Consolidate or die: how to prepare for the Amazonageddon

Beyond the big-name players, the Australian food industry is hugely fragmented. An industry with an estimated turnover of $120bn, in 2014 there were 1,537 employing more than 20 people in food processing, what is more staggering is less than 10% of these employ more than 200 people.  The sheer geography of the country, the entrepreneurial and family ethos of business and perhaps a historic lack of serious appetite for the sector from private equity are all drivers of this fragmentation.

Now though, we’re on the precipice of change – thanks to the growth of private label, a few wins for private equity and an untapped export market.

When we talk consolidation, we’re not just talking about two cake manufacturers buying another, but the entire food sector more broadly.

A great example of this is what Pacific Equity Partners is doing, adding Pinnacle, Patties and now Australian Wholefoods to its portfolio. I wouldn’t be surprised to see them all rolled together in the near future and probably sold to the highest bidder. Setting a new trend for the sector, the race for consolidation is about to begin and we think it could be worth getting in on it.

Australia has scale like no other when it comes to land – paradoxically when it comes to realising synergies and efficiencies, we find ourselves blaming these very geographical challenges for an inability to consolidate before really considering the opportunities.

And the opportunities are enormous, underpinned by a growing private label sector.

Private label continues its market growth up from 18% to 30% in the last five years and is expected to reach 35% of all food and grocery sales by 2020-21. Yet it is still significantly under traded compared to other countries. The share of shelf is more than 53% in Europe and 35 % in the United States, indicating that there is some serious headroom room for growth beyond the the forecast.

There are very few pure-play private label businesses in Australia – most suppliers will operate in a brand and private label business. Pollen estimates Woolworths and Coles each have more than 500 suppliers of private-label products, which is surely not sustainable with the sector growth anticipated.

In the UK private label has more than 50% of the shelf and has a number of key players that dominate the sector: Bakkavor, Greencore and Samworth Brothers as just a few examples. These are all billion dollar businesses that carry very few brands and focus on driving the private label with retailers. The retailers therefore enjoy a greater level of simplicity in relationships at a commercial level and also through their supply chains.

The business structure and organisational design in a private-label manufacturing play is different to a branded business. Marketing and sales need a different approach and often fewer resources. Product development is about collaboration and insight, not necessarily the next big thing. Joint business plans and a balanced supply portfolio protect the business from the macro environment.

Overall, the private label business is more inward facing and aligned to costs, managed by less complex market penetration metrics and a significantly smaller number of customers means fewer overheads, a leaner structure, centralised overheads and significant ongoing cost focus. This means the pure-play private label providers become the lowest-cost provider. Spare cash is invested into capital and equipment to drive efficiencies and technology, not sales and marketing campaigns. The reality is that the manufacturer is an extension of the retailer – the higher in the integration the more optimised the model.

Deciding where to play will be critical, particularly in a consolidation….

Running both models means businesses are optimised for neither. Exiting brands or private labels would reduce a manufacturer’s turnover significantly and make it an unviable and unappealing for investors.

This is where consolidation comes into its own. It would be possible to split private label and brands in two, growing scale and efficiency in the private-label business and simplifying the interactions for the retailers. And that makes you wonder whether it should be the retailers driving this agenda?

Morrison in the UK has integrated its supply chain across a number of key private-label areas, establishing its own capability. This strategy comes with both risk and reward. Perhaps a hybrid model is suited for Australia where the retailer funds, invests and even backs a play to build these suppliers.

Add in the export market and you have a whole new breed of supplier: Waitrose sells its private label brands in Hong Kong supermarkets. Why not Woolworths or Coles doing the same? The Macro brand for Woolworths could be an ideal starting point.

We must remember exporting is a complex beast

To execute exporting efficiently, sales channels need unpicking, networks need to be established and a supply chain needs to be in place. A fragmented supply base and smaller players exporting are creating duplication and distractions in their businesses. A consolidation of manufacturers could result in a leaner and more efficient export model that could be recognised as such by the overseas market, playing from the strength in perception of the Australia quality, while harnessing synergies and efficiencies.

 Keeping it owned in Australia

We may call it export now but countries overseas will be calling it off-shoring, as foreign investment continues to grow in Australia, picking up assets previously owned locally. The latest such deal will see Weilong Grape Wine Company and its Green Dragon brand building a winery near Mildura purely for the Chinese market. This is fast becoming a paradox to the drive for buying local, with the profits going off shore and with it a likely price increase locally. This is just another reason for the retailers to protect their supply chain and manufacturers to get ahead of the cost curve while benefiting from export growth.

How to make it happen

Our conclusion is that although brands might see an increased level of consolidation and bottom-line benefits, this space will continue to operate “business as usual”.

The bigger play is the investment into a private label and an export model, combining the two and getting this right could create a mutli-billion-dollar manufacturer quite quickly. It would need the backing of a retailer, private equity or some like-minded business owners who see a future in private label and a hell of an integration to harness the opportunities.

Coles and Woolworths have already started with this in meat and a few other sectors where scale is immediately visible. Earlier this week Woolworths Chief Executive Brad Baducci talked about Woolworths as a food business not a retailer, discussing the importance of the channels to the customer with the imminent arrival of Amazon. Perhaps looking at the channels into the business could be the competitive edge a retailer is looking for?

The idealists among us would love to find a group of business owners who were ready to combine assets, putting together this model overnight and then leveraging those assets to fund the integration, optimisation and potential future ventures. Applications on a post card please. Until then we are in the hands of private equity, retailers or foreign investment.

Written by Paul Eastwood and first published in