rates push up the cost of capital, the economics of winemaking tend to lead to one of two routes: small, high-end winemakers who fund themselves out of cashflow and rely largely on word of mouth for marketing, or huge operations with international brands that are part of a global marketing and distribution network. “It is the middle ground that is the killing ground,” says Mr Ferreira.
He came to the wine country of South Africa’s western Cape after a botched hijacking in 1990 left him lying in a pool of blood outside his house in Johannesburg with a bullet lodged behind his shoulderblade and an altered sense of priorities.
“In financial services you get incredible intellectual stimulation but there is nothing other than that – nothing that stimulates or appeals to any of the five primary senses,” he says. “The wine industry does that for you.”
Lifestyle against profits
Winemaking, he says, is like owning yachts or football clubs or racehorses: a lot of people are in it for the lifestyle, not the money. But with him, it turned out to be different: “My ego is so big that I want to make a profit out of the damn thing, and that is where the frustration comes in.”
Having bought 25 hectares of land with a stunning view over Stellenbosch, one of the great centres of South African winemaking, Mr Ferreira set up an integrated operation named Tokara, from the names of his children, Tomas and Kara. It combines vineyards, winemaking and a restaurant, for which he poached Etienne Bonthuys, a celebrated Belgian chef.
The three profit centres, “or loss centres, really”, sell to one another at commercial rates. The restaurant, whose main function is a marketing tool for the wine brand, is profitable; grape-growing is profitable. So, somewhat to his chagrin, is a separate olive-growing and pressing operation run by his wife. But, he says, “the winemaking division is the biggest one and that destroys any profits we make elsewhere.”
Winemaking requires a lot of capital up front, not least to buy land, while skills and brand value take time to develop. And so many people are in the industry for non-pecuniary reasons that land prices are driven up to a level where it is hard to turn a profit.
At least this stops winemakers losing lots of money. “Your dividend income is non-existent but your capital growth is what gets you out of trouble,” Mr Ferreira says.
There is a limit to what one company can achieve on its own. Marketing and distribution are key, but one of the peculiarities of winemaking is that brand value attaches to entire countries, not just individual companies.”
The sin of rushing
South African winemakers, he says, “shot ourselves in the foot”. They rushed to re-enter international markets when sanctions and consumer boycotts were lifted at the end of apartheid, pumping out huge amounts of low-quality Chenin Blanc that gave the country’s wine a bad name.
Mr Ferreira wants Tokara to break even by 2010, 15 years after it opened. In investment banking, that would be painfully slow. In winemaking, it is breakneck speed. He quotes the response of the matriarch of the Rothschild banking and wine family to a questioner who asked if it was possible to make a profit out of making wine: “Of course you can. It is just the first 200 years that are the problem.”