Price Determination in the Australian Food Industry A Report

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THE PERFORMANCE OF PRIMARY MANUFACTURERS/CONVERTERS Comparison We have also compared the reported performances of a number of primary manufacturing businesses and industries. In this analysis a comparison is made between: • rice – providing the analysis of Sunrice (Ricegrowers Cooperative); • meat – showing the reported performance of Australia Meat Holdings (AMH); • sugar – showing each of the major sugar companies (Mackay, Finasucre and CSR), as well as an industry average; and • dairy – showing the aggregate performance of the major dairy cooperatives. In this analysis: • The primary driver of returns in each of these sectors is the export market, which dominates the end markets for each of these commodity groups. • Comparatively low equity and asset returns are being earned in the sugar and dairy sectors due to low world prices in the period of this analysis. • While the major meat processor has low earnings before interest and tax, it is on a high throughput and the business (Australia’s largest meat processor) earns a higher return on equity compared with others. • The major rice processor and marketer earns a high return on equity and assets compared to other sectors. This has been due to a rationalisation of industry assets in recent years which has improved the cost-competitiveness of the industry’s value chain. Figure 122. Returns for primary manufacturers, three-year average Sunrice AMH Price Determination in the Australian Food Industry A Report Mackay ROE Finasucre ROA CSR EBIT/sales sugar industry dairy cooperatives -5 0 5 10 15 20 25 30 35 40 35% Source: Whitehall Associates’ analysis of financial statements 112
5. Grocery retail Determinants of prices in the retail sector GROCERY RETAIL – OVERVIEW Background This section of the report provides an overview and analysis of the determinants of food pricing in the grocery retail sector. Grocery food retailing takes place in a number of retail formats with a small number of publicly listed supermarket chains, wholesaler controlled chains and international operators entering the Australian market. These compete with over 30,000 specialty food businesses ranging from single shopfronts to multiple franchise operators. The Australian grocery retail market is characterised by a relatively small market, large distances and low growth in population. This requires economies of scale for national retailers to deliver food and other grocery items to consumers across that market in a consistent manner. Major retailers compete with other investment options for access to investor capital. They strive to achieve critical mass of infrastructure, business and profit growth while delivering suitable returns on investment to their shareholders in a small consumer market. The retail sector is among the least profitable sectors. The increasing concentration is not only an issue in the retail sector as several branded food categories are dominated by a limited number of largely internationally controlled brands and manufacturers. Australia cannot hope to stay immune from these pressures. They have been a major result of the changes in food retailing internationally, as retailers seek to achieve better economies of scale and asset utilisation in order to provide consumers with a better service offering. It is important to consider that price is not the only means by which retail outlets compete. Consumers consider a range of factors when purchasing food and grocery products. These include price, store location, product range and quality, queuing time, opening hours and access to car parking. For stores such as supermarkets, price plays an important part in this mix. However, smaller stores often compete on the basis of convenience, with many consumers prepared to pay higher prices for hassle-free shopping. This creates a nexus between price and convenience that underpins competition across competing retail outlets despite price differentials. Consumers increasingly have the opportunity to weigh a range of price and convenience factors when deciding the type of food products they purchase and the retail outlet from which those products are bought. Concentration of retail In the preceding section of the report there were several instances noted where major chain retailers have been increasing their market share in the retail food sector over recent years. Australia has a concentrated grocery retail sector but not relative to countries, like the Netherlands, or regions, like California or Florida in the United States, with similar populations. In measuring shares of the retail food market, the major retailers contend that the definition of the ‘food market’ is much wider than grocery retail and that the major chains hold less than 50 per cent of the food-liquor-groceries market. Industry analysts vary in their recognition of the relevant dimensions of the market and some see it differently, preferring a definition based on the mode and format of grocery retail as distinct from other forms of food sale. Concentration is horizontal as well as vertical, with greater integration leading to cost savings in logistics and inventory investment. Price Determination in the Australian Food Industry A Report 113
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Price Determination in the Australi
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© Commonwealth of Australia 2004 T
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FOOD AND AGRICULTURE BUSINESS GROUP
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FIGURES Price Determination in the
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• The current focus of retail cha
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• assertions as to market power i
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Overview - main drivers of prices i
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Food lines The analysis of food pro
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Figure 1. Overview of the approach
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Figure 2. Corporate profitability I
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Figure 4. Major drivers of prices a
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5.3 The greater influence of prevai
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DAIRY - PACKAGED MILK Overview of t
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Figure 10. Whole milk, 2 litre, sup
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Prices through the chain Our analys
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Figure 16. Natural cheddar cheese:
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Farmgate prices Farmgate prices are
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DAIRY - ANALYSIS OF PRICING OF DAIR
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Figure 25. Dairy butter and blend s
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‘Step-ups’ are paid by several
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THE MEAT SECTOR Analysis of the det
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The approach taken The pricing anal
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The changing value chains - various
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The approach taken Assumptions used
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Figure 39. Lamb market sales, ’00
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Figure 41. Lamb: Major drivers of p
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Observations The price comparison s
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Figure 46. Pork products, supply ch
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Figure 48. Value and cost-adding fr
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Supply chain management Wholesale m
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Figure 51. Fresh vegetables: Major
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FRESH HORTICULTURE - WHOLESALE MARK
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FRESH HORTICULTURE - ANALYSIS OF PR
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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
Page 100 and 101: • The major cost faced by egg pro
Page 102 and 103: Figure 96. Consumer price index, fo
Page 104 and 105: • Many such operators have indica
Page 106 and 107: SUGAR PRODUCTS Analysis of the dete
Page 108 and 109: Figure 103. White sugar, 2kg, suppl
Page 110 and 111: Projected export returns for the co
Page 112 and 113: • Export prices are driven by glo
Page 114 and 115: Retail prices • The average retai
Page 116 and 117: Industry risk • The overall retur
Page 118 and 119: 4. The performance of Australian fo
Page 120 and 121: THE PERFORMANCE OF AUSTRALIAN VERSU
Page 122 and 123: THE PERFORMANCE OF GLOBAL BRAND MAN
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
Page 136 and 137: PRODUCER INTEGRATION Does integrati
Page 138 and 139: Industries have in several cases ta
Page 140 and 141: Examples include: • 1 litre milk
Page 142 and 143: 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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