Fruit Cakes?

Gareth MorganEconomics

Gareth Morgan, Director of Gareth Morgan Investments

The self flagellation-by kiwifruit growers over the appropriate marketing structures they should employ is little more than a distraction for that industry along its path to peasant status. The saga of the Kiwifruit Marketing Board (KFMB)is an abject lesson in the costs of producers focussing on the wrong ball.

Put simply, the problem for NZ kiwifruit growers is that there are growers of the fruit elsewhere in the world who are prepared to supply the product for a return of 40 cents per tray. For the NZ industry which has its orchard assets priced to support a grower return more akin to $6 per tray, there is clearly a dilemma. That reality it seems has yet to be absorbed by those remaining in the industry.

The fiasco of the secular downward trend in the global kiwifruit price was initially blamed by growers on the free competition amongst kiwifruit exporters that prevailed up until 1988. The industry response was to establish a single desk operation under the auspices of the KFMB. But that response in itself didn’t provide any solution to the global reality of declining kiwifruit prices. The KFMB did develop a strategy however to deal with the “commoditisation” of the industry. That strategy was to impose more stringent quality criteria on fruit accepted for export so that the NZ fruit became distinguished as being of top quality. The presumption was that such a differentiated product would attract a higher price sufficient to generate a higher net return to the NZ growers. That presumption was just wrong.

There are a number of reasons why the strategy was wrong. Firstly the process of more stringent selection imposed markedly higher costs on the growers. With higher fruit rejection the cost per unit of export product rose substantially. Secondly there must have been a view by the KFMB that the price premium that would be attracted would be sufficient to cover the higher costs. But the reality has been that customers have not regarded prime NZ kiwifruit as worth that much of a premium. Simply, the assumption that more stringent quality was value added was not supported by the consumer.

The kiwifruit industry is a case study, not in single desk marketing versus competition, but in successive marketing strategy failures – under both competitive and single desk structures. Failure in the early days to establish an appellation strategy with the name ‘kiwifruit”, has been followed by failed attempts to secure profitability through quality premium. Failure to secure successful downstream processed product niches as the dairy industry has managed, also compound the fruit’s problems. 1992 European fruit market conditions may have been an aberration but the long term outlook for the industry remains extremely poor so long as peasants will supply it for 40 cents per tray. Thrashing around with marketing structures is a distraction – the product isn’t worth it. Lower orchard prices and inevitably a further destruction of orchard capacity will follow.

Fruit Cakes? was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.