Food and beverage manufacturers feeling the private label squeeze: How to survive in a supermarket duopoly

Grant Thornton’s Tony Pittito, GE Capital’s Chris Nay, Longwarry Food Park’s Rakesh Aggarwal, Rafferty’s Garden’s Michael Tinkler and the Australian Financial Review’s James Thomson at last week’s BRW/GE Capital ‘Momentum For The Mid-Market’ food & beverage industry panel.

When Gippsland-based dairy producer Longwarry Food Park decided to diversify its business four years ago and enter the domestic market, it couldn’t have come at a worse time.

“Within three months of us launching the product, Coles comes up with $1 milk,” chief executive Rakesh Aggarwal told the BRW/GE Capital ‘Momentum For The Mid-Market’ food & beverage industry panel last week.

The aggressive pricing policy, which Woolworths also adopted, has caused considerable pain for dairy farmers and producers across Australia.

“In the past four years the price of milk has gone up about 15 cents, but the price supermarkets are willing to pay has come down 7 cents,” Aggarwal says.

Reduced margins domestically have forced Longwarry Food Park to wind back its local operations, instead concentrating on its original business – the lucrative export market.

“In the last six months, we’ve brought down our volume of business with the supermarkets; we were doing 20 per cent last year and next year we’ll probably do seven per cent.”

BUDDYING UP...AT LEAST WHILE A CATEGORY’S GETTING BUILT

But the power of the supermarket giants and the growth of private labels isn’t all bad news for food and beverage manufacturers. Managing director of baby food manufacturer Rafferty’s Garden, Michael Tinkler, says working with the supermarkets can be the key to successfully launching and growing a product.

When Tinkler approached Woolworths with the concept of baby food in pouches, the supermarket embraced the idea and offered a major benefit of increased speed to market.

But the relationship has had its ups and downs. When Woolworths introduced its own branded food products earlier, this year it forced Rafferty’s Garden to reduce its own range in the supermarket from 55 to 35.

But he says despite losing “a chunk” of the business, the company is now stronger.

“Supermarkets can be terrific allies, but boy, they can be difficult buggers to deal with.”

WHEN THE GOING GETS TOUGH...THERE’S ALWAYS ASIA

The 2014 GE Capital Australian Mid-Market Report released last week revealed rising commodity and labor costs, pressure on margins and the increasing threat from private labels were some of the biggest challenges facing the industry.

The growth in imported private label products is not only crunching margins, but causing employment in the food and beverage sector to decline. Employment in the sector has reduced at an average rate of 1.4 per cent annually since 2009, while in 2013 imports grew by 1.6 per cent.

But United States food and beverage specialist from GE Capital, Chris Nay, told the panel that emerging industry players Costco and Aldi will increasingly offer suppliers alternative domestic markets with better margins.

“It’s going to make them have to be better to some of their suppliers,” he says.

Aggarwal agreed, saying: “The way Costco treat their suppliers, it’s the same with Aldi. [They’re] very good at treating suppliers.”

While the domestic market remains an important industry, the increasing demand for quality food products from Asian nations is providing opportunities for entrepreneurial Australian manufacturers.

Businesses like Longwarry Food Park are now looking to opportunities overseas to combat the duopoly of the supermarkets in Australia and remain profitable.

Aggarwal said the demand for his product overseas simply cannot be met.

“Asia is a big market. We could growth three times the size in a week and still not be able to meet the demand that we have,” he says.

However, Grant Thornton head of food, beverage and agribusiness, Tony Pittito, warned the panel against thinking of China and Southeast Asia as the silver bullet to domestic problems.

“It’s not always about China. For example...a company specifically went into the US market because they knew that market better than the Asian market. If you do want to enter an Asian market you’ve got to physically base yourself there to understand the market,” he says.

“Perhaps a joint-venture might be an acceptable alternative with local players in that market.”

Pittito says the local industry is also about to enter a phase of “rationalisation”, with increased merger and acquisition activity.

“Two thirds of all companies surveyed said they were either looking at acquisitions in their sector or at divesting. We think that’s going to play out in the next two to three years.”

Source: BRW - 5 May 14