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Key Sector Level Findings from the New Zealand Food & Beverage Industry

Summary ReportSeptember 2012

www.foodandbeverage.govt.nz

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Structure of the New Zealand Food & Beverage Information Project(2012)

F&B INFORMATION PROJECTThis document provides an overview of the sector level findings from the Food & Beverage Information Project; a much wider and deeper level of analysis is available in the complete set of reports available on the website

PAGE 3 Note: Every year two subsectors are completed in more detail. Seafood and Nutraceuticals in 2011

Dairy Sector

Meat Sector

ProduceSector

Seafood Sector

NutraceuticalsSector

Processed Foods Sector

Beverages Sector

Investor’s Guide

Global Markets

Overview

Sectors

Industry Snapshot

Markets High Potential Market Profiles

FirmsInvestors Government

TABLE OF CONTENTS

Section Page

1. Dairy 4

2. Meat 10

3. Seafood 16

4. Produce 24

5. Processed Foods 31

6. Beverages 38

7. Nutraceuticals 46

DAIRY – SITUATION

New Zealand

- New Zealand currently “on a high” in dairy

- Surging US$ prices

- Growing demand in China, SE Asia and NA/ME/CA1

- However likely inflating a bubble that will ultimately pop

- New Zealand is the 8th largest milk producing country in the world and accounts for 2.6% of global milk production

- New Zealand produces a similar amount of milk as other temperate countries its size (e.g. Italy, the UK, France)

- Small population; exports the excess

- New Zealand exports transport friendly dairy ingredients (e.g. milk powder)

- 95%+ of New Zealand milk supply is controlled by Fonterra, a farmer‐owned cooperative; Fonterra was formed in 2001 in a government sanctioned mega‐merger of dairy cooperatives and the government‐mandated export dairy board monopsony2

Competitors

- As regional dairy collection is a natural monopsony, dairy farmers in all developed countries control milk collection and primary processing through farmer‐owned cooperatives

- New Zealand competes with other dairy cooperatives to supply bulk dairy ingredients

- Competitors are primarily cooperatives in developed Western countries; South America cooperatives are an emerging threat

- While the BRIC3 countries are 4 of the top 5 milk producers in the world, they are not yet major exporters as they effectively consume all they produce

- New Zealand does not directly compete with major corporate dairy players (e.g. Nestle, Kraft, Abbott)

Consumers/Markets

- Dairy consumption is flat in the developed world; developed temperate countries (e.g. Canada, Japan) typically produce all the milk they consume and use trade barriers to protect their dairy farmers; therefore these markets are closed to New Zealand

- Dairy consumption is growing in the developing world faster than domestic production; in addition, dry and tropical countries are unable to efficiently produce all the milk they consume, therefore they import bulk dairy ingredients

- Corporate consumer‐focused dairy manufacturers buy ingredient dairy and transform ingredients into consumer dairy‐based foods (e.g. yoghurt)

- In Australasia (AU/NZ), Fonterra (but not other key NZ milk processor/exporters) sells significant amounts of branded consumer dairy products to consumers4

PAGE 5 1. North Africa Middle East, Central Asia; 2. A monopsony is a monopoly on buying not selling; 3. BRIC = Brazil, Russia, India and China; 4 Fonterra also sells about NZ$1b worth of Anmum outside Australasia

New Zealand competes with other dairy cooperatives to supply bulk dairy ingredients to corporate consumer‐focused dairy manufacturers primarily in dry/tropical areas

Key metrics #(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

Turnover NZ$18,800m N/A 6% +$1,100

Exports US$7,836m 12% 40% +$2,231

Enterprises 240 3% 2% +15

Employment 11,690 1% 3% +330

Turnover per employee

$1.6m N/A1 N/A1 N/A1

DAIRY – QUANTITATIVE SCORECARD The New Zealand dairy sector has performed well in the last year driven by surging prices in Asia

PAGE 6 1. Cannot be calculated due to Statistics NZ data issues; will be calculated in future years; 2. Of which 9,700 are in New Zealand; Source: various company annual reports; various company websites; Kompass; Coriolis analysis

Key firms Employ(#; 10)

Turnover(NZ$m; 10)

Fonterra

GF Meadow Fresh

Open Country

Westland

Tatua

Synlait

15,6002

1,000

196

350

194

160

$16,726m

A$441m

$497m

$422m

$166m

$150m

Key markets %(2010)

US$m(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

East Asia

SE Asia

S Asia/Ind. Sub

NA/ME/CA

SS Africa

S America/Other

Europe

North America

Australia/PI

26%

20%

5%

17%

4%

10%

6%

6%

6%

$2,059

$1,585

$397

$1,309

$306

$779

$448

$504

$450

16%

11%

18%

18%

27%

9%

3%

3%

13%

75%

42%

76%

28%

44%

33%

11%

‐10%

49%

+$884

+$469

+$171

+$284

+$94

+$195

+$43

‐$56

+$148

Key competitorscountry Key firms

Australia

California

Germany

Netherlands

France

Denmark

Murray Gouldburn (coop)

Cal Dairies Coop

Other coop

Nordcontor Co‐operative

Other coop

Friesland Co‐operative

Sodiaal

Other coops

Arla Coop

Key products US$m(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

Whole milk powder

Skim milk powder

Butter

Cheese

Casein

Whey

UHT milk

Lactose

Other

$3,072

$1,023

$1,545

$1,023

$476

$419

$127

$33

$117

16%

14%

12%

8%

0%

35%

16%

8%

8%

64%

23%

63%

20%

‐10%

19%

43%

‐17%

36%

+$1,197

+$194

+$596

+$168

‐$51

+$66

+$38

‐$7

+$31

DAIRY – SWOT ANALYSISThe global competitive environment will likely become more competitive going forward

PAGE 7 Source: various company annual reports; various company websites; Interviews; Coriolis

Strengths Weaknesses

‐ Low cost pasture‐based dairy production system

‐ National champion Fonterra with resources to address global markets and opportunities

‐ Growing market leadership position in Australasia/Oceania

‐ All our eggs in one basket (Fonterra); Fonterra is limited in its ability to add value due to the risks associated with competing with its own customers

‐ No rich dairy cultural heritage or tradition to draw from for new product development (vs. France or Italy)

‐ Small milk producer in an absolute sense (~2.6% global production)

‐ Limited defensibility of commodity and ingredient position

‐ Significant trade barriers limiting New Zealand access to North America and Europe

‐ Farmgate price mixes returns on milk with returns on Fonterra ownership leading to dairy land price increases leading to decreased international competiveness

Opportunities Issues/Threats/Risk

‐ Intensification through additional supplementary feed smoothing seasonal peak increasing total milk production and improving return on assets

‐ Growing dairy product consumption in developing world; dry and tropical countries not able to produce all the milk they consume

‐ Chinese dairy consumption per capita growing rapidly drawing in significant imported dairy product (in the short to medium term)

‐ Asians more likely to be dairy intolerant, therefore different consumption patterns (e.g. yoghurt drinks; infant formula)

‐ Ongoing dairy industry consolidation, particularly in South America

‐ Changing global weather patterns (also a threat)

‐ Further investment in in‐market production

‐ Removal of dairy subsidies into Europe

‐ Intensive feedlot dairy model (e.g. California) improving productivity faster than pasture system (e.g. NZ/AU)

‐ Southern South America rapidly adopting the AU/NZ pasture system (e.g. Argentina, Uruguay, Brazil)

‐ The boom/bust economic cycle expresses itself in China

‐ Experience of Japan & South Korea suggest Chinese growth has another 10 years to run; after this point, China will be either self sufficient or a major exporter; Chinese milk/cow almost at NZ levels

‐ Developing countries consumers, currently perceive dairy as healthy; science/attitudes/opinions could turn negative

‐ Adoption of genetically modified animals or feed by poor countries changing international competitive dynamics

‐ Non‐dairy substitutes (e.g. soy) more suited to Asian tastes and physiology

Situation creating opportunity Resulting potential strategic direction Opportunity Challenges

‐ New Zealand exports transport friendly dairy ingredients (e.g. milk powder) to corporate consumer‐focused dairy companies in other countries

‐ These companies then transform ingredients into consumer ready products adding up to 10x value to raw ingredients in the process

‐ Free trade deals removing punitive tariffs improving economics of NZ production (vs. in market)

1. Vertical integration of NZ milk production into downstream users of milk ingredients

‐ Acquire in‐market buyers of NZ ingredients; link into domestic production

‐ Create integrated supply chain with NZ production

‐ Fonterra unwilling to compete with own customers

‐ Significant capital required for in market acquisition

2. Existing NZ firms make final product in New Zealand and export

‐ “Made in NZ’ a strong positioning statement in some markets

‐ Does not work for highly perishable short shelf life products (e.g. non‐UHT fluid milk, yoghurt)

‐ Tariffs and trade barriers remain on many products into many countries

‐ Significant capital required for investment in plant & equipment

3. Current buyers of NZ ingredient exports manufacture in NZ instead

‐ Targeted program to attract new greenfields investments by existingusers of NZ dairy ingredients

‐ Reliant on single supplier (Fonterra)‐ Relative attractiveness of NZ vs.

other potential sites (e.g. Singapore)

‐ While the dairy industry is consolidated in developed markets, it is fragmented in developing ones

4. NZ firms participate in and drive consolidation in dairy industry in developing countries

‐ Acquire multiple smaller dairy companies in growing markets

‐ Consolidate and implement best practice

‐ Significant risk‐ Fonterra unwilling to compete with

own customers‐ Farmer owners of New Zealand co‐

operatives unwilling to either fund or allow in outside capital

‐ Developing countries are rapidly growing dairy production (e.g. BRIC1 are 4 of top 5 dairy producing countries)

‐ These countries will emerge as major competitors to NZ in ingredient dairy over the next 15 years

5. Apply NZ skills and capital to assist development

‐ Investment by NZ based skills and capital in growth markets

‐ Risk‐ Mixed transferability of NZ pastoral

dairy ecosystem

6. Move into more defensible products and categories

‐ Develop capabilities around defensible dairy/dairy‐derived products (e.g. infant formula)

‐ Competition from existing players with strong market position

‐ Lack of required IP and/orcapabilities

DAIRY – POTENTIAL STRATEGIC DIRECTIONSResearch suggests six potential “big picture” strategic directions for the New Zealand dairy industry

PAGE 8 Source: Interviews; Coriolis

DAIRY – POTENTIAL AREAS FOR INVESTMENT

- Farmers control 97% of New Zealand dairy industry limiting opportunities for external investment- Farmers own Fonterra, Westland and Tatua- “[Dairy cooperatives have] three main objectives: (1)

maximise the milk price paid to farmer members, (2) to process and market the milk collected every day from member farms and (3) to maintain farmer control”

- Low opportunities for new investment in ingredient dairy (particularly milk powder)- Globally milk collection/disposal is dominated by farmer

owned co‐operatives (typically marginal cost sellers)- Processing of raw dairy into simple ingredients is a

relatively high capital, low return sector- New Zealand already fully capitalised and saturated with

ingredient dairy processing plants

- Poor financial performance to date of post deregulation new market entrants in milk powder & other primary ingredient- Majority share in Open Country acquired by Talley family

following poor performance; Olam (Singapore) also a shareholder (threatened to quit due to low returns)

- Majority share in Synlait acquired by Shanghai Bright following failed public listing

- Oceania Dairy assets purchased by Synlait- Arapuni still “in development”- Maori‐owned Miraka recently opened

- Domestic dairy market is small, saturated, and low growth- High levels of dairy consumption per capita- Dominated by two key players: Fonterra and Goodman

Fielder/Meadow Fresh, each with fluid milk core- Limited domestic product innovation; domestic innovation

typically copied from other markets (e.g. yoghurt)- Growing store brands

- Opportunities for growth in smaller segments of export oriented specialty, niche dairy products that “fly under the radar”- Shredded cheese (e.g. Grate Kiwi, Milligans)- Single serve butter (e.g. Canary)- Premium specialty cheese (e.g. Whitestone)

- Strong opportunities for growth and investment in processed foods that contain significant dairy ingredients (discussed in processed foods document)- Chocolate- Infant formula- Frozen bakery (esp. croissants)- Dairy nutraceuticals (e.g. colostrum)


Potential areas for new and/or external investment primarily transforming ingredients rather than producing more ingredients

TABLE OF CONTENTS

Section Page

1. Dairy 4

2. Meat 10

3. Seafood 16

4. Produce 24


6. Beverages 38


MEAT – SITUATION

Lamb

- The major lamb consuming countries are effectively the major lamb producing countries (i.e.. Regions that grow lamb eat lamb)

- Most lamb consuming countries are too poor to afford NZ lamb in quantity.

- Key markets for NZ/AU lamb are a handful of rich Western countries; primarily counter‐seasonal supplier of lamb for consumption during religious holidays (e.g. Christmas, Easter and the end of Ramadan).

- Lamb production flat to falling in these countries and consumption per capita falling due to increasing price gap with other more efficient meats (e.g. chicken).

- China is an emerging market, but also massively growing producer. Unlikely to be a threat in key markets within medium term.

- NZ and AU lamb production flat for 40 years; falling domestic consumption making more available for export. New Zealand & Australia together account for 71% of global lamb exports

- Top four lamb meat processors account for 70% of NZ volume; Australian industry more fragmented than NZ. NZ lamb exporters primarily compete with each other and AU producers.

Beef

- NZ is a minor global producer of beef (~1%). NZ beef breeds (e.g. Angus) have declining numbers and not finished on grain as preferred by key premium markets. Growing proportion of beef production is a secondary product of the dairy industry not

optimal for meat quality.

- Grassfed beef has achieved minimum consumer cut‐through and sells at a discount to grain fed overall, despite healthy attributes. This low fat beef is however valued for patties in foodservice (e.g. supplying McDonalds)

- Brazil and Australia are both major producers and exporters of beef into key NZ markets; USA is increasing beef exports driven by the weak USD.

Pork

- NZ pork production has been flat for 40+ years; growing consumption of bacon, ham & smallgoods (B,H&SG) being filled by frozen imports

- Domestic industry now predominantly supplies fresh pork; recent moves to remove bio‐security from fresh pork threaten industry as (1) NZ not a major grain producer and (2) NZ farms sub‐scale.

Chicken

- NZ has an efficient, modern chicken industry with four processors (Tegel, Inghams, Brinks & Turks); NZ has high FCR1 due to lack of key poultry diseases. Bio‐security prevents imports due to threat posed to iconic native birdlife (e.g. kiwi, kea, etc.).

Deer

- NZ pioneered deer farming in the 1960’s. Industry initially two income streams (venison and deer velvet); deer velvet impacted by success of Viagra. Number of animals in decline and long term economic viability unclear without major long‐term breeding program to improve relative animal productivity.

PAGE 11 1. FCR = feed conversion ratio (a measure of conversion of food input into meat output)

New Zealand has a strong position in global lamb exports, is secondary player in beef exports; remaining key species are almost exclusively for domestic consumption

Key metrics #(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

Turnover NZ$9.6b N/A1 N/A1 N/A1

Exports US$3,722m 8% 12% $405m

Enterprises2 480 1% 2% 10

Employment 31,880 1% ‐2% ‐510


$302,500 N/A1 N/A1 N/A1

MEAT – QUANTITATIVE SCORECARD The New Zealand meat sector has performed well in the last year driven by surging US$ prices

PAGE 12 1. Cannot be calculated due to Statistics NZ data issues; will be calculated in future years; 2. Processing and wholesaling; 3. North Africa/Middle East/Central Asia; Source: various company annual reports; various company websites; Kompass; Coriolis analysis


Turnover(NZ$m; 10)

Silver Fern Farms

Alliance Group

Anzco

Affco

Tegel

Ingham

5,500

5,000

2,500

2,800

1,700

900

$1,897

$1,387

$1,167

$1,085

$402

$299

Key markets %(2010)

US$m(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

Europe

North America

East Asia

SE Asia

NA/ME/CA3

Australia/PI

Other

Total

38%

24%

18%

7%

6%

5%

2%

100%

$1,414m

$910m

$663m

$270m

$203m

$176m

$85m

$3,722m

8%

4%

13%

17%

12%

12%

9%

8%

‐3%

16%

24%

68%

27%

21%

35%

12%

‐$50m

$123m

$127m

$110m

$43m

$31m

$22m

$405m

Key competitorscountry Key firms

Australia

Brazil

JBS Australia

T&R

Fletcher

Cargill

Others

JBS

Mafrig

Others


CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

Beef, frozen

Beef, chilled

Sheep/Lamb frozen

Sheep/Lamb chilled

Offal

Processed meat

Other

Total

$1,177

$198

$1,326

$612

$299

$102

$7

$3,722

7%

11%

7%

14%

9%

14%

5%

8%

20%

32%

5%

11%

7%

21%

15%

12%

$199

$48

$60

$61

$18

$18

$1

$405

MEAT – SWOT ANALYSISThe global meat industry is undergoing fundamental shifts and consolidation; New Zealand’s competitive position is changing as a result

PAGE 13 ETS – Emissions Trading Scheme; Source: various company annual reports; various company websites; interviews; Coriolis analysis


‐ Natural environment favourable to pastoral agriculture

‐ Low cost, grass fed beef and sheep production systems

‐ Biosecurity high in New Zealand and presence of key diseases low

‐ High standards of food safety and animal welfare

‐ Regulatory credibility allowing exporters flexibility

‐ 130 years experience exporting meat long distances

‐ Strong position in global lamb trade in counter‐seasonal window to Northern Hemisphere

‐ Successful dairy industry generating large numbers of surplus stock

‐ Preferential access into Europe for some products for historical reasons

‐ High tariff barriers into key markets limits access to Japan, Europe, and Korea (e.g. Korean beef tariff is 40%)

‐ Limited experience with branded and high value processed meats or meal solutions

‐ Labour shortages both on farm and in processing

‐ Limited in‐market knowledge, few firms close to customer/consumer, especially in growth markets of Asia

‐ Inefficient use of meat plants (declining stock numbers) and inefficient procurement of stock (competitive, not coordinated)

‐ Lack of in‐market co‐ordination

‐ Pork and beef farm prices all decreasing

‐ Playing catch up with other countries with onfarm tracking technology; beef and venison proposed, no lamb


‐ Negotiating Free Trade Agreements with key markets and on‐going improvements in access to markets via WTO Doha Development Round

‐ Scientific research showing superior health properties of free range, grass fed animals

‐ Genomics research for lamb and beef to optimise output quality, growth rates etc.

‐ Ability to extend shelf life of chilled product (extend season window)

‐ Increased demand for protein globally

‐ Move from frozen with chilled; position/develop brands and case‐ready, convenience foods products for retail and hospitality and for the younger convenience focused consumers

‐ Removal of EU/UK farm subsidies in the medium tern

‐ Livestock identification extended to farm management and consumer market (use of smart phone apps etc.)

‐ Encourage innovative on‐farm practices to minimise green house gases

‐ Continued conversion of beef and sheep land into dairy

‐ Market access reduced due to import restrictions (e.g. Indonesia)

‐ Continued decline in consumption of lamb in Europe

‐ Disease outbreak affecting stock numbers and or trade access

‐ ETS, climate change legislation affecting cost of business

‐ Increasing pork imports threatening the viability of New Zealand pork industry

‐ Southern South America adopting the AU/NZ pasture system (e.g. Argentina, Uruguay, S. Brazil)

Situation creating opportunity Resulting potential strategic direction

Opportunity Challenges

‐ Lamb a very minor meat for most supermarket retailers globally

‐ Retailers lack experience and knowledge handling lamb

‐ Retailers often don’t stock lamb due to low volume

1. Manufacture case‐ready lamb in‐market in key markets

‐ Build case‐ready lamb packing plants in market (potentially JV with in‐market processors)

‐ Supply retailers with a solution to a problem

‐ Others already doing case‐ready lamb in some key markets (often from NZ lamb)

‐ Need to source lamb year round (limited NZ capabilities in flattening the peaks and troughs)

‐ Capital cost

‐ Millions of calves slaughtered as a by‐product of milk production

2. Utilise this raw material in beef production; develop higher yield, profitable lifecycle for calves2

‐ Currently poorly utilised and often wasted

‐ Typical outcomes vary by country

‐ Mindset and attitudes‐ Likely marginal economics currently

‐ Reduction in animal throughput has left NZ over‐capacity in processing

3. Industry mega‐merger to consolidate NZ lamb processing/exports

‐ NZ does not fully leverage its size in lamb exports

‐ Rationalisation of domestic capacity required

‐ Limited industry buy‐in‐ The cost of redundancies, etc.‐ Egos and personalities‐ Agreeing on relative value

‐ New Zealand & Australia together account for 71% of lamb exports globally

‐ Top 8 NZ+AU firms ~50% global lamb trade‐ Australian industry more fragmented than

NZ

4. Major NZ firms take strongposition in AU processing/exports

‐ Build a strong position across major lamb exportingcountries

‐ Leverage scale and transferrable skills

‐ Lack of capital‐ Limited experience under Australian

conditions‐ AU consolidation underway; NZ late

to the party

‐ World full of sandwich shops (e.g. Subway) with no pre‐sliced lamb product

‐ 100,000+ supermarkets, most with a deli; no convenient, pre‐sliced formed lamb product for sale

‐ People worldwide making sandwiches from sliced meat

5. Develop convenient processed meats based on lamb (e.g. salambi1, lambloni1)

‐ Convenience oriented consumers

‐ Un‐served market niche‐ Use of secondary cuts,

trimmings, and offal (optimise carcass utilisation)

‐ Hypothetical‐ Cost of product development (role

for government?)‐ Not an area of NZ beef/lamb

processors expertise (but is for B,H & SG manufacturers)

MEAT – POTENTIAL STRATEGIC DIRECTIONSResearch suggests five “big picture” potential strategic directions for the New Zealand meat industry; major opportunities primarily revolve around lamb due to NZ strength in this area

PAGE 14 1. Coriolis originals (google if you don’t believe); licensing of IP available for a fee; 2. alternatively only use sexed semen to increases proportion of females (e.g. centrifuge seedstock)

MEAT – POTENTIAL AREAS FOR INVESTMENT

Lamb and Beef

- Ownership of top 4 processors (~75%) locked up with limited opportunity for new outside capital to participate- 2 farmer coops (Alliance & SFF)- 1 family owned (Talley’s)- 1 Japanese owned (Itoham & Nissui)

- Returns historically poor; numerous exits from industry (particularly by listed players)

- Some opportunity for further consolidation among second tier beef & lamb processors (particularly in North Island)- Large number of small regional players each with one plant- Global experience shows single plant operators need to be

above average size to achieve economies necessary for success

Pork and pork products

- Domestic production flat last 40 years; industry sub‐scale by global standards (e.g. Canada, USA, Denmark); risk of throughput decline due to recent fresh imports decision

- Opportunities for further consolidation among bacon, ham and smallgoods producers (B,H&SG); already major users of imported frozen pork; unlikely to be impacted by fresh imports

Chicken

- #1 Tegel recently changed hands (private equity)

- #2 Inghams is AU #2 and long‐term family owner

- #3 Brinks was for sale; acquisition by Tegel rejected by NZCC; no other bidders emerged

Meat‐based processed foods

- New Zealand exports significant quantities of manufacturing beef as raw material for processors in other country’s; opportunity to make more in New Zealand (NZ has the advantage of relatively low labour costs compared with key markets (e.g. US))

- Significant further opportunities for growth across a range of sectors, including canned meats & meals, frozen meals, soups, jerky, pet food, formed hamburgers for chain fast‐food

- See “Processed Food” report for more details

PAGE 15 SFF = Silver Fern Farms; NZCC = New Zealand Commerce Commission

Potential areas for new and/or external investment primarily transforming ingredients rather than producing more ingredients

TABLE OF CONTENTS

Section Page

1. Dairy 4

2. Meat 10

3. Seafood 16

4. Produce 24


6. Beverages 38


SEAFOOD – SITUATION – WILD CATCH

New Zealand- New Zealand has access to a strong set of natural resources

- Isolated island nation in the middle of the South Pacific, 2,100 kilometres from Australia

- Sixth largest exclusive fishing area (EEZ) of any country - 10th longest coastline of any country in the world

- New Zealand’s fisheries are arguably the most sustainable fisheries in the world (on a par with Alaska and Iceland); uses effectively the same catch management system as Iceland- However as a result no growth in wild catch

- New Zealand has an efficient, modern seafood industry with large modern boats, in particular the deep sea freezer trawlers- NZ has 7% share of S. Hemisphere (S.H.) wild catch- 130 species commercially fished in New Zealand’s EEZ.1.

- Similar species mix to Australia, Chile, Argentina, etc. - Main catch by volume is hoki, followed by orange roughy

- There are five major (+$100m) firms in the wild catch sector and a range of secondary firms- Reasonably consolidated (though more possible) - Mixture of ownership (foreign, Maori, privately and listed)

Competitors- New Zealand competes in the first instance with other colder

water S.H. countries: Australia, Chile, Argentina, South Africa- Secondarily, S.H. fisheries compete with N.H. colder water

fisheries: Norway, Canada, Iceland, USA/Alaska, UK/Scotland

- Globally the seafood industry is highly fragmented with a huge number of medium to small sized firms competing. - In‐shore fishing is highly fragmented and primarily local

around the world- Deepwater fishing is more consolidated due to capital

requirements for large boats, but still fragmented globallyConsumers/Markets- Consumption of seafood is increasing globally

- Growing income in key seafood consuming countries (e.g. South East Asia (SEA), China)

- Increased public awareness around the benefits of increasing seafood consumption

- Seafood is highly perishable and the highest value products are often fresh

- NZ exported seafood to 108 countries in 2010; broadly speaking Western markets accounted for about half and the growing Asian market the other half- Bulk fish for further processing a key channel for NZ- Majority of fish consumption globally occurs in restaurants

and other foodservice outlets- Supermarkets underperform in seafood (relative to other

proteins); significant sales occur in more traditional channels (e.g. fishmongers and wet markets)

- Demand for sustainable varies by market- Increasing demand for sustainable in Western markets

(Europe/North America); often driven by retailers - Currently low/no demand in Asian and developing markets

PAGE 17 1. EEZ = Exclusive Economic Zone; Source: Coriolis

While New Zealand has a large and sustainably managed wild catch fishery, there is little likelihood of volume or throughput increases going forward

SEAFOOD – SITUATION – AQUACULTURE

New Zealand

- New Zealand farms three species in any quantity (mussels, salmon and oysters); these make up 99% of the total exports (valued at $275m in 2010)

- Green lipped mussels (production 86%, export value 63%)

- King Salmon (production 12%, export value 31%)

- Pacific Oyster (production 3%, export value 6%)

- Aquaculture is more consolidated than wild catch; the top 5 companies account for approximately 75% of the industry

- New Zealand has the 10th longest coastline of any country in the world; currently only a tiny fraction of this is farmed

- Aquaculture is a global growth story

- Globally aquaculture has increased its share of total seafood volume to 55%; In New Zealand this is 21%

- To date Government has been the biggest impediment to the growth of the industry; recent aquaculture reform aims to provide a stabile platform to enable further growth

Competitors – Shellfish

- On a global basis, most shellfish are produced and consumed locally and very little crosses borders

- 12% of global mussel production crosses borders; New Zealand competes with a wide range of regional players by market; Chile is an emerging multi‐regional threat

- 1% of global oyster production crosses borders; global production

is flat except for China which is increasing production massively

Competitors – Salmon

- Salmon aquaculture is highly consolidated globally

- Top 3 firms = 38% of global production; top 10 = 63%

- None of the top 25 global salmon producers in NZ

- Consolidation is driven by clear economies of scale in production systems, marketing, processing, skills, genetics and capital

- Effectively all1 other salmon aquaculture in the world farm Atlantic salmon due to its faster growth rates

- New Zealand biosecurity prevents imports of fresh salmon into New Zealand; over the past decade the majority of New Zealand salmon production has been consumed domestically

Consumers/Markets

- As per wild capture plus

- A handful of markets account for the majority of NZ aquaculture exports: Australia, Japan and the USA (plus S. Korea, Hong Kong & Spain)

- High levels of biosecurity in Australia (Salmon, Mussels & Oysters) and Japan (Mussels) benefit NZ firms

- e.g. NZ the only supplier of imported whole salmon to AU

- Recent increases in salmon exports to USA, may in part be due to ISA (Infectious Salmon Anaemia) effecting Chilean salmon supply

PAGE 18 1. 93% Atlantic/ 6% Coho/Chinook 1%; Source: Coriolis

Aquaculture has huge growth potential for New Zealand, however significant further growth will require building and developing new markets

Key metrics #(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

Turnover (08‐09) NZ$3,011m2 3% 5% +$156m

Exports US$1,017 5% 18% US$154m

Enterprises 1,851 ‐3% ‐4% ‐70

Employment 8,860 ‐2% ‐2% ‐190


NZ$339,7952 n/a1 n/a1 n/a1

SEAFOOD – QUANTITATIVE SCORECARD The New Zealand seafood industry is achieving limited growth

PAGE 19 1. Cannot be calculated due to Statistics NZ data issues; will be calculated in future years; 2. includes some amount of double counting due to Statistics NZ data issues; Source: SNZ; various company annual reports; various company websites; Kompass; Coriolis analysis


Turnover(NZ$m; 10)

Sealord

Sanford

Talleys

Aotearoa Fisheries

NZ King Salmon

KiwiLobster

1,100

2,000

600

300

440

25

$531m

$421m

$220m

$158m

$108m

$100m

Key markets % exports(2010)

US$m(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

East Asia

SE Asia

Europe

North America

Australia/PI

Other

Total

41%

5%

15%

13%

21%

5%

$421

$48

$151

$132

$215

$48

US$1,015

4%

2%

3%

0%

9%

21%

5%

21%

19%

3%

20%

18%

44%

18%

+$72

+$8

+$4

+$22

+$33

+$15

+US$154

Key competitorsCountry Key firms

Argentina

Chile

South Africa

Norway

Iceland

Denmark

USA/Canada

Japan

Thailand

Pesantar, San‐Arawa, Yuken

Toralla, Aqua Chile

Oceana Group, I&J

Marine Harvest, Austevol

Icelandic

Royal Greenland

Trident, High Liner

Maruha, Nissui, Uoichi

Thai Union

Key export products

NZ$m(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

Rock Lobster

Hoki

Mussels

Squid

Salmon

Paua

Other

Total

$229m

$172m

$171m

$89m

$86m

$63m

$682m

NZ$1,493

6%

‐2%

0%

9%

11%

0%

‐1%

1%

24%

13%

‐15%

19%

41%

31%

‐2%

5%

$45m

$20m

‐$31m

$14m

$25m

$15m

‐$17m

$70m

SEAFOOD: WILD CAPTURE – SWOT ANALYSISWhile there are some opportunities for New Zealand wild capture going forward, there are also challenges

PAGE 20 Source: various company annual reports; various company websites; interviews; Coriolis analysis


‐ Clean water and generally healthy aquatic environment‐ Unsubsidised industry‐ Quota management system preventing collapse of stocks through overfishing‐ Stocks generally at sustainable levels or rebuilding‐ Regularly ranked highly sustainable relative to other producers‐ Efficient, modern industry with large modern boats, in particular the deep sea

freezer trawlers‐ Stable, long‐term ownership in place across most major firms

‐ Most industry growth metrics negative‐ Wild catch volume has fallen ‐34% since 1998 leading to reduced throughput‐ Relatively small producer on a global scale‐ Supply fluctuates year‐to‐year with availability of fish‐ Most EEZ space low productivity deep water‐ Bulk supply driven rather than specialised/consumer focused‐ Firms primarily small/sub‐scale with limited access to capital‐ Highly regulated‐ Lack of market integration, not capturing in‐market value‐ Limited in‐market knowledge‐ Lack of capital


‐ Consumer perceptions of health benefits of seafood‐ Over half the fish body currently going to meal and waste‐ Use of byproducts for nutraceuticals /cosmetics sector‐ Growing interest by some more wealthy consumers in Western markets for

ecolabelling and environmental certification (driven by retailers)‐ Growing middle class in China and SE Asia‐ Gradual removal of global fishing subsidies‐ Ongoing removal of trade barriers and negotiation of new free trade agreements‐ Streamline regulations‐ New/improved supply chain technology

‐ New Zealand wild catch continues to decline going forward (for whatever reason)‐ Other countries “catching up” on sustainability (e.g. Argentina)‐ Low cost competitors in low wage/low regulation/higher productivity warm waters‐ Single variable special interest groups driving domestic regulatory agenda‐ Rising costs of airfreight reducing feasibility of fresh exports

SEAFOOD: AQUACULTURE – SWOT ANALYSISAquaculture faces both opportunities and threats



‐ Clean water and generally healthy aquatic environment‐ Unsubsidised industry‐ Strong food safety regulations‐ Predictable supply‐ Concentrated resources in three key species‐ Only country farming green lipped mussels (Perna canaliculus); other farm other

green shelled (perna viridis, etc.) or blue mussels (mytilus sp.)‐ Limited presence of disease‐ Unique access to some biosecure markets (particularly Australia & Japan)‐ Parts of domestic industry protected from imports by biosecurity measures

‐ Small producer of mussels on a global scale; very small producer of other two species‐ Mussels and oysters have low value per hectare; salmon development limited by

red tape (change in use and landuse consent difficult) ‐ Reliance on biosecure markets and a handful of flat to declining others (e.g. USA)‐ Constrained regulatory environment which is semi‐constantly changing‐ Relatively low government support for fledgling industry (e.g. vs. Norway loan

guarantees in early days of salmon industry development)‐ Competing users of coastal space‐ No competitive advantage around feed production due to low scale‐ Disconnect between scientific research into new species and needs of industry;

research appears to be constrained to primarily research native species


‐ Consumer perceptions of health benefits of seafood‐ Growing middle class in China and SE Asia‐ On‐going removal of trade barriers and free trade agreements‐ Preferential access to Australia due to access through phyto‐sanitary barriers‐ New species‐ Development of land based plants for use in aquaculture (e.g. soy)‐ Industry co‐operation

‐ Low cost competitors in low wage/low regulation higher productivity warm waters‐ Chile‐ China (future)

‐ Beach, bach and boat (the 3 b’s), NIMBY (not in my back yard) user population limiting industry activity

‐ Disease outbreaks (e.g. oysters recently)‐ Reliance on a small number (3) of species (risk if disease outbreak); no significant

new species has emerged since 1976‐ Single variable special interest groups driving domestic regulatory agenda

SEAFOOD – POTENTIAL STRATEGIC DIRECTIONSSix potential strategic directions are identified for the seafood sector

Situation creating opportunity Resulting potential strategic direction Opportunity Challenges

‐ New Zealand has strong experience with sustainable fisheries systems

1. Horizontal integration into other countries with emerging QMS systems

‐ Transfer skills and systems into less developed markets

‐ Inexperience‐ Capital‐ Political and economic risk

‐ Constraints on volume going forward; growth through increasing value/kg

‐ Significant export volume of frozen block as container quantities

2. Further investment into brandedconsumer products

‐ Grow share of value‐added, consumer products

‐ Develop sales and marketingcapabilities

‐ Establish in‐market operations

‐ Lack of marketing and brand capabilities

‐ Lack of capital

3. Export more fish in a live/fresh higher quality un‐damaged form

‐ Improved catch technology and systems

‐ Cost‐ Changing attitudes and behaviour

‐ New Zealand industry still relatively fragmented; in particular the inshore fisheries

4. Co‐ordination and/or consolidationof inshore fisheries

‐ Opportunity to work together ‐ Geographic spread of existing fisheries and firms

‐ Personalities

‐ Retailers and consumers demanding sustainable seafood in western markets

‐ New Zealand wild catch highly sustainable but not marketed as such

5. Collective program branding New Zealand as sustainable supplier of seafood

‐ Grow share in high value western markets

‐ Cost of compliance in westernmarkets

‐ Trade barriers and tariffs on seafood into Europe

‐ Low absolute levels of water space currently used for aquaculture

‐ Most aquaculture space currently allocated to relatively low value per hectare species

6. Increase production of salmon ‐ Significant increase in salmon area ‐ Space conflicts‐ Regulatory burden and cost

PAGE 22 Source: Coriolis

SEAFOOD – POTENTIAL AREAS FOR INVESTMENT

Wildcatch- Limited entry vehicles in wild catch, ownership locked up by:

- Maori interests (unlikely to sell), - Cornerstone shareholdings by large international

companies (Nissui and RH Group)- Cornerstone shareholding of publicly listed Sanford, - Many family businesses: Talleys, United, Independent,

Solander, Vela, Amalgamated unlikely to sell without generational change

- Limited growth potential; no volume growth in wild catch- No new species to discover- Strong sustainability management means catch will be flat

to down in the foreseeable future

- Main source of value creation in wild is in cost reductions via consolidation- Consolidation ongoing but slow progress due to the

ownership issues discussed above

Aquaculture- Pacific oysters have low/no growth potential, due to viral

breakout and global market structure/situation

- Mussel industry is mature and consolidating rapidly. Mussels are relatively low value use of space. Returns over the past five years have ben mixed to poor, particularly for smaller operators (driving

industry consolidation)- Mussel breeding program likely to deliver constant incremental

gains for foreseeable future. However these are likely to maintain New Zealand’s relative competitiveness (e.g. vs. Chile) rather than translate into increased profitability

- Theoretically New Zealand has huge potential in salmon aquaculture; in practice regulations/red tape will limit success

New Species- While New Zealand scientists are working on a wide range of new

species these are all highly speculative and unproven commercially

- Only investors with transferable capabilities or strong appetite for risk should participate

Further Processing- Opportunities for investments in further processing of New

Zealand bulk ingredients into consumer ready products - Greenfields by firm with transferrable skills

- Clear opportunity for investment in seafood derived nutraceuticals (discussed in nutraceuticals document)

PAGE 23 1. NA/ME/CA = North Africa/Middle East/Central Asia

Limited opportunities for new external investment in wild capture; however regulatory change and fundamental drivers may result in opportunities in aquaculture

TABLE OF CONTENTS

Section Page

1. Dairy 4

2. Meat 10

3. Seafood 16

4. Produce 24


6. Beverages 38


PRODUCE – SITUATION

New Zealand

- New Zealand has an environment conducive to horticulture

- The size of Italy with the population of Singapore

- Surrounded by the Pacific Ocean – has the light of Spain with the climate of Bordeaux

- This climate will moderate the effects of global warming (relative to large continents)

- The country’s farmers are highly productive and efficient

- The country has no agricultural subsidies

- Regulation is generally rational and light handed; however additional compliance costs are imposed by markets and retailers around the world, increasing total cost

- New Zealand has two significant export species, kiwifruit and apples; together they are 70% of the export value of fresh produce

Kiwifruit

- New Zealand was the first country to commercialise the kiwifruit (and gave it its name); it is now the third largest producer globally

- Kiwifruit are primarily packed by grower‐owned co‐operatives; these are consolidating rapidly driven by the increased capital cost of a packhouse (equipment, technology, etc.); the top four packers now account for 50%+ of volume

- Packhouses are backwards integrating into fruit production through leasing and management contracts with orchards, particularly those of “hobby” farmers

- All kiwifruit (except those to Australia) are exported through Zespri, a grower‐owned monopsony1; this structure is strongly supported by growers but disputed by competing apple exporters; Zespri is ~13x larger than its nearest global kiwifruit competitor

Apples

- The apple industry is highly competitive and undergoing rapid consolidation around large grower/packer/shippers; the top 8 packhouse operators account for about two thirds of volume

- Packhouses are backwards integrating into production to ensure supply and quality and more than a third of total apple area is now controlled by the top 10 packers

- The number of smaller family farms has decreased and area has fallen significantly over the last 10 years. Despite this production has been maintained due to increased productivity

Other fruit

- While New Zealand produces a wide range of other fruits and nuts, only a few are achieving any significant growth; avocados, berries, and olives stand out for generally positive metrics

Vegetables- “Fresh” vegetable exports are primarily onions- New Zealand is a mid‐sized producer of vegetables for processing

and export- Frozen french fries a strong success with top three global firms

invested in country; opportunities for further growth

PAGE 25 1. Monopsony = monopoly on buying not selling; Source: Coriolis

New Zealand is a major player in kiwifruit and apples; the industry is currently undergoing consolidation to increase scale and productivity

PRODUCE – SITUATION

Competitors

‐ In fresh, New Zealand competes in the first instance with other temperate countries in the S.H. seasonal window: Australia, Chile, Argentina, South Africa & Southern Brazil. Secondarily, the S.H. competes on the edges, with N.H. temperate production

‐ Global production of most F&V is relatively stable; the major exception is China which has dramatically increased its production of most major F&V over the past 20 years

‐ The impact of Chinese production growth has primarily been felt in some processed products (e.g. apple juice concentrate) rather than premium fresh F&V

‐ Chinese yields are still low and quality is an issue; this will change over the next 20 years as systems and processes improve

‐ Very few fresh vegetables cross borders; most are produced and consumed in their country of origin; cross‐border trade is more common in preserved/processed vegetables, particularly from temperate regions to tropical ones. In processed vegetables, New Zealand competes primarily with rich Northern Hemisphere countries (e.g. Netherlands, Canada)

‐ Globally, fresh fruit and vegetable packing is extremely fragmented with a huge number of medium‐to‐small packers operating

‐ Firms of any scale only exist around key tropical fruits (bananas and pineapples)

‐ New Zealand packhouses compete primarily with either co‐operative or family‐owned packhouses in other countries

‐ F&V preserving and processing is more consolidated, driven by economies of scale in processing equipment

‐ New varieties continue to be developed by competitors

‐ Summerkiwi, Kiwigold/Jingold, and Greenlight among many other in kiwifruit

‐ Kanzai, Honeycrisp, Cameo among many others in apples

Consumers/Markets

- Broadly speaking, the world can be separated into temperate and tropical production regions

- F&V consumption vary by region; people generally cook and consume what they produce

- For most F&V, the major producing countries are the major consuming countries and also the major counter‐seasonal importers (where relevant)

- China represents an opportunity not a threat for New Zealand in premium counter‐seasonal supply for the foreseeable future

- SE Asian markets are a rapidly growing opportunity (e.g. Indonesia, Thailand, Philippines, Vietnam) as they are pure importers of temperate F&V; per capita consumption evidence from Singapore, Malaysia and Taiwan suggest significant further growth potential exists

PAGE 26 Source: Coriolis

Chile is the key competitor in fruit (both apples and kiwifruit); there are still lots of growth opportunities available for New Zealand into Asia across all F&V

Key metrics #(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

Turnover1 (NZ$m; 09) $3,338m 5% 8% $254m

Exports2(US$m)

$302$1,046

6%8%

18%4%

$47$40

Enterprises 1,2946,445

‐7%‐1%

‐20%‐9%

‐314‐604

Employment1 6,65016,975

‐1%‐1%

0.5%‐11%

‐30‐1,995


$141,291

PRODUCE – QUANTITATIVE SCORECARD New Zealand produce exports are performing well, driven by growth in Asia and the Australia/Pacific Islands region

PAGE 27 1. Employees by enterprise unit; Growers only, excludes processors; 2.Includes HS codes 07 08 excludes HS20 Source: various company annual reports; Kompass; Statistics NZ; UN Comtrade database; Coriolis analysis


Turnover(NZ$m; 10)

Zespri

T&G

MG Marketing

Fresh Direct

Leaderbrand

150

2,000

350

300

240

$1,542m

$599m

$574m

$208m

$139m

Key markets %(2010)

US$m(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

East Asia

SE Asia

Europe

North America

Australia/PI

Other

Total

39%

6%

31%

7%

14%

3%

100%

$524

$86

$408

$88

$194

$47

$1,347

9%

9%

4%

2%

12%

13%

7%

19%

32%

‐13%

2%

25%

6%

7%

$84

$21

‐$61

$2

$38

$3

$87

Key competitorsCountry Key firms

South Africa

Chile

Italy

Capespan

Copefrut (co‐op)

Trinidad

David Del Curto

Intesa (co‐op)

Apofruit (co‐op)

Kiwi‐Uno (private)


CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

Kiwifruit

Apples

Avocados

Total fruit

Onions/Garlic

Peas

Capsicum

Total Vegetables

$687m

$235m

$38m

$1,046

$86m

$55m

$27m

$302

10%

3%

14%

8%

9%

6%

14%

6%

6%

‐9%

10%

4%

71%

8%

19%

18%

$39m

‐$22m

$3m

$40m

$35m

$4m

$5m

$47m

Vegetable

Fruit

Vegetable

Fruit

Vegetable

Fruit

PRODUCE – SWOT ANALYSISFuture growth and success is dependant on continued innovation around new varieties and cultivars and improvements in industry structure



‐ Track record of success in new fruit development (e.g. kiwifruit)

‐ Track record of success in breeding of new cultivars (e.g. Braeburn, Zespri Gold)

‐ Counter seasonal to Northern Hemisphere in a narrow climatic window only shared by 4‐5 competitors (Chile, Argentina, South Africa, Sothern Brazil and Australia)

‐ Proximity to fast growing Asian markets

‐ Strong biosecurity; free from many diseases and pests

‐ High yields per hectare/high levels of export packout in export fruits relative to peers

‐ Unsubsidised industry competing successfully in world markets

‐ Industry rapidly consolidating into fewer, larger growers operating at scale

‐ Transition to integrated grower/packer/shipper model underway

‐ Supportive, collective industry structure in kiwifruit

‐ Low/no ability to supply fruit year‐round

‐ Water, access and availability

‐ Higher cost structure than others in seasonal window (e.g. Chile)

‐ Too much area still in older varieties (e.g. Braeburn apples, Hayward kiwifruit) that are now widely produced by competitors and not IP‐controlled

‐ Still too many smaller orchards and farms; peer group benchmarking strongly suggests NZ needs fewer, larger farms (cost structure prohibitive)

‐ Failing to nurture emerging Horizon 2 products to scale (e.g. avocados)

‐ Poor current funding model for new cultivar development

‐ Poor current commercialisation model for new cultivars emerging from breeding programs

‐ Legal separation of apple and kiwifruit exporting (also a strength depending on point‐of‐view)

‐ Small scale niche player, limits availability of key agrichemicals available


‐ Further develop “Fresh” fruit, especially high value, high return fruits (e.g. berries)

‐ Continued growth of middle‐class in Asia

‐ Aging baby boomers focusing on healthy living eating for illness prevention

‐ Growth of nutraceuticals and functional foods

‐ Potential of the Australian market

‐ Continued work on FTAs to develop tariff free markets (e.g. ASEAN); especially focussing on the high volume, high impact products and markets

‐ Growing demand for fresh, convenient produce especially into Asian markets

‐ Continued orchard‐level technological innovation (e.g. Hi‐Cane) and management improvement (e.g. girdling) leading to increased yields, automated pruning

‐ Growing production of apples, kiwifruit and other horticulture in China

‐ Biosecurity retarding or preventing introduction of new genetics and new species

‐ Phytosanitary protocols limiting extent and speed to market

‐ Re‐export of produce labelled “Made in New Zealand” endangering NZ reputation

‐ Climatic conditions impact production rates

‐ Further disease outbreaks (cf. PSA)

‐ Other global centres of fruit development coming up with better products



‐ 76% of kiwifruit production still green‐ 68% of apples area still old varieties such

as Gala and Braeburn‐ Most other fruit & vegetables produced

not IP controlled varieties

1. Transition remaining old varieties into newer IP controlled varieties

‐ Grow new improved varieties not available to competitors

‐ Achieve superior returns per hectare

‐ Cost of investment in marketing‐ Ownership of IP ‐ Long‐term relationship where grower

takes most of the risk‐ Poor current commercialisation model

‐ Key competitors continue to improve and catch up with New Zealand

‐ Input costs continue to increase‐ Retailer push back on price increases‐ Consumers buy from a basket based on

price and quality

2. Continuous improvement is required across the value chain for New Zealand to staycompetitive

‐ NZ historically a global leader inefficiency and productivity

‐ Improve faster than competitors‐ Embrace rather than resist integrated

grower/packer/shipper model where it makes sense1

‐ “She’ll be right” attitude‐ Cyclical nature of industry returns;

difficult to regain efficiencies on downturn

‐ Skills and capabilities; education‐levelsof workforce

‐ Fruit packing technology changing and improving rapidly

‐ Requirements of some retailers increasing in complexity

‐ Competitors pack a wider range of fruit decreasing their fixed cost/unit

3. Further rationalisation of packhouses

‐ As a general rule, larger packhouseshave lower costs than smaller ones

‐ Reduce cost through increased efficiency

‐ Geographic limitations on consolidation

‐ Egos and attitudes

‐ There are only a handful of Government‐mandated exporting bodies left globally

‐ IP‐controlled varieties effectively create same power

4. There may some day be a post‐monopsony kiwifruit industry; if so this will require a long‐term plan for an orderly transition

‐ Recreate best attributes around IP‐controlled varieties

‐ Remove potential trade negotiation impediments

‐ Transition away from widely growngreen

‐ Not repeating past mistakes in marketing board deregulation (cf. Israel, South Africa and NZ apples)

‐ Large number of smaller, emergent new species and opportunities

‐ Many have technological or scientific barriers to growth

5. Focus on high potential emerging Horizon 2 products/species

‐ Build another “kiwifruit” industry‐ Focus more resources on fewer

opportunities‐ Rally around emerging successes

‐ Common criteria for identification of emerging successes

‐ Time and resources required‐ “Herding cats”

PRODUCE – POTENTIAL STRATEGIC DIRECTIONSFive potential strategic directions are identified for the produce sector

PAGE 29 1. See http://www.paramountcitrus.com for an excellent example of a best practice grower/packer/shipper model [Paramount farms more land than the NZ kiwifruit industry]

PRODUCE – POTENTIAL AREAS FOR INVESTMENT

Apples- Industry has consolidated around two key regions: Hawkes Bay

and Nelson; opportunities outside these regions less clear- Two largest apples exporters have changed hands in the last year

- #2 Mr Apple to Direct Capital- #1 T&G/ENZA to ? (currently for sale)

- Opportunities for further consolidation among smaller packhouses, particularly around regional consolidation

- New emerging third generation IP‐controlled varieties have high potential for growth, particularly in Asia- New Zealand has a strong track record of developing

successful new varieties of apples; for example NZ developed Gala and Braeburn now account for 1/6 apples trees planted globally (outside China)

Kiwifruit- Industry consolidated around Bay of Plenty region; opportunities

outside this region are more speculative- Industry almost totally grower‐controlled, limiting opportunity for

outside investor participation; further packhouse consolidation highly probable going forward (cf. recent cancelled Eastpack/Satara merger)

- Current Zespri structure prevents new investors from operating outside the system; participation in the New Zealand kiwifruit industry is effectively participation in the Zespri system

- Low/no likelihood of government removing monopsony in short to medium term due to strong grower support and five years of industry turmoil required for transition to open system

- Experience of other countries suggests deregulation will occur in next cyclical industry crisis as a “solution”

- Kiwifruit less advanced than apples in new IP‐controlled variety development- Zespri Gold kiwifruit a strong success for New Zealand and

doing well in Asia - Other recent new varieties appear to be tweaks (e.g. Green

14) yet to be proven either in production economics or the market (cf. Tomua1)

- Lack of red variety key failure of breeding program to date

Other fruit and nuts- International investors with strong transferrable skills in the

avocado sector could help the industry realise its potential- Berries have clear opportunities for growth but long run potential

is unclear; investors with transferrable skills should explore- Olives will likely only ever be a marginal, niche activity due to lack

of scale and huge plantings elsewhere due to high EU subsidies (cf. Spain)

- Wide range of other fruit and nuts that has yet to demonstrate clear market success

Vegetables- Strong opportunities for further investment by major global

value‐added vegetable processors- NZ strongly competitive with key temperate producer/exporters

such as the Netherlands, Canada, the US, France, etc.; EU producers should consider NZ as an Asia‐Pacific production base

PAGE 30 1. Tomua was a green variant launched in the late 90’s that failed

Opportunities for new and/or external investment primarily for those with transferrable skills or global networks

TABLE OF CONTENTS

Section Page

1. Dairy 4

2. Meat 10

3. Seafood 16

4. Produce 24


6. Beverages 38


EXAMPLES: Non‐processed foods vs. processed foods(2011)

WHAT ARE PROCESSED FOODS?This report defines processed foods as foods made from a combination of ingredients, rather than one single or predominant ingredient

PAGE 32 Source: various online shopping websites; photo credit (fair use; low resolution; complete product/brand for illustrative purposes)

Ingredients: Milk Chocolate (Contains Sugar; Cocoa Solids (Cocoa Mass & Cocoa Butter) (33%*); Milk Powder (30%*); An Emulsifier (Soya Lecithin); Flavour); And Roasted Almonds (27%*) *Minimum Percentage.

Processed FoodsNon‐processed foods

Ingredients: Kiwifruit

Ingredients: Lamb

Ingredients: Dried milk

Ingredients: Nonfat Milk Powder, Lactose, High OleicSafflower Oil, Soy Oil, Coconut Oil, Whey Protein Concentrate. In addition, less than 2% of the following: Potassium Citrate, Calcium Carbonate, Ascorbic Acid, Potassium Chloride, Magnesium Chloride, Ferrous Sulfate, Choline Chloride, Choline Bitartrate, Ascorbyl Palmitate, Sodium Chloride, Taurine, m‐Inositol, Zinc Sulfate, Mixed Tocopherols, Niacinamide, d‐Alpha‐Tocopheryl Acetate, Calcium Pantothenate, L‐Carnitine, Cupric Sulfate, Vitamin A Palmitate, Thiamine Chloride Hydrochloride, Riboflavin, Pyridoxine Hydrochloride, Beta‐Carotene, Folic Acid, Manganese Sulfate, Phylloquinone, Biotin, Sodium Selenate, Vitamin D3, Cyanocobalamin, Calcium Phosphate, Potassium Phosphate, Potassium Hydroxide, and Nucleotides (Adenosine 5’‐Monophosphate, Cytidine 5’‐Monophosphate, Disodium Guanosine 5’‐Monophosphate, Disodium Uridine 5’‐Monophosphate)

Ingredients: Selected Meat & Meat by‐products (Derived from Poultry, Lamb & Beef), Flour, Vegetable Proteins, Gelling agents, Oils, Colours, Flavours, Vitamin & Mineral Supplement

PROCESSED FOODS – SITUATION

New Zealand

- New Zealand has demonstrated capability in the production of temperate‐climate food and beverages. It is the largest exporter in the world of dairy products and lamb and a major exporter of beef, kiwifruit, apples and seafood. The country is now turning more of this raw material into finished consumer‐ready foods

- New Zealand has growing processed foods exports, particularly products with significant dairy‐derived ingredients

- New Zealand is an attractive destination for foreign Direct Investment; currently 43+ major global F&B manufacturers have invested in production in the country

- New Zealand also has a strong group of domestic firms growing and achieving success in processed foods

Competitors

- New Zealand competes in the first instance with the other major temperate climate exporters to Asia; key competitor countries are: the United States, Australia, Canada, Germany, France and other European nations

- These are rich countries as processed food production is highly capital intensive with defensive process or production technology

- Processed foods (unlike raw ingredients) are sold in a branded, consumer‐ready form, typically on the shelf of a supermarket; as such, packaged brands compete for shelf space with other brands

for the limited amount of shelf space available

- Therefore, while we may articulate competition at a country level, in practice competition in any given segment is occurring between a handful of major firms (e.g. Griffins vs. Campbell/Arnotts vs. Kraft/Nabisco)

- New Zealand also competes internally within multinationals as one of many potential investment destinations (e.g. for a plant upgrade)

Consumers/Markets

- Processed foods provide busy consumers with convenient meal and snack solutions; products are typically ready‐to‐eat, ready‐to‐heat or require minimal preparation time

- About 1/3 of the sales of a typical supermarket are processed foods (1/3 is fresh perishables; 1/3 is non‐foods); processed foods are also used throughout the foodservice sector to reduce labour requirements in food preparation

- Processed foods are an area of constant low‐level innovation, driven by product and packaging changes

- Processed foods manufacturers constantly bring their products to the attention of consumers via advertising and in‐store promotions


Processed foods have huge growth potential for New Zealand, however significant further growth will require large capital investments, both by global multinationals and by domestic firms

Key metrics #(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

Turnover N/A N/A N/A N/A

Exports $1,773 15% 10% $154


Employment 18,930 2% ‐3% ‐675


N/A N/A N/A N/A

PROCESSED FOODS – QUANTITATIVE SCORECARD New Zealand processed foods exports are achieving double digit growth driven by Australia and Asia

PAGE 34 * NZ non‐dairy; ** 2009; 1. Manufacturing; 2. Oils and fats includes predominantly bovine fats, margarine and other vegetable fats; 3. excluding french fries; Source: various company annual reports; various company websites; Kompass; Coriolis analysis


Turnover(NZ$m; 10)

Fonterra

Goodman Fielder

Heinz Watties

Griffins

Cadbury

GWF

Tip Top

McCain

Chelsea

20,000

3,000

1,900

800+

550

500+

400

500

160

$16,726

A$441*

$783

$259**

$259**

$273

$226

$211

$241

Key markets %(2010)

US$m(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

Europe

North America

Australia/PI

SE Asia

East Asia

Other

Total

4%

4%

41%

14%

31%

6%

100%

$72

$74

$729

$241

$544

$110

$1,770

15%

7%

17%

19%

12%

28%

15%

12%

‐46%

23%

14%

4%

24%

10%

$8

‐$63

$134

$30

$23

$21

$154

Key global firms

Nestle

Kraft Foods

PepsiCo

Mars

Unilever

Danone

General Mills

ConAgra

Kellogg

Assoc. British Foods

H.J. Heinz

Ajinomoto

McCain Foods

Grupo Bimbo

Barilla

Mead Johnson

Abbott

… many more

Key export products

US$m(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

Infant formula/foods

Pet food

Oils and fats2

Soups/Condiments

Biscuits

Other proc. F&V3

Honey

Frozen french fries

$476

$186

$125

$123

$106

$93

$70

$60

34%

9%

6%

10%

18%

11%

30%

18%

1%

‐2%

27%

10%

10%

31%

18%

23%

$4

$3

$27

$12

$10

$22

$11

$11

PROCESSED FOODS – SWOT ANALYSISNew Zealand has good strengths and is well positioned relative to many competitor countries



‐ Abundant supply of temperate climate raw materials

‐ Known and trusted supplier of safe and secure ingredients to most major global food & beverage multinationals

‐ Major global exporter of ingredients to offshore processed foods manufacturers

‐ Lower cost structure than Australia or the United States

‐ Low/no corruption, rule of law, efficient court system

‐ Welcoming of foreign investment; very few rules or limits

‐ Strong local manufacturing/process technology skills

‐ Customer/consumer awareness, particularly in Asia, of New Zealand as a source of quality, wholesome foods

‐ Highly efficient and unsubsidised farming system

‐ Small size of domestic market

‐ Distance to market (e.g. vs. Denmark to Germany)

‐ Limited pool of domestic or resident capital

‐ Small domestic private equity sector

‐ Resource Management Act (RMA) can delay new developments

‐ No rich food cultural heritage or tradition to draw from for new product development (vs. France or Italy)

‐ Limited domestic grain production

‐ Need to import tropical ingredients (e.g. cocoa)

‐ Exchange rate variability

‐ Limited vision of farmer‐ownership of key ingredients producers


‐ Growth of Asian middle class; increasing wealth in Asia

‐ Changing global weather patterns (also a threat)

‐ Rich countries of Europe pricing themselves “out of the game”

‐ Large number of alternative channels for processed foods

‐ Leverage success of New Zealand food industry, build on awareness of New Zealand in processed foods

‐ Growth of convenience foods

‐ Medium‐sized NZ firms coordinate marketing and sales in new markets

‐ Competitors with lower costs and larger economies of scale

‐ Adoption of genetically modified animals or feed by poor countries changing international competitive dynamics

‐ The boom/bust economic cycle expresses itself in China



‐ New Zealand exports transport friendly ingredients (e.g. milk powder) to corporate consumer‐focused companies in other countries

‐ These companies then transform ingredients into consumer ready products adding up to 10x value to raw ingredients in the process

‐ Free trade deals removing punitive tariffs improving economics of NZ production (vs. in market)

1. Replace in‐market production with New Zealand manufacturing

‐ “Made in NZ’ a strong positioning statement in some markets

‐ Manufacturing capability already in NZ in many cases

‐ Does not work for highly perishable short shelf life products (e.g. non‐UHT fluid milk, yoghurt)

‐ Tariffs and trade barriers remain on many products into many countries

‐ Significant capital required for investment in plant & equipment

‐ New Zealand is largest producer and exporter of milk powder in the world

‐ Significant percent of New Zealand’s milk powder exports are made into infant formula in other countries

‐ NZ has free trade agreements with a number of key Asia Pacific markets

2. Manufacture more infant formula in New Zealand3

‐ Targeted program to attract new greenfields investments by infantformula manufacturers

‐ Grow and nurture existing smaller producers

‐ Fonterra unwilling to compete with itsown customers

‐ Remaining tariffs on many products

‐ Retail private label/store brands are growing globally1

‐ Major global manufacturers often refuse to produce them

‐ Many New Zealand manufacturers aresucceeding in producing store brands for domestic and international retailers

3. Produce store brands for international retailers

‐ Additional volume through existing plant and equipment

‐ Volume to enable further capital investment

‐ Access retailers that sell almost exclusively private label (e.g. Aldi)

‐ Can dilute ability to enter market with own brand(s)

‐ Business only there as long as contract is in place; retailers can be capricious2

PROCESSED FOODS – POTENTIAL STRATEGIC DIRECTIONSThree potential strategic directions are suggested to drive the strong growth of the New Zealand processed foods sector

PAGE 36 1. See http://www.coriolisresearch.com/?page_id=240 for a number of reports on the subject; 2. “Given to sudden and unaccountable changes of mood or behaviour.”; 3. Coriolis have done non‐public research in this space that we are happy to discuss; Source: Interviews; Coriolis

PROCESSED FOODS – POTENTIAL AREAS FOR INVESTMENT

Products

- Current success occurring in a handful of key segments which use low cost New Zealand inputs as ingredients- Infant formula (dairy)- Chocolate/confectionery (dairy)- Frozen meals & sides (meat & vegetables)- Pet food (meat & vegetables)- Soups & condiments (vegetables)- Biscuits/baked goods (dairy)1

- Investors with strong leveragable capabilities in these or related areas should investigate greenfields investment- For example, Germany is the second largest exporter of

processed foods in the world but no German firms in NZ

- Opportunities in many small/mid‐size segments ignored by the slow moving farmer‐cooperatives

- Following the value chain for New Zealand raw materials suggests where the opportunities are in market (e.g. consumers don’t buy milk powder; where does it go…)

Markets

- Domestic market is small and relatively low growth

- Investors should focus on opportunities to drive strong export growth

- East & South‐East Asia are ideal markets given location and awareness of NZ as a safe/secure producer of wholesome foods

Acquisition targets

- Limited pool of acquisition targets - Many key firms already foreign‐owned by multinationals- NZ‐owned firms often have committed family ownership- Many would welcome investment

- As above, greenfields a sensible option for firms with existing capabilities- Greenfields plant construction relatively straightforward- Resource Management Act is only major hurdle in most

cases

PAGE 37 1. There is more butter in a frozen croissant than grain; Source: Interviews; Coriolis

Wide range of opportunities for investors in the New Zealand processed food sector; preliminary focus should be on products that leverage existing high quality/low cost New Zealand ingredients (e.g. dairy)

TABLE OF CONTENTS

Section Page

1. Dairy 4

2. Meat 10

3. Seafood 16

4. Produce 24


6. Beverages 38


BEVERAGES – WINE – SITUATION

New Zealand wine (exports US$774m)

- Wine production is a fast growing industry for New Zealand with a number of large players

- Many wineries are now foreign owned (Montana, Nobilo); ongoing acquisitions are occurring

- Large group of small‐to‐medium sized New Zealand owned wineries who are capital constrained

- The New Zealand wine industry has achieved spectacular growth over the last 40 years

- From NZ£51 in exports in 1960 to NZ$1b in 2009

- Achieved premium price position in–market on par with France (which has been producing wine for ~2,000 years)

- Competes successfully with major old world wine producers (e.g. France, Germany)

- Success to date almost exclusively Marlborough Sauvignon Blanc

- A “must‐have” wine for major wine players

- Good Marlborough wine area is now almost all used

- Emergent secondary regions are 20 years behind Marlborough in terms of development

- Hawkes Bay, Waipara and Central Otago stand out as the next best prospects

- Other than Gimblett Gravels Syrah, most still to find “their” wine

- Foreign ownership plays a big part in the wine industry, with the

top three wineries foreign owned; New World wines are an important part of a global portfolio.

Competitors

- New Zealand wine competes directly with other premium temperate climate countries

- France, Germany, USA, South Africa, Chile

Consumers/Markets

- Global Financial Crisis (GFC) depressed global demand, pushing down prices; this in turn triggered a decrease in global production

- These falling prices have impacted New Zealand wines

- Wine consumption is declining in many EU markets (France, Italy, Spain) due to economic conditions; however, New Zealand’s key markets (AU, UK, USA) have been stable to increasing

- Wine sales success to date in wine has been primarily in Anglo‐Saxon 4 (USA, Canada, UK & AU);

- China is an emerging growth market; now New Zealand’s #5 export destination

- Available market data suggests that the growth of New Zealand wine is at the expense of French wines (i.e. that the two are close substitutes to consumers)

PAGE 39 GFC = Global Financial Crisis; Source: Interviews; Coriolis

The wine industry has shown rapid growth driven by Marlborough Sauvignon Blanc; further diversification into new varieties and new regions should occur going forward

BEVERAGES – OTHER BEVERAGES – SITUATION

Beer (exports US$26m)

- Beer brewing is a low growth duopoly controlled by two international companies brewing for domestic consumption

- Lion, founded in New Zealand, owned by Kirin (Japan)

- Dominion Breweries, founded in New Zealand, now owned by Asia‐Pacific Breweries (Heineken/F&N)

- There are a wide range of smaller/micro breweries

- New Zealand is a minor beer exporter1, and imports +50% more beer than it exports2, driven in part by the foreign ownership of its two key breweries; however beer export surged in the last year (driven by smaller microbreweries)

Spirits (exports US$58m)

- Independent Liquor, recently purchased by Asahi, is the largest player in spirits; Independent initially developed its business around flavoured RTD3 drinks, however it is diversifying into other alcoholic beverages

- There are a range of smaller firms in spirits achieving strong growth and the sector is well positioned for further growth

Soft‐drinks (exports US$67m)

- Non‐alcoholic beverages are a duopoly controlled by two international companies that primarily manufacturing for domestic consumption

- Coca‐Cola Amatil, Australian‐listed Asia‐Pacific licensee of

Coca‐Cola

- Frucor, former Apple & Pear Marketing Board Juice Business, now a division of Suntory (Japan); maker of V energy drink and Pepsi licensee in New Zealand

- Smaller innovators emerging outside soft‐drinks/water (e.g. Charlie’s/Phoenix recently acquired by Asahi)

Juice (exports US$38m)

- New Zealand exports apple and kiwifruit juice, primarily as a secondary product of the fresh fruit industry; New Zealand imports +20% more juice than it exports2

Water (exports US$8m)

- New Zealand has excellent theoretical potential to produce and export premium bottled water; however to date it has realised very little of this potential despite 30 years of trying

PAGE 40 1. Mexico, for example, exports 87x as much beer as New Zealand; NZ currently exports about as much beer as the Dominican Republic; 2. in value terms; 3. RTD = ready‐to‐drink

Outside wine, the New Zealand beverage sector is primarily focused on production for domestic consumption; however, exports are growing

Key metrics #(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

Turnover (NZ$) $4,240m 5% 7% $271m

Exports (US$) $971m 18% 23% $182m


Employment 8,900 3% ‐4% ‐410


$476,404 ‐ ‐ ‐

BEVERAGES – QUANTITATIVE SCORECARD Most of the beverages produced in New Zealand are consumed in New Zealand; the wine industry is the key export success story to date

PAGE 41 1. Manufacturing only; Source: various company annual reports; various company websites; Kompass; Coriolis analysis


Turnover(NZ$m; 10)

Lion

Pernod Ricard

Delegats Group

Constellation Brands

Villa Maria

DB Breweries

Independent Liquor

Coca Cola Amatil

Frucor

1,400

750

50

270

250

500

300

1,100

900

$605m

$337m

$220m

$215m

$141m

$461m

$414m

$493m

$380m

Key markets %(2010)

US$m(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

East Asia

SE Asia

Europe

North America

Australia/PI

Other

Total

5%

3%

28%

25%

38%

1%

100%

$51

$25

$274

$241

$370

$10

$971

12%

20%

18%

22%

18%

15%

18%

20%

36%

23%

29%

19%

52%

23%

$9m

$6m

$51m

$54m

$59m

$4m

$182m

Key competingcountries Key regions

France

Germany

USA

Chile

‐ Loire Valley (Sancerre,

Pouilly Furme)

‐ Bordeaux Regions (Entre‐

Deux‐Mers, Pessac‐

Leognan)

‐ Alsace, Mosel

‐Washington State, Oregon

‐ Valparaiso, Casablanca

Valley

Key products export value

US$m(2010)

CAGR(00‐10)

CAGR(09‐10)

ABS(09‐10)

Wine

Spirits

Beer

Soft drinks

Juice

Water

Total

$774

$58

$26

$67

$38

$8

$971

24%

9%

12%

7%

7%

18%

18%

21%

46%

64%

23%

5%

51%

23%

$137

$18

$10

$13

$2

$3

$182

BEVERAGES – WINE – SWOT ANALYSISThe New Zealand wine industry is well positioned for further growth, but pressures will continue



‐ Islands in the middle of the South Pacific the size of Italy but with only the populationof Singapore; therefore relatively unspoilt

‐ Strong and growing success in premium/super‐premium

‐ Achieves a strong price premium in key markets (similar to France)

‐ New Zealand Sauvignon Blanc now a “must have” for global wine companies

‐ Growth in market share in key markets (e.g. USA)

‐ Innovative and quality‐focused winemakers

‐ Large number of small wineries with low/no economies of scale

‐ High debt levels of many small and medium sized wineries

‐ Highly dependant on four countries (AU, UK, USA and Canada)

‐ Increasing exports of bulk wine

‐ Lack strong super‐premium heritage brands as demanded by brand and status conscious Asian consumers


‐ Continued income growth in Asian markets

‐ Continued growth of New Zealand wine consumption in China

‐ Low share in Europe (two thirds of global wine consumption) outside British Isles

‐ Joint in‐market activity spreading cost of marketing

‐ Automated vineyard pruning technology reducing requirements for labour

‐ Strong and growing demand in Asia for premium fortified wines/wine based spirits (e.g. cognac)

‐ Growing consolidation of the wine industry

‐ Difficult finding good distributors to gain access into key markets

‐ Continued growth of bulk wine trade reducing the value of wine

‐ Continued impact of GFC, reducing wine spend

‐ Oversupply of wine globally increasing pressure on price

‐ Continued growth of retail brands/store brands in wine

BEVERAGES – NON‐WINE – SWOT ANALYSISNew Zealand is currently less well positioned outside wine; however the country is well positioned for further growth



‐ Islands in the middle of the South Pacific the size of Italy but with only the populationof Singapore; therefore relatively unspoilt

‐ Closer shipping distances to Asia compared to European competitors

‐ Demonstrated capabilities in beverage production

‐ On‐going growth and success of Frucor/V, and Charlies/Phoenix in non‐alcoholic drinks category

‐ Emergent success in spirits (e.g VoC and 42Below)

‐ No deep cultural unique “spirits” associated with New Zealand

‐ Long shipping distance to traditional western markets

‐ No large New Zealand owned champion growing and driving New Zealand brand position in beverages

‐ Limited culture or mentality of super‐premium branding or positioning (e.g. relative to France)

‐ Low levels of skills outside wine relative to peer group

‐ Not a producer of many base ingredients of typical beverages


‐ Leverage success of New Zealand wine industry; build on awareness of New Zealand in wider premium beverages segments

‐ Wide range of New Zealand unique plants available as flavouring (e.g. 42 Below Manuka honey)

‐ Rapidly growing demand for premium alcoholic beverages in Asia

‐ Limited opportunity shipping “water” around the world if it isn’t a premium product

‐ Changing consumer sentiment (e.g. bottled water backlash)

‐ Failure to achieve large scale export traction outside wine

‐ Hollowing out of management skills in New Zealand industry due to foreign ownership



‐ New Zealand has built a strong position in Sauvignon blanc

‐ Competitors improving and pushing into variety (e.g. South Africa) often at lower price point

1. Continuous improvement of Sauvignon Blanc from Marlborough

‐ Build on existing position‐ Create upward price pressure through

improvement in relative quality‐ “Vineyard‐to‐glass” approach

‐ Competitors improving as well‐ Spreading best practice across large

number of industry participants

‐ NZ still a very young wine producer finding its way

‐ Industry emerged from vision of handful of people, primarily EU/AU immigrants

‐ Peers have much wider range of regions and wines

2. Nurture emerging regions to Marlborough Sauvignon Blanc status

‐ Marlborough accounted for 70% of NZ wine production

‐ New Zealand over dependant on one variety/one region relative to peers

‐ Discovering new varieties that suit New Zealand conditions

‐ Expand immigration allowance of skilled wine industry participants

‐ Corporate group‐think and prevailing wisdom

‐ Capital‐ Biosecurity limiting introduction of

new genetics‐ Barriers to immigration

‐ The four large Anglo‐Saxon countries account for 20% of global wine consumption but 86% of New Zealand’s wine export value

‐ Northern Europe accounts for 32% of global wine imports but only 4% of NZ wine exports

3. Diversifying away from traditional Anglo Saxon markets into wine drinking Northern Europe

‐ Significant untapped potential for growth in Northern Europe, specifically Denmark, Netherlands and Sweden

‐ Language and cultural barriers‐ In‐market legal structures (e.g.

Sweden’s Systembolaget1)‐ Requires many years of hard work‐ Need to achieve minimum critical mass

“tipping point”1

‐ Asian consumers, particularly Chinese, favour smaller amounts of strong spirits

‐ Asian consumer are clearly signalling with their wallets that they want fortified wine not table wine

4. Move into fortified wines ‐ Fortified wine gets high prices‐ Fortified wine can support unique

positioning (e.g. Cognac, Armagnac, Pisco, Jerez)

‐ Lack of experience or skills‐ No heritage in space (need to do “new

world” approach)

‐ Many countries have a strong identity with a specific alcoholic spirit

‐ Peer group countries suggest spirits a strong area for growth going forward

5. Nurture development of a spirit industry

‐ Find New Zealand “spirit” (e.g. Mexico=Tequila)

‐ Build on existing premium position in wine

‐ Lack of heritage or history

BEVERAGES – POTENTIAL STRATEGIC DIRECTIONSFive potential high potential strategic directions are identified for the beverages industry

PAGE 44 1. For example a retail bay with the word “New Zealand” on the sign overhead

BEVERAGES – POTENTIAL AREAS FOR INVESTMENT

Wine- New Zealand Sauvignon Blanc a “must‐have” component of

portfolio for major global wine companies- Three of the top five US wine companies in NZ- Three of the largest EU alcoholic beverage companies in NZ- Three of the top five Australian wine companies in NZ

- Some opportunity in Marlborough- Due to lower price of wine (due to GFC)- Future area growth of Marlborough limited due to

geological constraints

- Large firms either foreign owned by majors or committed NZ family owners - Delegats and Villa Maria both committed owners

- Opportunities for investment in next tier down layer of firms (e.g. Giesen, Lawsons Dry Hills, Chard Farm, Allan Scott, Coopers Creek, Kumeu River etc.)

- Investors looking to unlock value in other regions; investigate emergent secondary regions (i.e. the next “Marlborough”)

Premium alcoholic spirits- Clear potential in premium alcoholic beverages

- Building on New Zealand positioning in premium wine

- Peer group countries suggest strong future growth possible- Limited entry vehicles; greenfields by global player with

skill sets recommended

Beer- No revealed demand for New Zealand beer in world markets

- Lion owned by Kirin- DB owned by Asia Pacific Breweries - Independent Liquor owned by Asahi- Microbreweries small and growing but primarily domestic

focussed

Soft drinks- In Soft drinks, Frucor/V and Charlie’s/Phoenix are attractive but

both recently changed hands for top dollars; both now Japanese owned

Water- Limited opportunities in export bottled water- Best fit would be for investor with transferrable capability

PAGE 45 GFC – Global Financial Crisis; Source: Interviews; Coriolis

Alcoholic beverages is a major opportunity for investors; wine has shown rapid growth; opportunities exist in second tier wine regions and developing a premium spirits category

TABLE OF CONTENTS

Section Page

1. Dairy 4

2. Meat 10

3. Seafood 16

4. Produce 24


6. Beverages 38


NUTRACEUTICALS – SITUATION

New Zealand

- The New Zealand industry is relatively young and filled with many passionate individuals; most firms are small; the median firm in NZ would have 2‐3 employees

- Industry regulation is increasing as the sector matures

- New Zealand produces a handful of nutraceuticals at any scale:

- Manuka honey – derived from the native manuka tree; honey sourced from the high factor trees is valued for its antibacterial properties

- Green lipped mussels assist with joint mobility

- Deer velvet used primarily for male impotence

- A range of dairy derivatives and dairy‐related bacteria

- High sector innovation with new products constantly emerging; many products are fads and many have a natural lifecycle; while Manuka is still on rise, deer velvet has clearly peaked

- The New Zealand sector has produced a number of mid to large firms

- Vitaco ($168m; Private Equity [Next Capital AU])

- Comvita ($85m; NZX listed)

- New Image (82m; NZX listed)

- Alpha Laboratories ($85m; private)

- The sector has been a focus of Government science funding over the past decade, but results for this research, limited to date

Competitors

- Production of key ingredients (e.g. vitamin C) typically occurs in large scale factories (e.g. China, Germany) and are traded globally

- Globally the nutraceuticals sector is highly fragmented

- Vitamins & supplements consolidating at a pace; large players emerging, often around major pharmaceutical companies

- Still a large group of mid‐sized firms, typically narrow focus

- Large number of small, single product firm selling “snake oil”

- There is intense competition in the market; new brands, products, compounds, and items are constantly evolving

Consumers/Markets

- Nutraceuticals are typically consumed in Western countries by wealthy/ city dwellers & aging baby boomers trying to repair the damage of modern living

- Nutrcaceuticals consumed in Asian countries is cultural

- Consumer often looking for more proactive health solutions as medical costs rise

- Consumers often purchase sporadically and have inconsistent consumption (e.g. a cupboard full of half finished jars of pills)

- Two key channels: (1) retail supermarkets which want two key brands and private label and (2) pharmacies/supplements specialists which want a wider range of non‐supermarket brands


Nutraceuticals, while still fragmented globally, is consolidating as the sector matures

NUTRACEUTICALS – SWOT ANALYSISNew Zealand needs to continue moving forward and adapting; success is not guaranteed



‐ Unique flora and fauna due to New Zealand’s geographic isolation

‐ Unique products proven success (e.g. Manuka honey)

‐ New Zealand trusted country and products with secure food source

‐ Able to leverage favourable opinion of New Zealand in key markets (e.g. China, Korea, Japan)

‐ Cheaper to manufacture than in Australia

‐ High cost of robust scientific validation of claims (e.g. clinical trials)

‐ Fickle market often fad products with inconsistent consumption

‐ Narrow consumer market

‐ Regulatory environment in export markets challenging to understand and frequently changing; no global standards or agreements

‐ Most NZ firms have low/no economies of scale

‐ Lack of capital for research and capital investment


‐ Large waste streams from existing food and beverage manufacturing

‐ Expansion into high demand nutraceuticals markets (e.g. East Asia)

‐ Native, unique plants

‐ Research into key high potential products with proven track record (e.g. manukahoney, blackcurrants)

‐ Marketing New Zealand’s unique environment and products

‐ Marketing to tourists in New Zealand

‐ Online shopping

‐ “Country of Origin” labelling supporting New Zealand products

‐ Special dietary requirements (e.g. for use in retirement homes, hospitals etc.)

‐ Counterfeiting of New Zealand products, particularly in China

‐ False claims bring disrepute on the industry

‐ Increasing amount of regulatory restrictions

‐ Backlash, negative publicity in sector with products with unproven claims

‐ Companies repacking imported ingredients as produced in New Zealand

‐ Scares/contaminations/disease damaging consumer image of New Zealand



‐ Large number of new nutraceuticals being developed by scientists

‐ Entrepreneurs developing new nutraceuticals

‐ Existing global nutraceuticals being launched in New Zealand (e.g. Noni)

‐ Handful of key products account for most of industry export growth

‐ Highly crowded world market

1. Focus on proven winners (e.g. manuka) instead of spreading efforts widely

‐ Build on and amplify success ofexisting winners

‐ Amplify consumer cut‐through with winning message

‐ Missing out on high potential new nutraceuticals

‐ Most nutraceuticals only delivered in single form to consumer (e.g. pill)

‐ Consumers have a wide range of consumption and use occasions

2. Line extensions to leverage functional properties into new forms

‐ Build strong consumer perception of health benefits of product (e.g. cranberries) through wider exposure

‐ Sell more volume to consumers

‐ Succeeding in new channels‐ Coming up with ideas‐ In market execution

‐ Industry still highly fragmented with large number of small players

‐ Few NZ brands have any in‐market awareness or presence

‐ Cost structures and overheads per unit are high

3. Industry consolidation to drive scale

‐ Roll‐up strategy by larger firms and emerging leaders

‐ Drive economies of scale around production and marketing

‐ Low barriers to entry (currently)

4. More collaborative marketing ‐ Firms work together to jointly market NZ as suppliers

‐ Similar to wine industry

‐ Egos and personalities‐ Cooperating and competing at the

same time

NUTRACEUTICALS – POTENTIAL STRATEGIC DIRECTIONSFive potential strategic directions are identified for the nutraceutical sector


NUTRACEUTICALS – POTENTIAL AREAS FOR INVESTMENT

- Wide range of opportunities for investors with leverageable or transferable skills- Marketing/market access- Distribution/infrastructure

- Fragmentation suggests significant opportunity for consolidation and /or industry roll‐up, driven by economies of scale

- Wide range of acquisition targets- Most companies for sale at the right price

Waste streams & by‐products- Clearest opportunity is in adding value to waste streams

emerging from existing large food production industries- Seafood- Meat- Dairy- Fruit (kiwifruit, apples)

- Large amount of waste give economies of scale in refining and processing

NZ Unique- New Zealand has a wide range of plants and animals found

nowhere else on earth due to New Zealand’s isolated location- Huge range of unique native plants - Wide range of sea organisms- Extraction from native land animals likely rejected for non‐

economic reasons- These unique plants and animals create opportunities and

success to date comes from a handful of these

Manuka honey- Manuka honey is achieving cut through and strong consumer

acceptance; consumers “get” the concept- Product is highly defensible as it is only in New Zealand (& AU) - Production fragmented across a wide range of geographically

disperse beekeepers; low/no opportunities here- In production Comvita is largest firm; another 4 firms at any scale

Green‐lipped mussel extract- Waste‐stream of production of green lipped mussels - Product is defensible as it is only in New Zealand; however, wide

range of competing products in joint‐mobility space

Dairy related- Wide range of dairy derived or related nutraceuticals being

developed or promoted in New Zealand- Consumer success to date primarily colostrum; leader is New

Image selling via direct marketing in Asia- Other dairy (bioactive milk components and probiotics)

controlled by farmer‐owned cooperatives

- Beyond these three proven success in the market, opportunities are more speculative


Investors should focus on proven products achieving traction in export markets; opportunities beyond there more speculative and only for those with strong transferrable capabilities; opportunities exist for industry roll‐up

For more information & the complete set of reports:

www.foodandbeverage.govt.nz

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