The New Zealand Exporter's Quest for Value. Is it a Pearl in the Marketing?

If you’re lucky enough to be on the right side of the economic equation in New Zealand, the world is your oyster, but if you aren’t, living the dream remains just that, a dream.??The charts below tell the story.??It may come as a surprise to many, but the news relating to low levels of productivity in New Zealand is not new. In fact, poor productivity appears to be endemic.??

Low productivity has pervasive and often subliminal impacts on people’s wellbeing. These outcomes seep into everyday life and into the corners of underprivileged society making it harder for many to make ends meet. For many, the opportunity to escape can be best be described as marginal. In these communities, many end up leading an unfulfilled existence. In such a situation it is challenging for those struggling to positively contribute to society. Once locked in, the disadvantages that ensue from poverty can transcend generations.?

Acknowledging that such a thing is actually happening in a country like New Zealand is hard. New Zealand has gone from being a world-beater to being beaten by much of the developed world in terms of productivity. Why does it matter so much? It matters because increased well-being is directly derived from the country being successful.?

GDP growth is considered by most to be the ‘gold standard’ economic performance indicator. GDP growth can come from the simple mechanical increase in productivity (widgets manufactured per paid hour) however, GDP growth can also come from productivity increases based on value creation and even more critically value capture (the same number of widgets manufactured per paid hour, but with a greater value per widget). New Zealand has made advances in the former but has actually lost ground in the latter route to higher GDP and greater well-being.??What’s the point of being the best producers in the world if the prices secured for the production output are not in line with the inputs? The effort should equal the reward should it not? It begs the question: why isn’t more value captured?

In 2011 Sir Paul Callaghan, outlined his vision for an ideal New Zealand economic scenario. It was one where New Zealand got off the grass, diversified, and made the most of its specific capabilities. Sir Paul stated,?“We are good, at what we are good at, and we better be prepared to be good, at some pretty weird stuff.”?New Zealand is a country that relies heavily on its exporting prowess, producing a range of commodity products to earn its living. This was Sir Paul’s point. Such a strong commodity orientation comes with risk (financial, environmental, & social) and limitations, particularly regarding growth.?

Current barriers to economic growth based on value-adding within New Zealand include a lack of diversification, an overreliance on China, and exposure from commodity trading as a price taker. The key term here is ‘price taker’. Commodity trading systems favour enterprises at the ‘top’ end of the value chain. The power they extract by controlling the portal to customers enables them to control the price that they pay to suppliers such as New Zealand.??It is unsurprising that the price that such buyers set is normally as low as that supplier can bear and yet continue to supply the commodity.??

It would also appear that many New Zealand exporters have accepted the long-term rules of this particular game. For example, New Zealand mince (ordinary ground beef) can retail for NZD $51.55 per kilogram in the US when the price paid to farmers in this country is sitting around NZD $6.00 per kilogram. That suggests 90% of the value is accrued beyond the farm gate, and beyond the borders of our society.?

The purely transactional nature of commodity trading, and this country’s broad acceptance of the price-taker status quo suppresses the design and implementation of marketing systems that would produce better economic outcomes for New Zealand. However, the focus of our major exporters is rarely on marketing as a comprehensive end-to-end system. Many of our major exporters have little if any significant long-term presence in their major export markets. This is proving to be an expensive oversight. The key questions for management to ask and answer are: Does the organisation really understand the marketing and distribution systems within the markets that it operates in? This is an important question because value-adding requires good intelligence and a system that converts that intelligence into value-added products.??

This country has pretty much squeezed the straight productivity lemon dry on the farms.??Any further increases will be small, and regulation in response to over intensification (straight farm productivity taken too far) may actually reverse productivity of this nature in coming years.??Therefore, the only avenue to increased productivity in the future for this country is the value-added/value capture route in our export markets.??This is the ‘smarter’, versus ‘harder’, alternative. Unfortunately, if the choice is taken by our exporters is ‘harder’, then the progression to poverty is accelerated.

Arguably, many exporters believe they do understand the value chains they operate in, but do they? Is it possible that ‘understanding’ means they can see where they are not making any money? Awareness is not necessarily a strategy to deal with such a challenge either. It requires action. Unfortunately, a deep dive into many export marketing systems nearly always reveals unsurprising insights and uncomfortable truths. Many commodity players believe telling a better story is a key part of the answer to improving performance and sure, a great narrative is important.?

However, at the same time, in many situations, particularly where results remain poor, enterprises may not have drilled down deep enough. For example, in the red meat sector, processing company’s approaches may prevent-inhibit-dilute the ‘real’ story of the farmer from reaching the consumer. How does a story escape from a container sitting on the wharf in an export destination, to a premium consumer? In place of genuine farmer-to-consumer representation, curated stories are often herded together to form a highly orchestrated narrative. In this way, an individual farmer’s effort is effectively homogenised. Is this what premium red meat consumers want? Not according to all the research.?

“Our understanding of our consumers has never been clearer. Consumers are increasingly anxious about food production values and environmental, animal welfare and health concerns are driving their food choices. With greater public scrutiny 'industrial' food production, consumers want meat raised as nature intended – natural, grass-fed, with integrity and respect, and with little intervention. New Zealand is well placed to meet that need.”?

Beef & Lamb New Zealand (2018)

From a marketing systems perspective, ‘corrupted’ information flows can unbalance the system. This can contribute to power asymmetry, weaken brands, and create downward pressure on pricing. This is because system participants in such business models are restricted or deprived from accessing the information needed to create and capture more value. These days, consumers, particularly the premium consumers New Zealand firms strive to secure, want to hear the real story. Authenticity is what they will pay up for. Understanding the technical nuances of this value creation and capture dynamic has a direct relationship with productivity too. In the commodity businesses, the strong focus is on the sale of product to the intermediary. This is unfortunate because as one of my learned colleagues suggested,?“This is the point where most of the value sails off into the sunset.”?

As figure 1.0 below illustrates, New Zealand has been clinging to minimal economic growth through the sheer force of its people’s willpower. New Zealanders have worked longer and harder than most of their counterparts in similar OECD countries. The solution to a nation’s prosperity is often tied to how its leaders and their economists think about the relationship between GDP growth and productivity. The usual focus on growth for growth’s sake represents flawed thinking and has proven to be short-sighted right around the world. The durability of strategy is down to the short-term political expediency demonstrated by most governments. It should come as no surprise to anyone that a government of the day wants to survive beyond the next election cycle. If reporting strong GDP growth helps achieve the objective of retaining power, then so be it.?

The cumulative failure of successive New Zealand governments to effectively grapple with being locked into the commodity space over many decades has amplified the problem. The cans have been continually kicked down the road, and now they have piled up. Dealing with them will be difficult, and doing so, will not win many votes from those doing well in the centre. The current situation in New Zealand is hardly a vote winning match made in heaven. The first-world aspirations promoted by politicians are becoming illusory for many.?

Fig 1.0?New Zealanders work longer and harder than most OECD countries and produce less than most.?Source: (2021) NZ Productivity Commission.

Governments of the day have also without exception, demonstrated a strong tendency to favour investing in continued GDP growth strategies over investing in marketing, which encompasses innovation, which has strong links to increasing productivity. New Zealand government policy favours output over value. I can almost feel the heat, fair enough, but that is my view. If the government favoured value, we would see very different strategies emanating from the Beehive and policy makers. Growth for growth’s sake creates all sorts of negative consequences, particularly in a world that has exhausted its natural resources. The current industrial optimisation mindset is pushing the boundaries of growth beyond the limits of the planet to deliver. Growth per se, has failed. Sadly, growth by default, particularly in the commodity space further embeds low productivity. It is lose, lose, lose. The red meat example above supports this argument. Are logs any different? Dairy? Seafood? Pick one.?

The problem with enterprises believing more growth will solve their problems, is the strategies they develop are usually aimed at achieving, wait for it…more growth, and that becomes the flawed strategy that is implemented. For example, in the quest for more growth, the New Zealand dairy sector expanded dramatically. The strategy succeeded, but extra growth did not equate to significantly more value. Along with the growth came a wide range of negative impacts. These included debt burdens, environmental damage, and pressure on the `farmer’s social license to operate.?

Ultimately, the linear decline emanating from the nation’s endemic low productivity boils down to poorer options for the country and progressively poorer people.?A diagnosis of low productivity includes the following symptoms. Low wages, low levels of innovation, increasing inequality, inability to fund world-class health systems, and a lack of resources to renew aging infrastructure.

Figure 1.1?New Zealand’s GDP per capita between 1870 and 2010.?Source: (2021) NZ Productivity Commission.

In New Zealand, low productivity may partly stem from the country’s proud farming heritage. In the glorious past, a farmer’s output received guaranteed prices in reliable markets. Has the legacy from those good times of old been subliminally embedded across inter-generational mindsets? Maybe, many of the industry people I talk with believe the good times will return once a few ‘very necessary’ tweaks are made. What is being delivered, however, looks more like ruthless incrementalism. I choose the word ‘ruthless’ because many of the transition-to-value strategies out there are relying on incremental change being enough. But will they be enough? Will they be enough to keep the country’s producers in the game? And it’s the long game that matters. Time will tell.?

The current consensus from researchers like myself suggests future prosperity will largely depend on how successful New Zealand enterprises become at creating value, and even more importantly, consistently capturing value. Doing so will allow enterprises to navigate around and through poor deals. It will allow the aspirations of New Zealand’s people to be realized. What could New Zealand look like if it seriously created and captured maximum value from all of its exports? Answer: amazing. It would resemble the countries towards the top of the OECD rankings, not those in the middle or towards the bottom. Even a paltry one percent increase in the value of exports would add hundreds of millions of dollars to GDP. Imagine…an extra 5%, or let’s push the boat out. Bugger it, dream big, an extra 10%. The world is New Zealand’s oyster, the pearl just needs to be seeded. Then harvest can begin.?

Ends.?

Written by:?Dr. James Wilkes