Improve productivity and efficiency or perish, says Simplot’s MD

“Improve productivity and efficiency or perish” was the crucial message in Terry O’Brien’s keynote address at the AIP’s National Conference at Surfers Paradise. As managing director of Simplot Australia, O’Brien is well qualified to discuss the ‘Implications for all stakeholders of the accelerating reduction in Australian food processing’.

O’Brien debunked the general assumptions that imports from China are a leading cause of the problems in the Australian food processing sector. He pointed out that many of the so-called “cheap imports” are actually from New Zealand and Europe, not China at all. The cheap imports are actually world prices and Australia is simply too expensive.

Heinz and McCain Foods have not moved their manufacturing to China or Thailand but to New Zealand! And, furthermore, a leading driver for this relocation was labour costs. A side effect of the Australian mining boom is the expectation among all workers that annual pay increases without commensurate productivity improvements are de rigueur. Unions are becoming more active and workers are demanding ever more from food manufacturers without offering any input into solving the manufacturing sectors woes.

The position in regional areas, according to O’Brien, is compounded by the average age of workers being greater than 50. These workers would rather like a nice retrenchment package, which they believe is their right, and so basically have a vested interest in having their employers fail. As often the food manufacturer is the major employer in the town, this means the workers are really hoping to see the demise of the towns themselves.

O’Brien did admit that the food industry in Australia does suffer some extra burdens. The retail duopoly, where Coles and Woolworths control 80% of the food supply and take 33% profit from the food train compared to the global figure of 25%, does make life more difficult for food processors here.

The other mitigating factor is simply size and the resultant lack of scale available. Australia does not have a large enough population to make automation options viable for many processors and then there are the transportation costs.

At the farm level, O’Brien contends that the family farm has to go. Farms have to consolidate to take advantage of cheaper infrastructure to be able to become competitive. In Australia, Simplot buys, on average, 900 tonnes of potatoes from each farm; compare this figure to China - 3000 t, New Zealand - 9000 t and the USA where the figure is 17,000 t.

Food processors have four options, according to O’Brien:

• Shut up shop
• Scale down to specialist, niche offerings
• Concentrate on protected categories
• Adopt a hybrid model of mixed onshore and offshore production

The short supply chain is going to be the key to onshore food processing. Products with short shelf lives are better serviced locally. This is why Simplot is investing in the chilled food sector and purchased Lean Cuisine from Nestlé.

An interesting keynote address at a very interesting conference.