The Australian food supply chain is too costly to sustain a strong manufacturing base, and contrary to popular belief the blame does not lie with retailers. This was the gist of the message from Terry O’Brien, CEO of food manufacturer Simplot Australia, who pulled no punches about the reality of the pressures food processors are facing and the inevitable change that lies ahead.
At the outset, he qualified that his view is taken primarily from a Simplot perspective, based on experience across the company’s local operations benchmarked against its global operations. It would be fair to say, however, that O’Brien’s position on the Australian Food & Grocery Council board and a number of government food boards means his view also embraces the broader issues common to most food processors in the country.
Local perspective
Simplot Australia is part of the American-owned private company Simplot, based in Boise, Idaho. Globally the company generates a turnover of $6 billion, with Australia contributing $1.5 billion. In Australia, the company operates in the food retail and food service sectors (roughly a 50-50 split), with a total of eight plants across Australia. Simplot brands in Australia include Edgell, John West, Birsdeye, Lean Cuisine and Leggo’s.
Simplot serves as a good example of a proactive company anticipating market changes. Under O’Brien’s leadership, the company has made some significant shifts in response to the fast-changing food supply landscape in order to create a more balanced portfolio.
When O’Brien first joined the business, retail products accounted for a hefty 75 per cent of sales. Recognising the pressure brands would continue to be under from private label, the company focused on raising its food service contribution to 50 per cent.
On a product level, potato-based products were at one time the mainstay of the business, but now comprise only 25 per cent of the business, with seafood, meat and chilled products added to end up with what O’Brien calls a “complete plate offering” to the market.
The company’s most recent venture is the Gippsland Food Company, an R&D and processing facility for chilled ingredients and ready meals manufactured under the Lean Cuisine brand (under licence from Nestlé) and for private label brands.
O’Brien said Simplot has invested in this venture because it believes the chilled products category is where the future lies for the food industry.
“While we’re not sure at this point whether there’s any money in it, we know that if you want to be a major food supplier in Australia you have to be participating in all categories... this is certainly an area that retailers are pushing and we feel we have to be involved.”
Chilled products with their short supply chain provide a degree of “protection” from overseas competition because it’s too risky for retailers to take a chance by lengthening the supply chain in this category.
However, costs can be high because of the high level of innovation and complex technology required, and the short time to market which in turn calls for a high degree of operational flexibility.
Addressing the packaging technologists in the audience, O’Brien said this sector offered an opportunity for packaging innovation to enhance shelf life.
Industry issues
Looking at the Australian retail picture, O’Brien bucked the current retailer-bashing trend and stated: “I don’t believe it is the retailers’ fault – industry, unions, the press are all saying if we could just get Coles and Woolies under control... get them legislated against... if we can stop them being ‘bullies’, the whole thing will be fixed. I’m not convinced.”
O’Brien acknowledged that retailers are in a strong position – supermarket retailers in Australia take 33 per cent of the profits out of the food chain (globally retailers enjoy around 25 per cent) – but he said it would be a mistake to think they would change their tactics, that they would stop looking for further profits.
He is of the view, however, that given the size of market share they enjoy between them (estimated at 80 per cent), Coles and Woolworths have some level of responsibility to food suppliers.
“They do have to understand the impact of their decisions; it’s very hard to operate in Australia without having one or both of them as customers, so when they make decisions to delist brands, they need to understand the impact of that.”
O’Brien moved on quickly though, and rather than blame private label growth and pressure on margins as a result of the powerful retailer duopoly, he pointed instead to what he believes is at the heart of the problem: Australia’s lack of scale – on the farm, in the factory and in the market. He said the food manufacturing sector’s survival would depend on increased efficiency and productivity; companies would have to treat any cost increases as “the enemy”, and that includes labour costs. He was quite hard hitting when he spoke of union pressures for across-the-board increases that in his view are short sighted, especially in the face of rising input costs for manufacturers, including the carbon tax, that could soon put many out of business.
“The re-energised union situation in Australia is not helping a bit, you’ve probably seen how many disputes are starting to happen. We’re in a round of enterprise bargaining agreements currently where the usual has happened. The union’s position is ‘Pay the money and you’re lucky you’ve got us’ and we’re saying ‘no, there’s no justification for it’, “ he said.
“We’re offering something less so we’re getting rolling strikes at the moment; all of these things are making us less competitive on a global basis.
“We can’t afford to pay these four to five per cent increases a year with no productivity increase when our opposition in Europe are paying roughly two per cent if any increase at all.”
And it came as no surprise that when O’Brien presented labour cost comparisons between the US, Europe and Australia across Simplot companies, Australia was far more expensive than the US. The wages gap was less marked between Europe and Australia, but still significant, especially given the higher efficiencies achieved in the EU.
At the same time that people are demanding higher wages, he said, they’re also not necessarily buying Australian-made products, supporting the business that pay their wages.
“We need to keep purchases within our country,” he said.
Close competitor
A lot of people blame the strong Australian dollar for the problems the Australian manufacturing industry is facing. However, O’Brien says, while that is certainly part of it, New Zealand and its dollar relationship to us hasn’t changed a great deal and yet it’s bringing more and more product into the country.
“At the moment, looking at potatoes, there’s about 135,000 tonnes of finished goods coming into Australia in the form of French fries, and of that 50,000 tonnes is coming out of Europe, and about 40,000 tonnes out of New Zealand. The problem is not just our competitiveness against developing countries [China, rest of Asia] it’s also against developed countries where their costs are lower,” he said.
Turning to the current migration of food manufacturers offshore, O’Brien said: “Heinz and McCain are two that have done it recently, and they’ve both gone to New Zealand, they haven’t gone to China or Thailand, where the cost of manufacturing is so much lower. But they had facilities in New Zealand, so the decision for them was a lot easier than it would be for Simplot, for example.
“We don’t have facilities in New Zealand that would make it possible for us to lift up our business in Australia and put it close at hand; we would have to reinvest somewhere else, and right now the economics of that isn’t all that attractive, even though operating within Australia is not attractive either.
“So, it’s a lot harder decision for those who have to reinvest offshore, and it will take a bit longer, but my guess is it will happen.”
A realistic picture
Looking to the future, O’Brien painted what he sees as a realistic picture: “I think some food processors will shut up shop, just give it away and leave the building – that’s probably what’s going to be the best option for smaller operators who have not got a lot invested. Some will scale down to niche offerings and concentrate on protected categories, like short shelf life or products with bio-security protection (like meat).”
The way forward as he sees it is a “hybrid model”, where local manufacturers will have to retain some onshore operations, but also have offshore operations to supplement their portfolio with some imported goods. Food manufacturers in the strongest position would be those who concentrate on “protected markets” – by which he means niche sectors that have a short supply chain where the risk for customers is too high to source product offshore.
“The most important thing that Australia needs to do is be absolutely efficient and look for productivity improvement. And then we have to service the hell out of the customer to the point where they have to take a risk to move to a longer supply chain!”
