Issue No 12, July 1999.

NOTICE: Hard copies of the Australian New Crops Newsletter are available from the publisher, Dr Rob Fletcher. Details of availability are included in the Advice on Publications Available.

7. The Value Chain in the Native Australian (Bush) Food Industry (continued)

Anthony Hotson
Tuckombil Native Foods
Telephone: 02 6628 5558
Facsimile: 02 6628 5558
Email: ahotson@nor.com.au

[This article first appeared in the Technical Journal of the Australian Rainforest Bushfood Industry Association, Issue 7: 9-13. It is reproduced with the kind permission of the author. Anthony Hotson is the Vice President of the Australian Rainforest Bushfood Industry Association Inc., which can be contacted at:

This article comprises three parts; they were written to satisfy the requirements of a unit of study in a tertiary educational context. Their inclusion in the ARBIA Journal and this newsletter is for the potential interest of their content. These articles do not claim to be a thorough or exhaustive analysis of the subject]

Other parts of this article:
Part 1. Analysing the Value Chain(s) of the Native Australian (Bush) Food Industry.
Part 3. Investigating and Planning the Establishment of a Producer Network in the Native Australian (Bush) Food Industry.

Anthony Hotson
Tuckombil Native Foods
Telephone: 02 6628 5558
Facsimile: 02 6628 5558
Email: ahotson@nor.com.au

[This article first appeared in the Technical Journal of the Australian Rainforest Bushfood Industry Association, Issue 7: 13-16. It is reproduced with the kind permission of the author. The article was written to satisfy the requirements of a unit of study in a tertiary educational context. Its inclusion in the ARBIA Journal and this newsletter is for the potential interest of its content. The article does not claim to be a thorough or exhaustive analysis of the subject]

Copyright of this article remains with the author, Anthony Hotson (June 1998)

For small growers in the Australian Bushfood industry, the creation of a superior value proposition for purchasers via the provision of quality assured, consistent and economic produce provides an opportunity for grower-producers to increase their market influence and profile.

This opportunity could be realised through the producers forming collaborative marketing ventures to facilitate their value creation proposition. Of the many types of collaborative marketing structures available to producers, some are either beyond the scope of the industry for reasons of market size and style or are beyond the abilities of producers due to capital and/or infrastructure requirements.

The benefits of collaborative marketing can be attained relatively easily on a scale which is compatible with markets through the formation of Producer Networks. These networks offer a flexible and responsive structure which can expand or rationalise as needed in what is a new and developing industry.

Nature:
Statutory Authorities are State and Commonwealth legislated boards which are set up to control the marketing of specific commodities.
They are established via polling when a majority of registered producers of the commodity in question vote in favour of such an authority.
The executive board of such authorities is generally comprised of a majority of producer-elected representatives and a minority of government-appointed office-bearers.
Authorities are funded in their activities via levies imposed on the produce they handle or the producers involved.

Their major functions are:

• to stabilise prices through controlling supply;
• to vest (compulsory acquisition of all production of the commodity in question) and monopolise in order to control markets; and
• to pool product to enable averaging and equitable distribution of income received over a period of time.

Advantages:
The boom and bust cycles and sub-cycles which are so characteristic of primary production can be moderated.
Economies of scale necessary for lowering of marketing costs to an affordable level for producers can be achieved.

Disadvantages:
Often the producer-elected executives lack business and marketing acumen.
The demands of government legislation can restrict the commercial efficacy of such marketing authorities.
Monopolisation can render an organisation lazy and it may fail to maintain responsiveness to the market.
The nature of the salary structure within Public Service guidelines is such that highly qualified and experienced executives may not take up positions on the board.

Appropriateness:
Appropriate for larger industries, where collaborative marketing has achieved gains for many players in an industry and some, only, are bearing the costs of that marketing.
A Statutory authority then compels all producers to market via the same process and bear the same costs.

Nature:
Co-operatives are group marketing ventures which are owned by its trading producer members.
There are legislated limits on the dividends which are payable to their shareholders and profits must be distributed via rebates or bonuses.
The bonuses are indexed volumetrically to product throughput in the cooperative and thus profits are distributed in proportion to actual use of the cooperative.
Profits are thereby kept for the actual users of the Cooperative rather than non-participatory share-holders or management.

Advantages:
Pooling of produce as a means toward season extension and more market control, sharing of cost of production and marketing.
Majority share-holdings and minority control is avoided.
Co-operatives can maintain economic activity and employment in a local region, usually the region of the grower-members.

Disadvantages:
Co-operatives require a high level of commitment from members.
Capital is often difficult to raise for expansion, due to limited profit-taking ability for investors; new regulations allowing non-controlling investment can make this easier. Growers often fail in their roles as executives and the board of the cooperative may involve growers in conflicts of interest.

Appropriateness:
Where grower margin is being eroded or economy of scale is important the cooperative is a flexible structure in terms of scale and adaptability to market expansion.

Nature:
Limited liability companies may be used as a structure in a manner similar to the way a cooperative works though without some of the restrictions of cooperative regulations.
Such companies can achieve similar outcomes for growers whilst offering a more commercially responsive organisation.

Advantages:
It is somewhat easier to raise capital for a company than for a cooperative. Management of a company may be easier due to its more commercial structure. Employment or sub-contracting of tasks (eg. packing) may be easily arranged (1).

Disadvantages:
The balance between growers' share-holdings can be skewed in favour of large growers.
The composition of the board and company control may lie in larger grower/instigators' hands.

Appropriateness:
Limited liability companies can be appropriate:

• where capital can be raised to realise a commercial opportunity or
• the state of play in terms of market competition would make the formation of a cooperative a risky or ineffectual structure.

Nature:
Strategic alliances involve the investment of organisations in one another's operations to draw on complementary strengths within the value chain of their product.
This is usually between organisations of a similar size, where each is able to then operate in the other's area of specialisation.
They concurrently lock out some of their competitors (often larger organisations) and lock in place improvements in their own quality, costs, contacts and/or facilities.
This is generally a process of vertical integration of sectors of the value chain to ensure greater control over those sectors by the allied organisations.

Advantages:
Achievement of greater economy in cost of sales.
Sharing of market intelligence garnered from a greater range than would be possible as single organisations.
Improvement or expansion of services the organisations are able to offer to their members and clients.

Disadvantages:
Organisations may also take on the short-comings of the allied organisation.
Alliances between unequal partners can lead to unwanted compromise by the weaker organisation; likewise for those of divergent direction or ethics.

Appropriateness:
When two smaller players in the value chain are generally out-competed by larger organisations, their strategic alliance will enable them to achieve greater competition with the larger players, whilst maintaining their strengths and identity.
Strategic alliances may also enable market dominance.

Nature:
The agreement between two (or more) organisations from complementary, usually different, industries to collaborate in their marketing efforts to achieve a marketing edge, to combine market sectors or to provide a value-adding service to their end-use customers.

Advantages:
A low cost means towards the expansion of market sectors or influence.
An extension of scope of market intelligence.
The effective distribution of costs across a greater base.
The structure need not be as complex and binding as other structures such as co-operatives or corporations.

Disadvantages:
Does not solve issues needing market control.
Are generally only effective in smaller sectors of industries, not entire production, though many small co-marketing ventures may exist within an industry.

Appropriateness:
Would be appropriate for expanding into new markets, cost sharing or coat-tailing of product into export markets and for injecting funds from external industries into an industry in an economically limited state.

Nature:
Unformalised or individually formulated groups of producers, often formed under the championing of a management or marketing consultant.

Advantages:
Very manageable due to the small but effective scale possible with such a flexible association.
A high degree of producer commitment and support is generally found.
Ease of technology transfer between players, quality grading and quality assurance within the group.

Disadvantages:
Capital must be raised within the network, which may require large inputs from members or which may not suffice for the necessary scope of the operation.
Producers may not have access to the necessary skills to fulfil the marketing needs of the network.

Appropriateness:
This structure is suitable for the coordination of marketing for new and individual strains or varieties of produce requiring specialist production, handling or processing and such technology transfer to all parties in the value chain, for example, with new crops, cut flower varieties or nursery plants.
Suits a small industry, a new and developing industry, or a short-cycle venture.

The Australian Bushfood Industry is a new crop industry. The market for its products is in a state of flux and with such an industry there is a high amount of risk involved in investment. A small network of producers may in fact be the only option, as not many people will be prepared to invest in such a climate and it would be very difficult to raise sufficient capital to establish larger, more cumbersome ventures.

Added to this is the need to be highly responsive to market needs in order to remain viable in such an industry. This is better achieved within a small, dedicated group than a larger and less accessible structure. It is far easier to communicate technologies in agronomy, harvest, cultivars, handling and storage within a network and also to maintain an awareness of market forces and opportunities amongst members.

Grower-producers will also maintain a more active interest in much more of the value chain than would otherwise be necessary in a larger organisation, thus becoming more skilled and dedicated to their network's ongoing success. The options of cooperative or company formation still exist, if market permits later on during the evolution of the venture.

The Network would satisfy the requirements of collaborative marketing as a means towards realising the opportunity for a consolidated brokerage point offering Quality Assurance and consistent, economic and convenient product to purchasers, and thus the superior value proposition.

4.1.1 Pre-Establishment Phase (0 - 12 Months)

• Collect and collate data on target producers and production methods.
• Assess database in terms of volume, species/cultivar/chemovar grown, agronomic practices, proximity to central (or sub-central) areas and grower suitability for Network membership.
• Collect and collate market data.
• Assess market data in terms of market size, targeted share, wholesale and retail prices (for various products and product forms), consumer tastes, market trend, food trends, and economic sensitivity of particular products and particular market sectors.
• Identify the target market based on researched facts.
• Plan how product is sold and to whom.
• Establish Network framework, outlining Network rules and requirements from members.
• Obtain commitment from potential members, including equipment, facilities, skills, product and capital.
• Identify appropriate Quality Management System in terms of cost to production and purchaser/legislative/market demands.
• Assess potential governmental assistance - both facilitative and financial.

4.1.2 Establishment Phase (12 - 24 months)

• Establish the Network via the chosen legal structure.
• Establish an inventory of product, equipment and facilities.
• Liaise with buyers and initial marketing contacts.
• Formulate a Marketing Plan including targets for market sector, volume and throughput and establishing marketing images, branding, promotion and selling mechanism(s).
• Formulate a Business Plan including management roles, financial exchange and targets for short, medium and long term goals.
• Establish benchmarks for performance of the Network both as goals and an agreed point at which to dissolve the Network in the event of unsustainable performance.
• Execute and monitor Quality Management System.
• Maintain relationships with marketing contacts and monitor value delivery all the way to the consumer.
• Emphasise the Network focus and value offered to purchasers.

4.1.3 Operational Phase (24 - ongoing months)

• Manage supply line and modify Quality Management in line with feedback from purchasers and consumers.
• Consolidate relations with purchasers.
• Assess potential strategic investment/alliance with other players in the value chain offering influence or value to the Network.
• Establish buying system for farm inputs and access greater purchasing influence and efficiency.
• Promote the Network's brand or name, focus, services and value offered to purchasers.
• Establish links with the Tourism industry with a view to co-marketing of produce as part of a regional identity.

4.2.1 Pre-establishment Phase (0 - 12 months)

Project champion - coordination of project's conception and formulation, liaison with market representatives, market researchers, government bodies, growers, researchers, horticulturalists, solicitors and accountants.

Growers - motivational forces behind the venture, source of agronomic facts, supply of trial produce, suppliers of capital.

Marketing consultant - market research, product formulation.

4.2.2 Establishment Phase (12 - 24 months)

Project champion - as above.

Committed growers - commitment to the venture, supply of product, equipment and facilities; adherence to and execution of Quality Management System.

Marketing consultant - establishment of Marketing Plan.

Accountant/Business consultant - management of Network books, establishment of Business Plan.

4.2.3 Operational Phase (24 - ongoing months)

Committed growers - fulfilment of various staffing roles, including Production Manager, Quality Assurance Officer, Market Liaison Officer, and Secretary/Public Officer.

Accountant/Business Consultant - monitoring of Business Plan, management of Network books; formulation of Network Strategic Planning.

Marketing consultant - liaison with Business Consultant, Grower-Members and purchasers.

4.3.1 Pre-establishment Phase (0 - 12 months)

Misjudgement of market trends regarding high-value niche-market food products.

Poor market positioning of products.

Poor or inappropriate market research.

4.3.2 Establishment Phase (12 - 24 months)

Inappropriate Network expectations perhaps because of incompatible membership.

Lack of investment capital for critical operations of the Network.

4.3.3 Operational Phase (24 - ongoing months)

Failure to respond to market change.

Inability to respond to market change.

Unforeseen competition from larger players in the chain eroding margin or market share.

Failure to deliver the value offered by the Network due to internal management shortcomings.

Failure of agronomic system to operate in adverse climatic conditions.

Failure of Quality Management System or food contamination at HACCP which passes to consumer.

Food contamination event caused by others in the industry affecting consumption and product throughput of the Network.

1. Neil Lyon. 'Avocado company reaps above average returns' Australian Farm Journal, June 1997 p177.

Other parts of this article:
Part 1. Analysing the Value Chain(s) of the Native Australian (Bush) Food Industry.
Concluded with:
Investigating and Planning the Establishment of a Producer Network in the Native Australian (Bush) Food Industry.

Contact: Dr Rob Fletcher, School of Land and Food, The University of Queensland Gatton College, 4345; Telephone: 07 5460 1311 or 07 5460 1301; Facsimile: 07 5460 1112; International facsimile: 61 7 5460 1112; Email: r.fletcher@mailbox.uq.edu.au

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originally created by: GK; latest update 17 October 2001 by: RF