Price Determination in the Australian Food Industry A Report

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Price Determination in the Australian Food Industry A Report x
EXECUTIVE SUMMARY Purpose The aim of this paper is to identify and explain the determinants of prices in some key grocery product value chains. The study has addressed three tasks: 1. provide an analysis of movements over time in retail prices paid by consumers in comparison to those received at the farm level; 2. identify the costs and value-adding factors which are determining food prices over time; and 3. provide an analysis of financial performance for publicly listed companies in food manufacturing, marketing and retailing in Australia and other countries. This report has undertaken analysis of the prices and costs through a number of food categories. Products have been selected and used in this analysis where there is a relatively strong similarity between the physical farmgate produce and the consumer good that appears on the store shelf. The food industry environment The study addresses these three core tasks against a background environment of the Australian food sector. The complexity of issues across food industry sectors and the intensity of competition within the food retail market means that simplistic explanations for the relationships between farmgate and retail prices are not meaningful. Any study must therefore make a case by case assessment of relevant influences and determinants. It is important to highlight that many factors influence and drive the pricing of food in the Australian domestic food sector. These include: • The impact of international trade is increasingly having an effect on farmgate prices across primary food sectors regardless of the forces in the domestic retail food sector, with a few important exceptions. • There is a highly competitive and contested retail food market for the consumer dollar. Whilst overall grocery sales are growing slowly, the intense competition for market share between the grocery retail majors, and between majors and independents and over 30,000 specialty food businesses is a major benefit to Australian consumers in terms of price, convenience, range and choice. • Australia’s geography and urban demographics, relatively small consumer market and low population growth present major chain retailers with significant challenges in offering ongoing growth in shareholder wealth. • Competition for retail market share between the two majors – Coles and Woolworths – Foodland Associated Ltd and Metcash-supplied independents, and newly arrived international food retailers such as Aldi and Pick n’ Pay, is closely linked to competition for investor sentiment – each vying for performance advantage and points of differentiation. Future trends in retail will continue to see extensions of the retail format into new areas where synergies are available, though scope for significant organic revenue growth is limited by competition. • Food retailers are increasingly using loyalty strategies to shape and entrench buyer shopping habits (store cards, fuel discounts, in-store banking services, loyalty reward schemes and so on). This drives repeat store visitations thereby encouraging high sales turnover. • There is a gradual commoditisation of basic core grocery lines. Processed food manufacturers are increasingly using the ‘every day low price’ strategies of each of the major chains. The primary aim of such strategies is to share benefits in cost savings between customers and shareholders – suppliers benefit from reliable market access, economic volumes and large-scale production in core product lines. Price Determination in the Australian Food Industry A Report 1
Page 1: Price Determination in the Australi
Page 4 and 5: © Commonwealth of Australia 2004 T
Page 6 and 7: FOOD AND AGRICULTURE BUSINESS GROUP
Page 8 and 9: FIGURES Price Determination in the
Page 10 and 11: Price Determination in the Australi
Page 14 and 15: • The current focus of retail cha
Page 16 and 17: • assertions as to market power i
Page 18 and 19: Overview - main drivers of prices i
Page 20 and 21: Price Determination in the Australi
Page 22 and 23: Food lines The analysis of food pro
Page 24 and 25: Figure 1. Overview of the approach
Page 26 and 27: Figure 2. Corporate profitability I
Page 28 and 29: Figure 4. Major drivers of prices a
Page 30 and 31: 5.3 The greater influence of prevai
Page 32 and 33: DAIRY - PACKAGED MILK Overview of t
Page 34 and 35: Figure 10. Whole milk, 2 litre, sup
Page 36 and 37: Prices through the chain Our analys
Page 38 and 39: Figure 16. Natural cheddar cheese:
Page 40 and 41: Farmgate prices Farmgate prices are
Page 42 and 43: DAIRY - ANALYSIS OF PRICING OF DAIR
Page 44 and 45: Figure 25. Dairy butter and blend s
Page 46 and 47: ‘Step-ups’ are paid by several
Page 48 and 49: THE MEAT SECTOR Analysis of the det
Page 50 and 51: The approach taken The pricing anal
Page 52 and 53: The changing value chains - various
Page 54 and 55: The approach taken Assumptions used
Page 56 and 57: Figure 39. Lamb market sales, ’00
Page 58 and 59: Figure 41. Lamb: Major drivers of p
Page 60 and 61: Observations The price comparison s
Page 62 and 63:
Figure 46. Pork products, supply ch
Page 64 and 65:
Figure 48. Value and cost-adding fr
Page 66 and 67:
Supply chain management Wholesale m
Page 68 and 69:
Figure 51. Fresh vegetables: Major
Page 70 and 71:
FRESH HORTICULTURE - WHOLESALE MARK
Page 72 and 73:
FRESH HORTICULTURE - ANALYSIS OF PR
Page 74 and 75:
market access - in the United State
Page 76 and 77:
The industry’s product mix The ke
Page 78 and 79:
PROCESSED FRUIT AND VEGETABLES Anal
Page 80 and 81:
Figure 69. Frozen vegetables, peas,
Page 82 and 83:
PROCESSED PINEAPPLES - ANALYSIS OF
Page 84 and 85:
Figure 75. Fresh fruit, with juice,
Page 86 and 87:
GRAIN AND OILSEED PRODUCTS Analysis
Page 88 and 89:
Figure 79. Flour, 1kg, supply chain
Page 90 and 91:
Figure 82. Share of retail price of
Page 92 and 93:
OILSEEDS - OVERVIEW Background The
Page 94 and 95:
Figure 87. Oils and fats, supply ch
Page 96 and 97:
The amount represented by the retai
Page 98 and 99:
Industry risks The key area of risk
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• The major cost faced by egg pro
Page 102 and 103:
Figure 96. Consumer price index, fo
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• Many such operators have indica
Page 106 and 107:
SUGAR PRODUCTS Analysis of the dete
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Figure 103. White sugar, 2kg, suppl
Page 110 and 111:
Projected export returns for the co
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• Export prices are driven by glo
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Retail prices • The average retai
Page 116 and 117:
Industry risk • The overall retur
Page 118 and 119:
4. The performance of Australian fo
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THE PERFORMANCE OF AUSTRALIAN VERSU
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THE PERFORMANCE OF GLOBAL BRAND MAN
Page 124 and 125:
THE PERFORMANCE OF PRIMARY MANUFACT
Page 126 and 127:
Our purpose in preparing this secti
Page 128 and 129:
GROCERY RETAIL - WHAT DETERMINES PR
Page 130 and 131:
The consumer trend towards eating o
Page 132 and 133:
GROCERY RETAIL - PERFORMANCE OF GRO
Page 134 and 135:
6. Issues for consideration ISSUES
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PRODUCER INTEGRATION Does integrati
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Industries have in several cases ta
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Examples include: • 1 litre milk
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Figure 132. Targeting the stomach H
Page 144 and 145:
MAJOR ADJUSTMENT - WHAT’S HAPPENI
Page 146 and 147:
THE IMPACT OF DROUGHT The sector Di
Page 148 and 149:
Price Determination in the Australi
Page 150 and 151:
Oczkowski, E, Murphy, T 1999, Influ
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Price Determination in the Australian Food Industry A Report

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