Enza risks bulldozing the orchard

BY ROD ORAM

OPINION: Three weeks ago in a Spanish wholesale market you could buy a 10kg box of Zespri-branded, size 27 kiwifruit from New Zealand for 19 euros. Or you could pay 5.50 for a box of Enza-branded kiwifruit from Chile of exactly the same size and weight.

Zespri says it earns a significant premium for its growers thanks to the strength of its brand, the sophistication, power and efficiency of its supply chain, and the depth of its relationship with its overseas customers.

In contrast, Turners & Growers, the Sir Ron Brierley-controlled owner of the Enza brand, says: "Zespri makes no sense from any perspective." It says it is an inefficient monopoly, thin on innovation and poorly serving its shareholders.

Yes, it says, NZ produce gets a premium, but that's because of the country's brand, not the skill of any particular marketing entity. Any capable exporter could also get it. Thus, T&G is campaigning to strip Zespri of its role as the sole exporter of kiwifruit to all markets except Australia.

Who's right? The answer matters because it will powerfully shape strategies across the entire primary sector. If producers get this right, they will have half a chance to break free from commodity products and markets, thereby enjoying a profitable future.

If they get this wrong, they will condemn themselves to oblivion at the hands of commodity competitors from low-cost countries. The imperatives are just as strong in dairy, meat and wool as they are in horticulture.

To make its case, T&G offers two documents: analysis it commissioned from NERA Economic Consulting of Auckland; and a position paper to government that reads like a lawyer's brief.

The NERA report is long on the theory, practice and evils of monopolies. But is very short on actual analysis of the kiwifruit industry here and abroad, and the performance of Zespri.

It makes no attempt to determine whether Zespri actually adds value to its grower-shareholders, is innovative or efficient.

For example, it notes that the Zespri Gold variety, the development of which was heavily funded by government and growers, generates $206.9m of benefits to growers each year. It estimates Gold will continue to add $200m or so a year over the next 10 years. It says this is a "crude" indication of the value that can accrue from innovation. But it makes no attempt to establish what role Zespri plays in that.

The position paper then takes an enormous and illogical leap. It claims that $200m a year would be the scale of additional gains growers would get if Zespri was broken up and more innovation somehow flourished.

NERA's analysis on Zespri's efficiency is equally unconvincing. By its own admission it cites only one New Zealand study the Commerce Commission's on the proposed alliance between Air New Zealand and Qantas. If it had been approved, it would have created inefficiencies estimated at between 1% and 5% of costs.

NERA admits that Zespri is in a very different market from the airlines, but nonetheless suggests that efficiency gains of 1.25%, or $5.3m a year, would be achieved if Zespri was stripped of its single-desk status. Even if that were right, it would be a ludicrously small gain from so much upheaval.

T&G's position paper is even worse. It is heavily laced with assertions about the global kiwifruit industry, Zespri's performance and the benefits T&G believes would flow from opening up exports to multiple players.

For example, T&G airily asserts that such a deregulation strategy has reaped big benefits for fruit growers in South Africa and Israel, and for apple growers in New Zealand.

Yes, there is a common story to the three. In the first phase, lots of new players rushed to export, often with limited experience so service and fruit standards fell to the damage of the national brand. Within a couple of years, though, their fierce rivalry drove down prices because large overseas buyers played them off against each other.

This in turn pushed many growers out of the business. Over the next five to seven years, the sectors restructured radically by cutting costs, innovating more and re-establishing in voluntary form many activities such as export co-ordination that had been regulated.

But the outcome in the three countries was very different. South Africa, with the benefit of low cost labour, managed to claw back market share and prices, but foreign multi-nationals took over a big chunk of exports. Israel recovered partially during its rebuilding phase, but fruit has since resumed its long-term decline.

In New Zealand, following the demise of Enza as the single desk seller, the number of hectares in apple orchards almost halved from 2000 to 2009, as did the number of growers. The number of packhouses fell by two-thirds.

The survivors became much more efficient and used new varieties such as Jazz and Envy protected by intellectual property rights to reduce their dependence on commodity varieties such as Royal Gala and Braeburn.

Volume is back up to levels near those of a decade ago. Roughly one-third is concentrated in 10 businesses that have become mini-vertically integrated operations from orchard to packhouse to brand, distribution and overseas' markets.

T&G is one of those, but since it won control of Enza, its share of apple exports has fallen to about 27% from 90%, and its apple revenues have fallen by two-thirds. It argues those radical changes were necessary to make the apple business viable.

And it's still very hard to make money growing apples. According to Maf figures, apple orchard profits have fallen from $12,732 per hectare in 2002 to $3308.

T&G is proposing the same painful deregulation for kiwifruit. It says it is driven to do so by its thwarted ambitions in the sector. It wants to grow its kiwifruit sales from under one million trays a year, mostly sourced from here with small volumes just starting from Chile and Italy, to 20 million a year, half from here and half from overseas, in 10 years' time. Its current share of NZ production is roughly 1%.

In pursuit of that strategy, it has bought rights to an Italian green kiwifruit, a Chinese red and a New Zealand gold, all of which have come out of programmes heavily funded by their respective governments.

It is trying to persuade orchardists to contract grow them. But to do so it needs a market for them other than here or Australia. As the regulations stand now, it has to apply for a collaborative marketing agreement with Zespri. It applied for one in each of the past two seasons, but five for this one. Of these, one was approved and three rejected by the regulator, Kiwifruit New Zealand, and one withdrawn by T&G.

All up, these collaborative agreements account for only about 2% of export volume, but they are worth doing. Last season, the average Zespri return for all fruit was $6.80 per tray, but collaborative programmes managed by Zespri returned 64 cents more, those co-ordinated by Zespri 45 cents more, and those run by exporters that proposed a collaboration agreement 24 cents less than the benchmark.

T&G says Zespri is hostile to collaboration marketing. But that's not the experience of others that succeed in doing it. So, there's clearly a deep clash of culture and strategy between T&G and Zespri.

In essence, T&G is an opportunistic trader seeking to maximise returns for its shareholders, with Brierley's GPG controlling 65% of the equity.

Zespri is a far more sophisticated, strategic investor and operator. It has a one-third share of global kiwifruit trade, even though NZ production is only 17% of the world's. It is 13 times larger than its nearest competitor and earns premiums of at least 65% over Chilean and Italian producers.

Yet it also faces big challenges such as helping growers here reduce their dependence on the Hayward variety of green kiwifruit, which is increasingly a commodity.

So maybe there's a case for grafting a touch of T&G's entrepreneurship on to Zespri's rootstock. But T&G's proposal to bulldoze the orchard entirely is purely self-serving. It offers the very real danger of destroying wealth for the sector at large.

- © Fairfax NZ News