21 March 2016

Preventing weak links in Australia’s food chain

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Preventing weak links in Australia’s food chain

Food manufacturing food chain fruit image

Australian food producers are tasked with meeting changing demands of consumers, and require the latest equipment to stay ahead at the top of their own ‘food chain’.

Australia’s food chain is becoming shorter yet more complex. In days gone by, each link in the chain was tasked with doing a specific part of the value-add process – that is, improving revenue from the same resources, through processes such as more efficient manufacturing. Agribusinesses would grow the food and outsource packaging and distribution, or food businesses would buy in produce and send it down the chain for packaging, and so on.

While these practices still happen today, a more discerning, inquisitive and educated Australian population has brought about a change in the processes involved in getting food from source to dinner table. Today’s consumer is more concerned about where their food comes from, how it has been grown or produced, how it is packaged and the way it is handled.

Studies from Roy Morgan Research [1] in 2015 reveal various examples of this:

  • 83 per cent of the Australian population consumes fresh vegetables, making them more popular than frozen (50 per cent) and tinned (18 per cent);
  • 13.6 million Australians drink fresh milk, while only 2.9 million choose treated and long-life options;
  • The great majority are likely to buy Australian-made food to avoid consuming fattening, genetically modified and additive-laden produce.

The latter statistic suggests that the Australian food chain is as strong as ever, with those who say they are more likely to buy Australian-made produce increasing from 85 per cent to 88 per cent between 2013 and 2015, according to Roy Morgan. However, in a bid to cater for a more health and environmentally conscious consumer base, there is a weak link growing, and what remains unclear is whether it will affect margins in such a capital-intensive industry.

An expanding food chain

Businesses are looking to satisfy changing consumer demands by taking control of the entire food-production chain. Agribusinesses are purchasing equipment and managing logistics – two things they have not been tasked with in the past.

To take control over the shrinking supply chain, businesses are buying assets that they have never needed before. Whether that be for packaging, manufacturing, farming, transport or other areas in which they haven’t operated in the past, it’s a substantial area of growth that requires a focused asset management plan.

Going capital-light

Much like consumers’ dietary preferences, many businesses are going ‘light’ in their use of capital expenditure. A capital-light model is a reduction on large asset expenditure by utilising the benefits of the operating budget.

Equipment leasing is a good example of how businesses can go about this. By reducing up-front capital expenditure on the equipment they need, those taking over more than one link in the food chain can finance equipment rather than buy it outright.

With average lease terms of three to five years, monthly repayments for the new assets can be placed in the operating expenditure (opex) budget, while maintenance, repairs, additions or upgrades are handled and financed by the leasing company – reducing the burden on the lessor, who may yet be unfamiliar with their new equipment.

Instead of a full-fat purchase, a capital-light model could be the reason why manufacturing businesses intend to increase their asset base at an increased rate. The January 2016 Alleasing Equipment Demand Index (the Index) reveals that 27.8 per cent of manufacturing businesses intend to expand their asset base in the March quarter, more than the average for all industries, which stands at 26.3 per cent.

Using existing capital to buy an asset outright is progressively falling out of favour however. Only 14.1 per cent of manufacturing businesses said they intend to acquire new assets in this way – below the 19.3 per cent average.

Feeding growth

Australia’s food and beverage industry is in a good place – it is the largest manufacturing industry in the country and enjoys a consumer base that prefers locally-grown produce. That’s not to say imported food is out of favour, with food brought in from foreign shores valued at a $11.6 billion, according to the Department of Agriculture.

In terms of getting the most from assets, manufacturing value-add in the food and beverage industry managed to increase by 2.3 percentage points in the 10 years to 2014, despite manufacturing as a whole declining by 4.1 per cent. It’s an industry that has a wealth of potential, should changing trends be managed effectively.

With consumer tastes changing, businesses that make up our food chain will be tasked with becoming more self-sufficient. It’s a big challenge, especially in light of how it could affect cash flow, though one they are perfectly equipped to handle.

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