Sourcing of Hayward Fruit
Zespri currently procures around 10 million trays of Hayward kiwifruit that meet our Zespri Global Quality standards from Italy and Greece each year and this fruit is marketed predominantly in the EU.
This fruit is sourced based on market demand and is the only Zespri programme where there is no mutual obligation of supply between Zespri and suppliers/growers. Zespri has no obligation to take the entire crop of an orchard which allows us to source fruit that meet our preferred taste and size profile. Growers are not subcontracted, with procurement taking place through Zespri’s approved Hayward supply partners.
Zespri sources Hayward from Italian and Greek suppliers after an official clearance process to ensure the fruit meets Zespri Global standards. Minimum dry matter and GLOBALG.A.P certification requirements apply.
Zespri contracts with all Northern Hemisphere SunGold Kiwifruit growers as we need to give authorisation for them to grow a Zespri PVR variety and ensure they grow to Zespri standards. There are different approaches in each of our regions.
In Europe, we use a multi-annual contract. This is a three-way contract between Zespri, growers and suppliers which helps ensure that suppliers are also responsible for their growers’ ability to abide by PVR and quality requirements. Growers must be associated with a Zespri-approved supplier. Zespri and suppliers sign both a multi-annual contract and a grower subcontract, while growers sign just a grower subcontract. We also use an annual terms of trade contract to apply certain quality and operational specifications and elements (i.e. Incentive payments) of supply with suppliers.
In Japan, there is a contract between Zespri and a grower giving authorisation to plant and grow a Zespri proprietary variety, and an annual terms of trade contract between Zespri and a grower outlining the standards for supplying fruit and payment elements. Packhouses also have a Post Harvest Services agreement with Zespri.
Contracting in Korea is similar to Japan, although there are no terms of trade with the grower.
Access to Licence
ZGS growers are not able to buy SunGold Kiwifruit licence, instead growers are authorised by Zespri to grow SunGold Kiwifruit in accordance with contract conditions. ZGS growers do not own the licence and instead pay through an increased annual commission charge rather than a single licence fee. ZGS growers can’t sell this licence and Zespri can cancel their authorisation to grow SunGold Kiwifruit if they don’t meet the terms of the contract.
Grower selection process
In Europe, Zespri works with our suppliers to consider new growers to ensure they are suitable both from a land and grower perspective, with local experts undertaking a grower assessment. When a potential growing area is new, more extensive data is collected, including soil and water analysis, as well as a review of historical performance of Hayward or other crops.
In Asia, an assessment process includes a site selection audit. This is to check the orchard site, location, challenges and grower capabilities. Only when all criteria are satisfied and the grower and site are approved, can the plants be distributed to the grower.
Zespri has filed for plant variety protection in Europe, Japan and Korea, and takes steps to enforce its proprietary rights if information becomes available that suggests that there are unauthorised plantings.
From a monitoring perspective, in Europe, Zespri’s partners are active in ensuring that growers abide by the hectares they are allocated and are legally bound to declare production areas through a land registry. As part of our selection process, Zespri audits new growers to ensure they are meeting requirements and EU phytosanitary requirements also require a plant passport for plant material on a specific orchard which provides an additional check.
In Asia, Zespri is actively trying to increase plantings in both Korea and Japan. Provided growers meet our requirements, we generally approve all requested hectares through the site selection audit, meaning there is no incentive for growers to plant outside of their approved hectares. We do, however, track how many plants are supplied from each nursery, with team members monitoring plantings on their site visits.
In Europe, plant material comes from authorised nurseries. There are currently 6 approved nurseries which we have been working with since 2013, all of which have signed an agreement to protect our PVR variety. This agreement gives nurseries the right to maintain and propagate the protected material on defined sites, and to sell plants to approved customers.
Most European growers don’t plant SunGold Kiwifruit plants, but graft a young rootstock. The budwood comes from mother plant sites which Zespri has contracted to produce budwood to our specifications. These providers are subject to the same rules as New Zealand nurseries and can only sell their budwood with Zespri's approval. Budwood may also be sourced from specified commercial sites, following a Zespri certification process. Currently, the only region where this is possible is Basilicata (in the south of Italy). Budwood may also be sourced from Psa-free regions of New Zealand, provided all phytosanitary rules and export/import processes have been followed.
All plants in Japan and Korea come from Zespri-approved nurseries. Zespri currently has agreements in place with 2 nurseries in Korea and 3 in Japan which we visit regularly and these nurseries can only sell plants to Zespri approved growers.
Financials / Resourcing
The costs of operating ZGS (overheads) are funded through the commission that ZGS growers pay. The commission is retained from Net Sales before paying the Total Fruit and Service Payment to Suppliers. The Commission rate is identified by the Suppliers’ contract in each growing region (between 13.25 and 15.75%) and identifies the remuneration to ZGS for its role of supporting growers, suppliers and its activity of supply chain management. The commission rate includes the royalty for the licence.
In addition to funding the direct costs of operating ZGS, ZGS growers also contribute to costs of other Zespri business segments.
The allocation of overhead costs from one business segment to another is set by the Segment Allocation manual and is based on the following approach:
- Overhead costs related to “selling activity areas” are typically offshore based companies that sell or provide in-market support for both New Zealand and Non New Zealand (ZGS) fruit. These overheads are allocated according to kiwifruit volume (trays) of each business segment.
For “non-selling activity areas” the allocation of overhead costs is based on the time spent working for a business segment. The charge is calculated by taking the hours spent multiplied by the employment cost (salary & bonus) and uplifted by 50% to cover additional overheads. This means that New Zealand staff that spend more than 5% of their time working on ZGS activities charge that time back to the ZGS business.
In 2020/21, segment allocation made up 45% of the Non-New Zealand supply overheads shown in the Alternative Revenue Statement in Zespri’s Annual Report.
As ZGS volume grows, so will its contribution to the costs of running the global Zespri business. If ZGS achieves the expansion strategy, this is expected to save NZ growers an additional 6c per tray on overhead costs in 2030.
In the 2021/22 financial year, ZGS contributed NZ$27 million to Zespri’s corporate profit.
As the ZGS business grows, it is anticipated that profitability will increase.
ZGS growers fund any promotion that is undertaken during their supply season. This cost is deducted from the ZGS grower pools. This includes in-store sampling, market research, media and trade marketing. In the 2020/21 financial year, ZGS invested $11.7m in promotional activities relating to ZGS fruit.
Zespri’s Northern hemisphere growers have experienced significant disruption from biosecurity risks in recent years, particularly in Europe. Two of the most significant are Kiwifruit Vine Decline Syndrome and Brown Marmorated Stink Bug – neither of which are present in New Zealand. The experiences of the ZGS growers in identifying and learning to manage these issues are very important to help New Zealand prevent their introduction or in the worst case, learn to manage them.
Kiwifruit Vine Decline Syndrome (KVDS), also called Verona Vine Decline or Moria, has been observed in Italy since 2012. While it had been localised to the northern Hayward-producing provinces of Italy for 7 years, its occurrence has increased in other parts of the country since 2019, namely in Lazio (Central Italy), with reports it has affected some SunGold Kiwifruit orchards and around 7,000 hectares of kiwifruit in total (mainly Hayward).
The phenomenon is linked to poor root health, likely developing from a mix of extreme weather events (heavy rainfall, floods), poor soil quality and soil compaction, and sub-standard orchard management practices (flood irrigation, lack of drainage system or cleaning ditches, over-irrigating) generating anoxia (lack of oxygen in the soil) and associated root diseases. Several orchards in France have also reported problems in the past two years, usually associated with blocks that have experienced recurrent flooding events.
KVDS manifests in random patches of vines dying or collapsing, typically in late Spring, with a withering of leaves. Fruit remains small and eventually drops with the main roots showing a red tinge and detaching. There has been few reports of new KVDS in SunGold Kiwifruit orchards which reflects the important work undertaken to improve soil and drainage conditions as well as less extreme heat in the early summer.
Key to recent advancements has been the work of the Kiwifruit Vine Decline Syndrome Taskforce. This is a multi-disciplinary team constituted by Zespri and its SunGold Kiwifruit partners and represent an excellent example of collaboration across the industry to support growers understanding that issue and finding strategies to mitigate the impact.
Brown Marmorated Stink Bug (BMSB):
BMSB was first detected in Italy in the province of Modena in 2012. It is now found in high numbers in northern Italian regions and is reported to be increasing in central regions of Italy, as well as in the South West of France, where our SunGold Kiwifruit is grown.
This pest has been reported to have caused significant damage, with up to 50% crop loss in unprotected orchards, mostly on block perimeters. The fruit on which the insect feeds becomes soft and eventually drop. In recent years, European growers have been able to mitigate damage to less than 3% by using a combination of physical barriers such as nets and using approved control treatments. The Italian and French governments are also assessing the opportunity of releasing a natural enemy: Trissolcus japonicus – a natural predator approved for use in New Zealand should BMSB arrive - with trials being undertaken in Italy.
To support the growth of SunGold Kiwifruit in the Northern Hemisphere, ZGS invests up to NZD$1.5m per year in research trials through the Innovation team based in Italy.
These funds come from the ZGS operating budget but trials are designed, implemented and reviewed in collaboration with Zespri’s New Zealand-based Innovation team to fill the existing knowledge gaps and support the main Zespri strategic targets and priorities for ZGS.
Many of the challenges faced by ZGS growers are also relevant to New Zealand growers and the research projects have benefits to both. This includes Italy undertaking the first ever trial on the water needs of SunGold Kiwfruit with work on nutrient management providing valuable industry knowledge to optimise nutrient application programs for higher productivity, quality and storability of SunGold Kiwifruit and increasing orchard sustainability. Similarly, work on budbreak alternatives means that trials in New Zealand can be replicated in Italy and two seasons of results can be achieved in 12 months, speeding up our understanding.
Work on KVDS and BMSB – issues which are not currently present in New Zealand – are of significant value to New Zealand growers in helping preventing their arrival and if necessary, managing them should they occur. Results from many ZGS research projects are shared with New Zealand growers through the Kiwifruit Journal.
What is the expected corporate profit generated from ZGS activities if the fruit volumes in the 2030 strategy are achieved?
Based on the current operating model, for non-New Zealand supply (ZGS) Zespri targets a normal commercial return in the EBIT percentage range of 3%-5% compared to net sales. For example, in the 2021-22 year, Non NZ Supply sales were $536m from 27m trays of fruit sold, and EBIT was $27m. The ZGS 2030 strategy indicates that fruit volume in 2030 could be 75-105m trays.