Food manufacturers must target the region’s booming middle classes with innovative processed products, writes Paddy Manning.
You get what you focus on,” said Kraft Food’s Australasian chief, Rebecca Dee-Bradbury, this week, both admonishing and urging her industry peers to seize the opportunity at our doorstep: to be much more than Asia’s paddock when it comes to food supply.
After touring food hubs in Shanghai and Singapore last month, Dee-Bradbury told a business gathering this week, ”it may shock you to understand that Australia is not seen as a high-value food innovator. It is seen as a critical supplier of food commodities.
”The impact on Australia’s largest manufacturing sector, if we become a farm gate supplier, is unthinkable.’
From meat, to dairy, to wine, Australia’s food manufacturing exports are worth up to $17 billion a year, bigger than education and tourism. But the Kraft boss’s warning underlines Australia’s emerging role in the region. The mining boom has already seen Australia become Asia’s quarry – digging dirt out of the ground to fuel China’s future.
Now Australia risks becoming Asia’s farm rather than an exporter and manufacturer of quality foods from trusted quality produce.
True enough, as Europe and North America’s economies flounder, Australia has enjoyed a surge in mining investment and that ”other boom” in the soft commodities we export to Asia’s burgeoning middle classes, lifting the income of farmers recovering from the millennium drought.
But when it comes to food and beverage manufacturing, most focus lately has been on tales of woe. Supermarket wars, rising input costs and a high dollar have crunched suppliers – in some cases pushing them to the brink, or driving them offshore.
Times are tough. Shares in our biggest baker, Goodman Fielder, are at record lows and the company is midway through a do-or-die turnaround. Heinz and McCains have closed factories in Victoria and Tasmania and shifted production to lower-cost New Zealand. Anzac biscuit maker Unibic collapsed. Kirin’s National Foods, the owner of Dairy Farmers, wrote off $1.2 billion in Australia and the Murray Goulburn Co-operative has mothballed a plant and shed 12 per cent of its workforce.
At Kraft, which makes ever-popular Vegemite and Cadbury, the most recent accounts show earnings before interest and tax in Australia dropped two-thirds between 2008 and 2010 – even before the supermarket wars erupted in earnest with Coles’s launch of $1 a litre milk last year.
Yet Dee-Bradbury, the sole food industry representative on the Prime Minister’s Taskforce on Manufacturing, which reports next month, chides the industry for being ”introspective” and neglecting the value-adding opportunity presented by the 1.6 billion middle-class consumers who by 2020 will live in Asia – where, she says, we have a ”right to win”, in marketing parlance.
The decline of food innovation in Australia over the past two decades must be arrested urgently, she says, and the Prime Minister’s taskforce will recommend the creation of a ”quadripartite, globally relevant food innovation centre” to re-energise the sector. A collaboration of multi-national and small-to-medium enterprises, the CSIRO and universities, it will be modelled on Singapore Polytechnic’s Food Innovation and Resource Centre, which Dee-Bradbury visited as part of a taskforce delegation.
Dr Chris Downs, a director of food and nutritional sciences at CSIRO, was on the same trip and agrees Australian companies are well-placed to develop innovative processed foods that target Asian tastes and preferences.
The first task for an Australian innovation centre, he says, would be to gather data to understand the many markets in Asia, and what customers want, so that innovation is ”insight-led”, and feeds back into better-tailored product development. Downs calls for ”joined-up thinking” between marketers and scientists. To get more stable foods, that can travel long distances to Asian markets. To get healthier foods – with lower salt content, lower levels of unhealthy fats, or dairy products targeting bone health in ageing populations.
There are myriad export opportunities for Australian food technologies. Downs points to the ASX-listed Clover Corporation, a part of Robert Millner’s Soul Pattinson empire, which is using CSIRO technology to encapsulate Omega-3 fatty acids into bread, infant formula and so-called medical foods. Another is the Melbourne-based Preshafood, which uses CSIRO-developed high-pressure processing technology to, for example, preserve the flavour of the precise apple variety a juice comes from.
Murray Goulburn broke ranks with its industry peers to target Asian markets several years ago and is now our largest exporter of dairy products, including infant formula, milk powders and long-life milks.
The managing director, Gary Helou, says 40 per cent of the company’s $1.2 billion in exports last year went to Asia, and there is an opportunity to lift that proportion to 60 per cent or more as the company looks to double exports.
The key is keeping costs down here, using technology and efficiency, and developing products that are tailor-made, ”not just exporting Australian-made products for Australian consumers, and hoping it sells. That doesn’t work any more’.
The first step is to get people on the ground to absorb the local culture and Murray Goulburn has offices in Dubai, Tokyo (the company is Australia’s biggest exporter of cheese to Japan) and Singapore and is soon moving into Vietnam. The next step will be to identify opportunities to create a more efficient supply chain and potential joint venture partners in manufacturing.
Helou says he has been amazed at the reticence of Australian dairy companies to target Asia, given its growth. In the past decade, for example, China has come from nowhere to become the world’s biggest importer of dairy products – particularly after the 2008 milk and infant formula contamination scandal.
That scare continues to drive demand for Australian dairy products and highlights that milk powders and infant formulas are not just commodities but sophisticated, ”functional food” products.
”Asians welcome Australia-made food products,” says Helou more generally. ”They are seen as high-quality, clean and safe.”
Murray Goulburn sells to Asia under its own MG and Devondale brands. ”Global brands translate so why can’t Australian brands translate,” says Helou. If our food industry has failed to innovate, he says, it is ”in a commercial sense, to create Australian global food brands”.
While dairy products have to be processed locally, before export, it’s the reverse for bread. So Goodman Fielder’s chief executive, Chris Delaney, talks equally about investing in Asia, not just exporting Australian-made products.
”You can’t just rely on exports, it has to be a combination of exports as well as investment in those markets to service that consumer properly,” he says.
Delaney says the Asia-Pacific business is Goodman’s fastest-growing business, representing about 15-20 per cent of earnings, albeit dominated by commercial rather than retail sales. Goodman, now 10 per cent-owned by the Singaporean palm oil giant Wilmar International, sells shortenings and margarines ingredients in China under its Pilot brand, and has a commercial fats and oils joint venture in Indonesia.
But there is growth in Goodman’s retail segments, too. Particularly successful have been Meadow Fresh dairy products made in New Zealand, sold in 150 Walmart stores across China, as well as the Meadow Lea spreads sold throughout the region.
Without downplaying the challenges for branded food processors such as Goodman at home, Delaney has no doubt that ”if we are doing the right things to invest in quality and innovation, Asia could be a significant opportunity for food manufacturers and food companies based in Australia”.
Goodman has a bakery in Papua New Guinea but Delaney says while the company does not have a fresh bread business in Asia yet, ”it is something we are looking at very carefully because we do believe western bakery habits are growing very, very quickly in Asia and therefore present an opportunity for Goodman Fielder”.
Delaney is a veteran American food industry executive who has spent half his career in emerging markets, opening up Russia and China for the Campbell Soup Company, the owner of Australia’s Arnott’s biscuits.
With some exceptions – Tim-Tams, for example, sell well in Japan – Delaney says ”food is local. You need to make sure the food you’re providing for any consumer group is tailored to their usage-occasion as well as taste profile”.
Asian consumers, he says, tend to favour sweet breads rather than savoury, sliced breads. He sees burgeoning opportunities for artisan-style breads such as French baguettes and croissants.
”It’s very difficult to simply ship a brand into a country and put it on the shelf and expect it to sell,” he says.
But Australian brands face no disadvantage. While there is latent awareness of big western food brands in Asia, Delaney says: ”For the most part, if you look at the broad middle class, there will be very little awareness of whether it’s an American, European or Australian brand because most people’s impression of brands and awareness of brands comes from their availability in the local market and direct marketing activities to communicate the benefits of those brands to consumers.
”Until you do those two things your awareness of any brand is going to be limited.”
In its pre-budget submission to the federal government the peak body for food and grocery manufacturers, the Australian Food and Grocery Council, proposed a partnership to promote the food industry abroad under the Brand Australia Program’s ”Australia Unlimited” umbrella, emphasising provenance, quality, safety and environmental sustainability. Austrade has hosted food and beverage exporters at a string of events in Asia but there is no sector-specific program in place.
”We need to go beyond ‘clean and green’,” says the council’s acting chief executive, Geoffrey Annison, to tell a more regionalised story about unique, remote food production areas like the Margaret River, Tasmania, or the Burdekin in Queensland.
The proposal was not aimed at Asia in particular – in fact the council does not keep figures on the proportion of our annual food exports sold there – but Annison says it is ”absolutely right” to focus on the opportunities in the region and welcomes the idea of a food innovation centre in Australia as a ”potentially, a very big step”.
But it is not before time, Annison adds: ”It is incredible to think Singapore itself sees a great future in food processing. If Singapore sees a future in it, it begs the question why don’t we? It is something the council has been calling for, for many years”.
But the council itself appears more domestically focused. In a grumpy press release on Tuesday Annison noted the Prime Minister’s statements about Australia’s potential to be the ”food bowl of Asia” and noted ”it is upsetting we were not invited to attend the Economic Forum”.
Annison pointed out that food and grocery are the largest manufacturing sector in the country and four times larger than the struggling automotive sector which is getting $500 million in industry assistance to stay afloat.
”We don’t want a handout,” Annison said. ”What we are doing is looking for government to consider key regulatory reform”. The council believes the food regulatory system is ”almost in disarray” and Annison points to tougher labelling requirements that will restrict the health claims made by food companies.
The chief executive at the Australian Chamber of Commerce and Industry, Peter Anderson, returning from a trip to Beijing, echoed similar sentiments this week. Decrying the shift of food companies such as McCains to lower-cost New Zealand, Anderson questioned why Australia struggled to secure overseas investment in its manufacturing.
”Neither Asia nor China are waiting for Australia to come to them, nor will they delay capital investment until we get our house in order,” he said. ”They are getting on with business.”
Anderson said Asia sees Australia as a producer of high-quality food and agricultural commodities and there is ”definitely the appetite” for our products. Small-to-medium enterprises would do well to find partners, he said.
”What I was told over there was that the companies that hang around a long time are the ones that will get the benefit. There isn’t a quick buck to be made there. You have to develop relationships.”
Of course, the chamber wants to lower the costs of doing business for Australia which has a much higher cost structure. If our manufacturers are not going to be able to compete on labour costs, says Anderson, ”we have to make every other post a winner”.
As usual a plethora of official reviews and reports are in process. As well as the Manufacturing Taskforce report, there are the overdue ”national food plan” and a coming ”food processing industry strategy”. But apparently it’s all top-secret: with two days’ notice, nobody from the Industry and Innovation Minister Greg Combet’s portfolio was able to talk to Weekend Business for this story, before the looming announcements. With many of Australia’s largest food processors already in foreign ownership, and many of those food giants already present in Asia, KPMG’s food and drink partner Mark Epper said it was understandable that the Australian divisions were often domestically focused. A company such as Unilever, he says, ”doesn’t need its Australian operation to start selling to China. Let’s not beat ourselves up too much”.
A key theme touched on by many is the capacity to supply at scale. Austrade’s commissioner in Beijing, David Duke, who leads the food and beverage and agribusiness team in China, says demand there ”is sometimes greater than we can supply”.
He quickly rattles off a list of in-demand product categories including Australian wine, for which China is now the fourth-largest export market with brands such as Jacobs Creek, Penfolds and Hardys all achieving recognition.
But for Kraft’s Dee-Bradbury, Australia’s food and beverages industry is lagging behind competitors such as Singapore and China, and insight into Asian consumers must be our focus.
”Australia with its significant national assets including the CSIRO, Austrade and a strong higher education sector can quickly catch up,” she says. With a multicultural society having all our Asian neighbours well represented, we ”can observe the emerging food trends of our new middle-class arrivals and test new concepts; this will lay the foundation for food design that underpins successful food commercialisation and ultimate export”.