‘Smarter, Faster, Better – Leading Niche Player’ · ‘Smarter, Faster, Better – Leading Niche Player’ A Development Strategy for the New Zealand Pipfruit Industry Innomarc

‘Smarter, Faster, Better – Leading Niche Player’ A Development Strategy for the New Zealand Pipfruit Industry Innomarc Consulting Project Team December 2006 This project was undertaken for Pipfruit New Zealand, with funding support from Ministry of Economic Development.

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Contents Executive Summary ............................................................................................................ 3 1. Introduction................................................................................................................... 14 2. New Zealand Pipfruit in a Dynamic Environment. ...................................................... 16

2.1 Consumers and Consumption ................................................................................. 16 2.2 Global Production, Markets and Prices .................................................................. 20 2.3 International Retailers and Distribution.................................................................. 23 2.4 New Zealand Crop Profile and New Varieties ....................................................... 27 2.5 Eroding Competitive Strength ................................................................................ 29 2.6 Economics of Production and Investment .............................................................. 32 2.7 Special Opportunities: Organics, Pears, Functional Foods..................................... 37 2.8 Industry Structure in Transition .............................................................................. 42

3. Future Strategic Framework ......................................................................................... 45 3.1 Scenarios ................................................................................................................. 45 3.2 Vision, Targets, Goals and Key Strategies ............................................................. 48

4. Improved Returns from the Existing Crop.................................................................... 50 5. Faster Transformation of the Crop to New Trees and Varieties ................................... 58 6. Building Stronger Competitive Advantage and Grower Succession............................ 62 7. Industry Commercial Framework: Future Options....................................................... 68 8. Summary and Implementation Accountabilities........................................................... 71 Appendix: Project Team ................................................................................................... 77 Enquiries to Innomarc Consulting Ltd, PO Box 19048, Wellington, or 04 4711 347

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Executive Summary Introduction Pipfruit New Zealand, on behalf of the pipfruit industry and with the assistance of the Ministry of Economic Development, has initiated the formation of a pipfruit sector strategy. A key initiative in the development of the strategy was to commission a project in July 2006 to:

(1) establish the steps the New Zealand pipfruit industry needs to take to generate sustainable economic returns for all parts of the pipfruit industry

(2) establish the roles key industry stakeholders and Pipfruit New Zealand need to

play to implement the strategy. The purpose of the strategy is to focus primarily on the long term future of the New Zealand pipfruit industry and to identify the changes necessary for New Zealand to maintain its internationally competitive position. This report outlines the proposed strategy, following a review of the industry by an international project team. Key changes are required to ensure longer-term sustainability. Background A key reference point for any future strategy is the reality that the New Zealand pipfruit industry has a number of competitive advantages1 that can be built upon:

• an excellent reputation globally as an apple growing country based on Royal Gala, Braeburn, some Pacific varieties and Jazz

• a well established production and commercial infrastructure • high levels of production efficiency • a breadth of apple varieties in production • a history of innovation for new apple varieties • purity of production under the Integrated Fruit Production protocols and organic

production systems • well established international market and distribution networks

Key Themes Key themes from this review (mainly focused on apples) were:

• Pipfruit has lost its traditional edge with consumers to other fruits/health foods. • The consolidation of major retailers continues to provide major challenges and

opportunities. • In-market perceptions are that New Zealand pipfruit has lost its quality position

relative to competitors and market expectations. 1 New Zealand was seen as the second most competitive apple supplier in the world after Chile based on rankings in production efficiency (#2), infrastructure and inputs (#3), and financial and markets (#5) – World Apple Report 2006. New Zealand has slipped from its #1 overall rating in 1995, with a major ranking decline from #1 in financial and markets under the single seller model to #5 today.

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• Southern Hemisphere suppliers, especially Chile, have caught up to New Zealand in many areas and have lower costs of production.

• New Zealand pipfruit exporters lag behind best practices in supply chain practices and distribution.

• Under current marketing programmes fruit returns are heavily influenced by global supplies on a season to season basis.

• Market information sharing remains very important. • Better market access remains a critical issue. • The crop profile is too dependent on two varieties for which there is not IP

exclusivity – Royal Gala and Braeburn. • There is limited grower confidence in Prevar, the current industry IP model for

new varieties. • Pipfruit is a high risk investment compared with other agribusiness sectors.

Challenges As a result of the above factors, the long term trend is for the prices of the main fruit varieties, Braeburn and Royal Gala to reduce 50 to 75 cents per TCE per year. The industry is at a point where its returns on average are too low and a programme of action is required. While New Zealand is a leader in production efficiency, it has a high cost structure and distance from markets. To achieve premium returns the industry needs to win in targeted segments with longer term sustainability depending on significant improvements in average orchard gate returns. Changes to current strategies will improve those returns. Some growers and exporters are already operating business models that reflect best practice trends and it is a very positive sign that leading groups and growers have already committed considerable investment to new trees and varieties. Strong competitors are posing challenges to the industry. Chile has production efficiency, improved quality and disciplined marketing; South Africa has improved its production efficiency; and Washington State benefits from a strong infrastructure, large scale operations, and new storage technologies. The rate of change and level of international competition can be expected to continue, with a corresponding impact on the shape of both global and New Zealand industries. Recently some apple production areas in the United States either no longer exist or have been considerably downsized, while the Netherlands is losing much of its production to Poland. In this environment the question must be asked as to whether New Zealand can achieve an economically sustainable pipfruit industry. A Way Forward The review team strongly believes New Zealand pipfruit growers and businesses (and thereby the ‘industry’) can look towards a successful future and economic sustainability. However, this will probably be at a reduced scale from the peak of the economic bubble when Royal Gala and Braeburn were grown only in New Zealand. Some rationalization is already well underway. The number of growers has decreased from 1751 during the peak period to 650 in 2005. Pack house numbers have declined from 183 in 1995 to 85 over the same ten-year period.

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The risk profile of the industry for future investment is not attractive for many growers whose capital has been eroded with the poor returns in two of the last three years. Further grower exit is anticipated. Land under production has reduced at a lesser rate due to the practice of orchard leasing and has been offset to a degree by higher density orchards with higher yields of export quality fruit. With continuing rationalization it is anticipated production will be focused in the primary growing regions of Hawkes Bay and Nelson. Activities in other areas will only survive when based around significant entrepreneurs or production systems e.g. organic production in Otago. The small independent orchard will have a lesser role in industry production in the future. The commercial structure will instead involve groupings as varied as co-operatives of smaller producers, medium sized businesses and corporate style businesses. Some will specialize only in pipfruit, whereas others will have a multi-product focus across fruit and, for some, other horticultural products. This evolution is similar to that occurring in other agribusiness industries, both in New Zealand and internationally. There will be an associated recruitment over time of more qualified staff and a greater commitment to staff training and skill development. A key challenge for the industry is that it needs to achieve average returns of $23 per TCE from the existing crop. This means an increase of at least $3 per TCE and for some a bigger increase, with the high New Zealand dollar having a significant negative impact on the current returns. The higher level of return is needed to provide the financial base for investment in new trees and new varieties to achieve a more competitive crop profile for the longer term. The rate of investment in new trees and new varieties will need to accelerate to double the present rate. Key requirements for the existing crop include:

• excellence in orchard management • improved availability of skilled labour for harvesting • more consistency in providing ‘fit for purpose’ quality • greater industry commitment to developing controlled customer focused

marketing programmes Future development opportunities exist in terms of investment in new apple trees and new varieties, further development of organic production, and investment in the fusion pear varieties. There are parallel opportunities for building competitive advantage through innovative ‘safe food’ and ‘sustainable production’ protocols and systems, supply chain innovation and seeking opportunities to leverage scale. The Strategy Framework proposed for the future and associated recommendations are presented below. Three strategic goals were identified as key elements in this framework:

• Increased returns from the existing crop • Faster transformation of the crop to new trees or new varieties • Building stronger competitive advantage and grower succession

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Strategic Goal 1: Increased returns from the existing crop

Strategies, Issues or Opportunities, Recommendations Priority, Timing 1a. Continued improvement of production efficiency and systems effectiveness

Issue/ Opportunity

Increased yields achieved in South America are threatening New Zealand’s leadership position and New Zealand’s cost structure has risen sharply. It is critical that the industry aggressively pursues further improvements throughout the system.

Recommendation 1

There is an ongoing commitment to ensure New Zealand is the global leader in production efficiency and systems effectiveness.

Implementation Accountability

Commercial firms, supported by research and consulting groups.

Priority: High Targeted Impact: Ongoing

1b. Consistent achievement of ‘fit for purpose’ quality as specified for particular markets Issue/ Opportunity

Market and industry comment supports the viewpoint that the quality of export pipfruit from New Zealand is not as consistent or at the perceived level of earlier periods. In particular, many believe Chile has surpassed New Zealand.

Recommendation 2

The industry commits to a major initiative of protocols to support the achievement of industry-wide consistently high standards of ‘fit for purpose’ quality. The industry gives serious consideration to operating under the Horticultural Export Authority framework or a similar industry designed framework to assist in achieving this.


Market panel leadership group, supported by Pipfruit New Zealand.

Priority: Very high Targeted Impact: 0- 5 years

1c. Develop innovative programmes for skilled seasonal labour supply Issue/ Opportunity

The availability of skilled seasonal labour is a major issue because of New Zealand’s high employment rates and increasing seasonal demand across the horticultural sector. Joint government and industry initiatives have resulted in some legislation as well as new programmes. However, it is the industry’s view that the policies and practices could be made friendlier for commercial users.

Recommendation 3

The industry strengthens its engagement with key agencies to achieve seasonal labour policies that are more attractive for commercial entities.


Pipfruit New Zealand with Horticulture New Zealand.

Priority: Very high Targeted impact: 0 –5 years

1d. Develop stronger commitment to integrated marketing programmes for selected customers Issue/ Opportunity

Best practice in the marketing of fresh produce emphasizes the critical importance of integrated programmes between the grower and retail customer involving both product and service/ organizational factors. While some exporters are developing this approach, the overall view is that New Zealand exporters need to lift their performance significantly in this area.

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Recommendation 4:

There is strong industry commitment to sharing information relating to best practice ideas, approaches, and case studies of international fresh produce integrated marketing programmes.


Pipfruit New Zealand with market panel leadership group.

Priority: High Targeted impact 5 -15 years

1e. Develop industry wide disciplined approach to European market for Braeburn in 2007 Issue/ Opportunity

A key element in ensuring shorter term industry sustainability is the revenue achieved for Braeburn (40% of the export crop) in a given season which is to a large degree determined by the price achieved in the European market. Some estimates for the 2007 crop are for a much higher Braeburn export crop and consequent likely significant reduction in prices in 2007. A managed supply approach is needed.

Recommendation 5

A market plan for Braeburn in Europe is initiated for 2007 on an industry wide basis, including incentives to achieve effective supply management.


Market panel with support from Pipfruit New Zealand. Incentive discussions to be held with the Ministry of Economic Development .

Priority: Very high Targeted impact: 0-5 years

1f. Establish cluster groups by exporters or varieties for more focused programmes. Issue/ Opportunity

There has been an explosion in the number of exporters of pipfruit since deregulation in 2001. Market comment is that the New Zealand approach is very fragmented compared with major competitors, and many businesses are not of sufficient scale for the necessary investment in innovation and marketing. Some consolidation into ‘groups’ is occurring, and the ‘club’ approach for Jazz, Pink Lady and Tentation will be a key approach for the future. More consolidation must be achieved quickly.

Recommendation 6

Review the approaches and benefits of joint international marketing initiatives, including approaches in the Wine Industry, and the new variety ‘club’ approaches.


Leadership group of interested exporters supported by Pipfruit New Zealand with New Zealand Trade and Enterprise support.

Priority: Medium Targeted impact: 0 -5 years

1g. Gain competitive access to markets Issue/ Opportunity

As a basic principle the industry is concerned to have favourable access to markets where apple consumption already exists and/ or where apple imports are growing. At present the industry feels very disadvantaged through the inability of New Zealand officials to resolve access issues in Australia, South Korea and Japan. In addition the industry view that we have tariff disadvantages e.g. India.

Recommendation 7

Continue to place the highest pressure on government for urgent resolution of the identified market access issues in Australia, South Korea and Japan; and achieve competitive tariffs in emerging Asian apple markets.


Pipfruit New Zealand with Government agencies.

Priority: Very high Targeted impact: 0- 5 years

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1h. Establish a transparent set of comparative exporter performance statistics for growers Issue/ Opportunity

Growers have the most significant investment in the industry and it is important they are able to make informed choices as to which exporter or pack house they use. This is particularly so given the industry’s strong commitment to a multiple exporter model. It is important for growers to have ready access to comparative season-to-season exporter and pack house performance information. This is a gap at present.

Recommendation 8

Establish comparative season-to-season exporter and pack house performance information sets. Implementation Accountability

Market panel supported by Pipfruit New Zealand.

Priority: High Targeted impact: 0 – 5 years

Strategic Goal 2: Faster transformation of the crop to new trees and varieties

Strategies, Issues or Opportunities, Recommendations Priority, Timing 2a. Improve business model for new tree and variety investments to offset risk profile

Issue/ Opportunity

The industry needs to invest in new trees and new varieties at twice the current rate to develop a more differentiated and IP protected export crop compared with competitors, and thereby benefit from the opportunity for premium returns. Initiatives are needed to reduce the total development costs of around $55,000 per hectare; to significantly improve the quality of nursery trees; and to enhance the return-risk profile of new investment in order to attract in an estimated $250m to the industry.

Recommendation 9

In order to urgently establish an improved approach, discussions are initiated between grower representatives and nurseries to review cost and quality concerns related to new trees.


Leadership group of growers and nurseries, supported by Pipfruit New Zealand. Recommendation 10

Initiate a review of depreciation rates for new or replacement orchards with a view to implementing new rates which will attract the necessary levels of new investment.


Pipfruit New Zealand, supported by a leadership group of growers, makes an urgent submission to the Inland Revenue Department and Ministry of Economic Development.

Priority: Very high Targeted impact: 0-5 years Priority: Very high Targeted impact: 0-5 years

2b. Grow varieties with IP exclusivity and controlled supply and marketing programmes Issue/ Opportunity

One of the key success factors for the industry will be the rapid transition to new varieties with IP exclusivity using a global ‘club’ approach to controlled supply and marketing. The challenge for growers and exporters alike is to have, link with or create an entity which has sufficient resources to create a significant international marketing programme. Industry estimates suggest an expenditure of $10m to $20m is required to commercialise a new variety.

Recommendation 11

Growers and exporters seek opportunities for new varieties with IP exclusivity and associated. ‘club’ international development and marketing programmes.

Priority: High

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Implementation Accountability Commercial decisions

Targeted impact 5-15 years

2c. Review industry IP model and funding to improve grower and exporter confidence Issue/ Opportunity

At present Prevar is the IP development model for industry new varieties. A number of growers and exporters are not confident in Prevar in terms of the alignment between its’s funding model and the access to new IP protected varieties by an individual entity. Another frustration is the perception that international competitors will be able to quickly get access to new varieties through the international nursery network.

Recommendation 12

Review the basis of the New Zealand funding contribution to Prevar, and the IP access policy with a view to developing improved industry wide understanding and ongoing support for the Pipfruit Research Consortium and Prevar.


Pipfruit New Zealand with Prevar.

Priority: Very high Targeted impact: 0-5 years

Strategic Goal 3: Building stronger competitive advantage and grower succession

Strategies, Issues or Opportunities, Recommendations Priority, Timing 3a. Develop a leadership position regarding safe food and sustainability protocols

Issue/ Opportunity

The New Zealand pipfruit industry achieved international recognition for the Integrated Fruit Production protocols it introduced quickly in the late 1990s. There are escalating consumer and customer concerns about ‘safe foods’ and ‘production sustainability’. There are opportunities for New Zealand to gain significant competitive advantage by moving to higher standards in these two areas, with the important next stage being a ‘nil discernible residue’ approach.

Recommendation 13

Urgently establish a ‘nil discernible residue’ programme, followed by initiatives to enhance the industry’s actual and perceived ‘production sustainability’.


Pipfruit New Zealand with Inter-Regional Partnership, supported by New Zealand Trade and Enterprise.

Priority: Very high Targeted impact: 0 -5 years

3b. Establish a systems approach to innovation and the adoption of best practice through the supply chain

Issue/ Opportunity

Fundamental to the development of a sustainable industry is an efficient and effective supply chain, involving ongoing innovation. Industry comment is that ‘most savings’ have already been achieved. However the industry manages over $450m of cost between orchard and customer, and performance improvement experiences suggest a potential of at least ten percent savings should be targeted by process innovation and leveraging of scale.

Recommendation 14

Review R&D focus to ensure appropriate systems research is initiated, and that best practice is more widely adopted by the industry.


Pipfruit New Zealand in conjunction with Crown Research Institutes and industry consultants.

Priority: Medium Targeted impact: 2 – 15 years

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3c. Establish consumer insight and market intelligence information flows into research and industry planning

Issue/ Opportunity

Development of a sustainable industry requires that it is adapting to, and anticipating changes in global consumers, markets and competition. The two main sources of information to the industry are international distributors and retailer visits, and in-market visits by exporters or growers. Longer term information comes through HortResearch and Crop and Food programmes and their international networks. Nevertheless there is a lack of industry level discussion and assessment of the implications of such information.

Recommendation 15

Establish an annual consumer insights and market intelligence forum. Implementation Accountability

Pipfruit New Zealand with Horticultural New Zealand, supported by HortResearch and Crop and Food.

Priority: Medium Targeted impact 5 -15+ years

3d Improved knowledge about key competitors, and assessment of longer term implications for New Zealand’s competitive advantage Issue/ Opportunity

The global pipfruit competitive environment is very dynamic. This review reinforces the viewpoint that New Zealand has lost some of its competitive strength. This is limited to systematic information available on key competitors. Southern Hemisphere exporters and Chile are particularly important to understand, as well as Northern Hemisphere exporters e.g. China, Washington State, Poland. It is critical that in-depth knowledge of the competition is available and rigorously assessed on an ongoing basis.

Recommendation 16

Review available competitor information, establish projects to fill key gaps and determine competitive positioning implications with Chile as an initial priority.


Pipfruit New Zealand with market panel, supported by New Zealand Trade and Enterprise

Priority: High Targeted impact: 5-15+ years

3e. Promotion of industry as an entrepreneurial business option and enhance industry skills Issue/ Opportunity

The industry has a key people challenge. Many of the independent growers are nearing the later stage of their careers. Many have already left the industry, and others are reluctant to make the necessary new investments. New growers are needed, bringing with them fresh ideas and capital. In addition the industry must ensure skills, capability and capacity are in place for the future.

Recommendation 17

Promote investment opportunities and new options for the industry through a human capability forum that will make the case for new profit and risk sharing structures for new entrants, and will consider programmes to attract suitable candidates.


Industry leader group with Pipfruit New Zealand, supported by banks and investment advisors. Recommendation 18

Review the skills needs of the industry, the opportunities for skill development and the alignment of tertiary organizations and training groups with these requirements.


Pipfruit New Zealand with Horticulture New Zealand, supported by Department of Labour.

Priority: Medium Targeted impact: 5 -10 years Priority: Medium Targeted impact: 0 – 5 years

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The industry is committed to the deregulated environment achieved in 2001. Even though it is acknowledged change is necessary there is widespread reluctance towards any re-introduction of industry wide rules or regulations to achieve a more disciplined approach. This suggests there are four mechanisms available to effectively implement the recommendations outlined above. These are:

(a) Specific rules or protocols for particular situations agreed between the industry and government

(b) Collective efforts in a commercial area (market panel or other leadership group) or in a collective industry benefit area (Pipfruit New Zealand e.g. market access)

(c) Commercial groupings focused on a common purpose by market or variety (a variety ‘club’ or a co-operative grouping)

(d) Individual commercial initiative Priority areas identified in the recommendations are summarized as: 1. Industry and Government Agencies Ministry of Economic Development

• Support for transition incentives for supply management for Braeburn crop in 2007 (Recommendation 5)

• Initiate a review of depreciation rates for new or replacement orchards, with a

view to a more attractive rate with Inland Revenue Department (Recommendation 10)

New Zealand Trade and Enterprise.

• Support for joint international marketing initiatives (Recommendation 6)

• Urgently establish a ‘nil discernible residue’ programme. Interregional Partnership supported by New Zealand Trade and Enterprise (Recommendation 13)

• Review of global competitors, with Chile as an initial priority (Recommendation 16)

Department of Labour

• Achieve more commercially friendly policies for seasonal labour

(Recommendation 3) • Review skills needs of industry and alignment of tertiary and training

organizations to meet these requirements (Recommendation 18) Ministry of Foreign Affairs and Trade

• Urgent resolution of identified market access and competitive tariff review. (Recommendation 7)

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2. Industry (Pipfruit New Zealand) and Commercial Entities in Partnership

• Major initiative of protocols to get a step-up in performance to consistently achieve ‘fit for purpose’ quality (Recommendation 2)

• Improve understanding of, and achieve greater commitment to, integrated

marketing programmes (Recommendation 4) • Develop and implement a market plan for Braeburn in Europe in 2007, including

supply management (Recommendation 5) • Establish a set of comparative season-to-season exporter and pack house

performance information (Recommendation 8) • Discussions between leadership group of growers and nurseries to improve

quality and cost of new trees (Recommendation 9) • Review basis of New Zealand funding contribution to Prevar and IP access

policies (Recommendation 12 – with Prevar)

• Review R&D focus to ensure appropriate systems research is initiated and best practice adopted (Recommendation 14)

• Establish an annual consumer insights and market intelligence forum – with

HortResearch and Crop and Food (Recommendation 15) • Promote investment opportunities and new options for the industry – with banks

and advisors (Recommendation 17)

Note: The nature of these recommendations emphasises the importance of the industry debating and agreeing the best form of industry structure to be used for the future. There is the opportunity to create and gain support for the industry’s own Designed Framework if the Horticulture Export Authority model remains unattractive.

3. Commercial Enterprises (individually or jointly)

• Ongoing commitment to ensure global leadership in production efficiency and systems effectiveness (Recommendation 1)

• Commercial implementation of initiatives developed in the Pipfruit New Zealand

and industry partnership programmes – above recommendations. Conclusion Growers and exporters must be the focus of the required changes. There are three key phases to the transformation: improved returns from the existing crop, a faster rate of

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transformation of the crop profile and building longer term platforms of competitive advantage. It is essential to reinforce the reality that international markets and competition are changing very quickly and the New Zealand pipfruit industry must transform at a much faster rate than at present to keep up. Some of the issues the industry faces are similar to other horticultural and food sectors. In our view it is important that the Government reviews policies to ensure it supports and encourages private sector initiatives and investment. Traditionally faster change has been associated more with technology industries such as electronics, information and communications technology, and biotechnology. In today’s competitive environment traditional industries such as pipfruit must also change quickly. Government agencies working in partnership with the industry to develop a package of initiatives can provide a supportive environment and keep the private sector at the forefront of the proposed transformation. Policies to be reviewed include upgrading New Zealand's capability, taxation review (market development, R&D, and training benefits) and achieving faster economic transformation (including depreciation rates). The industry has a sustainable future under the proposed framework. The challenge is in getting the right combination of ‘carrot’ and ‘discipline’ to trigger the next phase of change. Success requires a combined government and industry approach in key areas. The pay-off in the medium term will be an industry of 12 to 18 million TCEs for international markets, representing an annual revenue of $350m to $450m, providing the essential platform for the longer term sustainability of the New Zealand industry. It will be located mainly in the Hawkes Bay and Nelson regions, with average annual employment of 6,500 fulltime and 24,000 seasonal workers. The pipfruit industry provides a particular and very valuable opportunity to apply the emerging economic transformation policies and ideas of Government to support established commercial leadership, investment and disciplines. It is vital to move decisively and quickly as there is much to be done.

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1. Introduction The pipfruit industry is an important part of New Zealand’s food and beverage sector, accounting for 25% of the horticulture industry. It is the major horticultural crop in Hawkes Bay and Nelson. It is a significant land user and employer in Central Otago, Waikato, and Gisborne. The industry has faced significant challenges, particularly in the last two years. Significant change is necessary to secure the long-term future of the industry.

Pipfruit New Zealand on behalf of the pipfruit industry and with the assistance of Ministry of Economic Development has initiated the formation of a pipfruit sector strategy. A key initiative in the development of the strategy was to commission a project in July 2006 to:

• establish the steps the NZ pipfruit industry needs to take to generate sustainable economic returns to all parts of the pipfruit industry;

• establish the roles key industry stakeholders and Pipfruit NZ need to play to implement the strategy developed.

The purpose of the strategy is to focus primarily on the long term future of the New Zealand pipfruit industry and to identify the changes necessary for New Zealand to maintain international competitiveness.

The project team’s analysis approach emphasized:

• a review of key trends, issues and opportunities at each stage of the supply chain from consumers to the orchard;

• reviewing and drawing on a range of international research and perceptive commentaries that had been undertaken in the recent past2;

• discussions with key New Zealand industry participants and drawing on their insights as a result of their commercial interactions in key markets, including with Southern Hemisphere competitors;

• and discussions with small groups of growers in Hawkes Bay and Nelson, and with other industry stakeholders.

During the project, the consultant team had three meetings with a governance group established by Pipfruit New Zealand to outline the themes as they evolved and to debate possible strategies. In addition three meetings were held with a number of policy officials from a range of government departments. The key findings, key future strategy recommendations and implementation proposals were discussed with Pipfruit New Zealand and with a number of key grower and exporter groups in November to test their feasibility. 2 See “New Zealand Apple Industry – crunch time!” Rabobank Global Focus, January 2006; “Comparing Apples: Opportunities for the New Zealand Pipfruit Industry.” Audacity July 2005; Growing Futures Case Study Series, Martech Consulting Group in association with NZIER; NZ Pipfruit Industry Strategic Plan 2005-2010, Pipfruit New Zealand; New Zealand Fresh Deciduous Fruit Annual 2006, USDA Foreign Agricultural Service, December 2005; “The Australian Apple Industry Squeeze”, Hassal & Associates Pty Ltd, 2001.

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The World Apple Report (2006) continued to rate the New Zealand industry very strongly for apples from an international perspective. New Zealand was seen as the second most competitive apple supplier in the world after Chile in 2006 (Table 1), but down from its #1 position in 1995.

Table 1: International Implications of Apple Producers

Rank Overall Production Efficiency

Infrastructure and Inputs

Financial and Markets

1 Chile Netherlands Chile France

2 New Zealand New Zealand USA Belgium

3 France South Africa New Zealand Italy

4 Italy Chile Argentina Japan

5 Netherlands Italy Canada New Zealand

6 USA France France Chile

This gave recognition to the traditionally strong performance platforms of the New Zealand apple industry. However the ranking in financial and markets had dropped from #1 in 1995 to #5 in 2006. The rating for pears was at a more modest level. Despite this recognition this study was undertaken during a time of considerable change and consolidation resulting from poor economic returns to growers in 2004 and 2005. Grower numbers reduced from 1200 in 2001 to 650 in 2005. Grower returns were quite improved in 2006, but what of the future?

The Report presents: • a review of external factors impacting on the New Zealand pipfruit industry and

the consequent strategic issues

• a discussion on future scenarios, and a proposed strategic framework

• strategies to achieve better performance from the existing crop

• faster transformation of the crop by investing in new trees and new varieties

• building longer term support platforms for competitive advantage

• industry structure options and implementation accountabilities

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2. New Zealand Pipfruit in a Dynamic Environment. The analysis presented here should be read in conjunction with two supporting documents prepared as part of this project:

• Overview of the New Apple Industry in a Global Context – Coriolis Research • The Case for Investing in the NZ Pipfruit Industry – Agricultural Investments.

This section draws on key findings in those reports which are an integral part of the total review project. This section focuses on several key areas which provide critical reference points for developing a future strategy for a sustainable industry. These are:

• apple consumption is static or declining in key markets and pipfruit must now compete across the spectrum of fruit and the emerging healthy food space

• there is global overproduction of apples, export markets have remained mainly unchanged and price trends are downwards for established varieties

• the consolidation of major retailers remains a major challenge, along with a rapidly changing distribution model

• the New Zealand crop profile is dominated by two global varieties and newer varieties have not delivered commercially as expected

• the New Zealand pipfruit’s competitive strength is being eroded, and inconsistency in delivering ‘fit-for-purpose’ quality is of concern

• investment in pipfruit production has not been attractive but opportunities exist to create a better business model

• there are excellent eating fruit, organic and healthy food opportunities • the industry is in transition, and yet to leverage scale.

2.1 Consumers and Consumption

Consumer Apple Attitudes and Behaviour In many countries, per capita consumption of apples is static or, indeed, declining (Figure 1). But why?3

• Competition from other fruit – there are winners and losers. For example, in the UK market, bananas have slowly overtaken apples as the nation’s favourite fruit. This reflects the consumer perception that the banana is more convenient, child-friendly (child size bananas are available and sold at a premium) and has a 21st Century nutritional profile (e.g. good for instant energy). It also has strong associations with attractive sportsmen and women (Wimbledon tennis stars munching bananas [not apples] between sets!). Significantly, this image has been promoted by an alliance of banana importers.

3 The first half of this section has a strongly developed country market orientation, and the second half has an Asian perspective.

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Figure 1: Falling Consumption in Key Markets

• Competition from FMCG4 processed fruit products. Led by Nestlé5, FMCG

companies are moving quickly to change their product portfolios to reflect consumer interest in health and wellbeing. Major players have shown a remarkable ability to change and change quickly. Examples include –

- PepsiCo moving into oat products (with the purchase of Quaker Oats) and healthy beverages such as Tropicana brand juices, lightly pasteurized “fresh” apple juice (in the UK), Gatorade sports drinks, and new age flavoured waters. A good case in point is the UK PepsiCo joint advertisement for Quaker Oats and Tropicana which has the strap line “Get half your whole grains and fruit before you’re out of your slippers!”.

- Unilever’s launch of Knorr Vie which, essentially, takes the Yakult/Danone Actimel little plastic bottle of drinking yoghurt concept into the 5-a-Day market with concentrated fruit and vegetable juices which provide the consumer with 2 of the 5 portions of fruit and vegetables. To support the launch a year ago August, Unilever put NZ$12 million behind it in promotional spending.

- The Swiss company Hero has launched a “lunch box friendly” line of fruit pieces suspended in juice branded Fruit-2-Go where, again, the benefit claim is that consumption provides 2 of the 5 recommended fruit and vegetable portions.

- And, even closer to the bone, Del Monte has Fruitini which includes apple juice sweetened apple pulp in a child-friendly squeezable tube.

- Then, of course, there has been a rash of smoothie products (e.g. Innocent in the UK, Naked in the USA, Nudie in Australia) launched at retail, and

4 FMCG – fast moving consumer goods 5 In October, 2001, the Nestlé CEO announced that the company, forthwith, was intent on repositioning itself as a trusted health and well-being nutrition company, rather than as a trusted food and beverage company.

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juice bars as a beverage service format which all make incursions into the fresh produce market space.

Asia6 has been a strong growth market for apples – both fresh and in juice form – over the past few decades, with imports tripling and more. There is a clear preference for quality in higher income markets, and in emerging economies with a significant middle and upper income class. Overall, the preferred variety would seem to be Fuji in many markets. Review of the regional economies and consumer and retail trends reflects:

• increasingly, there is movement towards modern supermarket-style retail environments, although traditional markets will continue to be very important;

• the regional markets are huge in total, although substantially different between economic regions and geographies;

• consumer segmentation patterns similar to developed economies exist7; viz. shoppers who seek convenience in purchasing and consuming (easy life seekers), those that are unequivocally price-driven (value seekers), shoppers who wish to purchase from knowledgeable vendors (authority seekers), and those that are motivated by purchasing the best on offer (quality seekers). Although under increasing pressure, the traditional produce markets are still the principal source of purchase for those seeking the highest quality fruit and for those with lowest price firmly on their mind. The modern retail sector is the firm favourite for shoppers driven by convenience.

Asian consumers are knowledgeable fruit eaters:

• fruit is an important component of their overall diets (more so than in, say, Northern European countries);

• consumers are knowledgeable about and interested in the seasonality associated with their domestically-produced fruits, but substantially less so in regard to temperate fruits. (For example, apples are available year-around and, for many shoppers, country of origin of fruit has not been of significant concern, rather price and appearance “on the day” have been the principal drivers of purchase);

• apples and other temperate fruits have been regularly available and, as such, have been perceived as an acceptable and predictable “filler” between (and even within) seasons in lieu of the more succulent, albeit unpredictably available local fruits (e.g. mangoes, rambutans, and mangosteens);

• to a degree, there has been an element of “snootiness” associated with purchasing temperate fruits as, indeed, there is in cold climate countries when purchasing tropical “exotics”;

• apples are not perceived to have particularly strong intrinsic health or other lifestyle attributes;

• over time the quality of apple supplies has been inconsistent and, frequently poor, reflecting long and poor storage, generally indifferent post-harvest handling, and poor quality of produce at point of export shipment;

6 Notes from Professor David Hughes following a recent visit in Asia. 7 The Accenture shopper and consumer research had a focus on major metropolitan cities, with significant middle-class communities and, typically, an established, albeit still emerging, modern retail shopping environment.

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• however, apples are available widely and are given a share of retail shelf space which is surprisingly large given that they are not indigenous produce, and where competitive fruit when in season is, often, cheaper and more preferred by local consumers.

In markets as diverse as Viet Nam (with a rudimentary modern retail sector), Hong Kong (with a long-established supermarket sector but, still, a vibrant traditional market milieu), and South Korea (with a host of international retailers present), there is a considerable range of fresh apple products on offer. In Viet Nam (October), Chinese Golden Delicious apples were the most prevalent and affordable, followed by Chinese Fuji, South African Granny Smith and Washington State Gala produce with a 1: 4 ratio between cheapest and most expensive per unit. In more developed markets similar price ratios were in evidence and with a notable proliferation of export points (e.g. France, USA, Chile, RSA, Australia, New Zealand). Direct price comparisons are, often, challenging because of different pack sizes, fruit sizes, and a predilection to sell by unit or units (e.g. $x per 5 apples).

Trends in Consumer Attitudes and Food Markets8 A number of underlying consumer trends are expected to drive new products in the 21st century. Driven by a variety of socio-economic and lifestyle changes, consumer demand is expected to gravitate around a mix of three major 'mega-trends'

• Mega-trend 1: Convenience - increasingly individual and fast paced working and family life implies that consumption moments will involve less expert people, be less planned, more individual, less formal, more frequent, and occurring in more different locations. This will drive demand for more convenience. The high growth categories included9 Cereal/Muesli/Fruit Bars and Fresh Ready-to-Eat Salads which met both convenience and health needs.

• Mega-trend 2: Health - growing health awareness, concerns about food safety and the environment and anxiety about physical appearance will drive demand for 'food minus', 'food plus' and natural products. These allow better control over nutrient intake, as well as more user-friendly evidence supporting health claims. The high growth Food & Beverage categories identified this year were:

o Products that have perceived health benefits, often diet related o Products that are accepted healthy staples o Products that offer ‘healthy’ alternatives

• Mega-trend 3: Pleasure - an increasingly adventurous and demanding or 'spoilt' consumer with a growing need for reward, comfort and guilt-remedy products. They are intent on optimising limited leisure occasions, will drive demand for more ethnic and exotic, fun and entertaining, premium and indulgent products. This reflects that consumers are getting tired of being told what they cannot do and are looking for solace in food. The market for pleasure and indulgent foods is growing.

8 This section draws extensively on: David Buisson, formerly Professor of Marketing, Otago University, Dunedin, New Zealand – “The Changing Consumer: Trends in Preferences and Tastes”, May 2006 - see www.conferenz.co.nz 9 AC Nielsen study across 59 countries as reported in footnote (8) above

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The socio-economic and lifestyle drivers behind health, convenience and pleasure exert their effects constantly and simultaneously on consumers. As a result, every purchasing decision is influenced by all three trends. What differs is the degree to which each is relevant, the balance of health versus convenience versus pleasure, in different occasions. The most significant global growth in 2003 for nutritional and related markets was in natural/organic foods (10.9%), sports/meal/ home/speciality (9.3%), functional foods (9.1%), and natural personal care (8.8%) – as reported in AC Nielsen study.

2.2 Global Production, Markets and Prices

Global production and price trends A fundamental challenge derives from the reality that the world is awash with apples (driven by the increasing production in China -Figure 2), and prices are tracking down (Figure 3). Figure 2: China Driving Production Growth

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Figure 3: Price Trends of Major Varieties

For the two main varieties, the long term trend is for prices to have reduced on average between 50 and 70 cents per TCE each year.

Key markets for New Zealand pipfruit Key markets for New Zealand apples are in Europe and particularly Germany, with the United Kingdom taking only 22% of exports in 2005 compared with 32% in 1980. Export quantities in 2004 and 2005 were: (Table 2) Table 2: Key Markets10

2004 tonnes 2005 tonnes CAGR % (96 - 05)

United Kingdom 85.7 71.7 (0.4) Rest of Europe 181.5 177.0 5.3 USA 62.0 35.5 (4.3) Asia11 49.7 46.9 (2.2)

Another key dimension is that the prices for apples in Europe remain higher than generally achieved in other markets. The overall price results are hence significantly influenced significantly by what happens in Europe. While this has been improved in 2006 after the disastrous results the previous season, there is concern for 2007 with an expected large increase in Braeburn exports to around 6m TCEs or more. Various exporters commented that the price is likely to drop by around $2 per TCE for each 500,000 TCES above the 5m level.

10 See Coriolis Reports – Markets p. 8 11 Key Markets in Asia (To week 42, 2006): Taiwan (15.1 tonnes), Hong Kong (5.6 tonnes), Singapore (4.6 tonnes), Malaysia (4.5 tonnes), China (1.4 tonnes).

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Winning in traditional markets will be critical going forward because of the volumes and higher prices which generally can be achieved (Table 3). Development opportunities exist on a selective basis in Asia and in markets which are currently closed e.g. Australia, Japan, and South Korea. Table 3: Benchmarking Market Attractiveness

The Asia situation is worthy of specific comment given the rapid growth of economies in that region. The reality is that consumption overall is growing and hence there will be opportunities to target segments on a market by market basis. Consumption in Asian developed12 economies, such as Japan, Taiwan, South Korea, Singapore, and Hong Kong have plateaued, while emerging markets continue to see consumption growth, albeit tempered by occasional stalls, associated with economic downturns. In per capita consumption terms, China dominates with around 14 kg – clearly, apples are a favoured and domestically available fruit – followed by Singapore -10 kg. Japan, Taiwan, and Hong Kong are steady markets for fresh apples with per capita consumption in the 6 - 7 kg range; Malaysia consumption is 3 - 4 kg and India, Thailand, Indonesia, Philippines, and Viet Nam poised for growth, as incomes increase at 1 -1.5 kg per capita. Nevertheless it is important to recognise that China is the major exporter and as such has driven the average prices down. Improved market access and a targeted approach will be a key part of market development in Asia. Australia represents an important market opportunity with annual consumption of 6.4 kg per capita albeit static or in a slight decline.13 Domestic production and hence consumption is based on Granny Smith and Cripps Pink, with the latter growing strongly. Retail prices appear higher than current prices in this country. These factors along with its much bigger total size than New Zealand14 means that it represents a significant 12 See Agrifood Globalisation and Asia, Volume III, “Asian Agrifood Demand Trends and Outlook to 2020”. Department of Foreign Affairs and Trade, Government of Australia, 2004, and national statistics of importing countries. 13 See The Australian Apple Squeeze, Hassell & Associates Ltd – 2001 p 73 14 It is estimated that annual consumption is around 130,000 tonnes compared with 40,000 to 50,000 tonnes in New Zealand, although one estimate is as high as 215,000 tonnes

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opportunity for exports from this country. A major challenge however, exists in respect of market access “Australia historically has maintained a tightly conservative Appropriate Level of Protection (ALOP) to protect itself from diseases and pest i.e. fireblight”. The issue of market access to Australia for pipfruit has received intense focus both from growers (very high levels of frustration) and politicians, but as yet without the desired progress. The recent Australian announcement has not resolved the situation, with industry now seeking application to WTO to resolve the issue.

2.3 International Retailers and Distribution

Retailer consolidation Consolidation is occurring in most markets, with supermarkets becoming global players. The situation for United Kingdom is outlined (Figure 4) and supermarkets in key countries are listed below.

• United Kingdom – Tesco, J Sainsbury, Asda/ Wal-Mart, Morrisons, Sommerfield, Marks and Spencer

• Germany – Edeka, Rewe, Metro, Tengelmann, Aldi, Lidl, Spar • Netherlands –Ahold, Casino, Schnitema, Metro, Aldi • France – Carrefour, Intermarche, Leclerc, Casino, Auchan • USA –Wal-Mart, Kroger, SuperValu, Safeway, Ahold, Costco • China – Lianhua, Beijing Gome, Hualian, Carrefour • Hong Kong – Dairy Farm, Park’n Shop, CRC, Dah Chong • Taiwan – Carrefour, Dairy Farm, RT Mart, Makro, Tesco • Malaysia – Dairy Farm, The Store, Carrefour, Tesco, Jusco

Of interest is the push of European retailers in Asia to challenge the traditional ‘wet market’ retailing approach. Carrefour is a significant player in this respect. Figure 4: Changing Supermarket/Superstore Market Share in the UK by Chain

International retailers such as Tesco, Carrefour and Wal-Mart, have an increasing presence in many Asian markets although they are by no means dominant. Indeed, the

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initial enthusiasm for retail “flag planting”, i.e. establishing a small base in a new market, has been tempered as major players such as Carrefour and Wal-Mart have exited South Korea, as has Tesco from Taiwan. Strong local and regional players (e.g. WuMart in China and Dairy Farm International in South East Asia) have a firm presence. Particularly in fresh foods, there is still a predilection for supermarket purchasing to be undertaken on a national basis. For example Tesco does not procure regionally within Asia to gain buying scale economies as yet. However, a more co-coordinated approach to regional, if not global, buying is around the corner. New Zealand exporters have established relationships with these retailers on a direct basis. Generally it involves several exporters supplying through a centralized distributor or category manager depending on the stage of evolution of the distribution sector. UK and European importer and supermarket buyer perceptions of preferred point of supply (e.g. Chile or New Zealand) were mixed. New Zealand supply performance for apples was seen to be inferior to, say, kiwi fruit from the same source and, overall, the New Zealand apple sector’s performance over time had slipped. However, markets were awash with fresh apples which, invariably, led to general grumpiness from all market participants as margins are squeezed. Building partnerships with the national arms of international retailers and with local players is challenging, given the traditional trading mentality of the fresh produce trade and the pervasive over-supply of fresh apple products. Trade buyers see minor points of differentiation between the principal sources of supply and, as a result and understandably, revert to carnivorous type when purchasing with the focus being on achieving their prerequisite “entry threshold requirements” than principally on price. Produce from China is a consistent threat in this regard, with a stream of fruit from the value end (retail parlance for “cheap”) to the premium end of the market, all at very competitive prices. Indeed, whether it be for fruit or vegetables, landed prices for Chinese produce present a significant threat to domestic producers in Asian markets (e.g. even in low cost producing countries such as Viet Nam and Thailand), as well as to traditional exporters into the region for temperate fruit (such as New Zealand, Australia, South Africa and Chile).

Retailer Competitiveness and Supply Changes Globally fresh food retailers are using fresh food departments – including produce – to differentiate themselves from their competitors. There is little opportunity for differentiation via putting grocery products on shelves: price is virtually the only point of leverage. Economies of scale favour the discounters such as Wal-Mart. Fresh food on the other hand provides greater strategic options, where smaller size can be an advantage. For example, Whole Foods in North America has developed a format based on an understanding of the provenance of food they sell and promoting organic products where possible.

Similarly, Waitrose Supermarkets in the UK source all their meat, dairy and egg products from dedicated primary producers who are members of Waitrose producer groups. Waitrose see one of the advantages of this strategy is that it is well nigh impossible for larger competitors such as Tesco to replicate.

Reducing the number of produce suppliers and working more closely with these suppliers is an integral component of the retailers’ strategy. Terms such as ‘category management’

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or ‘category leadership’ are typically used to reflect the increasing role of the supplier to work closely with the retailer to increase sales via product differentiation and innovation.

Essentially the supplier evolves from just a supplier of product to a category partner whose success depends on (developing) marketing and innovation capabilities. Two cases: one from North America and one from the United Kingdom are presented to illustrate this point.

Case I. A. Duda and Sons, Inc15 five years ago was a traditional USA grower/shipper supplying a range of products such as celery, corn, citrus and onions to retail and food service companies. Success was based on their ability to grow and deliver products into their customers distribution centre: product factors. Wal-Mart – a customer of Duda - changed the model for produce suppliers by insisting that suppliers assume responsibility for growing sales and innovation. In response, over the past few years Duda has developed a dedicated team of 16 marketing and category analysts to support the Wal-Mart business. These capabilities are now being leveraged with other USA and export supermarket customers. These new organisational capabilities – and not just product attributes – are increasingly the foundation for Duda competitiveness. Duda currently exports citrus to Japan and is developing customer acquisition strategies in other Asian markets. They will compete against New Zealand suppliers based on a complex configuration of product and organisational factors. They have the demonstrated ability to be an innovation partner and not just a product supplier.

Case II. Munoz Mehadrin and Mack Multiples are the two major citrus suppliers to Marks and Spencer in the United Kingdom. These two work extremely closely to ensure on time and full deliveries into the Distribution Centers: if one supplier is short the other willingly assists to avoid out-of-stocks. Supplying product into the Distribution Centre is not the focus of competition between these two suppliers. The competition between suppliers is demonstrating their superior ability to grow the category and innovate. An organisational capability – not product attributes– is the prime source of differentiation. Product factors allow suppliers to play the game: organisational marketing and innovation capabilities distinguish the winners from the losers in the game.

This approach to innovation has an impressive track record in traditional commodity oriented industries such as produce and red meat. For example, Waitrose supermarkets in the United Kingdom recorded at least 20% growth in value and volume (in a market that was growing 7% in value terms) with every fruit and vegetable category after introducing a category leadership strategy. In a more recent example, G’s Marketing and Tesco have grown the beetroot category by over 100% in the past 12 months. The application of marketing and innovation capabilities clearly has an impressive impact on the growth of the produce business.

Suppliers such as Munoz, who is also a Tesco supplier, clearly aspire to be global suppliers to major supermarket chains. These are the companies against which New Zealand suppliers will have to compete.

The discussion suggests that any perceived reliance on product attributes – whether quality, price or ‘clean and green’ – misses one of the fundamental changes that is 15 These cases draw on work undertaken by O’Keeffe & Associates. The projects involved discussions in USA with retailers such as Wal-Mart, Schnucks and Wegmans; and with Waitrose in United Kingdom. Other projects involved a range of retailers and distributors in USA and UK/ Europe.

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occurring in retail markets globally. Increasingly the major sources of competitive advantage will be organization and service related, and not-product related.

The outlook for New Zealand produce suppliers, including apple exporters, to meet this challenge is sobering for a number of reasons.

1. Narrow supply window. New Zealand enjoys a relatively narrow and declining supply window into Asia and Europe. This is a weak position on which to build a category partner proposition with a retail customer. The logical decision from the perspective of supermarkets is to work with the supplier with the broadest window, who then manages supply continuity from working with growers from countries such as New Zealand. Clearly one way to offset this problem is for some New Zealand suppliers to control or have an alliance with some Northern Hemisphere production.

2. Leverage domestic supermarket relationships. Woolworths and Coles are local supermarkets: Tesco and Wal-Mart are global supermarkets. Suppliers such as Duda and Munoz have a demonstrated track record of working with the supermarket customer in their respective domestic market. Similarly they are able to approach other retailers such as Dairy Farm International in Hong Kong with a proven track record of working with the leading global retailers. New Zealand suppliers do not enjoy this advantage.

3. Retail partnering capabilities. New Zealand apple exporters are essentially traders, who may have strong relationships with traders/importers in overseas markets. However, these current relationships are different to retail partnering, marketing and innovation capabilities.

Whether it be in the UK or Korea, the USA or China, modern sector retailers are embracing the “Good, Better, Best” tiering for fresh produce. This is retail parlance for “Cheap, Regular, Premium” and is best illustrated by the more elaborate Tesco own/private label programme with its “Value, Regular, Healthy Living, Free From, Organic, Finest” offerings. The top end – “Finest” for Tesco, “Taste the Difference” for J Sainsbury, for example, provides unique opportunities for New Zealand apple growers. We know that quality characteristics of produce will vary by period within a season, by grower, and certainly by variety. Yet, the Tesco’s of this world have to deliver the brand promise of “Finest” every day of the year or else disappoint their premium customers and/or devalue the integrity of their premium brand. It is viewed the New Zealand apple industry could position itself as the “carrier of the brand integrity torch’ on behalf of key retailers (building on the previously strong ENZA (as single seller) performances and the continuing strength of Zespri International) as a professional produce leader. To-date, the “Good, Better, Best” tiering for apples has been less clear than for other produce items (such as tomatoes). Pink Lady, Jazz, Sundowner are loosely positioned in the “Best” camp. The sustainable future for New Zealand growers is to “own” the Best/premium market space through exceptional quality control and ownership of IP-protected premium varieties, work in alliance with other suppliers (e.g. Chile) who could be the principal providers in the regular and value end of the market, and earn the reputation of “New Zealand as apple category leaders” through an unequivocally acknowledged superior understanding of shopper and consumer behaviour.

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2.4 New Zealand Crop Profile and New Varieties New Zealand apple production and export by variety has been in constant flux over the past 50 years – with new varieties rising and falling over the decades (Figure 5). Importantly though in 2003 the export profile was dominated by Braeburn (40%) and Royal Gala (37%). This is a higher two variety production and export concentration than almost any other Southern Hemisphere export suppliers. Figure 5: New Zealand Apple Variety Profile

Unfortunately these two varieties have been taken up by competitors in increasing quantities. When New Zealand returns were compared with Chile it appears that the ‘bubble’ is closely linked to the historical advantage with Braeburn and Royal Gala (Figure 6). Figure 6: New Zealand and Chile Average Export Price

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There is however a major challenge, as during the last decade other countries are now growing these and other varieties that are exported from New Zealand. This is well illustrated by the export variety profile from Chile. (Figure 7). Figure 7: Chile Apple Exports by Variety

New variety development has been a fundamental dimension to the perception of New Zealand as a strong and innovative global supplier. So what are the prospects for the more recently launched new varieties? (Figure 8). Figure 8: Five New Varieties Dominate Non-Top 5 Exports16

16 These five new varieties represented 12% of current apple exports.

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Industry comment was consistent that the Pacific series had not delivered the commercial returns they had anticipated and this was reflected in the decline or plateauing of new plantings (hectares) of the Pacific series between 2002 and 2006. There is however growing recognition of opportunity to develop the market in Asia, particularly in China for Pacific Queen and Pacific Beauty which may see an increase in plantings of these two varieties. The initial prices for Jazz are promising (Figure 9). Figure 9: Prices for Newer Varieties

The relative price return of the different varieties is reflected in the growers’ investment decisions (Table 4). Clearly Jazz is the big winner at present with the active support of ENZA. Pink Lady and Crisp are also still on a strong growth curve. Table 4: New Plantings Year Pacific Rose Pacific Beauty Pacific Queen Jazz Pink Lady/

Crisp 2002 1054 ha 355 ha 304ha 127ha 241ha 2006 691 ha 332ha 329ha 626ha 354ha Percent change

(34%) (6%) 8% 390% 47%

2.5 Eroding Competitive Strength

Competitors New Zealand faces three levels of competition: primary - fresh produce from Southern Hemisphere suppliers such as Chile and South Africa; secondary – fresh produce from Northern Hemisphere suppliers such as USA and France; and emerging – processed or ready to eat products from Northern Hemisphere suppliers such as China and Turkey. A

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benchmarking of Southern Hemisphere suppliers and a qualitative comparison of these and Washington State is outlined below. The absolute importance of Chile is evident and this is supported by a variety of market comment that Chile has caught up to New Zealand in terms of perceived quality, and in terms of the market discipline implemented by their key exporters. The relative breakeven cost of production has been estimated as follows17 (Table 5): Table 5: Perceived Breakeven Production Cost Country Breakeven

$US per box FOB

Comment – for Fuji except for USA which is Red Delicious

New Zealand $12- 14 While New Zealand has a superior production yield, the majority of the orchards are less than 20 hectares which limits the scale benefits

USA $10-12 80% of Washington State is produced from orchards greater that 40 hectares, and 50% from those 200 hectares or larger

Chile $6-8 Significantly increasing yields and improved quality are key factors, although cost pressures starting to have impact. Lower labour productivity still a factor

China $3-4 While production is increasing rapidly, quality has been an issue from the mainly smaller orchards. Relocation of production with larger production units is a factor watch. The threat factor relates mostly to their impact on prices in Asia

A review of the metrics of key Southern Hemisphere suppliers reinforced the importance of Chile’s position as a major direct competitor. Of particular note was their Compound Annual Growth Rate of production for 2000-05 of 10.9%, and a production yield which is getting closer to that of New Zealand and improving much faster. Argentina was also quickly increasing its apple production levels and yield rates. A qualitative assessment is outlined below (Figure 10). There has been particular industry comment that the Chilean perspective does not take enough account of the lower levels of labour productivity that are evident in that country, and the strengthening peso. Specific data is not available on the former factor, but there is need for recognition that Chile has rapidly become a disciplined and efficient horticultural producer, including pipfruit and is able to offset the comparative disadvantage they have in labour productivity.

17 International importer estimate: for Fuji, except in Washington State where Red Delicious used. New Zealand industry comment on these estimates is that changes in the relative exchange rates – Chile/USA and NZ/USA mean that Chile’s cost have increased in 2006. Despite this they are still seen to have a comparative cost advantage.

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Figure 10: Competitive Environment of Select Competitor Countries

South Africa remains a key competitor in Europe and the United Kingdom with strong established distributor relationships. 40% to 50% of all production is exported with the main varieties being Granny Smith and Golden Delicious with production concentrated in West Cape with increasing scale of production and increasing yields. They have recognized the need to get out of commodities and into new varieties18. In particular they are planting Pink Lady and Sundowner, and have their own unique IP controlled variety – African Carmine.

Competitiveness Discussions with exporters and market analysis suggest that the two key varieties exported from New Zealand have lost relative competitive position in recent years. A perceptual map is presented (Figure 11) and is viewed by key industry participants to be reflective of the changes in position and future opportunities. The key messages in this perceptual map are that:

• Braeburn and Royal Gala had a positive position in the normal competitive market for pipfruit. However their relative differentiation has diminished as uniqueness was lost and New Zealand’s increasing cost structure contributed to the reduced competitiveness.

• These factors resulted in these products entering the ‘danger zone’ of markets in terms of lower differentiation/ higher relative costs. This was most likely to result in reduced returns. The net impact was likely to exist irrespective of whether New

18

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Figure 11: Competitiveness Map

Relative Delivered Cost

Rel

ativ

e D

iffer

entia

tion

Low HighLo

wH

igh

Zone of

Competitive

Battle

Danger Zone

Exchange rate:Lower, High

D. JAZZ

B. BraeburnRoyal Gala

C. Selected-size,

-organics

A. Braeburn,Royal Gala-historical

E.Other new – apples, pears

Zealand had a weaker or stronger dollar relative to the USD. This was because of the overall commodity nature of the market for these varieties.

• Improved positioning opportunities are available and have been created by specific exporters. They include:

o Particular specifications of Braeburn targeted to key customers (size, organics, nil residue in future)

o Introduction of new varieties and a planned market development programme e.g. Jazz

• The exchange rate does have a material impact on importer costs if the dollar is in its present high band relative to the USD, as compared with a band around the long run average of NZD/USD of 0.55 approximately. Achieving differentiation on attributes of importance to designated consumers is critical in the longer term e.g. eating quality, health functionality.

2.6 Economics of Production and Investment A viable pipfruit sector must attract and retain investment in its core components; orchards, plant and equipment, pack houses, cool stores and marketing infrastructure. Whilst the sector will continue to be supported by existing participants who have a ‘sunk investment’, the thesis of this analysis is that it will require new investment to survive and grow.19 It is difficult to determine the current level of investment in the NZ Pipfruit industry given the owner-operator status of many orchard holdings and the range of off-farm assets (i.e. difficulty in determining the capacity, age and level of technological investment of pack houses and coolstores). However, from MAF/Pipfruit monitoring data and from data provided by interview subjects it appears that there is between $1.2

19 This section is based on the Report ‘The Case for Investing in the NZ Pipfruit Industry’, Agricultural Investments, November 2006 which was completed as part of this project.

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-$15,000

-$10,000

-$5,000

$-

$5,000

$10,000

$15,000

$20,000

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

$/h

a

-$12,000

-$10,000

-$8,000

-$6,000

-$4,000

-$2,000

$-

$2,000

$4,000

$6,000

$8,000

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

$/h

a

billion and $1.4 billion of investment in the industry, with the approximate makeup shown in Figure 12. Figure 12: Estimated Industry Investment

Investment from a grower perspective In the past 20 years the industry has had periods of profitability, notably in the late 1980’s through to 1992, a few years in the mid 1990’s and in the post-deregulation period of 2001 to 2003. However, in the words of one experienced operator; “there haven’t been enough good years”. This commentary is supported by data from Pipfruit Monitoring Reports published by the Ministry of Agriculture. Their bi-annual publication reports financial and physical information from a group of ‘industry representative’ growers in both Nelson and Hawkes Bay. Whilst in the past 10 years the industry average grower has made a trading profit of $175/ha and made a cash loss of $3019/ha, the trend data (Figure 13 - left) shows a deteriorating position. It appears that in concert with falling real prices for New Zealand’s main apple varieties20 the industry is losing its ability to generate profits and is ‘bleeding’ cash. Given total assets in the realm of $75,000 - $100,000 /ha this is a totally inadequate position. Figure 13: Trading profit (left) and cash position for Hawke’s Bay growers –

inflation adjusted

20 See Figure 3 and data from Coriolis Research.

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Whilst orchard businesses have returned cash profits of between 10% and 20% p.a. in exceptional seasons, and the underlying investment in land has appreciated, overall operating returns have been insufficient and too variable. The industry has a poor investment outlook if it continues to rely on current technology/production systems/varieties through existing routes to market.

Historical position - risk Horticulture and pipfruit production has traditionally been considered more ‘risky’ than pastoral farming because of price variations and weather risks. Because pipfruit is perishable and demand tends to be inelastic, an imbalance between supply and demand can have significant effects on price. And because of the fruit development and maturation process, the production system tends to be at risk from unseasonable frosts, from humid and wet conditions and from hail and wind damage. One formal way to consider risk is to measure the standard deviation of product prices - summarised in Table 6. Risk for both apple types is high relative to the price of milk solids. Braeburn, despite having a good reputation as a variety with ongoing potential, is highly price sensitive and should earn a significantly higher price to compensate for its highly variable pricing. Table 6: Comparison of Risk; One Standard Deviation About the Mean

Braeburn Royal gala Milk solids $/TCE $/TCE $/kgMS

Average price: 1990 - 200621 $ 20.66 $ 22.69 $ 4.46 One standard deviation $ 8.38 $ 6.01 $ 0.64 Percentage (STDV/average) 41% 26% 14%

A target for the industry is to increase the prices it receives for its fruit (with the objective of increasing profits per hectare) and to reduce price variability.

Growers projected financial position The following figure (Table 7) shows two minimum sustainable revenue points; 2500 export cartons per hectare at a price of $21/TCE or 3500 TCE at $18 per carton. By comparison the New Zealand average yield of export cartons is just under 2000 TCE/Ha; with prices trending towards $15/TCE for our main export varieties of Braeburn and Royal Gala (see Figure 3). 21 There is downward trend in the inflation adjusted price for New Zealand’s two main varieties of 50 cents to 75 cents per TCE per annum. This reflects the competitive nature of world markets and New Zealand’s relative comparative advantage relative to competitors- see paper by Agricultural Investments.

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Table 7: Sensitivity Analysis –Yield of Export Quality Fruit and Price

Export cartons / ha 2,000 2,500 3,000 3,500

$ 15 - $11,327 - $8,647 - $5,967 - $3,287 $ 18 - $5,327 - $1,147 $3,033 $7,213

Exp

ort

pric

e ($

/TC

E)

$ 21 $673 $6,353 $12,033 $17,713

Despite the relatively poor ‘average’ performance, there are operators achieving acceptable profits as shown in Figure 1422. These results reinforce the viewpoint that the leading growers have developed the variety selection and orchard management knowledge and systems to achieve acceptable returns and will have the confidence to continue to invest for the future. The lower performing growers have a real challenge ahead with many having already exited the industry. Figure 14: By quartile performance from 2002 and 2005 seasons for the Hawke's

Bay Group23

-25,000

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

Min LQ Average UQ Max

Pro

fit/

Ha

2002 2005 From anecdotal information provided by interview subjects, growers that are achieving better than average performance usually:

⇒ Have a focus on per hectare profitability and benchmark their orchard, and even parts of their orchard on that basis.

⇒ Have relatively high yields of export quality fruit relative to the benchmark for that variety.

⇒ Have average or above average scale. Whilst there are clearly some small, high-performing orchards, scale seems to be important for fixed costs dilution and to support new investment.

⇒ Achieve better than average prices per TCE through a mix of the following strategies

o Selling a portion of their crop onto the domestic market

22 The data is taken from Hawkes Bay MAF Pipfruit monitoring information for 2002 (a ‘good’ season) and 2005 (‘difficult’). 23LQ – means Lower Quartile; UQ means Upper Quartile)

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o Producing larger fruit size o Producing sport varieties that have better colour or are available for

market ‘early’ o Have diversified away from the duopoly of Royal Gala and Braeburn.

⇒ Have made targeted investments in dwarf plantings in new varieties or sports of existing varieties and are innovating with these new plantings.

Future grower performance – the case for investment The above discussion suggests a limited future for a grower with a 15 – 20 ha orchard dominated by Royal Gala and Braeburn plantings from the 1980s and early 1990s. Prices, yield and quality are all at uncompetitive levels from a New Zealand perspective. Yet during the interview process there were a number of both large and small businesses with a positive view of the future and an investment program involving planting or replanting 10% to 15% of their orchard in new trees. Typically these businesses are part of an integrated business that owns packing, coolstore and export operation; either within direct ownership or as part of a semi-co-operative grouping. Much of the investment is in new ground where there are fewer yield limitations from planting dwarf varieties, nearly all of the plantings are intensive, and most of the plantings are new varieties (Jazz), new club opportunities (e.g. Tentation / Delblush), niche opportunities (e.g. Cox Oranges ) or of sports of existing varieties. At present the industry is developing approximately 500 hectares per year but the project team is of the view that the industry needs to double this rate of transformation to break away from the commodity profile of the existing crop. Acknowledged best practice for most new plantings and replants is to convert to intensive plantings of dwarf root-stock varieties. Although these intensive orchard systems will outperform an established orchard, the development comes at a high cost of between $50,000 and $55,000/ha24. Figure 15: Return on investment for planting pipfruit at various prices and

yields

-$100,000

-$50,000

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

1 2 3 4 5 6 7 8 9 10

Year

Cu

mu

lati

ve c

ash

su

rplu

s

Status quo $25 and opt yields $25 & normal yields$23 and opt yields $23 & normal yields

22%

15%

7%

30%

24 Numerous references from scientific, advisory and grower sources.

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The chart (Figure 15) shows return on investment25 (measured as Internal Rate of Return) for investing in the redevelopment of a one hectare orchard with a standard yield profile26 and an accelerated yield profile27 at two assumed lifetime apple prices of $23/TCE and $25/TCE. Each line indicates the time taken to achieve payback on the investment, the total return on the investment (non-discounted returns) and the overall Internal rate of return (figures). The first point to note is that any investment in pipfruit has a long payback due to the costs of development. Unless prices are good in early years a breakeven point of four to six years is not uncommon. The second point is that the investment model is very sensitive. A $2/TCE price difference can make a 15% p.a. difference in the rate of return over ten years. The difference between typical and accelerated yields (the first four years of production) affects returns by about 8% p.a.

2.7 Specialist Opportunities: Organics, Pears and Functional Foods

Organics28 But all is not doom and gloom. The concern for cleaner foods has given rise to new premium markets. This market is increasingly being called ‘Farm Friendly’. Foods that are closer to the farm—referred to by such terms as homestead and farmstead; organic and natural; sustainably grown, free range and grass fed; continue to capture premium food and beverage markets worldwide. In the AC Nielsen study, across all the regions the main reason for purchasing organic food and beverages was that consumers believed such products were healthier for them. In Europe, more people cited benefits for the environment as their secondary reason for purchasing organics. For those who never buy organic food or beverage products, the main reason is price. Fuelled by mounting media attention to a wide range of issues, from mad cow disease and BSE to food poisoning outbreaks and import contamination, to environmental runoff and GMOs, the demand for cleaner, purer, and more “close-to-nature” foods has accelerated to the mainstream. In USA consumers are increasingly opting for organic packaged foods over natural, according to the Natural Marketing Institute. Global sales of organic products are increasing at approximately 20% per year with this demand concentrated in USA, and Europe, including United Kingdom. Production of organic fruit and vegetables has increased significantly across Europe but imports were seen as continuing to play an important role. Imports represented 22% of all sales in 2004, with fruit being the major import category. In USA total organic food sales have

25 Analysis by Agricultural Investments as part of this project involved their own modeling but the assumptions and methodology was similar to that utilised in Chapter 8 of the Pipfruit NZ Technical Bulletin #001. In general terms, the model has assumed a 20 Ha orchard, variable costs of $15/TCE equivalent (inflating), fixed costs of $110,000 (inflating) and interest costs of 8% p.a. 26 8 tonnes/ha in year two, 35 tonnes/ha in year three, 54 tonnes/ha in year four and 65 tonnes/ha thereafter. 27 20 tonnes/ha in year two, 40 tonnes/ha in year three and 65 tonnes/ha thereafter. 28 See ‘Overview of the New Zealand Apple Industry in a Global Context’, Coriolis Research as part of this project.

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been growing at 17% year on year and are currently 2.4% of sales. Fruit and vegetables dominate these sales. Major retailers in both regions report significant annual growth in organic food sales and that obtaining the needed supplies is posing major challenges as domestic production has not kept up with demand.29 This growth is reflected by the rapid growth and profitability of the USA retailer Whole Foods which is now launching stores in UK. In New Zealand, 5% of all apple production is organic, with 70% being exported. This involved the export of around 900,000 TCEs30 at premium prices – reported to be as high as $50 per TCE31. USA and Europe are the key markets. Total production reached 1.4 m TCEs in 2004 focused mainly in Hawkes Bay but declined in 2005. Production at the peak level is expected again in 2007 as result of a better growing season and additional growers in ‘organic’ production (Figure 16). Figure 16: Organic Apples Production

The current high prices are not seen as sustainable as a result of increasing production overall and particular larger production increases in Argentina, Chile, Italy and USA. Hence it is anticipated that New Zealand production levels will not rise significantly beyond the 2007 estimates as growers balance the risks of achieving effective production and the premium that may be available for those risks. “New varieties are seen as the key to the success of the organic apple subset of the industry. New strains of Braeburn apples, and a range of pears show promise. Work is to continue on Gala, Royal Gala, and Pacific

29

30 Source: Biogrow – this represents 4.6% of total exports 31 This price level is viewed as providing a sustainable return.

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Rose. The key is to develop varieties that are naturally resistant to pest and disease, yet still maintain high colour and are cosmetically clean and eat well”.32

Pears The world market for pears is concentrated in Europe, with consumption growth occurring in both USA and United Kingdom. Compound growth has been highest in United Kingdom at 2.7 % pa for a number of years. New Zealand exports are very small (5844 tonnes compared with 345175 tonnes of apples) and have a 10% import share in USA, whereas only 1% in Europe/ United Kingdom. The majority of production is sold fresh in the domestic market or used in processing. Chile, Argentina and South Africa have achieved significant growth in recent years, whereas New Zealand has not despite it superior production yield (Figure 17). The achievement of higher export prices plus the development of some exciting new varieties such as the fusion pear provide a positive base for diversification in the industry range of products. New Zealand will be a niche player in world markets, and there is a growth opportunity to produce and market excellent eating quality and attractive pears. A new range of pears, particularly the red skinned crisp fleshed ‘Fusion Pears’ from the HortResearch breeding programme being developed by Prevar show promise. Figure 17: Pear Export Volume by Key Southern Hemisphere Suppliers

Functional Foods and New Fruits Today's shoppers pursue an aggressive dual strategy for managing their health through foods: foods and beverages are selected because they contain healthy ingredients or offer

32 Comments by New Zealand Organics and exporters.

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health benefits they consider important e.g. antioxidants, calcium, cholesterol lowering properties, and others choose fortified foods33. There is an increasing belief that fruits, vegetables and grains contain 'naturally occurring substances that can help prevent disease' and that these foods are good sources of vitamins, minerals, and dietary fibre. The health promoting properties inherent in phytochemicals will continue to grab market attention, as will antioxidants. Some campaigns have been highly successful e.g. The international Kiwifruit Association campaign 'bite for bite the most nutrient dense fruit'. As phytochemicals rise in popularity expect to see fruit powders and vegetable extracts - naturally high in a wide diversity of nutrients and phytochemicals to bridge the gap between natural goodness and good health. Pleasure eating experience, novelty and convenience are important attributes to be considered in new variety or fruit development. Understanding what these attributes mean for different consumer groups across world markets and translating that into successful new fruits or products is a challenge but recent successes with Arguta and and ready-to-eat apple slices suggest the future possibilities (Figures 18 and 1934). Figure 18: Arguta – The drive for convenience

The drive for convenience: A case study

A. Arguta is a new product ...

» A kiwifruit

» Premium-priced,» convenience,» ready-to-eat,» bite-sized fruit,» appeals to consumers

33 Functional foods are foods similar in appearance to conventional foods, consumed as part of a nortmal diet but with demonstrated physiological benefits and/ or reduced risk beyond basic nutritional functions. The top functional food trends as reported in Institute of Food Technologists USA (2005) are: • ‘Eating Better’ – avoiding or reducing intake of some food or seeking healthy foods that provide more nutritional enhancements. • ‘Counting carbs’ – consumers seeking out low carbohydrate, high protein foods although this appeared to be waning. • ‘Healthier Kids’ – Households with children were seeking healthier foods and beverages trading off convenience for health benefits • ‘Eating for Change’ – 40% of consumers were altering diets to reduce cholesterol, 40% to reduce trans fats and 2 out of 3 adults were eating healthier. • ‘Must-Have Ingredients’ – nearly 50% of consumers recognised functional foods provided positive health benefits. Consumers were looking for more information on ingredients. 34 As described by Dr Ian Fergusson, Chief Scientist, HortResearch in a presentation to an international conference in Berlin, 2006.

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Figure 19: Ready-to-eat apples

Innovation in packaging

Fruit and fruit based snack foods and beverages

Easy eating cultivars

Consumer research

The drive for convenience

Development of functional foods is an important opportunity for the pipfruit industry as it progresses. The potential is well illustrated by the transformation of blueberries from being another fruit for the consumer to consider, to today where it is strongly positioned and consumed for its health properties based on its high antioxidant content and available in a wide range of product forms from fruit to juices, flavouring and ingredient in convenience foods. The fruit composition and health functionality of several fruits – bananas, blueberries, and apples illustrate the opportunities:

• Apples o Functionality sources – fiber, phytonutrients, pectin, flavanoids o Health benefits- ‘whole body’ health, reduced cholesterol, improved

bowel function, Type II diabetes, asthma • Blueberries

o Functionality sources -antioxidant o Health benefits – slows down age related losses e.g. memory function,

physical and mental decline • Bananas

o Functionality sources- natural sugars, vitamin B6, fiber, magnesium, potassium

o Health benefits- instant energy, calming of nerves, assists constipation, blood pressure control, mood food.

A major research programme looking at opportunities for new customized foods targeted at an individual’s genetic needs has been funded by the Foundation for Research, Science and Technology. A collaborative partnership has been established between University of Auckland, Crop & Food Research, HortResearch and AgResearch for this programme. Opportunities exist for:

• the identification and promotion of inherent properties already in pipfruit which may have particular health functionality

• the findings to be used in the development of novel fruits • the knowledge to be used in developing ‘healthy’ food products which are

enhanced with particular nutrients.

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2.8 Industry structure in transition The New Zealand pipfruit industry is in a state of flux. This involves several key dimensions:

• The decline in grower numbers by 1050 in the last nine years to 650 in 2005 • The decline in pack house numbers by 98 in the last seven years to 85 in 2005 • The explosion in the number of exporters following the deregulation of the

industry in 2001 from its single seller structure to 90 in 2006 • After peaking in 1995, the area of pipfruit production has fallen for the last

decade to around 12000 hectares in 2005 (Figure 20) • Growing dominance of Hawkes Bay and Nelson – Tasman (Figure 21).

Figure 20: Falling Pipfruit Area in the Past Decade

Note: Data received during the current orchard re-registrations for 2007 season indicate a production area of 8,500 to 9,000 hectares. This figure is much lower than the statistics have shown previously. This indicates either very inadequate industry statistics and/ or further serious decline in the last 12 months, with the former viewed as the most likely explanation . Within this overall decline has been an important change in the relative importance of the growing areas. In particular is the growing dominance of Hawkes Bay and Nelson as the growing areas. This has importance in terms of the nature of the infrastructure and the growing condition advantages for particular varieties. Not to be overlooked are the perceived differences in attitudes of growers to such issues as the extent of industry activities which should be funded on behalf of everyone and the benefits of collective export efforts compared with ‘individual freedom’ expectations.

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Figure 21: Production by Region

Another dimension of the transition is the growth of integrated grower/ exporters groupings – some large controlling 10 percent or more of the export crop35 and others quite small - controlling only 200,000 to 500,000 TCEs. Within these changes has been the parallel reduction of the number of independent growers which was the traditional backbone of production and politics in the industry. Finally the term ‘transition’ can infer that the industry is moving to some defined future state. This is not seen as the case at present with one grower reminding the project team in a small group discussion: “remember we have only done this (marketing outside the single seller approach) for four or five times so we are still learning and it will take time to sort out what is the best approach”. Equally a smaller collective group recently remarked how they had learned from the disastrous results of 2005 and had moved to a more robust relationship and associated marketing programme with its key distributors in 2006 with consequent much improved results. But what can we learn from other countries in terms of the likely or desired end points of such transition? The situation for several countries is outlined below –Table 8. One overall conclusion is that the industry will consolidate to a smaller number of exporters controlling most of the exports. This will be complemented by a number of smaller groups focused on very specific customers and markets. Within this overall framework, it is anticipated there will be some co-operative groups which could aggregate over time. 35 ENZA is largest with an export share of over 30% and Mr Apple is next largest. The group of ‘next largest exporters’ includes: Fresco, Heartland, DM Palmers, Pickmee, Fern Ridge, Fresh NZ, Taylor Corp, Freshmax, Grower Trust, Delica.

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Table 8: Industry structure of other major deregulated pipfruit producing countries

Country/region Industry structure Key attributes of model South Africa Former single

desk, now deregulated

• Unifruco (former Deciduous Fruit Board founded in 1939) merged with Outspan to form Capespan taking taking full range of South African product to the world

• Market consists of a strong Capespan -25 to 30% of crop- and a number of smaller exporters

Washington State (USA)

Free market with regulation and subsidies

• Ongoing consolidation underway in packhouse sector to exploit high capital investments in mechanization

• Integrated packer/shippers selling a range of temperate fruit (apples, cherries, peaches..)

Chile Free market with very limited regulation

• Mixture of local offices of banana-centred fruit conglomerates (e.g. Dole, Chiquita, Del Monte) and strong local exporters e.g. Copefruit, DdC

• All exporting a wide range of produce (e.g. grapes, apples, kiwifruit etc)

Brazil Free market with very limited regulation

• Mixture of apple-focused integrated grower/packer/shippers/, multi-fruit exporters and regional apple packing cooperatives

• 14 exporters of any scale British Columbia (Canada)

Single desk seller of all export fresh tree fruit

• BC Tree Fruit Ltd handles all sales and marketing of all fresh apples, pears, cherries, apricots and peaches

• Supplied by multiple packhouses (both cooperative and private)• 2 cooperatives pack 75% of apples

Source: Coriolis Research paper As part of this approach the New Zealand apple industry could position itself as ‘the carrier of the brand integrity torch’ on behalf of key retailers. This would build on the previously strong role of ENZA (as single seller), and the continuing strength of Zespri International as a professional produce leader. The other conclusion is that exporters will seek to develop less narrowly based business models to better manage the risk. For example the major exporters in Chile have a wide product range e.g. grapes, citrus, kiwifruit, apples and the equivalent here would be groups handling a range of horticultural products. Some groups are already working to this business model in New Zealand and further development is anticipated.

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3. Future Strategic Framework

3.1 Scenarios The project brief requires the development of an implementation strategy that assesses the changes that are necessary to secure a short (0-5 years), medium (5-15 years), and long term (15 years plus) sustainable future for the industry. Clearly over the period of the medium to longer time frame a number of scenarios are possible depending on the outcome of a number of uncertainties. Key uncertainties include:

• Exchange rate- there is no certainty about the key NZD/USD cross rate which has proved very volatile and economic forecasters have been consistent in being incorrect.

• Relative inflation – New Zealand costs structures have increased steadily in recent years both in terms of capital items such as land and buildings, but also operational costs. How does this compare with other exporting countries?

• Global economic confidence – commodity prices have been on the top of their cycle for some time. But how sustainable is this?

• International trade – the suspension of the recent WTO Doha trade talks before agreeing on the next phase of trade liberalization/ tariff negotiations suggests that bilateral trade negotiations will be the major focus. Some issues are difficult to resolve at that level; e.g. Australian market access.

• Safe and healthy foods – there are many signals that consumers are increasingly interested in safer foods. Hence the interest in organics but could this be upset significantly by a major scare along the lines of the recent organic spinach recall in USA36. Will the next phase be about buying local in response to ‘food miles’ concerns?

• Energy costs – New Zealand’s distance from key markets means that transport key inputs i.e. energy is a key cost factor in the overall supply chain and hence of the net margin and ultimate sustainability.

• Commercial/ government balance – the choice behaviour of retailers and consumers has a strong impact on the longer term commercial model and its sustainability. But equally governments are taking an increasing interest in consumer health and the role of specific foods and the sustainability of the production system. A key issue will be how much and in what form regulation arises from such interest.

• Producer confidence – many producers have already left the industry. What is the likely pattern for the future both as a result of the likely economic returns, but also from the realities that many growers are late in their careers. Many of these are not positive about the return- risk- timing balance for significant new production investment.

• Ownership of key entities – the development of corporate groups operating in an integrated way across production-pack house-export is an important component of

36 Organic spinach recall –Natural selection Foods, a California company recalled all its prepackaged spinach because of an outbreak of E.coli – contaminated irrigation water was suspected.

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the industry’s evolution. Nevertheless the globalization of businesses means there is the real possibility that key parts of the industry could be owned by international entities, including some key New Zealand sourced IP.

• Global competition – there exist the normal Southern Hemisphere uncertainties as to what form and extent will Chile, Argentina and Brazil really progress. But also what will be the cross impact from selected Northern Hemisphere suppliers as a result of changing production and/ or storage systems and technology?

Three scenarios of the future have been identified:

‘Rising Star’ (Optimistic Future) The pipfruit industry has shaken off the years of poor returns and the challenge of transformation to achieve a crop with distinctive attributes of appeal to consumers and customers. Significant new investment has occurred as prices became consistently higher driven by: a global economic confidence; New Zealand re-establishing its leader role; a NZ/ US dollar exchange rate settled below 0.55; cost-effective market access to Australia; a growing premium level market in selected parts of Asia; a disciplined international market plan led by a small group of exporters; a world leader in ‘fit for purpose’ quality performance; an innovative and efficient supply chain; a differentiated product range with strong ‘health food’ pipeline possibilities; and new investment and entrepreneurs in the industry. Southern Hemisphere competition has plateaued as New Zealand has established some key partnership arrangements and with Northern Hemisphere suppliers, and the impact of new technologies has not been as great as feared. The result has been an industry exporting around 18m TCEs at returns greater than $23 per TCE (FAS). The make up of the exports is 4m Braeburn, 4m Royal Gala, 3m Jazz, 3m a new variety under a ‘club’ approach, 2m new pears, and 2m of other varieties.

‘Slow Demise’ (Pessimistic Future) The volatility of pipfruit returns has continued resulting in ongoing challenge to the confidence of growers, exporters and other stakeholders alike. Fundamental to the poor returns has been the strength of the Southern Hemisphere competitors led by Chile but increasingly the carryover effects of lower cost but quality production from such countries as China and Poland has proved a real problem. Other contributing factors have been a volatile but generally high New Zealand dollar (NZD/USD of 0.65 or higher), the inability of the New Zealand industry to make substantial progress on achieving consistent ‘fit for purpose’ quality, and a continuation of the highly fragmented export effort. The poor returns resulted in a slow down of investment in new trees and new varieties resulting in the export crop remaining quite ‘commodity’ oriented despite Jazz reaching a global supply level of over 5m TCEs. Prices varied between $18 and $23 per TCE (FAS) and the industry reached a new export equilibrium at 12m TCE, with resultant reduction in the number of pack houses and exporters. Key growers had developed business models which enabled them to withstand the seasonal volatility but many smaller growers had found it very difficult to remain viable and had exited.

‘Leading Niche Player’ (Most Likely Future) By 2011 the industry had developed and implemented a very forward looking approach, albeit still facing the significant challenges arising from sustained global competition. The pressures from lower cost production from countries such as China and Poland had

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not been as severe as anticipated and New Zealand was seen by the market to have regained parts of its leadership position from Southern Hemisphere competitors. The export crop was around 15m TCEs with Braeburn and Royal Gala at 3m each, Jazz now at 3m, and 3m from existing smaller varieties and new ones such as pears. The returns had been improved as the export crop became more differentiated with the investment in new trees and new varieties, including pears and sustained progress with organics and the New Zealand marketing approach had developed a lot more discipline. The ‘nil discernible residue’ approach had been well received by customers and while the ‘food miles’ and other ‘production sustainability’ issues continued to surface there had been no regulatory response so the overall situation had been able to be managed without major problems. The exchange rate remained above 0.60 (NZD/USD cross rate) and the industry had been successful at obtaining additional efficiencies from the supply chain to offset the exchange rate impact. This had been supported by supply chain innovation and a strong commitment to integrated supply and marketing programmes. Promising opportunities were in the pipeline for the first generation of ‘functional foods’ based around pipfruit.

Grower and Commercial Participant Scenarios Within the above scenarios it is anticipated there will be three different types of positioning taken by individual growers and business entities – see Figure 22. Figure 22: Grower/ commercial entity positioning

Product/ System Attributes

Premium Price Position

Good/ Average Price Position

GrowerBusiness Sustainability

HighLow

‘Fortress’ growers-Costs high relative to returns, reluctance to reinvest; gradual exit

Me-too competitors-Smart alignmentof position attributes, cost efficiency and business model, but average returns

Super –performers-Clear understanding

of premium position –product and systems

attributes and innovation,and market alignment – well

rewarded

GrowerBusiness Sustainability Mix o

f integrated co

rporate,

co-operative and sm

aller busin

ess

Traditional in

dependent grower

It is anticipated that the smaller traditional independent family grower will have a lesser role in industry production in the future. A mix of groupings will evolve: co-operatives of smaller entities, medium sized businesses and bigger corporate style businesses. Some groups will specialise only in pipfruit, whereas others will involve a multi-product approach across other fruits. For some this will extend to other horticultural products. The larger scale should enable the entities to recruit and retain higher qualified managers

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and invest further in upskilling of staff – a process similar to what is happening in other agribusiness sectors.

3.2 Vision, Targets, Goals and Key Strategies

Vision A globally competitive industry driven by innovation to provide sustainable business returns for growers and exporters.

Targets 1. Orchard returns increased on average to $23 per TCE (FAS) over the next three

years. 2. One-third of NZ crop is in new trees or new IP controlled varieties within three

years. 3. Four exporters/ export groups or co-operatives control 80% of export crop within

three years. 4. Productivity through the supply chain increases by 3 - 4 % per annum.

Strategic goals 1. Increased returns from the existing crop 2. Faster transformation of the crop to new trees and varieties 3. Building strong competitive advantage and grower succession

Key strategies A key reference point for any future strategy is the reality that the New Zealand pipfruit industry has a number of advantages37 on which to build:

• an excellent reputation globally as an apple growing country based off Royal Gala, Braeburn, some Pacific varieties and Jazz

• a well established production and commercial infrastructure • high levels of production efficiency • a breadth of apple varieties in production • a history of innovation for new apple varieties • purity of production under the IFP protocols, and established organic systems • well established international market and distribution networks.

Key strategies for future success and longer term economic sustainability, given New Zealand’s cost structure and distance from many markets, will be:

37 New Zealand was seen as the most competitive apple supplier in the world based on rankings in production efficiency (#5), infrastructure and inputs (#2), and financial and markets (#1) – World Apple Report 1995. More recently New Zealand was ranked 2nd after Chile, with a significant drop in rankling in respect of ‘financial and markets.’ (2006).

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Increased returns from the existing crop 1. Continued improvement of production efficiency and systems effectiveness 2. Consistent achievement of ‘fit for purpose quality’as specified for particular

markets 3. Develop innovative programmes for skilled harvest labour supply 4. Develop stronger commitment to integrated marketing programmes for selected

customers 5. Develop industry wide disciplined approach to European market for Braeburn 6. Establish cluster groups by exporters or varieties for more focused programmes 7. Gain competitive access to markets 8. Establish a transparent set of comparative exporter and pack house performance

statistics for growers. Faster transformation of crop to new trees and new varieties

1. Improve business model for new tree and variety investments to offset risk profile 2. Grow varieties with IP exclusivity and controlled supply and marketing

programmes 3. Review industry IP model and funding to improve grower and exporter

confidence

Build strong competitive advantage and grower succession 1. Develop a leadership position re safe food and sustainability protocols 2. Establish a systems approach to innovation and the adoption of best practice

through the supply chain 3. Establish consumer insight and market intelligence information flows into

research and industry planning 4. Improved knowledge about key competitors, and assessment of longer term

implications for New Zealand’s competitive advantage 5. Promotion of industry as an entrepreneurial business option and enhance industry

skills. The details around each strategy component and the overall approach are outlined in the following major sections, as are the implementation steps and accountabilities.

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4. Improved Returns from the Existing Crop In reality the die is cast for the next few years in terms of what will mainly be available for export and hence this must be well sold and marketed to build the base of expertise. Further this provides the cash flow to fund the future investment to transform the sector. Strategic Goals Strategies

a. Continued improvement of production efficiency and systems effectiveness b. Achieve consistent achievement of ‘fit for purpose quality’ c. Develop innovative programmes for skilled harvest labour supply d. Develop stronger commitment to integrated marketing programmes e. Develop industry wide disciplined approach to European market for Braeburn f. Establish cluster groups by exporters or varieties for more focused programmes. g. Gain competitive access to markets

1. Increased returns from the existing crop

h. Establish a transparent set of comparative exporter performance statistics for growers

Continued production efficiency and systems effectiveness New Zealand pipfruit producers have an excellent international reputation for effective production systems and this remains a key component of any future strategy. This involves an ongoing commitment to38:

• An orchard management approach focused on specific customers/ markets. • A commitment to $ per hectare rather than just tonnes per hectare. • Effective attainment of the IFP production and alternative requirements. • Cost effective management of orchard inputs e.g. fertilizer, machinery, labour. • Adoption of existing proven technologies on current varieties. • Learning how to manage older trees for consistent production (or remove them

from production). • Better understanding of crop loading and size manipulation techniques and less

reliance on manual intervention. • Better understanding of crop nutrition and water needs. • Technology for cost reductions- application technologies, thinning, tree nutrition,

harvest and handling. • Use of packaging and packing technologies that take advantage of high quality

fruit production. • Adopt best practices in production, harvest, cool-chain, and packing.

It is viewed that these areas are already receiving close attention from the industry both in terms of existing technical support and programmes and through the initiatives of individual growers, pack-houses and exporters. Nevertheless this area remains a critical component of improved returns from the existing crop. Recommendation 1 There is ongoing commitment to ensure New Zealand is the global leader in production efficiency and systems effectiveness Implementation Accountability 38 See Pipfruit NZ Industry Strategic Plan 2005 -2010

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Commercial firms supported by research and consulting groups Priority: High Targeted impact: Ongoing

Consistently achieve ‘fit for purpose’ quality Market and industry comment supports the viewpoint that the quality of export pipfruit from New Zealand is not as consistent or at the perceived level of the earlier reputation. Three factors appear to underlie the market concerns re quality facing New Zealand:

• Consumer’s expectations of the quality they expect in ‘better’ or ‘best’ quality fruit and food have increased and are driven by their experiences across a range of fruits and foods.

• Retailers are seeking to improve their differential position in the eyes of consumers and have increased their expectations and standards.

• Competitive suppliers of fruit have lifted their game and hence New Zealand’s has declined in relative terms. Chile is seen to have made significant progress re quality and now even to surpass New Zealand.

The challenges of the ‘quality’ issue are illustrated by two different viewpoints. The first being grower/exporter comment that this was not a new issue but had previously been masked by the overall pools operated under the single seller approach before deregulation. The second from a major importer to the United Kingdom market who recently indicated that performance against their quality standards had improved over the last few years. Nevertheless two key dimensions suggest that the market perceptions are based on the reality that quality of some New Zealand pipfruit exports has slipped and urgent attention is required. The reality of the issue is based on:

• Percent total spoilt defects for Braeburn from one exporter show an increase from approximately 2.1% in 2002 to 2.9% in 2005 and an improvement to 2.6% in 2006. Royal Gala increased from 1.6% in 2001 to 2.3% in 2004 and an improvement to 1.7% in 2006.

• The proportion of fruit exported has increased by 5% to 15% (depending on the time period involved) suggesting some lower quality fruit is exported to gain the better return compared to processing returns.

The consultant team views this is key issue to be addressed if the industry is to retain a comparative competitive position, in the first instance against other Southern Hemisphere suppliers. The markets see that on average they have improved, and we are getting left behind. This suggests the urgent need for a formal industry wide accreditation programme to turn the situation around, with the real benefits of the industry going under the disciplines of the Horticultural Export Authority model. This proposal has been tested with a number of key industry participants, given that such an approach was considered and rejected some 18 months ago. Minimal support has been found for such a recommendation; rather key participants see that it has to be addressed as part of integrated marketing programmes. Recommendation 2 The industry commit to a major initiative of protocols to support the achievement of industry-wide consistently high standards of ‘fit for purpose’ quality. The industry to give

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serious consideration to operating under the Horticultural Export Authority framework or a similar industry designed framework to assist in achieving this. Implementation Accountability: Market panel leadership group, supported by Pipfruit New Zealand (See Section 7 for related discussion). Priority: Very high Targeted impact: 0-5 years

Develop innovative programmes for skilled seasonal labour A key element in the production chain is the actual harvest in terms of picking the right fruit at the right time to ensure fruit quality is not compromised. A critical element of this is having enough skilled labour available on a seasonal basis. Pipfruit industry comment suggests the need for an additional 5000 workers on a seasonal basis. This has been met traditionally by New Zealanders and by ‘working holiday’ visitors who move through New Zealand as the horticultural season progresses. Nevertheless with high employment rates in New Zealand and growing seasonal demand, availability of skilled seasonal labour is a major issue. The specific issue of skilled seasonal labour availability has been the attention of combined industry (led by Horticulture New Zealand) and government working parties for some time39. They identified five major objectives:

• Providing seasonal work opportunities for New Zealanders • Accessing global labour • Informed management of seasonal labour • Developing skilled workers • Improving workplace quality and productivity

Specific initiatives to make progress on labour availability include: Central Otago ‘one stop shop’ approach, and in Hawkes Bay, a joint agency/ industry working group. Most recently the Government has announced modifications to the immigrant scheme for seasonal labour. While positive about the attention the matter is receiving, there remain significant concerns with key industry employers that the proposed initiatives by government place too much emphasis on Government getting involved in the ‘doing’ dimensions of solving the problem as well as working from the reference point that they are ‘not very good employers’. Rather they view that government should provide the framework, allow individual companies in good faith to get on with implementation, and then monitor the results in conjunction with the industry. This suggests the need for further engagement by the industry to sort through their identified implementation issues with the recent changes to immigration schemes on an urgent basis to complement existing working party initiatives.

39 See “Medium – Long term Horticulture and Viticulture Seasonal Labour Strategy” December 2005; and Innovation in Seasonal Labour Markets: Central Otago March 2005.

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Recommendation 3 The industry strengthens its engagement with key agencies to achieve seasonal labour policies that are more attractive for commercial entities. Implementation Accountability: Pipfruit New Zealand working with Horticulture New Zealand, with input from key regional employers. Priority: Very high Targeted impact: 0-5 years

Develop stronger commitment to integrated marketing programmes Each of the markets New Zealand sells to have very different dynamics and consumer drivers because they are all in very different states of development and have divergent priorities as a result. There is no high level global market viewpoint and development plan, or disciplined plan for particular markets. Rather there is a very individualistic approach, with some taking a longer term high service and integrated approach and others emphasizing a shorter term and more transactional approach. Some fruit is still sold on an ‘open’ consignment basis, although it is understood the proportion of this has reduced substantially in 2006. Market feedback in 200540 noted that New Zealand’s approach was fragmented, haphazard and inconsistent, and during this review there were ongoing comment that other countries are operating in more disciplined ways in global markets to their advantage as a seen by distributors. Best practice in fresh produce marketing emphasises the critical importance of integrated programmes between grower and retail customer. The requirements for each programme will vary across countries and within markets depending of the retailer’s requirement in the ‘good’, ‘better’, ‘best’ positioning. The framework below developed from insight in the Audacity Research report illustrates the different requirements: Table 9: Consumer Attributes of Importance

UK Europe USA Asia Consumer: attributes of importance

Service Price Food Safety Quality

Country of origin Price Food safety Timeliness

New products Country of origin Price Service Food safety Quality

Price Timeliness Country of origin Quality Service

Implications for strategy

Maintain quality Nil residue Innovation (new varieties) Greater market discipline

Improve quality/ valueProtect new varieties Improve consumer communications

Ensure high quality Sharper segmentation Variety differentiation Country of origin/ brand Safe food/ traceability leadership

Communication re NZ attributes Enhance value Improve quality Reduce brand proliferation

It is very important that the New Zealand pipfruit industry significantly lifts its commitment to the integrated marketing programme approach, whether on a one-to-one

40 Audacity Research ‘Comparing Apples: Opportunities for the New Zealand Pipfruit Industry’ July 2005

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basis or as part of some cluster group. Exporters need to develop strong ‘value propositions’ as a basis for effective negotiation with the ‘power’ position held by the key retailers involved in in-market distribution. These are:

• Get the basics consistently right – pricing/ product/ process/ people • Focus on the category management issues and relationship issues • Be innovative to build the retailers businesses.

However, as always, businesses in any industry have a number of strategic responses to market changes: some will respond quicker and better than others. Possibilities for New Zealand pipfruit produce suppliers are:

1. A product supplier. Our assessment is that many New Zealand growers will continue to be only product suppliers – albeit to major supermarkets via ‘category leader’ suppliers. A UK example illustrates the strategy41. 3M’s is a group of three potato growers who joined together in response to the dominance of supermarkets in the UK. They decided that they had to evolve from commodity growers to suppliers to supermarkets. They decided not to try and deal direct with supermarkets but via the category leader supplier with ASDA, Marks & Spencer and Waitrose. This strategy presumes that the growers involved can continue to provide the category leader with least cost requisite specification product.

2. Category alliance. Another option would be to develop into a ‘category leader’ supplier despite the limitations of the narrow supply window. The New Zealand supplier could work both the retailer and the category leader supplier from another supply country to offer the supermarket retail customer a seamless supply transition and integrated marketing programme.

3. Commodity grower. Remaining a commodity grower remains a valid option for some growers. In this case the rules of the game are simple and well understood: success is based on securing the low cost position and managing currency and price volatility.

While industry comment indicates these issues are receiving greater attention, a significant step-up in approach in this area is required. This is especially so in respect of category management and innovation to build the retailers business. A strong commitment to education and sharing of best practice ideas is essential. Recommendation 4 There is strong industry commitment to sharing information relating to best practice ideas, approaches, and case studies of international fresh produce integrated marketing programmes. Implementation Accountability: Pipfruit New Zealand with market panel leadership group Priority: High Targeted impact: 5 – 15 years

41 O’Keeffe & Associates conducted a review of the potato value chain for Solanum Pty Ltd, the sole potato supplier to Waitrose during 2003 and 2004.

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Develop industry wide disciplined approach to European market for Braeburn in 2007 A key element in ensuring shorter term industry sustainability is what revenue is achieved for Braeburn (40% of the export crop) in a given season which to a large degree is determined by what happens in the European market. Price variation for Braeburn over time is seen as very high at 41% for one standard deviation of variation. The disastrous results for 2005 clearly identified the consequences of oversupply, major competition between two groups of distributors and a lack of a disciplined marketing approach by New Zealand exporters. Clearly not all factors are in the control of the industry and the power of major retail chains will provide a challenge to any initiative among New Zealand exporters to achieve a more ‘managed’ market approach. But the stakes are very high if New Zealand production moves into an oversupply situation. Exporter estimates are that a crop of 5 million TCEs can be sold for reasonable returns but that production in excess of that will drop returns by $2 per TCE for every 500,000 TCEs above that level. There are some early estimates of an export crop of 6.5 million TCEs of Braeburn being available for export in the 2007 season. This indicates the potential for another disastrous season unless the industry works together in a concerted and disciplined way. The attitudes of a number of key people reflect a ‘free’ market approach and a reluctance to countenance the benefits of any collective approaches in terms of marketing approach. This reflects a number of legacy issues from the industry deregulation process. One exporter described the industry as currently in a ‘Darwinistic’ mode which severely limited the opportunities for industry wide approaches. Not withstanding the above attitudes, our discussions suggest there is some acceptance that ‘effectively managing Braeburn into Europe in 2007 at least’ is critical. Hence that it should be of critical concern to all exporters and that a collective and disciplined approach has to be achieved. This could involve an industry wide pool supported by a managed supply situation, with the possibility of some fruit not being harvested and incentives being identified to support this. Support for a combined industry/ government approach to incentives to reduce supply including removal and/or replacement of some Braeburn to be sought from Ministry of Economic Development on behalf of government. Recommendation 5 A market plan for Braeburn in Europe is initiated for 2007 on an industry wide basis, including incentives to achieve effective supply management Implementation Accountability: Market panel with support from Pipfruit New Zealand. Incentive discussions to be held with the Ministry of Economic Development. Priority: Very High Targeted Impact: 0-5 years

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Establish cluster groups by exporters or varieties for more focused programmes The trends among international competitors are to use consolidated marketing structures as the basis of their marketing approaches. So where should New Zealand progress to when currently the industry is culturally in a very individualistic phase of evolution? The area of biggest challenge is encouraging exporters to work together more either in a total export sense, or in particular markets. Some smaller growers have already linked in groups such as Growers Trust, Frupak, Orchard Crisp and these initiatives are commended. Equally is the joint initiative to Braeburn exports to Europe between Mr Apple and ENZA. Other groups working together are Heartland and FreshCo. It is strongly believed that significant further progress in working together is required to get the benefits of scale and to be able to compete more effectively against global competitors. There is good understanding of the ‘club’ concept with the ongoing development of growers working under this concept for Jazz with ENZA, the Pink Lady and Tentation approaches. More of this kind of approach is anticipated when varieties are licensed on an IP exclusive basis. Evolution to a new level of aggregation will take time and industry maturity given the “Darwinistic’ attitude of a number of groups. Hence it is proposed that the industry could valuably learn from other industries which are not regulated in some way. For example the Wine industry uses a collective ‘user pays basis’ for market development and promotion initiatives as part of an overall global marketing strategy of enhancing demand for ‘New Zealand’ wine. Individual companies select which markets and which programmes they wish to participate in on a shared cost basis. The New Zealand Winegrower Group has the marketing executive capability to initiate and implement the programmes in conjunction with industry. A further development has been the formation of the ‘Family of 12’ of a group of smaller exporters which are seeking to take their cooperative efforts further while retaining their own brand identities. Recommendation 6 Review the approaches and benefits of joint international marketing initiatives, including approaches in the Wine Industry, and the new variety ‘club’ approaches Implementation Accountability: Leadership group of interested exporters supported by Pipfruit New Zealand, with New Zealand Trade and Enterprise support. Priority: Medium Targeted impact: 0- 5 years

Gain competitive market access to markets The seasonal nature of the industry means that the actual quantity of fruit for export varies and importantly in high production years, the economic impact of too much fruit going to a particular market can be disastrous e.g. Braeburn to Europe in 2005. As a basic principle the industry is concerned to have at least as favourable access to relevant markets as its competitors. At present the industry feels very disadvantaged in respect of the inability of New Zealand officials to achieve access to Australia, Japan and South Korea, and that on an international basis Chile is advantaged by the number of bilateral Free Trade Agreements they have achieved relative to New Zealand.

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Discussions with officials suggest we should be optimistic re progress to Japan in the near future, although the subsequent key challenge is expected to be in achieving a disciplined and focused market entry strategy on an industry basis. It is anticipated the Australian ‘risk assessment’ evaluation for New Zealand apples will be promulgated shortly and this will then give all concerned a basis for planning the next phase of access and planned market entry. Despite this view that pipfruit market access continues to receive attention at the highest levels of government, pipfruit exporters and growers view that progress is far too slow on most market access issues and in particular with Australia where it is viewed that country is operating an unjustified ‘nontariff’ barrier. In addition they view the tariff situation in countries like India has New Zealand exporters at a disadvantage, and more generally that countries like Chile have achieved more favourable status re tariffs into a number of countries. Recommendation 7 Continue to place the highest pressure on government for urgent resolution of the identified market access issues in Australia, South Korea and Japan, and to achieve competitive tariffs in emerging Asian apple markets Implementation Accountability: Pipfruit New Zealand working with Government agencies. Priority: Very High Targeted impact: 0 – 5 years

Establish a transparent set of comparative exporter and pack-house statistics for growers The forces for change in the industry will come from the markets through the distributors, and in New Zealand through some form of interaction between exporters, pack-houses and growers. Given that the growers have the most significant investment it is important they are able to make informed choices as to which pack-house or exporter they use in the industry. At present information is available if an individual undertakes the necessary search and comparison checking. Even when done, anecdotal evidence suggests that some growers are loyal to particular entities even when their returns are perceived to be consistently lower. Nevertheless it is viewed as important to have valid comparison of performance information on an easily accessible and reliable basis. Recommendation 8 Establish comparative season-to-season exporter and pack-house performance information sets Implementation Accountability: Market panel supported by Pipfruit New Zealand. Priority: High Targeted impact: 0-5 years

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5. Faster Transformation of the Crop to New Trees and Varieties The New Zealand export crop dominated in the two major varieties of Braeburn and Royal Gala. This level of two variety dominance is much greater than other Southern Hemisphere competitors. Competing Southern Hemisphere countries are planting some of the newer varieties and there is a need for the industry, in our view, to transform to new trees and new varieties at twice the current rate to be competitive in world markets on a longer term basis.

a. Improve business model for new tree and variety investments to offset risk profile b. Grow varieties with IP exclusivity and controlled supply and marketing programmes

Faster transformation of crop to new trees and varieties c. Review industry IP model and funding to improve grower and exporter

confidence

Faster returns, lower risk from new investments The implications of the new variety investment model and its sensitivity are that:

• Initiatives to either reduce the total development costs per hectare, and/ or accelerate earlier fruit production are critical to achieving realistic returns for the risk profiles.

• Achieving and exceeding production targets of export quality fruit is critical to success. The industry needs to access good quality trees, needs to address yields on ‘replant’ ground and needs to understand all the key success factors for early and ultimate success of the newly developed block. It appears that there is a gap between best practice and what growers are actually achieving.

• A number of growers commented that the cost of new trees was significantly higher than compared with what was available in Europe42, and also that many of the New Zealand sourced trees were of poor quality and as a consequence full production was delayed and the returns were reduced significantly

• Growers need to access high paying varieties or variety sports. That is, varieties that have the combination of an acceptable price per TCE, appear to have a sustainable position in the market and achieve acceptable yields without significant quality or other defects.

• Growers, either individually or collectively need to access sufficient capital to embark on a new planting or orchard redevelopment program. In addition any options to reduce the risk by say increased depreciation rates would be attractive. Some growers view that a level of 20% - 25% of Diminishing Value is required to make the industry attractive enough in the shorter term to get the needed changes in place.

42 Some growers talked of a three fold difference but this is not likely to have included any biosecurity regimes and costs on entry.

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Recommendation 9 In order to urgently establish an improved approach, discussions are initiated between grower representatives and nurseries to review cost and quality concerns related to nursery trees. Implementation Accountability: Leadership group of growers and nurseries supported by Pipfruit New Zealand Priority: Very High Targeted impact: 0-5 years Recommendation 10 Initiate a review of depreciation rates for new or replacement orchards with a view to implementing new rates which will attract the necessary levels of new investment. Implementation Accountability: Pipfruit New Zealand supported by a leadership group of growers makes an urgent submission to the Inland Revenue department and the Ministry of Economic Development. Priority: Very high Targeted impact: 0-5 years

Controlled Supply and Marketing and IP Exclusivity A key success factor for the industry will be a rapid transition to new varieties or improved trees of existing varieties and that IP in the new varieties is managed to control supply and marketing internationally (a ‘club’ concept). Pink Lady and Jazz are seen as leaders in this respect. A new development is one for T22 (ENZA). Those growers who have elected to operate under the Jazz (ENZA) club have been well rewarded with returns reported at around 35NZD per TCE, returns equivalent in profitability to Zespri Gold.

The challenge in pursuing a strategy of the ‘club’ style’ is for growers and exporters to link in with an entity which has sufficient resources to create a significant marketing programme. This is true whether the IP is New Zealand centric or more international. Industry estimates suggest an expenditure of $10m to $20m is required to commercialise a new variety from licensing through to market development. Currently a number of New Zealand grower/ exporter groups are on a dedicated global search to find and license outstanding new varieties to complement their existing crop profile. Competition between some entities is seen as intense, to a degree fuelled by the

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lack of confidence by many in the structure and approach of Prevar for New Zealand –centric IP. Resolution of the perceived issues around Prevar would encourage more industry co-operation in the above type of controlled marketing based off exclusive IP (see next Section). Another dimension of controlled marketing which will be increasingly important is the opportunity for organisations – big and small to combine to better handle particular market situations; and for several smaller ones to combine to leverage international market development and sales. Recommendation 11 Growers and exporters seek opportunities for new varieties with IP exclusivity and associated ‘club’ international development and marketing programmes. Implementation accountability: Commercial firms or groups Priority: High Targeted impact: 5-15 years

Improved Industry IP Model There is no one model for varietal development. It is not easy to undertake new product development for tree crops because of the seemingly commercially unattractive period to deliver a market ready product - see Jazz timeline (Figure 23)43. Nevertheless new trees and varieties are needed so that New Zealand can regain an innovative pipfruit crop profile. Figure 23: Timeline for innovation for a new apple variety - Jazz

43 Growing Futures Case Study – New Apple Cultivars 2005

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At present Prevar44 is the industry IP model for new varieties. The organisation’s vision is “The global leader in developing and commercialising innovative apple and pear products”. Prevar itself reflects that it has a global intent and perspective, that it aspires to lead, is an innovation company that will market and sell protected valuable intellectual property; and the products include novel, brand-led, fashionable, apple and pear varieties in conventional fresh form alongside identifying the potential. Prevar ownership is: Pipfruit New Zealand, Australian Pipfruit Association, International Nursery Growers Association and HortResearch. There is a lack of confidence among a number of growers and exporters for Prevar in terms of: the alignment between Prevar’s funding model, and the access to future specific IP by an individual entity. Fundamentally the funding is on an industry wide co-operative basis, and access to IP is on a restricted basis as a member of a ‘specific’ club. Another key frustration relates to the perception that international competitors will be able to quickly get access to the new varieties as members of AIGN have an objective of quickly getting widespread distribution of new varieties. A third frustration relates to the long period of time involved in getting new varieties to ‘go to market’. The challenge then is to finds ways to gain stronger grower and exporter confidence in Prevar within the overall strategy that controlled production and marketing programmes with exclusive New Zealand centric IP is critical for the future. Options include:

• Funding the New Zealand grower contribution to Prevar on an elective commercial basis to match the commercial model of access to new IP.

• Agreeing that some of the IP would be available under a co-operative model rather than a strict commercial model.

• Educating growers and exporters as to how ‘the New Zealand advantage’ policy will work and what it actually allows to happen internationally.

• Changing the ownership structure so that AIGN members work on a contract basis to Prevar as required, rather than having an ‘insider’ position which could be used to New Zealand’s detriment.

Recommendation 12 Review the basis of the New Zealand funding contribution to Prevar, and the IP access policy with a view to developing improved industry wide understanding and ongoing support for the Pipfruit Research Consortium and Prevar. Implementation Accountability: Pipfruit New Zealand with Prevar Board Priority: Very High Targeted Impact: 0-5 years

44Prevar™ is an international joint venture company established to develop and globally commercialise new apple and pear varieties and products.

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6. Building Stronger Competitive Advantage and Grower Succession In parallel with the strategies for achieving the strategic goals of lifting performance and faster transformation there is need for longer term focused strategies to build New Zealand’s competitive advantage. There are three key parts to this.

a. Develop a leadership position re safe food and sustainability protocols b. Establish a systems approach to innovation and the adoption of best practice through the supply chain c. Establish consumer insight and market intelligence information flows into research and industry planning d. Improved knowledge about key competitors and assessment of longer termimplications for New Zealand pipfruit competitive advantage

Building stronger competitive advantage andgrower succession

e. Promotion of industry as entrepreneurial business option and enhance industry skills

Leadership Position for Safe Food and Sustainability A new series of farm-related environmental and agricultural product issues are moving centre stage. Consumers perceive that environmental concerns are having more of an impact on their health. They have become concerned about the environmental conditions that crops or animals are raised under. For example, is the water being fed pure and clean? Is there environmental runoff on the land, contaminating the crops? Is the feed well balanced and safe from toxins and environmental pollutants? Are the conditions sanitary? Do the animals receive optimal veterinary care? More and more farmers are creating premium products by stressing environmental and humane conditions. New Zealand pipfruit industry has world wide recognition for the Integrated Fruit Production protocols it established and quickly implemented from 1995 following the initial concerns from consumers who sought ‘safe and environmentally grown’ fruit. The commercial significance of the Integrated Fruit Production system lies with its ability to audit the production technologies and use the information to provide a measure of confidence to the customers and biosecurity agencies of the importing countries. The genuine working partnership between science and industry was an essential outcome of the implementation plan and led to strong industry ownership of the outcomes. Previously in this report, the increasing consumer and customer concern re ‘safe foods’ and ‘production sustainability’ has been discussed. There are some targeted opportunities for specific initiatives to provide a strong base of competitive advantage for New Zealand. In particular the issue of ‘nil discernible’ residue is now receiving attention from one of the big retail chains in United Kingdom, Acceptable Quality Levels (AQLs) are getting more demanding, and improved testing technology has seen some market access residue levels being significantly reduced. Currently Pipfruit New Zealand is working with Enterprise Hawkes Bay on an Inter-regional Partnership to initiate funding support for a ‘nil discernible’ residue programme. Early progress to develop and implement such a set of protocols will be important in

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assisting the industry to quickly establish better points of difference with global customers and consumers. Recommendation 13 Urgently establish a ‘nil discernible residue’ programme followed by initiatives to enhance the industry’s actual and perceived ‘production sustainability’.45 Implementation Accountability: Pipfruit New Zealand with Inter-Regional Partnership supported by New Zealand Trade and Enterprise Priority: Very High Targeted Impact: 0 -5 years

Systems Approach to Innovation and Supply Chain Best Practice Fundamental to the development of a sustainable pipfruit industry is on going supply chain innovation as a result of a systems approach supported by R&D. Industry comment is that substantial cost savings have already been achieved in such areas as packing materials and in shipping rates. Nevertheless when the total process and cost structure from production to in market distributor is considered, there is a significant apparent opportunity for improvement. Table 10: Supply chain cost components ($s per TCE)

$1.4-$1.7

Storage costs

$3.1-$7.0

Pack-house

$1.5-$2.5

Harvest

$4.5-$8.5

Orchard grower

$2.0-$8.5across markets

$9.0-$10.0

$8.0-$9.0

In-market distribution costs

Shipping costs

Post harvestcosts

The initial reference point is that the industry is managing around $450m being between orchard and customer. Performance improvement experience suggests a potential of at least ten percent savings should be targeted by process innovation and leveraging scale i.e. $3 per TCE. The potential for savings has been identified by some and implemented in the current season. For example the practice of ‘open’ consignment often resulted in significant ‘in-market storage and other costs’, and savings of $2 per TCE have been achieved by some exporters working on a very integrated manner through to the key customers. Another area with potential for process innovation is in the post harvest sector where there remain a large number of pack houses. In Hawkes Bay in particular there appears to be significant overcapacity and there exists the potential for some aggregation there and

45 See “Food miles debate stretches truth”, National Business Review, August 18 2006, p. 15

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in the Nelson region. Discussions within the post-harvest kiwifruit sector indicated a pack house for their roles and functions being optimum at around 1m cartons. In pipfruit the general consensus was less clear, and anecdotal evidence indicated some smaller units were very efficient. Nevertheless there appears significant potential for rationalization of pack house capacity for industry cost saving benefits. Commercial decisions will be the focus of such rationalisation. Systems type commercial analysis and targeted R&D would be an integral part of finding improved solutions. Recommendation 14 Review R&D focus to ensure appropriate strategic systems research is initiated and that best practice is more widely adopted in the industry. Implementation Accountability: Pipfruit New Zealand in conjunction with Crown Research Institutes and industry consultants. Priority: Medium Impact: 5-15 years

Establish consumer insight and market Intelligence information flows Development of a sustainable industry requires that it is adapting to and anticipating changes in global consumers, markets and competition. The flow of such information in this industry is limited. The two main sources of such information are: international distributors and retailer visits or market reports, and exporters or growers visiting markets for their own informal intelligence gathering. The third source is through research programmes at groups such as HortResearch and their international networks. All groups and stakeholders within the New Zealand pipfruit sector will require high quality knowledge and foresight to enable it to anticipate, innovate and adapt to meet the changing requirements of the consumer and the marketplace infrastructure. Specific areas to consider in a systematic approach include:

• Consumer: o An understanding of trends in consumer buying behaviour: The changing

attitude towards convenience, environment, the importance of health and the role of fruit in the diet.

o The effect of and attitudes to new discoveries in science, acceptance of new technologies, new products, GE, and nutrigenomics.

• Regulatory Sector: o Market access. Early warning of changes in compliance for food safety,

phytosanitary and production systems. o Impact of energy requirement and environment/social concerns.

• Retail Sector: o Aggregation in the multinational super market segment of the market and

the changing requirements this will bring to suppliers. o The attitude of super markets to managing shelf space and opportunities

this creates to innovate and adapt our supply systems. o Understanding what retailers and distributors require in the emerging

models and best practice. o Market segmentation, the opportunities within different levels of the

market. o New product and package opportunities.

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The potential flows of a focused programme of such information are shown in Figure 24. Figure 24: Information Flow Recommendation 12 Establish an annual consumer

Consumers *Consumer behaviour

*Attitude trends -convenience

-health -diet

-environment -new technologies

Wholesalers / supply chain Adaptation / Innovation

Regulatory Authorities *Mkt Access / SPS *new mkts /existing mkts *Compliance *Politics

Pack houses Adaptation / Innovation

Research *New IP

*New varieties *New

technologies

Retailers *Structural changes

-trends -counter trends

-expectations of supply -important relationships

Growers / production Adaptation / Innovation

Industry representation

PNZ PUSEG

Service groups

Adaptation / Innovation

Consumer research results

Market Intelligence

Monitoring

Innovation & tech support

Direction

New technology & support

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Recommendation 15: Establish an annual consumer insights and market intelligence forum Implementation Accountability: Pipfruit New Zealand with Horticulture New Zealand, supported by HortResearch and Crop & Food Priority: Medium Targeted impact : 5 -15+ years

Improved knowledge about key competitors and assessment of implications The global competitive situation for pipfruit remains dynamic and international assessment and the findings of this review reinforce the viewpoint that New Zealand has lost some of its competitive strength. In particular South American suppliers are a major force and Chile is now seen as the #1 apple global supplier from a competitiveness viewpoint. The competition extends beyond this direct impact to the Northern Hemisphere carryover in markets as a result of changes in production varieties and the advent of storage technologies. In addition is the price impact from Chinese competition in Asian markets. Exporters are currently engaged in market intelligence gathering through visits to key competitor countries and PNZ executives regularly participate in world pipfruit forums. International speakers are also invited to annual conferences. In addition from time to time New Zealand Trade and Enterprise in conjunction with industry bodies undertakes specific country reviews. The China review for Horticulture New Zealand and an assessment of Chile in recent years are illustrative. These activities are important and are what would be expected in an industry selling to global markets with a changing competitive situation. But there is a strategic gap. In particular there is a lack of considered assessment of how best New Zealand can learn from the advances made and being made in Chile and other South American countries, in Washington State, and South Africa. Looking further ahead is the need to understand and monitor such places as China, Poland and Washington State. Then there is a need to determine what the strategic implications of this assessment are, and how New Zealand can actively position itself to strengthen its medium and longer term competitive position. Recommendation 16 Review available competitive information, establish projects to fill key gaps and determine competitive positioning implications, with Chile as an initial priority Implementation Accountability: Pipfruit New Zealand with market panel, supported by New Zealand Trade and Enterprise Priority: High Targeted Impact: 5-15+ years

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Promotion of industry as entrepreneurial business option for new participants and enhance industry skills The pipfruit industry has a key people challenge: many of the independent growers who have been a key driver in the earlier success of the industry are nearing the latter part of their careers. Many have already left the industry with consequent loss of production and industry knowledge. Many remaining are conservative about investing again for the next stage of industry transformation because either they do not expect to be able to realise the expected benefits or they are reluctant to risk their remaining equity as they near retirement. The challenge then is to be able to attract a new cadre of committed pipfruit orchard and business owners to take the industry forward in parallel with the larger businesses which have already committed significant investment. This challenge is common across the agribusiness sector and accentuated by the apparent lack of attractiveness of pipfruit and other sectors from an investment viewpoint. The dairy industry traditionally had built in succession through its sharemilker approach but this has now been overtaken by the equity partnership approach. This latter approach has been successful in attracting in some experienced managers and business people. The larger corporate groups are attracting manager level people but there is need for a concerted effort to widen the appeal of the industry to new investors – skilled operational managers Another dimension of the succession is the appeal or not of horticulture and the pipfruit industry for those leaving school and in the selection of university study programmes and subsequent careers. While some regional initiatives with schools are in place, it is viewed that more concerted regional publicity is required following the mainly negative reports associated with the poor returns over the previous two years. The proposed strategies will required enhanced levels of skills at all stages of the supply chain. The needs for an improvement in skills are readily evident for example in harvesting where unskilled labour are likely to incur quality related costs which are carried into the whole supply chain as an unnecessary cost. Recommendation 17 Promote investment opportunities and new options for the industry through a human capability forum that will make the case for new profit and risk sharing structures for new entrants, and will consider programmes to attract suitable candidates Implementation Accountability: Industry leader group with Pipfruit New Zealand supported by banks and investment advisors. Priority: Medium Targeted Impact: 5-10 years Recommendation 18 Review the skills needs of the industry, the opportunities for skill development and the alignment of tertiary organisations and training groups with these requirements Implementation Accountability: Pipfruit New Zealand with Horticulture New Zealand, supported by Department of Labour Priority: Medium Targeted Impact: 0 -5 years

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7. Industry and Commercial Framework: Future Options The pipfruit industry is at a turning point in terms of the future industry and commercial framework which will best assist it to achieve its goal of longer term sustainability. The recommendations include reference to three key areas. Firstly there is a need for the industry working in conjunction with Government – a role undertaken by Pipfruit New Zealand. Secondly a need for a range of initiatives involving an industry or market panel leadership group in conjunction with the industry body – Pipfruit New Zealand. Thirdly the nature and rate of consolidation among the exporter group which could occur. But what are the framework options for the future? Particularly in respect of industry driven strategies with some form of commercial focus to complement the initiatives of individual exporters? The overall range of options includes:

a. Individual business entities undertaking all commercial and related activities – no industry body.

b. Industry body focusing on ‘industry good’ areas with business entities responsible for commercial strategies. It may involve a small amount of information sharing e.g. current market panel. (Current pipfruit industry model).

c. Industry designed framework including commitment to an agreed industry development plan and key market plans, with agreed procedures for dealing with non-compliance. The approach also including some ‘industry good’ activities.

d. Use Horticultural Export Authority framework which requires industry agreement, involves agreed export marketing strategy and agreed quality

e. Single point of entry approach in which all exports are only permitted through an agreed entity. On-shore activities involve a range of commercial entities. This is the current kiwifruit industry model and previously existed for the pipfruit industry with exports through ENZA.

The industry achieved deregulation from the Single Point of Entry model in 2001, and grower attitudes expressed during this project were strong in their preference for a deregulated approach. Nevertheless there was acceptance by some that there were potential benefits of a wider industry approach beyond the current model (Option b above). The industry tested going under the Horticulture Export Authority model about two years ago but there was not enough support. The range of models is outlined in Figure 25 and in reality the review group sees that the industry has two key options to consider: firstly an Industry Designed Framework, and secondly the Horticulture Export Authority model. There has been firm comment during this project that there will not be support for the Authority model despite a number of groups successfully operating under it. For example:

• avocados - $ 54m, 11 exporters, • squash and kaboch - $55.5m, 17 exporters • kiwifruit to Australia - $35m, 15 exporters • summerfruit - $14.2m, 18 exporters.

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Figure 25: Industry Structure Options46

Industry Structure Options

Free market-anyone canexport Industry

DesignedFramework

HorticultureExportAuthoritymodel

Single desk-only oneexporter

Requires speciallegislation rewho can export

Example:NZ Kiwifruit via Zespri

•Voluntary use of a set of rules with legislative backing•Product groups canand do opt in and out of the system•Exporters are requiredto meet licensing

criteria and export in accordance with thoserules

No legislation specifically controlling who can export

Industry good-R&D, market access, quality standardslabourInformation sharingPromotion/ market development

Quality accreditationExport market strategySupply management

Key limitations of the Authority model for the pipfruit industry include the inability to place any restrictions or quotas on exports in general or to particular markets, or on the markets to which an exporter may sell. Equally many have a fear of the compliance costs associated with any legislation, and the possibility that an export licence could be revoked. Nevertheless there are positives in terms of agreeing an Export Marketing Strategy, some teeth around achieving quality specifications, and commitment to an industry-wide and disciplined development and marketing approach. There are a number of recommendations which emphasize the industry working in partnership with its industry body – Pipfruit New Zealand. Many involve crossing the divide between traditional ‘industry good’ activities and those seen as commercial activities. Currently the market panel is the focus of information sharing. There is however the need to consider joint activities in such areas as:

• promotion and market development • quality accreditation • global export market strategy, including branding • supply management

An Industry Designed Framework has the advantage that the industry can decide and implement supply management approaches such as quotas, tree pulling, or accelerated replacement programme without being in breach of WTO requirements to which the New Zealand Government is a signatory. The opportunity for the industry to consider this approach is presented in Recommendation 2, and is relevant in a number of other recommendations. 46 Industry Designed Framework added to outline of Simon Hegarty, “HEA Gateway to Exports,” Grower, October 2006

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In parallel with such an approach, any consolidation in the number of exporters would be as the result of independent commercial decisions. The review team view that such a consolidation is highly desirable but recognize it will take time as the commercial process is followed.

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8. Summary and Implementation Accountabilities ‘New Zealand pipfruit industry has a sustainable future by being globally competitive’ A key reference point for any future strategy is the reality that the New Zealand pipfruit industry has a number of competitive advantages which can be built upon:

• an excellent reputation globally as an apple growing country based on Royal Gala, Braeburn, some Pacific varieties and Jazz

• a well established production and commercial infrastructure • high levels of production efficiency • a breadth of apples varieties in production • a history of innovation for new apple varieties • purity of production under the IFP protocols, and organic production systems • well established international market and distribution networks.

Challenges Key themes from this review (mainly focused on apples) were:

• pipfruit has lost its traditional edge with consumers to other fruits/health foods • the consolidation of major retailers continues to provide major challenges and

opportunities • in-market perceptions are that New Zealand pipfruit has lost its quality position

relative to competitors and market expectations • Southern Hemisphere suppliers, especially Chile have caught up and surpassed

New Zealand in many areas and have lower costs of production • New Zealand pipfruit exporters lag behind best practices in supply chain and

distribution • fruit returns are heavily influenced by global supplies on a season to season basis, • market information sharing and better market access remain critical issues • the crop profile is too dependent on two varieties for which there is not IP

exclusivity – Royal Gala and Braeburn • there is limited grower confidence in Prevar, the current industry IP model for

new varieties • pipfruit is a high risk investment compared with other agribusiness sectors

While New Zealand is a leader in production efficiency, it has a high cost structure and distance from markets. To achieve premium returns the industry needs to win in targeted segments with longer term sustainability depending on significant improvements in average orchard gate returns. Changes to current strategies will improve those returns. Some growers and exporters are already operating business models that reflect best practice trends and it is a very positive sign that leading groups and growers have already committed considerable investment to new trees and varieties. Strong competitors are posing challenges to the industry. Chile has production efficiency, improved quality and disciplined marketing; South Africa has improved its production efficiency; and Washington State benefits from a strong infrastructure, large scale operations, and new storage technologies. The rate of change and level of international competition can be expected to continue, with a corresponding impact on the shape of both global and New Zealand industries. Recently some apple production areas in the

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United States either no longer exist or have been considerably downsized, while the Netherlands is losing much of its production to Poland. In this environment the question must be asked as to whether New Zealand can achieve an economically sustainable pipfruit industry. However to achieve sustainability, the industry needs to address a number of challenges. These have been discussed through the report and are summarized (Figure 26). Figure 26: Pipfruit Supply Chain Challenges

There are a number of challenges ..

Orchard/ grower

Harvest Packhouse/ storage

Shipping Distributors ConsumersCustomers

Exporter domain

Integrated grower/ exporter model

Info flows/communications

Contract models

Consumers attractedto exotic fruits/ convenience products –pipfruit??

Major/ increased competitionfrom other global suppliers –variety, quality and service

Significant overcapacity- chasing volume,

Information mainly short termdistribution/ retail focused

Seasonal labourchallenges, benefitsfrom new orchard systems –easier harvest options

Need to quickly changecrop profile- younger trees/ new varieties –realchallenge unless highperformance grower

Increasing supplychain costs

Risk mainlyaccrues togrowers –poor returns!

Need improvedmarket returns

Need improvedFAS returns

Opportunities The overall view is that competitive pressures are such that a renaissance in fresh apple consumption is unlikely and, as a result, over-supply of apples globally will likely be a continuing feature of this decade and the next. Successful fresh apple products will be those that significantly exceed consumer expectations. This will be for taste and crunch, relative to other fresh apples. They will be identifiably different in appearance; and are consonant with consumers’ lifestyle aspirations. The latter may well mean that exporters of fresh apples may have to invest in and/or partner with processing firms. The trends in respect of consumer attitudes and behaviour may be summarised as follows (Figure 27). The emphasis is that pipfruit must deliver ‘excellent eating’ to compete with other pipfruit or fruit. In addition is the benefit to be achieved by finding or breeding in novelty, convenience or health functionality attributes which are of increasing interest to consumers.

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Figure 27: Consumer Opportunity Pyramid

Health/ Functional Foods

Apples

Fruit

Foods

Con

sum

er B

ehav

iour

Retailer Proposition

Consumer Behaviour

Greater focus on:•health•convenience•pleasure

Pragmatics of:•price•supply/demand•perceptions of value

….increasingly a need to recognise that competitors are not just other producers and other fruit crops…

How can New Zealand work with retailers and their category managersto give them ‘points of difference’ to win with their targeted consumers?

The day of the fresh apple is far from over. Yet, the current over-supply will be exacerbated by evolving technology in the post-harvest sector. SmartFresh,47 for example will provide a challenge to those who have enjoyed counter-seasonal supply advantages. This serves to underline the importance of communicating with export consumers when the New Zealand product is at its very best and freshest.

Going Forward The review team strongly believes there can be a successful future and economic sustainability for New Zealand pipfruit growers and businesses (and thereby the ‘industry’). This will be at a reduced scale from the peak of the economic bubble when Royal Gala and Braeburn were grown only in New Zealand. Some of that rationalization and reduced scale is already well underway. The number of growers has reduced from 1751 during the peak period to 650 in 2005. Pack house numbers have declined from 183 in 1995 to 85 over the same ten year period. The risk profile of the industry for future investment is not attractive for many growers whose capital has been eroded with the poor returns in two of the last three years. Further grower exit is anticipated. Land under production has reduced at a lesser rate due to the practice of orchard leasing and has been offset to a degree by higher density orchards with higher yields. With continuing rationalization it is anticipated that production will be focused in the primary growing regions of Hawkes Bay and Nelson. Activities in other areas will only survive when based around significant entrepreneurs and production systems e.g. organic production in Otago. The small independent orchard will have a lesser role in the industry production in the future. The commercial structure will instead involve groupings as varied as co-operatives of smaller producers, medium sized businesses and corporate style businesses. Some will specialize only in pipfruit, whereas others will have a multi-product focus

47 Smart Fresh benefits the low cost supplier who can win the time, value-of-money waiting game.

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across fruit and, for some, other horticultural products. This evolution is similar to that occurring in other agribusiness industries both in New Zealand and internationally. There is the associated recruitment over time of more qualified staff and a greater commitment to staff training and skill development. A key challenge for the industry is that it needs to achieve average returns of $23 per TCE from the existing crop. This level of return is needed to provide the financial base to invest in new trees and new varieties to achieve a more competitive crop profile for the longer term. The rate of investment needs to be accelerated to double the present rate. Key requirements for the existing crop include:

• excellence in orchard management; • improved availability of skilled labour for harvesting; • more consistency in providing ‘fit for purpose quality’; • and greater industry commitment to developing controlled customer focused

marketing programmes. Future development opportunities exist in terms of: investment in new apple trees and new varieties, further development of organic production, and investment in the fusion pear varieties. There are parallel opportunities for building competitive advantage through innovative ‘safe food’ and ‘sustainable production’ protocols and systems, and supply chain innovation to leverage scale. The industry is committed to the deregulated environment achieved in 2001. There is a wide reluctance to any re-introduction of industry wide rules or regulations to achieve a more disciplined approach. This is the case even though it is acknowledged that some things need to change. This suggests there are four avenues by which the recommendations outlined above can be effectively implemented. These are:

• Specific rules or protocols for particular situations agreed between the industry and government

• Collective efforts in a commercial area (market panel or other leadership group) or in a collective industry benefit area (Pipfruit New Zealand and market access)

• Commercial groupings focused on a common purpose by market or variety (a variety ‘club’ or a co-operative grouping)

• Individual commercial initiative

1. Industry and Government Agencies Ministry of Economic Development

• Support for transition incentives for supply management for Braeburn crop in 2007 (Recommendation 5)

• Initiate a review of depreciation rates for new or replacement orchards, with a

view to a more attractive rate with Inland Revenue Department (Recommendation 10)

New Zealand Trade and Enterprise.

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• Support for joint international marketing initiatives (Recommendation 6)

• Urgently establish a ‘nil discernible residue’ programme. Interregional Partnership supported by New Zealand Trade and Enterprise (Recommendation 13)

• Review of global competitors, with Chile as an initial priority (Recommendation 16)

Department of Labour

• Achieve more commercially friendly policies for seasonal labour

(Recommendation 3) • Review skills needs of industry and alignment of tertiary and training

organizations to meet these requirements. (Recommendation 18) Ministry of Foreign Affairs and Trade

• Urgent resolution of identified market access and competitive tariff review (Recommendation 7)

2. Industry (Pipfruit New Zealand) and Commercial Entities in Partnership

• Major initiative of protocols to get a step-up in performance to consistently achieve ‘fit for purpose’ quality (Recommendation 2)

• Improve understanding of, and achieve greater commitment to, integrated

marketing programmes (Recommendation 4) • Develop and implement a market plan for Braeburn in Europe in 2007, including

supply management (Recommendation 5) • Establish a set of comparative season-to-season exporter and pack house

performance information (Recommendation 8) • Discussions between leadership group of growers and nurseries to improve

quality and cost of new trees (Recommendation 9) • Review basis of New Zealand funding contribution to Prevar and IP access

policies (Recommendation 12 – with Prevar)

• Review R&D focus to ensure appropriate systems research is initiated and best practice adopted (Recommendation 14)

• Establish an annual consumer insights and market intelligence forum – with

HortResearch and Crop and Food (Recommendation 15)

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• Promote investment opportunities and new options for the industry – with banks and advisors (Recommendation 17)

Note: The nature of these recommendations emphasises the importance of the industry debating and agreeing the best form of industry structure to be used for the future. There is the opportunity to create and gain support for the industry’s own Designed Framework if the Horticulture Export Authority model remains unattractive.

3. Commercial Enterprises (individually or jointly)

• Ongoing commitment to ensure global leadership in production efficiency and systems effectiveness (Recommendation 1)

• Commercial implementation of initiatives developed in the Pipfruit New Zealand

and industry partnership programmes – above recommendations. Conclusion Growers and exporters must be the focus of the required changes. There are three key phases to the transformation: improved returns from the existing crop, a faster rate of transformation of the crop profile and building longer term platforms of competitive advantage. It is essential to reinforce the reality that international markets and competition are changing very quickly and the New Zealand pipfruit industry must transform at a much faster rate than at present to keep up. Some of the issues the industry faces are similar to other horticultural and food sectors. In our view it is important that the Government reviews policies to ensure it supports and encourages private sector initiatives and investment. Traditionally faster change has been associated more with technology industries such as electronics, information and communications technology, and biotechnology. In today’s competitive environment traditional industries such as pipfruit must also change quickly. Government agencies working in partnership with the industry to develop a package of initiatives can provide a supportive environment and keep the private sector at the forefront of the proposed transformation. Policies to be reviewed include upgrading New Zealand's capability, taxation review (market development, R&D, and training benefits) and achieving faster economic transformation (including depreciation rates). The industry has a sustainable future under the proposed framework. The challenge is in getting the right combination of ‘carrot’ and ‘discipline’ to trigger the next phase of change. Success requires a combined government and industry approach in key areas. The pay-off in the medium term will be an industry of 12 to 18 million TCEs for international markets, representing an annual revenue of $350m to $450m, providing the essential platform for the longer term sustainability of the New Zealand industry. It will be located mainly in the Hawkes Bay and Nelson regions, with average annual employment of 6,500 fulltime and 24,000 seasonal workers. The pipfruit industry provides a particular and very valuable opportunity to apply the emerging economic transformation policies and ideas of Government to support

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established commercial leadership, investment and disciplines. It is vital to move decisively and quickly as there is much to be done.

Appendix: Project Team • Project leader : Dr David Cullwick David is Director, Innomarc Consulting Ltd, Wellington and is a strategy advisor to Boards of Directors and CEOs to a range of NZ businesses and industries. Previous projects include: Chair, Stage III Review of kiwifruit industry turnaround project in the mid 1990s; involved in strategy, and innovation development with the pipfruit industry prior to deregulation. He was project leader for HortResearch in developing a new strategic framework and of a major review of the on-farm dairy industry and 10 year capability development plan in 2005.

Professor David Hughes Dr. David Hughes is Emeritus Professor of Food Marketing at the Centre for Food Chain Research, Imperial College London, and Visiting Professor at the Royal Agricultural College, U.K. David is a regular speaker at international conferences and seminars on global food industry issues, particularly consumer trends, and is a strong proponent of building vertical alliances between key chain members in the food. He is: an international advisory board member with food companies and organisations in three continents; and a Non-Executive Director of KG Fruits – a U.K. farmer-owned berry fruit business (US$200 million turnover in 2004) with a blue chip customer portfolio. He works closely with senior management of food and beverage firms on business strategy development. Michael O’Keefe Michael O’Keeffe is a strategy consultant specialising in the fresh food and agri-business industries. Michael’s global consulting practice services clients in the USA, UK, Canada and New Zealand as well as Australia. Clients include all sectors of the food chain from retailers to genetic suppliers. Michael is Adjunct Professor of Food Chain Management at the University of Queensland. Recent work includes: working with the UK retailer Waitrose to develop and implement a category management process in fresh food; developing a new product development system for a Florida based major produce firm. This project addressed innovation along the whole value chain. Michael investigated the capabilities that will underpin success in both the processed and fresh food sectors for the ANZ Bank with support from the National Food Industry Strategy. Michael was formerly Managing Director of Agribuys Australia and National Business Manager – Produce with Franklins Supermarkets.

Peter Luxton Peter is GM Global Marketing Services, Zespri International, Mt Maunganui and is actively involved in supply chain issues as part of this role. He has been in the kiwifruit industry since 1986 when he established the then New Zealand Kiwifruit Authority's European office in Amsterdam. Since then, he has held marketing and sales management positions for ZESPRI, including Regional Manager Southern Europe. Prior to joining ZESPRI, Peter held a number of senior roles in the

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Department of Trade and Enterprise, including Trade Commissioner roles based in Vienna and The Hague.

Tim Morris, Coriolis Tim is a principal of Coriolis Research Ltd. a strategic management consulting and market research firm founded in 1997 and based in Auckland, New Zealand. Coriolis primarily works with clients in the food and fast moving consumer goods (FMCG) supply chain, from primary producers to retailers and foodservice providers. Areas of expertise include food, beverages, health and beauty aids, over-the-counter pharmaceuticals, household products, tobacco, paper products, and selected consumer durables.

Coriolis is made up of a team of researchers with extensive and diverse food and fast moving consumer goods experience on multiple continents. While their researchers have a diverse background, all have extensive experience in advising manufacturers and retailers on real-world strategic questions. Recent projects include: review of United States market and market entry strategy for Australian manufacturer; comprehensive analysis of potential new business platforms for growth for major New Zealand based food exporter; and profiled in-depth the top twenty major global competitors for large New Zealand based food exporter. Other projects have included: United Kingdom market entry strategy for New Zealand retailer and the development of new growth strategies for category leader through both international and New Zealand consumer and retailer research.

Andrew Watters Andrew is partner in Agricultural Investments Ltd. which specialises in investment advice and developing investment products in agri-business including horticulture. He is experienced in farm systems, value chains, investment models and economic analysis. Andrew was a Nuffield Scholar in 2004 and this involved a six month study tour of UK, Europe, North America and Japan studying ‘innovation management’ applied to food commodities and the study involved over 60 customer and market interviews. Subsequently he was involved in a report into the sustainability of intensive farming, and in the on farm dairy capability review for the next decade during 2005. Allan White, HortResearch Allan is currently Business Leader Pip and Stonefruit, International for HortResearch. This role involves relationship management with organisations including IRTA (Spain), ENZA, Prevar, Washington Tree Fruit Commission, Yunnan Red Pear, China INRA (France) and Plant Research (Netherlands). Previously he was commercial leader for future horticulture and was portfolio manager for new pipfruit varieties after an extensive career in plant breeding.

Documents

‘Smarter, Faster, Better – Leading Niche Player’ · ‘Smarter, Faster, Better – Leading Niche Player’ A Development Strategy for the New Zealand Pipfruit Industry Innomarc