*This article was published in the Weekly Times as an Opinion Piece
Travelling to food markets around the world, I feel a great sense of frustration and a sadness at the generally held misconceptions regarding the competitiveness of the Australian food industry. Despite the daily stories in the media highlighting the declining fortunes of our food industry, there is still a blind belief and confidence amongst producers , which is fostered by many trade officials, that Australia is a leading force in global food. This self perpetuating myth needs to be killed once and for all.
The folklore that Australia is the ‘Supermarket to Asia’ prevails. This belief is founded on the premise that as Asians become more affluent, they will eagerly look to the Australian food industry to satisfy their hunger. Its an attractive line for politicians to push so the trade officials feed them every good news story they can to support the case.
The reality is that Australia is a declining global force in processed food markets - not that we were ever terribly global in the first place. Every day we hear of food companies closing their Australian factories and moving offshore with a resultant loss of jobs and the flow-on effects.
The reason for this is simple – in the main, Australia is not competitive in processed food production (there are some minor exceptions).
There are a number of reasons for this, the most important being our very high labour costs. The Federal Government is intimating that the new workplace reforms will address this situation, but the reality is that our labour costs are up to 30 times higher than our competitors. The IR reforms are merely window dressing.
Other factors include market size and economies of scale; higher input costs such as ingredients, packaging etc; higher shipping and transport costs and high compliance costs.
The appreciation of the Australian dollar has also exacerbated the situation and it is widely blamed as the root cause of the problem. Again this is only a minor contributor. There are still many who believe that if and when the Australian dollar comes back to around the 50 cent mark, we will once again become globally competitive. But this is far from the truth.
Trading terms are driving the competitiveness of commodity exports, and at the same time making imports less costly and more attractive. As a result of this, not only are we becoming less competitive in exports, but increasingly Australian food producers will face competition from imports. This is already happening, and will undoubtedly continue.
Traditionally Australia has been a dominant player in bulk commodities such as grains, dairy and beef. However, even in core industries such as these, our future is not assured. The beef industry is being challenged by South America and it is only bio-security restrictions which prevents head to head competition in our key markets. Similarly with dairy, Brazil is emerging as a competitive threat. Chile and South Africa are challenging us in wine and horticulture.
Global supermarkets are a significant contributor are the problem. Food retailing in Australia is dominated by two big players who between them have in excess of 70% of the market. Increasingly, they are moving towards private label strategies at the expense of proprietary brands. These private label products are being sourced overseas because they are far cheaper.
In this new era of free trade, the world food industry is dominated by large global players with mega brands. These companies have highly efficient, automated, state-of-the-art factories strategically located in low cost countries adjacent to the key markets. The food industry is moving heavily towards Thailand, Malaysia, Vietnam and China for the reasons previously mentioned. Even the staunchly patriotic Australian-owned companies will struggle to keep their operations in this country. With the best will in the world to preserve ‘Australian made’ status, they will struggle to remain viable in Australia, and will need to look off shore.
Sadly, the ‘Supermarket to Asia’ myth is also being promulgated by federal and state government policy. Governments have built strategies centred on the belief that Australia is globally competitive in food. These strategies are being based on false assumptions and will inevitably produce the wrong outcomes. For example, the various government agencies are funding programs to encourage businesses, mostly SMEs to get into exporting when realistically they have little chance of succeeding.
Looking five years ahead, the situation in the Australian food industry will be very different. In my view, there will be three categories of food processors. The first will be the first stage value-adders who basically create ingredients that are then further processed and value-added off shore. Essentially, there is a trend in our food industry now, but this will come under increasing threat.
The second group of processors will be boutique operators who have differentiated high-value products that they sell to niche markets at prices that can sustain Australian cost premiums. These are likely to be SME’s.
The third category will be low cost processors that produce private label product for supermarkets.
Australian companies that wish to be globally competitive in food will have no option but to move off shore. At least in this way, much of the benefit and the value added can still be enjoyed by Australians. Australia is a leader in food technology and there is a huge opportunity for us to export this technology and to utilise it to produce products that at least are Australian by name.
Until our politicians in Federal and State government are prepared to face the reality and promote the hard messages, the Australian food industry will continue to languish. Tinkering at the edges with food labelling regulations is little more than political posturing. The Federal Government needs to take a leading role in developing a pragmatic strategy for the food industry based on fostering innovation, product differentiation and commercial reality.