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2 Five forces of change in the Australian Agrifood sector Dr David McKinna July 2013.

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Presentation on theme: "2 Five forces of change in the Australian Agrifood sector Dr David McKinna July 2013."— Presentation transcript:

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3 Five forces of change in the Australian Agrifood sector Dr David McKinna July 2013

4 The agrifood sector is undergoing its biggest shift in history and regional Australia is feeling the impact!

5 This change is being driven by 5 forces 2 Private Label Renaissance 1 Supermarket Oligopsony 4 Corporatisation & technology 5 Water 3 Global competitiveness... with apologies to Michael Porter

6 1 Supermarket Oligopsony

7 7 Collectively Coles and Woolworths account for 70%+ of retail food sales

8 8 The ‘big two’ are in a head-to-head battle Aggressive price negotiations to achieve deep cost cuts. Range rationalisations Supply chain restructuring e.g. primary freight Differentiating fresh food offering Locked Down Low Prices Sophisticated data mining tools Revamp of private label offering British management at Coles ruthlessly pursuing performance targets.

9 Bread and milk are now loss leaders

10 Large scale food producers have no option but to roll the dice with the devil

11 Most major food companies have over 60% of their business with Coles and Woolworths

12 50% of food sold in supermarkets is sold on promotion

13 13 Down, down, down goes category value Category value is being destroyed Profitability is declining for all processors Reduced investment in R&D and innovation Product de-engineering Multinationals are rewriting their Australian strategies SMEs are a threatened species – many are in receivership

14 There is an everyday battle for shelf space

15 ‘Cliffing’ is just one of their tactics 15

16 Supermarkets are using smart cards to build data bases on shopper behaviour

17 The Aldi factor added fuel to the discounting fire

18 Supermarkets don’t profit more from their power Consumers are the main beneficiaries of the price war - at least in the short term. This is why ACCC wont step in. Supermarket margins are low, they work on shopper traffic and volume. In the longer term, consumers will have less choice and many Australians will lose their jobs.

19 19 Most food companies have had enforced price cuts despite significant cost increases

20 20 Over the past three years Australian consumers have enjoyed a 4% deflation in food prices!

21 $ 1Milk has resulted in a transfer of value of approximately $2 billion p.a from processors and and producers

22 22 Supermarkets are exploiting social sensitivities

23 23 Processor margins are not sufficient to support the reinvestment needed to remain globally competitive

24 24 Global food companies are closing Australian factories

25 25 Once the plants are closed down, they will not reopen

26 “The Australian market is the worst market... (to do business in)” Bill Johnson Heinz Global Chair

27 2 Private Label Renaissance

28 Based on overseas markets, private label market share is likely to grow 28 Australia 1/4 USA 1/3 UK More than 1/2

29 Private label has now become the smart shopper’s choice

30 30 Private label is seriously eroding the value of most food categories It is benchmarked against market leaders, Sold at 30-50% discount. Takes shelf space from proprietary brands. Proprietary brand owners are forced to discount to protect market share and shelf-space. The profit margins for producing private label are razor thin. For products that can be economically shipped, there is direct competition from low cost imported product.

31 Valrhona Chocolate Simon Johnson $21.95 Private Label Chocolate Aldi $2.49

32 Strong proprietary brands generate the margins required to fund innovation and category growth 32

33 3 Global competitiveness

34 In most agrifood products with a high labour component, Australia is hopelessly uncompetitive

35 35 Factors in Australia’s lack of competitiveness Labour Input costs Energy - electricity has gone up 40% in 3 years Flow-on effects of carbon tax Compliance Freight and logistics Disposal of trade waste

36 The weighted average labour cost in a processing plant is: Australia: $56 per hour New Zealand: $18 per hour China: $4 per hour

37 37 Freight and distribution costs are higher than manufacturing for bread Source: AFR, 11 February 2012 Goodman Fielder cost breakdown for bread: Raw materials30% Manufacturing27% Delivery43%

38 $AUD needs to be around 70-80c to the $USD for Australia to be competitive. Economists predict it will stay at around 90c for the next five years

39 The free trade agenda benefits some industries at the expense of others

40 40 For multinationals, margins are no longer sufficient to manufacture in Australia

41 4 Corporatisation & technology

42 The economics of agriculture demands scale

43 43 The critical importance of scale Major improvements in overhead recovery Farms have to double in size every 10 years to produce the same income. Farm productivity is growing at 2% PA. Commodity prices are cyclical but on average are not keeping up with inflation rates.

44 Scale requires technology and capital

45 45 Demand for capital is driving corporate farming models Scale Geographic spread Production volume Capital Best practice technology and IP Logistics capability Tight cost control Corporate models demand:

46 In most horticultural industries fewer than 8 businesses supply 70+% of the market

47 47 There is a growing interest in Australian agrifood assets by foreign investors They see assets agrifood assets as undervalued Anticipate growing demand for food Expect long term capital gains Ensuring food supply for sovereign needs

48 48 Technology reduces need for labour Direct seeding Large GPS controlled machinery Robotics Self-guided vehicles Drones Smart phone apps

49 Because of efficiency, corporatisation can be profitable and substantially reduce costs Smaller farm businesses aren’t viable at these prices

50 5 Water

51 Today farming is about managing water

52 52 Impact of the MDB Plan Loss of production- irrigation land is 20 times more productive than dry land Loss of processing jobs Many farms off the backbone channels will become uneconomic to irrigate Farms are too small to support a family in a dry land farming enterprise. It will be uneconomic to use irrigation for grazing. Around 30% of water has been removed from Victoria’s irrigation system

53 What does this mean for regional Victoria?

54 54 The prognosis Many agrifood companies will disappear More jobs will be lost Dry land farming towns will be under continued pressure Smaller family farms will exit the industry, selling out to lifestyle hobby farmers Corporate investors will move in

55 What can local government do about this? Information Infrastructure Introductions

56 56 LGAs must become change leaders Provide information and knowledge transfer about industry trends Help farmers adapt to changing circumstances Treat food processing businesses as a threatened species Be business friendly Help towns suffering the loss of irrigation water to find new dry land enterprises Implement sensible land use planning regulations Manage peri urban interfaces Make your shire investor friendly Support farmers markets and buy-local programs Support more business building capability in online marketing and farmers markets Support networking and information sharing

57 This is the reality of a free market, global economy

58 mckinna.com.au


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