The Australian Food & Grocery Council says manufacturers can no longer absorb increased costs that have been exacerbated by the pandemic and geopolitical instability.
AFGC CEO Tanya Barden says Australian food and grocery manufacturers are facing cost pressures that are starting to flow through to supermarket shelves.
“Over the past decade manufacturers have already been dealing with a situation where wholesale prices – the prices they receive for their goods – have risen by less than the cost of their inputs. There has been a lot of absorbing of costs by manufacturers before the impact of the pandemic,” Barden said.
Last year, Barden told the Senate inquiry into the state of Australian manufacturing how food and grocery manufacturing differed from other parts of the sector because it was consumer facing, fast-moving, and faced significant consumer, government, and community expectations around health and wellness and sustainability.
AFGC’s Sustaining Australia: Food and Grocery Manufacturing 2030 report said that from 2010 to 2020, Australian food manufacturers’ input prices increased 49 per cent, whereas output (wholesale selling) prices only increased 24 per cent. The challenge is obvious when this is compared to the broader manufacturing sector where output prices have closely tracked input prices, it said.
Earlier in the year, Woolworths CEO Brad Banducci and Coles CEO Steve Cain voiced their concerns about inflationary impacts on grocery prices.
Banducci referred to inflation as a “live and real” issue that was impacting all parts of the supply chain and that price rises up to three per cent were to be expected.
Banducci told The Sydney Morning Herald that the company had been weathering price rises from grocery suppliers and “a raft” of other cost increases including the fourfold increase in shipping and high fuel prices.
Cain said inflationary pressures were the worst he had seen in a long time, and while packaged goods and red meat were the first to be impacted, pricing pressure was set to expand across all channels.
Barden said, “Over the past couple of years, the price of inputs for making and distributing goods has risen. The cost of shipping ingredients and finished goods to Australia has risen by 500 to 700 per cent.
“There have also been significant costs to business due to COVID safety measures, domestic freight cost increases caused by weather disruptions, shortages of pallets and rises in the cost of packaging.
“Adding to this unprecedented COVID disruption, manufacturers are facing increases in global commodity prices as a result of the situation in Ukraine and they are now seeing increases in labour costs.”
The report, released in May 2021, said food and grocery manufacturers have little opportunity to pass on higher input costs due to the highly concentrated nature of Australia’s retail marketplace.
It said, “In a market already dominated by two major supermarket retailers, the arrival of overseas-based competitors has driven a focus among the majors on cutting purchasing costs. The result has been a limited ability for manufacturers to pass through cost increases, a progressive decline in operating margins, and stagnation in the new investment required to stimulate innovation and productivity.”
Almost a year later, Barden said: “There is no longer the ability for manufacturers to continue to absorb those increased costs.”