The New Zealand Merino Company Limited (NZM) is an integrated sales, marketing, and innovation company focused on transforming the country’s Merino sheep industry.

NZM is headquartered in Christchurch in New Zealand’s South Island. The organization was started in 1995 by Merino growers who wanted to lift New Zealand’s Merino wool out of the commodity basket through marketing and differentiation. As demand and prices for coarse wool declined, many farmers transitioned to raising Merinos for their finer, more valuable fiber.

However, New Zealand’s Merino farmers were still struggling due to the fluctuating prices that are characteristic of any commodity market. In total, the country produced 8,000 metric tons of clean Merino per year — just 2.7 percent of the world’s 290,000 clean-ton Merino supply. Against this backdrop, the New Zealand clip had no identity of its own and was often blended with fiber from other countries. Moreover, the growers had only a limited understanding of the market for Merino fiber, and little ability to influence it. As a result, they faced unsustainable prices, an increasing cost of production, and diminishing returns.

As John Brakenridge, NZM’s CEO, recalled around the time the organization got started...

Fine wool in Australia was measured as the single most volatile commodity, behind sugar. So you’re talking about a very, very volatile commodity.

NZM needed to find a way to minimize that volatility and make Merino wool a more stable, profitable enterprise in New Zealand. This would involve defining a model that would directly shatter a series of prevalent industry myths.

Industry Myths Prior to 1996

  1. There will only be one price for wool — the commodity price
  2. The contract prices will only ever equal the average commodity price
  3. The market will not honor contracts when the commodity market fluctuates in their favor
  4. Fiber ingredients cannot be differentiated
  5. Any value added will be captured by others further through the supply chain
  6. Growers get little or no value from investments in marketing

Through extensive market research, along with grower involvement, NZM was able to define a unique identity for its offering (see the section called Product and Partners for more details). It also crafted a marketing story that would support a price premium at retail that could be shared among players in the supply chain. NZM would further support this price premium by investing heavily in research and development (R&D) and market development activities that would help retailers and brands boost demand for products made with New Zealand Merino wool. Brakenridge explained his philosophy:

When we walk into work each day, we ask ourselves, ‘How do we add value to the retail brand?’ because this is the only way that we can get more money back through the entire supply chain to the growers.

The first step toward this end was to develop a strategy for differentiating New Zealand Merino wool from other types of Merino available in the marketplace. The route NZM chose to accomplish this was to identify leading brands in its targeted market segments and then match the needs of those companies to the attributes of its wool.

Specifically, NZM had to define those benefits that would distinguish New Zealand’s offering from Australian and South African Merino and make the product highly desirable to buyers. According to Brakenridge…

No matter what we do to try to increase demand, it’s not going to have an effect on our price unless we can differentiate and brand our fiber.
Merino fibre

NZM’s Action Plan

  1. Identify attribute/benefits
  2. Provide partners with marketing story and brand
  3. Invest in new product and market development
  4. Drive innovation through R&D
  5. Develop deep partnerships and relationships

Two NZM growers discuss the benefits of forward contracts. These particular farmers supply Merino wool to New Zealand company Icebreaker, which is led by CEO Jeremy Moon.

The aligned New Zealand Merino supply chain

Supply Chain

To capture and share the additional value associated with price premiums, NZM developed a new business model for the industry. According to Brakenridge, “Prior to 1997, auction was the only method for the sale of Merino fiber in New Zealand.” Farmers paid a traditional broker roughly 4 percent of their gross income to represent and sell their wool through this mechanism.

NZM’s business concept is to transition a significant percentage of New Zealand’s Merino wool into sales executed via forward contracts. Once retailers are convinced of the superior attributes of the NZM offering and its other associated benefits, they are willing to enter into and honor long-term contracts to ensure their supply. These contracts are not priced directly in relation to historic and forecast commodity prices. Rather the price-points are negotiated between NZM and its brand partners at a level that allows growers to receive a fair, equitable, and sustainable return for their fiber and manufacturers to be successful over the long term. The premium nature of the product gives NZM the leverage it needs to make this model work.

Growers under contract supply wool to one or more brand partners according to clear specifications at a fixed price - generally, one to three years in advance. These contracts are based on the farmers’ historical production to help ensure that they can meet the specifications from the wool produced on their property. However, given the biological nature of wool production, there is a risk that growers will not always be able to meet their contractual obligations. In these cases, NZM sources wool on the commodity auction market to fulfill the requirements. If the commodity price of the wool is less than the contract price, the growers are paid the difference. If it is higher, then the growers compensate NZM accordingly.

To build its business model, NZM had to align the somewhat adversarial members of the supply chain. As Brakenridge explained:

What we wanted to do was a complete contradiction to the traditional way commodities make their way through a supply chain. The whole essence of a commodity supply chain is about short-term transactions, where somebody's trying to ride a commodity market, bring volatility, and not let anybody else know what’s going on further up or down the chain.

Farmers generally worked in isolation from wool buyers (and vice versa), and this same lack of visibility characterized all of the other relationships between players in the ecosystem (shearers, processors, designers, and manufacturers, among others). NZM had to persuade them that there was more to be gained by openly sharing information and working together to benefit the industry overall.

“This required a huge mindset and cultural shift,” recalled Brakenridge. In the end, NZM was able to stimulate increased cooperation among key external players. The organization also drove some consolidation in the industry. As Brakenridge put it…

Historically, you’d have government-funded or levy-collected R&D, marketing, and traders all working separately; now we’ve got marketing, creative services, R&D, and administration all working together as cogs. We’ve brought them all in-house.

NZM also had to convince growers to pay for its services. To cover its costs, which included marketing New Zealand Merino wool as a premium product, developing relationships with prospective buyers, negotiating long-term supply contracts, and performing R&D to help its retail and brand partners succeed, NZM would have to charge nearly twice as much as traditional brokers. “So if you sell your wool through us, in round terms, it costs you about 8 percent of your gross income,” noted Brakenridge, “whereas, if you sell it through our competitor, it costs you about 4 percent. It was up to us to justify that differential by persuading growers that, over time, we would generate a lot more revenue for them.”

Johnsmedley

NZM executed its first direct supply contract in 1997, which brought together New Zealand Merino growers and John Smedley Limited, one of the world’s premier knitwear manufacturers (see Products and Partners for more information about NZM’s brand partners).

With the contract in place, NZM marshaled its resources to making John Smedley and its Merino products more successful.

More than a decade after its founding, NZM transacts approximately 85 percent of all Merino wool grown in New Zealand with turnover of more than US$85 million. More than 50 percent of this volume changes hands through direct supply contracts, some of which extend up to 5 years in the future.

As a result, NZM growers have greater price stability that allows them to more effectively manage their farms and make important capital investment decisions. In exchange, NZM’s brand partners receive sustainable pricing, guaranteed supply, consistency of supply, traceability, and fit-for-purpose processing consignments.

In 2010, based on NZM’s success to date, the New Zealand government committed more than US$10 million to help the organization continue revolutionizing the country’s sheep industry. NZM and its supply chain partners contributed another US$15 million to the five-year initiative.

The program, referred to as NZSTX (The New Zealand Sheep Industry Transformation), has multiple objectives. However, its top priorities are to expand the international market for Merino wool, grow New Zealand’s fine wool supply base, and drive greater wealth to the country’s sheep farmers by extending the NZM model to their other sheep-based products, such as meat, leather, and lanolin.

Mark Satkiewicz, President and General Manager of SmartWool, discusses the NZSTX program.

TERMS OF USE | DOWNLOAD