Feb 8, 2023 | Governance, retail, Strategy
We all need to eat, but we seem to take for granted the access to processed and fresh food and groceries. To consider the ‘food industry’ as one entity ignores the entirely different strategic drivers of the three main components: Raw material production or ‘farming’, Manufacturing, and retail.
They should be treated separately as while interdependent, they are driven by entirely different forces.
In addition to food products in the FMCG basket, you have many non-food items from cleaning and homewares to health, beauty, and personal and pet care categories. Go into any supermarket, and these non-food categories take up somewhere around 20% of shelf space.
Farming.
The ‘family farm’ used to dominate the farming sector, but that is diminishing as scale enabled by capital takes the place of family intergenerational ownership. Costs come down with corporate ownership, but you are most likely to see agricultural monocultures emerge, as short-term financial returns creep up the priority list.
The register of foreign ownership, flawed as it is, records in the latest report June 2021, that 14.1% of agricultural land is in foreign hands, up from 10.9% the previous year. The National Farmers Federation estimates that 99% of farm enterprises are owned by Australians. Clearly the big are getting bigger at the expense of the small.
The infrastructure necessary for the management of farm production requires substantial investment, the rail networks have broken down, and the roads are a mess. This is a long-term problem, and the logistic costs of farming will increase faster than the inflation rate.
Manufacturing.
A report from the AFGC concludes that profitability is declining, due largely to the concentration of retail, and that imports will gain ground as a result. Currently the food & beverage manufacturing industry employs 276,000 people, 40% of them in regional areas, and has an output value of 127 billion, 32% of total Australian manufacturing output. In other words, it is big and diverse both geographically and demographically, and therefore should hold a significant place in the thinking about how we educate and groom future leaders.
The gross figures for the industry indicate that there is almost 30% of production value exported. Problem is that the vast majority of this is raw or minimally processed meat and grain, employing few people, anywhere in their supply chains, and competing in commodity markets.
Of The 8 directors of the Australian Food and Grocery Council, the industry’s ‘representative’ body, one is the CEO of an Australian beverage company, the other 9 are all the chief executives of multinationals. This is not a bad thing beyond the obvious fact that it perpetuates the lobbying and resulting policy positions of government in favour of MNC’s vs the locally owned industry.
As a young bloke coming into FMCG in the late 70’s after a few years as a nomad, there were many businesses of a whole range of sizes and types to work for. Over time, the number and diversity has been radically reduced. Significant industries like dairy are now almost complete branch offices of multinationals. The exception is produce, where there are still many farming suppliers, although there are now a few very big consolidators, like Costas, who dominate the supply chain into retail. There are no proprietary produce brands in retail, beyond a couple of minor organic brands. Retailers have ensured that they absorb all the proprietary margin in produce.
If there is a light in the tunnel starting to be seen evolving as a result of the disruption of supply chains, and the low profitability of FMCG manufacturing, it may be Bega. Bega Cheese, which was rescued from the clutches of the receiver by now foreign owned Dairy Farmers Ltd way back in (about) 1991, has been able to expand by buying the Port Melbourne site of Kraft, as it was taken over by Mondelez, and ending up being able to buy the Vegemite brand, and more recently the rebranded peanut butter business. Perhaps this is the beginning of a resurgence?
Retail.
Grocery market size and share in Australia is debateable depending on what is included. By most analyses, Woolworths has around 37% share, Coles 28%, and Aldi, now the real third force 11%, and the wholesaler supplied groups around 7%. The remaining 17% is made up of a patchwork of fresh and farmers markets, direct from farm delivery, small independent retailers, and convenience outlets.
In addition to grocery, there is the huge food service market, varying from the local owner operated restaurant and takeaway, to fast food chains and five-star dining. This sector consumes a large amount of product and employs thousands of people.
The power wielded by this bloc of 76% of grocery sales is immense. As they have scaled out of the ruck that was the retail playing field in the 70’s and 80’s, taking over or leaving to the receiver less robust competitors. They have squeezed manufacturer margins by a range of strategic weapons that are a classic case study of Michael Porters 5 forces. In response, manufacturers have similarly scaled by using regional manufacturing hubs, most often in Asia. The impact on domestically owned manufacturing has been dramatic, accelerated during the period where the $A was above parity with the $US, which encouraged wider adoption of house brands manufactured overseas, wiping out what remained of locally owned manufacturing. With a couple of notable exceptions, (San Remo, and now Bega, and Sanitarium who do not pay tax, for example) Australian owned food manufacturing is down to sub scale cottage manufacturers relying on the fragmented but still difficult 24% not controlled by the three retail gorillas.
It is fair to acknowledge the strategic failure of local management, while throwing rocks at the retailers. There used to be major FMCG brands owned by domestic businesses, built up over extended periods that failed to recognise the long-term strategic importance of maintaining their brands. Instead, they surrendered to the tactical demands of retailers for short term promotional dollars that assisted retail margins while keeping prices low. Short term, consumers may have benefitted from the price competition while having significantly less choice. Long term, they face the impact of an economy that has only a tiny proportion of its biggest manufacturing industry being able to make strategic choices driven by domestic priorities.
A few thoughts about the future.
Technology cannot do anything but increasingly impose itself on the industry, in all its components. Australia is already a world leader in the development and deployment of Agricultural technology. Failure to accelerate the rate of innovation will find Australian agriculture losing the current productivity edge we have, as while we are really good farmers, the soils of the continent are old and poor, subject to significant climatic risks Therefore to keep our position, we must continue to be smarter.
Innovations in retail are happening elsewhere. ‘Amazon Go’ type technology will transform the shopping experience, and home delivery will not be going away. Meanwhile Australian retailers are wedded to optimising the business model that has made them successful in the past. This will open up opportunities for alternative retail formats and processes.
Retailers are good at retailing, but have been proven to be lousy at product innovation. In the past, product and category innovation has come from businesses tapped into the consumer psyche. Unfortunately, those businesses are virtually gone, so where is the next innovation going to spring form? Certainly not from the office of a buyer whose KPI’s are all about margin today
The logistic infrastructure so vital in a country as large and diverse as Australia is in poor shape. Rail networks are broken, roads are going the same way, a trend recently accelerated by flooding, and you cannot get drivers of heavy and long-haul equipment easily. The median age of all transport drivers is approaching 50, and long-haul semi drivers is now 55, and they are not being replaced. When considering specialised driving jobs like picking up cattle from farms, the situation is already dire.
In summary, the Australian food industry is faced with a series of significant challenges that have evolved over a long period. They will not be effectively addressed by industry or public authorities that think in terms of only a four or five year strategic horizon.
Note: this post was first published in the auManufacturing Linkedin group in December last year.
Feb 5, 2023 | Change, Leadership
Every individual and group on the planet has in their heads a set of parameters built by the personal experiences they have had, and those that are passed on by the parents, grandparents, all antecedents, and their social circles.
The formulation of strategy intersects with these stories, beliefs, and biases, which greatly influences our behaviour in the future.
Throughout our history, great advances have been made by those few brave enough to call out the metaphorical emperors clothes when they (don’t) see them.
Like many, I am of the view that we face an existential crisis caused by the human emission of carbon dioxide into the atmosphere. Demonstrably, the planets climate has changed many times over geological history, remaking itself at the expense of what has gone before, but never at anything like the pace that is happening currently. For perspective, the origin of homo sapiens is around 300,000 years, or .007% of geological time. If the geological life of the planet was a 24-hour clock, we have been around for only tiny fractions of a second of the available 24 hours.
As we seek answers, nuclear power is, at least in this country, off the table. The fact that it is not off the table in other countries makes Australia’s position somewhat ridiculous, as we are all part of the same planet.
However, it is off the table here due to the political problems of waste, and risks of disaster exemplified by 3 Mile Island, Chernobyl, and Fukushima. Somewhat irrationally, we are nevertheless prepared to sell the raw material to power these plants to ‘approved’ buyers, recognising the commercial reality that if we do not, someone else will.
I know absolutely nothing about nuclear technology beyond the stuff I had shoved down my throat 50 years ago at school. However, I do know that like every other branch of technology, nuclear has undergone incredible and compounding advances since the first demonstration of its power in the New Mexican desert in 1945. As the father of the theoretical science that led to that explosion, Albert Einstein noted, ‘Compounding is the most powerful force in the universe’. Our knowledge of atomic science has grown at a compounding rate since that first explosion, and the subsequent opening of the first power plant in Obninsk, 100 k’s from Moscow in 1954, and should not be discarded.
If we are to stop the self-induced implosion of our world, we should not rule out any potential solution by kow-towing to our collective prejudices and emotional response to technology 70 years old. Rather, we should seek out the truth, understand the developments in nuclear technology that have evolved, are likely to evolve, do reality checks, and ramp up investment in rapidly evolving understanding of the physics surrounding ‘science fiction’ ideas like Fusion. We must know if the general perception of the risks of nuclear are still valid, or if they are just the projection of our fears of a 70 year old technology.
Are our collective heads stuck in the sand, or can we have a rational debate that recognises the sceintific developments over the last 70 years?
Feb 3, 2023 | Branding, Demand chains, Marketing, Small business, Strategy
Woolworths last week announced they would close 250 of their current 300 in store butcher shops. Clearly, centralisation and opacity of the supply chain that serves customers via Woolworths is geared to the lowest common denominator, price.
At the other end of the scale is Wolki farm in Albury. This is an integrated farm to retail supply chain that innovates at every point. Rather than just trying to do the same job as always for a lesser cost, they re-engineered the whole chain. From their website: ‘We are the connector between the conscientious consumer and quality produce’
Their 24/7 retail outlet in Albury is just the end of the chain, but full of innovation. I do not normally inhabit TikTok, but this video of owner Jake Wolki’s view of the future was referred to me by a (younger) friend, who knows my views about agricultural supply chains.
The challenge both retailers are setting out to address is the core challenge of marketing: how to create and communicate value that motivates customers to a transaction facilitating longer term engagement.
Woolworths (and Coles, Aldi, et al) do it by price and convenience. They might mumble about quality, but it is at best a second order priority. As long as it is edible, legal, and delivers the category target margin, it is OK. By absolute contrast, Wolki’s (I do not know them at all, had not heard of them until last week) are clearly focussed on quality, product provenance, and integrity. The price they charge for their produce will reflect all that, but no consumer who is looking for the cheapest cut of meat is likely to find it at Wolki’s. What they do get in detail is supply chain transparency that delivers the provenance and guarantee of quality of the product they are about to buy.
That may interest only a small proportion of the market, but that proportion is significantly larger than it was just a couple of years ago, and will continue to compound.
It seems to me that Woolies are repeating the mistake they made with Thomas Dux 6 years ago. They are ignoring the messages being sent by consumers from the ‘edges’ of their customer base that ‘Mass’ was not acceptable. More probably, they are choosing to ignore those consumers in favour of low cost supply chain control, and reluctance to rock the competitive ship by innovation. Perhaps they will prove me wrong, and use the remaining few in store butchers to experiment?
Photo credit: Wolki Farm from the website
Feb 1, 2023 | Analytics, Governance, Strategy
Mark Zuckerburg has a lot to answer for, disrupting as he has the lives of my children. However, he is also very smart and rich, so being annoying must have something going for it.
When pitching the $5 billion Facebook float in 2012, Zuckerburg wrote to prospective shareholders via the prospectus, a letter that outlined his vision of what Facebook had become, and would continue to be.
This is to my mind the crucial paragraph, buried in the body of the letter.
“The Hacker Way is an approach to building that involves continuous improvement and iteration. Hackers believe that something can always be better, and that nothing is ever complete. They just have to go fix it — often in the face of people who say it’s impossible or are content with the status quo”
It now seems he has taken that perspective of his obsession to the world of virtual reality. He has invested billions of shareholder funds in his personal vision, triggering a loss of billions from the market value of Facebook, now Meta. He does not seem to care, but many other shareholders do. They must be getting very annoyed about now, the value of their shares dropping 70% from its peak 15 months ago.
At some point, businesses must develop stable, repeatable processes that just gets the mundane stuff done.
Facebook did that with remarkable efficiency for a long time, creating a river of cash. However, ‘hacking’ has taken hold.
Hacking to improve mundane processes should be part of the culture, so long as the experimentation is part of a managed process. The alternative to that discipline is chaos.
Mixing the cultures that accommodate the disciplined repeatable processes that get the bills paid, and the sometimes chaotic, creative environment of “hacking” is a function of the leadership of the enterprise.
Management needs to be “Loose” to accommodate the creativity and experimentation necessary for process improvement, while being “tight” to enable the learning that comes from experimentation to be incorporated into standard procedures when they prove to be an improvement.
Loose/tight management, is the environment in which “Hacking” Kaizen, or whatever you choose to call it thrives.
‘The Zuk’ has imposed his single minded obsession with hacking on the culturally poisonous monolith he created, because he can. If his VR vision becomes a reality, Meta share price will not only recover, but break all records. I do not expect that at any time soon, particularly if as rumoured, Apple comes out with their version. Meta now faces a governance challenge that could be a real game-changer.
Addendum February 4, 2023.
This article from the Statista website details the progression of losses Meta has booked on Zuks metaverse bet. $US13.7 Billion in 2022, on an increasing trend. While the share price has dropped dramatically, if you look at the PE ratios before and after the drop, it seems to me that the price is settling back to where an old fashioned investor, one who expected a return from dividends rather than capital growth on the basis of a never ending share price increase, might expect it to be. The same comment can be applied to many other digital pletform stock price drops over the last year or so. Fundamentals kicking in??
Addendum 2 February 5, 2023.
They are coming thick and fast!. I read this ‘Wired’ article by the brilliant Cory Doctorow this morning. It explicitly defines the life cycle of social platforms, something we all ‘sort of’ knew but dismissed in favour of the value for early adopters, progressively locking in users, at the same time they squeezed the algorithms to generate ad revenue. Doctorow calls it ‘Enshittification’, a lovely word. Towards the end of the article is a quote from a very young Zuckerberg ”I don’t know why tney trust me, Dumb fucks’. Here is the news Zuk, we don’t!!
Jan 30, 2023 | Governance, Small business, Strategy
The Federal Government committed to a $15 Billion National Reconstruction Fund’ in the October 2022 budget. While the 7 priority areas have been articulated, and there is a better than average website full of glossy photos and optimistic copy, we are waiting on the details.
Of the $15 billion, 8 billion has been earmarked as follows:
- Up to $3 billion for renewables and low emission technology. (I wonder how much the fossil fuel industry has earmarked in their political diaries for carbon capture projects that double as subsidies)
- $1.5 billion for medical manufacturing. Moderna has already committed to completing an mRNA manufacturing facility by the end of 2024 in partnership with the Feds, which must chew up a chunk of that money. They have also just tripled their price/dose in the US for a technology that greatly benefited from public funding during the pandemic. I wonder how the PBS will address that one?
- $1 billion for value adding resources. Presumably, this is to start to cover some previously fumbled bets on Lithium, and rare earth mining and processing. We have roughly 50% of the global production of Lithium, 25% of known global reserves, but capture virtually none of the value of the stuff as it goes into battery production.
- $1 billion for advanced manufacturing. The facility set up by Flinders University in Tonsley Park in SA in collaboration with several defence suppliers, and the Manufacturing Institute of Scotland, one of the UK’s successful Catapult programs has a run up start. It is envisaged that defence accredited SME’s will be able to access funding and mentoring from the arrangements. This seems to be a very sensible bet, hopefully just the start of many experiments, but I am not holding my breath.
- $500 million for agricultural value adding covering food, fibre, fisheries and forestry. For an industry sector where Australia has consistently demonstrated a capability to innovate as a response to the poor average quality of our soils, this seems parsimonious.
The balance remains unallocated, waiting on the detailed guidelines.
Where the demarcation between this fund, the funds allocated to the CRC program, which recently announced $148 million to 6 CRC’s (from a final submission list of 26) is a bit unclear to me. However, what is clear by the thrust of all the programs and press releases, is that the emphasis is on high tech, however you choose to define it. The normal, run of the mill SME manufacturer, those not engaged in technology, struggling to pay the bills, employ and train people in the absence of TAFE, keep up with bigger domestic competitors funded from overseas, are left out in the cold.
It is easy to draw the conclusion we do not need them, and individually we do not. However, collectively they are a huge part of the economy, employ hundreds of thousands, and generally pay their taxes when lucky enough to make a profit, without engaging the services of accountants in Bermuda.
Most innovation comes from SME’s. Not just the technical innovation that drives the defence, electronics, and space industries, but the more mundane process and customer innovation that drives an SME to see a market opportunity that others do not, or choose not to see. Such innovations are sometimes potentially disruptive to an established group of big players who would rather stomp on the SME than change the business or product model that had made them successful. Often, these incumbents are protected by so called ‘industry standards’ written by those same incumbents, further expanding their hold on the status quo.
For that latter group of SME’s, they have a problem evolving from the deindustrialisation of the Australian economy over the last 30 years. This is graphically illustrated by Australia’s drop to 91 from 60 just 20 years ago on the latest Harvard Economic Complexity model. This puts us just behind powerhouses like Kenya (90) Laos (89) Uganda (87), and a host of others we would dismiss as ‘third world’ economies.
This lowly position is compounded by the currently disrupted industrial supply chains: they cannot get their hands on the equipment necessary to move quickly to fill the market gap. This assumes they can access the equity and/or loan funds necessary for the commercialisation, and the skills to run the gear.
There are also various programs run by the states, for all sorts of reasons, chief amongst them seemingly the opportunity for a press release and flurry of PR activity before an election. Printers (those that remain in business) are expecting a mini-boom in NSW over the next few months.
Being one who has seen this problem from both sides, I do not underestimate the challenges. Nevertheless, effectively ignoring a very substantial group that provides many day to day goods and services, employing and training thousands, and generally making an irreplaceable contribution does not seem sensible.
It seems to me that the answer of the question in the headline is ‘you can’t’
Is there anything I have not seen that assists these enterprises?
Feel free to disagree, or indeed, provide advice I can pass on to those struggling enterprises.
