WA Horticultural Update 2018Dr David McKinna & Catherine Wall

August 2018

Presentation

1. The emerging export opportunity

2. The need for premiumisation

3. Opportunistic trading versus programmed marketing

4. The power of collaboration

5. Case studies

6. Critical success factors

The emerging export opportunity

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• Total value growing strongly driven by green vegetables.

• Total volume flat due to declining potatoes and onions.

• Middle East and SE Asia are the dominant market regions.

VALUE VOLUME

Exports $248 million 197,811 tonnes

Growth trend 4.8% 5.7%

5 year CAGR 10.8% 4.4%

2017/18 vegetable exports

Current export performance

5

Source: ABS via Global Trade Atlas, Fresh Intelligence Analysis

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50

100

150

200

250

300M

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n A

UD

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r ye

ar

All vegetables 20 year export (value)MAT Period - April 17 to March 18

Other fresh vegetables

Capsicum

Tomatoes

Pumpkins & squash

Cabbage & kale

Celery

Fresh beans

Lettuce

Broccoli

Onions

Potatoes

Asparagus

Carrots

Export growth drivers

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1. Growing economic prosperity and modern trade in target markets

2. Australia’s reputation for safe food and trading integrity

3. Location and freight connectivity

4. Favourable $A exchange rate

5. FTAs and improved market access

6. Strategic investment in exporting by category leaders

7. Implementation of AUSVEG export strategy and improved industry culture

8. Strong and growing trading relationships in Asia and Middle East

Benefits of exporting

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1. Potential for higher returns

2. Domestic market price impacts

3. Market diversification

4. Business resilience

Risks of exporting

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1. Market risk

2. Commercial risk

3. Freight connectivity risk

4. Exchange rate volatility

The need for ‘premiumisation’

Australian horticulture is not price competitive in commodity markets

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1. Higher cost of labour

2. Higher cost of inputs

3. Distance and logistics

4. Cost of compliance (although also a competitive advantage)

1. Focus on premium market segments

2. Transition from ‘opportunistic trading’ to ‘programmed marketing’

3. Build a value proposition based around differentiated products

So, what do we need to do?

Australian exporters must target high end, modern trade channels

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High end retail High end food service

Premiumisation approaches

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1. Superiour variety/genetics

2. Product size/shape/maturity/colour

3. Trim, wash and preparation

4. Value-adding

5. Quality standard/consistency

6. Packaging

7. Branding and provenance

8. Supply chain efficiency

9. Service levels

Opportunistic trading versus programmed marketing

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Opportunistic trading: Programmed marketing:

Reactive to enquiries and orders Proactive – planned, scheduled supply

Highly volatile trade Stable trade

Short term, deal-by-deal negotiation Agreed pricing formula

Price driven Ability to build brand loyalty

Tends to be agent drivenRequires critical mass and supply continuity - suits collaborative model

Orders consolidated from central markets Product tailored to export market

No commitments, but no loyalty Mutual obligation and loyalty

The power of collaboration

Advantages of collaboration

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1. Allows smaller businesses to sustainably export

2. Provides access to markets and customers

3. Closed-loop supply chains improve returns

4. Improves market power

5. Optimises freight and logistics

6. Embeds quality and compliance systems/processes

7. Supports skilled, professional management

8. Provides the critical mass required for brand-based marketing

9. Enables access to better market intelligence

10. Mitigates or better manages risks of exporting

3 levels of collaboration

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Communication Coordination Collaboration

• Informal information sharing

• Risk/reward held with individuals

• Highly flexible

• Formal relationships

• Pooled collective resources

• Shared goals

• Commitment and accountability

• Shared risk and reward

• More structured systems

• Closer relationships

• Sharing of resources

• Business cooperation on marketing

Example: Taking a stand at the AUSVEG trade events and sharing networks

Example: A broccoli exporter coordinating supply from counter-seasonal contract growers in other states under a common pack

Example: JV between a group of companies to collectively market all their produce

Collaborative models

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1. Regional collaborations with single category

2. Regional collaborations with complementary categories

3. Multi-regions with single category

Entity structures

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1. Partnerships

2. Corporations

3. Cooperatives

4. Joint ventures

5. Licensing agreements

6. Codes of practice

Governance structures

1. Mission/vision/goals

2. Business strategy

3. Terms of employment

4. Board charter and risk appetite statement

5. Shareholding structure

6. Funding model

7. Profit distribution policy

8. Operational policy

Case studies

Summer CitrusSouth Africa

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• Over 250 citrus growers from Western Cape

• Formed an alliance in 1999 to coordinate shipping to the USA

• The central entity manages logistics and provenance marketing only

• The organisation is a critical contact point for coordination of the US citrus counter season

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Structure & Governance

• ‘Not for profit’ company • Limited by guarantee• Does not issue dividends• Board of 8 directors and CEO• Seasonal contract staff• Hold weekly board meetings during the season

Business model

1. Logistics services: • Negotiates shipping rates• Export documentation• Engages a ‘grower rep’ at port in USA

2. Marketing:• Provenance marketing only• Growers retain own brands• Growers continue to manage their own sales and marketing

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Benefits

• Lower shipping costs• Improved coordination of logistics• Strong ‘country of origin’ messaging• Improved returns with independence retained

Risks

Growers leave the group and economies of scale are lost

Summer Citrus:Harvest of Hope

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Summer Citrus participate in Harvest of Hope - a charity to improve economic situation of 30,000 citrus workers including:

• Skill development

• Education and training

• Childcare

• Leisure time development

• Healthcare

Summer Citrus: Learnings

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1. Pre-season planning brings all partners in the supply chain into the discussion – including US importers and retailers

2. The group attempted a marketing relationship with a US retailer. After this failed it was agreed to keep sales functions separate.

3. Recognition that a ‘whole of industry’ approach was needed to compete against South Americans

4. Leveraging Harvest of Hope program as a point of difference in marketing

5. Summer Citrus cannot act independently of growers

“Our annual planning meeting is a vital part of our company’s success and offers the opportunity to bring all of our partners together before our first vessel arrives in the U.S. in June,”

Suhanra Conradie, CEO,

Summer Citrus

Summer Citrus: Applications in WA

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1. Ideal for single category industry importing large volumes into one market

2. Potential categories: Apples, Carrots, potatoes, onions, melons

3. Ideal for building country-of-origin or regional endorsement brands

AvocoNew Zealand

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1. Conducts the planning, shipping, logistics, forex management, marketing for 800 NZ growers

2. Formed in 2013 expressly for export collaboration to reduce competition into Australia – no domestic sales

3. 80% of fruit is marketed to Australia

4. Exports branded under ‘Avanza’

5. Historically, have achieved much higher returns to growers

Avoco

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Structure & Governance

• A 50:50 partnership between two leading packing/marketing businesses (Primor & Southern Produce)

• Four board members including 2 CEOs of the partner businesses• 10 member grower representative group from across regions – meets 4

times p.a. • Annual planning conference

Business model

• Sells to wholesalers and retailers in all export markets• Separates contracts for Coles & Woolworths• Gross returns (after shipping cost) are pooled by grade and distributed

to the pack houses less Avoco 10% fee.• Pack houses pay growers on pooled return, less packing fee.

Avoco

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Benefits

• Scale and market power supplying 75% of Australian exports• Australian buyers unable to play one supplier off against the other• Market information and feedback is delivered back to the growers• Growers benefit from Avoco’s investment in market development• Collaboration on technical issues and industry networking• Excellent returns to growers

Risks

• Loss of supply if growers leave the arrangement• Dispute between the two principal partners resulting in reversion to

competitive market

Avoco:Learnings

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1. The two CEOs from the principal companies have a great working relationship

2. Grower representative board provides shared vision and open communication

3. Gives small growers access to highly professional and experienced sales, marketing and logistics personnel

4. Growers share equally in the gains

5. There is an understanding about “Better results through working together”

AvocoApplications in WA

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1. Suited to a single commodity selling into the same markets

2. Works well to improve returns where two or three dominant marketers compete against each other

3. Suits categories with high volume seasonal windows

G’s GrowersUnited Kingdom

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1. A collective of 19 growers trading as a ‘not for profit’ EU ‘Producer Organisation’ (like our cooperative)

2. G’s Growers has a strategic alliance with a privately-owned, exclusive marketer (G’s Fresh)

3. G’s Growers produce a range of complementary vegetables under long term supply contracts

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Structure & Governance

• A board of directors is selected from grower members• Staff includes CEO, procurement, logistics and technical team• The family who manage the marketing through G’s Fresh are also

members of G’s Growers• Growers share expertise and experience

Business model

• G’s Fresh markets the produce on behalf of G’s Growers for a set 6% fee

• G’s Growers pools all returns by category (from all markets) then pays growers net of commission, packing and handling costs

• Much of the product is sold in retailer home brand – G’s Fresh have their own brands

• Growers commit 100% of their production to the group (with exceptions)

• The alliance has the scale to supply large supermarket home brand contracts

• Service UK, EU (10%) and US markets

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Benefits

• Most of the 19 businesses have grown significantly since the alliance began

• The group is tightly knit and there have been few new members• The main benefit to all is the ability to achieve scale• G’s Fresh are experienced marketers and conduct market research• G’s Growers buy in-puts collectively – labour recruitment is done

centrally by G’s Fresh• G’s Fresh also assists in managing working capital requirements for

growers

Risks

• Loss of member growers• Adding new growers that do not fit the culture or product mix (an organic

grower did not work)

G’s Growers:Learnings

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1. Leadership from the marketing entity G’s Fresh

2. Transparency, accuracy and trust in G’s Fresh

3. Flexibility in applying the rules (e.g. some growers do not buy inputs through the group)

G’s GrowersLearnings for WA

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1. This model works well for marketers of complementary products e.g.

• Hard vegetables

• Green vegetables

• Citrus

2. The model is not dependent on being a cooperative structure as could be applied to a single company or alliance

Avalon GrowersUnited Kingdom

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• Avalon Growers is a grower-owned ‘Producer Organisation’ representing 22 pome fruit growers

• Operates a collective, highly efficient, large scale pack house

• Provides advisory support and services to its members

• Collectively purchase inputs and insurance

• Owns 50% of exclusive marketing company ‘Avalon Produce’

• Turns over 20,000 tonnes of fruit and sales of circa 15 million UK pounds

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Structure & Governance

• Avalon Growers owns 50% of Avalon Produce (marketing organisation) in partnership with a very large grower/marketer

• Avalon Growers is capitalised through grower loans which are repayable on exiting the arrangement

• The board has 5 directors – 4 growers and 1 packer (chair)

• There are common directors on Avalon Produce board

• The ‘PO’ status entitles the organisation to annual grants

• Underwritten by grower loans

Business model

• 3 income sources:

1. Bin rental

2. Fees for advisory services

3. Grant income

• Any profits are re-invested

• Avalon Produce markets the fruit for a 6% percentage fee

• Profits are pooled to growers

• Growers also receive a rebate on their 50% share of the marketing company

• All administration is outsourced to keep operational overheads to a minimum

• Supply several major UK retailers

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Benefits

• Shared pack house facility ensures scale and efficiency• Collectively growers are able to service contracts like Tesco• The cross-ownership of the marketing company ensures supply loyalty

and provides a rebate

• The rule where only 10% of a grower’s fruit can be sold outside the system also locks in supply

Risks

• Removal of the PO grant opportunities when Britain exists EU• A break up of Avalon Growers (unlikely given the superior returns

and rebate)

Avalon Growerslearnings

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1. Strong support for growers with buying discounts, rebates and advisory services

2. A financial commitment to participate - growers received matched funding to buy the assets and have a covenant over them until they are paid down

3. The group are able to access professional marketing services and lock in contracted supply to large retailers like Tesco

Avalon GrowersApplications for WA

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1. A separate, jointly-funded marketing arm removes the historically adversarial nature of this relationship and ensures transparency.

2. The commonly owned pack house model works well where there are economies of scale to be gained from investment in high tech facilities e.g. potatoes, onions, apples, etc.

Critical success factors

Common success factors

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1. Being customer and market led

2. A compelling value proposition for all collaborating parties

3. Having the appropriate business model for their size and needs

4. An appropriate balance of sharing risks and rewards

5. Open and transparent communication

6. Brand-based marketing programs

7. Separation of growing and marketing functions

The key to successful collaboration is an understanding of the greater opportunity, a shared goal, mutual interest and a willingness to commit.

WA Horticultural Update 2018Dr David McKinna & Catherine Wall

August 2018