Australian Agribusiness Review - Vol. 4 - No. 2 - 1996
Director, Spencer Stuart, Executive Search Consultants.
Based on an address presented at the Marcus Oldham College, June 1996.
Theres a revolution going on in food in Australia and the world, and its passing Australian agriculture by. It doesnt have to, but it is. And without almost total change in the way we behave, my forecast is that Australian agriculture will be significantly worse off in the future than it is now, and it might not even notice that it has happened.
Attitudes are a fundamental problem. If wheat and other agricultural commodities only make money when the world is short, as far as I am concerned it shows what a poor situation agriculture is in. Industries of all kinds have to work out how to make money all the time. If a change in the behaviour of Korea and Japan for political or other reasons fundamentally damages the profitability of the Australian beef industry, this is no way to run a business, or a country for that matter. Anyway, thanks to higher grain prices, at least something in Australian agriculture is making money. Or is it? Why should high grain prices be good for Australia? The foods we eat will be more expensive, and inflation will rise. The cost of living will overall. We shall find it harder to increase exports of many foodstuffs, which include grains, or build critical mass in these industries. Remember wheat is an ingredient, and not a food. Increased costs of grains will impact on the cost of so many foods. If wool prices rise, why is that good for Australia? If my clothes cost more, Im not usually happy. Wool is also an ingredient, like wheat, and not a finished product.
Future growth of world trade in whatever product category you may care to look at depends to a large degree on growth outstripping inflation, and the price of products being held down. Shortages and high prices of major agricultural commodities around the world cannot possibly be good for the future growth of world trade or for Australias overall economic health in the long run.
But there are significant opportunities for us to do a better job in food. There are immense opportunities to change the way we behave in the production and marketing of our products. Many of these opportunities should have substantial benefits to the producers of the commodities who at this stage are buffeted by the slings and arrows of outrageous fortune, both domestically and internationally, and with very little ability to interfere with the tides in any meaningful way.
So where is world food potentially going, and how can Australian agriculture begin to win, as opposed to continue on the losing path, which weve been on for the last forty or fifty years? Lets look quickly at whats happening in food. For centuries, in almost every country, everybody bought his or her food mostly every day. They went to the market, they bought fresh produce, fresh meat, fresh vegetables, everything in season. At home someone was clever enough to cook it. The next day they did much the same thing. Shopping was a daily exercise for fresh materials. The 20th century brought the packaged food revolution. We buy things in so many different ways these days. But is that really what we want? I think if you observe the last 10 years or so you will find that people in Australia, and pretty much every other country, are showing every indication of wishing to revert to previous behaviour. We eat out a lot more than we did, we have plenty of money, we are interested in experimenting with recipes, and when we go out we find restaurants which use fresh materials (like we used to) and put them together in a fresh way, and make fine foods that we can enjoy any day of the week.
But most important of all, in the shops I can now begin to buy similar foods of similar quality to those I go out to eat. Experience has taught me that I want total quality, and maybe shortly I can get it at home. I also want total convenience, and I used never to be able to get total convenience with total quality. And at the same time, Im rapidly reaching the stage in Australia and many other countries, where I cant cook. I never did cook, my mother used to cook, but really I dont particularly want to, especially with the mess it makes in the kitchen. If someone can offer me real quality, like eating out, with the convenience I now need, Ill go back to eating perfect food, made from the freshest quality ingredients, in a way that would never have been open to me in the past.
This emerging phenomenon is a challenge for everybody in the food chain. Even the retailer is under as much threat as the manufacturer. The eat-out and take-away revolutions increasingly mean that quality foods are not only available from a supermarket. Everyone in the chain is obliged to rethink where he or she belongs, and how to build power.
I particularly want to concentrate on the role of agriculture in this emerging revolution. Agriculture is in the worst position of all. Agriculture has no power- it has abrogated its power at the farm gate over the last 50 years. Agriculture did not wish to belong to the consumer revolution. Agriculture does not understand logistics, consumers, shelf life, and menu selection. In short, agribusiness has to wake up to belong, or else in the future it will be increasingly controlled by yet another group of masters, who have no time to give its ingredient suppliers more money, especially when it can buy quality materials probably from a variety of countries, and even buy finished product from a variety of countries. Id like to give you two analogies of things that are happening today in food production and marketing in different countries, which show the different position that agriculture is capable of taking.
The first analogy is Marks & Spencer in the UK. This firm has pioneered a revolution in selling more or less finished meals, and certainly fully prepared ingredients, to its customers. In a Marks & Spencer store, you will not find a leg of lamb. In fact you probably wont find any recognisable piece of meat at all. You will find ready meals in delicious sauces and fully cooked pieces of meat and vegetables. You will find what you go to a restaurant for. You will find it at a very affordable price. Marks & Spencer is supplied in the main by one or two very efficient and very large suppliers, who do all the work, all the preparation, all the purchasing, all the cooking, and all the logistics. The power in the UK in food supply is increasingly going to the few retailers who are following this trend, and to the few major suppliers of the finished product. Agriculture is nowhere. Traditional food manufacturers or processors of single ingredients are also increasingly nowhere.
Ill give you a second example of what is happening in the world at the moment, and one which shows a real opportunity for agriculture if it were to be applied in Australia and other places. The country in question is Denmark and the company, which I will not name, is one of the large meat processors. Pig producers own this company. The Danish system is built up whereby many pig producers combine and own the processing and marketing arms of their supply chain. Many producers integrate, and become one company. Anyway in my example, this one company has decided that it will focus its attention on developing markets for its products in one of the fast changing and very large European economies. It decided to tackle the marketing of pork in this country in a totally comprehensive and unusual way. It began with consumer research - a rather novel approach for a producer group, I would think.
The Danes went to this country, analysed the preferences of consumers in different parts of the country for different fundamental cuts of pork, for different variations of leanness, colour, marbling of fat, shape of pieces, and various aspects of packaging and presentation. Having ascertained what the various major groups of consumers wanted, they went back to the drawing board and changed their product. Actually they changed the pig, because the pig is their product. All of you in agriculture will know that this would be a rather major undertaking. But not only that, they then attacked the question of product selection at the meat processing side as well, because they now search through very advanced technology to define the suitability of various parts of every pig they process, to split into suitable cuts for all the markets which they supply. A pig is destined perhaps to ten countries when it is scanned at entry into the processing works. And finally of course, this Danish company will work with the retailers of the consuming country to market their product in a much more successful way than the agricultural suppliers of pig meat from every other place, who have not done the homework that the Danes have done, who have not understood the chain like the Danes, and who have not fitted their product to the market like the Danes.
So what does this mean for us?
The worst invention in Australia is the farm gate. Australian agriculture has deliberately shut itself off from the market place. The market place is uncomfortable; its for somebody else. But with that way lies weakness, lack of profitability, lack of innovation, and lack of understanding of market signals. As a result we respond slowly if at all to change our product, we do not really understand efficiency in a global or regional way, and some day someone will take our birthright away. The future for agriculture in Australia has to be:
To do so, we should give away some of our independence and pride. But it is worth it to belong. We will have more power, our system will be more sustainable, Australian food will begin to win. We have to fight better and harder domestically, because imports will be regularly allowed, especially of finished products, and increasingly of raw materials, as other countries correct their own quarantine or efficiency problems. And also we will be fighting in an arena where the developing economies of Asia will be processing extremely good finished products if we decide not to. We have to lose some independence, but we will gain in the end.
And it is possible that Australia can develop a sustainable advantage in the production of tomorrow 5 food. No-one - not even tightly focussed agricultural countries like Denmark - has the linkages right yet. No one has the linkages across a range of products, which will make finished foods. Australia in any case is small and could be a country, which successfully focussed on a few important areas of agribusiness, if we realised we had to. And indeed my premise is we do have to. Not only will agriculture suffer even more in the future if it doesnt change radically, so will manufacturers. We need each other, and it is that common understanding which will drive the future. The first place to look for this future is to use our present institutions better. We do have institutions which should be forces for change, forces for innovative thinking, forces for thinking together as a group, forces for bringing people together from all ends of the food chain, groups in which agricultural people will feel comfortable and not uncomfortable.
We are at such a place today. Marcus Oldhams tradition and fraternity is an ideal environment for thinking and doing to change by the improvement of collective wisdom. Farmers groups, universities, local communities - for example the Goulburn Valley, where people are quietly trying to think their way out of present difficulties in precisely the way that I am describing - all these types of institutions (formal or informal) have a potential role in pulling us together and helping us to think. Indeed in Australia we do have a few models which we can point to as being quite successful in recent times. Two that I bring to mind are the dairy industry, and the wine industry. Both of these have developed a quite reasonable positive and pro-active communication between producer and the market. Producers belong in the market. Large entities have been created which can react on a big scale. Cost parameters can be really well understood on a world competitive basis. It can be done. In fact it has to be done. It has to be done in the grains industry, it has to be done in the meat industry, and it has to be done all over the place. And any farmer who joins the revolution, who de-commoditises his product, who avoids the lowest common denominator pooling systems of old fashioned agriculture, any farmer who applies talents to understanding customers, and differentiating product, either alone or by joining with others, can only make more money, can only increase market power, can openly benefit. Help farmers to belong, help them to see it.
Id like to close with just a few examples of the hard work we need to do. Maybe the organisations that we operate through today and the systems for marketing produce, are not conducive to the development of a product chain. I speak of marketing boards and so on. Apart from any other benefit they may or may not confer, it seems to me that their history is one of mitigating against communication and of creating adversarial and certainly separated relationships, rather than productive partnership from paddock to plate. I believe we should rethink. We also have to think of our positioning as an export country, whether or not we consider the export of commodities or the export of semi finished or finished products. Australia does have the opportunity to position itself as a seriously different country in a world of pollution, nuclear and other accidents, and over crowding.
Australia can be seen and probably should be presented as a haven of cleanness, and of quality. But to justify such a positioning in the world requires no scandals, no errors, no old herbicides, no substitutions, or else our brand, our brand called Australia, cannot survive. We cannot afford pesticide residues in meat; we cannot afford any hind of quality shortfall from any producer going to any other country. As a country, we have to consider how we can achieve brand consistency status in agricultural and other food matters. We must develop a system which eliminate the risk of error, whether by omission or by wilful choice. If we cant we will never have a national positioning.
Above all we have to recognise that whatever we might want, the consumer is the king in any market. Countries or companies or producers, who do not satisfy the consumer, will in the end not survive. So I would ask Australian agriculture, do you know precisely what grapes people want in Japan? Do you know precisely what bread they like in China? Do you know whether you wheat works particularly well to make those hinds of bread? Do you know how you could grow different hinds of wheat, which might make better bread, that the Chinese would pay more money for? And do we know whether our regulatory system, labelling or inspection procedures, or quarantine, or industry support and intervention, do we know whether these things add value to our activities, or take them away?
I have my doubts. And finally, can we ultimately and finally stop using the dreaded word commodity? Ive tried hard during my business life to persuade all my people and myself that it is not necessary ever to market anything as a commodity. A commodity is traded on price and not on quality or service, and does not generally recognise the specific requirements of a market. People trading in commodities can expect to lose. People trading in commodities can expect to get the lowest price. Can we collectively work out how to put Australia in the position where we never again ever sell any commodities?
Australian food can be a major source for profit for all involved in the chain, and we can collectively offer a major benefit to the world, but only if we work back from the market, and do it together. We have to change a lot of things to go where the consumer wants us to go. The consumers of the world, not just Australia, increasingly demand absolute freshness, top quality, total convenience and a fair price, all at once. They couldnt get it before, but they can now. They will not buy wheat to make into flour - they want bread and cakes. They dont even want a leg of lamb; they want ready-to-eat veal cordon bleu. Agriculture, especially Australian agriculture, can be there if it wants to, but it has a lot of changing to do. Academic institutions must be a major force for the non-biased, rational argument we need to have as a nation, to rebuild our system. We owe it to ourselves. We probably owe it to the world.