A postcard from the AFGC Leadership Forum 2017 – Asia, health and energy on the menu

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Scott Bouvier and Melissa Monks attended the Australian Food & Grocery Council (AFGC) Leadership Forum held at Parliament House on Thursday 19 October.  Scott, Melissa and Helena Kanton report below on the key developments and issues for the food and grocery sector discussed at the Forum.

An annual event, the AFGC Leadership Forum brings together senior executives from Australia's largest manufacturing sector to hear from key government ministers, decision makers and public policy influencers.  While the Forum has a food, beverage and grocery focus, many of the issues discussed are relevant to other sectors.

The Forum also marks the official release of the annual AFGC "State of the Industry Report" (Report).  Although the Report indicated that there has been strong jobs growth in the sector, it also highlighted a decline in turnover for the industry, which AFGC Chairman Clive Stiff attributed to the difficulties faced by companies operating in a low growth domestic market where retail prices remain stagnant despite increases in input costs.  In addition, a 15.4 per cent decline in the real value of food, beverage and grocery exports was reported.  These gloomy statistics seemed to set the tone for much of the discussion at the Forum, with a heavy emphasis on the challenges the industry is facing and less of the optimism of previous years. 

Three key themes dominated the Forum – the sector's role in health, the wider relevance of Asia and the energy crisis.

1. The role of the food and grocery sector in the health of the country

Greg Hunt, Minister for Health, discussed the way that the Government is working with the AFGC in relation to preventative health measures given the interrelation between food and health.  These include a "healthy food partnership", looking for guidance to the work being done in the UK to reduce chronic conditions like diabetes, heart disease and obesity.  Mr Hunt highlighted how in the UK, industry led progressive formulation on a voluntary opt-in basis has led to a reduction of sugar, fat and salt in some foods, but over a number of years so as not to significantly impact taste.  Mr Hunt spoke of a vision that involved a long term practical program with industry looking at portion size and the use of sugar, fat, salt and other inputs over the course of a decade.  Mr Hunt was quite emphatic in his view that any such initiative should be a partnership between Government and industry to better the health of the nation, rather than the imposition of regulation - "there is no need for further regulation or draconian legislation to add to the red tape in the industry".  Mr Hunt also acknowledged the public discussions on sugar, but confirmed that the Government will not introduce a sugar tax on foods.

It was inevitable that the Health Star Rating (HSR) system would get a mention, particularly in light of the commencement of the 5 year review.  Dr Geoffrey Annison (Deputy CEO, AFGC and member of the HSR Advisory Committee) spoke about the misalignment between what people think the star rating for a food should be and what the algorithm produces, but emphasised that the algorithm is based on the requirements of the Food Standards Code and the state of foods as consumed (not when sitting in the pack). 

Dr Annison noted the following trends in submissions to the review:

  • sugar – added sugar is the top issue across submissions. The algorithm refers to total sugar which the AFGC considers more valuable, but consumer lobby group Choice and others are pushing for added sugars to be disclosed;
  • mandatory scheme – another focal issue in submissions has been whether the HSR system should be mandatory. Both Dr Annison and Mr Hunt were of the view that there had been a good take up so far.  Dr Annison commented that the AFGC was not supporting a mandatory scheme;
  • dairy – some dairy products considered reasonably healthy, are getting unreasonably low scores. Dr Annison said members of the Advisory Committee are keen to look more closely at the issue; and
  • wholemeal – the algorithm does not include wholemeal in its calculation, despite the acceptance that wholemeal foods are better. Dr Annison observed that there were good reasons to include wholemeal as an attribute from a nutrition perspective. 

The review will involve consultations, workshops and most likely a further opportunity to provide written submissions.  Dr Annison reassured the Forum that if any change is required to the algorithm or the HSR system more broadly, there will be a reasonable period of time provided to allow a transition to new labels given the long lead times required for FMCG products. 

Key take out: Further food-health regulation unlikely, at least under the Turnbull government.  Opportunities for the sector to collaborate with government to deliver on health outcomes.

2. The importance of the Asian export market only continues to grow

A recurring theme from several speakers was the importance of the Asian export market to the sector.  Craig Mickle of Ernst & Young announced that for the first time, China has become the largest export sector for Australia.  However, it is clear that further growth opportunities still exist in the Asian market.  For example, Mr Bowen noted the considerable growth opportunities associated with Indonesia, which is set to become the fifth largest economy in the world in the next 10 years.  Yet Australia is lagging behind in forging important trade links with Indonesia (which is not in the current top 10 trading partners with Australia).

The opportunities in the region were highlighted through the sheer population figures – with China, Indonesia and India's combined population well exceeding the combined population of Europe, the UK and USA.  However, despite the wide recognition amongst the sector that the Asian market will become key to success in the future, the Forum highlighted that Australia has a poor record in educating itself in Asian practices (particularly culture and language).  Chris Bowen quoted startling statistics regarding the rate of proficiency in Mandarin amongst non-Chinese origin Australians (amounting only to a "few hundred" good speakers across Australia).  Despite our close proximity to Indonesia, a further statistic quoted was that fewer Australians study Indonesian today than in the 1960s. It seems clear that there will need to be a shift in the national approach to engagement with this region given its importance.

Key take out: China hasn't diminished as an important market.  It's necessary to take a broader and longer term view as there is more to Asia than China.  However Australian business still need to do more to become "Asia literate".

3. Energy, energy, energy

In contrast to forums held in previous years, there was a greater sense of pessimism at this year's Forum, with concerns regarding the energy crisis dominating the mood.  This concern is reflected in the Report with discussion of the rising electricity and gas costs "hampering the competitiveness and profitability of the domestic food and grocery manufacturing industry". 

Tanya Barden, the AFGC's CEO, spoke of the need to drive lower cost energy in order to ensure the food and grocery sector remains internationally competitive, as well as support jobs and investment in Australia.  She also spoke about maintaining pressure on gas suppliers to bring more gas into the Australian market, with the Government's power to ban the exportation of gas a significant threat over the energy industry. 

Craig Laundy, Assistant Minister for Industry, noted that much of the discussion in the media concerning the energy crisis focussed only on households, with the impact of high energy costs on industry being largely ignored.  Mr Laundy spoke of the need for government intervention to increase supply and move price downwards.  Mr Laundy also outlined the government's progress in implementing additional measures to enhance affordability and reliability including engaging with retailers, abolishing limited merits review and considering advice from AEMO regarding how new continual dispatchable power is distributed.

Insight into the Australian Competition & Consumer Commission's (ACCC) position was provided by Baethan Mullen, General Manager for the Retail Electricity Price Inquiry.  Mr Mullen highlighted the breadth of the inquiry, covering both the national market and all levels of the pricing chain (and not, like the name suggests, being confined to the retail/consumer level), with the focus affordability, although the regulator is also considering issues of sustainability and reliability.  

The inquiry attracted significant attention from a broad range of industries – with the ACCC having received over 200 submissions from interested parties as well as relying on data obtained using its compulsory information gathering powers.  One of the central findings of the ACCC's recently published draft report, was the unsustainable pressure that increased electricity prices has placed on business, in some cases wiping out profit.  Mr Mullen observed that some businesses were able to pass on these costs to consumers, but that many could not.  He also noted that the high cost of energy was given as a reason for businesses moving operations offshore or shutting down the business.  Clearly these actions and outcomes have a significant impact on the Australian economy.   Interestingly, Mr Mullen spoke about some businesses attempting to mitigate the impact of increasing energy costs through behaviours like reducing usage, investing in energy efficient lighting or equipment, forming buying groups or installing solar systems.  However he noted that not all businesses could do this and that in any event, the effectiveness of such measures have often been eroded by the alarming rate at which energy costs are increasing.  

The concept of an "Energy Code" akin to the Food & Grocery Code of Conduct was mentioned as a potential solution to the crisis.  Mr Mullen noted that such an initiative may be an effective way to regulate industry behaviour if it has broad industry buy in, but did observe that the negatives associated with such a code are likely to outweigh the benefits given the complex regulation already in place in the sector.  Instead, Mr Mullen made clear that the key focus for trying to fix the problem is the improvement of effective competition in the wholesale and retail market, and reduction of the monopoly in networks.  The ACCC considers that there is a lack of competition in the energy sector which is what has led to skyrocketing prices, and so addressing this should "fix" the energy market.  The ACCC is continuing its work in this sector. 

Notably, Chris Bowen, MP, spoke of the need for bi-partisanship in relation to energy, referring to the UK experience where for the last two elections, all parties have had the same energy policy so that no matter who wins the election, the energy policy is the same and therefore gives security and certainty.  Mr Bowen stated that the Labour party had offered a bi-partisan approach.   

Key take out: There is no quick fix to the energy crisis - it will get worse before it gets better.

What else?

In addition to these key themes, speakers commented on some other notable issues:

  • The importance of innovation in the industry, including increasing digitisation of supply chains, changing the way businesses operated. For example, Craig Laundy commented that innovation is the centrepiece of the governments' policy agenda (including $23 million incubation support and an entrepreneurs program).  There appears to be a general consensus of the need to innovate for the benefit of the industry as a whole, and that digital technologies are changing businesses. 
  • The national approach to food safety certification. Mr Laundy hinted at changes to come to – "I want to take an axe to this sector to avoid the hoops we make you jump through at federal, state and council level.  More to come in this space I assure you";
  • The Food and Grocery Code of Conduct review next year. Samantha Blake, Director of Industry Affairs at the AFGC, noted that the Code had resulted in a shift in retailer behaviour but claimed that some "loopholes" remained and the review provided an opportunity to tighten these.

However, perhaps further insight can be drawn from what was not discussed at the Forum:

  • Country of origin labelling.  However this was perhaps the product of resignation of being stuck with the regime. There seemed to be a consensus amongst many attendees about the practical difficulty in complying with it.  Anecdotally, several businesses noted, consistent with our experience in assisting businesses preparing for the 1 July 2018 mandatory labelling deadline, that they are choosing not to make "made in Australia" claims because of the difficulty in understanding the ambit of the current regime.  Instead, many businesses are choosing instead to rely on a "packaging" claim which was observed by some to be counter-productive.
  • Other significant regulatory issues. For example, passage of the new competition law changes (including the misuse of market power amendment), container deposit scheme and ACL Review (particularly the Federal and State Government's commitment to increasing penalties to align with those for a breach of the competition provisions).  Again, perhaps a resignation of the inability to influence change on these now.
  • Government stability. The Forum was held prior to the High Court ruling that Barnaby Joyce, MP, Deputy Prime Minister and Agriculture Minister and Senator Fiona Nash who was Regional Development and Rural Health Minister, are ineligible to serve in Parliament.  Nevertheless, it was somewhat surprising that there was no mention of the then impending case at the Forum, despite discussion of the "Citizenship Seven" dominating headlines in the preceding weeks and the prospect of challenge to decisions made by them in their purported capacity as ministers.  It will be interesting to observe the fallout of the High Court decision, particularly as both Senators have proven to be a vocal supporters for the food and agriculture sector in the past.
  • The entry of Amazon in Australia. It's been a topic that has dominated headlines for months.  Amazon has been a significant disruptor in the US food-grocery market with the acquisition of Wholefoods, launch of "Amazon-Fresh" (a same-day grocery delivery service) and testing of a range of innovations such as the use of drones in meal delivery. Despite this, there was no mention of the e-commerce giant at all at the Forum. 
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