Experts at J.P. Morgan have expressed concern at the divergence between business and consumer sentiment, with the executive director of its retail and consumer division Shaun Cousins saying: “We are now watching closely to see if these two groups can come together."
Cousins, who was speaking at the Australian Institute of Food Science and Technology (AIFST) convention in Sydney, also warned of rising levels of consumer debt which would restrict spending power.
“There is high household debts due to interest-only loans, and we are concerned about this because it makes consumers more fragile to changes in prices and interest rates.
“Banks are also starting to rise mortgage rates, and while low employment is positive, there is low wage growth and under employment is high. We believe underemployment is leading to consumer caution because there are many people out there who want to work more than they can.”
Wage growth in Australia is currently at its lowest level in 20 years, running at around 1.9% - lower than inflation which stands at 2.1%.
A further problem for consumers, and indeed food manufacturers, is the projected 10% rise in energy prices.
One bright area for the food industry in general is that out-of-home eating continues to rise, although that will be little comfort for manufacturers who don’t have a significant food service offering.
For those relying on supermarket retail, Cousin’s pointed out that food sales traditionally outstripped the overall retail average, but this has slowed in the past three years.
Increasing pressure
Australia’s main two food retailers, Woolworths and Coles, have also seen their EBIT margins declining in recent years to around 5% and 4% respectively, no doubt meaning suppliers will continue to come under increasing pressure to maintain or reduce prices.
Cousins said Coles now trailed Woolworths in like-for like food sales, but added J.P. Morgan believed the two giants may continue to trade the top spot in the coming years.
They will both, however, continue to be wary of the threat posed by discount retailer Aldi.
“Aldi has had a very influential role on the market here,” said Cousins. “Since 2001 it has quietly chipped away and has contributed to a changed perception of value in the minds of consumers.”
It’s strong private label focus has also had a significant impact on major food brands. Not only has it led to Coles and Woolworths ramping up its private label offerings, it has also resulted in some aggressive discounting from the big brands as they strived to compete.
He also said that CostCo was likely to increase retail fragmentation and competition, and suggested that Kaufland, Lidl’s hypermarket brand, could also set up shop in the next few years.
“And then there’s Amazon,” he added. “After it’s Whole Foods acquisition in the US, we can see they realise they need physical points of distribution for food and can’t purely rely online.”
Amazon will launch in Australia later this year, and while food will not be part of its initial offering, Cousins believes “this will come in time.”
The AIFST convention is taking place alongside the FoodPro exhibition.