Food for thought

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Australia is well into deficit when it comes to its food processing trade. 

The Australian Food and Grocery Council's annual State of The Industry report (using ABS figures and KPMG's research) released last month showed we imported a net $2.8 billion worth of food and beverage, grocery and fresh produce. 

More worryingly, total industry output dipped 4.5 per cent for 2010-11 and its number of employees went down by 2.2 per cent.

"The sector's growth, competitiveness and ability to create jobs are under threat," Gary Dawson, the AFGC CEO, said when the report was released. 

"The findings of State of the Industry 2012 serve as a warning to policy makers at all levels of government that the Australian food and grocery manufacturing sector – Australia's largest manufacturing sector – is facing an environment where input costs are rising on everything from commodities to labour to energy, and retail price deflation continues to cut margins, placing the sector under increasing pressure"

Why are things in such an apparently bad way? 

The high dollar – as has been the case with almost every segment of manufacturing – has presented problems. 
Terry Davis, the CEO of Coca-Cola Amatil – the parent company of SPC Ardmona, Australia's biggest fruit and vegetable processor – has said that supermarket private labels, the high dollar and taxes were driving many in the industry out of business.

"We all know high labour costs are an issue," he told a Rabobank agribusiness event, while pointing out the payroll taxes were a massive pain. "Tell me how a tax on employment fosters sustainability?"

Dan Tehan MP, a federal Liberal backbencher, is another outspoken critic of taxes on food manufacturers. 
Tehan, the member for Wannon and a former adviser to federal Nationals leader Mark Vaile, believes that the carbon tax risks sending industries such as diary overseas.

"In recent government policy, obviously the carbon tax harms our international competitiveness and the government has hung the food manufacturing sector out to dry," Tehan told Manufacturers Monthly. He compares it unfavourably to the EU's treatment of its food processors.

"The European Union not only gives its agricultural slash food processing sector subsidies, it also allocates them with free permits under their carbon tax."

Tehan also believes that the National Food Plan, which is in the green paper stage and ended its consultation period on September 30, will do nothing to address the problems food manufacturing faces.

"We've seen job losses in this area and yet government hasn't done anything to help what is key part of the whole food chain, where you value add, add additional income and employ people.

"At this stage it just seems to be a lot of motherhood statements. And one would hope that it would address the tough issues that need to be addressed if we are to ensure the long-term future of food manufacturing in Australia."

The food manufacturing industry's malaise isn't exactly news. The AFGC and consultants AT Kearney released 2020: Industry at a Crossroads report a year ago, predicting 130,000 jobs in the sector would disappear by 2020 if nothing was done, and that 55 per cent of manufacturers were pessimistic about the future.

The SPC Mooroopna plant's closure last year made big news. The beginning of the year saw Heinz stop tomato sauce production, closing its Girgarre factory, which also had people talking about the decline of local food processing. As did the announcement that Kerry Ingredients would close its Altona factory.

What's behind the industry's woes? Of course, exchange rates hurt. Others have pointed to the rise of private label brands in supermarkets. 

In-house supermarket products have been around for three decades or more, but has only recently become so popular. IBIS World research published this year suggested a quarter of groceries were private labels.

Critics, such as the AFGC, say that private labels are getting in the way of Australian products getting to consumers, robbing Australian makers of shelf space, being increasingly produced offshore, and forcing them to whittle their margins away to compete on price. 

"The Australian food processing sector is being destroyed," said David McKinna, a food industry consultant and principal of McKinna et al. 

"Australia is going the same way as the UK and US where private labels are up to 70 per cent of the supermarket range."

For all the pessimism, are there many opportunities for Australian food and beverage manufacturers? 

Certainly, with the Asian Century singled out as a big potential boost for future sales. Wine exporters are seeing excellent improvements in sales to China, the fastest growing market for Australian wine. The growing Asian middle class was singled out as a huge opportunity for Australian processed food in the recent Prime Minister's manufacturing task force report, describing it as "one of the few areas of manufacturing where high distance costs are outweighed by other factors, in this case Australia's natural resource advantage."

The task force report recommended initiatives like a Food Industry Innovation Hub to best identify what the market's marketing and taste needs might be. 

"Food is singled out, it's something that's a comparative advantage in Australia," Professor Roy Green, a member of the task force, told Manufacturers' Monthly. "And food manufacturing is an important value adding element of food production."

Our biggest manufacturing segment has a huge potential to do well, despite the current difficulties around cheap imports, input costs and taxes, and the purchasing habits of supermarkets. 

"If we can't do that, well, what can we do? That's a kind of basic product that we really have to be successful in," said Green.