Five forces of change in the Australian Agrifood sector

3. Five forces of change in the Australian Agrifood sector • Dr David McKinna • July 2013

4. The agrifood sector is undergoing its biggest shift in history . . . . . . and regional Australia is feeling the impact!

5. 2 Private Label Renaissance 1 Supermarket Oligopsony 4 Corporatisation & technology 5 Water 3 Global competitiveness This change is being driven by 5 forces . . . with apologies to Michael Porter

6. 1 Supermarket Oligopsony

7. Collectively Coles and Woolworths account for 70%+ of retail food sales

8. The ‘big two’ are in a head-to-head battle • Aggressive price negotiations to achieve deep cost cuts. • Range rationalisations • Supply chain restructuring e.g. primary freight • Differentiating fresh food offering • Locked Down Low Prices • Sophisticated data mining tools • Revamp of private label offering • British management at Coles ruthlessly pursuing performance targets.

9. Bread and milk are now loss leaders

10. Large scale food producers have no option but to roll the dice with the devil

11. Most major food companies have over 60% of their business with Coles and Woolworths

12. 50% of food sold in supermarkets is sold on promotion

13. Down, down, down goes category value • Category value is being destroyed • Profitability is declining for all processors • Reduced investment in R&D and innovation • Product de-engineering • Multinationals are rewriting their Australian strategies • SMEs are a threatened species – many are in receivership

14. There is an everyday battle for shelf space

15. ‘Cliffing’ is just one of their tactics 15

16. Supermarkets are using smart cards to build data bases on shopper behaviour

17. The Aldi factor added fuel to the discounting fire

18. Supermarkets don’t profit more from their power • Consumers are the main beneficiaries of the price war - at least in the short term. • This is why ACCC wont step in. • Supermarket margins are low, they work on shopper traffic and volume. • In the longer term, consumers will have less choice and many Australians will lose their jobs.

19. Most food companies have had enforced price cuts despite significant cost increases

20. Over the past three years Australian consumers have enjoyed a 4% deflation in food prices!

21. $ 1Milk has resulted in a transfer of value of approximately $2 billion p.a from processors and and producers

22. Supermarkets are exploiting social sensitivities

23. Processor margins are not sufficient to support the reinvestment needed to remain globally competitive

24. Global food companies are closing Australian factories

25. Once the plants are closed down, they will not reopen

26. “The Australian market is the worst market . . . (to do business in)” Bill Johnson Heinz Global Chair

27. 2 Private Label Renaissance

28. Based on overseas markets, private label market share is likely to grow Australia 1/4 USA 1/3 UK More than 1/2 28

29. Private label has now become the smart shopper’s choice

30. Private label is seriously eroding the value of most food categories • It is benchmarked against market leaders, • Sold at 30-50% discount. • Takes shelf space from proprietary brands. • Proprietary brand owners are forced to discount to protect market share and shelf-space. • The profit margins for producing private label are razor thin. • For products that can be economically shipped, there is direct competition from low cost imported product.

31. Valrhona Chocolate Simon Johnson $21.95 Private Label Chocolate Aldi $2.49

32. Strong proprietary brands generate the margins required to fund innovation and category growth 32

33. 3 Global competitiveness

34. In most agrifood products with a high labour component, Australia is hopelessly uncompetitive

35. Factors in Australia’s lack of competitiveness • Labour • Input costs • Energy - electricity has gone up 40% in 3 years • Flow-on effects of carbon tax • Compliance • Freight and logistics • Disposal of trade waste

36. The weighted average labour cost in a processing plant is:Australia: $56 per hourNew Zealand: $18 per hour China: $4 per hour

37. Freight and distribution costs are higher than manufacturing for bread Goodman Fielder cost breakdown for bread: Source: AFR, 11 February 2012

38. $AUD needs to be around 70-80c to the $USD for Australia to be competitive.Economists predict it will stay at around 90c for the next five years

39. The free trade agenda benefits some industries at the expense of others

40. For multinationals, margins are no longer sufficient to manufacture in Australia 40

41. 4 Corporatisation& technology

42. The economics of agriculture demands scale

43. The critical importance of scale • Major improvements in overhead recovery • Farms have to double in size every 10 years to produce the same income. • Farm productivity is growing at 2% PA. • Commodity prices are cyclical but on average are not keeping up with inflation rates.

44. Scale requires technology and capital

45. Demand for capital is driving corporate farming models Corporate models demand: • Scale • Geographic spread • Production volume • Capital • Best practice technology and IP • Logistics capability • Tight cost control

46. In most horticultural industries fewer than 8 businesses supply 70+% of the market

47. There is a growing interest in Australian agrifood assets by foreign investors • They see assets agrifood assets as undervalued • Anticipate growing demand for food • Expect long term capital gains • Ensuring food supply for sovereign needs

48. Technology reduces need for labour • Direct seeding • Large GPS controlled machinery • Robotics • Self-guided vehicles • Drones • Smart phone apps

49. Because of efficiency, corporatisation can be profitable and substantially reduce costs Smaller farm businesses aren’t viable at these prices

50. 5 Water