Health Check on the Australian Food Industry

An Address to Beyond Commodities:  The Food Tech Revolution
35th Annual AIFST Convention
Sydney, 23 July 2002

THE AUSTRALIAN FOOD-MANUFACTURING INDUSTRY IS IN TROUBLE

The Australian Food Processing Industry has been the great hope of the Australian manufacturing sector for decades and the subject of innumerable strategies.

And for good reason, as it plays a vital role in the economy

While there are a number of extremely positive trends in the industry, it still faces some major challenges particularly of a tough cultural kind and while the National Food Industry Strategy released last month is generally a step in it has some glaring omissions.

IMPORTANCE OF THE INDUSTRY

Food processing industry plays a vital role in the nation's economy.  It is easily Australia's largest manufacturing sector -- three times the size of the automotive industry.  It employs 168,000 people and 67,000 in rural and regional areas.

Trade in processed food is increasingly becoming a necessary means for exporting agricultural products and thereby sustaining the agricultural industry.  Processed food now makes up 75 per cent of total global agricultural trade, compared to 50 per cent in 1985.  Value-adding not only assists in circumventing the many protective barriers that inhibit commodity trade but creates new markets and products as well.

On paper, the food-processing industry has most of the essential fundamentals in place -- something that cannot be said for many areas of manufacturing.

• It enjoys a relatively large and affluent domestic market -- one of the largest in the Asian region
• It enjoys a diverse range of low-priced, high-quality food inputs.
• As a country, Australia has an excellent reputation around the world as food producer.
• We sit on the edge of the fastest-growing market for processed food in the world -- Asia.
• The Australian industry already includes most of the world's major food multinationals.
• Australia is a far more attractive place to live for European and US expatriates than almost any country
• Australia has had excellent economic fundamentals for the better part of a decade including in recent years a super-competitive exchange rate.

Despite its importance and potential, the food-manufacturing industry has struggled as a whole to live up to expectations.

EXPORT PERFORMANCE

The Food processing sector does make a substantial contribution to Australia balance of payment.  Indeed it is the only manufacturing industry other than metal products to export more than it imports.

In reality this is not saying much, given that 85 per cent of these exports are made up of simply transformed agricultural including meat, dairy and sugar as well as wine all of which have virtually zero imports.

During the mid-to-late 1990s, Australia exports of processed food did relatively poorly.

While world trade in processed food was growing in excess of 10 per cent per year, Australia's exports grew by a mere 1.8 per cent per annum.  Australia's performance was poor, not only relative to its own potential but also relative to other high-cost, mature economies such as the US, Germany and France.

Process food exports have improved significantly since 1998 with the recovery in Asia.

As a result over the 1995-2000 period, total export grew a average rate of 9.5 per cent driven by the traditional goods:  meat (up 8.8% per year), dairy (up 17.6 % per years) and wine (up 48% per year).  Sugar exports however declined during the period.

Elaborately transformed manufacture of processed food also did well over the last five years.  Indeed the growth rates have been on paper fabulous for a decade and half.  However, it started from a small base and elaborately transformed products still account for a small share of exports having increased from 5% in 1990 to 9% in 2000.

Despite the high growth rates, Australia's share of world processed food exports has changed little over the last decade, while some competitors have been steadily increasing their global market share.  In short Australia food exports have done well but buoyant market were many did well.

DECLINING INVESTMENT AND LOST OPPORTUNITIES

The 1990s should have been a decade of growth for the Australian food-manufacturing sector.  Globalisation of the industry offered the potential for Australia to attract the new generation of plants focused on supplying the Asia-Pacific region.

Traditionally the world food-manufacturing industry has been structured to satisfy national markets with a large number of relatively small plants producing a plethora of local brands.  Most food manufacturers have owned and operated their own plants.  Over the last 15 years this has begun to change.  In response to global forces, multinational firms have secured a greater share of the world processed-food markets.  Generally, their global strategies are to cut the number of brands they manage, and to focus on building and strengthening this smaller number of global brands.  They are also closing ageing plants and replacing them with large, state-of-the-art plants which focus on regional rather than national markets.  There has also been a trend towards contracting-out the manufacture of niche.  These -- as with most global forces -- present both an opportunity and a threat to Australia.  The opportunity, which on academic analysis looks very prospective, is that Australia stands a chance to attract new investment, particularly targeting the Asia-Pacific region.  The risk is that if we fail to attract the new investment, we could lose existing national plants as they reach the end of their technological lives.

There are a number of examples where world-class food firms have invested in, Australia for the regional markets, particularly in the early-to-mid-1990s.  For example, Campbell's bought Arnott's in the early 1990s specifically to develop biscuit markets and to export to Asia.  Nestlé expanded its operations in Australia for the local and Asian markets.  Indeed, quite a number of local manufacturers expanded capacity with an eye on the export market.  While there are success stories, these are also many tales of disappointment.

In Victoria -- which accounts for 32 per cent of the national food industry -- 15 significant food-processing plants have closed over the 14 months from April 2000 to August 2001, with a loss of over 2,000 jobs. Victoria is merely the starkest example of a national trend.  Some of the closed operations are simply shifting to other Australian locations, such as the Qantas Food Centre and part of the Heinz operations.  Some of the changes are the outcome of productivity improvements that will enhance competitiveness.  Nonetheless, many of the closures represent firms leaving or reducing production capacity in Australia.

There is also evidence that the investment made in the 1990s, to take advantage of growth in export markets, has met with disappointment.  A recent survey of food manufacturers found that capacity utilisation in the local industry was low, significantly below 60 per cent.  Although there were several reasons given for the excess capacity, a common reply was "misjudgements about the likely rapidity of growth of domestic and export markets".

There is also evidence that we may have missed the window of opportunity that existed in the 1990s, and that the worst, in terms of disinvestments, is coming.  As the CEO of a major listed Australian manufacturer stated:

I'm very worried about the future of our firm, say in two to three years' time.  The Asia meltdown weakened Asia, but the rebound is already starting and that's what I'm worried about.  For example, new equipment will be installed in Asia.  If we don't act fast, we will miss the opportunity.  The multinationals who have invested in Asia are 40-70 per cent cheaper than us.  I worry about how we are going to compete.

POOR STOCK MARKET RESULTS

The overall stock market performance of many Australian food manufacturers has been dismal.  Of the 15 large food manufacturers listed on the Australian Stock Exchange (excluding fish and grain processors and wine companies), only four did better than the all ordinaries index over the last two years.  Indeed, only four stocks achieved an improvement in value.  Most experienced large double-digit declines in share value.  Indeed, the market index for the food-processing sector has declined by around 25 per cent in absolute terms and by nearly 50 per cent against the overall market (the All Ordinaries).

The listed firms that have achieved growth in market value have done so to a great extent by way of mergers and acquisitions rather than through organic growth.

These problems cannot be put down to a slow domestic market, as the Australian economy exhibited solid overall growth as well as good growth in food sales over this period.  The reasons for the poor performance are clear:  namely, in Australia there is little competitiveness in value adding.  As reported in a recent study:  During interviews with very senior and experienced managers in large companies, they said that in Australia, value-adding ... was unlikely to confer competitiveness and often diminished it.

LOW LEVELS OF PRODUCTIVITY

The underlying reason for the failure to live up to expectations -- whether in terms of export, investment or profits -- is low levels of productivity.

Arguably, McKinsey & Company undertook the best study under contract to the Australian Manufacturing Council -- a tripartite body that has now been disbanded.  It found that Australian food-processing plants were, on average, just 68 per cent as productive as similar plants in the US, and some 39 per cent behind their competitors in Denmark.

What is driving the poor productivity?

The key factors identified by McKinsey for Australia's weak performance were low capital investment, the small size of most Australian plants, weak commitment to innovation and poor labour relations.  Other reports have confirmed these findings and, importantly, have found little change in the subsequent six years.  Although the studies tend to focus on solutions aimed at other factors -- most commonly investment and innovations -- labour relations is clearly a key issue.

As McKinsey stated "poor labour relations [in the industry] ... retarded rationalisation, investment, and process modernisation".  In other words, poor workplace relations have undermined competitiveness directly, as well as indirectly, by inhibiting capital investment, plant rationalisation and innovations.

To understand the impact of workplace relation, one must look beyond the macro data to the shop floor and to the particular.

I would present three case studies of how our poor workplace relation culture stops investors from coming in the first place and force investors staying.

JOB GROWTH AND OUTPUT

The good news is that the food processing sector has created 10,000 jobs in regional Australia since 1996.

This is positive not only because of the need for rural based jobs, but those rural and regional operations tend to have better workplace and competitive cultures.

The bad news is that during this period there has been a reduction 5,000 jobs in the industry as a whole.

BARRY CALLEBAUT

Barry Callebaut is one of the world's largest and most successful chocolate manufacturing and marketing companies with sales of $3 billion and network of 24 state-of-the art production plants around the world.

Like other global food manufacturers, Barry Callebaut seeks to position itself to service the emerging Asia-Pacific markets.  In 1995, the company undertook an extensive due diligence exercise in siting its first Asia-Pacific plant in Australia.

Australia was not chosen;  instead a plant was built in comparatively high-cost Singapore.  The $80 million high tech Singapore plant employs about 45 well-paid people.  Many of the raw ingredients are sourced in Australia, processed, valued-added and sold back to Australia and to other Asia-Pacific markets.

A key factor in not choosing Australia was the problem of poor and seemingly insoluble labour issues.  Their conclusion in 1995 was that because of persistent, negative labour issues, a plant could not confidently be built within the budget or timeframes required, or operated at the levels of productivity necessary to warrant the investment.

Barry Callebaut stays abreast of the Australian scene, and believes that little has changed according Australia is not on the short list for the next Asia-Pacific plant.

The implications of the Barry Callebaut story are not just the direct loss of investment, jobs, cost of imports and loss of export revenue, but also of Australia's reputation as an investment option.  As a world leader in the global food chain, Barry Callebaut has contacts with other major food producers, particularly in Europe, and with global fund managers.  The "word of mouth" message for potential investors that the Barry Callebaut story delivers is that Australia is not a viable option in the food-manufacturing sector.  The message is as clear for Australian investors as it is for global ones.

Barry Callebaut message will not be masked by pretty advertising campaigns or hand outs for R&D.  It will require actions to address the real problem -- workplace culture.

SAIZERIYA

Saizeriya is one of Japan's modern success stories.  Go to any major Japanese city and you are bound to find one of Saizeriya's authentic Italian restaurants, with imported Italian chianti and pasta, a true Italian atmosphere and prices that are way below those of their rivals.  It is this combination that created a profitable food giant with an ambition to have 800 outlets by 2010.

A key to Saizeriya's success is the supply-chain possibilities offered by the new global economy.  Fresh produce is sourced in Italy and washed, chopped and diced before being flown direct to Japan.  The extensive food preparation abroad avoids the high labour costs involved in traditional Japanese restaurants and delivers higher quality control.

Australia was to be a beneficiary of this.  Saizeriya decided to set up a food processing facility in the City of Melton, in outer Melbourne.  All the elements existed for success.  High-quality, fresh produce is being grown in the city surrounds and could easily expand.  The road-air link infrastructure is of world-class standard.  Melbourne is a city of significant Italian heritage and has extensive local expertise in Italian cuisine.  An educated, eager workforce is at hand, and the Victorian government keenly supported the project with free land.  Saizeriya took the big step and committed to constructing the first phase of what should have been a $A400 million investment.  However, someone forgot to factor in the unwritten rules of the Australian approach to controlling work.

In doing its operational planning, Saizeriya cast around to construct an enterprise agreement to cover labour issues.  They entered discussions with the National Union of Workers (NUW) and reached an agreement that was signed off in the Industrial Relations Commission.  Then the turf war broke out.  The Australian Metals Workers Union (AMWU) claimed rights to operational coverage of the plant.  In pursuit of its claim, the AMWU banned the delivery of building materials to the construction site to try and blackmail Saizeriya into giving the AMWU operational coverage.

Currently, the plant is 12 months behind schedule.  Saizeriya is building its second plant in New Zealand rather than Australia.  And Australia will not get subsequent plants unless there are dramatic.  The Victoria Government has been unable to do anything constructive.

This tragic case reflects the uniquely Australian approach to regulating work, where nothing is ever what it seems.  The formal rules are irrelevant to the true game that only becomes apparent when exposed.  The controllers of this mafia/union game use the banner of workers' rights to mask their own self-interest.  That Australian workers will never know these lost jobs is not of concern to the AMWU.  The only job the AMWU will accept is an AMWU job.

ARNOTTS

Arnott's is one of food processing industries success stories, with more than 3,000 local staff and some of Australia's most recognised the brands.

The giant Campbell's Soup Company of Canada purchased Arnott's during the 1990s for its "powerful brand potential in the pacific markets".  The purchase was a key part of Campbell's global strategy.

In 2001, Arnott's announced the closure of its principal manufacturing plant in the Melbourne residential suburb of Burwood, and the relocation of the Australian manufacturing and warehousing facilities to Queensland.  550 jobs are to be eliminated.  The reaction from the unions at Burwood and from the Victorian Government was one of wild condemnation and threats.

Campbell's has said little about the reasons for the closure of the Burwood plant.  Ageing equipment and proximity to residential dwellings have been offered as two factors;  however, a study of the labour situation reveals a pervasive problem.  The Burwood plant has not suffered from excessive strike action, but rather low profile and persistent labour management problems.

This is best comprehended by its the site-specific Enterprise Agreement.  The key feature of the Agreement is the requirement for a "Joint Improvement Committee" which was "charged with the responsibility for the implementation of the contents of the agreement ..."  The Committee has 15 members with only six appointed by management.  The Committee meet every two weeks with a formal agenda circulated beforehand.  Before the Committee can make operational recommendations, matters have to be referred to the Single Bargaining Unit of the more than four unions on site.

The matters over which the Committee has authority include, but are not limited to:

• Quality control processes.
• Human resource management.
• Employee payments and timekeeping.
• Employee attendance levels
• Management of absent employees
• Shift times.
• Production and delivery rosters.
• Career paths and training.
• Engagement casual and/or contract employees.
• Insurance broker.
• The provision of mobile phones.

In effect, Arnott's had signed an Agreement that undermines the ability of the Burwood site managers to manage, and where control of the plant was assigned to the employee collective under the authority of the Committee and the Bargaining Unit.

The outcome was a management system that was highly formal, bureaucratic, slow and ineffectual.  To have any impact on how the site was to operate, "managers" had to be deft at the manipulation of employee and union site politics.  This management system clearly could not have delivered the levels of continuous productivity improvement that Campbell's apply as a benchmark to their global operations.  Closing the site fixes the management problem.  The shift of the manufacturing facilities to Queensland does not guarantee that Arnott's production will remain in Australia.  To remain viable, the Queensland plant will need to prove that it can meet the continuous, productivity improvements in line with Campbell's global standards.

The message from the case studies t workplace culture needs priority attention.  After all, policies that focus on the easier, less contentious issues, such as investment and innovation and market promotion, are likely to yield little value if they are undermined -- as McKinsey found -- by poor labour relations

THE NATIONAL FOOD STRATEGY

The National Food Strategy which was released last month is the latest effort by the industry and government to "identify the actions and tasks that need to be taken to release its (the industry's) full potential"

It provides a more balanced and more comprehensive assessment of the industries challenges and potential than previous strategies and strategies put our by the states.

It gives a good overview of the global and regional trends and correctly emphasises the need for greater focus on R&D, market access, food standards, environmental sustainability.

However, it says little about workplace relations and the little it says is in carefully coded terms.

The most that is said is:

"There is an important role for policy setting to promote industry growth, which covers removing distortions in input and labour markets..."

Significant labour productivity improvements have occurred in Australian industry over the last decade.  In the 1990s, productivity growth averaged over two per cent, well ahead of most other high-income countries.  However, in an increasingly competitive market, the boundaries of business competitiveness continue to shift.  As a result, Australia cannot rest on its laurels."  This statement is true, Australia has produce world lead productive growth over the 1990s.  However, there is no evidence that this has been achieved in the food industry aside from the retail and wholesale side.  Indeed manufacture as a whole has experienced modest productivity growth during the 1990s.

The Strategy also says that the industry will:  "Encourage its members to pursue productivity improvements supported by the current workplace relations framework".  This is hardly a commitment to the status quo.

Indeed the strategy focuses much more on telecommunication and tax reform and than workplace reform.

When it comes to money the Strategy appears to be quite generous allocating $102.4 million over five years.  None was specifically allocated to address labour issues.

Some funding for workplace relation reform maybe including the $14.7 million allocated to establish and operate the new Council and to fund other tasks to support work, but that is not clear.

Clearly once again the workplace reform issue has been put in the too hard basket.

The problem is in the end cannot be ignored as it goes to the heart of the industries competitiveness.  If we do not address it the major section of the industry particularly those involved in the elaborately transformed good will decline.  And more taxpayer funds will have been wasted.

We can have the best science in the world, no trade barriers, good food standards but these will count for nothing unless manufacturing process is competitive and innovative.