The recent decisions by Heinz Wattie and McCain Foods to close business units follows last year’s closure of Oji’s Kinleith mill. Nobody willingly closes a profitable operation and, in these cases, none of these businesses was performing well enough to escape the axe.
But it is hard to escape the conclusion overseas investors buy a well-known New Zealand business for its brands but then decide after a few years the market is too small, so it is absorbed into a bigger Australian operation. The next step is to run the marketing from across the Tasman and when that doesn’t work close the factory.
People assume these decisions are reached because of excessively high energy prices, but I suspect it is more a question of scale. The business is no longer profitable enough and it requires too much investment to restructure; at the same time, local market size, poor governance and management, inadequate capital expenditure, changing demand patterns, and world events may combine to make closure the easiest option.
The frozen produce category is predicted to experience substantial growth globally over the next six years, driven by the growth of the middle class in China and India, technological innovation and the demand for fresher food. Sales increased by 19% between 2019 and 2025 and are forecast to grow by another 44% by 2032. So why can’t they be sourced and processed here?
It is hard to accept that Wattie’s and McCain’s frozen vegetables will no longer be processed and packed in Hastings where Wattie’s started in 1934 to take advantage of the plentiful local produce. The sad fact is New Zealand is a tiny market at the bottom of the world and without the scale to supply global markets efficiently, while Wattie’s and McCain’s are both owned by international giants driven by growth objectives.
Pulp and paper is a different case, being part of a global market which has experienced huge overcapacity in recent years and is undergoing structural transformation to meet evolving environmental, labour, energy and consumer demand trends.
Closures have occurred across the United States and Europe, so New Zealand is not alone. But in meat, dairy and pulp and paper production scale and access to large markets are essential to efficient plant operation and capital investment in modernisation.
Dairy and red meat have been central pillars of the agricultural sector and New Zealand’s economy for well over a hundred years. In each case the industry has undergone huge restructuring, ownership changes and substantial capital investment. Farmer or grower involvement is a desirable component of a viable agricultural sector, but 100% cooperative ownership poses problems with raising sufficient capital, profit allocation and global strategy development.
The red meat sector has moved on from the days when New Zealand was Britain’s tame farm with British owned meat works. Cooperatives have not ultimately been successful with AFFCO, Silver Fern Farms and Alliance the only survivors under new ownership structures. All of them had an excess of inefficient capacity, designed for an earlier age, but inadequate financial strength to replace it without new capital.
Because of the nature of the dairy industry with a stable seasonal supply pattern, the cooperative ownership structure has proved ideal for most of the sector with a single cooperative replacing many smaller regional dairy companies. This hasn’t necessarily led to innovation, but to the acceptance brand building is not Fonterra’s strength, hence the sale of Mainland to Lactalis.
Innovation has come from smaller dairy companies such as Tatua and a2 Milk which has built a successful business based on a differentiated product that Fonterra decided was too small to be profitable, a similar case to Mainland.
The wine industry has also achieved great success, predominantly with a single grape variety, so it may be premature to claim this will last. However, like dairy and red meat, place of origin or terroir is critical to its popularity. Scale is important with wine, but it can also accommodate a large number of producers although rationalisation has inevitably happened here too.
Apples and kiwifruit have benefited from innovation from new varieties which differentiate them from their competitors. They have also enjoyed coordinated marketing which has succeeded in building a uniform brand with sufficient scale.
Other industries to have achieved global competitiveness are mostly limited to the results of technology where location is less important than vision and innovation such as Fisher and Paykel Healthcare, Xero, Rocket Lab, Gallagher and Halter. To be successful companies like this generally need outside capital and may also have to establish a base offshore, although Gallagher is an exception.
My conclusion is that 100% overseas acquisition of a New Zealand business is generally the first step down a path leading eventually to closure. Notable exceptions to this rule include Japanese owned ANZCO and Chinese owned Westland Milk which have committed long-term owners.
Coincidentally both are owned by Asian corporations which take a much longer view of investments than the North American and European perspective. It is regrettable New Zealand companies often struggle to attract local investment because of a shallow pool of capital or reluctance to take the risk.
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4 Comments
Well if you are right Allan and I think you probably are, then this current high price trend will be another blip. If processors cut back capacity red meat farmers will face uncertain times due to drought etc. So back to the future it is. Lucky most farmers know that good times never last.
The thing is, don't run out and buy crap hill country thinking things have changed and profit is to be made. Fools gold. Nothing has changed, make the most of it while you can if currently farming is your game.
Interesting read thanks Alan.
I do take issue with your take on cooperatives though. Yes, Fonterra and Zespri are successful. Why haven't the others been successful?
My explanation for the success differences lies in the marketing of NZ product. Although we had several cooperative meat companies, each company marketed it's product. Not to a domestic market, but into the international market. And over the last 40 or so years, the buyers of NZ product have become fewer and bigger with significantly expanded market power. Multiple exporters supplying to those players have little market power. And there is likely multiple NZ exporters knocking on the same buyers door, each trying to sell pretty much the same product. I.e. Kiwi exporter competing against kiwi exporter to shift product to the same buyer. A poor negotiating position.
Then NZ has a proliferation of processing plants, the older of which have legacy over capacity. This leads to procurement competition to keep plants operating and at least contributing to overhead costs, even if not profitable, at least meeting some dead weight cost - a slow death. Resulting in the NZ meat industry being squeezed at both ends - higher than desirable procurement cost at supply end and weak seller at the market end. Essentially the same dynamic that lead to the near extermination of the Kiwifruit industry in the 90s.
The current structure of the meat industry has a great deal of duplication in marketing costs and splintered scale for negotiating shipping and other inventory management costs. The perishability profile has changed with the move from frozen carcass export to a much greater portion sold chilled. I suggest that perishabilty is now closer to Kiwifruit, whereas it used to be more akin to canned product. The window to sell meat has significantly shortened. This further weakens the NZ seller negotiating position.
That's all well and good to identify the woes the meat industry operates under. That's not helpful moving forward, other than awareness of the deficiencies.
What's the solution look like? The following is pretty radical but it is not new. The meat industry has been here before.
My suggestion is re-establish a NZ meat Marketing Authority/Board but this time with statutory single desk export control. Model that on Zespri, with MEATNZ (for want of a better name) taking control of the product at point of export. MEATNZ would have similar powers to Zespri in product specification, compliance assurance, etc.
I'm under no delusion that this would be an easy, uncontested transition. But it is important to recognise that no statutory single desk exporter has been established without fierce opposition from vested interests. It takes a visionary and gutsy government along with similar qualities in industry leaders to get it established. But it can be done, if the leadership steps up.
Using AI to answer NZ ranking in total red meat production in 2023, it spat out 19th at 883 thousand tonnes against Brazil, at 12.6 million tonnes. When asked ranking for red meat export NZ came in 6th at 675 thousand tonnes, against Brazil in #1 spot at 3,750 thousand tonnes.
No doubt about it, Brazil is a big read meat producer and NZ is a relative minnow in gross production terms.
BUT, Brazil has a very large domestic market. It's exports in terms of tonnage dwarf NZ yet only amount to 30% of total production. It is difficult to get precise figures of the split tonnage for NZ, between domestic consumption and export of NZ grown red meat but I expect it it is not more that 15% of total production consumed in the domestic market with 85% or more exported. And therein lies an important dynamic difference between the biggest red meat producers and New Zealand.
In a nutshell, NZ consumes it's EXPORT market surplus, domestically. Brazil exports its DOMESTIC market surplus.
Arguably, the strongest competition factors that affect profitability of the Brazilian red meat industry are domestic market competition. Whereas for the NZ red meat industry the strongest competitive factors affecting profitability are global market competition.
NZ must recognise this fundamental difference and structure the NZ red meat sector to gain best competitive advantage in the global market. Dairy does it. Kiwifruit does it. Pipfruit industry did it until vested interests torpedoed it.
The biggest problem I see with your thoughts Lou is the single desk buyer. Processors are unlikely to invest without control of marketing.
What you have outlined has been talked about for many years. Where it has to start is with the producer ie farmer, as in garanteed supply and catchment areas. Sending stock all over the country to be killed is a distortion.
It would lead to flatline pricing with topups at year end, similar to Fonterra etc. All farmers would receive the same price regardless of their scale of production. I can see a lot of backlash from big farmers with their favorable payments.
Agreed Hans. It would not be easy. And farmers, at the bottom of the value chain have to take whatever they can get to try and maintain profitability under the current regime. Really not too far removed from peasantry. But asset (and debt) rich peasant which certainly does not guarantee profitability. The survival mode that farmers inhabit and, have for a long time now, means it is pragmatically very challenging to envisage a different way, that would increase their market power. And in a manner that does not necessarily increase domestic consumer prices. That would still reside within the supermarket duopoly.
That adage definition of a farmer: "buys retail, sells wholesale and pays the cartage both ways" absolutely applies to the meat, wool and pipfruit sectors. Not so dairy and kiwifruit.
Any farmers hoping to regain the current, added fuel cost burden are whistling in the breeze. That is not how it works. They will absorb it, some how, because they have no power whatsoever to pass cost the only direction available to them - up the value chain. While those further up the chain have some latitude to pass up or down, additional cost.
Kiwifruit faced enormous challenges from vested interstate to gain their single desk exporter status. That's why, unlike the old Apple and pears marketing board (NZAPMB) Zespri control of the sales starts at point of export. The NZAPMB initially had total control of crop sales both domestic and export. For that privilege, it had to ensure affordable supply to the domestic market. From memory, American red delicious appeared in NZ market mid December when domestic fruit supply sold out. Storage tech was a bit more basic back then. Remember those waxed US red delicious? Looked soon delectable...but internawere like chaff, flowery as.
And with dairy pre Fonterra. Kiwi Cooperative Dairies and NZ Dairy Group went eye to eye to gain dominance of the NZ industry. In that battle, some might even say Fonterra bailed out Kiwi. Tui suppliers were very disenchanted after the sale to Kiwi,especially after investing in the new, state of the art factory in Pahiatua. But those enmities have been consigned to history on the overall success of Fonterra (even though it has been a roller coaster) - long vision, doing the basics well, regaining its raison d'etre to maximise milk value back to the farmer shareholder.
The majority of NZ meat companies have that same raison d'etre, its just for most, those shareholders are not farmers. Procurement at least sustainable cost (for the company) to secure supply and sell at highest cost in the market. But then they struggle because there are too many NZ exporters peddling basically the same product to a small panel of very big international buyers.
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