Dr. David McKinna, founder and director of Victoria-based consultancy Strategic Insights, said that it is primarily the strong Australian dollar that is making it hard for Australian processors to compete with imports.
“Increasingly, we are seeing that the major supermarkets are importing their private label products. Also Australian exports are no longer competitive meaning that Australian processors no longer have the volume and the scale economies,” said McKinna.
According to McKinna, it is the strong market power of Coles and Woolworths (the top two Australian food retailers), which is driving the margins out for food processors.
“The ramping up of private label programmes by the major supermarkets is creating intense competition and devaluing categories, i.e. volume is growing but value is declining,” said McKinna.
McKinna is not the first executive to come out against the supermarkets' power in Australia. Heinz company's CFO and executive vice president Arthur Winkleback singled out supermarkets in an earnings call for their poor Australian performance, saying they were squeezing the company's margins.
Coles and Woolworths have been in a price war since January this year, when they slashed the price of their home-brand milks, placing further pressure on branded suppliers.
McKinna further added that Australian food manufacturers are also suffering from high raw material costs, because of increasing input costs, scale economies, cost of water and the impact of climate change.
“Freight and logistics costs are rising due to rising fuel costs. We also have a run down an inefficient rail system and poor road infrastructure that imposes weight limits,” he said.
McKinna pointed out the Australia already has very high labour costs relative to competitor countries and the aforementioned logistical costs are further crippling the food industry.
“The sector also ails from old and run-down factories, that have become so due to the lack of investment. Also, most factories are not running to full capacity, which is impacting overhead recovery,” he said.