The Apple in the World Coping with Unrelenting Change

Desmond O’Rourke

November 2012

Major Drivers of Change

• Five major drivers:

Consumers

Retailers

Competitors

Products

Society

• How can the apple industry adapt to and profit from change?

Reluctant Consumers

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EU-15 EEurope

Japan U.S.

Fall in Per Capita Consumption of Fresh

Apples, 2000-10

In developed world:

Older population moving to mangos, papayas, pineapples, blueberries, etc.

Younger consumers reluctant to eat apples.

Fewer heavy consumers of fresh apples.

Population Trends Unfavorable

• Population already falling in Japan, Eastern Europe.

• Will fall in Western Europe after 2020.

• North America expecting another 30 million by 2020…. But birth rate now falling and immigration slowing.

• Europe faces similar birth and immigration trends.

Negative Effects of Great Recession

• Many millions have lost jobs, incomes, pensions, homes, other assets.

• Since 2008, “thrift” has replaced “indulgence”.

• Consumers have reduced food spending, especially away from home.

• More are buying sale items, using coupons , shopping at discount stores.

• Thrifty habits may persist for years to come.

Economic Power Shifting from West to East, but…..

• BRICs economies (Brazil, Russia, India, China) surged since 2009.

• Trade liberalization under WTO has stalled.

• There has been a rash of protectionist measures.

• Political unrest in Middle East, North Africa, South Africa, Argentina, China, Russia, etc.

• Many exporters looking East, but demand growth there may be slowing.

• BRICs: Less optimism about their future markets.

Fearful Retailers

• Prior to Great Recession, many retailers expanded aggressively.

• Caught unprepared as consumers turned thrifty.

• Retailers have serious overcapacity. Many have sold divisions, abandoned markets.

• Many moving towards fewer, smaller stores.

• Hard discounters have done well serving the price-conscious.

• Upscale retailers have done well serving affluent, quality-conscious.

• Many mainstream retailers, neither upscale nor discounters, are struggling to survive.

Desperate Competition for Shoppers

• Chasing any “hot” issue that might attract new customers.

• Both pragmatic (energy efficiency) and elusive (sustainability).

• Often contradictory, e.g. local sourcing and global sourcing.

• Still pushing numerous standards (like GlobalGAP) of questionable benefit to consumers or suppliers.

• Forging joint business plans with suppliers (covering special products, packs, promotions, etc.)

Modern Retailing Spreading Worldwide

• Multinational and local supermarket chains expanding in developing world, increasing retail competition.

• Mom & Pop stores and wet markets are under pressure.

• Multinationals are spreading their standards on food safety, traceability, the environment, worker rights, etc., everywhere.

Unrelenting Competition in Fruit

• Competition increasing within apples/ all fruits.

• Apple industry moving to large, integrated grower-packer-marketers.

• Intensive production, automated packing, large scale marketing.

• By 2020, forecast world apple production up 24%, per capita supplies up 12%.

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World Apples: Change 1994-96 to 2008-10 (%)

Supplies of Competing Fruits, 1994-96 to 2008-10

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Change (%) • Supplies of competing fruits all grew faster than world population.

• That growth will continue for some time.

• Also snack & beverage manufacturers are increasingly invading the healthy food space.

Major Apple Exporters Expanding, Battling for Foreign Markets

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2000 2010

Million Metric Tons Rank 2000 2010

1 France China

2 U.S. Italy

3 Italy Chile

4 Chile U.S.

5 N Zealand Poland

Apple Product Mix More Complex

• 1960s & 1970s

French Goldens

Washington Reds

Cape Grannies

• 1980s & 1990s

Gala, Fuji, Braeburn, Elstar, Jonagold, etc.

Premiums for Innovation Eroded Rapidly.

Solution: Managed Varieties (Clubs)

• Sustain price premiums by controlling production, packing, marketing across countries.

• Few club varieties have met sponsors’ goals.

• Could not demonstrate superior quality.

• Difficult to control volume and timing across markets.

• But, the apple industry still seeking new, winning varieties.

What Many Retailers and Marketers Want Now

1. A new variety to which they have exclusive access.

2. Primary goal is to differentiate themselves from other retailers or other marketers.

3. Happy with a modest price premium if the new variety contributes to the overall competitive advantage of their business.

4. But, the apple industry (not retailers) must bear the costs of developing new varieties.

Time to Re-examine New Product Development in Apples

PROS:

New varieties have brought excitement to the apple category.

Some club sponsors have earned price premiums.

New organizations have been developed to promote specific apple varieties.

CONS:

Per capita consumption of all apples still falling.

Have consumers been enriched or confused?

Questionable payoffs to much of the investment.

Is there a better way to enhance the apple industry?

Sweeping Societal Changes

• Many countries trying to escape “debt trap.”

• Governments made promises to their citizens that they cannot meet.

• The number of dependents has surged while working populations shrank.

• Solutions include reduced government employment, reduced government services, higher taxes, or some of all three.

• Hardships and tensions for citizens ahead.

Populations (and Markets) Becoming More Diverse

• Floods of immigrants (with higher birth rates) have caused greater national, racial, ethnic and cultural diversity in many rich countries.

• Widening gap in jobs, incomes and prospects between knowledge-rich and knowledge-poor citizens causing stress.

• Not always so happy together.

New Force for Societal Change: “Peer Networks”

• Two dominant forces for change in last 200 years have been:

1. Governments

2. Large corporations

Both controlled the flow of information through centralized processing and dissemination, working closely with national media.

3. Peer Networks. Its tools are social media like Facebook, Twitter and You Tube.

Information flows freely between consumers, political and social activists, businesses, governments, NGOs, etc.

No one edits information, or directs its flow.

Power of Peer Networks Still Unclear

• Each person controls his/her story (true or false). • Many use peer networks to spread their philosophies,

attack competing philosophies. • Twitter has been credited with the rapid spread of the

Arab Spring. • Facebook could have influenced outcome of U.S.

elections. • Marketers (from farm markets to Coca Cola and

Walmart) are trying to get peer networks to work in their favor. Walmart claims 22 million Facebook friends. Each Walmart store in U.S. now has its own Facebook page.

Technology’s Relentless Advance

Technologies Applications in Apples

Genetic engineering Improve nutrients in fruit. Resist pests and diseases.

Nanotechnology New chemicals for disease control. Skin protectants.

Robotics Remote monitoring of crop development. Harvesting delicate fruit.

Automation Moving apples by machine. Moving machines to apples.

Neuroscience Deeper understanding of consumer attitudes, motivations, etc.

Understand new technologies Use them to improve quality, lower costs.

Apple Industry: Meeting the Challenges

• Industry is starting from much better position than a decade ago.

• Efficiency has improved dramatically in orchards and packing houses.

• Marketers are larger, better organized. • Industry has wide diversity of good varieties. • SmartFresh has improved quality from storage. • Biggest weakness: It lacks a comprehensive,

professional approach to expanding demand for fresh apples.

Biggest Challenge: Halting Decline in Per Capita Consumption

Requirements:

1. Better information on the wants and preferences of different, specific consumer segments.

2. Better information on what will most benefit our retailer partners.

3. How to better communicate through old and new media.

Set the Bar Higher for New Varieties

• No longer sufficient for a new cultivar to look and taste good.

• New test: “Can this variety expand total demand for the apple category?”

• Does it have unique appeal to youth, females, ethnic groups, etc?

• Can it make unique health claims?

• Does it contribute to sustainability?

• Does it offer special advantages to retailers?

Communicate More Effectively with Target Consumers

• Must be able to use old media like newspapers and television, new media like Facebook.

• Euro area annually produces 7m tonnes of apples, worth 3€ billion. 5% = €150 million/year.

• Need €150 million to mount professional market research and promotional program. Exporters could also contribute.

• Need to change attitudes/ habits of producers and consumers.

Keep an Open Mind on New Technology

• No technology is good or bad in itself, it is a question of how it is used.

• The apple industry has adopted many new technologies over the decades.

• Replace fear with objective assessments.

• Many new technologies can help lower costs, improve quality, protect environment.

Expand Sales in Non-Traditional Markets

• Potential markets vary:

China, India, Indonesia, Thailand, Malaysia, differ in language, culture, affluence, availability of competing fruits, trade ties, etc. Also differences within countries.

Need professional analyses of each potential market.

• Sales Opportunities Vary:

Some countries and firms may do better to focus on domestic markets.

Some may be best suited to selling in specific export markets, not in others.

Need rigorous assessments of the capabilities of your country/ your firm.

Asia: Both Promise and Challenge

• Between 1996 and 2010, Asian apple import volume up 185%, value up 261%.

• New record in 2010, over 2 million mt of apples, worth 2 billion euros.

• BUT, average prices still less than 12€/18kg. SE Asia 11€, S Asia 10€.

• Tough competition from China and U.S., but Chinese prices now rising rapidly.

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China/U.S. Dominate SE Asia

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Potential Beyond Asia

Many other opportunities and challenges:

Russia and neighbors.

Middle East. Still wealthy.

North Africa ???

South America. Brazil has World Cup and Olympics coming.

Conclusion

Apple industry challenges can be met if: 1. Industry is willing to provide needed funds. 2. Scientifically evaluates markets at home and

abroad, and promotes accordingly. 3. Will require fresh thinking about one’s

organization, products and opportunities. 4. Will require flexibility and commitment. 5. Payoffs will be positive if necessary

adjustments are made. I wish you well.