What’s in store for the Australian food & beverage sector?

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Once again 2016 was a less than spectacular year for Australian manufacturers. And once again the food and beverage sector was an exception to this trend. Matthew McDonald takes a closer look at what’s in store for the industry’s top performers in 2017.

Ford’s gone and Holden and Toyota will soon follow suit. Industries like steel, petroleum and aluminium are in decline and Prime Minister Malcom Turnbull’s attempt to rally the nation with his call to ‘innovate, innovate, innovate’ failed to set the nation on fire during last year’s election.

So, while things aren’t crumbling around us, it isn’t exactly easy to get excited about Australian manufacturing. We seem to be stuck with a slow decline of about 2 to 3 per cent a year.

But it’s not all bad news. Food and beverage makers have many reasons to be happy about where their sector is headed in 2017.

“Food and beverage manufacturers have remained resilient to factors affecting other manufacturing industries in Australia,” Nick Tarrant, Senior Industry Analyst with IBISWorld told Food & Beverage Industry News.

For example, we are blessed by our proximity to key export markets in the Asia Pacific. Also, because perishable items like butter and other dairy products can’t be easily transported from overseas, demand for such goods is fairly constant.

The Winners

Late last year, as featured in our sister publication Manufacturers’ Monthly, IBISWorld compiled a list of Australia’s top 100 manufacturing companies for 2016. As we move into the new year, it is worthwhile to take a look at the food and beverage makers on that list and consider where they are headed in 2017.

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Australia’s largest integrated cattle and beef producer, Australian Agricultural Company (AACo) was one welcome addition to the list. And the success of the company (which is said to be the nation’s oldest continuously operating business) is expected to continue. According to Tarrant, it should grow at a rate of 38 per cent over the coming financial year to reach $781 million.

“A lot of that is due to growing sales revenue due to high demand for [its] beef produce in the USA and South Korea,” said Tarrant, adding that AACo is positioning itself as a premium producer on international markets and that the company is part of a trend in which manufacturing industries are increasingly relying on Australia’s natural resources.

Fellow beef producer Teys Australia (a Cargill joint venture) is in the same boat. Last year, with help from the high demand for beef, strong cattle supply and good weather conditions, the company was able to increase its stock production and increase its revenue by 21.7 per cent.

Dairy

The year, 2016 was a pretty torrid year for the dairy sector. Fonterra and Murray Goulburn (MG) both found themselves cast as major villains (not just by suppliers, but by the wider community) when they retrospectively cut their farmgate milk prices and instantly put many dairy farmers into debt.

As a result, many accused the two co-operatives of incompetence or worse, with the attitude of many being “how could they let things get so out of hand”.

Whatever the case, the root cause of the crisis was global oversupply and subsequent low milk prices.

“[Milk prices] kind of bottomed out a couple of years ago so the worst of it seems to be over,” said Tarrant.

He said that he expects MG revenue within the milk and cream processing sector to decrease by 6.4 per cent in the coming year to $475.5 million, while Fonterra revenue in that sector is expected to fall by 2 per cent to $260.8 million.

Despite these problems, MG and Fonterra remain two of the mainstays of the Australian food and beverage industry. Pointing out that milk and cream processing is worth about $2.2 billion, Tarrant said the fact the sector is so reliant on export markets means that slight downturns in demand can negatively affect it. However, he maintained that a lot of the problems are short term.

“A lot of them can be due to changing policy or looking to purchase more locally made produce. It can be affected by change in the Australian dollar as well,” he said.

“There is strong demand for milk from places like China where it sells for about $8 a litre…[and] free trade agreements as they are introduced sets up opportunities for milk producers to export.”

He said that as MG and Fonterra become more vertically integrated, streamline their costs and get more efficient distribution methods going both should be able to recover.

The other big player in the sector, Warrnambool Cheese & Butter is expected to see revenue grow by 43.8 per cent in 2016/17 to reach $653 million.

“A lot of that is not necessarily organic growth,” explained Tarrant. “They acquired Lion Dairy & Drinks. They’re a cheese business, so they’re also becoming more vertically integrated and trying to consolidate their supply chain. And they’ve also got a Japanese joint venture.”

Beverages

According to Tarrant, in the current year the beverage sector is growing by 2.2 per cent (which is the second strongest growth for a manufacturing sub-division).

“Most of that is to do with the strength of Australian wine production,” he said.

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“Revenue for the wine production industry is expected to grow by 7.1 per cent in the current year to reach $6.2 billion. A lot of that is to do with strong export growth. The industry is recovering from a wine glut where there was some structural over supply for about a decade due to lower grape prices and the sharp entrance of a lot of wine producer into the Australian industry.”

But, he added, strong export demand from Asian markets combined with poor harvests in Chile and Argentina have meant an undersupply for exporters. This, in turn, has seen Australian wine makers picking up that slack. On top of that, Australia’s clean green image hasn’t hurt. Australian wine is seen as high quality.

When asked to nominate a top performer in the wine industry, Tarrant pointed out that our wine industry is quite fragmented, with a lot of small producers.

“The biggest is Treasury Wines [which owns Penfolds, Wolf Blass, Yellowglen, and others]. It’s expected to grow by 7.4 per cent in the current year but that’s roughly in line with the industry average.”

Beer manufacturing, on the other hand, is expected to decline by 0.7 per cent over the five years to 2016/17, to $4.2 billion.

“Although beer consumption has been declining in Australia over that period, there’s been a shift to premium beers, craft beers, beers that are low in carbs or foreign labels. That’s kind of negatively affected companies like Carlton United Breweries are focused more on their traditional staples like VB, Carlton Draught, etc.,” said Tarrant.

“Other companies like Lion, a subsidiary of Kirin which produces Tooheys, XXXX, James Boag’s, etc., have looked to acquire more craft beers to respond to that trend. They own Little Creatures and White Rabbit. Although they’re expected to decline by 1.3 per cent this year, the outlook for them as they transition towards more craft and premium beers is positive.”

IBISWorld

03 9655 3800

www.ibisworld.com.au