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Wool has a problem with productivity – Burbidge

Grant Burbidge, October 29, 2015

WOOLPOLL2015 logo Mar10-15AUSTRALIAN Wool Innovation chairman Wally Merriman’s response to my original article completely misses the main point; that the wool industry has a major problem with a lack of productivity.

This lack of productivity is partly due to the wrong allocation of resources into marketing.

AWI claims that within the five-year period from 2010, wool prices have risen compared to previous five-year periods as a direct result of AWI’s marketing program. Anyone with any basic understanding of statistics will know that a correlation does not equate to causation. In other words the correlation between marketing investment and wool price rises does not necessarily mean that the marketing investment caused the price rise.

If price is going to be the sole determinant of success of a marketing campaign, then there will be periods when the marketing campaign will appear to be working and periods when it will be failing, because on average wool prices spend 50 percent of the time rising and 50pc falling. As Chick Olsen has correctly pointed out, the price of wool has declined by almost 40pc since 2011 in US dollar terms. On this analysis, the marketing program is failing. The US dollar is the correct currency to measure wool price, because it is the currency which all international wool trade is conducted in. If AWI is going to use a rising EMI as its yardstick for marketing success, they are ignoring the positive effect of the falling Australian dollar during the past 18 months.

The goal of any marketing programs should be very simple; either increasing product sales and or increase sale price of existing production. To determine if the marketing program is successful, it has to be measureable.

The most likely place where a marketing program can be measured most accurately is within an individual business where only one product is produced and sold. However, there are many factors which complicate measurement of marketing success; supply and price of alternate or similar products; demand; economic conditions; exchange rates, etc.

At an industry level, there are a myriad of wool types, supplied by thousands of businesses, into a wool pipeline producing thousands of different products, into a diverse range of economies, for sales to hundreds of thousands of consumers. On this scale it is virtually impossible to measure the success of an industry based marketing program. This is especially difficult as the industry does not own the raw material or the end product and does not collect the sales figures along the supply chain.

Dr Elizabeth Nolan, who Wally was so keen to reference, also suggests in her 2014 report to AWI  that it is difficult to measure success: “..the hedonic pricing model in this analysis has been modified to control for these changing market conditions. Included variables are change in Gross Domestic Product in key markets to account for changes in world economic activity, exchange rates, prices of substitute fibres, and Consumer Confidence Indicators and retail sales of apparel in some key markets. Some of these included variables are admittedly quite blunt measures of these influences, and further work to clarify the extent and nature of their influence would be valuable.”

The more difficult it is to measure the effect of marketing on sales volume and price the more proxies are used as surrogates of success. Marketers use a proliferation of metrics and terms used as surrogates to try and extrapolate sales volume and price changes. Marketers spin, it’s in their DNA.  Some of these terms are; number of retailers using a brand, amount of unpaid for editorial space created, amount of media coverage gained, consumer sentiment, surveys of purchasing intentions, and the list goes on. Some may be accurate some of the time; however none of them measure the underlying goal of marketing – to either increase product sales or increase sale price of existing production.

So when AWI claim that for every dollar invested in marketing there is a $4.80 benefit, this does not mean that the sales volume or price equivalent has increased by $4.80. What it means is that someone has estimated that their surrogate measures have a perceived value of $4.80. This may or may not be an accurate measure, as it is too hard to measure the real change in volume and price of sales. By using surrogate measures as proxies for the real value, because it is too hard to measure accurately, AWI is in effect guessing at the outcome of its marketing programs.

Deloitte, who were commissioned by AWI did not offer any calculations as to why they thought AWI’s marketing program was successful. It was presumably too hard for them also.

Marketers are very good at the sales pitch to potential clients, including AWI, that their surrogate measures are a reliable substitute for real measurable results. AWI uses a similar propaganda to convince woolgrowers that AWI’s programs are successful, because it is too difficult to measure the real situation.

If Australian woolgrowers owned a vertically integrated wool business like Merino NZ, then there may be some justification in investing in marketing programs because there is a grower owned brand and end products for which there is sales data.

The real crisis in the wool industry is in the R&D field. Slowdown in productivity growth since the mid-1990s has been associated with diminished public R&D intensity since the mid-1970s.

Over the last couple of decades there has been considerable reduction in public funding for agricultural Research, Development and Extension (RD&E) in general. Part of this is due to decreased Federal Government funding for Agricultural RD&E, reductions in State departments of agriculture RD&E budgets and re prioritising of R&D within CSIRO and universities.

Due to lack of funding there are now whole disciplines of agricultural research which have disappeared or are likely to disappear very soon. Agricultural researchers build up their expertise over many years and if funding is not available then they disappear into other areas of work and are unlikely to ever return. In the future we cannot expect to have researchers in any field in which we are not willing to give continuity of research funding. These people are highly skilled and not easily replaced. Training of new researchers can only occur if there are people left in those disciplines with the expertise to train others.

The Lifetime Ewe Management program, to which Wally refers is a very good example of how a successful R&D outcome is derived. What makes this program successful is the six decades of research and development by CSIRO, Departments of Agriculture and Universities which underpin the advice given in the final extension stages. Some of the funding for the original research may have come from AWI. However, much of it has come from other sources which are no longer available to the wool industry.

Read Grant Burbidge’s original letter advocating a zero wool levy here and Wal Merriman’s response here.

Read Dr Elizabeth Nolan’s full report on The Economic Value of Wool Attributes (Phase 2) here: http://www.wool.com/globalassets/start/about-awi/publications/wool-attributes.pdf

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Comments

  1. Peter Small, October 29, 2015

    What an excellent response Grant Burbidge to Wal Merriman. Every body associated with the wool industry, whether in the agri-political area or the commercial area, should read, read and re read what Grant has explained. If any one cannot understand Grant’s thesis, minister or whoever, they should be humble enough to ask Grant for a private briefing. Until we come to grips with the reality Grant presents then our industry, an industry that should be growing and expanding, will continue to wither! Research, is the driver of productivity gains and research, or more aptly, the lack of it, should be central to our thoughts and deliberations! As discussed previously, the only way to halt this AWI debacle is a zero vote.

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