Is Red Meat a Commodity Product, a Luxury Product, or a Lifestyle Product?
Where were we? That’s right, we were discussing the links between red meat, luxury, and lifestyle looking at how New Zealand red meat producers might use these links to their advantage? Perhaps the most proactive way of exploring this question is returning to ground zero and heading back to basics. For a producer that means thinking strategically about markets and consumers and future opportunities. Where will the best opportunities be found? What will they look like? How can they be accessed? What will a successful business model look like in the future? Currently, the dominant business model of the day hasn’t changed that much since the first frozen meat (1250 tons) left Port Chalmers on the Dunedin in 1882. It was geared to commodity trading then, and it remains geared to commodity trading now. The difference today is the terms of trade are nowhere near as lucrative as they were. Back in the day they were so good New Zealanders enjoyed one of the highest standards of living in the world. They shifted significantly downwards at the end of the 1960s when Britain joined the European Economic Community (EEC). New Zealand red meat producers have been sailing against the wind ever since.
Acknowledging this decline is important because the current industry would be wise to realise it isn’t perfectly configured to cope with future disruption. Many people in the red meat industry are realising the race to adapt has already begun. For this reason, it is important to stay tuned into consumers. That can be a difficult task when nearly all farm production is sold through a maze of intermediaries, which opens up the distance between the farmer and the consumer. As a result, it can be hard for producers back on the farm to hear and see what is happening in markets, especially export markets where most earn their living. This sounds a warning because it means the producer must rely on others to ensure consumer needs are met, and needs can change, often with little or no notice.
Maintaining profitability has been an industry wide challenge for a long time now and to date the industry has proven it isn’t up to dealing with it. This is very old news, but critical strategic questions remain unanswered and until they are, the voice of the consumer will remain muted and hard to hear. It also means the links to luxury and lifestyle cannot be successfully exploited, no matter how attractive these emerging opportunities might be. It’s also unlikely to happen while marketing has been relegated to the back of the room and told to be quiet. The industry continues to put production needs in front of consumer needs and farmers are paying the price. Selling without the guidance and finesse of marketing appears to be the industry default. The need to push hard against downward pressure on pricing is a clue something isn’t right.
Theodore Levitt, an economist and Professor at Harvard Business School provided the following advice suggesting,
“The history of every dead and dying “ growth” industry shows a self-deceiving cycle of bountiful expansion and undetected decay.”
Levitt then lists what he says are the four conditions that guarantee this cycle. They are interesting to consider in a red meat industry context.
1. The belief that growth is assured by an expanding and more affluent population. Mmmmm, China comes to mind. Increasing demand for protein comes to mind. These things are great until they are not. What happens if China sneezes and what happens if the guys in the white coats do manage to develop some amazing lab derived meat? Stuff happens.
2. The belief that there is no competitive substitute for the industry’s major product? If the guys in the white coats ‘crack’ lab-derived (synthetic) meat and then find a way to scale it things will get interesting. I’m backing them to be successful based on the enormous capital being thrown their way. Relentless capital can solve many challenges. Industrial red meat producers are going to be having some very long board room sessions in the future. I believe this is where Craft Beef with its natural links to luxury and lifestyle opportunities could come into its own.
3. Too much faith in mass production and in the advantages of rapidly declining unit costs as outputs rise. Does this sound familiar? In my view, it is easier to go the other way. Let the marketers define more lucrative pathways. I would back marketing innovation over production optimization any day.
4. Finally, Levitt suggests that a preoccupation with a product that lends itself to carefully controlled scientific experimentation, improvement and manufacturing cost reduction has also proven disastrous for many organisations in many different industries. Again, I can hear a production echo and it is worrying.
Looking down from Planet Big Picture, it looks very much like the future is still reliant on, connected to, and on course to keep heading down the commodity route. In other words, more of the same, status quo, steady as he goes. Have I missed something? Will it be different this time? Is that why there is no real change? I can’t see what’s different. Even the so-called high-value brands that have been created still fight mano-mano to reach supermarket shelves and appear on restaurant menus. They fight each other in New Zealand and will almost certainly continue to compete with each other in export markets. This has resulted in further downward pressure on pricing. The winners: once again, it is supermarkets, distribution businesses and restaurant owners. Whilst there are hugely credible efforts from many groups to transition to value, the reality is, the needle hasn’t shifted much from the producer’s perspective and I fear it isn’t likely too. That’s because of the sheer volume processing businesses have to deal with. Big Processing talks about tonnage and as soon as you talk about red meat in that way any potential links to luxury and lifestyle are immediately severed. There is simply no je ne sais quoi. No cache, it’s industrialised farming, which isn’t the ideal business model for appealing to the wallets of luxury and lifestyle consumers. That’s an assumption. I could be wrong, but I’m well on the way to testing those assumptions in the real world, and so far…so good.
Of course there are many reasons for the current state-of-play and I’m not trying to lay blame. Quite the opposite, I’m trying to point out that this knowledge isn’t new, which is why writing this article is somewhat perplexing and in some perverse way, interesting. Why is the industry locked into a model that appears destined to disappoint? As a Western Australian the New Zealand red meat industry reminds me of the Iron Ore industry. In WA we just dig stuff up and send it overseas. No value is added, we don’t do anything and we don’t make anything. We just send it to those who do and hope we make an acceptable return through the commodity exchange. Sometimes those returns are incredibly good and sometimes they are not. Like red meat producers, iron ore miners have virtually no control over pricing, but they do have massive scale and that helps. They also have access to nearly unlimited capital, the world’s best practice optimization and cost control systems and some of the world best talent. They are highly likely to be the most effectively managed commodity businesses on the planet. That suggests they have the right business model and all of the credentials they need to be successful at commodity trading. The New Zealand red meat industry would appear to be the opposite. Have I missed something? Is $5.50 or thereabouts an acceptable return per kilo for a producer to achieve for beef? And if processors are struggling to generate solid returns at current levels then does that mean they are paying producers too much? Not sure, but it poses a question and in an industry where stock numbers are declining that dilemma could get interesting.
I often hear industry people suggesting red meat farmers should ‘share up’ like their dairy counterparts. They suggest a flush of investment commitment will set things right. That’s a yeah- nah from me, because if the business model is wrong, it’s wrong. If you just wanted to create wealth there are much safer, better and faster places to generate healthy returns. The red meat industry in New Zealand doesn’t have a stellar record for growing producer wealth. Perhaps as some of the programs and strategies, which have had millions and millions of dollars invested in them burst into life their superlative returns will prove this narrative to be the ramblings of some outsider. That could happen and I hope it does for the sake of farmers. However, right now it looks like the industry is firmly back in selling mode and instead of sending out marketers and letting them showcase the voice of the consumer, the industry is sending out sales people tasked with selling a range of products that look pretty much (to me anyway) exactly the same as the competitor’s product, whilst hoping to secure a premium based on provenance and a great story around grass-fed beef. This homogeneity is pretty much the underlying requirement for defining a commodity and the problem with playing in the commodity space is price is always the clearance mechanism. It is a game that belongs to countries that can use their agricultural scale to muscle their way into and through the channel.
Back to the luxury and lifestyle links or as I view them…commodity escape hatches. Will producers be able to reach them? I hope so, but currently they are too far away from their customers. This means they are likely to be the last ones to hear about new trends, disruption and new opportunities. It’s not just synthetic meat that’s an issue, it’s the way consumers are rapidly changing their behavior and expectations about everything. Reaching premium opportunities successfully is largely dependent on the way business models interact with and engage consumers. Luxury and commodity to my mind are just states-of-mind and they can be changed. For example, to my Craft Beef mind, premium red meat is a luxury product. I have never believed and don’t believe premium red meat should be marketed as anything but a high-end product. That’s what it actually is. It all comes down to the value placed on it and selling through a commodity platform means producers have no control over value whatsoever. Large quantities of New Zealand beef simply go into the grinding beef market. Draw your own conclusions about that, but getting a dramatic improvement in price through selling mince is very unlikely. Why can’t value be added?
Ever had a steak at Neil Perry’s Rockpool in Sydney, or Wolfgang Pucks Cut restaurant in Singapore. Do your math per kilo after that exercise and look at what an animal is worth to a luxury consumer. Those guys are all about luxury and their restaurants ooze the very essence of it from the moment you enter their establishments to the moment you leave. Why have they invested so heavily in ambiance? Who’s making the money? It isn’t the farming enterprises on the wrong side of the commodity trade, that’s for sure. Engaging directly with the consumer certainly has its rewards. You get some control over pricing for one thing and you end up with more power in the channel as well. For example, compare the profitability of a supermarket distribution business against a red meat processing business. Being on the wrong side of the trade with little or no power isn’t much fun and most farmers are not driving Maserati cars. It begs the question, how does the industry effect change?
Mark Ritson (Adjunct Professor at Lancaster University) highlighted in a recent article about Burberry that, “In any large company the two most important people are usually the chief executive (CEO) and the chief financial officer (CFO). The two work together, often on a daily basis, to run almost all aspects of the executive operation.” Ritson suggests this is true across nearly every business sector, with the notable exception of luxury brands. Now that is immediately interesting to me. Why would that be? What’s different in a luxury goods company? Could it be the need for creativity? Luxury brands run on raw emotion and they’re fuelled by authenticity and a bunch of other really cool stuff. Read Lovemarks by Kevin Roberts. This modality is how the luxury world connects with and engages, high-end, big spending consumers. The rag trade is tough and fashion is fickle, so it doesn’t respond well to being driven by those with linear financial mindsets. Arguably, for this reason Chief Creative Officers hold sway in luxury businesses.
Shifting the context, I wonder, in non-luxury enterprises is it possible that in some cases the traditional leadership and management modus operandi is contributing to the blindsiding of red meat enterprises? Are the traditional organizational structures preventing organizations from seeing the reality of their business models operating in the shadow of decline? It’s certainly possible. One thing is for certain, large organizations have a tendency to be dominated by executives driven by financial metrics, which for a marketer is akin to putting the cart before the horse or looking in the rear vision mirror. For something to be sold effectively marketing needs to play a pretty significant role. Could the depletion of high-level professional marketing expertise from boardrooms be one of the reasons many red meat enterprises are currently delivering suboptimal returns to shareholders? Perhaps contemplating what Theodore Levitt had to say all those years ago isn’t a bad place to start reflecting when you’re involved with a business model under pressure. Maybe ask yourself and those around you…what is it we’re not seeing?
By Jim Wilkes