The two-speed food processing industry in Australia
In an otherwise declining manufacturing sector in Australia, the food processing industry1 has been a standout performer contributing over $25 billion in value-added in 2014/15 according to ABS data. Over the last 10 years, the annual rate of growth in industry value-added for food product manufacturing averaged around one percent and for beverage product manufacturing around 8.5 percent per annum, in real terms.
These aggregate trends of industry growth, however, mask what is going on within these sectors. In this article, we explore the increasingly two-speed trend in the food processing industry – while some subsectors are booming, other (more traditional) subsectors are struggling. We highlight a number of subsectors in the fast lane such as craft beer, marinated meat and wine manufacturing, and contrast them to those experiencing declining or negative growth trends, such as processed vegetables, fruit juices and processed cheese.
Craft beer – a booming subsector
In a previous article, Craft beer in Australia – going from strength to strength, Deloitte explored the emergence and rapid growth of craft beer despite an overall decline in Australia’s total beer consumption. Demand for craft beer has grown considerably in recent years, mostly popular among younger generations living in inner-city areas2. This is part of an ongoing shift in consumer preferences from quantity to quality.
As Australian beer drinkers purchase more premium and craft beer, the number of craft breweries has also increased. In 2016, the Australian craft beer industry consisted of 350 breweries and microbreweries, up from 200 in 20133. Robust consumer demand has also attracted bigger players, including global beverage businesses, to invest in once-independent and relatively small labels.
Retailers have also taken an interest in craft beers either through acquiring the exclusive rights to sell certain craft beer labels or launching their own products. An interesting aspect of the interest from large players in craft beer is that the acquired craft brands tend to retain the look and feel of a niche product.
Marinated meat – a high speed subsector
According to IBISWorld, the growth in domestic demand for meat has averaged over 10 percent per annum over the last ten years. Anecdotally, the amount of butcher cabinet space used for marinated or seasoned meat products has grown even faster, increasing from around 15 percent (a decade ago) to around 50 percent of cabinet space in 20164.
This observation reflects a trend that has been attributed to increasingly time poor households being drawn to more convenient meal options. Exploiting this trend, retailers have increased the number of SKU (stock keeping units) which now include short ribs, brisket, beef cheek and meatloaf packaged in a formed aluminium tray, ready-to-cook at home, for example. In 2016, Woolworths rolled out its pre-cooked ‘grab-and-go’ beef roasts, building on the popularity of the 'hot chook' offering5.
The example of marinated meat highlights the role of marketing innovation in identifying and expanding new market opportunities, in this case the opportunity for more value to be captured from the core product offering of meat processors.
Wine manufacturing – a revitalised subsector
The growth in wine manufacturing has been driven by the revival of wine exports. The value of Australian wine exports grew by 11 percent (to $2.11 billion) in the year ended June 20166. This export growth appears to be correlated (at least in part) to a softer Australian dollar, making premium wines more affordable to overseas consumers. The growth in export value was skewed by increasing sales of more valuable wine, and not higher volume of wine overall.
Following the successful negotiation of the China-Australia Free Trade Agreement, wine exports to mainland China in 2016 enjoyed 50 percent growth from 2015’s export level7. China is now Australia’s second most valuable wine export destination behind the US, accounting for $419 million in export value.
Further, the key export markets of the UK and USA, where Australian wine has traditionally enjoyed success with mid value wines, have become more sophisticated and discerning. Consumers in these markets are seeking more high value, premium and distinctive wines that Australia’s wine regions are well placed to supply.
Processed vegetables – a subsector in decline
The performance of the processed vegetable industry has fluctuated over the last five years as local manufacturers battle changing consumer preferences and low-cost imports8.
Over the past five years, health conscious consumers have opted for fresh vegetables over tinned produce.
Even as the Australian dollar weakened, cheaper imported canned products have made it difficult for domestic processors to remain profitable. Heinz relocated its Victorian tomato processing plant to New Zealand in 2012. The last-wholly Australian-owned cannery, Windsor Farm in Cowra, was also closed in 2012. Gourmet Good Holdings had to end the Rosella brand in 2013. The key factors in these closure decisions were the high labour and energy costs associated with manufacturing in Australia, more than offsetting the effect of lower Australian dollar.
Fruit juice manufacturing – a subsector with limited overall growth
Strong competition from private labels and other beverages and volatile consumer sentiment have contributed to low industry growth over the past five years. On the one hand, rising health consciousness and a desire for healthier drink options has boosted sales9. On the other hand, high sugar content fruit juices are concurrently driving health conscious consumers away.
At the same time, sales of high-value premium fruit juice drinks have softened due to below-average growth in household disposable incomes. Instead, consumers appear to have shifted their preference to the less expensive end of the fruit juice market, giving rise to demand growth for private-label products10.
Processed cheese – a slow moving subsector
Domestic demand for Australian processed cheese has fluctuated in the last 10 years with a 2.1 percent decrease in the 12 months to June 201611. Industry revenue, as a result, has followed a similar trend and decreased at an annualised 1.3 percent over the five years through to 2016-17. This trend reflects a move away from processed cheese, such as cheddar, toward higher quality and specialty cheese like feta and goat’s cheese.
The change in consumer preferences for higher value products has encouraged manufacturers to produce more specialty cheeses. For example, Lion sold its everyday cheese business to WCB in early 2015 to focus on its faster growing specialty cheese business12.
The two speed industry now and in the future
Australia’s food processing industry is not following the overall declining trend of Australian manufacturing and there are pockets of opportunity within the industry’s subsectors.
Fast growing subsectors are those that focus on producing food products for specific market segments rather than generic commodities. They also play well to the changing consumer preferences that emphasise on regional provenance, convenience, health consciousness, and environmental and animal welfare concerns. And importantly, for a higher-wage country like Australia, food processing subsectors that are less labour dependent will be more cost-competitive and more resistant to competition from cheap imports.
1 In the context of this article, the food processing sector includes food product manufacturing as well as beverage and tobacco product manufacturing (noting that the contribution from tobacco over the last 5 years has been minimal). The industry is broad and captures many different activities along the supply chain, from the first state of processing to the final step before consumption.
2 Roy Morgan Research: Nothing Bitter about craft beer’s rising popularity, 2014
3 Good Food: Craft beer boom means heady days for Victorian hop growers, 24 February 2016
4 Nason, J: Nine trends shaping meat demand in Australia, Beef Central, 2013
5 Condon, J: Top 10 Australian red meat food service/retail trends for 2016, Beef Central, 2016
6 Wine Australia: Australian wine exports – growth driven by higher price points, 2016
7 Jasper, C: Wine export sales continue to surge as Asia drives growth, ABC Rural, 2016
8 IBISWorld: Australia Industry Reports - Fruit and Vegetable Manufacturing, 2017
9 IBISWorld: Australia Industry Reports - Fruit Juice Frink Manufacturing, 2017
10 IBISWorld: Australia Industry Reports - Fruit Juice Frink Manufacturing, 2017
11 IBISWorld: Australia Industry Reports - Cheese manufacturing, Key statistics, 2017
12 IBISWorld: Australia Industry Reports - Cheese manufacturing, Industry performance, 2017