The Australian food, beverage and grocery manufacturing industry has an annual turnover of approximately $111 billion, directly employs almost 300,000 people, with half of those in rural and regional areas, and generates $24 billion in exports.
How healthy is it - financially? That's what KPMG has been assessing. It has just released The Competitiveness and Sustainable Growth Report for the Australian Food and Grocery Council (AFGC) – a detailed analysis of real financial data from food and grocery suppliers, covering the last four years 2010-13.
According to AFGC chief executive officer, Gary Dawson, the report found Australia now has the highest manufacturing costs in the world, and that retailers are extracting even greater payments from suppliers to fund discounts and promotions.
"This report demonstrates how tough the market conditions have become for food and grocery suppliers, squeezed between the unstoppable force of dominant retailers and the immovable object of high labour, utility and regulatory costs. A key finding is that one dollar in every four earned by suppliers is being returned to retailers to fund discounts, rebates and promotions.
"The rapid growth in payments extracted by retailers represents a direct profit shift from suppliers to retailers and reflects the dominant position of the two major supermarket chains. The two major retailers extract an additional 5% more from suppliers than other retailers, reflecting their market power. This 'trade spend' has been growing at four percent per annum, while volume has been flat and profitability declining sharply.
"This level of funding flowing back to the major retailers is simply unsustainable, with a direct impact already on marketing, R&D and innovation spending."
Australian agriculture, agribusiness and food industries are not without opportunities. Increasing global population, rising incomes and greater demand for protein and high value foods in Asia present Australian agri-food industries with a platform for growth to 2050. Dairy in particular, is a sector with particularly bright prospects.
But these significant global growth opportunities have a counterweight. Increases in regulation, inflexible labour arrangements, and poor infrastructure are the primary causes of Australia's fall from the top 20 competitive countries in the world (as measured by the World Economic Forum). In 2006, Australia was ranked the 16th most competitive economy in the world and had an average 11% market share of food exports in key Asian markets. By 2013, Australia had fallen to 21stmost competitive country and our market share had fallen to an estimated 6.5% .
The fall in Australia's international competitiveness affects all industry sectors but is potentially most damaging for export-focussed sectors, including dairy.
So what needs to be addressed:
Australia has the highest manufacturing costs in the world, with labour, utilities and regulatory costs all among the highest globally; A strong focus on cost containment by suppliers has brought some reductions in supply chain costs through initiatives such as automation to boost efficiency and productivity; Capital investment is growing, which is a positive sign for the future, although much of this investment has been focused on 'staying in business'; Profitability of Australian suppliers is now well below international peers, and falling further behind, raising questions about the willingness of major companies to make major investments to upgrade Australian facilities; Despite growing demand for premium food in Australia's key export markets, we are losing market share in China, Indonesia, Thailand, Malaysia and Japan.
"This report underlines the importance of levelling up the playing field between retailers and suppliers. It is important that the draft Food and Grocery Industry Code of Conduct move through the current regulatory review process to get it in place as soon as possible. The Code will provide greater contractual certainty and transparency.
"In addition, the 'root and branch' review of Competition Policy provides a welcome opportunity to examine and address the current market imbalances. Without a viable domestic food processing sector Australia will not fully capitalise on the opportunities of the Asian 'dining boom', Dawson concluded.
