Page 0 David McKinna et al Pty Ltd 2005

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The Australian vegetable industry at the cross
roads. Dr David McKinna
PRESENTATION 30 JUNE 2005 Ref 0206
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REPORT MAP
VEGETABLE INDUSTRY OVERVIEW
THE GLOBAL PICTURE
AUSTRALIAS COMPETITIVE POSITION
THE CONSUMER
THE RETAIL ENVIRONMENT
REALITIES OF EXPORT MARKET
THE INDUSTRY IN 2010?
THE NON-RETAIL SECTORS
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OVERVIEW OF THE AUSTRALIAN VEGETABLE INDUSTRY
AUSVEG PRESENTATION JUNE 05
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AUSTRALIAN VEGETABLE INDUSTRY AT A GLANCE
Production value 2 billion Key
crops 14 Top 4 crops Potatoes 485
million Tomatoes 226 million Mushrooms 193
million Carrots 102 million Number of
growers 4,300 Predicted growers by 2010
900 Source AUSVEG 2005
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EXPORT STATISTICS AT A GLANCE
Vegetable export value 207 million Export
varieties 27 Top 5 exports Carrots Caulif
lower Onion Broccoli Key
markets South East Asia, Japan
Europe Source AUSVEG 2005
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IMPORT STATISTICS AT A GLANCE
Import value 73 million Key Imports Shelled
peas 19.4 million Sweet corn 15.9 Mixed
Veg 15.8 Miscellaneous 9.7 Spinach 4.
8 Beans 4.7 Frozen potatoes 1.2
Source AUSVEG 2005
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KEY IMPORTING COUNTRIES
New Zealand Beetroot, carrots, corn,
mushrooms, peas potatoes, beans,
cauliflower. Belgium/Luxembourg Mixed veg,
beans Netherlands Beans Thailand Mushrooms,
corn, mixed veg Taiwan Peas Philippines Bee
troot Italy/Turkey Tomatoes China Broccoli
Mexico Mixed veg USA Corn, Beans Source
ABS
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INTERNATIONAL RELEVANCE

• Australian vegetable exports in total account for
  less than 3 of world vegetable trade.
• Vegetables account for less than 6 of Australian
  agricultural GVP.
• Australia has traditionally been a net exporter
  but the situation is likely to be reversed within
  3-5 years.
• Exports are declining and imports increasing.
  This places supply pressure on domestic market.

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THE AUSTRALIAN VEGETABLE INDUSTRY UNDER SEIGE

• Declining competitiveness in face of new world
  players.
• Declining market price rapidly escalating costs
  declining margins.
• Increasing land value (urban encroachment, hobby
  corporate farms).
• Age of Australian growers.
• Cost and availability of water.
• Cost and difficulty of compliance (EPA, OH S
  etc).
• Cost and availability of labour (labour 70 of
  direct cost).
• Strong AUD against US
• Cost of product quality compliance.

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MARKET STRUCTURE
Retail Supermarket 70 (65) Retail fruit
shop 20 Local markets 7 Farmers
markets 3 Food Service Restaurants (30) QS
R Catering Institutions Transport
Ingredients Manufacturing (5)
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VEGETABLE PRODUCTS

• Fresh
• Fresh value added Washed salads
• Pan ready
• Processed Frozen
• Canned
• Dried
• Ingredients

Fresh and value added are growing rapidly.
Processed categories are at best flat.
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AUSTRALIAS COMPETITIVE POSITION
Australias competitiveness in commodity
horticulture is rapidly declining.

• 1. Horticulture is essentially a third world
  industry, being run in Australia with first world
  cost structures and labour conditions.
• 2. The removal of trade barriers.
• - Horticulture is a poor relation in trade
  negotiations, eg. beef, dairy, cars.
• 3. Strong competition from new world countries
  China, Chile, South Africa, and the longer term,
  Indonesia and the Philippines.
• 4. Australia has a significant freight cost
  disadvantage because of the structure of shipping
  routes.
• 5. Traditional seasonal windows of opportunity
  for Australia are narrowing for most commodities.

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THE CONSUMER
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EVOLVING FOOD TRENDS
Meat and 3 veg has given over to a whole new menu
selection.

• The weekly Australia menu now includes
• Pasta
• Stir fry
• Noodles
• Warm salads
• Sushi
• Tapas
• Fusion food (eg. East meets west)
• Authentic ethnic (eg. Asian, Middle Eastern)

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EVOLVING FOOD TRENDS contd
No more slaving over a hot oven.

• Ease of preparation is a key driver of meal
  choice
• One pot/one plate meals (eg. warm salads, stir
  frys).
• Meal assembly rather than cooking from scratch
  (ie. bottled sauces and marinades).
• Gourmet BBQs.
• More casual, away from home dining.
• More men cooking and enjoying it!
• Microwave means the family eat at different
  times.
• More grazing and snacking
• Designer juices and smoothies.

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EVOLVING FOOD TRENDS contd
Dietary anxiety - paranoia and confusion exists
about eating.

• Atkins and low carb diets.
• Glycemic index
• The obesity plague
• Fresh and authentic
• Organics and biodynamic
• GMOs
• Label reading
• Allergies and food sensitivities
• Functional foods

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DRIVERS OF FOOD PURCHASE
Despite growing health consciousness, the key
driver of food purchase is taste/enjoyment and
convenience. Key drivers in order are

• Taste/enjoyment
• Availability
• Price/value
• Nutritional value
• Convenience
• Safety

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DISCONNECT BETWEEN ATTITUDE BEHAVIOUR

• What consumers say they want, and what they buy
  are 2 different things. They say they want
• Healthy
• Environmentally friendly
• Ethical
• Australian
• Consumers actually buy products that deliver on
  taste, convenience, and value - regardless of
  origin.
• The fact is, that cheap, unhealthy, imported food
  sells well.
• Origin labeling and consumer product education
  could dramatically change behaviours.
• Consumers are horrifed to learn that they are
  eating imported food which they believed was
  local.

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THE RETAIL ENVIRONMENT
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THE RETAIL MARKET
Mega market power by the big two is constraining
horticultural development.

• Dominance of Coles and Woolworths fundamentally
  effecting the supply chain.
• Closed loop supply chains.
• Focus on shelf presence and minimising spoilage
  at the expense of taste/enjoyment-constraining
  consumption.
• Global sourcing strategies being established.
• EDLP - devaluing many categories (eg. eggs).
• Private label - premium emphasis.
• Central wholesale market is becoming weaker,
  reducing market outlets for smaller/medium
  producers.

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THE RETAIL MARKET contd

• Major focus on supply chain efficiency at
  suppliers expense.
• Adoption of global benchmarking and business
  models.
• Convenience chains and mini supermarkets aligning
  with petrol outlets declining route market.
• Aldi and annoyance to the big 2
• Merger of Metcash and Foodland will potentially
  create a third, strong mainstream player.

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DISCONNECT BETWEEN CONSUMER WANTS AND SUPERMARKET
OFFERING
Supermarkets are the gatekeepers who decide what
we buy. Consumers only have the right of veto.

• Consumers want food which
• Tastes good.
• Is nutritious.
• Convenient
• Authentic
• Locally produced.
• Environmentally sustainable and ethically
  produced.
• Value for money.

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DISCONNECT BETWEEN CONSUMER WANTS AND SUPERMARKET
OFFERING
However

• Supermarkets focus on foods which deliver them
  bottom line returns
• Fresh foods with shelf presence.
• Shelf stable and durable.
• Low cost.
• Fit a standard range across all stores.
• High stock turns.
• Can be sold with low skill labour.

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THE RESULT OF THIS DISCONNECT

• Consumers are often disappointed with fresh food
  quality.
• Because of disappointment with the eating
  experience, consumption levels are constrained.
• Suppliers who develop products which meet
  consumer needs are frustrated they cant get
  supermarket distribution.
• In some markets boutique grocery stores are
  emerging to fill a quality niche (eg. Wholefoods
  USA, City Super Asia).
• With contemporary lifestyle and nutritional
  trends, vegetables should be enjoying
  unprecedented growth, but this isnt being
  realised by the industry.

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CITY SUPER - HONG KONG
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THE NON-RETAIL SECTORS
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FOOD SERVICE

• At present around 40 of the food dollar is
  consumed away from home
• Restaurant, bistro, cafe
• Pubs/Clubs
• QSR
• Catering/Institutions
• Travel
• Rationalisation and consolidation in this sector
  emergence of large global players (eg.
  Spotless, Bidvest etc)
• Labour cost and deskilling drives use of
  pre-prepared food - heat and serve portions and
  emergence of central kitchens.
• Casualisation and deflation reduced margins.
• Food safety

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INGREDIENT MARKET
The ingredient market is valued at 100 million
p.a.

• Inputs into receipe foods
• Canned and dried soups
• Convenience meals
• Sauces
• Stocks and flavour bases
• Baby foods
• Rapidly growing market.
• Increasingly food processors are outsourcing
  non-core lines.
• Growing demand for first stage processing
  peeled, cut, pureed, dried, frozen.
• Tends to be dominated by cheap imports,
  particularly for dried products ie.
  Indian/Chinese.
• Offers substantial opportunities for Australia in
  some categories/markets.

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THE GLOBAL PICTURE
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GLOBALISATION

• Emergence of mega global food companies,
  supermarkets, and food service companies.
• Emergence of mega global brands.
• Increasing freedom of world trade means product
  purchased from cheapest source. (Major buyers
  have global sourcing strategies).
• Linked and closed global supply chains.
• Emergence of large, efficient, strategically
  located production plants ( increasingly in Asia)
  to supply global markets.
• Relatively strong AUD favours imports and
  reduces export options.
• Highly mobile capital.
• Growing affluence and Westernisation of Asia.

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TRANS NATIONAL BRANDS
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GLOBAL SUPERMARKETS - THE KEY DRIVERS

• Most countries dominated by globally aligned
  supermarket cartel.
• Follow the Walmart model super stores, EDLP,
  tight supply chain control, continuous
  improvement, high stock turn threshold, suppliers
  fund category.
• Strict quality and product integrity at
  suppliers expense.
• Global sourcing from transnationals.
• Global brand alignment.
• Private label dominance new focus on premium
  private label.

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HOME BRANDING - UK
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TRENDS IN GLOBAL AGRI-BUSINESS

• Closed loop supply chains are international in
  scope.
• Massive rationalisation eg. Ardmona/SPC/CCA
  leading to emerging mega global businesses.
• Alliances with global supermarkets.
• Corporate farms and corporatisation of large
  family farms.
• Transnational operations with year round supply
  capability.
• Global brands through transnational alliances.
• Use of IP and a PBR to achieve sustainable
  differentiation.
• Specialisation based on core competency in the
  supply chain.
• Focus on quality assurance and compliance.

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THE REALITIES OF GLOBALISATION

• The food business is rapidly becoming seamlessly
  globalised.
• Supplier margins being eroded.
• With WTO and various bilateral FTAs, markets are
  rapidly being opened up.
• Exclusion of competitors on bio-security grounds
  is becoming very difficult.
• Australia faces strong competition from new
  emerging competitors with significantly lower
  labour costs eg. China, South Africa, South
  America, Thailand.
• For the above reasons, Australia is rapidly being
  squeezed out of traditional markets.

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THE REALITIES OF GLOBALISATION contd

• To the extent that it can compete, it is because
  of a seasonal window of opportunity where no one
  else can supply, or some other point of
  difference (eg. superior quality).
• Seasonal advantages are reducing and so too is
  the quality gap.
• Global competition is now starting to strongly
  effect the domestic market. Both Coles and
  Woolworths have buying offices in Asia.
• The key message is, that in order to survive, we
  must be able to compete globally. Companies must
  reduce costs to globally benchmark or have a
  point of difference sufficient to support premium
  pricing.

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AUSTRALIAS COMPETITIVE POSITION
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AUSTRALIAS COMPETITIVE POSITION
Australias competitiveness in commodity
horticulture is rapidly declining.

• 1. Horticulture is essentially a third world
  industry, being run in Australia with first world
  cost structures and conditions.
• 2. The removal of trade barriers to competitors.
  Horticulture is a poor relation in trade
  negotiations, eg. beef, dairy, cars.)
• 3. Strong competition from new world countries
  China, Chile, South Africa, and the longer term,
  Indonesia and the Philippines.
• 4. Australia has a significant freight cost
  disadvantage because of the structure of shipping
  routes and flows.
• 5. Traditional seasonal windows of opportunity
  for Australia are narrowing for most commodities.

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AUSTRALIAS COMPETITIVE GLOBAL POSITION
Australian horticulture is being squeezed out of
its traditional markets.

• Australia is a minute player in world
  horticulture production and trading (less than
  3).
• Australia cant survive in commodity trading
  except for short term, spot market opportunities.
• Australias only chance to compete in global
  markets with vegetables is through niche
  marketing, product differentiation, premium
  quality product and technology transfer.

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PROCESSOR MARKETING FOCUS

• Australias processors are more marketing focused
  than growers.
• Processors have capitalised on proven marketing
  tools to raise value, eg. product
  differentiation, market segmentation, brands.

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HIGHER OVERALL COST STRUCTURES

• In the face of falling market prices, Australian
  growers are dealing with increasing costs
• Labour
• Water
• Lack of economies of scale
• Cost of escalating compliance
• Higher input costs (eg. fertilizer, chemicals)
• Freight
• Packaging

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AUSTRALIAS FRESH SECTOR LACKS A MARKETING
ORIENTATION

• Australia is largely a spot market, opportunistic
  trader.
• Australia is not employing proven marketing
  tools
• Targeting prime prospect countries
• Market segmentation
• Product differentiation
• Global branding

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AUSTRALIAS COMPETITORS
Australias key competitors are out performing
us on the following factors

• Lower cost base.
• Ability to value add.
• Focused and aggressive business thinkers.
• Traders with a long term view.
• More customer focused.
• Predatory pricing to build market penetration.
• More product and packaging innovation.
• More marketing savvy in fresh produce.

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SOUTH AFRICA

• Post apartheid South Africa has entered many of
  the markets where Australia and New Zealand once
  had a seasonal advantage. In summary
• Taken Australias leadership position in Asian
  horticultural markets.
• Taken a deliberate and focused approach to
  building markets over the last 10 years.
• Has a lower cost base cheaper labour and
  freight, better economies of scale due to larger
  farms.
• Supermarket buyers prefer to deal with the larger
  farms.
• Has strong, defacto single desk brands.
• Understand branding and are promoting strongly.
• Product quality is improving rapidly.
• Most producers are Eurepgap accredited.

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NEW ZEALAND

• Competes with Australia on temperate products
  such as apples, pears, vegetables.
• Approximately a 10 currency advantage over
  Australia.
• Very export focused as they have such a small
  domestic market.
• Stronger in European markets as they have a
  freight disadvantage into much of Asia.
• Accepting of lower margins than Australian
  farmers.

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CHINA

• China is a growth powerhouse on a scale most
  Australians cannot comprehend.
• Many peasants displaced by the 3 rivers dam have
  been redeployed in government sponsored
  agriculture.
• Tend to produce in large, collective farms or
  with government sponsored foreign joint venture
  partners.
• Massive, large scale plantings of horticulture
  occurring.
• Quickly improving on poor track record regarding
  product quality and safety.
• Farmers becoming more educated - this generation
  are university graduates.
• Learning about branding. Continued . . .

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CHINA contd

• The vast size of the continent means China has
  many climatic production zones.
• In Malaysia, China has taken over 50 market
  share from Australia.
• Freight daily into Hong Kong market where they
  are up to 20 times cheaper than Australia.
• In Singapore, Chinese produce is around half the
  price of Australian.
• Although Australian product is still seen to be
  superior, the price disparity is too great to
  sustain a premium.
• Aggressive competitor willing to use predatory
  pricing to gain market access.
• Major investment via govt or foreign joint
  ventures.

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CHINA (continued)

• Highly responsive to customer needs and willing
  to produce to detailed specifications.
• Has a great advantage low labour costs allowing
  value adding eg. trimming, sorting, pre-packing
  etc.

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TRIMMED, GRADED ASIAN GREENS - HONG KONG
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DAILY DELIVERIES FROM MAINLAND TO HONG KONG
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EUROPE

• Large, efficient processing outlets.
• Technologically advanced.
• Freight cost advantage.
• Ecomomies of scale available.
• Allegedly heavily subsidised.
• Strong country of origin labeling in most EU
  countries.

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ORIGIN LABELING - UK
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SOUTH AMERICA

• Chile, Brazil, Argentina and other South American
  nations are also encroaching on Australias
  counter seasonal markets.
• Further to labour and freight advantages, many of
  these nations qualify for tariff advantages in
  some markets on the basis of developing country
  status.
• They are building reputations for good quality
  product at a lower price.
• They trade in US, but most have the advantage of
  low and devaluing currencies.
• Argentineans and Chileans particularly are seen
  to be very astute business people and easy to
  deal with.

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REALITIES OF EXPORT MARKET
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CRITICAL SUCCESS FACTORS FOR AUSTRALIA IN
AGRI-FOOD

• Cost reduction - continuous improvement.
• Innovation - products and processing.
• Critical mass and economies of scale.
• Market/customer focus - Marketing 101.
• Market segmentation.
• Product differentiation.
• Critical mass issues at every level of supply
  chain.
• Market intelligence.
• Tight specialisation.

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PRE-PREPARED VEGETABLE PACKS
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VALUE ADDING POTATOES - UK
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SUCCESS STORIES FOR AUSTRALIA
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WHERE WILL THE AUSTRALIAN VEGETABLE INDUSTRY BE
IN 2010?
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WHERE WILL THE INDUSTRY BE IN 2010?

• Majority of commodity vegetables and vegetable
  products will be imported - potatoes, peas,
  beans.
• Water intensive, low value products will be
  uncompetitive eg potatoes.
• Processing industry will move offshore.
• Strong domestic focus.
• Growth in categories where Australia has a
  comparative advantage - beetroot, corn, onions.
• Growth of large corporate and family business
  farms with
• economies of scale
• state of the art technology
• IP/PBR
• best practice management systems.

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WHERE WILL THE INDUSTRY BE IN 2010? contd

• Australian corporates will move part of their
  production offshore.
• Growth of value added (pan ready veg, salads,
  fresh soups, etc) through strategic alliances
  between marketing and distribution companies (eg.
  Harvest Fresh), and large corporate growers.
• Continual growth of organic and minimum chemical
  vegetables.
• Supermarkets will control 80 of the retail
  market.
• Central wholesale markets will continue to become
  less important.
• Further consolidation in global food service
  sectors.
• Australia will be an exporter of technology eg.
  PBR mini-tuber potatoes.

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GROWERS SHARE OF THE FOOD IS DECLINING

• Power of supermarkets and food service operators
  increasing.
• Increasing share of food is processed and value
  added.
• Growers sector isnt participating further along
  the supply chain.
• Growers not delivering to consumers,
  expectations
• - taste
• - nutrition
• - convenience
• - value for money.
• Under investment in market development, branding
  and promotion.
• Failure to embrace the proven principles on
  consumer focus, market segmentation/niche
  markets, and product differentiation.

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HARMONISATION OF PRODUCT INTEGRITY SYSTEMS

• Global supermarkets driving product integrity -
  Due diligence requirements.
• Seamless whole of supply chain system.
• HACCP.
• SQF.
• Codex.
• Eurepgap.
• Fresh Care.
• Red Tractor/BRC.
• Globalisation of European supermarkets is making
  EU standards a global standard.

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THE AGENDA FOR AUSTRALIAN VEGETABLE INDUSTRIES

• Cost reduction, particularly labour.
• Delivering consumer satisfaction
• - genetics
• - value adding
• - packaging
• - branding
• - fitness for purpose selection and labeling
• Product differentiation/innovation
• - taste/enjoyment
• - nutrition
• - functionality
• - convenience - microwavable, semi-prepared
• - value for money
• .

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THE AGENDA FOR AUSTRALIAN VEGETABLE INDUSTRIES
contd

• Market segmentation/ niche marketing/ market
  development.
• Reduce chemical usage - move towards
  quasi-organics.
• Product integrity and quality schemes.
• Build supply chain partnerships.
• Category management.
• Origin labeling.

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