A peak industry body has revealed that Australia’s food and grocery manufacturing sector is heading toward “extinction” amid challenging economic and market conditions.
During a recent Senate hearing, Australian Food and Grocery Council CEO Tanya Barden painted a bleak picture of the local industry.
Ms. Barden said that food and grocery manufacturing had faced declining margins prior to the COVID-19 pandemic, and the situation deteriorated further in subsequent years due to supply chain issues.
“In the decade before COVID, food and grocery manufacturers were only able to pass on half of their rising input costs. That led to a falling industry profit from $8 billion (US$5.14 billion) to $5 billion, and over that period, capital investment stagnated,” she said.
“All the fat was cut from the system pre-COVID. Suppliers had to go to extraordinary lengths to find efficiencies, which meant that coming into the COVID period, there was no capability to absorb the extraordinary level of costs that came through.”
As a result, manufacturers had to pass on the cost increases to consumers, leading to sharp rises in food and grocery prices in recent years, Ms. Barden added.
She noted that the average annual CPI (consumer price index), an indicator of inflation, for food products was 1.6 percent during the decade to 2019. Since then, the figure has shot up to 4.4 percent.
“The pattern of having prices held artificially low for so long, and then having this big peak of increase, that’s not healthy for suppliers. It’s not healthy for consumers, and that’s a pattern that we need to avoid in the future,” she said.
The CEO also noted that the drop in profit margin resulted in a reduction in capital investments in the industry at a time when it needed more funding to remain competitive.
“We’ve had turnover growth over the last five years of up just under 5 percent, but capital investment has actually declined by 0.3 percent in that same period. That’s not sustainable for the future of the industry,” she said.
“We do have an industry that does have a lot of aged equipment. So we do need to support means to allow the industry to innovate and invest in more technology that actually can boost productivity and allow domestic businesses to be more competitive on that global scale.”
Increased Offshoring of Food and Grocery Products
At the same time, Ms. Barden pointed out that the increased offshoring of food and grocery products had become an issue for the local industry.“Australia used to have a net surplus of $2 billion in high-value-added food products. And over the last couple of decades, that’s now shifted to a $2 billion trade deficit. So we import more high-value-added than we did previously,” she said.
The CEO stated that the above behaviour pattern and the inability of suppliers to cover their costs in the long-term and be able to reinvest led to the question of whether they would move production offshore, continue to invest in Australia, or exit the market when their assets reached their end of life.
“This sector is the biggest manufacturing sector in the country and employs 275,000 people, and 40 percent of those are in rural and regional areas,” she said.
“There is a significant concern that if the viability of food and grocery manufacturing gets impacted, then jobs will get impacted along with that.”
Amid the flood of imported products, Ms. Barden said the best thing that the government could do to support the industry was to help it become more productive and more competitive rather than implementing ineffective measures such as country of origin labelling requirements for products sold in Australia.
“One of the things that we have suggested is that we need to deal with the effects of supermarket concentration on the industry by supporting investment,” she said.
