Learning lessons from Comvita

A Comvita bee keeper.
supplied

A Comvita bee keeper.

OPINION: 

Behind Comvita's excellent year-end results lies a long story of how it has learnt to create and capture value in health products. 

As it transformed itself over the past decade, sales have increased four fold and its operating profits almost five fold.

Comvita has a simple way to show what value creation means. At the rock bottom end of the scale sits 250 gm of an utter commodity it doesn't sell – generic, unbranded honey. A jar of it is worth only $5.

Business commentator Rod Oram.

Business commentator Rod Oram.

But the same quantity of manuka honey in a branded Comvita jar is worth a lot more. Depending on its Unique Manuka Factor, a scientific way of measuring its health benefit, the price ranges from $14 for UMF 5+ to $104 for UMF 20+.

On up the chain, the 250 gm of raw manuka honey is worth $250 in throat lozenges, $330 in an antibacterial gel used to treat severe infections in wounds, and $500 in skincare products.

Creating value is only half the story. The harder half is capturing the value. Most NZ companies are only producers of raw ingredients or finished products. Yet, most of the value is captured overseas by importers wholesalers and retailers.

A deeply worrying example is infant formula made here and sold in China. It came to light in a report by Coriolis Research last year.

NZ farmers and processors contribute 40 per cent by value of the assets required to make and sell infant formula but receive only 12 per cent of the profits. The main reason is most of their output is for overseas brand owners who have direct links to consumers.

Where we stand on value creation and capture is measured by the World Economic Forum's global competitive rankings. The value creation scale runs from 1 (relying on low cost natural resources) to 7 (unique products and services). We score 3.8, ranking us 36th.

Value capture is measured from 1 (only one step in the value chain such as exporting logs) to 7 (multiple steps including relationships with consumers). 

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Again we score 3.8 but this time we rank 58th in the world.

OECD REPORT

Our Productivity Commission explored these shortcomings in a report it commissioned from the OECD last year. The analysis showed our theoretical GDP per capita should be $43,518 based on the quality of our macro-economic policies such as free trade. That's well above the OECD average.

But our actual GDP per capita is $30,179, some 30 per cent below the theoretical. 

The main reason was our weak participation in global value chains.

Comvita, founded 40 years ago in the Bay of Plenty, used to demonstrate all the failures of this NZ model. It had developed a range of honey-based health products and was an exporter, sometimes boldly such as opening a store in Hong Kong in 2001. But it struggled to grow, or be profitable and resilient.

A crucial turning point came in 2003 when it listed on the NZX's small company market. It used the money raised to buy back its distribution in the UK from a local agent. This gave it more control over prices, closer relationships with retailers and an increased cash flow.

It subsequently bought out its distributors in continental Europe, Australia and Hong Kong, gaining the same benefits.

Meanwhile it entered the Chinese market and began work on its global branding. 

Over the following years it established with its local partner 400 stores-within-stores in 40 cities across China. It has a further 200 such outlets in other Asian countries.

HEALTH BENEFITS

Back here, it invested in science to prove the health benefits of manuka honey, and to help it develop and verify new products such as olive leaf extract, which helps support consumers' immune systems. It also invested in new plant and systems.

In addition, it developed crucial relationships, such as with Derma Sciences. It sells medical grade honey to the US company and receives a royalty on the wound dressings and other products Derma Sciences makes. The companies also have a small shareholding in each other.

It recent years, it has increased its investment in the first step in the chain - bees and their honey production. It has bought some small companies and formed joint ventures with others such as the East Taupo Lands Trust. Now, half its supply is under its control, and the other half in partnerships and long-term contracts.

While the financial rewards of this transformation have been growing over recent years, the latest results show the full benefits. Net profits rose 28 per cent to $10.2 million on sales up 32 per cent to $153m.

One driver was particularly telling. Sales in New Zealand almost doubled with purchases by Chinese tourists being a big factor. With Comvita well established as a premium brand back home, the tourists were keen buyers for their own consumption and for gifts for friends and family. 

"We've reached the stage that the business model is in place and it's going to support a significantly larger business," says Brett Hewlett, Comvita's chief executive.

The company, and its industry, has plenty of challenges, though. The biggest by far is to reassure consumers overseas. Manuka honey is unique to New Zealand. 

But some unscrupulous operators overseas are cashing in on its success with fake or adulterated products.

The sector and government here are working rapidly to introduce new testing and inspection regimes, standards and labelling for manuka honey to guarantee its integrity.

With these in place, Comvita and its sector will thrive as value champions.

 - Sunday Star Times

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