Keith Woodford says New Zealand businesses must act together to get the huge potential benefits from online marketing of food

Keith Woodford says New Zealand businesses must act together to get the huge potential benefits from online marketing of food

By Keith Woodford*

Recently I was asked to address the New Zealand Institute of Agricultural and Horticultural Science on ‘climbing the value chain’.  The address had two parts: first came a focus on understanding our consumers; second came some specific changes required down on the farm.

In this article, I focus on the first part. Arguably, it is because we are not focusing on our consumers that we are struggling so much to climb out of the commodity world. Specifically, we have to focus on China because that is where most of our future consumers live. 

Now to many people that statement about China will be seen as very confronting, and it is a statement that many people will want to refute. But in the long run we do have to confront reality.

Consider the counterfactual. Europe and the USA do not need our food. And they have considerable potential to increase their own production if necessary. In Japan, the population is now declining, at about 300,000 people per annum, but very soon the annual decline will be one million people. Over the next fifty years, the Japanese population will decline from 126 million to about 80 million or maybe even less.

In many other parts of the world, particularly India and Africa, populations are still increasing rapidly, but they do not have the wealth to buy our food. That will not change in the foreseeable future.

I expect that, in relation to India, I will be challenged on the above points. But the facts are that Indian living standards,  measured as GDP per capita, and using exchange rates as the valid basis for comparison, are less than a quarter those of China.  India remains more than 20 years behind China and currently there is no evidence of progress towards a free trade agreement.

So the hard reality is that our future is linked inextricably to China. Of course our future is not only linked to China. There will be ongoing opportunities in Hong Kong, Taiwan, Singapore, Korea, Thailand, Malaysia, and Vietnam.  And we will also find some continuing markets in Japan despite the demographics. 

Indonesia may also become important. However, their population is less than one fifth that of China, and the Indonesian economy is less than 10 percent the size of the Chinese economy. 

So yes, it is a big world. We will indeed find niches in many places, with most of these in Asia. But without China, our future is very constrained. Accordingly, we need to understand as much as we can about China, and what it is that makes Chinese consumers tick.

Actually, I don’t think anyone really understands China. It is too big and too diverse. Almost any statement that one makes, it is possible to find evidence for the opposite.  Nevertheless, there are some things we can say as generalisations that will hold most of the time.

China’s journey

China is on a huge journey from a rural to an urban society. The urban population grows at about 13 million each year – that is like a city of Christchurch being built every ten days.  The country is now criss-crossed by four and six lane highways. The trains travel at 300 km per hour. The China of 2015 is very different to the China of even 2010, with wealth up nearly 50 percent in those five years.

Of course there are still opposites. Less than two months ago, I was sitting together with colleagues in a tent with Tibetan yak herders, who still live a semi nomadic lifestyle, with a diet almost exclusively of meat and milk products. For those of us who are interested in grassland sustainability and how that fits into global sustainability, those environments are very important. But that is not the China where we are going to sell our value-add products.

Many modern Chinese are hardwired for materialism.  They want to buy, and buy, and buy. But they also want to be sure that what they are getting is genuine. Experience has taught them that trust should not be given lightly.

In relation to food, they certainly want food that is safe. But they also want food which is of genuine provenance; it must be from where it says it is. And once again, experience has taught them that trust should not be given lightly. 

As Kiwis, we buy our food at supermarkets. But that is not quite how it works in China.  China has its supermarkets – probably more than 200,000 of them. But for Kiwis to manage the logistics of supplying the Chinese supermarket jungle is a step too far.

For most Chinese people, getting to the supermarket, and then lugging the goods home, is indeed many steps too far. So increasingly they buy online.

Accordingly, I want to make one very important generic point: the way for New Zealand agri-food companies to get to Chinese consumers is through online marketing. And that has to be with an ‘NZ Inc’ approach.

When people hear me say this, they typically say they agree. But most of the time they are thinking about individual companies going out and doing their individual thing, with self-proclamations as to how they are part of ‘clean and green’ New Zealand. Well, that is not going to work.

Aligning with the Chinese online world

To align the food needs and wants of Chinese consumers to New Zealand products, it is essential that Chinese consumers can go to one site where they know everything comes from New Zealand, and where all products are quality assured by an official organisation.  And they need to be able to purchase everything into the one online cart, with their purchases all arriving together at their doorstep within 24 hours. 

Currently, lots of New Zealand companies are trying to go online but doing it by themselves or with very limited partners. As with supermarkets, online marketing is another jungle, which now contains millions of products.  So most companies going it alone are going to fail. Nothing is surer.  With very few exceptions, they are simply not big enough to make it by themselves. 

Currently, there are about 26 million Chinese consumers who fits the key demographic for New Zealand food. That may not sound much out of a total Chinese population now approaching 1.4 billion, but it is more than enough for us to start with. And of course that number is growing rapidly as more and more Chinese climb into the demographic that has lots of disposable money.

About 90 percent of these ‘disposable income’ people currently live either in the Beijing region, or the Shanghai region, or around the Pearl Delta inland from Hong Kong. They are the same people who are traveling to New Zealand as tourists. 

This year more than 300,000 Chinese will visit New Zealand. In all likelihood that is going to rapidly increase to over half a million a year in the very near future. These people, and their social networks are exactly the same people that we need to be targeting for value-added New Zealand goods.

The key part of the concept that I am currently finding hard to communicate to fellow Kiwis is that there has to be one online site where Chinese can buy all of their guaranteed New Zealand-origin food, and then it has to be delivered to them in one big basket within 24 hours. There is no other way to manage the online jungle.

Managing and integrating the logistics from New Zealand to China is a key part of the structure.  Then there has to be a distribution centre in each Chinese region where we are aiming to sell.  Initially it will need to be Beijing, Shanghai and either Shenzhen or Guangzhou (in the Pearl Delta), but over time expanding much further.   In all, there are more than 150 Chinese cities each with more than a million people.

Assuming we can get this ‘NZ Inc’ act together, then what are the opportunities for New Zealand?  Essentially, those opportunities relate to anything that we grow and consume ourselves, and which we can put into consumer packs here in New Zealand. It can be wine, or it can be fruit. Or it can be meat or dairy products. Or it can be biscuits and jams or a thousand other products.   In aggregate, we are talking about billions of dollars.

Moving from talk to walk

To really make the system hum, there has to be a public-private partnership in the establishment phase. The Government does not necessarily have to be a long term shareholder, but without the Government there at the start then whatever happens will only be a pale shadow of what could have been.  This is not something that can happen off a shoestring budget; it is actually a very big project.

Unfortunately, there is a big chance that the integrated ‘NZ Inc’ approach of ‘food baskets from down under’ is not going to happen. Or if it does happen, it will be put together by Chinese rather than New Zealand entrepreneurs. And in that case they will legitimately take the entrepreneurial profits.

I have now been pushing the integrated ‘NZ Inc’ approach to ‘food baskets from down under’ for more than four years, ever since some initial work I did for New Zealand Trade and Enterprise (NZTE) back in 2011.  There is lots of interest, and a few companies are trying to work together in regard to managing their China logistics. But in terms of the big picture, and relative to the prospects, we have not yet got to the action phase. It seems that ‘everyone working together’ is not the way we usually do things in New Zealand.

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Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. His archived writings are available at http://keithwoodford.wordpress.com

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A single point, quality-guaranteed, 'NZ Inc', food portal is an extreme of commercial naivety, worthy of only of Eastern European thinking of the 1950s and 60s.

Why would any New Zealand business producing high-value, environmentally-considerate, food products want to be associated with New Zealand's environmentally-poisonous, low-value, commodity dairy sector?

The fact is, New Zealand's forward-looking, environmentally responsible businesses in foods and other product sectors are in the position of needing to radically distinguish themselves from a national agricultural sector mired in accelerating environmental degradation.

Premium product provenance rests on a host of environmental, social and professional values, almost none of which can be claimed by the New Zealand dairy industry.

The crucial issue is to distinguish those New Zealand products which strive for and achieve genuine premium values, and thus promise the greatest economic, environmental and social benefits to the country, not bundle them together with volumes of the second-rate.

I used to have the most pristine stream running through my farm, not anymore, now our stream is a mess due to some large feedlots further up. Regional Council formed a working group with some the worst offenders running it.
Doesn't look like a battle I can win as the council is firmly in the farmers camp.
Looks like it would take 15 years to clean up if they stopped the abuse today and thats not going to happen. Perhaps they should have user polluter pays, that would be an overnight instant fix.

That would sooooo piss me off. If you want to take an action - happy to help/look at it from a regulatory point of view. I can understand perhaps why you would not bother - this is happening all over NZ however. People just can't be bothered fighting with Regional Council's that are not enforcing the rules they set themselves.

Hey andrewj - on the subject of government-sponsored/facilitated irrigation:

http://www.stuff.co.nz/business/farming/agribusiness/73058496/the-alien-...

Aj - just to clarify - those feedlots are beef feedlots not dairy?
Environment Southland have put out a draft Plan for feedback (as opposed to formal submissions and notifying the Plan) and have suggested that ALL stock be fenced out of waterways. Hasn't gone down too well with non dairy farmers. Have to give ES credit - they have taken a draft Plan out for public consultation - no other regional council has done that before.

What a lot of people don't realise is that at nutrient leach rates (that is excess nutrients) of 36 for dairy, 12 for sheep and 4 for forestry - 300ha sheep farm, 900ha forestry and 100ha dairy all leach the same total excess (3600kg) nutrients in to a receiving waterway. Add beef/dairy grazing in to a sheep farm and their rates can be not far behind dairy. Regional Councils that have concerned themselves only with dairy when dairy may not be the predominant land use in the region, have their heads buried firmly in the sand.

CO, up the stream it's all beef, however one farm started to convert. Large numbers of 2yr beef cattle on feedlots on the river bed. Problem isn't going away.

Wasn't this one of the claimed benefits when they set up Fonterra. They certainly failed badly on that one. When you look around at the NZ dairy companies that are succeeding further up the value chain, it seems to be all the other smaller players ie everybody apart from Fonterra. I always thought that the concept of Fonterra was flawed; it was like the Japanese amalgamating all their car makers. Would that work? Pretty unlikely, they would become cumbersome, bureaucratic and loose any creativity and market sensitivity. Pretty much sums up Fonterra.

I think that Fonterra has enabled the scale necessary for the co-op to develop its markets. Fonterra hires some dynamic individuals in some countries who do their best to operate as a business concern outside the corporate behemoth that it appears to be in NZ.

I'm not sure I agree with the "one stop" information, purchasing online platform for the Chinese market. Realistically, what proportion of consumers go online to verify the quality of the dairy they consume? Wouldn't it be better to be able to win over the consumer at POS or Moment of Truth? I would think that branding is the best way to communicate quality to the consumer, which means that quality is verified at the most appropriate touch point, which could be a combination of different media.

If someone wants to open an online shop selling "all things NZ", that sounds fantastic, but what relevance is it to the Chinese consumer? Is someone going to buy UHT or cheese online? If they are surely they will want it bundled with other consumer products, therefore the barriers to online shopping
exist unless Chinese are really that passionate about NZ products or the categories.

what proportion of consumers go online to verify the quality

not to verify, but to purchase (from yesterday re local bias)....
as a reader writes:

............ I just want to add some personal experience as a foreigner living in China. It is 4pm in the afternoon and my wife has received already few deliveries from Taobao. In my office (20 people) the door constantly rings with deliveries. I estimate that each person receives on average at least 1-2 deliveries per day from taobao. I don't really know how to explain it - Taobao is so pervasively embedded in people's everyday life and shopping habits that it is difficult to believe unless you experience it.

When my family spend summer back in the US, we never shop on Amazon as much as we shop on Taobao. We buy something on Amazon perhaps once a week I would say. Ok, twice. But here we buy something on Taobao EVERY DAY. And normally multiple purchase every day. I (nor anyone I know) ever goes to a mall to buy something. The sheer size of cities makes it so much more convenient to get your shopping done on Taobao that it makes no sense to do otherwise.

Regarding Alipay, it is widely used not just to buy items on taobao. I give you an example - today I purchase some coffee capsules from Nespresso. Alipay is the payment system. Very few commerce sites in China ask for credit card numbers (penetration is still low). Everyone asks for your Alipay login. So I would not be surprised if a significant amount of transactions on Alipay has nothing to do with Alibaba core business.

Regarding logistic during single day. Again, it is difficult to describe. I will give you some anecdotal evidence. There are two stores near my office - neighborhood-size logistic centre (third party. There are several logistic companies and yes, Alibaba owns stake in the largest if I am not mistaken). When you see the word logistic center don't think of the super massive infrastructure that Amazon operates. Sometimes there are multiple centers servicing just a neighborhood - a-la mom and pop. As a cycle to work, these centers are normally closed (early in the morning) and if I stroll by during the day, they are busy but nothing strange to really notice.

During Single Day - oh man. It is incredible. The packages spill out of the store, on the sidewalk and occupy part of the street disrupting traffic. It is a madhouse at all time of the day and nite - hundreds of people coming and going. Delivery men stacking up their bicycles and scooters to the brim. It is hard to believe. And indeed delivery times lengthen a bit. normally you get something from tabao within 24h. No matter where the seller is in China. It is freaking efficient. I don't know how it is done. During Single Day, I think deliveries lengthen to 48h or 72h. And yes - taobao is predominantly an infrastructure where each seller runs its own business. .....

http://brontecapital.blogspot.com.au/2015/09/job-interview-questions-siz...

now compare this with what is going on in Oz (CER, the trade agreement that should be flying...) - say cheese :(

Woolworths could recoup some of the cost of its $500 million loyalty program by asking suppliers to fund customer rewards and by trimming promotional spending.

Woolworths has not ruled out tapping suppliers to contribute to the new program, which offers reward card holders discounts or rewards averaging 15 per cent on about 500 food, grocery and liquor products.

"We are however very confident this is going to be a very attractive vehicle for suppliers to promote their product," Mr Banducci said. "In the future if they wish to participate we can certainly look at how that works for them."

Suppliers said they had not been yet been contacted by Woolworths about the new program, which kicks off on Wednesday with a multi-million marketing campaign and a mail-out of nine million Woolworths Rewards cards to existing Everyday Rewards cardholders.

However, one major supplier said it would be "out of character for Woolworths to fund the whole thing themselves."

and readers write...
.....A couple of reasons that Woolies may be losing customers could be that they replace products with their own inferior supposed 'select' brand. Their fruit and vegetables don't last much longer than the trip home. Most of their products are brought in from overseas and Australian products have almost disappeared from the shelves, there are many more reasons and their assumption that just reducing prices will solve their problems is not accurate and possibly doomed to fail.

and
Nothing will ever make me give Woolworths an inch of business. They have proven to be poor corporate citizens for many, many years both as supplier and customer. I worked for an outsourcing company that provided services for Woolworths and they were horrible to deal with, They were also universally despised by all in the outsourcing company. I now prefer to pay higher prices than ever set foot in a Woolworths establishment

Read more: http://www.smh.com.au/business/retail/woolworths-loyalty-program-to-cost...
Follow us: @smh on Twitter | sydneymorningherald on Facebook

so in shifting branded goods to reach the hands and the hearts of paying consumers, two very big, but very different battles to wage.

J.C., the idea of consumers 'verifying the quality' of New Zealand products doesn't have sufficient meaning beyond the most basic reassurance. Quality at this level of common verification is a standard no higher than 'achieved' in NCEA. The fact is, quality comprises a spectrum of issues and values, reaching from achieved to excellence - or from bog standard commodity to highly differentiated, premium, added value.

The inability to grasp these measures of quality infects New Zealand agribusiness thinking to an alarming degree - and to the increasing detriment of the industry sector and the country.

Professor Woodford, above, imagines 'all products [being] quality assured by an official organisation'. Quality for the New Zealand dairy industry appears to mean no more than ensuring the products are fit for human consumption. Do we really imagine brand-owners in wines, honeys, oils, fruits, condiments, grains, organics, etc, being satisfied with the basic level of quality assurance available to Fonterra or the general dairy sector?

For other companies and their products - and, crucially, for premium consumers - quality is a matter of values. In agricultural sectors, these values include such issues as carbon footprint, standards of animal husbandry, soil care, water use, employee and community responsibility, antibiotic use, etc.

The inability of the New Zealand dairy industry and its advisers to get to grips with these differentiated quality issues keeps it firmly in a low-value, low horizon, low common denominator, commodity wasteland.

Moreover, the environmental damage consequent on this thinking is now a tightening straitjacket on every business seeking to add value within the New Zealand environment. It is also a grave constraint on our future national economic well-being.

Oh I agree to you to a large extent and I understand the impact that consumers put on quality. The prof has good reason to believe that official endorsement of a product's quality is important, which is fundamentally no different to a Western consumer. What I was trying to say is that a don't believe a centralized, industry- or govt-led information source is a single solution.

And also I think you need to be careful about the emotional gratification that a Chinese consumer places on NZ food products. Do you really think that they consider the environmental impacts in a country that most have never been to when they consider the product? That's a whole different argument and I'm not convinced that Chinese consumers would reject the product based on that or even go out of their way to verify it.

J.C., official endorsement of a product's quality can only go so far as to say it's safe to eat. This doesn't come close to fulfilling any premium or added value positioning (moving up the value chain), which is what the Professor's notions are hoping for.

Many or most Chinese consumers may pay little or no attention to the environmental impacts of food production (though consciousness of poisoned land is fast increasing there). Does that mean we shouldn't? Should we base our national environmental strategies on merely satisfying the ignorant and uninformed? Should we abandon any hope of moving out of a commodity economy - of achieving premium brand positioning? 'What sort of first world nation - bar New Zealand - could countenance that?

And when the environment is truly degraded - and we can point to no respectable fresh water standards - then what? At that point, brand-owners involved in added value food production will need to head offshore.

25% of Fonterra's consumer sales in China are on line.

SAI Platform is the global initiative helping food and drink companies to achieve sustainable production and sourcing of agricultural raw materials. Fonterra is one of over 50 global members who share, at a precompetitive level, knowledge and initiatives to support the implementation of sustainable agriculture practices.

http://www.saiplatform.org/

And at home:
http://www.fonterra.com/global/en/sustainability+platform/sustainable+da...

CO, yes, I'm aware of these initiatives. But these are fingers in a disintegrating dyke. We can go on deluding ourselves and attempting to deceive others about our clean, green land and practices, about sustainability in dairying, responsible environmental management, amelioration of negative land-use effects, etc, but every bit of data tells a different story - one of extending and accelerating deterioration - : in fresh water quality, in endangered and disappearing flora and fauna, animal husbandry practices, compacted and poisoned soils, etc.

New Zealand is fast becoming steeply adverse territory for environmentally responsible businesses and added-value agri-related brands. The Professor's thesis that we'd do best to lump everything together is commodity thinking at its most basic - which is why we have the problems we do.

I cannot see any reference to 25% of consumer sales being online. I assume this is Fonterra Brands?

JC It was a comment made at a farmer meeting. My notes don't say which products make up the mix but I know they sell Kids milk and UHT on line. There may be others.

Well there is cheese involved here, and not just script.

https://www.fonterra.com/au/en/our+products/our+brands/bega+cheese

Yes, I guess I agree with you that instilling values throughout the chain is ultimately valuable to the consumer brand. But back to my original point, I'm not convinced that a centralized online source is the single key at the consumer level, but this could be different throughout the value chain.

BTW, I am aware that Fonterra milk powder is occasionally turned away from dairy manufacturers in Japan such as Meiji as it doesn't meet the required standards. This milk powder is shipped on to markets where it does meet required standards.

Many of the above comments would seem to be off-topic from the original article. However, as a generic comment, when working out strategies for China, it is important not to assume New Zealand perspectives based on NZ experiences . Chinese consumers show by their revealed preferences and behaviours (i.e. how they act, not just what they say) that they are not particularly environmentally focused, but they are very concerned about both food safety and food provenance, and that they trust foreign manufactured foods and foreign regulatory systems rather than their own. Also, for most people it is much easier to buy online than to go to a supermarket. There are of course many other countries that are competing with NZ and we are all trying to make ourselves visible. In that jungle, there is no hope for most NZ firms to succeed by themselves - they are far too small.
Keith Woodford

Yes Keith I agree with you. I am involved in consumer insights in the Asia region, including China and Vietnam. Food safety is a key issue, which extends right down to package copy and communications. I once did a study on an American confectionary brand that had high likeability and purchase intent among consumers,but failed dismally when shown with packaging indicating "Made in China." I am very interested in the claimed proportion of online shopping, particularly for food and dairy.

I noticed in Vietnam that UHT market is saturated with foreign brands, all competing with Vinamilk and other local brands. It seems that many Australian and European brands have entered the market recently. It appears that Dutch Lady has strong market share whereas the Fonterra brands have limited distribution and are priced much higher.

JC, I do not have accurate data about online purchases for China at hand. My recollection is that for infant formula it is now about 40 percent (and climbing). As for European UHT sales, there is no doubt their market share has been increasing.
You mention Vietnam. It is some years since I was in Vietnam but Dutch Lady has been prominent for quite some time. I happen to have in front of me some stats for Vinamilk - it's market share of drinking milk products (wet and dry) has increased from 24.9% in 2005 to 44.1% in 2014. In the same period, Fonterra's market share declined from 2.4% to 2%..
During this same period in Singapore, Meiji ( from Japan) increased its market share from 9.2% to 16.3% whereas Fonterra's market share declined from 9.4% to 7.7%.
Fonterra's market share has also gone backwards in the Philippines and Thailand, However, in Indonesia market share has increased modestly.
Lots to ponder on there!