British Columbia Tree Fruit Industry

Transcription

1 School of Business British Columbia Tree Fruit Industry The road ahead? Facilitators: Svan Lembke, Ph.D. Lee Cartier, P.Ag.

2 Workshop Agenda 9:00-9:15 Welcome and introduction 9:16 10:30 Summary of research findings 10:31-10:45 Refreshments break 10:46-11:30 Workgroup discussions Opportunities and Challenges 11:31-12:00 Session debrief and summaries 2

3 Executive Summary Economic assessment of financial information across different value chains & 17 in-depth interviews with industry cluster stakeholders was carried out June Nov Agriculture is a fundamental part of the Okanagan s economy although compared to other industries, agricultural product exports are less than imports, despite a claim for exceptional quality that should encourage specialization and trade to new markets. Price volatility, product lifecycles, changes in market behaviours are mapped to industry responses and it becomes apparent that change and opportunities are not pro-actively managed. A multitude of opportunities are available to the industry and change seems inevitable. 2017, Cartier & Lembke 3

4 2016 Research Design Confirmation of the current economic structures of the Okanagan tree fruit value chains: Conventional Apples Organic Apples Cider Cherries Identification of major obstacles and barriers to growth and innovation in the Okanagan region: Internal cluster dynamics External drivers of change Quantitative data sources Qualitative data sources 2017, Cartier & Lembke 4

5 An Economic MAP by industry type of the Okanagan /Similkameen Okanagan Valley BC Reference (2006) RE=Real Estate A/E=Arts & Entertainment AG=Agriculture 1.5 Construction More export than import Location Quotient British Columbia Health Care Retail 1.1 RE Manufacturng Hospitality 1.0 Ag A/E Growth rate 0.9 Cartier, Compound Annual Growth Rate 5

6 Industry Cluster Map Okanagan Valley BC Reference 1.6 Only three clusters 1.5 Ag. Products Ag Products Cluster has highest growth potential 1.4 Location Quotient British Columbia Life Sciences 1.0 Hospitality & Tourism Cartier, 2012 Compound Annual Growth Rate 6

7 Agricultural Products Cluster Framework Adapted from Porter, M (1990), Competitive Advantage of Nations, The Free Press 7

8 Agricultural Products Cluster Sectors 1 Farm management services 2 Soil preparation services 3 Irrigation equipment & services 4 Processing and packaging machinery 5 Fertilizers 6 Farm primary products 7 Wine or brandy 8 Milling and refining products 9 Product distribution and wholesale services 10 Malt beverages 11 Specialty processed food products 12 Animal health products 13 Agricultural chemicals (excluding fertilizer) 14 Supplies distribution and wholesaling 15 Related financial services 16 Transportation and logistic services 17 Bulk packaging 18 Other related services Cartier, 2012: Value Chain Analysis of the British Columbia Wine Industry 8

9 The building blocks of the Agricultural Products industry cluster The tree fruit industry value chains The wine industry value chain (includes cider) Dairy and poultry value chains (north Okanagan) Fixed land-base for agriculture Changes are on-going and are influenced by value chain performance 2017, Cartier & Lembke 9

10 Okanagan Tree Fruit Value Industry An Industry in Transformation Acres CAGR Apples 8,677 10,005 13, % Pears % Plums % Cherries (sweet) 3,532 2,515 1, % Cherries (sour) % Peaches 1,209 1,387 1, % Apricots % Grapes 9,515 6,589 4, % Total 24,017 21,888 23, , Cartier & Lembke 10

11 British Columbia Apple & Cherry Industry Value Chain , Cartier & Lembke 11

12 British Columbia Cider Industry Value Chain , Cartier & Lembke 12

13 BC Apple Sales Volume, Price, Quality Volatility in apple prices (partially off-set by government programs) BCTF Apple Sales Apple Quality - Selected Varieties % (Pounds (millions) Dollars (millions) Percent of Packed Crop 100.0% 80.0% 60.0% 40.0% 20.0% % Apple Sales Pounds Apple Sales Revenue FCY or better Commercial Cull 2017, Cartier & Lembke 13

14 Historic Apple Prices New apple varieties are needed to keep average price high (lifecycle <20yrs) Apple Prices - Selected Varieties $ per Pound McIntosh Royal Gala Red Delecious Honeycrisp Ambrosia Average - All Varieties Linear (Red Delecious) Linear (Ambrosia) 2017, Cartier & Lembke 14

15 Apple Sales by Geographic Market 100.0% Channel Sales Percentage Apples 160,000, Channel Sales $/pound Apples Percent 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 140,000, ,000, ,000,000 80,000,000 60,000,000 40,000,000 20,000,000 Pounds $/pound $/pound 0.0% Local Canadian U.S. Export Pounds Local Canadian U.S. Export Average Sales process does not seem to follow attractive markets 2017, Cartier & Lembke 15

16 17 In-depth Interviews (with innovative stakeholders in the cluster) Interview sample distribution 3 2 Where is the apple stakeholder s main focus and attention? , Cartier & Lembke Apples Cherries Other 16

17 Industry Key Success Factors N Minimum Maximum Mean Std. Deviation product_number product_frequency External force technology_changes distribution_channels competitor_aggression internet_usage local_access , Cartier & Lembke 17

18 Focus on Marketing vs Technical Innovation Not a strong focus on marketing Focused Primarily on Technical Strength Technical Somewhat More than Marketing About Equally Balanced? 2017, Cartier & Lembke Marketing Somewhat more than Technical Focused Primarily on Marketing Strength 18

19 Marketing vs Technical across Value Chains Conventional Apples Organic Apples Cherries Other Focused Primarily on Technical Strength Technical Somewhat More than Marketing About Equally Balanced Marketing Somewhat more than Technical 2017, Cartier & Lembke 19

20 Strategic importance to the business N Minimum Maximum Mean Std. Deviation product_price product_differentiation Internal focus innovativeness marketing_mix production_process production_costs , Cartier & Lembke 20

21 Apple Producer Margin Existing Planting Yields Conventional Apple Production Organic Apple Production , , ,000 2, ,000 7,000 6,000 $ per Pound , ,000-2,000-3,000 $ per Acre $ per Pound ,000 4,000 3,000 2,000 1,000 0 $ per Acre Margin/lb Average cost / Lb Average price/lb Margin/Acre Margin/lb Average cost / Lb Average price/lb Margin/Acre This is the historic yield for conventional production? Average Apple Yield: 30.5 Bins/Acre Average Organic Yield: 27.5 Bins/Acre Is this a realistic yield for organic production? 2017, Cartier & Lembke 21

22 Apple Orchard Densities Apple Orchard Densities Low Medium High Sample Acres Zone 1 3,754 Zone ,446 2,947 Zone , ,208 8,290 High 32% Low 36% Low density: <400 trees/ac Medium density: 401-1,000 trees/ac High density: >1,000 trees/ac Medium 32% Cartier 2014:Source SIR program data 22

23 Apple Production Margin Opportunities Existing Yields Compared to Super Spindle Yields Potential Conventional Apple Margins Potential Organic Apple Margins 100% 12, % 18,000 Percent of $ per Pound 90% 80% 100% 100% 100% 70% 60% 50% 40% 54% 39% 30% 82% 20% 61% 10% 46% 18% 0% 30 Bins/Acre 50 Bins/Acre 75 Bins/Acre Average price/lb ,000 8,000 6,000 4,000 2,000 0 $ per Acre Percent of $ per Pound 90% 80% 100% 100% 70% 60% 50% 40% 41% 32% 30% 20% 59% 68% 10% 0% 25 Bins/Acre 45 Bins/Acre Average price/lb ,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 $ per Acre Average cost / Lb Average cost / Lb Margin/lb Margin/lb Margin/Acre 1, , , Margin/Acre 7, , , Cartier & Lembke 23

24 Packing and Shipping Cost Structure Apples - Existing and Potential Yields Packinghouse Cost Structure Dollars (millions) Income Cost of sales Shipping Labour cost Materials cost Apple cost Overhead Net sales Costs indicate little change in sales approach Bins/Acre 75 Bins/Acre 2017, Cartier & Lembke 24

25 BC Cherry Sales Pounds (thounds) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 BCTFC Cherry Sales Pounds Shipped Revenues 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Dollars (thousands) 2017, Cartier & Lembke 25

26 Cherry Sales by Geographic Market BCTFC Channel Sales Percentage Cherries Channel Sales $/pound Cherries 90.0% 9,000, $ % 8,000, % 7,000, $2.00 Percent 60.0% 50.0% 40.0% 30.0% 6,000,000 5,000,000 4,000,000 3,000,000 Pounds $/pound $1.50 $1.00 $/pound 20.0% 2,000, $ % 1,000, % $0.00 Local Canadian U.S. Export Pounds Local Canadian U.S. Export Average Large independent cherry producers are vertically integrated. In contrast to BCTFC 80% of their crop is exported out of Canada and 20% is sold across Canada 2017, Cartier & Lembke 26

27 Cherry Producer Margin Cherry Production Margin , , ,000 $ per Pound , ,000 $ per Acre An even more volatile market ,000-3, Margin/lb Average cost / Lb Average price/lb Margin/Acre Average Cherry Yield: 12,000 pounds/acre -4,000 Are 12-18,000 pounds/acre possible? 2017, Cartier & Lembke 27

28 Cherry Production Margin Opportunities Existing Yields Compared to High Density Yields Potential Cherry Production Margins 100% 90% 80% 70% 100% 100% 14,000 12,000 10,000 $/Pound 60% 50% 40% 30% 67% 53% 8,000 6,000 4,000 $/Acre 20% 10% 33% 47% 2,000 0% 12,000 Lbs/Ac 20,000 Lbs/Ac Average price/lb Average cost / Lb Margin/lb Margin/Acre 4,821 11, , Cartier & Lembke 28

29 Packing and Shipping Cost Structure Cherries 40,000 Packinghouse Cost Structure 35,000 Dollars (thousands) 30,000 25,000 20,000 15,000 10,000 5,000 Revenue Cost of sales Shipping Labour cost Materials cost Cherry cost Overhead Net sales , Cartier & Lembke 29

30 Agricultural Products Cluster Current Primary Producer Margins PRIMARY PRODUCER MARGINS 16,000 14,785 DOLLARS PER ACRE 14,000 12,000 10,000 8,000 6,000 4,000 2,000 5,441 2,238 2, ,520 2,653 2,451 7,416 6,123 3,841 4,821 8,602 3,947 1,987 2,668 6,896 3,947 1, Vertically Integrated Vineyard and Winery Red VQA 3.5 Tons/Ac Red VQA 4.0 Tons/Ac Wine margin/acre 9, , Grape margin/acre 2, , Total margin/acre 11, , BINS/AC 25 BINS/AC 12, 000 LB/AC 3. 5 TONS/AC 3. 5 TONS/AC APPLES ORGANIC APPLES CHERRIES RED GRAPES WHITE GRAPES Revenue Labour cost Materials cost Net 2017, Cartier & Lembke 30

31 Agricultural Products Cluster Potential Primary Producer Margins PRIMARY PRODUCER MARGINS DOLLARS PER ACRE 30,000 25,000 20,000 15,000 10,000 9,038 13,557 8,265 22,536 15,323 24,642 9,163 11,473 9,831 7,881 Vertically Integrated Vineyard and Winery Red VQA 3.5 Tons/Ac Red VQA 4.0 Tons/Ac Wine margin/acre 9, , Grape margin/acre 2, , Total margin/acre 11, , ,000 2,596 2,246 4,196 3,046 2,246 4,189 3,024 4,005 4,008 1,987 3,836 4,008 1,987 1, BINS/AC 75 BINS/AC 45 BINS/AC 20,000 LB/AC 4.0 TONS/AC 4.0 TONS/AC APPLES APPLES ORGANIC APPLES CHERRIES RED GRAPES Revenue Labour cost Materials cost Net WHITE GRAPES What changes do you expect over the next 10 years? 2017, Cartier & Lembke 31

32 Strategic Context: Organic Apples Demand? Supply (10-13% more costly) 6% of apple production is organic (Washington) 3% of apple production is organic (BC) Demand meets supply at 12% production Taylor, M & Granatstein, D. (2013) A Cost Comparison of Organic and Conventional Apple Production in the State of Washington, Plant Management Network. 2017, Cartier & Lembke 32

33 Growth measured by employment FTE change CAGR 3.8% CAGR 24.5% Small employers Large employers 2017, Cartier & Lembke 33

34 What kind of growth initiative are we seeing? Small to moderate innovation is most frequent Small Innovation Radical Innovation Moderate Innovation Vertical Integration New Varieties 2017, Cartier & Lembke 34

35 ? Defensive, we react to competitor actions or customer demands 2017, Cartier & Lembke 35

36 Perceived industry prospects ? 0 Conventional Apples Organic Apples Cherries Other industry_prospects Neither pessimistic nor optimistic industry_prospects Somewhat optimistic industry_prospects Very optimistic 2017, Cartier & Lembke 36

37 Okanagan Apple Cider Wine and Cider Demand Price and Per-capita Consumption Price and Per-capita Consumption Growth Price Elasticity of Demand 2017, Cartier & Lembke 37

38 Wine and Cider Demand Total Wine Coolers & Cider Per Capita Quantity Sold (L) Price/L Per Capita Quantity Sold (L) Price/L 2017, Cartier & Lembke 38

39 Price and Per-capita Consumption $/Litre Coolers & Cider Price Time Per Capita Quantity Sold (L) Coolers & Cider Consumption Time 2017, Cartier & Lembke 39

40 Cider Price and Per-capita Consumption Minimum Maximum Mean SD Cider Price/L Cider Per-capita Consumption (Liters) , Cartier & Lembke 40

41 Comparison of Price and Per-capita Consumption Growth Cider is not like wine! CAGR ( ) Cider/Cooler Price -0.87% Total Wine Price 0.61% BC VQA Price 1.62% Foreign Imports Price 2.29% CIC Price 1.73% Beer Price 0.41% Cider/Cooler Consumption 4.11% Total Wine Consumption 3.59% BC VQA Consumption 8.46% Foreign Imports Consumption 2.53% CIC Consumption 3.20% Beer Consumption -0.63% Key to success is marketing 2017, Cartier & Lembke 41

42 Price Elasticity of Demand An economic concept that measures the responsiveness of the quantity demanded of a good to a change in its price when all other influences remain constant. Price elasticity is measure of a consumers sensitivity to price Products are either: Price elastic: an small % change in price results in a large % change in demand Unit elastic: a 1% change in price results in a 1% change in demand Price inelastic: a large % change in price results in a small % change in demand Why is Elasticity of Demand important in this study? Lower priced generic products typically exhibit higher elasticity of demand (more price elastic) than higher priced specialty (luxury) products of the same type (more price inelastic) Brand identity lowers price elasticity (products are become more price inelastic), consumers become less sensitive to price increases. 2017, Cartier & Lembke 42

43 Price Sensitivity in Market Segments Price/Litre Price Elasticity Cider Cider is price inelastic. Strong brand identity makes wine consumers less sensitive to price increases Brand identity decreases price elasticity: these products become price inelastic and consumers become less price sensitive 2017, Cartier & Lembke 43

44 Together we are strong! How can the cluster environment deliver strength? 2017, Cartier & Lembke 44

45 Demand Conditions (Markets) Canada AGRICULTURAL PRODUCTS CLUSTER International Organic Apples Fruit Products Conventional Apples Cherries Cider Cherries Conventional Apples Organic Apples Local Market BC Market Rest of Canada U.S. China Ohers Rival Firms (Exporters) Organic Packers & Shippers Fruit Processors Conventional Packers & Shippers Cideries Nutraceuticals? Health? Other? Support and Related Industries (Suppliers) Specialty manufacttured Food Products & Services Cherry Growers Distribution &Wholesaling Services Soil Preparation Services Legend Imported into the region Provided by local suppliers Mixed local and imported Irrigation Services Farm Management Services Related Financial Services Organic Apple Growers Conventional Apple Growers Fertilizer Transportation &Logistics Services Processing & Packaging Equipment Agricultural Chemicals Irrigation Equipment Factor Conditions (Foundation Level) BCFGA BCWI & BCWA BC LDB & BC LLC BC Ministryof Agriculture Okanagan Physical Local 2017, Cartier & Lembke UBCO SR&DC College Infrastructure Government Lee Cartier, Svan Lenbke

46 Demand conditions: Which markets are we targeting? Are we leveraging our connections and brand awareness? 2017, Cartier & Lembke 46

47 Importance of Trade Agreements Not an opportunity Definitely an opportunity Not an opportunity for any business in the industry Potentially an opportunity for the industry but unlikely to be an opportunity for my business` Potentially an opportunity for my business if we as a business or the Canadian government take certain actions Definitely an opportunity if we as a business or the Canadian 2017, Cartier & Lembke? government take certain actions A significant opportunity and we already have a plan 47

48 Rival Firms: How well do we work together? Clusters benefit from spill-over effects of knowledge, innovation and alliances. 2017, Cartier & Lembke 48

49 Support and Related Industries: How well do we work together? Support and Related Industries (Suppliers) Specialty manufacttured Food Products & Services Cherry Growers Distribution &Wholesaling Services Soil Preparation Services Irrigation Services Organic Apple Growers Conventional Apple Growers Processing & Packaging Equipment Legend Imported into the region Farm Management Services Fertilizer Agricultural Chemicals Provided by local suppliers Mixed local and imported Related Financial Services Transportation &Logistics Services Irrigation Equipment Support and related industry stakeholders are hesitant to grow their business in the Okanagan. 2017, Cartier & Lembke 49

50 Conventional Apples: Sharing of information Limited spill over effects There is no sharing of important information Some of the industry players have in the past shared some important information Some of the industry players or associations have in the past shared some information and have made some joint decisions Key industry players and associations actively seek each other out to share information Key industry players and industry associations drive knowledge sharing and industry-wide decision making beyond their own benefits 2017, Cartier & Lembke 50

51 Factor Conditions: How well do we work together? Simple, single-action policy and decision making rarely works for complex market and cluster dynamics. 2017, Cartier & Lembke 51

52 What is our strategy? Organic apples Foundations of Strategy (Canadian Edition) (2015) R.M. Grant, J. Jordan and P.R. 2017, Cartier & Lembke 52

53 Demand Conditions (Markets) Canada AGRICULTURAL PRODUCTS CLUSTER International Organic Apples Fruit Products Conventional Apples Cherries Cider Cherries Conventional Apples Organic Apples Rival Firms (Exporters) Local Market Organic Packers & Shippers Support and Related Industries (Suppliers) Legend Imported into the region Provided by local suppliers Mixed local and imported Specialty manufacttured Food Products & Services Irrigation Services BC Market Develop new profitable export markets Build a strong unique brand Fruit Processors 2 related opportunities Farm Management Services Related Financial Services Organic Apple Growers Cherry Growers Rest of Canada Conventional Packers & Shippers 2 opportunities Conventional Apple Growers U.S. China Ohers Fertilizer Cideries Transportation &Logistics Services Diversification Distribution &Wholesaling Services Soil Preparation Services Processing & Packaging Equipment Agricultural Chemicals Nutraceuticals? Health? Other? Increase yields and maintain quality Focus on specific quality criteria Irrigation Equipment Lower quality product management 2017, Cartier & Lembke Factor Conditions (Foundation Level) 53

54 Four potential strategic opportunities for conventional apple production 1. Increase the yield per acre with good quality and re-plant new varieties where possible, and hope for high apple prices and government support programs 2. Focus on the high quality fruit brand by removing any lower quality (and cheaper) BC apples from the market (eg into cider production) leaving the lower cost market for imported apples. 3. Follow the cherries and develop export markets for high quality apples as a luxury good. 4. Follow the organic apple producers and build a low pesticide brand for the growing demand of high quality (healthy) fruit 2017, Cartier & Lembke 54

55 Let s Get to Work: The Workshop Process You chose your own group Each group will be asked to develop a strategy for one or more of the opportunities identified from the research Each groups will present their strategy There will be discussion to summarize the strategies and possible next steps You will receive a summary of the research and workshop findings 55

56 Group Discussion: 30 minutes Strategic Opportunity Desired Outcomes Increase the yield per acre with good 10 minutes quality and replant new varieties where possible Strategy / Strategies 20 minutes Present 56

57 Four potential strategic opportunities for conventional apple production 1. Increase the yield per acre with good quality and re-plant new varieties where possible, and hope for high apple prices and government support programs 2. Focus on the high quality fruit brand by removing any lower quality (and cheaper) BC apples from the market (eg into cider production) leaving the lower cost market for imported apples. 3. Follow the cherries and develop export markets for high quality apples as a luxury good. 4. Follow the organic apple producers and build a low pesticide brand for the growing demand of high quality (healthy) fruit Not all opportunities are mutually exclusive a combination can be selected 2017, Cartier & Lembke 57

58 Workshop Group 1: Increase the yield per acre with good quality and re-plant new varieties where possible Outcomes (broad differentiation): Partnering with retailers for new varieties (input and commitment) Increased yield and quality from growers Increased prices for consumers (increased returns to the industry) Strategies (broad differentiation): Industry needs to coordinate their efforts: Develop a strategy for uniqueness/differentiation & a plan for execution Agree new bi-directional contracts to plant acres & sell specific varieties 2017, Cartier & Lembke 58

59 Workshop Group 2: Focus on the high quality fruit brand by removing any lower quality BC apples from the market Outcomes (focused differentiation): Increase returns to growers (30c/lb net return; assume no change in production cost) Predictable quality from growers (low volumes but high return varieties) Strategies (focused differentiation): Focus on growing low volume but high return varieties Enforce grade segregation with clear standards for quality Work with retailers on brand specific programs Triple investment in a pro-active sales approach and marketing Ensure growers are involved and agree on strategy (trigger psychological change) 2017, Cartier & Lembke 59

60 Workshop Group 3: Follow the cherries and develop export markets for high quality apples as a luxury good Outcomes: Increase in exports (100% over 3 years) Strategies: Leverage the Canada brand for food safety Cultivate and increase quality of production Active marketing and lobbying for government support Need international trade expert (hire) Send apple representative globally (use Canadian trade commission) Work closely with Summerland research station to develop new high quality varieties Explore opportunities 2017, Cartier to change & Lembke property tax policy & subsidy programs to support export 60 strategy

61 Workshop Group 4: Follow the organic apple producers and build a low pesticide brand for high quality (healthy) fruit Outcomes: 1. More organic growers (supply 12% of Canadian market with organic apples) 2. Lead the development of organic cherry production (and sales) 3. 10% of conventional apples grown in BC meet IPM standards 4. 50% of Canadian and 100% of Export market know that Canada is #1 in food safety Strategies: 1. Increased education and active recruitment of growers 2. More research on pest management for cherries 3. Develop an IPM standard and credible monitoring / certification 4. Develop a credible food safety rating system and adherence for all stakeholders along the value chain (including retailers) 2017, Cartier & Lembke 61

62 Conclusion: Evaluation of opportunities There is a multitude of opportunities across the different stakeholder groups and working together will achieve better leverage of resources and increase chance of success. 1. A new strategic approach is needed. The BCFGA can trigger the process but development and execution of the plan will have to be led by the BCTFC and independent growers. 2. A better understanding of new market developments and involvement of the grower community are essential for buy-in and success. This cannot be achieved without industry champions. They have to be identified first! 3. Investment is needed to pursue the opportunities, especially for better marketing of BC tree fruits. Much of this investment may come from government but only when offering a clear focus and commitment to a plan. Our next step has to be a collaborative development of this plan. 2017, Cartier & Lembke 62