Global report highlights challenges for Australian food and beverage industry

Posted by AFN Staff Writers on 25th November 2011

One of the world’s largest accountancy and business consultancy firms, Grant Thornton, today published its annual international business report on the food and beverage industry. The report highlights several key trends and predictions for Australia, including the strength of the Australian supermarket duopoly and the problems posed by their private label business.

In the report, ‘Managing through uncertainty: Food and beverage industry in transition’, Grant Thornton’s Industry Leader for Food & Beverages in Australia, Tony Pititto, predicted that heavy reliance on private labels by Australia’s major supermarkets will continue to have a negative impact on the margins of Australian food and beverage companies.

Mr Pititto said there is a lot of work being done in product innovation and new product development by Australian companies, but mainly for the purposes of meeting private label demand by the supermarkets.

He said, “Private labels in Australia have grown from about 10 per cent to approximately 25 per cent in the past year, and supermarkets are now aiming for 40 per cent. While other trends, such as healthy foods, ethnic foods, and localisation are important, that is not what is keeping the manufacturers or the processors awake at the moment. It is clearly about ensuring that they are on the supermarket shelves.”

Foreign investment on the rise in Australia

Mr Pititto pointed out that Australia is seeing a lot of overseas corporations endeavouring to buy assets in food and beverages, from land holdings to commodities such as grain or wheat.

He said, “It is happening in the beef, beer, and sugar industries, to name a few. There is going to be greater mergers and acquisitions involving overseas corporations buying into the Australian market.”

In Australia, Grant Thornton conducted a study that indicated F&B companies are planning to invest in capacity, such as expanding manufacturing lines.

“Surprisingly, over 80 per cent of those companies expanding facilities or building new plants said they would be financing internally or with existing debt lines,” said Pititto, “perhaps expressing lack of confidence in the availability of capital at reasonable terms and the fact that companies have been in savings mode since the global financial crisis.”

Organic food products “less fashionable”

Pititto said that organic food products in Australia were first to feel the pain of the financial crisis of 2008-2009.

“People are willing to pay for premium products as long as the benefits of those goods are clearly communicated. Willingness to spend on more expensive items seems to be focused on healthier products, while organic products have become less fashionable.

“Unless the organic products are priced well, there is not so much interest in buying them. While they are still growing, the biggest issue in Australia is that there really are no defined standards as to what makes something ‘organic.’ It is very confusing,” he said.

Challenges for global food and beverages sector

Grant Thornton identified four key issues facing the global food and beverages sector, as follows:

  1. Productivity improvement and operating-cost reductions: Rising commodity costs – coupled with customer resistance to price increases – make productivity improvements and cost control vital to success.
  2. Mergers, acquisitions and divestitures: Food and beverage companies are once again looking to grow through acquisition.
  3. Regulatory compliance: Food and beverage companies face an increasing complex set of regulations around the world, along with emerging sustainability standards.
  4. Innovation and quality: Consumers want innovation, improved quality, and lower prices – a trio of demands that small, midmarket and even larger food and beverge companies often find difficult to address.