AgriNurture Inc. is a company fully integrated into the agro-industry supply chain. President and CEO Antonio Tiu gives us his insight into agriculture sector in the Philippines and discusses his company’s business model, ‘From Farm to Plate’
The government has set its objectives to play a more crucial role within the region. The Philippine economy was a top performer in South-east Asia in 2016 with a YOY growth of 6.8% on the back of strong domestic demand and government actions with special emphasis on infrastructure and human development. Agriculture accounts for more than 10% of total GDP and is the country’s second largest employer. What is your evaluation of the agriculture sector?
The agriculture sector is also considered the biggest employment sector covering one third of the total population, while another 15% make up the sub-sectors of the industry. This shows that nearly half the Filipino population depends on the sector.
However, seeing that agriculture accounts for only about 10% of the total GDP, there is a mismatch with regards to the input and output. This is because there is a lack of appropriate spending within the sector. Generally, the agriculture sector ranks top 5 in the national budget, making it a considerable priority. Nonetheless, challenges such as the wrong approach, insufficient resources, or red tape hinder it from becoming a major priority. Analyzing the budget of the Department of Agriculture, it can be seen that 2/3 of the budget is allocated to the rice sector. Generally, the cabinet secretary is viewed as an effective one depending on if the country’s rice production is fruitful or if it surpasses all the rest, which may be a factor in the focus on rice production.
This will be a big problem for the government especially now as we approach the ASEAN Integration. The problem will be in terms of the rice trade liberalization which took effect from July 1 this year. From the time of the ASEAN Integration which happened two years ago, we requested for a two-year extension on the rice restriction. Now, the big challenge would be how the rice farmers will be protected while the safety net is no longer in place. If the macro-perspective of the agriculture sector is not being considered, the sector will not be led towards the right direction.
The national government is keen on growing farm production by 2.5 percent to 3.5 percent annually starting this year until 2022. What are the possible investment opportunities here? What is the importance of the so called “golden crops” that you are especially involved in?
The Philippines has to realize that not all its resources can come out at the top. Maximizing local resource is a critical factor but always a formidable task in stimulating economic growth. Some countries are not notable rice producers, but manage to generally prosper in their agricultural produce. Holland, for example, has an agricultural produce that ranks #2 in the world in terms of dollar value despite being a small country in Europe.
Given the Philippines’ good relationship with countries such as China, Japan, and Russia it can be considered an opportunity, a golden era – one that must be capitalized on in order to promote the country’s resources and to be able to increase the income of farmers. If rice becomes the focus, it’s going to lead the sector towards total failure. The right resources must be channeled to the right products.
There are some synergies happening between China and Philippines due to the sudden turn of events. China wants to expose the benefits of having the Philippines accept them. There are already several Chinese companies that are being tasked to buy Philippine products. However, only a few products have economies of scale such as banana, pineapples, and mango. As for commodities, we produce primarily only coconut oil and maybe a little bit of abaca, tuna, and other seafood. A lot of Chinese companies are also aggressively looking to invest in the Philippines. I sincerely hope that some of them would look into agri-infrastructure which is an important input for agricultural productivity.
The trading part is becoming more robust and non-trade barriers are already being removed. I believe that if there’s demand, supply will follow. On top of that, there is already a clear increase in the arrival of Chinese tourists. Once the tourists have consumed and experienced the products and services, they will demand for it when they return to their country. Again, this is a very good opportunity for the Philippines to showcase its products and services and to export the brand.
As a highly advanced country, Japan is at the forefront of innovation and technology. What kind of synergy can come from deeper cooperation, especially considering the Japan–Philippines Economic Partnership Agreement?
The interesting thing about Japan is that there is more awareness of Philippine products in their country than there is in China. There is also more demand from Japan making it easier to sell Philippine products in their country. A factor coming into play may be tourism, given that Japanese tourists came in next to American tourists in previous years. After consuming products of the Philippines, the Japanese, upon returning to their country, demand for these same products such as mangoes. The scarcity of agricultural resources in Japan has led the country to demand for a number of off-season vegetables from the Philippines. These are then considered high-value items that the Philippines can mainly offer to Japan but not to China. A reason for this being that China has more options and more local productions that is similar to the Philippines.
So far, no conflict has been serious enough to stop bilateral activities between the Philippines and Japan in the last few administrations, unlike with China. There is continuous trade and exchange of information, as well as investment of Japan into the Philippines. However, I think it will be beneficial for the Philippines to acquire infrastructure investments from Japan in the case that it is not available or successful with its newfound relation with China. Looking back, a lot of the infrastructure projects in the last 6 years, handled by the previous administrations, were given to Japan and stripped away from China; either China was removed or it backed out and was replaced by Japan. Likewise, considering the fact that other western countries were too expensive.
In 1997, Agrinurture was set up as trader of post-harvest agricultural machineries. It later diversified into several operations, following its goal to set up a fully integrated supply chain from the crop, to manufacturing and distribution. Would you be able to walk us the focus of your operations?
I started as an agri-entrepreneur selling Taiwanese postharvest facilities, requiring me to travel all over the country for 20 years. It was not a bad business, per se, as it opened my eyes to the realities of the countryside. At that time, I realized that selling more agricultural equipment was my way of helping farmers to bring their produce to the consumers. That is why we came up with our business model, farm-to-plate. My focus is actually to create a brand through the promotion of our Big Chill brand rather than adding a business to our portfolio. We are expanding Big Chill in Hong Kong as a retail brand, and it’s also available in China and soon in Southeast Asia, Korea, and Japan. A marketing strategy would be when people go to the supermarket and pass by the fruit section, they will correlate it with Big Chill.
My focus will still be on the main core business of AgriNurture, which is the rice trade and the export of fruits as of today. That comprises about 90% of our total revenue, whereas coconut water and Big Chill contribute only a few percent each. However, Big Chill is exciting because it creates and enhances the value of my products from just a commodity product to branded product. This is a long-term strategy for us. Moving forward, an advantage would be our creating synergy of this retail brand with other non-competing brands such as Tully’s. It will also strongly improve the profitability of the company in the retail sector.
Considering the partnership you have with the founder of Tully’s coffee Japan, what investment opportunities or partnerships would you see possible for Japanese companies such as Calbee and Meiji Holdings?
There are a few offers on the table to buy stakes in our companies. It is quite an exciting time and several companies can see strategic investment value in my business. There were offers from Japanese and Chinese investors to take a stake in the company. And if the price is right, I would seriously consider.
Agrinurture has been mentioned on a few occasions together with renowned names such as BDO to be a constant and stable performer with a general upward trend on the Philippines Stock Exchange. Nevertheless, your profits have been shrinking over the last year and also in Q4 2016 - results show earnings decrease by a whopping 95%, mostly due to a drop in export sales. How is it that you attract your investors and how do you assure them of a secure ROI?
The reduction in earnings is a result of the write-offs. It started with the political noise which affected me three years ago. And in order to survive, I shutdown all the non-performing units and the negative cash flow generating units which resulted to a number of write-offs in the last 3 years. So, what’s left is the best I have. The company has survived the crisis and we’re on our path to recovery.
My message to shareholders is that the worst is over and that we have a solid foundation after our name was cleared of false accusations. I guess this made me stronger because it proves that I have nothing to hide and that the company is solid.
Within the Philippines we have seen several great examples of internationally successful companies in the food business. One of them certainly is Jollibee. How would you evaluate your position in the domestic market and how do you measure up to these giants in an international context?
We do not compare ourselves with the big companies. Some of these names have shown that they are a good model to emulate for Big Chill and Tully’s Coffee. However, we are more on the healthy side. Our main offering includes ‘SSSS’; soup, salad, sandwiches and smoothies. We want to be something new, similar to the fast-food chain but with healthy and with all-natural products. Big Chill is aiming to go in that direction. It’s going to be listed soon, and it will develop slowly into something like the famous retail brands in the country.
The AgriNurture parent side is focused on commodity – the importation of rice and export of fruits. It is more similar to the commodity companies in Singapore. We are not a large company that will be known by the normal folk. That’s a business model I want to change: I want to be able to grow a commodity business but still have a retail brand with Big Chill.
Big Chill will serve as the face through its visibility, even if it’s just a small fraction of our total business. The farm and trading side is more important in terms of volume, but the plate side is the face. At least people will appreciate AgriNurture as the owner of Big Chill.
If you have the chance to communicate to international investors/community, what is it you would like them to know about the Philippines that they might not be aware of?
The Philippines is akin to a sleeping tiger. The economy has been idle for the last three decades. Doing business in the Philippines is like doing business in their own countries during the early 90s. Investors will be able to make use of a very simple business model.