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Food manufacturers at the mercy of high costs and dominant retailers, says AFGC

Following the release of the Competitiveness and Sustainable Growth Report, The Australian Food and Grocery Council (AFCG) says that food manufacturers are “being squeezed” by increasingly high manufacturing costs and dominant retailers.

Conducted by KPMG on behalf of the AFGC, the Competitiveness and Sustainable Growth Report provides a detailed analysis of real financial data from food and grocery suppliers over the last four years (2010-13).

CEO of the AFGC, Gary Dawson said that the report’s findings indicate that Australia now has the highest manufacturing costs in the world and that the nation’s retailers are extracting greater payments from suppliers to fund 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,” said Dawson.

"A key finding is that one dollar in every four earned by suppliers is being returned to retailers to fund discounts, rebates and promotions."

Dawson says that the rapid growth in payments extracted by retailers represents a direct profit shift from suppliers to retailers.

"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,” he says.

"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.”

Other key findings in the report include:

  • 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.

Dawson says that the key challenge for the Australian food and grocery industry is to improve competitiveness in order to secure growth opportunities both domestically, and in international markets – especially if the industry wants to become Asia’s ‘food bowl’.

Dawson also added that the report underlines the importance of levelling up the playing field between retailers and suppliers, stating that the sooner the draft Food and Grocery Industry Code of Conduct moves through the current regulatory review process, the better off manufacturers and suppliers will be.

“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,” says Dawson.

“Without a viable domestic food processing sector Australia will not fully capitalise on the opportunities of the Asian ‘dining boom’.”

 

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