What manufacturers should do about the high AUD
You're in a high wage country, your currency appreciates quickly and factories in China use fast learning, high volumes and an incredibly cheap supply base to kill your margins.
What to do?
Well, GrowthPath's founder, Tim Richardson, can tell you what he did when both faced with this situation in Germany and France a few years ago.
1. You need to quickly work out where you have a genuine competitive advantage (for FMCG firms facing the private label push by Coles and Woolworths, watch out: your brand may not be worth as much as you hoped. See Lion cries over spilt milk)
2. Any competitive strategy based on having the advantage of scale or size is over. (this is actually good for small manufacturers, because they're used to being small. For Australian businesses that thought they could acquire and grow to get a dominant size, it's time for a rethink).
3. You are guaranteed one major competitive advantage: you are geographically close to your customers (assuming that the high AUD has made you focus locally).
(2) is a reality check. Australian manufacturers will never, even again have any chance of competing on volume. Manufacturing strategies based on high utilisation, high production runs and low variation are not the way forward. Experience tells me that the best firms can delay the inevitable for quite a while, but all they can do is delay.
(1) should lead to outsourcing and restructuring. It's important to stop bleeding. If you outsource products you are being killed on, at least you keep customers.Sourcing is complex and manufacturers are good at it, so this is a chance to build some added value.
(3) is the key. Become metaphorically closer to customers, not just geographically closer. Focus on become responsive to opportunities. Be the first to quote.
The PPRS strikes: Retention of Title is not what it used to be and not enough Australian businesses have noticed
Many suppliers to defunct WOW Sight and Sound have got a $25m shock because they didn't pay enough attention to a big change to Australian business law which took effect on Jan 30, 2012: the PPSR. They've discovered they are now unsecured creditors because they didn't register Retention of Title interests.
Australian businesses which sell physical goods on credit to other businesses usually have a Retention of Title (ROT) clause in their trading terms and on their invoices. Retention of Title is a common law concept meaning that a customer doesn't get title in goods until they're paid for, meaning the supplier can retrieve unpaid property if the customer goes into administration. It's of most relevance to trading stock.
Common law Retention of Title doesn't really exist any more, because at the end of January 2012 Australia has implemented the New Zealand system of a national registry of security interests. This is innovative for a few reasons: it combines consumer and business securities, it presumably greatly reduces the risk of security-interest fraud and lowers validation costs ... and it also completely replaces the old retention of title law.
ROT is now a security interest that needs to be registered. I haven't personally registered one, so I don't know how it works, but the idea seems to be that you register a ROT-situation once per customer, not for every invoice. Presumably businesses should make it part of the process of giving credit terms to a customer. It's not free.
Apparently a lot of suppliers to Wow Sight and Sound didn't take action. The administrator has refused claims to pick up unpaid goods which have not been registered at the PPRS. One report values this at $25m. A great win for secured creditors.
I'm not sure whether this is correct behaviour by the administrator since there are transitional arrangements, but the old protection (title is not transferred if goods are not paid for) has been substantially reduced if the PPSR is not used. According to the article below, the WOW administrator is refusing claims and is selling the stock to raise funds, which of course go to priority creditors.
Read more about PPSR and Retention of Title
http://www.ppsr.gov.au/ForBusiness/Newrules/Pages/default.aspx
and
http://www.mondaq.com/australia/x/164934/Contract+Law/Retention+of+title+ROT+clauses+under+the+PPSA
Private Labels and supermarket competition
Many Australian branded goods FMCG manufacturers are nervous about the proposed increase of private labels on the shelves of the two large supermarket chains. In some comments, this is linked to the 80% market share of the Coles and Woolworths. Other approaches are even more defensive and futile, such as trying to prevent "copying" of branded-product packaging.
I have a strong FMCG manufacturing background. I'm not anti-FMCG. But I don't believe in trying to hold back the tide. Change is coming. It's overdue. There are ways to respond which are based on getting ready for the future. Trying to erect barriers in the face of this change will fail, and distract FMCG manufacturers from adapting. So not only is it a waste of money and effort, it is worst of all a waste of time. If manufacturers try to solve this by going to war with the big supermarkets, they will lose, and deserve to lose. Instead, they need to offer products that consumers want to pay for. Since their customers are committed to making private labels a bigger, it's time for the manufacturers to look for opportunities in this change.
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In a report released yesterday by the Australian Food and Grocery Council, the share of Australian supermarket private labels sales is expected to rise to 40-50%. The report, 2020: Industry at a Crossroads describes this as a level consistent with mature markets. Many angry manufacturers blame this on the high concentration of Coles and Woolworths; in contrast, I believe the high concentration is more likely to explain why private labels in Australia are currently only 25% of food and grocery sales, much lower than comparable markets elsewhere. Please see my earlier article for more on that point: Private labels and supermarket competition
Despite the facts in the report, the report blames this apparent normaliastion of the food and grocery market on the high concentration of Coles and Woolworths.
It also acknowledges other factors which are more likely, such as the high AUD.
Being positive, some advice is given to local players:
Read more: Why private labels are increasing: it's not retail concentration
Lion cries over spilt milk
A warning for manufacturers regarding growth in Australian house brands
The Age reports that a large milk processor, Lion (owns Pura and Dairy Farmers brands) has moved to a loss due to the milk price war.
It looks like this is evidence that the price way is harming milk producers. But the details of the story don't prove that the supermarkets are selling below cost and I'm sceptical that the price war is harming farmers or consumers. I think a bit of mix analysis will shine some light. This story is an interesting case study for manufacturers affected by the private labels/home brands promised by Australia's two leading grocery chains. It shows how easily category margins can collapse with changes at the entry level.
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- Last Updated: 18 July 2014 18 July 2014