Australia now has the highest manufacturing costs in the world, according to the Australian Food and Grocery Council (AFGC) following the publication of a gloomy report on the state of the country’s food industry.
The Competitiveness and Sustainable Growth Report, a annual financial health check of Australia's A$111bn (US$104bn) food and grocery sector conducted by KPMG for the AFGC, this year it found suppliers being squeezed between high manufacturing costs and dominant retailers.
The report provides detailed analysis of real financial data from food and grocery suppliers, and this year covers a period of four years from 2010 to 2013.
According to AFGC chief executive Gary Dawson, Australia now has the highest manufacturing costs in the world, while 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.”
Dawson added: ”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.
“[These] extract an additional 5% more from suppliers than other retailers, reflecting their market power. This 'trade spend' has been growing at 4% 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.
The report also highlighted how 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.
And while capital investment is growing, which should be seen as a positive sign for the future, much of this investment has been focused on staying in business.
Losing profitability and share
The study warned that the profitability of Australian suppliers is now well below their 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, the country is losing market share in China, Indonesia, Thailand, Malaysia and Japan.
“Looking forward, the key challenge for Australia’s food and grocery sector is to improve its competitiveness in order to secure growth opportunities domestically and in export markets,” said Dawson, calling for the government to establish a levelling of 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’.”