Agribusiness Review - Vol. 10 - 2002

Paper 7
ISSN 1442-6951

Coordinated Citrus Marketing for International Competitiveness

Rick Edmonds

• Introduction
• What is Riversun?
• Advantages and disadvantages of coordinated marketing
• Advantages
• Disadvantages
• Why has Riversun been successful?
• Shipping
• Table 1: Shipping costs saved by using Riversun as the coordinator
• Will Riversun survive in the future?
• Accountability is the key
• Orderly marketing versus open marketing
• Quarantine / food safety
• Government role

Introduction

International competitiveness by the Australian horticultural industry is vital to its future success. Because of its small size compared to our global competitors, and because of increasing world production and trade, the Australian citrus industry must be more coordinated in its international marketing.

What is Riversun?

Riversun was formed in 1992 by a group of Australian exporters and packers to provide a coordinating umbrella organization under which citrus fruit would be exported to the US. The original companies involved in setting up Riversun were exporters and packers of citrus in the Riverland area of South Australia, and Mildura, Victoria. Shareholding was limited at this initial stage, mainly due to the fact that quarantine restrictions meant that the Riverland area (up until 1995) was the only area permitted to supply the US market. In 1996, citrus production from both Victoria and New South Wales also gained access to the US market.

In the five years of its operation, the annual volume exported into the US by Riversun has increased from 126 847 cartons in 1992 to 758 016 cartons in 1996.

Riversun shareholding is held by some 14 packers, packer/exporters, and exporters, including some city based exporters. In the 1992 season Riversun coordinated only 10 packing sheds – that has since grown to 37 packing sheds distributed across three States of Australia.

Riversun is a service company only, involved in the coordination and shipment of the product. Individual exporters retain ownership of fruit, which is supplied on consignment to agents in the USA.

As an exporter, the Australian citrus industry in general has a reputation worldwide of lacking coordination, to the detriment of returns. Certain overseas importers are concerned by the lack of stability caused by the undercutting of Australian exporters and have stated on many occasions that it would be better for everyone if there were less Australian exporters in the market.

The US program is currently an exception and is the only market where all exporters of the Australian citrus industry work together to the commercial benefit of all. This has come about for two main reasons:

• the Australian citrus growers' strong desire for coordination in new markets, resulting in Australian citrus growers directing the Australian Horticultural Corporation (AHC) to use its licensing powers to license a single importer (DNE World Fruit Sales).
• the decision by packers and exporters, initially in the Riverland, to work together. This was necessary because:
  • there was a need to charter ships,
  • there was a short market window,
  • there was a need to assemble large volumes of fruit quickly,
  • the market requires consistent distribution to retailers.

It was from this desire to work together that Riversun became the vehicle to export Australian citrus to the US. The US program has brought together competitive export companies, which have now handed over their marketing and coordination roles. This has been a big step for these companies, because in the past, and indeed with every other market, which they service, they have been in total control from packinghouse to importer.

We now have 'committed' growers, packers, and exporters from three States, all working to standards and protocols, and working together to the commercial benefit of all sectors.

Advantages and disadvantages of coordinated marketing

Advantages

• gives the supplier some competitive advantage over the buyer;
• cheaper freight rates per unit volume;
• enhanced ability to supply volumes of consistent product;
• lessen importer's ability to play one Australian exporter against another;
• gives the opportunity to conduct brand promotions;
• lower disport costs;
• ability to negotiate quarantine issues more successfully;
• strong government support for funding and quarantine issues;
• stronger lobby power with government;
• better position to negotiate terms and conditions with agents;
• lower raw material costs per unit through bulk buying in the packing shed;
• greater technical support;
• better market information and communication;
• raising of the overall standard of the Industry;
• higher net returns to growers.

Disadvantages:

• if not set up correctly then non performing companies will disadvantage the performers;
• limits flexibility of individuals;
• removes individuals' total control over marketing;
• removal of individual brand identity and independence.

Why has Riversun been successful?

• There is commercial benefit and saving to the Riversun member organizations.
• Shareholders are accountable for their own product and returns are based on individual performance.
• Riversun has a quality program which gives a consistent product in the market place and also ensures packing sheds, which compete for the same growers' fruit, are packing to the same standard so that no one shed is disadvantaged.
• Because Riversun is not an exporter but a coordinator, it is not seen as a threat to other exporters, which encourages them to join. It allows a certain amount of independence.
• Cheap freight rates and raw material costs.
• With Riversun's volume, it is able to supply the national supermarket chains, which are able to return a significant premium over agents based in the city terminal markets.
• Riversun structure, provided that individual sheds can reach the required standard and protocol set by Riversun, excludes no one.
• AHC licensing powers that require all fruit exported to the US to be directed through DNE World Fruit Sales, also acts as a reason for all members to work together.
• There is a strong grower and government support for orderly marketing.

Shipping

The cost of shipping horticultural products out of Australia is undoubtedly the most significant hurdle to be addressed if the industry is to become internationally competitive.

The AHC Australian Orange Industry Bench Marketing Study clearly identifies shipping costs as being the most significant cost which impacts on grower returns when comparing Australia performance against South Africa and California shipping to Singapore. This is despite our distinct advantage of location.

Both US and South African exporters make use of cheaper 40-foot containers in the US and in particular refrigerated cargo vessels used by South Africa, results in cost saving over Australian supplies. These other countries have the critical mass, which enables them to negotiate better terms and conditions, and there lies one of the reasons why there needs to be coordination in Australia and why Riversun can be used as a role model.

In 1996, due to the collective volume, Riversun was able to negotiate a Time Volume Rate (TVR) with shipping lines, which immediately gave it a significant advantage over the independent exporters. Riversun was able to save A$500 per container, a 12 per cent saving ($0.71 per carton or around $50.00 per ton) in net returns back to growers.

The savings can be further improved, when the cost effective and more efficient option of bulk shipping is used, with a saving of $2.75 per carton and $181.50 per ton.

There are huge gains to be made on operational costs at the port of entry compared to the point of entry to the retailer level. The highest cost for Riversun chartered ships was $2.40 per carton compared to the independents who, due to their lack of volume, can only ship containers at a cost of $7.58 per carton – a saving of $5.18 per carton or $341.88 per ton to Riversun exporters.

Because Riversun has ships arriving with sometimes 20 to 40 containers on a vessel, compared to independents with ad hoc shipments of one to five containers, the savings are once again considerable. For Riversun, disport costs were $3.18 per carton compared to the independents' $5.69 – a saving of $2.51 per carton or $165.66 per ton.

If we now add the costs saving at port entry (charter versus container) as well as the TVR for Riversun members only, the benefits which Riversun shareholders enjoy over the rest of the industry are clearly demonstrated.

Table 1: Shipping costs saved by using Riversun as the coordinator

Further savings in raw materials such as pallets, chemicals, corner boards and strapping can be significant if bought in bulk.

Other savings, such as the Australian Quarantine Inspection Service (AQIS) reduced inspection costs, are harder to quantify because of Riversun's recognized QA program.

These figures speak for themselves. Clearly, just in shipping costs there are substantial savings to be had by Australian horticulture if only the industry can work together.

Will Riversun survive in the future?

Business survival will always be a challenge for the Riversun management team. There will need to be a continued, commercial and financial benefit to shareholders, but just as important we will need to ensure that our operational pooling system does not disadvantage high performance packing sheds and that sheds remain accountable for their own product.

This is undoubtedly our greatest hurdle and is where I believe many other companies who jointly market have fallen down.

Accountability is the key

To have an effective Quality Assurance/Coordination system in place is a major factor in Riversun's success. We have designed a Quality Specification Manual, a first for the citrus industry, and perhaps the Australian Horticulture Industry, which has been instrumental in giving our markets in the US long lines of consistent quality fruit. This minimum standard is just as important in establishing a base standard at the 37 packing sheds throughout Australia. All these sheds are competing for throughput of growers' fruit, and in many cases the same grower's fruit, so that if shed A packs at a lower standard than shed B, shed A has the opportunity to pack more fruit out of a field bin and pay the grower a higher return and thereby win that grower's support.

Trying to keep 37 packing sheds to one standard is a challenge, and our systems will need to be constantly under review and improved if we are going to keep these highly competitive companies working together.

Also, our shareholders have in the past had total control from orchard to importer. Under the Riversun system they have handed over these roles to Riversun and DNE World Fruit Sales, giving up their individual brand names which has been a major step for them, particularly for those exporters who have had a long history with their own particular brand. But this is necessary if we are going to be able to effectively promote our product.

Riversun cartons are marketed under the Riversun label, but every shed has its own brand name on the end panels. This is critical in keeping individuals accountable so that problems can be sourced back to sheds and any costs associated with poor out-turn can be directly debited against that shed. One poor performer out of 37 sheds can tarnish the image of all Riversun shareholders and disadvantage the performers.

Orderly marketing versus open marketing

There is no doubt in my mind that the licensing arrangement in the US, which limits the importer to only one, has financially benefited all sectors of the citrus industry – whether a packer, exporter, importer or grower. This is the only market in the world where Australian industry has some control over the market. Supermarket chains all over the world are becoming stronger. We as growers and suppliers need the critical mass to begin to counteract this power.

Certainly, according to John Stanbury (Managing Director of OUTSPAN in South Africa), this was one of the main reasons for OUTSPAN combining with UNI FRUIT CO to form CAPESPAN to even further improve their bargaining power and distribution with supermarkets in Europe. This also gives them product on these supermarket shelves 12 months a year, which ensures that they have continuous contact with retailers and their brand name is on display all year round.

To gain best premium of the US market one needs to sell to supermarkets. To be able to supply these chain stores requires volumes of consistent quality fruit delivered in a timely fashion. No one company or small group of companies in Australia could do this, but the formation of Riversun has given the industry the vehicle to achieve these premiums. The fact that Riversun was able to increase the price by $4 per carton in 1996, as well as achieve the results in previous seasons, speaks for itself.

Although the independents would not acknowledge this, they are lucky that they are sending to the same agent in the USA because they are at least able to piggyback to the same chain stores, allowing them to enjoy the higher returns from supermarkets.

Quarantine / food safety

Once again, close industry cooperation has allowed us to overcome any trade barriers and many quarantine problems, which have arisen over the last five years. We have been able to achieve this through the work of an industry 'champion' for the US market, David Cain from the Citrus Board of South Australia, who has over many years had an excellent working relationship with the various Australian Government departments and their counterparts in the US. This has enabled the Australian citrus industry to quickly resolve any problems that have arisen. This would not have occurred if there was a disorganized trail of individuals approaching the US authorities.

Consumers all over the world now have a choice of products, not only from their own country but also from around the world. Consumers are in general better educated and more sophisticated on issues such as quality, chemical residues and food safety, and with world communication as it is today one mistake can decimate an industry overnight.

Issues such as food safety and chemical residues are another reason why rationalization/coordination in Australia will be forced upon us. One only needs to note the AIAR scare and more recently the E.Coli outbreak in apple juice, to see just how quickly bad news travels and how it can affect an industry overnight. This will mean packing sheds/exporters are going to need to have in place expensive, sophisticated management systems because supermarkets concerned about food contamination will demand them. This added cost will, in turn make it difficult for smaller operators to survive.

Government role

In the past the Government, through schemes such as Export Market Development Grants, actually has encouraged fragmentation and has subsidized the setting up of new export companies which then went out into the export market place and used these Government funds to undercut the market price and buy market share from existing established exporters. I believe the criteria for this grant has now been changed, but it is too late – the damage has been done.

Australia has the growers, packers and exporters with the expertise – equal if not better than the rest of the world. If only we could combine our efforts, and channel that competitiveness so that it is kept here in Australia and direct all our resources to out-perform our world trading partners.

As the industry strives to achieve international competitiveness, one word dominates strategic planning efforts: Coordination. The Government now needs to foster and encourage companies to join forces to meet head-on this ever-competitive market.

It is now up to Government to show the strength and leadership to encourage the required coordination in horticulture; otherwise the critical mass needed to be world competitive will not happen or will develop too slowly, resulting in lost export dollars.