AVCJ Awards 2018: Responsible Investment: Manuka Health

A proper environmental, social and governance (ESG) program starts pre-deal, and in the best examples, even before due diligence. As Pacific Equity Partners (PEP) demonstrated with its investment in New Zealand’s Manuka Health, this can translate into thinking about practical operational and legacy issues in the earliest theoretical stages of sector targeting and deal sourcing. 

The Australia-based GP knows that there is growth potential in situations where ESG is integral to the entire turnaround and approaches potential deals accordingly. In the case of Manuka Health, a deeply embedded mix of sustainability issues meant that corporate responsibility considerations had to be intertwined with every aspect of the investment process, including several unique operational factors.  

Manuka honey is an ecologically and politically delicate health-oriented export from a jurisdiction few would dispute as having the cleanest reputation in Asia Pacific. The industry encompasses dietary supplements, gourmet foods and personal care products that command a high premium due to the difficulty of extracting the honey from its scattered regional production areas. 

“One of the key aspects was that it was a clean, natural health product coming out of New Zealand and it was unique,” says Evan Hattersley, a director at PEP who worked closely on the deal throughout the investment horizon. “It’s not really produced anywhere else, so that gave it scarcity value. Additionally, there were a lot of health benefit claims we had to validate.”

Industry advocacy

PEP took 100% control of the company in 2015 in a deal said to be worth about NZ$110 million ($76 million). An exit was agreed in October this year on confidential terms, but PEP stresses that the success of the turnaround extends beyond the performance of the company itself. 

During the holding period, concerted efforts to formalize a niche industry suffering from serious counterfeit issues contributed to a formal government definition of what constitutes manuka honey for commercial purposes. Carried out in concert with marketing initiatives around educating customers on sourcing authentic products, it helped lift the annual growth rate of New Zealand’s overall manuka export volumes by more than 20%. 

In 2015, PEP was tossing up concerning reports that the amount of supposedly authentic manuka honey being sold in the UK was more than the entire output of New Zealand. After the health benefits of the honey were scientifically demonstrated in the early 2000s, moves were made to establish standards around certification, but most players in this space were family operations unaccustomed to dealing with that kind of red tape.

“Manuka Health was still operating very much in a start-up mentality, still focused on getting products to its customer rather than looking at the big picture,” Hattersley says of the company at the time of PEP’s investment. “It didn’t have the management bandwidth to think about things like the broader industry.”

The plan to create a market leader was perhaps uniquely feasible in a micro segment with limited and divided industry leadership on key operational and product quality issues. Manuka Health, which oversees about 20,000 beehives was one of only two large commercial operators in this space, so there was a real opportunity to set industry standards. Typical manuka businesses manage less than 1,000 hives. 

Much of the early legwork involved interacting with industry bodies such as the New Zealand Food & Grocery Council (FGC) and regulators in the Ministry of Primary Industries. Through this approach, the process of building a corporate reputation went hand in hand with advancing the professionalization and development in the overall market. 

“We wanted to do that in a way that was broader than just individual brand positioning,” Hattersley explains. “We were keen to work with other leading manuka honey producers to support the industry both financially as well as through senior management’s time.”

Acceptable standards

The main focus in terms of regulation was on reducing the impact of counterfeiting through the introduction of formal criteria for labelling honey as manuka. This was officially achieved through government channels in late 2017 by weighing the concentrations of four nectar chemicals and one DNA marker from manuka pollen. 

Establishment of these guidelines has proven important in removing risk around customer confidence, especially in overseas markets that have counterfeiting issues of their own such as China. Manuka Health’s input on the issue had to be considered carefully. If the rules ended up being set too strict, it would have reduced the size of the industry. If they were set too lax, it would dilute the brand and the whole concept of manuka. 

“Taking time out from focusing on our specific business objectives to help the broader industry objectives had knock-on benefits for the industry as a whole and helped us ride that wave of development,” says Hattersley. “It set up the industry on a clear path of sustainable growth as opposed to having this risk that you could lose favor with consumers if it became too difficult to tell was an authentic product.”

For Manuka Health, the devil was in the details. The accepted industry norm had been to classify honeys based on their “unique manuka factor” or UMF. When UMF’s antibacterial, anti-inflammatory and antioxidant properties were scientifically clarified to come primarily from methylglyoxal (MGO), Manuka Health founder Kerry Paul pushed for a formal change to the accepted grading system.

This view clashed with most industry participants, who saw little value in erasing a history with UMF to go MGO, and as a result, Manuka Health found itself marginalized in much of the rules-making process. The situation played into PEP’s strategy by allowing the GP to bring new skills into company leadership while also reintroducing an important voice to industry-level debates. At the time of the initial investment, Paul was CEO and his wife was head of sales, while their son-in-law was an operations executive. 

John Kippenberger, a former FGC board member and executive at Australian meat and dairy company George Westin Foods, was brought in as the new CEO. Kippenberger is one of three owners of Premier Beehive NZ, one of the country’s biggest deli meats producers. He was joined in the role of apiculture operations manager by David Campbell, a 10-year agribusiness veteran with 20 years of experience in beekeeping. 

Meanwhile, Kate Kember, a former executive with dairy leader Fonterra, was brought in as manager of marketing and R&D. Perhaps most significantly, Kember’s appointment recognized that product positioning and development in an ESG-sensitive niche like manuka requires a certain passion and personal touch.

“In the first meeting the board had with her – when she was a shortlisted candidate but we hadn’t made a formal offer – she spoke about how she’s always used manuka honey and it was a key part of her household health routine with young kids,” Hattersley remembers. “She clearly understood the product suite and demand, and had the skillset needed to broaden the customer reach.”

Full bloom

Operational improvement under the new team leveraged the use of new climate and bloom monitoring technologies, as well as water and waste recycling systems. In addition to reducing environmental footprint, these efforts helped increase in-house supply and the identification of additional land suitable for bee husbandry. 

Expansion in this segment is tricky for various environmental agriculture-related reasons, including some basic challenges around growing manuka bushes that defy the plant’s reputation for hardiness. Although New Zealand does not suffer from the same issues around bee colony collapse that plague North America and Europe, the natural scarcity of manuka means that maintaining biodiversity remains a critical issue for producers. 

Recent activity by Manuka Health on this front includes partnering with fellow producer Te Roroa Honey in planting 55,000 manuka seedlings and establishing 100 beehives on about 55 hectares of new land. The partnership plans to establish a further 1,000 hives on more than 500 hectares of land by 2028. 

One of the key mantras in these expansions is to create benefits for regional communities and work respectfully with local partners, including indigenous landowners. Unlike many manuka companies, Manuka Health harvests and manufactures some of the honey it markets, but about 80% of it is still sourced from third-party beekeepers.

“A lot of our sites were on farmer’s properties, so if there was an accident that destroyed a fence, there would be implications like livestock getting loose,” says Hattersley. “So we were very careful when operating on other people’s lands. We wanted to do the right thing there, and make sure that our staff was doing the right thing.  A lot of times, that was just basic stuff like shutting the gates.”

Instilling a culture of safety was a big part of training and encompassed activities well away from the farms such as the operation of machinery at processing facilities. Forklifts were a focus area, with user training and new operating protocols put into place including the establishment of safe walk zones in warehouses to reduce the risk of accidents. 

Staffing levels were reviewed by the board monthly, leading to a range of initiatives including culture surveys and formal exit interviews for resigning employees. Manuka Health also instituted staff retention programs during periods of significant upscaling, while collaborating with Enrich+, a not-for-profit employment agency that supports people with intellectual, physical, and sensory disabilities. 

Many of these efforts were needed to contend with the seasonal workforces inherent to beekeeping. Training standards had to be maintained when the size of the staff periodically increased around the core team. In addition, Manuka Health participated with Immigration New Zealand, a government agency, in various programs to introduce supplementary income to seasonal works following periods of local labor market exhaustion. 

“You need to maintain that training and make sure the people who are coming on board have clear guidelines and a clear way of operating consistent through the group rather than allowing people to do things in an ad-hoc manner,” says Hattersley. “That’s where having that stronger leadership throughout the organization helps to foster the right way of doing business.”

Logistical legwork

One of the most important aspects of team management was in logistical support, especially regarding truck drivers who were accessing honey collection sites in remote and mountainous areas on unsealed roads. As well as ramping up efforts around driver training, Manuka Health implemented a system of staff pairing as a safety measure for instances when a loan driver may experience an emergency on an off-road path. 

Fleet tracking technology and vehicle upgrades, meanwhile, were instituted to improve both fuel efficiency and safety. These precautions are not incidental in the honey industry. Trucks can be loaded precariously with several hundred kilograms of wooden frames and wax. Bee stings are a constant threat away from first-aid and driving on New Zealand’s one-lane backroads is notoriously hazardous. 

Logistics concerns also extended to making sure the company had balanced relationships with its supply chain partners. “When we came in, some of those relationships were not on the type of footing that would have supported a sustainable level of growth,” Hattersley explains. “For example, landowners historically were not paid much by the beekeepers for access to the land, which is clearly a key enabler for the honey to be produced.”

Work in this area was a largely a matter of resolving payment disputes by bringing in formal contracts where previously there were none. This had the added impact of improving business with mainstream retailers that had more demanding consistency requirements for their deliveries – a difficult challenge to contend with in relatively small-batch agriculture. 

Perhaps most tellingly, supply chain improvements emphasized a policy of consistently buying honey from existing production partners year after year. The idea was not only to establish more systematic delivery channels, but also to support the health of the industry at the farm level. 

“That helps foster good will and build out the industry, which allows them to expand and in turn creates more supply for us,” says Hattersley. “There’s more manuka honey available to the public and more people access the benefits of it. Ultimately we benefit from that ¬– and so do all the other participants in the industry.”   

Pictured: David Brown (left) of Pacific Equity Partners with Ralph Keitel of the International Finance Corporation

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• Topics
• Australasia
• Buyouts
• Consumer
• New Zealand
• Pacific Equity Partners