Suppliers are being squeezed between high manufacturing costs and dominant retailers more than ever, and the pressure being applied is unsustainable, according to a new report.
The Competitiveness and Sustainable Growth Report conducted by KPMG for the Australian Food and Grocery Council (AFGC), found Australia now has the highest manufacturing costs in the world, and that retailers are extracting even greater payments from suppliers to fund discounts and promotions.
The report has been drawn from a detailed analysis of real financial data from food and grocery suppliers, covering the last four years, 2010-13.
AFGC CEO Gary Dawson said the report demonstrated how tough the market conditions have become for food and grocery suppliers, which are being squeezed between the “unstoppable force of dominant retailers and the immovable object of high labour, utility and regulatory costs”.
"A key finding is that one dollar in every four earned by suppliers is being returned to retailers to fund discounts, rebates and promotions,” said Dawson.
He said the rapid growth in payments extracted by retailers represents a direct profit shift from suppliers to retailers and reflects the dominant position of the two major supermarket chains.
The two major retailers extract an additional five per cent more from suppliers than other retailers, reflecting their market power, according to Dawson, and this 'trade spend' has been growing at four per cent per annum, while volume has been flat and profitability declining sharply.
"This level of funding flowing back to the major retailers is simply unsustainable, with a direct impact already on marketing, R&D and innovation spending,” he said.
He also said that despite growing demand for premium food in key export markets, Australia is losing market share in China, Indonesia, Thailand, Malaysia and Japan.
“Looking forward the key challenge for Australia’s food and grocery sector is to improve its competitiveness in order to secure growth opportunities domestically and in export markets,” said Dawson.
“Without a viable domestic food processing sector Australia will not fully capitalise on the opportunities of the Asian ‘dining boom’,” he said.
Some other key findings of the report:
- Australia has the highest manufacturing costs in the world, with labour, utilities and regulatory costs all among the highest globally;
- A strong focus on cost containment by suppliers has brought some reductions in supply chain costs through initiatives such as automation to boost efficiency and productivity;
- Capital investment is growing, which is a positive sign for the future, although much of this investment has been focused on ‘staying in business’;
- Profitability of Australian suppliers is now well below international peers, and falling further behind, raising questions about the willingness of major companies to make major investments to upgrade Australian facilities.
