Agribusiness Review - Vol. 4 - 1996

Paper 1
ISSN 1442-6951

What is the Australian Food Council Doing for Us?

Murray Rogers
Chairman, Australian Food Council, and Executive Chairman, Kellogg Australia Pty Ltd.
Based on an address presented at the Foodweek Conference) Sydney, 18 June 1996.

• Introduction
• The 'big picture'
• What ails Australia, ails the food industry
• Investment
• AFC operations and activities

Introduction

The Founding Members of the Australian Food Council (AFC) determined that the processed food and beverage industry must take greater control of its own destiny, set its own agenda for growth, the strategic marketing of its products, and so convert its comparative advantages into competitive strengths. Establishing the AFC as the industry's peak national representative body is our answer to the historical legacy of an industry that is, or is perceived, as fragmented, passive, inwardly focussed and reactive.

The processed food and beverage industry was adversely affected not only because Government did not know who to turn to on matters of policy relevant to it, but also because the industry could not find a single voice for a galvanised and concerted approach. We were, and still are, bearing the legacy of the investment community's lack of confidence in the industry due to what they consider to be its fragmentation, lacklustre performance, and reaction to external developments (rather than setting the agenda), and its preoccupation with the domestic market.

Right from the outset, we intended the AFC would be an inclusive organisation, and not just for the large corporations. Since opening our doors in June last year, membership has grown quickly from the 16 Founding Members to over 100 enterprises, from small manufacturers and ingredient suppliers to Australia's largest food companies. The membership represents about 80 per cent of the output of the industry. Importantly, nearly 30 per cent of the membership are small to medium enterprises with group sales less than $100 million, and with around 45 per cent of the membership being Australian owned companies. Those companies paying the minimum membership fee enjoy the same voting rights and membership privileges as the companies paying the top rates. The Board of the AFC is an excellent mix of industry representatives, reflecting the industry's structure and operations.

In less than a year we have established a vibrant, focussed, outcomes-driven organisation with credibility and integrity. Our organisational structures and functions reflect this imperative. So too our commitment to tackling the big picture issues, as well as the more sector specific issues, and to do so within the totality of the industry and the commercial and global environment in which it operates. We were determined from the outset that there would be a coordinated, integrated and balanced approach to policy development and implementation across the industry and each of its disciplines and that our activities would complement and not duplicate those of other national industry associations with comparable policy objectives.

The 'big picture'

Few other industries could claim to play as important a role in the social and economic welfare of all Australians as does the processed foods and beverages industry.
Such importance arises because of the following:

• prominence in Australia's manufacturing sector;
• the shift from being a net importer to being a thriving exporter over the past decade;
• growth in exports to the burgeoning markets of the Asia-Pacific;
• increased sophistication in manufacturing; and
• ready access to a supply of high quality raw commodities.

Total Australian processed foods and beverage exports were around $11 billion in 1994/95, of which $3.7 billion were highly processed. Exports of highly processed food and beverages grew by 88 per cent in the five years to 1994/95, and their share of total processed food exports increased from 27 per cent to 35 per cent over the same period.

In 1994/95, Australia's trade surplus of highly processed food and beverages approached $1.3 billion. In a decade the industry has gone from being a net importer to being a thriving exporter.

The perception of the industry's potential and the reality of its capability are often at odds. Not considered is our relative size in world trade. There is a naive presumption that the growing food markets of the world are there for the taking.

But those of us in the industry know better. Greater export earnings and economic

• growth will not result simply because of Australia's:
• proximity to the world's burgeoning food markets;
• success in producing and trading agricultural commodities;
• impressive record of generating knowledge and achievement in science and technology; and
• technologically advanced manufacturing capability.

Understanding this challenge, and the necessity for each component of the value chain to be considered within the totality of the commercial and global environment in which the industry operates, is the basis of the AFC's charter and its activities.

And the need for global competitiveness has probably never been greater in the history of this industry. The domestic market is mature. Many processed food and beverage products have hit saturation point, and growth can only come at the expense of market substitution. We cannot expect a repeat of the 1970s and 1980s profits on the back of falling commodity prices and rising retail prices and there is a limit to the extent of growth from restructuring and rationalisation that was a source of growth in the early 1990s.

Many packaged grocery products are under increasing pressure from the fresh sector and food service sector; our domestic retail trade is becoming more highly concentrated and powerful, and our brands are under constant assault from generic products. Also, there is a wave of aggressive consumerism causing a real danger that our businesses could become over regulated. There is always the risk that regulators will over-respond to the agenda of consumer advocates - whose views may not alway be representative of those of the Australian consumer.

We cannot continue to rely on Australia's natural advantages to underwrite the competitiveness of the processed food and beverage industry. The increasing globalisation of the world's economy has introduced a new element of competition shock to the industry. While globalisation has been critical in improving our access to international markets, we now face competition from imports into Australia and from the world's best suppliers as we develop our exports

Our competitiveness and strategic advantage will increasingly be determined by our conversion costs efficiency - in turn a function of investment, domestic cost structure, and labour productivity. Industry studies have clearly demonstrated the extent of the correlation between growth in output and profitability, and an increasing share of sales offshore in total sales. Industries without strong export potential are likely to face lower growth prospects.

And yet a recent study by Coopers and Lybrand Consultants investigating activities of small to medium enterprises, found that a large proportion of businesses do not want to grow and become internationally competitive. These businesses arc not convinced that there are opportunities in, or long4erm benefits from, being internationally active, and do not believe that they could necessarily be successful in international markets.

The conclusions reflect a domestic market that has historically been stable and profitable, and the considerable disincentives to forging offshore markets.

The upshot has been to reinforce the very problems contributing to the industry's limitations in competing offshore - such as under-investment in innovation, skills development and training; investment in new technologies and automation, and sub-optimal productivity growth. Also, there are ineffective linkages across the value chain.

I am not saying that all members of our industry have to strive to be exporters. What I am saying is that we all need to think about:

• the internationalisation of our economy;
• the integration of production processes world wide;
• global companies utilising individual countries' comparative advantages, enabling strategic investments to optimise their global competitiveness;
• facing increasing competition as import-competing industries and export-competing industries.

The message as I see it, whether a company exports or not, is that we must become what I term 'globally aware.

This applies equally to smaller companies, reliant on the domestic market for sales and growth, as it does for transnational companies. We need to be practicing world's best if we are going to compete profitably and sustainably here in Australia and offshore.

And while many of our companies, particularly our leading edge companies, are right up there with the world's best, as an industry we have got some way to go to close the gap if we are to truly realise our potential.

What ails Australia, ails the food industry

There can be no question that governments have made substantial gains over the past decade in internationalising the Australian economy and exposing more of Australia's infrastructure to competition. A McKinsey Report which was recently made public, also recognised the change in Australia's economy over the last 15 years -reforms relating to the financial sector, business regulation, industrial relations, and trade protection. But, more to the point, the take home messages from that study would come as little surprise. These are:

• that the nation's relative economic prosperity has altered since 1970;
• even where we were catching up, the rest of the world was moving on;
• the problems that beset Australia are similar to those that beset our own processed food and beverage industry;
• on average, investment in Australia's food processing industry was only 60 per cent of that of the US and Denmark; and
• the government has a legitimate role in providing incentives and support by promoting export development, removing structural and cost obstacles to investment, and enabling rationalisation in the sub-scale industry sectors.

As stated previously, comparative advantage in natural resources and production of goods and services does not automatically amount to international competitiveness, nor to increased market share for value added products.

At the value-added end of the chain, Australia is relatively weak. The processed food and beverage industry, although Australia's largest manufacturing industry, has generally faired less well over the past three years than manufacturing generally. In the three years to 1994/95:

• real value adding in food and beverages increased by around 16.5 per cent whereas that in manufacturing increased by nearly 20 per cent;
• labour productivity in food and beverages increased by 8.2 per cent compared with an increase of 11.6 per cent for manufacturing generally;
• real investment in processed food and beverages increased by 60 per cent compared with an increase of 37 per cent for manufacturing generally (albeit from a low base for the former);
• exports of processed food and beverages and manufactures increased by around the same amount (33 per cent), although highly processed food exports grew by 40 per cent, while high value-added manufactured exports grew by 57 per cent;

• although approximately 78 per cent of Australia's processed food exports now go to the Asia-Pacific region, compared with less than half in 1984, we still only supply 0.2 per cent of Asian food consumption and we are losing market share, even when the disparities between that region's average rate of economic growth and Australia's are corrected for.

• The McKinsey report demonstrated the strength of the relationship between investment, labour productivity, output growth, employment and profitability. It established that the Australian food processing industry's performance in terms of labour productivity and employment is well behind that of the US and Denmark. On average:
• Australia's labour productivity is running at around 68 per cent of that of US and Denmark levels, and the gap is widening;
• our output growth at around 11 per cent during the 1980s and early 1990s is well short of the US (54 per cent) and Denmark (32 per cent);
• although our export growth has been significant, we have lagged in the rate of growth on a per capita basis, behind New Zealand and Denmark.

The McKinsey study identified the major contributors as being:

• the existence of smaller-scale plants and sub-optimal critical mass;
• a lack of innovation in products, brands and production processes, with too great a concentration on cost reduction and rationalisation in contrast to overseas competitors who innovate to concurrently increase market demand and output.

The message, as I see it, is that as an industry we need to:

• lift our aspirations;
• challenge the traditional views of our markets, our production processes and our range of products;
• stimulate investment in our plants, our research and development and technological innovation;
• develop the skills and competencies of our workforce;
• drive labour productivity, growth and profitability.

But that is a tough call unless we have got an operating environment within Australia which is conducive to internationally competitive enterprises and to reasonable access to international markets.

The McKinsey study pointed to the government's responsibility for removing structural and cost obstacles to investment.

Investment

Generally, institutional investors have failed to appreciate the strategic economic significance of Australia's food industry, preferring short-term to longer-term investments, and onshore investments rather than strategic offshore investments.

It appears business managers and investors are at odds over how growth will be generated. Or in the words of some private sector analysts, the financial community is looking in a different direction for growth. Larger companies (not specific to the food sector) that develop dominant positions in the domestic market are apparently not being encouraged by financiers to expand into foreign markets. And they are, by the actions of our competition policy regulators, discouraged from pursuing growth through acquisitions and mergers. This prevents them from becoming optimal in size. The McKinsey report notes that the sub-optimal size of many Australian plants is one of the reasons for our weak labour productivity and employment performance.

Smaller companies find it difficult to persuade investors to back their growth strategies, particularly the institutional fund managers who simply don't consider them big enough to justify the time invested in analysis. Their capital availability is often limited to reinvesting earnings, which can severely limit growth potential.

The new breed of multinationals are the Asian agri-food conglomerates. Their government's protection, patronage, patient capital, tax and investment incentives, and extremely lenient domestic policies are nurturing their development. By contrast, the administration of our own competition policy, particularly in respect to acquisitions and mergers, is preventing the development of critical mass and is a significant disincentive to long4erm investment in plant and equipment.

Thus our regulators are substantially shackling the competitive strength of our agri-food enterprises in their ability to match the size of their offshore competitors, especially in Asian markets.

We at the AFC are not convinced of the necessity for such a vigorous domestic competition policy in an open market. There are few, if any, significant barriers to entry to the Australian processed food sector.

Effective competition policy is one that ensures markets are operating efficiently and not just less concentrated or, indeed, less regulated.

This is one of the primary reasons we set up the AFC; we wanted to address the fundamental issues of industry fragmentation and lack of overall direction, considered by investors, institutional investors at least, to be a prime factor in their lack of confidence - a factor that is a deterrent to investments.

AFC operations and activities

The AFC is fast building a reputation for credibility and integrity, and in doing so, is meeting one of the fundamental objectives of its establishment charter to be the peak national organisation to which Government and industry can turn to as an authority on matters relevant to the Australian processed food and beverages industry.

The AFC had established a wide and impressive network of formal and informal consultative arrangements with government agencies and industry associations. The working relationship between the AFC and the National Food Authority ~FA) continues to be close and effective. The AFCs critical role as a circuit breaker in negotiating a workable solution to the long running and contentious issue of country of origin labelling established very early our credentials with the NFA, and our ability to work productively with them.

We arc an integral part of the NFAs work in reviewing Australian Food Standards Code, the development of a nationally uniform approach to food safety and hygiene, and the harmonisation of food standards across the Tasman and potentially with the Asia-Pacific region.

The AFC played a key 'bridging role', at the NFAs behest, in the development of a new standard for continued fermented meat products. This strategy is based on an extension of the existing Code of Hygienic Production to an integrated, coordinated preventative systems approach based on Hazard Analysis Critical Control Point procedures and co-regulation. Along with others in the industry, we were successful in opposing more stringent regulations that would have severely handicapped the industry.

The AFC has proposed a structural means by which the development of quality assurance systems within and across industry sectors and the Federal bureaucracy can be coordinated and integrated.

During the recent 'Mad Cow' scare, we moved quickly to minimise any effects on our industry, working closely with the NFA and the Federal Minister for Health and Family Services, to quickly reassure consumers that no foods in Australia, aside from a very small number of identified canned imported items, prevented any risk. We carried out a speedy survey of our members to arrive at the conclusion that no British beef or beef products were being imported.

We in the AFC are now turning our attention to what Australia can learn from the 'Mad Cow' scare, what we can strategically do to ensure the integrity of our own processes. We recognise the necessity for disclosure and keeping the public informed; the underlying imperative for quality assurance systems to be developed that are integrated, coordinated and preventative based; and the advisability of an audit of our own intensive livestock systems

We are actively engaged in the public debate on biotechnology and have prepared a major discussion paper on the topic, which was released recently. Our work in biotechnology policy is another good example of our consideration of new technologies and within the broader commercial and global context. Australians must not divorce themselves from biotechnology developments. To do so could substantially affect Australia's ability to capitalise on its comparative advantage in agri-foods in the global market, and its significant capacity in pioneering new technologies. Australia must keep abreast of new technologies, particularly as they affect genetic advances in plants and animals.

Equally encouraging is the extent to which companies are accessing the AFC Secretariat for information and advice. The modus operandi, consistent with the AFCs charter, is to address individual company issues on a pre-competitive or generic industry basis, providing technical advice and/or political/strategic counsel to assist companies in their own endeavours before they might require AFC intervention.

We are responsible for managing the Code of Conduct for the Provision of Information on Food Products. And in cooperation with other key sectors of the value chain we are working to updating the guidelines for dealing with tampering and the deliberate contamination of our products.

We recently launched an information campaign called 'Safe Food Australia' which aims to inform consumers of the work which our industry is doing to maintain the highest standards of a safe, healthy food supply to Australians and to our export markets.

We have developed a corporate vision for the industry and for the AFC. We have mapped out the challenges and started the process of developing a corporate strategy for capitalising on the opportunities and remedying the impediments to growth and profitability.