Local food initiatives

The Tassie food branding exercise announced this week by the Government and grocer Woolworths is the latest effort in retailing to take advantage of regional provenance. Tasmania has fair chance of carrying it off – for a start it is self-contained, and there is little chance of blurring the boundaries. It has also set some clear objectives in the past based on “purity” in its stance on some ethical food fronts.

But can regional branding really make a difference? Will the Tassie label support make a difference to Tasmania suppliers and their industries? Well it can if, and only if, the strength of the brand can go distance, and win the respect by people in Sydney or Cairns or Perth rather than just those shopping on the Apple Isle. “Win the respect” means a tangible difference in spending so that Tasmanian suppliers see the difference in orders and in the unit value column of their sales invoices. Cynics may suggest that Woolworths is after another point of difference in the food retail battleground, but if it didn’t believe in the value of the local food support, it wouldn’t go to the effort.

The local food supply has some traction with other retailers, and the big players are compelled to either watch it go past them or join it. The IGA independent supermarket group recently took a similar step. Following on from its “local heroes” positioning, IGA is giving further voice to locals with its new campaign “How the locals like it”. This initiative is designed to build on “local store” appeal by emphasizing the individuality of its 1,000 stores. The scheme will extend to support of locally supplied produce where it can meet demand required at each outlet. IGA wants to add to the advantages it feels can offer in its convenience appeal, by providing a full-service supermarket experience without sameness.

Retailers see some mileage in being seen to respond to consumers’ preferences by localising their pitch. Time will tell if these initiatives hit the sensitivity of shoppers to the extent that it can drives higher store traffic and spending. There is a risk to those who don’t follow this lead and by default imply a lack of support the local community. Catering for local needs is being elevated as one of the key brand values for the larger retailers.

There’s another slant from the UK where a larger regional population begs a logistical solution if a regional promise is to work. A scheme called From My Farm is a supplier concept that divides the UK into regions in which a co-ordinator identifies and works with growers, collating orders, liaises with growers and delivering to the distribution centres or direct to store. This not only offers supermarket chains the convenience of a one-stop-shop buying solution for perishable, regional, fresh produce but also provides growers with the opportunity to supply in bulk in their regions when they would otherwise not have the volume of scale to do so.

Regional food provenance has been the backbone of the European food culture for at least a century. We won’t revive anywhere near the same cultural backdrop to sustain regional food production to the same extent, but excellence in quality and character can create better value for suppliers if the consumer gets into the spirit and demands more of it.

Interesting Food policy

We are well into an election campaign that is devoid of passion and spark, and has degenerated into a me-too game of desperation for each of the two front-line candidates to win at any cost. Policies have become a mish-mash of socialism and free-market principles – one both sides of the divide. Meanwhile every now and then the Greens pop up with something admirable, profound, altruistic and completely unachievable.

Late in the piece – almost as a neglected bolt-on to either major party’s platform – came policy announcements on food and agriculture. “Food” has long been been hard for Governments as an area in which to do something significant and meaningful.

Tony Burke as the Minister for Far Too Much announced the National Food Plan last week as a major policy. The Plan promises to consult with key players to come up with - a plan. There is no new money for the plan – it will be reshuffled from Regional Food Producers Innovation and Productivity Program budgets. The plan strives for “world peace” and will tick all the topical buzz-words - food security, affordability, sustainability, productivity and global competitiveness, as well as tinkering with regulations, taxation, and the labour market. Down the track it will then take on health and nutrition.

This has been tried before hasn’t it? Remember the Corish report that tackled a massive menu but failed to change the world? Are we going to find a new way of looking at things with the same people around the table?

On the other side of the fence, there are apparent differences that money can buy, as the highlights of Opposition promises throw an additional $150milion at R&D, provide a place at the Cabinet table for Food Security, and spend money measuring the carbon footprint of the food industry, which most food sectors have already started work on. People working at managerial levels in R&D Corporations may be keener as this package may well make redundant the Productivity Commission’s current mission to streamline R&D infrastructure. The detail on the workings of that further investment aren’t available just yet, though.

There have also been the usual rumblings on the campaign trail about “dealing with the rising cost of food” which always gets a run around an election, and was a major issue in 2007. Well, hello, we’ve been in an era of deflation for food (and a few other categories of household goods) for the past year as the post-recession blues have kept retailers discounting. What can governments do about that anyway, as the consumer is the clear winner when retailers go hammer and tongs at each other’s market share?

But we have seen little tangible evidence of actual measures to address “food security” itself which has suddenly become a new clutch-phrase of politicians. Food security for many is a no-brainer - we export 60% of our food production, and have a free trade stance to ensure increasing volumes of cheap processed food gets onto our supermarket shelves. Job done? Not so when water for food production is exposed to greater competitive threat from household, industrial and environmental users than ever. We’re still waiting for leadership on that front.

Food security

You could be forgiven for thinking Australia and New Zealand food industries are being raided by Asian buyers. There has been a flurry of activity in recent weeks with a new breed of players involved in a fresh wave of transactions. Chinese food conglomerate Bright Dairy & Food has announced an agreed purchase of a controlling stake in emerging NZ South Island dairy manufacturer Synlait Milk, nominally valuing the dairy company which has been operating a couple of years at about $A120 million. Japan’s commodity house Mitsui is already a shareholder in Synlait.

Bright had recently been gazumped by Singaporean commodity player Wilmar, the world’s biggest listed producer of palm oil, in a bid for CSR’s sugar division.

Dairy has been on the radar for others. A NZ-financed dairy farming operation based in South America has also been snapped up by another diversified commodity group Olam, which owns a fair slice of Australia’s cotton industry. Olam holds a stake in another NZ dairy group, Open Country.
There are other Chinese bidders involved in potential deals in NZ. A large portfolio of dairy farms is being sold off by receivers, while other large farm clusters that are in trouble due to financial pressure have potential overseas buyers in the wings.

Fears for food security are partial drivers for this activity. That motive is a strong factor in Bright’s purchase of Synlait. The Chinese dairy sector is still adjusting to a new order after the disastrous melamine poisoning fiasco of 2008 which is still sending fresh tremors through the retail market as contaminated product continues to show up in shops. Bright wants a secure supply of products (whole milk powders and infant formula products) made from “quality milk”. The Chinese retail market has not yet returned to its former self, as Bright and its competitors build new credible supply chains rather than rely on fragile and corrupt practices of the past. Bright will give momentum to Synlait’s expansion, promising to support a further planned capital raising by the company in 3 to 5 years – when the share market may also be in better health.

In the case of activity of commodity traders, the moves are interesting as they go from dealing in commodities to owning the suppliers. After taking a hiding in the global financial crisis, the commodity traders are after food security of a different form – reliable access to product without exposure to volatile conditions. Wilmar is also keen to dilute its exposure to palm oil which will only be a less-popular food ingredient in future, and promises rapid expansion in Brazilian and South East Asian sugar production.

Where else might the raiders look? Wine might be a real opportunity for a bargain hunter as there would be plenty of sellers given the depressed state of the sector reeling from the double-whammy of over-supply of grapes and the erosion of export values by low-cost competitors and the value of the $A. Bright was reported several weeks ago as in talks with Fosters which has struggled to make its wine business a worthy contributor to the drinks group.

There is little doubt we’ll see more action in this space as emerging global players compete for a slice of the hungry consumer markets in the developing world.

Food Miles buried?

There’s always some distance between the intentions people have regarding their shopping and what actually happens in the store. The visibility now being given a host of issues loosely grouped together under the often-misused “sustainability” heading has led to an increase in the preferences for “doing something about it”.
But with the reality faced by the consumer when they get into the store ensures that intentions translate only in the minority of cases. At the heat of the moment in the store, they deal with a complicated set of influences - what they are willing to spend, what’s on special this week, how much time they have to shop, and what information they have to look for on food labels.

Remember the “food miles” scare? A beat-up by one of London’s big daily newspapers in support of an English dairy brand about the journey New Zealand butter and cheese makes to get into a UK supermarket led to fear of new “ethical” trade barriers being erected for food exports to the developed world. In recent years “food miles” has been one of the concepts by advocates to support food produced as locally as possible, especially fresh produce, as in order to reduce carbon emissions.
The issue stuck around for a while in the UK before it was gradually consumed in the carbon footprint industry, as major retailers started to lead the push to establish some standards of measurement that would allow consistency between claims being made on labels.

A New Zealand university has put some researchers into the field to see where the issue is these days. Two small surveys were done - one on the High Street in the UK and one in a supermarket. The researchers even went to the trouble of asking the questions in a local accent, to reduce suspicions of a link with New Zealand.
The two sets of results weren’t the same – nearly a quarter of the people on the street said they wouldn’t buy New Zealand goods due to food miles. Those in the supermarket however had it well down the list – less than 6% gave “country of origin” as a determinant of what was in the shopping basket. Exporters to the UK also claim they’ve suffered no losses in volumes – in fact business is better than it was before “food miles” became an agenda. The researchers have claimed the food miles scare is over! It may be a tad early to claim a victory on the strength of the opinions of 500 British shoppers in the hardest times.

There’s little doubt that concerns about the planet are on shoppers minds. But given on what else is apparently on top of mind at the time when they get to within two feet from the product shelf, the concern is pushed down the list. Things aren’t great at the moment in the UK so “price” is a dominant issue facing a larger percentage of households compared to a few years ago in more prosperous times when food miles surfaced as an issue.

But carbon measurement and other “sustainability” standards will get better, labels will become more believable and when money is back in pockets, the discerning consumer may change habits. Given the blight expected in European economies however, that may take a while.

Death of Franklins

The announcement of the death of the Franklins grocery chain – after a slow, painful illness – won’t surprise many supplying the grocery market with produce and other goods. The small grocery chain these days has its stores mostly located in NSW.
The original Franklin’s chain – which had an expensive failure at running a “fresh food” challenge against the two major grocers but failed in delivery - was carved up between Woolworths and Metcash/IGA in 2001. Some might remember the Franklin’s Big Fresh fiasco that aimed at using a radically different approach to fresh food marketing as a drawcard into stores, but the model lost customers quickly. Old ladies and children got frightened and it was very easy to get lost in a store as you were corralled through a maze of fresh food sections.

South African retail group Pick n Pay took a punt on expanding in the Australian market and bought 50 of the stores in NSW and the rights to the soiled Franklins brand. The group subsequently added 35 stores to that portfolio. But it was never a big winner – Franklins holds about 2% of the grocery market and earned its owners a paltry margin of less than 1% on sales over its history. The majors operate at between 4% and 7% these days, depending who you study. Metcash formerly supplied the Franklin’s chain but the parties had a dispute in 2005 and Pick n Pay set up its own chain that never achieved critical mass.

Pick n Pay has agreed to sell to Metcash for $215 million. Metcash will then on-sell most of the stores to IGA store owners, but it will hold onto a few as IGA corporate stores and close a few dogs in the portfolio. The existing $860 million of retail sales made by Franklins, which will convert to around an additional $500m in wholesale sales by Metcash through these stores in future. You can do the maths, but there’s a little glimpse into the scale of the mark-up that exists in the land of independent retail, where stores are more expensive to operate and achieve much smaller sales per square metre of floor space than large supermarkets.
It will achieve a few synergies in merging that additional business into its operations as well, providing the independent sector with a little more muscle. Metcash has also made a major play in hardware with purchase of Mitre 10 to apply a similar model to food wholesaling, where it takes on the big box approaches of Wesfarmers and Woolworths groups.

Metcash and its IGA franchise partners have been pretty effective at mixing it with the grocery majors in the past few years. Couple that with the expanding and menacing presence of the discounter Aldi and the market operates with some fierce competition based on both price and convenience. This small expansion will take out an ineffectual competitor and narrow the field to further intensify the battle.
It will be interesting to see how the ACCC plays this proposed transaction. The chairman of the competition regulator and the CEO of Metcash aren’t good mates after their stoush in the 2008 Grocery Inquiry.

Society and the environment

The tumultuous political events of the past two weeks have shown how delicately poised the battle for hearts and minds of the populous can be. Just as quickly as the former Prime Minister led a landslide in the run-up to the 2007 election by managing to conjure “spin” to hit the popular political nerve, he just as quickly lost it. It has been easy for a new leader to look good with such appalling policy development and delivery over the last year.

It has given us interesting examples of leadership models and styles. The country has shown in swinging towards Rudd in the first place, followed by a speedy loss of faith and now a swing towards a new yet unproven talent, that it craves strong leadership on issues that challenge this society. The country chose change in 2007 because it felt there was a greater priority placed on the issues that mattered for the quality of society, rather than the quality of the economy. It’s such a pity that so many who supported change have been left feeling vanquished ever since, as there was such a poor follow-through.

What we do about our impact on the environment was one of those massive moral issues where a clear point of difference was developed. The major environment issue in 2007 was unfortunately packaged as concern for “climate change”. It got dragged down the wrong path in worship of Al Gore and belief in the word of his hired scientists.

The opportunities provided by new leadership will probably miss the chance to correct the skewed direction of policy that addresses the sustainability of our society. The real focus of what we need to address as a society should get back to the fact that we are fast running out of finite resources that are essential for our future lifestyles – water, fuel and ultimately food. Rather than simply cap the output of a certain gas pollutant that might lead to long term change in weather, dries dams and rising seas, we should be limiting the finite fuels we take out of the ground, constraining the right to convert and consume, and cutting out waste.

At the same time, governments could face the long-term need and guide choices made about how we make things, what we consume, how we travel, and how we cool and warm our homes. Rudd’s spin team partially tapped into a major concern that is felt in households and in businesses – that we have to change habits and take the initiatives and incentives down to the point of consumption. The population has an appetite to take action but has been left confused by debates about science, rebates, compensation and a lack of support to change behaviour. Never mind the fear of new taxes – changing behaviour will only come when things are correctly costed and priced!

Go across to Europe where the concern for the environment is very strong. See how these same concerns are now entrenched in the modern European society’s values and now an essential part of business practice. We are a decade behind that pace and it doesn’t feel like we’re going to be put on the right track any time soon.

Yuan will big change happen?

The Chinese Government took away one of the major sources of trade tension with the United States when it agreed to relax controls over the value of its currency. The Chinese yuan has been pegged to a constant value ($US1 to 6.83 Yuan) against the US dollar for much of the past 2 years. This has helped the Chinese sustain a massive trade surplus with the US, and fill the shelves of the Walmart chain (and other department stores) with cheap goodies.

Given that the Chinese financial system owns the US landmass after the debacle caused by the housing crisis, having it dominate trade as well has been too much to swallow. As the G20 meeting of the leaders of major economies (this time just “G19” as the new Australian PM took a leave pass to sort out a few redirections of policy) loomed, the grievance of the currency imbalance was a major agenda item for the Americans.

The change in currency values – which will see a revaluation upwards in the value of the yuan – may have a major impact on trade. It has been touted as the most significant trade development of 2010 given the scale of the trade between the two countries, and the knock-on effects of an alteration in those trade flows on other major traders. The currency situation has given Chinese exporters a major advantage as the value of the US dollar tumbled to reflect the poor state of its economy.

A stronger yuan can partly reverse that effect, although the scale and maturity of the trade balance between the superpowers hasn’t happened because of the financial crisis. It has been building steadily since 2004 as the might of the Chinese production engine became a compelling source of consumer products for the stressed US shopper.

But China won’t rapidly revalue their Yuan. Their government is managing a very delicate balancing act – and will be for some time – as it tries to deflate a few massive bubbles that have developed in its economy which, if popped, will make the GFC look like a pub chook raffle.

The weight of expectation of currency players would have driven the change quickly, but the Chinese will continue to closely regulate their currency to play this change out over time. It will follow a “Pantene effect” – it won’t happen overnight but it will happen. The Chinese are trying to gradually shift their growth engine from exports to greater household affluence, which will take years not months. So that means it also won’t change much for the complaining US politicians, but it will take the heat out of the issue so that they can focus on some of the things they can control.

The reality of a gradual impact didn’t stop our currency reacting to give our agricultural exporters more grief, with the $A rising on the expectation that it will possibly make the value of exports to China a little cheaper, and also help the Chinese fight a building inflation rate. This will also hold interest in resource commodities which have been affected by anxieties about the sustainability of the growth in demand from the Chinese nation-builders. It will also affect competitiveness of the cost of Chinese goods, which have been losing some of their advantage of late with rising labour costs.