KGI Forum Presentation 4 September 2014 Sir Brian Elwood Hendrik Pieters Ian Greaves Alister Hawkey Ruth Lee Richard Procter (KNZ)
Agenda 1. Contextual framework 2. Collaborative marketing (2013-14 season) 3. Collaborative marketing (last 10 years +) 4. Some collaborative marketing perspectives 5. KNZ over the last year 2
1.1: The Regulations are for growers: The Regulations resulted from growers wishing to work together for their common good The Regulations provide the opportunity to capture marketing and cost economies of scale, and exporter accountability and performance Growers control the governance of the kiwifruit industry from orchard to market: through ownership of orchards & pack-houses through ownership of Zespri (5 grower directors) through the Regulatory right to elect anyone to be KNZ Directors 3
1.2: What does KNZ do: two main areas of activity Export orientated: Authorise ZGL to export New Zealand grown kiwifruit (Regulation 4) at FOBS (Regulation 5(c)) Determine collaborative marketing applications (Regulation 33) the purpose of which is increasing the overall wealth of NZ kiwifruit suppliers Monitoring and enforcement: the non diversification rule (Regulation 11), the non discrimination rule (Regulation 9,10), the information disclosure requirements (Regulations 12, 14 and 15) Note: 1. The Board must perform its function in a manner that is as efficient and cost effective as possible (Regulation 34) 2. KNZ is subject to the OIA 4
1.3: What KNZ does not do: KNZ must not: (a) carry on any commercial activity, including the purchase or sale of kiwifruit: (b) operate to make a profit (Regulation 35) Note: KNZ has no general industry supervision role 5
2.1: The strategic context for collaborative marketing changes: currently Strong market. No shortage of perceived market opportunities: China and India are flavour of the month Unsatisfied demand for NZ supply, increased enquiry for supply through collaborative marketing Increasing market demands - heightened health and food safety concerns, quality and supply chain risk, safe food consumer preferences. Increased country risks eg: China customs compliance Both green and gold supply is constrained, Chile supply constrained. Multiple cultivars Preparing for gold volumes 6
72% 75% 82% 84% 86% 86% 88% 97% 98% 99% 100% 101% 104% 106% 109% 109% 110% 110% 110% 111% 111% 112% 116% 116% 116% 121% 124% 130% 130% 161% 200% 180% 2.2: Of the approved arrangements for 2013-14 two thirds exceeded the Zespri benchmarks CM as % of Zespri Benchmarks 2013-14 Season Note: South Pacific CM's are benchmarked against SEA 160% 140% 120% 100% 80% 60% 40% 20% 0% 7
3.1: Over the 14 seasons including 2013-14 there have been, for collaborative marketing: 29 individual kiwifruit collaborative marketers (excluding kiwiberry) 32+ countries of destination 26.6 million trays kiwifruit shipped 8
CM Volumes 000's trays 3.2: There was a spike in collaborative marketing volumes in 2011/12 when Zespri exports also peaked: 1,101 1,860 1,664 1,613 1,742 1,660 1,428 1,657 1,908 1,715 2,534 3,577 2,406 1,743 1,719 Zespri export volumes (Millions trays) 4,000 180.00 3,500 160.00 3,000 140.00 2,500 120.00 2,000 100.00 80.00 1,500 60.00 1,000 40.00 500 20.00 0 0.00 Trays (total) RHS Zespri export volumes 9
3.3: Looking at the last two 5 year seasons: Total net applications hardly changed 5 Yearly time periods Net applications (number) Approved (number) % approved Declined (number) 2004-2009 149 2010-2015 144 10
3.4: But the approval rate jumped: Year Net applications (number) Approved (number) % approved Declined (number) 2004-2009 149 119 80% 2010-2015 144 134 93% 11
3.5: And the number of applications declined reducing to one third of what they were Year Net applications (number) Approved (number) % approved Declined (number) 2004-2009 149 119 80% 30 2010-2015 144 134 93% 10 12
3.6: Over the last 14 years, it is the Zespri managed arrangements that have returned the best CM returns 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00-0.10 0.58 Total (14 years) Cents per tray - 0.09-0.15 0.09-0.20 Zespri Managed Market coordinated Other Total 13
3.7: And the more Zespri are involved, it seems the better the returns 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00-0.10 0.58 Total (14 years) Cents per tray The more Zespri are involved, the better the returns - 0.09-0.15 0.09-0.20 Zespri Managed Market coordinated Other Total 14
4.1: On average over the last 5 years there has been a very high 93% approval (conversion) rate: Average 29 applications a year Only 2 Constraints Increase overall wealth Collaboration 93% Average 27 approvals a year 15
4.2: Why is the approval rate so high? The application forms encourage collaborative marketers to disclose sufficient pertinent information to enable the Collaborative Marketing Committees to accept that the application meets the Regulatory criteria Some Collaborative marketers have gained experience of how to utilize collaborative marketing, and what drives OGR Zespri are prepared to work with prospective collaborative marketers who meet the Regulatory criteria However, WE ARE SURPRISED that amongst the 293 applications approved in the last ten years that NONE HAVE TRANSLATED into high volume, significantly innovative and wealth enhancing arrangements that meet the regulatory criteria 16 However we remain hopeful.
4.3: And there is hope, for example: Seeka continues to explore opportunities to diversify and to innovate in support of our core business. For example, Seeka in the past six months initiated collaborative marketing programmes which lifted company revenues as well as increasing the wealth of all kiwifruit growers. 1 1 Seeka 30 June 2014 Half Year Report 17
4.4: There are a number of structural issues confronting collaborative marketers, including: Focus Incentives CMs Generalist, multiple product exporter. Adjusting to OGR focus. CMs earn commission from kiwifruit as part of a diversified business Zespri Single product, multiple market, OGR focus, recognised world leader in kiwifruit marketing This is Zespri s sole business. It must be successful because it is accountable for that one business. Economies of scale CMs have small scale economies but with collaboration with Zespri can gain some of Zespri benefits Marketing system, brand Freight Foreign exchange Quality system Funding In market personnel Use agents Zespri have [152] offshore dedicated employees, plus agents 18
4.5: Collaborative marketing fees The Regulations require KNZ to be funded on a cost recovery basis by charging Applicants under the collaborative marketing regime [Regulation 39(b)] KNZ cannot make a profit from collaborative marketing fees Any over-recovery of collaborative marketing fees is rebated to collaborative marketers. 19
4.6: Has collaborative marketing been successful Grower perspective? The current Regulations (CM) are a balance between the interest of the industry and others that would like a piece of it. For growers, collaborative marketing can be thought of as an insurance policy. There is a cost (a premium, including part of the cost of KNZ), which results in a certain level of collaborative marketer activity (cover). The benefit from the insurance policy is the single desk: How much cover is enough? What premium is the industry prepared to pay? The starting point for a collaborative marketing application must be an increase in the overall wealth of kiwifruit growers (the common good). CM profit flows from that outcome. 20
4.7: Has collaborative marketing been successful CM perspective? The current Regulations (CM) are a balance between the interest of the industry and others that would like a piece of it. Prospective collaborative marketing applicants and KNZ are bound by the purpose of collaborative marketing as set out in the Regulations that is an increase in the overall wealth of NZ kiwifruit suppliers in collaboration with Zespri If achievement of that purpose can be demonstrated by an applicant (which requires not insignificant effort by the collaborative marketer), past approval rates of applications should provide some confidence of probable success 21
5.1: KNZ must operate cost effectively (Reg 34) 1 Expenses 2012-13 NZ$000 2011-12 NZ$000 2010-11 NZ$000 Funding as reported by Zespri 2 318 285 244 Amount refunded to Zespri after year end (net of both years) 33 5 - Regulation 39(a) funding from Zespri 351 280 244 General funding transferred from one year to another by KNZ Actual general funding each year Regulation (b) collaborative marketing funding; and interest - (1) - 351 279 244 232 282 224 KNZ actual costs (incldg CM) 583 562 468 1. Regulation 34. Figures extracted from KNZ Annual Report 2. Per note in Zespri Annual Accounts 22
Any Questions? 23
Splice Norway Class 1 Green Southern North America Class 1 Organic Turners Korea Class 1 Gold Bidvest South East Asia Class 1 Gold Southern North America Class 1 Green Turners North America Class 1 Gold Fruitlynx Indian Sub Continent Class 1 Green Turners China Class 1 Gold Coop Italy + Med Class 1 Green Fruitlynx South East Asia Class 1 Green Southern South East Asia Class 1 Green Fern Reunion Island Class 1 Green Southern South East Asia Class 1 Organic South South East Asia Class 1 Gold Outlands North America Class 1 Organic Seeka South East Asia Class 1 Green Splice Norway Class 1 Organic First South East Asia Class 1 Gold First South East Asia Class 1 Gold South South East Asia Class 1 Green First South East Asia Class 1 Gold Bidvest South East Asia Class 1 Green Seeka China Class 1 Green Turners South East Asia Class 1 Green First South East Asia Class 1 Gold Fern Mauritius Class 1 Green Chevalier South East Asia Class 1 Green DMPalmer Hong Kong Class 1 Gold Chevalier South East Asia Class 1 Gold Splice Austria & Switzerland Class 1 Organic 72% 75% 82% 84% 86% 86% 88% 97% 98% 99% 100% 101% 104% Packed to retailers labels Pricing (agents comm.), freight, timing Sale price, Family kiwi Price Sales price (agents comm.), freight Sales price, freight Exchange rate, timing Freight, agents comm, Sales price Exchange rate 106% 109% 109% 110% 110% 110% 111% 111% 112% 116% 116% 116% 121% 124% 130% 130% 161% 6.1: 2013-14 Collaborative marketing results CM as % of Zespri Benchmarks Note: South Pacific CM's are now benchmarked against SEA 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% 24
6.2: 2013-14 return by fruit type and pool 25
6.3: The returns appear to move around with volume? 26
6.4: Where have the returns originated: Breakdown of 14 year returns 27
6.5: The contextual framework for collaborative marketing is evolving: more countries, more cultivars... Separate pools Market trials Business case based on differential wealth at FOB Sovereign, legal commercial risks 1-2 products, single source, common quality Focus on Entity capability (market, operational & financial) Diversifying markets increasing commercial risk Product, entity (market, operational (on and offshore) & financial) & cultural commercial capability Orchard to market business case based on FSA differential OGR Diversifying multisource product range, increasing quality risk 28