We're now at the end of October, so your 2014 season is coming to an end. How have things gone for you so far?
LJ: We've had a really good season. Bear in mind that an important context for that is that Chile had terrible frosts, so they only put half the kiwifruit into the market that they normally would, which means that we were supplying into a short market. Also, we supplied only 19m trays of gold, down from 30m trays in 2011, because we are still recovering from the impact of Psa.
In general around the world we found markets were good to us. The European fruit market was tough this year - it was tough for most products - but there was an undersupply of kiwifruit so our green kiwifruit went well. China, Japan, Korea, Taiwan, Hong Kong, Singapore, the whole of southeast Asia was very, very strong. We've had a season characterised by strong demand.
What about the US market?
LJ: The US has been very, very good, particularly for our gold kiwifruit offering. One of the big things happening in our business is that we are transitioning from Hort16a, which has been terribly impacted by Psa, into Gold3, and so this year [we had] 11m trays of Gold3 and 6m trays of Hort16a as the former comes into production and the latter goes out of production.
One of the pleasing things this year is that we had a high dry matter offering of Gold3, which has gone very well, even in Japan which is very taste-sensitive. So what we know is that when that product is delivered at high dry matter it works well.
So, overall, good markets around the world with 70m trays of green kiwifruit, which is the new standard Zespri green volume. In 2011 we had over 80m trays, some people have grafted across from green to gold, and going forward we will see around 67m-70m trays of green which is a very comfortable volume for us, particularly with the growth continuing to come out of southeast Asia and China. Then of course we will continue growing gold volumes into the future.
And you've done this against the background of a pretty strong New Zealand dollar, a weak euro and a relatively weak US dollar?
LJ: Yes, and that's really one of the big stories in the fruit trade, not just for New Zealand. Supplying countries like New Zealand and Chile are getting knocked around from a currency perspective because of the relatively weak US dollar, euro and yen, with the smaller currencies bobbing to the top like corks, which makes it really tough. But because the markets have been strong that's offset a lot of the impact, so the returns for growers have actually been quite good.
We hedge three years out, and our hedging is continuing to erode over time which leaves us exposed to a relatively strong kiwi, in fact, we're at a ten-year high in terms of strength relative to the yen, euro and US dollar, and that's tough on producers around the world.
When you look at the three major consumer markets in the Northern Hemisphere of Asia, Europe and North America, how do you see the five- to ten-year trends generally?
LJ: I think the big story is about growth, particularly out of China but also out of southeast Asia. Europe continues to be very predictable for us - we continue to support the market, there isn't a lot of growth there but it remains an important market for us. Just as when you've got one market growing faster than the other, then what happens is that as we grow, the volume goes disproportionately into those growth markets, and so there is certainly that feeling at the moment.
the other thing that has happened is there has been a rebalancing of global supply and demand, particularly as China has demanded more and more product and is prepared to pay for that product. What we are seeing is a change globally and really what's happening now is that we're seeing, to some extent, the European and US markets react to that and be prepared to pay a little bit more, because otherwise the product will go into Asia - and I think that's happening across the fruit market.
This is also against a background in Europe, generally speaking, where retailers are trying to offer everyday low prices and it's all about discounting, and yet you've got this pull from China which is simply about wanting the fruit and being prepared to pay for it – it must be very difficult to know how to service these markets effectively?
Actually I think we've seen, particularly among the leading retailers in Europe, a different approach being taken. They are saying that they want to present quality in the green grocery section, they want to know that they have security of supply, its about commitment from suppliers for the season, and I think it has really opened up a strong dialogue between the suppliers and the leading retailers.
It also presumably puts rather more power in your hands than you have had for quite a long time?
LJ: Obviously I don't like to talk about power, from my perspective it's about partnership and strategic fit. We represent a quality offering, and what we are seeing is really strong fit with retailers who are looking to put quality produce in front of their consumers. They are looking for predictability – they want to know that the fruit is safe, it's traceable, it's coming in predictable quality and quantity, and that it's going to be served up through the New Zealand season and bridged into the start of the Northern Hemisphere season.
I think what has happened is that the unrelenting focus on price has just rebalanced a little bit, and so the strategic fit, the conversation about where the value is in the offering, has changed from being just about price to being a broader conversation, and that suits suppliers.
Presumably more of the discussion is now about how you can satisfy the customer in Asia, rather than satisfying the consumer in Europe or North America? I know you talk about them equally, but the analysis shows that all the growth seems to be happening in Asia?
LJ: I think that two things are true. One is that consumers around the world are under financial pressure, and they are demanding value. But in the green grocery, they demand quality as a part of value. There is an unrelenting focus on taste, on brix, on delivering consistent quality, I think that's true across all markets.
But, I agree with you that, when the growth is disproportionately in broader Asia – but also in the Middle East, Brazil, which are important markets too – I think inevitably what happens is you end up asking how you can best serve those markets and the needs of those consumers, meaning a lot of the growth focus is on Asia.
that's not that easy though. We talk with great excitement about the growth in Asia, but actually when you look at the Us and European markets they have very mature food distribution systems, cool chain integrity, traceability systems, and that brings us a certain predictability and maturity, while in Asia there is an awful lot of development, so it's all about partner selection, the quality of the infrastructure, the quality of information systems – ensuring that your control processes are robust enough to operate in that environment.
Plus, of course, these markets are unrelenting in terms of the eating quality of the fruit, because they consume a lot of domestic product, and the exported fruit is something that's coming to them as an addition.
In terms of the amount of focus that you as an industry has to devote to satisfying these issues that you have in Asia, does this mean that you have less time to spend thinking about the European or North American markets?
LJ: Inevitably when you've got growth markets, you put resources in those markets. So, for instance, we have strong growth in our team in China, strong growth among our teams in southeast Asia, Brazil, in terms of the number of people, so you've got focus there, you're investing in marketing there, you're building distribution there.
That doesn't mean we do less in North America or less in Europe, but what it is is a bigger world, and that's how I would describe this – and doing business in China is not the same as doing business in Spain, or in Belgium, and that's hugely exciting and challenging. Effectively it's an incremental focus, not a lessening of focus, on Europe and the US and in fact, through the shortage of kiwifruit this year, it's been very important for us to try and continue serving longstanding customers with reliability, because we are all here for the next season, and the season after that.
The demand in Asia can be no bad thing for you because it helps support the price – for as long as Asia is demanding more fruit, that means that the price quotations that you're putting together for your traditional markets in Europe and North America are going to be firmer each year?
LJ: I don't think it's just a fruit and vegetable story, I think that applies to products around the world. There is very strong growth on the demand side, driven by rapidly developing economies, and when people are allocating products or looking around the world for the best places to sell goods, then I think it's a global marketplace, and an increasingly transparent one.
Interestingly, it's not just about the price but it's also about the relationships and so what we're seeing is leading retailers open a dialogue with us, saying that they are in markets in Asia or they are in markets in Europe, they are looking to have a global relationship with us, they understand that may not mean there is a global price because that's not the way that the world works. However what they are looking for is security of supply, and they are looking for assurances that programmes will be supported.
I absolutely take on the point that, there is no doubt, there is a rebalancing of global supply and demand. Exported fruits, or fruit markets in general have been characterised by oversupply. We still see that and will do for some years with volatility of supply and demand, but as often as not product is short than is long, and I think that brings a different balance to the discussion.
What does all this mean for the brand proposition for Zespri? Presumably in Asia there is an opportunity to put the brand at the front of people's minds, whereas in Europe, producer brands really have been put to the back of the store, it's all about supermarket private labels?
LJ: I'm acutely aware of house branding, and of direct supply to the supermarkets. I think what we are seeing now is a focus by leading retailers on wanting to know that they have the best product for the consumers, on wanting to know they have reliable supply of that best product, and that means certain things. It means the supply chains need to be efficient, traceable and the food needs to be safe, and that all the information needs to be available down to producer level.
I think the conversation then about house branded product or it must be at the sharpest price, is being rebalanced. That's not to say those strategies are invalid or are falling away, it's just that other variables are beginning to overtake those things. So I think what we are seeing from retailers is an absolute determination that when consumers walk into the stores, there is going to be a a variety of quality produce available. That means that they will tolerate supplier brands, if they deliver on those requirements.
There is no doubt from the work you do in Asia, the amount of money you invest in putting the Zespri brand forward to consumers and the resulting uplift in sales, that it is surely a story that the retailers in Europe and North America must listen to and consider as a way to grow sales – are they more receptive to that idea?
LJ: Absolutely. I think that one of the things that is transforming the business is that supermarkets can see exactly what's happening with their weekly sales of kiwifruit and their stock turns. They know that when they're stocking a quality product then they are selling more kiwifruit, they are going to see a better stock turn, they'll see better profitability for their shelf space.
What I think people are becoming increasingly aware of is that the fruit doesn't sell itself. It's about how the fruit is presented, how sales are supported, and therefore marketing and presentation can be, and I think should be, part of the value proposition. I think one of the things we try and bring is strong support for those programmes that flow into the stock turn of the product, reducing shrinkage. Again, we are seeing leading formats look at quality in the green grocery area, while the dry goods area is more focused on value. This more sophisticated segmentation serves quality suppliers.
It's very positive for us because, being from New Zealand, we're never going to be the lowest cost supplier, but we can be a high-quality value-added supplier and a really good and predictable partner, so I think that's working well for us.
That must be vitally important to you, because you need to ensure that you maintain your margin for as long as you possibly can?
LJ: Yes, being a producer is not so easy with high-fix costs and lots of risks, and actually for everyone in the fruit supply – retailers, supply chain partners, the growers – predictability is vitally important. Knowing that you're going to have the product on one hand and the markets on the other and that every campaign is going to be a good one. While campaigns are seasonal, they are underpinned by predictability, long-term relationships and professionalism in the fruit trade.
It would be fair today to say that the situation today compared with 10-15 years ago is that it's much more a sellers market than a buyers market. There is the sense that if you are a good producer of top quality products, you've got a really great opportunity to make a good return for your producers in a way that hasn't been around previously.
LJ: I think we've almost been through a cycle. I think if you go back to the early nineties and the eighties, we saw smaller supermarket chains and greengrocers really doing a great job with produce. Then we went through a cycle with a commoditisation approach and a lot of pressure was put on suppliers, there was a standard presentation across the shelves, and increasingly now we are moving decisively out of that period, and when you walk into the supermarkets now it's all about the quality of the presentation and the quality of the produce.
Yes, you've got to hit appropriate price points, because there are points above which the fruit won't move, but once you've got those it's all about the quality and what people are recognising is that when a consumer walks into the green grocery, they will flick their eyes over the price and as long as it's not above a certain level, they will buy on quality. That's why the green grocery is making good margins, perhaps not so much in the dry goods section. It's positive for suppliers, and it brings sustainability for suppliers.
We certainly had a situation five years ago where a lot of suppliers were looking sideways at the business and saying 'how sustainable is this?', they were under tremendous pressure, but I think now there is increased confidence that we are beginning to move out of that phase when people had genuine concerns.
It's an exciting time to be at Zespri?
LJ: It is an exiting time and certainly we've come off the back of a very good season, while looking ahead to some strong growth in our gold business over the next three of four years.
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