When South Africa’s fruit industry plumped for deregulation as its next step forward, there were varying predictions for the future market share of Capespan. While the company itself was outwardly bullish and predicted handling between 60 and 80 per cent of the SA export crop, there were others with far darker perspectives. “I think, all things considered, we’ve held things together very well,” says Capespan UK’s commercial director Martin Dunnett. “In hindsight, the initial figures we looked at were unrealistic, but no-one could have accurately predicted the outcome of the process in its early stages.”
Managing director Ronan Lennon estimates Capespan brings 30 per cent of the SA fruit into the UK now. “That’s a good balance,” says Dunnett, “any more and there would be too much expectation on us from the grower end.
“Our relationship with the grower base is totally different. We are not obliged to placate the angry producer any more and those growers that don’t want to export through us don’t have to.” Dunnett, who was a veteran of 20-plus years before deregulation came to pass, was also often quoted in FPJ as saying deregulation would allow Capespan to weed out its lesser growers. “A lot of our growers always did a good job and we have retained most of them,” he adds.
The focus pendulum has definitely swung, however, from grower to customer. “Instead of being an extension of South African growers’ financials, we are now a self-sustaining company, servicing shareholders, our customers, our staff and our producers,” says finance and operations director Ben Ward. “We are a far more commercially-focused organisation. We used to be a price-setter and a volume-allocator, now we are far more attuned to the needs of our customers. During the initial stages of deregulation, I think Capespan was disadvantaged against other exporters because some of the historical elements of the regulated market were used against us to a certain extent. But in my view, we have been a bit more aggressive in the last four years.
“We have had to manage costs in the UK environment that we did not have to deal with before, as South Africa did it, and that has required a big step change in the way we operate. In the last few years, we have done extensive benchmarking to ensure that we are competitive on costs with the industry’s best and I think now we are where we need to be - in the upper tier of suppliers.”
Dunnett continues: “As a company, we have a degree of freedom we never had before. Growers could always say that we were selling too fast, too slowly or too cheaply and in their eyes, we were fully responsible for the success of their crops. We are still 50 per cent owned by South African growers, but also since 2000, 50 per cent owned in the UK by Fyffes. We also bought Multifresh, in Spalding and Scotland, which added a salad side onto our business, and we have more recently formed an alliance with Fresh Produce Supplies for one of our major customers. We have a commercial responsibility now - it gives us a good balance and the growers realise that we need to make money.”
Making money is impossible without a customer base and to optimise its own, Capespan has re-evaluated its UK priorities. “We’ve gone through a major internal restructure and split our business into three, almost separate companies,” says Lennon. “Our Tesco business, with its own commercial, procurement, technical and financial teams, is run by Simon Trewin, while Martin Dunnett runs the rest of our multiple retailer business as another unit. I head up our trading business, which is dedicated to wholesale, foodservice, processing, some of the smaller retail customers, and Ireland. Each unit is 100 per cent dedicated to the needs of its particular customers.”
He explains that it is essential in the UK market to weigh up the differing needs of each sector. “The way our trading business and Simon’s Tesco business operates is totally different, and the people we procure from are entirely different animals.”
Dunnett believes that within three years, Capespan will be the biggest importer of Chilean produce into Europe. He also points to “rocking-and-rolling” sales of Chinese produce, which are moving onto another level since Fyffes purchased production facilities in China. Lennon talked to FPJ from Fortaleza in Brazil, where another Fyffes purchase, Nolem, will add more power to Capespan’s elbow as one of the UK’s leading 12-month melon importers - mainly for Morrisons and the Co-operative Group - a business that will amount to 850,000 cartons of fruit this year, he says.
“I think it was inevitable, under our old structure, that our percentage of the UK market for South African fruit would decline, because increasingly customers were looking for 12-month suppliers and eventually category managers,” says Capespan UK managing director Ronan Lennon. “As a dedicated SA supplier to all retailers, we could not have adapted to the needs of the business and especially to supermarkets that wanted suppliers to focus entirely on their needs.”
Capespan is now a 12-month supplier of top fruit, citrus and melons, as well as other products. Ward says: “Whereas seven years ago, just under three per cent of the product we sold in the UK was non-South African, in 2006, that figure will be around 60 per cent. That has been with a similar turnover. In 1999 our turnover was between £120 million and £130m, it has remained broadly the same. The skills set that was put in place to deal with South Africa has had to be significantly adapted to source from 40 countries.”
It has adapted well, says Dunnett. “Wherever we’ve been given the opportunity to show what we can do in countries other than South Africa, we have not failed to deliver. With some customers it was harder to lose the South African tag, but most people look at us as a different company entirely now.”
As a business Capespan’s risk profiling is better. “We can weather a poor SA crop,” Ward says. “This year will be the lowest SA top-fruit crop for six years, but as a 12-month supplier, with the ability to switch between sources, we can hopefully pick that up in another area.”
Capespan took the bold decision of moving its packing and warehousing operation to a 300,000sqft, 22,000 pallet site at Sheerness, with Fresh Fruit Services eight years ago, and the vast majority of its UK employees moved to be on top of their fruit in 2001. While there were immediate benefits, Lennon feels the real advantages to being port-based are still to come through.
“Certain UK retailers are beginning to look at their business models and questioning whether they should not be going directly to growers themselves, rather than using a category manager in between,” he says. “There are a number of big logistics companies setting themselves up to deliver door-to-door solutions along these lines. There will definitely come a time when retailers interact more directly with growers and outsource the logistics. We are very aware that is the way the business could go and we have positioned ourselves accordingly, with port and coldstore facilities in South Africa, chartered vessels and our quayside operation in the UK.”
Ward adds: “One key differentiator between us and any other UK importer is that we have no significant inland infrastructure. We have a very flexible set-up, which has allowed us to transport directly from the port to distribution centres and this has played a large role in expanding our business in melons, for instance, which has grown to its current size from virtually nothing in just four years.” The Capespan model at Sheerness is a tough one to replicate for importers that will naturally be reticent to relinquish their inland facilities, he adds.
“The onset of containers from South Africa presented us with some challenges, but we can apply our exact model to different ports and we have a lot of mobile, highly skilled people to move to where the fruit is.”
Dunnett believes Capespan was ahead of its time in moving to Sheerness, as retailers were committed to other suppliers, but with the tremendous pressure on the existing infrastructure in the UK, it is in a good position to stand out. “Every importer is looking closely at costs and customers are looking at the costs that are incurred between the first point of arrival in the UK and their depots, via a supplier’s inland facility,” says Dunnett.
“The size of some of the super-depots being built by the main customers enables them to absorb direct container loads and there is also going to be a greater degree of ex-quay selling. It may be that the port takes on more responsibility, all the skills are developed there now. But, operationally, the logic of moving to Sheerness was right when we did it - it is even more right now.”
South Africa, Dunnett claims, is still the “natural southern hemisphere source for the European market”, due to the journey time, the communications and the freight links. But Europe is no longer the only destination available to growers for their fruit. “There is no shortage of fruit overall, but it is not all coming to Europe,” he adds. “Growers and exporters have a wide variety of options opening up for them.”
“If you look from a South African fruit grower’s perspective, deregulation has been disastrous,” says Ward. “Producers generally are far worse off now than ever before and it is no different to the scenario in New Zealand, or in Israel a few years ago - fragmentation of the market means it loses pricing power. Even if you factor in the inefficiencies that existed in the regulated era, the savings are a drop in the ocean compared to the deterioration of prices in the past decade.”
Lennon concurs: “There is no doubt in my mind that, as far as the SA fruit industry is concerned, deregulation was a mistake. Negotiating power was tossed away, which has led to lower returns to growers as a whole. Some might be doing alright, but a lot of growers would agree with me.”
The power of the UK retailers to dictate prices and therefore returns to the grower base is leading to a change of mindset in South Africa, according to Lennon. “The UK is a very tough market to deal in, it is high-risk, and at times the returns don’t come anywhere near the costs of production, whatever the volumes available and the exchange rate situation. There is very little that Capespan can do about that.
“It is a scenario that is just as relevant elsewhere, but a lot of growers have gone out of business in South Africa and the returns are significantly down for those that are left,” says Lennon. “In the Orange River for instance there is huge financial hardship and the same can be said for certain citrus areas. We believe we have some of the best growers, but even they are struggling to cope in the current environment.
“In the past, the premiums that could be gained in the UK made the risk worthwhile, but today a lot of growers are beginning to question whether they want to supply such a high-risk market. It is high-risk, if any proportion of your products, for whatever reason, do not match up to the standards of the customer, your returns will be disastrous.”
South African fruit is now being exported into the Far East and the Middle East, Russia is a major market, and the US offers increasing opportunities. Meanwhile, as importantly, the domestic market and the front-line southern and northern African markets are beginning to present themselves as good revenue streams. “The local market is becoming very attractive,” says Dunnett. “Without the same disciplines and risks, growers are finding they can make similar returns - Royal Gala prices have been as good in South Africa as on export markets this season.
“It is difficult to reverse perceptions and buyers here do not accept that the exchange rate is working against the South African grower. But it is not just the exchange rate. The shift in the balance of the supplier/buyer relationship has made a huge difference. In the year before deregulation, we would have expected a 30 per cent premium for SA Golden Delicious over the French product that was in the market when it arrived, and the French accepted that, because it brought the market value up. Now we try to achieve a premium, but it just isn’t there.
“It has been a difficult 10 years in South Africa, politically, culturally and commercially,” Dunnett says. “I think those people that decided they didn’t want to be part of the new South Africa have moved on now - 500,000 live in London, for instance - and as many of them had an agricultural background, that has long-term implications for the industry.
“There are fewer growers left and the average size of grower is increasing. Until three or four years ago, the exchange rate was in their favour, but now there is a realisation that the only way to survive is to get bigger and more efficient by creating economies of scale, in order to reinvest in the farm.”
The globalisation of Capespan’s sourcing network has been reflected in the use of its brands on non-South African fruit. However, the strength of Cape and Outspan has been sapped somewhat by market forces. “The brand has undeniably weakened - the pure financials have dictated that,” says Dunnett. “We still support the brand, but we cannot run TV ads anymore. It is sad for the industry, because the Outspan and Cape brands promoted fruit, not just South African fruit. But Jaffa has shown recently in Tesco what can be achieved by brands in the UK - it is a question of how you unlock those values.”
In its last research project, two years ago, Cape and Outspan both retained a 65 per cent prompted awareness score, which is only bettered by Jaffa in the fresh-fruit sector. “The brands are an asset that we have and when we have an opportunity to push them, we will,” he adds. “It takes a long time for brands to disappear and the key is finding where they add value to a customer’s portfolio.”
He also points to the regular reference in wholesale markets to Cape and Outspan product, often when it is not even branded. “That is a compliment in itself,” he admits.
To be a member of the fabled Cape panel in the UK wholesale markets was enough to keep many a wholesaler in profit in the 1970s and 1980s. Capespan has continued its sponsorship of the Re:fresh Wholesaler of the Year award for the third successive year and is one of few companies that can claim a £20 million plus business with the UK wholesale markets. “We are still one of the biggest players and looking to develop that area with more dedicated supplies for the non-supermarket side of the business,” says Dunnett. “The balance of our crop used to go into the wholesale markets, but growers are less inclined to take a perceived risk and we have a more strategic way of working with the sector. Capespan is trying to build longer term relationships and business-building programmes with a select band of wholesalers and all we can ask for is some preferential access and a longer term outlook from our customers.”
Having said that, there is recognition that the key not just to survival, but to the ability to turn a profit in the UK fresh produce industry, is not what you can ask of your customers, but what they can confidently ask of you. Ward concludes: “If you ask our customers what they think of Capespan now as opposed to the Capespan of a few years ago, I think you will get a very positive response. Which is no mean feat, as there were a lot of people who didn’t expect us to be around much after 2000.”
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