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Exporters should strive to set value, not price

It seems like the era of cheap food is nearing an end. The global rice stocks are at a 25-year low, with many net exporters of rice like Vietnam, India, China and Cambodia restricting exports, while many net importers, including the Philippines and Bangladesh are struggling to find sufficient supplies.

Food prices have been pushed to a historic high. As disposable incomes are squeezed from all angles, demand for imported packaged food, in particular, is being reduced. As consumers review their eating habits, it seems like there is no end in sight to this emerging crisis.

Meat and poultry in China currently cost 46% more than a year ago, and in March 2008, the leading dairy producers were given the green light by the government to raise milk product prices by up to 14%.

The food sector is like a barometer which indicates consumer behaviour, aspirations, goals and evolution patterns of the market. “The current trend threatens to slow the long-term movement towards marketisation in Asian food markets by pushing consumers back to traditional, cheap and unpackaged food,” forecasts Euromonitor International’s senior analyst Damian Shore.

A closer look at the price-pinch

Governments across Asia have been swift in their reaction by reducing tariffs and trade barriers to encourage imports and relieve supply pressures in India and South Korea; banning or restricting exports of key commodities, such as rice in India and Thailand; increasing food subsidies and public sector wages, and sometimes even threatening punitive measures against what they describe as hoarding by intermediaries.

The Singapore government is advising consumers to buy local products or switch to house brands, and is casting the food net wider by scouring from non-traditional source countries for cheaper alternatives. New sources include seafood from Namibia, pork from Belgium, Chile and the Philippines, and poultry from New Zealand and Chile.

South Korea, as part of the wider trade deal to ward off the inflation threat, has decided to reopen its market to U.S. beef. This will have a direct negative impact on Australian imports, which accounted for almost 75% of South Korean beef imports last year.

China has gone a step further by adopting a more mercantile approach. It has banned the construction of new soybean crushing plants. Announcing the decision, China’s National Development and Reform Commission’s He Yanli, claimed that foreign ownership limited “China’s ability to negotiate prices and secure supplies”.

A world of cheaper alternatives

NTUC FairPrice Singapore’s Director of Integrated Purchasing, Tng Ah Yiam, has stated that “despite rising inflation, our house-brand items continue to be 10 to 15% cheaper than comparable brands in the market.”

The mantra for shoppers is to choose frozen meat over chilled meat at 50% less, and to switch to different grades of rice which cost up to 20% less.

“Source diversification has always been our strategy to stabilise prices and food supply. We will continue to expand our sources of supply from various countries,” said Tng. FairPrice’s house-brand rice from Vietnam is 20% cheaper than rice from Thailand, and its olive oil from Italy is 30% cheaper than other brands from Spain.

“Since we launched the 5% Housebrand discount scheme, sales of our Housebrand products have grown by close to 40%,” Tng remarked.

Time to re-think strategies

Australian exporters need to fight back with a ‘forward plan’. The answer is not an easy one, but according to Euromonitor International, corporate strategies to carve out export opportunities could include:

  • Reformulating products to reduce production costs;
  • Reducing pack sizes;
  • Simplifying manufacturing processes by reducing product proliferation;
  • Rationalising production facilities;
  • Shifting production into higher margin segments, such as baby food; and
  • Targeting lower income consumers with ‘inferior’ (in the economic sense) goods.

Austrade New Delhi’s Trade Commissioner, Michael Carter, told FOOD Magazine that in Indonesia, importers are price-sensitive but “there is no indication of a move away from Australian food exports”, as Indonesian importers are more concerned about maintaining supply of Australian foods for delivering the quality-point to their consumers.

This has been facilitated by efforts from Australian exporters to explain the reasons behind the higher prices, such as extended drought conditions, diversion of land use from food crops to biofuel crops, and higher production costs as a result of high oil prices.

Due to the Thai-Australia Free Trade Agreement (TAFTA), import tariffs for over 5000 line items have been eliminated since 2005, and although Thailand is, at this time, focussing on US products due to the currency situation, Australian-made products will certainly be considered and looked to for the long run.

Despite intense competition from the Indian food processing sector, the Bangalore retail project has been launched by Austrade and the Department of Agriculture, Fisheries and Forestry (DAFF). The first shipment of Australian processed foods across 11 categories and +160 SKUs is likely to hit the retail shelves in Bangalore shortly.

Value over price

There are no definitive short-cuts to surviving in a market where the price-bar is constantly upped. Thus, the name of the game is to strategise, reformulate plans and innovate further. Euromonitor International suggests exploiting reduced tariff barriers to increase exports, re-doubling efforts to reduce costs, concentrating on higher-value segments of the market and investing in marketing to increase the value of brands.

Carter also cautions exporters not to downplay the importance of marketing and brand-building and to have forward plans building in the margins or variances across the manufacturing cost (labour, material and production cost) for the next three to five years. Australian exporters need to improve the run-rate on production flow, readily renegotiate packaging contracts, and regularly review the price-forwarding arrangement so that there is continual focus on reviewing the pricing structure.

In conclusion, Carter said that “most successful companies set apart from others by building around quality in terms of products, and weaving it into a more effective marketing and branding activity.”

Manali Pattnaik is a freelance journalist for FOOD Magazine.

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