Farmer level marketing: case studies in the South Island of New Zealand

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CHRISTCHURCH NEW ZEALAND

AE R U

Farmer Level Marketing:

Case Studies in the

South Island, of New Zealand

Ross K. Bowmar

Research Report No. 305

May 2008

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Research to improve decisions and outcomes in agribusiness, resource, environmental, and social issues.

The Agribusiness and Economics Research Unit (AERU) operates from Lincoln University providing research expertise for a wide range of organisations. AERU research focuses on agribusiness, resource, environment, and social issues.

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Farmer Level Marketing:

Case Studies in the South Island of New Zealand

Ross K. Bowmar

Research Report No. 305

May 2008

Agribusiness and Economics Research Unit PO Box 84

Lincoln University Lincoln 7647 New Zealand Ph: (64)(3) 325-3604 Fax: (64)(3) 325-3679

ISSN 1170-7682 ISBN 978-0-909042-93-6

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List of Tables

Table 2.1: Characteristics of production orientated vs. marketing orientated farmers ... 7 Table 2.2: Traditional vs. value chain business relationships ... 13 Table 2.3: Market risk management for different degrees of involvement in marketing ... 14

List of Figures

Figure 6.1: The advanced marketing strategy ... 50

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Acknowledgements

I wish to thank Sandra Martin for acting as my advisor. Her guidance and assistance is greatly appreciated. I would like to thank Neil Gow for his assistance in obtaining study participants.

I must thank the five very kind and knowledgeable farmers that so willingly took time out of their busy schedules to participate in this project. Their stories provided added satisfaction and sparked an interest in this study for me. In essence their stories are the subject of this report.

I would also like to thank the businesses and organisations that supported my study through their scholarship programs in this past year. The support from Meat and Wool New Zealand, Landcorp Farming, and South Island Agricultural Field Days is greatly appreciated.

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Executive Summary

The purpose of this study was to learn about how and why red meat farmers incorporate farm level marketing activities into their operations. The major themes examined were the motivational factors behind marketing involvement, personality attributes, the process by which opportunities were identified, how marketing strategies were implemented, the role of relationships, and the impacts and risk associated with the incorporation of advanced marketing strategies into the farming operation. The ultimate goal of this investigation was to gain insightful information that would be helpful to farmers contemplating a greater involvement in marketing at the farm level.

Using a qualitative research case study approach, five farmers were interviewed. Participants were chosen based on their current or past demonstration of having incorporated advanced marketing strategies into their farming operation.

Farmers were motivated to become involved in marketing because of a combination of three factors: drive for greater economic returns, desire for greater control, and the urge for a novel challenge. Three further factors are closely linked to marketing involvement:

entrepreneurship, a perception that marketing is a valuable business function, and a sense of personal competency in marketing.

Opportunities for involvement in such activities were identified through informal environmental scanning and current business analysis. Farmers heavily relied on downstream supply chain partners to scan their environments, and this process often yielded significant information. Farmers were, therefore, proactive in the initiation and maintenance of such relationships. Current business analysis consisted of examining current product and market outlets.

Farmers viewed the end consumer as their primary customer, and held a focused view of their competition that appeared to be associated with the degree of product differentiation. All of the decisions in the marketing mix were made with end consumer requirements in mind, and the competitive position derived from these decisions was reinforced through the use of branding. Farmers’ relationships with downstream supply chain partners were found to be critical in the initiation and management of the marketing strategy.

The initiation of advanced marketing strategies had notable impacts on farmer operations. The most significant of these were intensification of capital requirements, reallocation of human resources, changed profitability and cashflow, and the transformation of product quality advantages into either greater economic returns or greater market share. Study participants viewed advanced marketing strategies as a source of risk; however all felt that it was manageable. A significant finding was the availability of traditional supply channels to act as a buffer for farmers’ own marketing activities, allowing an easier match of supply and demand of product, and acting as a backstop if the venture failed.

Keywords: farmer-level marketing, farmer marketing strategies, New Zealand, meat industry.

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Chapter 1 Introduction

1.1 General introduction

Increasingly in the New Zealand agricultural scene, the production of red meat is seen as less profitable and correspondingly a less desirable business venture. Often poor marketing by the traditional channels is blamed for the current situation. However, generally few farmers incorporate marketing as an integral part of their business operations, with the common view that marketing is very much a secondary function to production, and one that occurs ‘beyond the farm gate’, and outside of the realm of individual farms and farmers.

In an increasing competitive global environment, businesses that are adept at meeting the needs of consumers will survive and grow (Hobbs, Cooney and Fulton, 2000). Therefore, farmers increasingly need to consider the role that marketing plays in their business operations, and ask themselves if they could ‘do a better job’ than the traditional marketing channels by using more advanced marketing strategies. However, this will require a fundamental shift away from the current production oriented nature of New Zealand red meat farmers, and education on what is necessary if one is to be successful in farmer-led marketing activities. In theory, farmers that have incorporated marketing activities into their overall farming business, should represent the vanguard of such activities and be a fertile ground for management research. Learning more about these farmers and their operations could reveal insights and provide guidance and direction for others contemplating adopting similar strategies.

Thus, the purpose of this study is to build on the study completed by Harsh (2003), who carried out research into marketing activities of a range of cropping farmers in New Zealand.

The aim of this study is take a more in-depth look at practitioners of farm level marketing in relation to the red meat industry, their personal attributes and motivations for becoming involved in such activities, how they identified the opportunity to do so, the ways in which they undertake marketing activities, and the impact of marketing on their farm business.

These study findings can then be compared with those of Harsh, to see if any significant differences exist across industry boundaries inside the broader agricultural industry. For this study, farm level marketing has been defined as marketing activities and strategies that are internal to, and an integral part of, the farm operation and that move the farm business away from price sensitive commodity production, and towards a competitive strategy based on differentiation (Harsh, 2003).

1.2 Problem statement

It is suggested by Harsh (2003) that New Zealand primary producers may need to consider a refocus away from traditional production oriented business models towards marketing oriented business models. This may help ensure their survival in increasingly competitive agricultural markets. Many New Zealand farmers appear to give little consideration to marketing, while others appear to have fully embraced marketing as an integral part of their farm operations (Harsh, 2003). Learning more about these farmers and their operations could yield useful insights and direction for others contemplating adopting similar strategies.

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1.3 Research objectives

Based on the above problem statement, the specific objectives of this study are to:

• Learn how farmers involved in farmer-level marketing identified market opportunities, and their motivation for engaging in marketing.

• Discover how these farmers capitalise on these opportunities with a specific focus on starting out, supply chain management and marketing aspects therein.

• Examine the impacts on the farming operation of following these opportunities and the interaction between marketing and production.

1.4 Research approach

A qualitative case study research approach was chosen for this study. Five South Island (New Zealand) farmer participants were interviewed between June and August 2007 (Chapter 3).

1.5 Report outline

The report has been organised into six chapters that are presented as follows:

Chapter 1 Introduction

Chapter 2 Literature Review: This chapter provides a review of literature related to basic industry characteristics, motivational factors, identifying opportunities/scanning the environment, farmer orientation, marketing strategy, marketing management, supply chain engagement and relationships, the risk associated with marketing and impacts on the farm business.

Chapter 3 Method: This chapter describes the research methods used in the study including sampling, data collection, and data analysis.

Chapter 4 Case Study Profiles: This chapter provides in-depth background on study participants, including descriptions of their operations, marketing activities, marketing mix, and strategic direction.

Chapter 5 Results: This chapter presents and analyses the results of the study and includes relevant quotations as supporting material.

Chapter 6 Discussion, Implications, and Conclusions: This chapter discusses the implications of the results, and highlights conclusions that may be relevant for other farmers that want to become more involved in marketing

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Chapter 2 Literature Review

2.1 Introduction

The purpose of this chapter is to define and discuss areas of literature that are of significance to this study. The study will focus on the red meat industry, so it is important to first understand the characteristics associated with red meat industry as they relate to the agribusiness operating environment (section 2.2). The focus will then be on why farmers get involved in farmer level marketing opportunities and their associated personality characteristics (section 2.3). An investigation will then be done into how opportunities are identified and the environment scanned (section 2.4). Attention will then turn to orientation (section 2.5), marketing strategy (section 2.6), and marketing management (section 2.7). The purpose of these sections is to understand the difference between production and marketing oriented farmers, and then how farmers undertaking farmer level marketing develop, implement and manage such activities. From there, the process of supply chain engagement and importance of relationships will be investigated (section 2.8). Finally, the impacts and risk of incorporating marketing activities into the farming operation will be investigated (section 2.9).

2.2 The agribusiness operating environment

This section identifies and discusses the defining characteristics of the red meat industry as they relate to the agribusiness operating environment of the farm, market characteristics and supply chain structures, and discusses them in relation to the pressing issues currently found.

The New Zealand Meat Industry is a subset of the broader New Zealand Agricultural industry, and includes the sheep, beef, deer, pork and poultry industries.

The business of farming is influenced by set of defining characteristics associated with agribusinesses, which differentiate it from general businesses (Woodford, 2002, p.1). These defining characteristics go beyond the obvious statement that agribusiness deals with production, processing and marketing within the food and fibre industries. They include long investment cycles, production uncertainty, many small scale producers of commodity products, unique issues of quality management associated with perishability and food safety, and substantial trade barriers associated with the politics of food and the politics of farming.

Obviously, the above characteristics lead to a lack of control, and this is the root cause of variability in product characteristics, which is a major problem according to Haines (1999, p.107), as today’s consumer expects consistency. Haines further suggests that in the case of meat, what determines consistent quality and different quality attributes is not well understood. The result is customer insecurity surrounding the product.

Seasonality of supply as a result of the natural environment is viewed as variability by today’s consumers, who, due to urbanisation are now less in touch with farming systems and the factors causing seasonality of supply. The consumer is also becoming more health and safety conscious, and therefore there is increasing demand for complete traceability, food safety and animal welfare assurance. Ultimately what is required is increased quality management (Woodford, 2002, p.3).

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Furthermore, at the farmer level, there are many small farm operators producing an almost identical product, which essentially means farmers produce a commodity product (Woodford, K., 2002, p.3). Prices for commodity products are set by supply and demand as there are no distinguishing characteristics to justify one supplier receiving a premium over another (Haines, 1999, p.28).

In addition, almost all farmers lose control over their product when it leaves the farm gate.

Livestock are sold to meat processing companies who manage the marketing mix of the supply chain to best meet customer specifications. According to Haines (1999, p.3) this presents an “opportunity for better marketing that lies in the fact that barely a quarter of farm output reaches the consumer in the state in which it left the farm”. He goes onto say “most farmers know this, but they underestimate the marketing effort and the value added by the downstream marketing sector, and the missed business opportunity which this represents”

(Haines, 1999, p.3). The difficulty in this is that processing plants (where the vast majority of value is added to product) are highly capital intensive and therefore it is difficult for the individual farmer without high throughput to make this an economically viable option.

The supply chain also has problems in effectively relaying product specifications demanded by customers. Haines (1999, p.109) states that, this problem results from the current classification system being devised for intermediary buyers. The current classification system is based on the primary variables of size and fat covering of the carcass. This correlates to a schedule of prices determined by market demand. However, there are other attributes (e.g., ease of preparation, tenderness, taste and colour) that the consumer looks for and that play no part in meat classification. The classification system has led to a focus on maximising production potential behind the farm gate and the implementation of a cost leadership competitive model. However, as agricultural markets continue to become more competitive, farmers may need to turn their attention away from cost leadership to a greater focus on differentiation. (Harsh, 2003, p.2)

The major issue, according to Harsh (2003), is that although New Zealand farmers understand that marketing is an important factor, they primarily see it only as a means to sell their product and to reap the revenues, and do not understand the principles behind how to successfully market their products so as to maximise these revenues. Haines (1999, p.4) also states that added value enterprises “require a better understanding of the marketing system than most farmers possess, and a much greater willingness to co-operate with the downstream sector and other producers”.

Another point is that, due to a relatively small domestic population the New Zealand, the red meat industry is strongly export orientated and therefore prices received on farm are strongly influenced by the international market prices and exchange rates. More importantly however, is the point raised by Haines (1999, p.215) that export supply chains are more risky, due to vulnerability to interruptions outside of managements control.

Furthermore, Martin (2005, p.135) states that product characteristics effect the likely marketing positions to be taken up by farmers. For example niche strategies are more likely with wine grape growers, while dairy farmers are likely to be commodity producers. This is due to the level of differentiation that is easily obtainable; however, it is conceivable for any product to be differentiated.

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2.3 Motivational factors

According to Giera (1999, p.113) the motivational factor for entering into direct marketing is usually increased profitability. Increased profitability is often seen by ‘would be’ direct marketers as achievable through taking the middleman’s share of customer expenditure.

However, according to Haines (1999, p.153), this hope is rarely realized and is never a sufficient reason to enter into direct marketing. Haines (1999, p.4) states that “the main benefit to be derived from added-value enterprises is not profit but better customer feedback and greater influence over the post-farmgate use and destination of output”.

Farmers who enter into direct marketing are generally regarded as entrepreneurs. Giera (1999) found that entrepreneurship manifests itself in different ways, with the main avenues being:

advanced marketing, production, and processing. This agrees with Harsh (2003) who noted that it is possible that a link exists between entrepreneurship and marketing activity in farmers. Giera (1999) found that the personal attributes commonly found in entrepreneurs are:

determination, perseverance, a willingness to try new things, a tendency towards innovation, and a high level of motivation.

According to Giera (1999), the characteristics of entrepreneurs are high risk tolerance and foresight as to benefits rather than problems associated with risk taking. The entrepreneur also views information gathering as a vital part of decision making and likes to be surrounded with advisors and literature. The entrepreneur has a large circle of contacts both within and outside their own field of interest, thinks in strategic terms and devotes considerable time to planning and management. Information gathering is an important facet in identifying opportunities/environmental scanning and thus deserves greater analysis.

2.4 Identifying opportunities/environmental scanning

Clearly, farmers involved in direct marketing identified the opportunity to do. This is primarily done by a process called environmental scanning. Environmental scanning is the process by which a firm observes, analyses, and takes into account the happenings and changes in its operating environment (Harsh, 2003, p.13). It includes the actions of competitors, changes in customers, shifts in major economic parameters, societal trends, etc.

Environmental scanning is described by Capon and Hulbert (2001, p.47) as a major responsibility for marketers, and a key aspect of searching out new opportunities and directions for a business to pursue. Haines (1999, p.33) suggests that successful businesses are those that are able to effectively scan their environments for change and new ideas, and make corresponding operational adjustments. He then states that good environmental scanning is likely to help a firm to reduce uncertainty in planning, deal with changes, and capitalise on unexpected opportunities.

To understand the role of environmental scanning and analysis in marketing, it is important to define and understand what is meant by the term ‘operating environment’ (Harsh, 2003, p.13).

Miller (1998, p.75) divides a firm’s operating environment into two broad realms: the general environment, and the competitive environment. Miller states the general environment consists of six dimensions: demographics, socio-cultural trends and issues, political/legal parameters, macroeconomics, technology, globalisation. In Miller’s view, the competitive environment (i.e., the situation faced by a firm in its specific area of operation or industry) is best described by ‘Porter’s Five Forces Model’ (1980). The Five Forces Model divides the competitive environment into five sectors: new entrants, buyers, suppliers, substitutes, and rivalry. Any of the above dimensions and sectors can hold either threats or opportunities for a firm (Barney 1996, p.68).

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In terms of the internal environment within a business, (Haines 1999, p.15-31) stated these to be new opportunities, areas in need of improvement, profit centres, and unprofitable enterprises, all of which can be revealed through current business analysis. Such analysis deals with the examination of a firm’s resources, capabilities, products, and the markets that a firm utilises.

Environmental scanning is closely aligned with market research, defined by (Harsh, 2003, p.5) as “the process by which a firm identifies a new opportunity by examining and interacting with the market (customers), hence determining what the market requires”. He goes onto state “the ultimate goal of performing market research is to gain insight into the desires and drives of customers, which in turn allows producers to design product offerings accordingly”. A market opportunity could be described as the gap between the present situation and what the consumer truly desires.

The most fundamental issue of market research according to Martin (2005, p.124) is to identify who the consumer of the product is likely to be, what characteristics of the product the consumer desires, how stable their demand for this product is likely to be, and who else can provide it to them.

Harsh (2003, p.7) stated, “Once a firm has identified a market opportunity (i.e., a market segment that is currently under served and where the firm can compete), it must consider how it will exploit this opportunity”. This involves the second task of marketing, marketing management which includes the marketing mix.

According to Haines (1999, p.161) producers who have done their own market research and product development should be the best salesmen as they have all the relevant information at their fingertips. He notes that when starting out, direct marketing is usually done, as gaining market access generally requires personal selling. He claims that personal selling is an unrivalled opportunity to explain distinctive attributes and particular benefits of a product to the customer (Haines, 1999, p.161).

In summary market research involves gaining an understanding of customers driven by wants and needs, the purchase decision and marketing segmentation. Market segmentation is the process of dividing customers (or potential customers) into groups based on discriminating criteria, e.g., geographic, demographic, physographic, and behavioural. Therefore, market research requires marketing rather than production skills (Haines, 1999, p-79-87).

2.5 Marketing orientation

Marketing orientation is defined by Haines (1999, p.9) as “a management reorientation which ensures that a business activity is demand led not production driven”. Haines identified characteristics of production and marketing orientated businesses (1999, p.9) as outlined in Table (2.1).

Martin (2005, p.124) states that there are a number of basic marketing decisions that all farmers have to make whether they pursue a production or market orientation. Decisions such as when to put to the ram out and who to sell to are aspects of marketing that even the least market orientated farmers must consider. It is possible for a farmer to be highly market orientated, while still maintaining a strong emphasis on production (Harsh, 2003, p.13).

Likewise, according to Haines (1999, p.105) a farmer whose strength is in production and has limited time for market research will be better off by focusing on production modifications,

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Table 2.1: Characteristics of production orientated vs. marketing orientated farmers

If you are production orientated:

• ‘Marketing’ means disposing of what happens to have been produced.

• The management focus and emphasis are on production.

• Products are ‘over engineered’ to satisfy own standards, regardless of customer requirements or willingness to pay.

• Marketing research and planning are almost non-existent.

• Price tends to be cost-based, with value and competitive considerations largely ignored.

• Cost reduction efforts dominate, and may sacrifice product quality and customer service.

• Instead of adapting to customer needs, other buyers are sought for the same products.

If you are marketing orientated:

• The focus is on the marketplace: customers, competitors, and distribution.

• Monitoring the market is a routine part of business.

• Change is recognised as inevitable and manageable.

• Management is committed to strategic business and marketing planning and creative product planning.

• The emphasis is on profit – not just volume, with profit and growth kept in balance.

Source: Marketing for Farm & Rural Enterprise (Haines 1999, p.9).

McLeay, Martin, and Zwart (1996), in a study of the marketing and strategic behaviour within the Canterbury (New Zealand) intensive cropping sector, identified five distinct groups of farmers: stability, production/production flexibility, production/market outlet focus, arbitrage, and differentiation

2.6 Marketing strategy

Marketing strategy is defined by Kotler, Brown, Adam & Armstrong (2004, p.132) as the marketing logic by which a business hopes to achieve its marketing objectives. Marketing strategy consists of specific strategies for target markets, marketing mix and marketing expenditure level. The objective of marketing strategies according to Haines (1999, p.12) is to

“achieve the best possible match between resources and market opportunities, and ideally to establish a long-term competitive advantage by securing a customer base loyal to the product and the supplier”.

Porter (1980; 1985) states that competitive advantage can be derived from one of two broad generic strategies: cost leadership, or differentiation. Cost leadership is often associated with the production of commodity type products, and based on a specific set of resources.

Alternatively, differentiation involves a unique product or set of attributes that can ideally be protected from duplication. The strategy must be sustainable if truly lasting competitive advantage is to be achieved (Barney, 1996).

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A firm determines how it will compete in a given industry by first understanding its environment (see section 2.4). Harsh (2003, p.8) states that “in developing a marketing strategy a firm takes into account: competitors, substitute products, targeted market segments, product maturity, and various other marketing parameters, to yield a comprehensive direction for product marketing based on current capabilities”. By scanning and understanding the environment a firm builds, and protects competitive advantage (Barney, 1996). A sustainable competitive advantage is described by Barney (1996) as robust and not easily duplicated. For a competitive advantage based on cost leadership, this means ensuring that a firm remains the low cost producer of a given product (within quality specifications) in the market place. A differentiation strategy requires that products must be unique, or possess unique attributes, that separate them from others in the market, and that are ideally protected by the use of a brand (Barney, 1996).

Competitive advantage is the basis of an effective marketing strategy (Capon & Hulbert, 2001, p.16). Firms use competitive advantage as a starting point for marketing activities, and then strengthen and secure their advantage through marketing activities. For competitive advantage based on differentiation, this will require investment in advanced marketing activities, while for cost leadership, it is likely that less advanced marketing activities will be required (Capon & Hulbert, 2001).

According to Haines (1999, p.12) four basic marketing strategies exist which involve different levels of innovation and risk: market penetration, market development, product development and diversification. The appropriateness of these strategies needs to be evaluated in every situation according to Haines (1999).

2.7 Marketing management

Marketing management can be viewed as the means by which the strategy is put into operation. Kotler et al. (2004, p.16) define marketing management as “the analysis, planning, implementation and control of programs designed to create, build and maintain beneficial exchanges with target buyers for the purpose of achieving organisational objectives. Thus, marketing management involves managing demand, which in turn involves managing customer relationships”.

Harsh (2003, p.2) defines farmer level marketing as “the marketing activities and strategies that are internal to, and an integral part of, the farm operation and that move the farm business away from price sensitive commodity production, towards a competitive strategy based on differentiation”

This section will first discuss the relevance of a target market and then the ways in which the marking mix of product, price, place and promotion can be managed to meet the needs of the target market. Kotler et al. (2004, p.109) define the marketing mix as “the set of controllable marketing variables that the company blends to produce the response it wants in the target market”.

2.7.1 Target market

According to Haines (1999, p.27) a marketing strategy depends on the following strategic decision. Whether to address the total market for a product with a single marketing mix to match their separate needs, or whether to research and identify market segments which may be supplied with a different product and marketing mix to match their separate needs.

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The former is known as undifferentiated, commodity or mass marketing; the latter is what farmers know as niche marketing, and what marketing theory refer, to as differentiated marketing or market segmentation. The target market is the identified market segment for which the marketing mix is designed to meet the needs. Haines (1999, p.30) states ‘it is generally assumed that it is better to identify an under served segment rather than to confront existing competition on its own ground’. Furthermore, Martin (2005, p.124) states, “extent to which an individual farmer should focus on consumer needs and market research will depend on the degree of his or her involvement in marketing and his or her role in the supply chain.”

2.7.2 Product

Kotler et al. (2004, p.8) define a product as “anything that can be offered to a market for attention, acquisition, use or consumption that might satisfy a want or need”. Dunne (1999, p.61) refers to a product as ‘the physical product or service, that a firm produces, and includes both its functional (what the product does) and non-functional features of the product (size, colour, packaging, brand, etc.).

The product decision according to Haines (1999, p.95) identifies exactly which product attributes must be provided in order to target an identified demand, and the management implications of supplying it. Haines (1999, p.95) states, in the farming context the basic product decision – what to produce – is limited by the natural environment and physical situation. He notes that product choice is further restricted by: legal, social and land-use constraints which either prevent certain types of development altogether, or increase the costs and operational problems; designated area planning constraints which may entail higher building costs, impose access restraints, limited opening times, quiet activities, etc;

compliance with public health and hygiene requirements which may entail prohibitive plant, equipment and labour costs that rule out a processing enterprise. The individual product decision must also be made in relation to the consistency and credibility of the total business offer, their potential impact on overall revenue, costs, and profitability, and their implications for resource allocation (Haines, 1999, p.95).

Before making the product decision, it is important, to understand the purchasing decision.

Haines (1999, p.95) states “a customer purchasing any product buys a combination of functional attributes, functional services and psychological benefits which can be modified to encourage purchase”. Haines presents the following examples to illustrate the statement above: Functional attributes – fat content, organic source, different flavours; Functional services – doorstep delivery, monthly accounts, eco-packaging; Psychological benefits – reliability, friendliness of deliveryman, product assurance.

In relation to agricultural produce the decisions about the physical aspects (functional attributes) of a product include: initial choice of product to supply an identified demand: for example the right livestock breed, and the production implications: fertiliser/feeding regime (Haines, 1999, p.97).

Demand for products is dynamic, and the competitor offerings and marketing environment change over time, and hence the product decision is not a once only task. Product development is a continuous process which responds to (and ideally anticipates) changes in demand and competitor activity according to Haines (1999, p.96). He then states that, it is rarely the case that existing products cannot be modified and re-positioned in the market to add value and gain a competitive advantage.

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Sustaining a competitive advantage with a product is often associated with branding, which is described by Haines (1999, p.99) as “the ultimate expression of a product with a strong psychological content and which communicates the benefits customers can expect to derive from purchasing a product”. A brand identifies known product attributes and the quality assurance guarantee. Branding reduces customer effort and risk and for the supplier it creates a customer base loyal to a brand. Haines (1999, p.99) states that, there must be strict adherence to the standard set (brand consistency), and that only small deviations from the standard are likely to be tolerated, and only then on the understanding that any such change will be reliably managed without loss of customer satisfaction. However, problems are often encountered according to Haines (1999, p.100) on scaling up operations as standards may no longer be under owner/operators control only. One example of this is a marketing group that supplies quality finished sheep risks its reputation by marketing poor store stock.

Haines (1999, p.112) concludes that in a competitive marketplace of branded products, the aim is to establish a clear product identity which guarantees consistent quality and encourages repeat purchase, and allows promotion of the product’s functional and physiological attributes. He states that, for raw materials, quality improvement coupled with labelling may be the best that can be achieved, possibly augmented by post-production systems generally linked to quality assurance schemes.

2.7.3 Place

Placing the product involves all the activities necessary to make products available for purchase and to inform customers they are available for purchase (Haines, 1999, p.135).

Placement includes the physical distribution (logistics) which includes transportation, storage, sorting, packaging, stock and order control, and the corresponding information flows along a supply chain (Haines, 1999, p.135). The placement decision is an important one, according to Haines (1999, p.135), as simply placing the products in the right outlets may gain a quality premium and adding value may be simply the choice of another buyer or distribution channel.

Haines (1999, p.135) states, “distribution must be viewed as the management effort to maximise revenue from production”. The purpose of the placement decision is to get the product to the right place at the right time via the right marketing channel in the required form (Haines, 1999, p135). The related questions that must be asked are: When to sell? How to sell? In which form to sell? and Where to sell?

In the agricultural context, this element requires farmers to interact with various distribution channels that are made up of channel facilitators (wholesalers, brokers, exporters, etc), and product modifiers (processors) (Dunne 1999, p.64). These interactions are managed through relationships (see section 2.8). Information flows are important as it allows quick feedback of market requirements and modifications of the marketing mix to meet changing demands.

The placement decision is not a one off as the role of a distribution channel and functions it performs continually evolve in the search for competitive advantage and improved efficiency, and in response to technological change. Haines (1999, p.165) states, the key is to deliver required level of service at minimum cost.

2.7.4 Price

Price is defined as the amount of money charged for a product or service, or sum of the values consumers exchange for the benefits of having or using the product or service. Price has

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obvious relevance for enterprise viability, since price and numbers sold determine revenue received (Haines, 1999, p.115).

It is therefore important to understand how price is set. A firm is either a price maker or a price taker according to Haines (1999, p.115). The price received by a price taker, such as commodity producers, is derived from the market price, which is set by supply and demand.

Conversely, the price received by a price maker is set based on their pricing objectives, which is a derivative of their business objectives. The business objectives could be business survival, sales maximisation, current profit maximisation, product quality leadership, or some combination of these, according to Haines (1999, p.115).

Essentially there are two issues surrounding the price decision (Haines, 1999, p.115). These are, price level (how is or can the general price level for a product be determined?), and variation around the price level, reflecting quality/quantity purchased, time/place of sale, use values, distribution costs (e.g., extra remote regions), product forms and sizes within a range.

Various approaches can used to determine price, such as competition orientated, cost- orientated, profit-orientated and demand-orientated (Haines, 1999, p.118). Competition orientated pricing is set by supply and demand. Cost-orientated pricing relates price received to costs incurred. Profit orientated pricing is most common, and occurs when a business is looking for a certain return on investment. Demand orientated pricing relates to price discrimination and perceived value pricing; that is different prices are charged for different customers. Harsh (2003, p.8) notes that “in the agricultural context some producers set the price for their products, others use contracts, and some utilise open markets to discover prices”.

When pricing, perceived value is an important factor, according to Haines (1999, p.125) “as customers purchase psychological benefits as well as intrinsic product attributes, and hence they may pay a higher price for a product which maximises their perceived value”. He then states the perception may be based on tangible product improvements (e.g., taste) or solely on the customers’ perception. The latter is often associated with a brand name, and the higher price of the branded product is part of the benefit it confers (i.e., if it is more expensive, it must be better, or it shows off purchasing power). Conversely, if a product is cheaper some customers will assume it is inferior.

Haines (1999, p.125) states that price highlights the importance of market research, as it allows judgements to be made about common attitudes to price and product requirements, and the need and scope for price competitiveness. The price decision, once made, can be altered and often price modulation features prominently in the marketing strategy (Haines, 1999, p.125). He states that the important criterion is value for money, which is a combination of price and quality factors.

2.7.5 Promotion

According to Kotler et al. (2004, p.110), promotion refers to activities that communicate the merits of the product and persuade target customers to buy it. It is described by Dunne (1999, p.65) as a way to increase product visibility mainly through advertising, publicity, and personal selling. Everything a business does communicates something to the customer, whether or not it is intended: product packaging, premises, vehicle livery, business manner and style, personal delivery of service products. However, the key point is that promotion must transform customer interest into product sales (Haines, 1999, p.169). In relation to the

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agriculture, the sales skills required for promoting ones product are commonly underestimated (Haines, 1999, p.153).

The purpose of promotion, according to Haines (1999, p.171), relates to both short run and long run objectives. The short run objective is to achieve sales by gaining a high degree of customer recognition for the product in competition with comparable offers. The long-run objective is to achieve a customer base loyal to the product and the supplier, which reduces marketing effort and cost, and provides a basis for sustainable trading.

There is two types of promotion strategy according to Haines (1999, p.173), the push strategy which persuades those further down the supply chain to stock your product, and the pull strategy which targets promotion direct to consumers (mainly through advertising and direct marketing). Usually the strategies are used simultaneously.

Promotion involves transmitting a clear and informative message that identifies what is essentially different about a product and the particular benefits the customer will derive through purchase (the unique selling proposition) (Haines, 1999, p.173). All of the above implies branding. The investment in production effort and financial support for the brand will be repaid in the form of secure market access and often a premium price (Haines, 1999, p.172). Brand establishment is difficult (Haines, 1999, p.28), particularly in a highly competitive sector, and tends to be expensive.

The difficulty with promotion is in the calculation of the cost relative to the effectiveness, which is difficult to measure (Haines, 1999, p.184). The main focus of promotion should be the target consumer group identified by the market research. The nature and extent of the target audience existing knowledge and attitudes towards a product and supplier needs to be identified if promotion is to be well targeted (Haines, 1999, p.176). Hence, promotion is an integral part of market segmentation and product positioning.

2.8 Supply chain engagement and relationships

The concept of a supply chain has already been raised in regards to the place decision. The supply chain is defined by Hobbs, Cooney and Fulton (2000, p.9), as “the entire vertical chain of activities: from production on the farm, through processing, distribution, and retailing to the consumer”.

Farmers engage with the supply chain either through vertical integration or relationship management (Martin & Jagadish, 2005, p.7). Vertical integration requires capital investment and so increased revenue must be compared to increased costs including own resource (Haines, 1999, p.153). If the job cannot be done as effectively and as cost–efficient as it can be by specialist intermediaries, then they should be used, which then requires building supply chain relationships (Haines, 1999, p.153).

The concept of relationship management has become integrally linked with supply chain management. For example, Hobbs, Cooney and Fulton (2000) believe that supply chain management entails the process by which a group of vertically aligned firms seek closer integration to improve product flow and information sharing (both up and downstream), with the ultimate goal of increasing customer orientation. Often the term supply chain is used interchangeably with the term value chain. Value chain refers to the alignment of firms along the chain in order to create value for the final consumer, and includes distribution of margin between firms (Hobbs, Cooney & Fulton, 2000, p.9-11). They say a value chain moves

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vertical alliance or strategic network between a number of independent business organisations within a supply chain” (p.9). The distinct attributes of value chains as opposed to traditional agriculture chains are shown in chart 2.2.

Table 2.2: Traditional vs. value chain business relationships Traditional Value Chain Information Sharing Little or none Extensive

Primary Focus Cost/price Value/quality

Orientation Commodity Differentiated Product Power Relationship Supply push Demand pull

Organisational Structure Independence Interdependence Philosophy Self optimisation Chain optimisation Source: Value Chains in the Agri-Food Sector (Bouma 2000 in Hobbs, Cooney, and Fulton 2000, p.11)

Relationships are of the utmost importance in value chains; their maintenance and development having become a main component of many firms operating strategies, and a significant topic of discussion in agribusiness and supply chain management literature (Harsh, 2003, p.18). Relationship management is defined by Morris, Brunyee, and Page (p.18, in Harsh 2003) as: “A strategic orientation by both buyer and seller organisations, which represents a commitment to long-term mutual beneficial collaboration”. Morgan and Hunt (1994) focus on commitment and trust, and hold these factors as important in successful inter- firm relationships. According to Morgan and Hunt (1994) commitment and trust in relationships encourages managers to resist short-term actions in favour of long-term commitments, work co-operatively to preserve their mutual relationship investment, and to engage in potentially high risk actions in the absence of opportunistic behaviour by relationship partners. However, Speckman, Kamauff, and Myhr (1998) found that healthy, committed supply chain relationships are more valued by sellers than buyers.

According to Dunne (2002) the degree of development of supply chain type relationships can be determined by examining the nature and volume of information exchanged among firms in a given chain. The exchange of simple transaction data is a sign of weakly integrated relationships, while sharing of more advanced information (i.e., costs, margins, quality, and production information) shows strongly integrated relationships.

Haines (1999, p.155) states that ideally firms involved in a relationship should share business objectives and values, as this will allow the establishment of a long-term relationship. He mentions that strong relationships yield the main advantages of direct selling (control of distribution and effective customer feedback, resulting in faster and better modification of the marketing mix) without the costs and risks which it involves.

2.9 Impacts and risks of marketing

The farmer level marketer is responsible for a wider range of functions within the marketing channel for his or her product than would be the case if product went down the conventional marketing channels where they are undertaken by a number of intermediaries (Haines, 1999, p.153). Therefore, there is no doubt that incorporating marketing activities into the farm business has specific impacts on its operations and the associated risk.

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Haines (1999, p.153) stated that “the increased complexity associated with such activities enhances the need for resource management by the owner/operator”. Accordingly, the biggest constraint is often resources available to the farmer level marketer. Likewise Haines (p.153) states that “direct selling can contribute to lower cost levels, but at the expense of increased management commitment which may adversely affect the owner managed business (decreased product quality, missed deadlines, timeliness of farming operations etc)”.

According to Martin (2005, p.132) the further down a supply chain a farmer operates, the more time they must divert from production to marketing activities. She goes on to say, that when this occurs, they may need to delegate aspects of production or marketing to others.

Therefore the incorporation of marketing activities often results in increased staffing.

Likewise, Martin (2005, p.135) stated “farmers may need to take on increased debt to finance their marketing venture”.

Furthermore, good marketing management implies good management of market risk, according to Martin (2005, p.133). She defines market risk as variability in output prices and input costs, and states that many factors can underlie price variability. These can include changing consumer patterns and quality requirements, instability and poor performance within the marketing chain, the behaviour of competitors, overseas trade barriers, and changes in government policy.

Martin noted that risk in general was managed by two strategies: lower a firm’s exposure to risk (i.e., smoothing out prices and yields), and controlling the impact of risk on the firm (i.e., lowering leverage, raising total profitability). In relation to different degrees of marketing, Martin (2005) suggests a range of strategies (see table 2.1) to reduce the likelihood of a risk event and to control the impact of risk should an event occur. In practice, most producers will use a combination of strategies. Furthermore, risk management practices are likely to vary according to the producer’s degree of involvement in marketing.

Table 2.3: Market risk management for different degrees of involvement in marketing High Involvement Moderate Involvement Low Involvement Enterprise diversification Enterprise diversification Enterprise diversification Control over supply chain Forward contracts Market information

and product Spread sales Have an ability to absorb Extensive market information Market information market risk

Source: Martin (2005, p.143).

A study by Martin (1996) found that NZ primary producers were very concerned about market risks and that all farmers cited long term flexibility as being important in dealing with market risk. Other popular risk management strategies included crop and venture diversity, market information coupled with short term flexibility to allow for opportunism, and financial buffering against price fluctuations.

Martin (2005, p.135) also claims that, by establishing their own supply chain, farmers are reducing the market risk that emanates from low and uncertain prices offered by existing marketing channels. However, they are replacing this with the risk that their venture will not appeal to consumers, or that they are not able to deliver the right quantity to the right place at the right time. Martin (2005, p.134) also states that gaining more control over a marketing channel may be an effective risk management strategy. This is due to increased information flows and the quality of the information specifically in relation to prices and market requirements. She also cited very active management of the whole production and marketing

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process as a critical element in reducing the risk of failure. Enterprise diversity was also seen by Martin (2005, p.135) as an effective risk management strategy. That is, selling a range of products, and being prepared to change the mix as consumer demand changes, will reduce the market risk associated with the venture on the rest of the business.

If entering into marketing activities reduces overall risk load, it may allow an increase in risk from another source to be tolerated. For example, it may allow farmers to correspondingly expand their production activities. However according to Martin (2005, p.135) risk is more likely to rise in the early stages due to the factors mentioned above. But this is unlikely to concern farmer led marketers due to their less risk adverse nature. However, Martin (2005, p.135) states that farmers will be aware that it is a high risk venture and that they will need to do everything possible to avoid failure. In summary, Martin (2005, p.135) stated that producers deal with risk in different ways, and the key is to ensure risk exposure remains at a tolerable level.

2.10 Summary

In conclusion, it is expected that the defining characteristics of the red meat industry, particularly in relation to ease of product differentiation, may give different results to those found in the study by Harsh (2003) which was conducted on a range of cropping enterprises.

However, it is possible that many other similarities may exist. From the literature, it is suggested that farmers are likely to be motivated to get involved in farmer-led marketing activities because they have a desire for increased profitability or more control over their product. Furthermore, the literature suggests that farmers may identify opportunities for such activities through informal environmental scanning.

The literature found that, if marketing oriented farmers had developed a marketing strategy which was implemented through marketing management. This included strategic decisions on the target market, product, place, price and promotion. The significance of engaging with the supply chain and associated relationships and their management was emphasised in the literature, and advantages of doing so were highlighted.

It is suggested in the literature that focusing on marketing activities rather than solely on production has impacts on the farm business, and these impacts bring with them associated risk. However the literature also suggests that, farmers who enter into farmer-led marketing believe that they have competence in marketing and that their risk is manageable.

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Chapter 3 Method

3.1 Introduction

The aim of this study was to learn more about how and why farmers incorporate marketing into their operations at the farm level. Emphasis was placed on exploration of what motivated farmers, personal character attributes, identification of new opportunities, target market, customer views, and the marketing mix. It also included a focus on how farmers engaged with the supply chain, impacts of marketing activity on the farm business and risk involved. To accomplish this, a qualitative research approach was utilised. Five semi-structured farmer interviews were conducted from the period of June to August 2007.

This chapter explains the decision to use a qualitative research approach for this study, the implications of such an approach, and describes the methods used for data collection, organisation, and analysis.

3.2 Research approach

Prior to the study carried out by Matt Harsh (2003), limited formal information existed on individual farmer’s marketing activities and strategies in New Zealand. Actions and attitudes surrounding marketing at the individual farm level involves more than just the farmer making simple decisions about farm produce, and market channels. Marketing is part of the complex

‘whole farm system’, and thus needs to be considered in the proper context, and examined in a holistic manner.

As the study is similar to that conducted by Harsh (2003), it was deemed appropriate to follow the same method since this allowed comparisons between the two studies to be made.

This method was an inductive, qualitative research method. Like the study conducted by Harsh, this study was designed to begin the exploration process of the issues associated with the application of marketing at the individual farm level, and in doing so, to gain insights that would be relevant to other farmers that desire to implement more active marketing programs.

Patton (1987, p.44) states that, “qualitative methods are particularly oriented toward exploration, discovery, and inductive logic.” Woodford (2000) also noted that qualitative research methods are well suited to management issues in agriculture (such as marketing), as they allow for topics to be examined in a natural and whole system context, and for the study of farmers, “doing what they do normally”. Therefore the method used by Harsh (2003), a qualitative case study research approach, was selected for the study.

Yin (1994, p.13) defines a case study as “an empirical inquiry that investigates a contemporary phenomenon within its real life context, especially when the boundaries between phenomenon and context are not clearly evident”. Harsh (2003, p.24) stated that “in many ways, this definition is an accurate depiction of the challenges faced when studying farm-level marketing, as such activity is inextricably linked to the farm and the farm operator”. Harsh (2003, p.24) also found that “the case study approach provided a vehicle for the proper examination of the essential and peripheral issues faced in farm level marketing, in an appropriate contextual understanding”.

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Evidence for case studies can be obtained from six distinct sources: archival records, documents, direct observation, participant observation, physical artefacts, and interviews (Yin, 2003, p.83). For this study, in depth, open-ended, semi-structured, qualitative interviews were used for data collection.

3.3 Sampling issues

Following Harsh (2003) purposive sampling was utilised in this study to maximise the amount of information that could be gained from a limited number of study participants.

According to Patton (1987, p.52), “the power of purposive sampling lies in the selection of

‘information rich’ cases”. Patton goes on to define information rich cases as “those that yield a large amount of in-depth information pertinent to the central purpose of the given study”.

Lincoln and Guba (1985, p.233) recommend that sample size in qualitative research should be determined by redundancy (i.e., including new cases until all of the issues and topics relevant to the study have been fully covered and no new information is to be gained). However, given the limited time frame and resources allocated for this study, it was decided to predetermine and limit the number of study participants, with a serious attempt being made to select a range of highly ‘information rich’ cases that fitted with the purpose of this study.

Therefore, five study participants were identified with the assistance of the Lincoln University Farm Management Division. Participants were chosen because of demonstrated activities of advanced marketing strategies at the individual farm level. An effort was made to ensure all farms were representative of the diversity of red meat farming operations, as well as giving an appropriate geographic distribution.

Although the number of participants for the study was predetermined, five appears to have been appropriate number. By case five, no appreciably new or different information was gained, and therefore it was felt that redundancy had been reached.

3.4 Data collection and analysis

Easterby-Smith, Thorpe, and Lowe describe in-depth interviewing as the “most fundamental of all qualitative methods” (1991, p.71). “Qualitative interviews are conversational in tone, and can run the gamut from completely non-directional and open ended, to well structured and based on a rigid questionnaire” (Easterby-Smith, Thorpe, & Lowe 1991, p.72). Semi- structured, open ended interviews are of an informal conversational nature; this allows respondents to share their experiences and give a wide range of responses, without the interviewer imposing pre-existing expectations (Patton 1990, p.281). This type of interview also allows greater flexibility, and the ability to ‘follow up’ issues and interesting lines of questioning that arise during the interview process that may otherwise not have been raised in a highly structured setting (Patton 1990, p.282). Following the method used by Harsh (2003), while the interviews for this study were in depth, they were not completely non-directional.

Instead they were semi-structured, as opposed to non-directional style of interviewing. This provides a basic structure to the interviewing process, which helps to avoid obtaining poor data that is difficult to analyses (Easterby-Smith, Thorpe, & Lowe 1991, p.75).

Data was collected through personal, semi-structured interviews with each of the study participants. Study participants were initially contacted by email, which was followed up a few days later by telephone, and interviews were arranged at the convenience of the farmers.

All interviews took place at the farmers’ place of operations (i.e., ‘on the farm’), and

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generally lasted about two hours. Yin (2003, p.72) recommends that interviews be conducted in a significant place where respondents feel comfortable to facilitate more meaningful answers. The general interview guide approach (Patton 1990, p.280) was utilised in the questioning process. In this approach, an interview guide outlines the general topics and questions that are to be covered in the interview, but a specific wording or order of questions is not used. A set of loose questions and related topics formed the basis of the interview guide for this study (see Appendix 1), and was used to ensure that all relevant topics were covered.

Interview questions were varied for each participant, and tailored to their particular circumstances.

Interviews were recorded on audiotapes to ensure total accuracy in the data collection process, and also field notes were taken during the interview process. Audio tape recordings were subsequently transcribed to provide a complete written record of each interview and to facilitate data analysis. Transcripts were prepared with extra wide margins for ease of annotation and coding in the latter stages of data analysis.

After transcription, interviews and field notes were evaluated to identify preliminary themes and issues. Several important themes (headings) were ‘predetermined’ by the semi-structured nature of the questionnaire, while others emerged from the data during analysis. A coding system was developed (i.e., headings were colour coded) whereby interview text was critically read, annotated, and assigned to appropriate headings. Using Microsoft Word software, interviews were then ‘cut and pasted’, with all of the text related to a given heading collated for further analysis. These were then analysed on a cross case basis for themes that were common and divergent.

Additionally, a case study profile (see section 4) of each study participant was developed in order to give an appropriate ‘feel’ for each operation’s ‘whole farm’ system, and to understand the current role of marketing within that system. These profiles consist of:

information on each operations physical attributes (i.e., size, general location, farm type, etc.), evaluation and description of participants’ ‘marketing mix’, and analysis of the operations overall strategic and marketing directions.

3.5 Confidentiality

Every effort has been made to protect the confidentiality of study participants. Participants were assured that all information shared in the course of interviews (particularly that which could be considered proprietary) would be used only for research purposes, and any reference to their specific operation would be omitted from the study’s final write-up. Farmers were assigned a representative letter (A-E) for identification in the data organisation, transcription, analysis, and final write-up processes and only the supervisor was given privy to the letter/farmer relationship. Any un-coded reference to specific operations was removed from tapes, notes, and transcripts used in the study. Study documents and materials were stored in a secure location at all times, and were accessible only to the researcher. Upon completion of the study, documents and materials (notes, transcripts, and tapes) deemed no longer necessary were destroyed, and any relevant materials (a confidential appendix of interview transcripts) were properly documented and archived.

Although at no time are study participants or their farms specifically referred to in the final study presentation, it may be possible to infer their identity from information or quotations used in this document. Participants were made aware of this prospect and gave their approval to proceed. Every effort has been made to minimise the possibility of this occurrence.

Farmer level marketing: case studies in the South Island of New Zealand

AE R U

Farmer Level Marketing:

Case Studies in the

South Island, of New Zealand

Ross K. Bowmar

Research Report No. 305

May 2008

Farmer Level Marketing:

Case Studies in the South Island of New Zealand

Ross K. Bowmar

Research Report No. 305

May 2008

Table of Contents

List of Tables

List of Figures

Acknowledgements

Executive Summary

Chapter 1 Introduction

Chapter 2 Literature Review

Chapter 3 Method