Australian agri-food producers are behaving more and more like miners.

This week, when most of us sit down with a glass of Christmas cheer to reflect on the year just finishing and speculate about the one ahead, we’d be feeling much better about life than the last few Christmases.  However, unlike those in the sector who’ll be checking off the year’s wins, my reflections are likely to be laced by a sense of frustration and lost opportunity, despite all the hype about the rosy future of agrifood. 

For a start, the Gillard government tried its hardest to kill us all off. The National Food Plan and Asian Century papers were big on philosophy but totally lacking in pragmatic policy direction. The mishandling of the live cattle trade did serious long-term damage and offended a strategically important customer. The carbon tax and the pro-union attitude of that government put the nail in the coffin of our few surviving food manufacturers, most of who were already in the intensive care ward.  At risk of sounding like the Christmas Grinch, I don’t feel that confident that the Abbott Government will do much better. It seems that the agrarian socialists are running the show.

Any thinking person looking at the Australian agrifood sector from afar must be totally confused by the Graincorp/ADM debacle and the hysteria around the Warrnambool Butter and Cheese takeover. It shows that the most vociferous defenders of the farming sector are either extremely xenophobic or extremely naïve. Effectively they are willfully destroying the sector that they claim to be so passionate about protecting.

The reality is that most industries within the Australian agrifood sector are in a critical situation. Many food processors have moved off shore or closed down and others are seriously questioning their future in this country.   SPC is contemplating closing its Goulburn Valley facilities with a loss of 2000 direct jobs. The impacts of such closures are not just economic; the social consequences for regional communities are more devastating.

There is no doubt about the growth prospects for agrifood in the Asian region. The demographic data forecasting the rising Asian middle class is conclusive.  But the tired old proposition that Australia will become the “food bowl to Asia” or leaders in a “dining boom” as advocated by the many agrifood think tanks, is still a bit hard to swallow, even in the current environment.

The reason it is unrealistic is that much of the growing global demand for food is at the highly contested and competitive, low end of the market.   Australia sells undifferentiated commodities at world parity prices, with all the volatility that comes from being a global commodity trader. If Australia is to truly cash in on the Asian opportunity, it needs to target the high-end, premium food segments by developing differentiated products built around the brand values of provenance and safety.

But the reality is that in this space, Australia is hopelessly uncompetitive and poorly skilled. With a weighted average labour cost of $55 per hour for a factory worker compared with $18 in New Zealand and $4 in China, we are not in the game, even when the $AUD is around $US 80 cents. Our factories are old and inefficient, our energy and water costs have risen sharply and the cost of compliance with complex, government-imposed red tape is crippling. The road, rail and port infrastructure greatly adds to cost; the majority of secondary roads don’t have legal B Double access.  Furthermore, our capabilities in marketing, supply chain development and export market development are poor.

If Australia is to be a global player in food we need a massive investment in infrastructure, new plant and equipment and technology. This capital must come from overseas investors because the industry doesn’t have the money and Australian retail investors are gun-shy about agrifood, seeing it as too volatile and risky (no wonder when it is so poorly managed and government policy is so unstable).

We need active investors who can bring more than capital alone. We need their global supply chain and cultural connections and market knowledge. Passive superannuation fund and short-term equity players are not the answer.

Politicians need to let global agrifood world know that we are open for business. The starting point is some sensible, coherent policy that should include:

·         A pro-foreign investment policy (with adequate safe guards).

·         A flexible work force policy that recognizes the 24/7 and seasonal nature of perishable agrifood products.

·         Accelerated depreciation and incentives to invest in automation and technology.

·         Government investment in infrastructure, roads, rail, ports, electricity, gas, water and waste water recycling, bio-digester technology and co-generation.

·         Cutting government red tape

·         Taxation incentives for mum and dad investors (although it was poorly managed the much maligned MIS did create world class, globally competitive and sustainable businesses).

·         Promoting agrifood as an up and coming career opportunity for young talented people.

·         Fewer expensive trade missions and more export capability building.

The alternative is for Australian agrifood to go the same way as Australian mining i.e. large, listed companies ripping huge volumes of low value commodities out of the ground for short term gain, letting other countries extract the value from the supply chain.  It seems that the miners and agriculturalists have more in common than they think.

About the author

Dr David McKinna is Principal and Director of global strategy consultancy McKINNA et al in Melbourne.  David’s commercial ‘street smarts’ belies his academic background.  Over 30 years of global consulting has given him deep insight into how markets work.  In particular, David has been the quiet achiever behind some of Australia’s most successful strategy break-throughs in the food sector.  His experience and expertise in agrifood spans paddock to plate.  David’s ‘tell-it-like-it-is’ style makes him a sought after speaker, writer and social commentator.  David was also a founder of the David Syme Business School at Monash University.

E: david@mckinna.com.au

W: www.mckinna.com.au

M: 0418 332 488

T: 03 9696 1966

An Australian Century is food for thought.

Asian markets alone will not save Australia.  International competitiveness and global scale will.  In particular, we must see ourselves as part of the global food system and plan to invest accordingly.

An Australian Century captures that sentiment nicely.  It puts greater emphasis on the need to be pulling the right economic levers domestically, whilst thinking globally – Asia and beyond. 

Talk of an Asian Century is appealing.  In particular, there is an overwhelming expectation on China making us wealthy.  However, abundant food exports are not a forgone conclusion because of our proximity to the Asian region.

The overriding limitation of our new national vision is it aspires to produce more of the same for some.  The risk lies in the political proposition Australia will now ride a food commodity boom and sell its way out of trouble.  Food markets do not operate like the resource markets we have been supplying.  When it comes to global food production, only a very small percentage is traded across borders.  Asia will buy Australia’s food commodities when it is convenient or cheaper to do so.

So let’s be clear.  Nowhere in the world does there exist a mass-market for food from Australia.  We are not anyone’s food bowl and we never will be.  Australia’s current contribution to the global food system is less than one percent.

Spruiking absolute numbers is cruel for those least likely to benefit, as the emerging situation in Asia is very complex.  The devil is in the detail.  For many it will be the realisation that opportunities in Asia are very limited.

My Australian Century includes getting our food industry in a competitive position to also do business with those we are not already close to.

The economies of many other countries are developing at amazing pace. Some will sustain their growth well past the bulk of Asia’s peak.  As we will soon find out in Asia, these new markets will be incredibly discerning about what foods they allow to be imported and in what form.  This will be driven by the nuances of local middle-class consumers and strong domestic policies.

In my Australian Century there is a re-balancing of public money invested in Australia’s long-held tradition of producing and exporting bulk foodstuffs.  The time and money required to sustainably re-intensify the primary production of food under Australian conditions is immense.   The world will not wait and many countries will close their productivity gap much quicker than Australia.
 

Future attempts to raise agricultural productivity will increasingly need to be funded by those most likely to gain in that sector, by developing new investment relationships with other companies in the global food system.

The emerging change in the composition of where and how food is purchased and consumed presents the most profitable and timely opportunity for Australia’s food industry.  Consumers put greater importance on convenience and packaging.  Food experience is the one key trend consistent in all emerging food markets.  Consumer purchasing behaviour now points directly to the non-price characteristics of food and so requires the innovation of Australia’s food processing sector in particular, to create tailor-made solutions and take advantage of these new preferences.

Arguably, Australia does not value its food processing sector.  While it is in survival mode, Australia’s competitors are in expansion mode.  We have been outpaced and outflanked in emerging value-added markets.  The result is we now import more value than we export.  Trying to becoming a food quarry and commoditising our food products will not economically mitigate these issues.

In my Australian Century we pursue a whole-of-chain approach to food innovation and transformation.  Australia’s food industry is characterised by its imagination and sophisticated thinking.  Anticipating and providing tailored food solutions is the best wealth-creation strategy Australia has.  We make the necessary structural and economic adjustments to allow this to happen.

Still, it is only those businesses with the strongest leadership that will make the hard decisions needed to survive.  It is the ambition and foresight of these people that will ensure our food industry will expand and prosper – whitepapers or otherwise; Asia or otherwise.

Connecting with Australian Consumers.

In endless industry surveys and market research, Australian consumers have stated they would seek-out and / or pay more for Australian origin food products.  However, when Australian's go shopping, it is a very different story and they do not follow-through on what they say.

The situation has caused an identity crisis for the Australian agri-food industry.  Millions has been spent on campaigns such as Year of the Farmer that have not worked.  The debate rages as participants in Australia's food system look for someone to blame, with most fingers pointed at food retailers and supermarkets.  The story not often told is that Australian consumers are the biggest part of the problem and should be held more publicly accountable for the gradual demise of Australia's food system that was once the envy of the world.

So why are Australian consumers so disconnected with the origin of their food?  Why are they not insisting that Australian food products be more available, and kicking up a stink when they are not?

The situation has become very complex, nuanced and precarious, and likely to result in countless more Australians losing their jobs.

In today's special guest blog, global marketing and strategy expert Mr Barry Urquhart starts to shed some light on why consumer purchasing behaviour has been changing.

“CONNECTING WITH AUSTRALIAN CONSUMERS”

Australian consumers are a funny lot.

Some 78% unreservedly declare they have an unqualified preference for Australian made and grown products... if all things are equal.

At the supermarket checkouts, business counters and online, that figure falls to less than 40%, across a broad cross-section of consumer segments, products, services and brands.

The latter point provides a key insight into buying habits and customer preference in a complex, fragmented global marketplace in which commodisation is common. A lack of loyalty and preparedness to pay value-based premiums is explained by a lack of effective branding.

Indeed Australia, and Western Australia in particular, suffers from a lack of the inherent benefits and advantages of widely recognised and respected brands. At present, each is labelled and the latter suffers from commonly-held reputation... it is expensive. Labels, logos, attractive graphics and appealing advertising do not in isolation equate to a brand.

Brands enunciate values, qualities, beliefs and aspirations. For example, the single word, “pure”, speaks volumes about New Zealand. Scotland enjoys the financial and social consequences of world-wide expectations of the attribute, “quality”, which is attributed to its produce.

Some Australian brands are recognised internationally. There is Vegemite. It is owned by Kraft, which is intern apart of Philip Morris, the largest cigarette manufacturer in North America. Holden, likewise owned by General Motors.

Qantas, “The Flying Kangaroo” is iconic, recognised in many parts of the world and is 49% owned by overseas shareholders. A significant percentage of the fish sold in Australia as “Barramundi” is caught in the canals of Thailand and Vietnam. Perish the thought! Barramundi is an Australian aboriginal word. Is nothing sacred?

Hence, Australian consumers have over the past from decades become disillusioned, disappointed and disloyal. They find it difficult to conclude what exactly is meant by the terms Australian-made, Australian-owned, Australian-packaged and Australian produce. The terms are vague, inexact and the consumers are apprehensive.

HOPE SPRINGS ETERNAL

There is increasing evidence of the market appeal, potential and advantages of fresh, local, quality and value Australian agricultural produce and general food.

Community-centred Growers’ Markets and Farmers’ Markets are resonating with consumers and impacting on the competitive, established major retail chains and networks.

INTERESTING INSIGHTS

The relevance of local markets provides some invaluable insights.

In the first instance, they are typically well branded.

Personal relationships are established and sustained, underwritten by the trust accorded to genuine Australian producers.

Most significantly, there are few, if any, “middle-men” in the supply chain. That implies “local”, “fresh”, “quality” and “value”, each a commendable and compelling attribute.

Therein lies a key question, challenge and message:

“What industry are you in?”

The simple single answer which much be applied, regardless of where one is in the distribution network is:

Supply Chain Management

Farmers, orchardists, vignerons and growers can no longer satisfy themselves with “producing quality goods and delivering such to the farm, orchard or vineyard gate”. 

Within their respective categories, unpackaged, unbranded beef, milk, oranges, wine and the like look remarkably the same. That is the nature of commodisation.

FOUR FEATURES

To satisfy consumer needs and wants, local produce and producers need to be able to provide (in descending order of importance):

·         Convenience

·         Range

·         Brand

·         Price

Each of those qualities should be and, indeed must be, complemented with the underlying philosophy:

IT IS BETTER TO BE DIFFERENT

THAN IT IS TO BE BETTER

When a product, service, company or brand is different it is, by definition, incomparable. That is when Australian consumers are readily happy to pay up to 15% as a premium for Australian products.

IN CONCLUSION

This is not a plaintiff call to “get back to the basics”. It is a reality check and a challenge to:

“Never leave the basics”.

The foundations to ensure that the agribusiness and food sector and individual operators are able to reach out, connect with and engage Australian consumers are:

Formulate, document and implement a disciplined, structured BRAND MANAGEMENT STRATEGY

·      Refine and define a concise SUPPLY CHAIN

·      Identify, isolate and then make a virtue of those aspects which are SUSTAINABLY DIFFERENT

·      Involve, engage, recognise and celebrate those who are TEAM MEMBERS

ABOUT THE AUTHOR

Barry Urquhart, Managing Director of Marketing Focus, Perth is an internationally respected consumer behaviour analyst, marketing strategist, author and conference keynote speaker.

He has extensive experience in the retail, rural, manufacturing, services and finance sectors.

E:        Urquhart@marketingfocus.net.au

W:       www.marketingfocus.net.au

M:        041 983 5555

T:         08 9257 1777

Why GM crops won't fly in South Australia.

Advocates have failed in their bid to stop the State Government’s suspension on the introduction of GM crop technology in South Australia.  Not because of what they have said, but because of what they haven’t said.  Or rather, the key questions they haven’t answered.

That is, how will the introduction of genetically modified grain to South Australia’s much differentiated food system add value to customers and consumers of our products here and abroad?

Rightly so, the State Government has adopted an integrated perspective of South Australia’s food industry.  For example, understanding the relationship between food and tourism is why an integrated perspective is important for South Australia.  Hence, we have Tourism Ministers making announcements about South Australia's food system.  A smart marketing move.

Whilst individual debates such as GM technology will always circulate, the ground-swell of opinion across South Australia’s broader food industry is that we needed to dare-to-be-different and use this to build a sense-of-place about South Australian food that can be marketed to the rest of the world.

Whether or not GMs are safe is not the issue here.  The South Australian food industry has a mantra to provide premium food produced at the highest standard and to give people an authentic food experience.  It is the current view of consumers that GM foods are not premium quality and are not authentic - safe or otherwise.

Consequently, the State Government has developed, prioritised and committed itself to a range of new programs and market-centric strategies that are propelling South Australia’s food industry around the globe and is capturing a niche in consumer sentiment.

For the moment that means some individual farm-gate requests have not been met in order to achieve the greater good for South Australia’s food industry.

It is vital that the local grain production community soundly demonstrates how their future wishes at the farm-gate can be integrated into the greater vision for South Australia already under way.

Farmer choice at the expense of consumer choice is not how things are done.  Clearly, this is not the request of South Australia’s grain producers.

But what has not been explained is how the grains sector intends to work-in with the rest of South Australia’s food industry vision on the issue of GM crops.  It is important that primary producers of all types view themselves as part of the broader food value-chain community in South Australia, or risk being isolated from the decision making process.

Without that buy-in, it will be 2019 and beyond for no GM.

Food for thought.

So what do Australian consumers think about all this?

It's interesting that a lot of the debate about GM gravitates around whether or not they are safe for consumers. 

For the average punter in the supermarket, whether or not GM is safe scores quite low. Why? 

Because in Australia we have generally kept consumers in the dark about GM. What is influencing their decision against GM the most, is that consumers actually see no real value in having GM foods. They see no benefit in altering food that way. 

Consumers are not scared of the advancement of powerful new sciences, because they know it does great things such as cure disease.

But why food?  Would Australian consumers buy into the need for food security, as this is often presented as the case for GM crops?  

The average consumer would not be aware the world already produces enough food to feed 12 billion people.  But most families understand food waste and the need to reduce it.  

So if food security is the problem statement, then consumers would change their attitudes about food waste much sooner than they would change their attitudes about lifting productivity via GM, simply because they see value in one and not in the other.  

This demonstrates the power of consumer decisions to lift the efficiency of the entire food chain, not just one group involved in supply.  These are the type of local market shifts Australia should be aiming for, to improve the profitability of our entire food industry.

With the information consumers do have available when making decisions about foods to buy, what scores highly then are things like origin, quality and authenticity. They use these to work out points-of-difference and points-of-parity. 

The SA moratorium is not about whether or not GM is safe. It's about deliberately targeting what we know consumers do currently value, in order to extract a premium from them. 

As it stands today, consumers do not view GM as authentic, premium or provenant - safe or otherwise. 

If you want to grow GM you need to convince consumers THE VALUE of eating them.

The (un)natural attrition of Australian farmers will continue at pace.

I’ve noticed a resurgence of articles in the rural press, centred on the old adage that farmers make no money and are not rewarded for the work they do.

A nice sentiment but I’ve yet to see a pricing method based on effort.  Nor do markets pay for effort, let alone pay a premium for it.  If only.

A common complaint I read is that farmers need to be price makers, not price takers.


Once again, a nice sentiment, but I’m not aware that Australian farmers are producing anything for which there is no substitute.

Let’s forget the price taker / price maker thing.  If you are a primary producer then you are a price taker.

What a farmer needs to be is a margin maker.

Why is this important?  Well, the business model of farming is already skewed.  Inputs are purchased at retail prices and outputs are sold at the bottom rung of wholesale.  If retail prices are rising faster than wholesale prices, there is only one way for everyone involved to survive this business model = equity.  You are ‘margin called’ by the industry.

Farmers have been carefully groomed as consumers of inputs, equipment, finance and services.  This is driven by the other common complaint I read about farmers needing to get more productive.

Of course the more you produce, the more you consume – putting equity at risk.

There is still too much emphasis on productivity and scale, and not enough on profitability.  Can you believe that in the National Food Plan released by the Australian Government, productivity is mentioned 100 times and profitability is referred to 9 times.

 

The industry obsession with productivity has led many farmers to over-capitalising on expensive farming systems.  For example, in the grains industry some farmers have financed enough production equipment to farm a small country.

Productivity – be careful what you wish for.

Sure, ‘get big or get out’ but unless you have a solid understanding of cost behaviour and how specific costs respond to increased business activity, you could be headed down the path of low profit or no profit - especially if the business is simply producing more of the same.  And you are now working 100 hours a week feeling very unloved.

As some farmers have described to me “I’ve done everything I was advised to do, and I’ve gone backwards – and I’m exhausted.”

 

There once was a time of less interference, when farmers knew their business.

It brings me back to my point of knowing how to make a margin - something that has been bred out of the primary industry.  Those not controlling margins are being squeezed by everyone else in Australia’s food system that does, including their neighbours.  It’s tough when buyers and suppliers know more about your margins than you do.  They go to great lengths to know your business.

So, if every Australian farmer wants to remain a primary producer, then under the current conditions of continuing to do business in this globalised industry, there are still too many farmers trying to do the same thing.  Global supply chain systems are designed to remove excess, as there are no longer enough margins for as many participants as before.

Where did the margins go?  I’ll talk about that in another blog.

‘Get big or get out’ no longer applies.  It’s too late.  What applies now is ‘change, or get driven out.’  This is why the proposition that productivity (i.e. produce more of the same for fewer buyers) will save Australian farmers will continue to put many of them in a precarious position, and we will continue to read articles about Australian farmers making no money and feeling unloved.

What needs to change?  Two things.

Change the business model of our primary industry.

Strengthen Australia’s marketing network so that it is globally competitive.

I’ll talk about the power of these changes to improve margins in future blogs.