Peter Davis is a member of the board of trustees of The Helen Clark Foundation, a non-partisan public policy think tank, but writes here in a personal capacity.
OPINION: The government has announced a series of initiatives which it sees as likely to lift New Zealand’s game on economic growth, including the so-called Fast Track legislation which overrides environmental and other safeguards; plans to loosen investment restrictions under the Overseas Investment Office (OIO); enhancing the investor visa category; encouraging digital nomads; opening up housing and build-to-rent for overseas investors; the recent infrastructure summit; changing procurement rules; and free trade negotiations with India.
A surprising omission is the absence of a strategy for added value to services and products associated with existing industries, particularly in the primary sector. Yet, right on cue – by happy coincidence – Fonterra is starting a series of roadshows with investors promoting the sale of its consumer brand business under the name Mainland Group, accounting in value for about 20% of the company’s total sales.
Fonterra was established in October 2001 following the merger of New Zealand’s two largest dairy cooperatives, despite a counter ruling from the Commerce Commission. One of the claims in its favour was that the new cooperative could become an international champion for the New Zealand dairy industry, building an industry that not only exported commodities but built branded consumer products as well.
For many, then, this roadshow is a “bittersweet” occasion. From its establishment under statute, Fonterra was seen as an opportunity for New Zealand to capture more of the value of its dairy exports. Yet, Fonterra is now selling or spinning off its branded consumer goods channel, concentrating instead on the specialty ingredients it promotes to other businesses for use in their products.
While it might be easy to regard this as a failure of the Fonterra model, does it also say something more broadly about the export prowess and value-add of the primary sector? It was to explore this question that The Helen Clark Foundation last year published a report with NZIER on the issue of adding value in the food and fibre sector, based on both desk reviews, and interviews with industry and sector leaders. The report was launched with the virtual participation of Paul Polman, a visionary former CEO of Unilever which is a consumer goods giant.
While the report identified some worrying trends – such as the fact that New Zealand has the lowest export intensity of 24 smaller OECD countries – it also highlighted a series of industry case studies, with the key success factors, of which three were featured.
These were Zespri SunGold kiwifruit, which developed a disease-resilient variety following the incursion of the bacterial disease PSA in 2010. Kiwi gold is now a top export. This required cooperation with Plant and Food Research, extensive consumer and market testing, and government support, including funding to fight PSA.
The second was Comvita’s mānuka honey. Comvita has fifty years of experience with natural products. It chose not to be in honey as a food business but as a natural product and decided not to compete on price. UMF (Unique Mānuka Factors) certifies quality and provides trust. Comvita has exploited a unique local product and developed a distinctive market.
And thirdly, Beef and Lamb’s Taste Pure Nature, a country-of-origin branding for red meat, including cross-industry coordination and extensive consumer and market testing in eight countries. This has required a consumer focus rather than product push, industry investment via levies, and government backing for research and industry programmes.
Could Mainland be added to this group of New Zealand success stories, based and owned in the country and adding value to its primary sector? Or will the brand businesses instead be sold in a so-called trade sale, likely to overseas interests able to muster the capital and skilled managerial and financial talent able to make a go of it?
Arguably the “best” outcome from a national interest point of view would be a retention of Mainland as a New Zealand business with a listing on NZX. Fonterra could keep a cornerstone holding, in part as a strategic move to ensure it had a foot in two camps – ingredients business and consumer goods – while extending a vote of confidence in the new entity and an invitation to other interests, including retail investors, to commit to the proposition.
Indeed, while the idea of a listing on NZX is very much Fonterra’s, a long-time observer of the sector – Honorary Professor Keith Woodford – suggested something like this many years ago as a solution to Fonterra’s undue reliance on a cooperative structure that both made it hard to raise capital in the way of a standard company and also provided a slightly discordant cultural element, pitting a commodity production orientation against the expertise needed for consumer brand promotion. He called it the dual company model. In the light of Fonterra’s “road show”, he can see merit in a listing, arguing it is a “win-win” for farmers, for Fonterra, and for the wider public and national interest.
It is early days, and Fonterra management are doing the right thing in presenting two clear options, but it has to be in New Zealand’s interests for the Mainland group to remain in the country and be listed on the stock exchange with full political, corporate, and public support.
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