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Home / The Country

Several New Zealand food, beverages and agricultural stocks have edge

By Dene Mackenzie
Otago Daily Times·
28 Mar, 2017 03:27 AM4 mins to read

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Comvita had developed a strong brand position across key regions. Photo / John Borren

Comvita had developed a strong brand position across key regions. Photo / John Borren

Several New Zealand food, beverages and agricultural (FBA) stocks are successfully achieving price premiums in local and global markets for their products.

Forsyth Barr broker Suzanne Kinnaird says from an investor's perspective, having conviction around the sustainability of price premiums relative to competitive or substitute products is integral when determining long-term earnings potential and, ultimately, company values.

Brand value and demand could be created and destroyed through pricing signals. Market positioning, with regard to competition, barriers to entry, product differentiation and consumer perception, also played a significant role in determining whether a consumer was willing to pay a price premium, she said.

New Zealand FBA products were often supported by a provenance and perception advantage over many global competitors given its geography, track record, operating style and perceived "clean green'' image.

On that basis, investors expected New Zealand-listed FBA companies to achieve price premiums on export products, whether fundamentally warranted or not, Ms Kinnaird said.

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Sustainability of price premiums was generally challenging over the long term, with competition likely to normalise industry premiums given time.

Over the medium term, intellectual property - including copyrights and trademarks - barriers to entry, market/consumer relationships and internal expertise all supported sustainable price premiums.

Companies achieving and likely to achieve price premiums include:

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The a2 Milk Company (ATM)

ATM commanded clear premium above its peers in both the fresh milk and infant formula markets.

Analysis by Forsyth Barr suggested ATM commanded about a 30% price premium in the Australia-New Zealand infant formula market to an average of its peers, including Bellamy's, Blackmores and Murray Goulburn.

Also, a 19% price premium to global peers was also notable through Chinese e-commerce platforms, Ms Kinnaird said.

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"This premium is higher versus standardised products, albeit we note other super premium products exist in a similar price range to a2 Platinum.''

Scientific evidence supporting the consumption of milk containing only a2 beta-casein, coupled with strong consumer perception and reaction surrounding ATM's core products, had continued to strengthen the a2 Milk brand.

The challenge for ATM would be how to shift volumes away from the grey channel over time and into more direct Chinese channels. At present the company was supporting the grey channel through a combination of massive price differentials, creating an arbitrage opportunity, and direct relationships, she said.

Comvita (CVT)

Comvita had developed a strong brand position across key regions, including its domestic New Zealand market, Australia and China/Hong Kong.

It had built significant brand strength in its key growth market of China with its top brand-by-value on Taobac, the grey consumer-driven market, and Tmail, which was distributor driven.

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"Despite current sales channel challenges, due in part to a specific strategic shift to align pricing across geographies, we believe this brand positioning strength sets the Comvita brand apart from the rest of the manuka honey industry. It also provides the company a platform where it could leverage other natural healthcare products.''

NZ King Salmon (NZK)

NZ King Salmon had developed two strong brands in its Ora King food service brand and its Regal consumer brand.

While some genetic differences between NZK and Pacific King Salmon existed, the real price premium appeared to be driven by the brand, Ms Kinnaird said.

"We believe this will remain in some form over the near term, although there is a risk to long-term price premium sustainability given Sanford is developing its own foodservice and consumer branding for Pacific Salmon around a similar, if not better, provenance and product story.''

There was a possibility of Ngai Tahu joining the race through its own salmon farm expansion, she said.

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A rational New Zealand market and the small volume of Pacific salmon would continue to support a strong price premium to Atlantic salmon through its premium product image versus the more commoditised market.

Scales (SCL)

Scales had successfully shifted its apple sales towards the premium end of the market over the past six years, Ms Kinnaird said.

Growth in the high-colour Fuji and Royal Gala segment, and strong NZ Queen varietal roll-out, had supported an increase in premium sales volumes from 27% of total volumes to 47%.

SCL's premium varieties received 25%-35% average premium over traditional varieties.

The company had also highlighted some new, customer-tailored varieties had been developed to be rolled out in the medium term. Those included Dazzle, with IP restricted to only a few growers, and two yet-to-be-named varieties.

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The lack of a transparent global marketplace for apples limited pricing comparability between regions. However, the IP and research and development behind some of Mr Apples' new varieties were likely to continue to generate, and potentially improve, pricing dynamics, she said.

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