Capex collapse and rising costs put strain on Australian grocery sector

Posted by AFN Staff Writers on 26th November 2018

RISING input costs and a 10 per cent slide in capital expenditure is putting strain on the competitiveness of the domestic grocery sector, the Australian Food and Grocery Council’s annual report shows.

But the tenth annual industry report, released today, also shows the industry’s growth prospects increasingly lie in export channels.

An increase of 7.7 per cent in exports to 36.1 billion in 2017-18 shows the ability to realise premium prices for value-added food and beverage products in growing export markets is a key source of future growth and contrasts with the low growth, deflationary domestic trading environment.

The report shows the $131 billion food and beverage, grocery and fresh produce sector accounts for nearly 40 per cent of Australian manufacturing jobs.

Key facts from the State of the Industry 2018 report on the food, beverage and grocery sector:

• Industry turnover $131.3bn, down -2 % in real terms; 2016-17 data

• Direct employment 324,450 people, down -1.4%; 2016-17 data

• Net capital expenditure $2.9bn, down -10.3%; 2016-17 data

• Total international exports $36.1bn (up 7.7 %); 2017-18 data

AFGC CEO Ms Tanya Barden said the report compiled by EY shows that despite being faced with challenging conditions through 2016-17, the sector now accounts for nearly 40 per cent of Australian manufacturing jobs.

“This year’s State of the Industry highlights the importance of the food and grocery sector to Australia’s economy, and its resilience in the face of a significant loss of competitiveness that has impacted Australian manufacturing more broadly,” said Ms Barden.

Tough environment

“There is no doubt Australia’s largest manufacturing sector is facing a tough environment where input costs are rising on everything from commodities, particularly caused by the drought, to labour to energy, and six years of retail price deflation continues to cut margins, placing the sector under increasing pressure.

“These factors have created relentless pressure back through the supply chain, with companies having made efficiency improvements in order to stay competitive. It has now however reached the stage where this pressure is placing strain on the sector.

“While the food and beverage, grocery and fresh produce sectors directly employ 324,450 people, there was a 1.4 per cent decline in employment in 2016-17. There was also a small decrease in industry turnover by 2 per cent to $131 billion,” said Ms Barden.

“A 10.3 per cent decrease in net capital expenditure, off the back of a decade of declining investment, reflects a genuine concern that increases in input costs coupled with depressed pricing makes the case for investment difficult at this critical time.

“Continuing to stimulate investment in site modernisation is critical particularly in light of mounting input cost pressures. We are now in danger of drifting into a low investment trap, where uncertainty about return on investment flowing from retail price deflation and rising costs is seeing investment decisions deferred or dumped,” said Ms Barden.

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Targeted investment allowances

The AFGC recommends that targeted investment allowances be adopted to bring forward investments in Australia, to retain jobs and businesses here, particularly in regional areas where approximately 38.8 per cent of the sector’s jobs are located.

In contrast to the domestic market, the report highlights that the industry’s growth prospects increasingly lie in export channels.

“An increase of 7.7 per cent in exports to 36.1 billion in 2017-18 shows the ability to realise premium prices for value-added food and beverage products in growing export markets is a key source of future growth and contrasts with the low growth, deflationary domestic trading environment.”

“For the Australian economy to grow, we need strong regional employment, a strong manufacturing base and export led growth. The food and grocery sector offers these three aspects but requires polices that address cost competitiveness and ensure fairness in retailer supplier trading,” said Ms Barden.

 

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