Pressure mounts on food producers

The past year has been a tough period for some of Western Australia’s best-known food manufacturers.

Iconic smallgoods producer D’Orsogna reported flat sales and a decline in profit; listed company FFI Holdings reported a substantial fall in profits from its core food manufacturing business; Noodle exporter Ball Noodles has just closed the doors of its Hamilton Hill manufacturing plant; and KH Foods, which owns the Mills & Wares bakery business, is trying to complete a major debt restructuring to stem big losses.

But the news isn’t all bad.

Companies like D’Orsogna and FFI believe their weak performance in 2006 was an aberration and plan to bounce back next year.

David Clapin’s Anchor Foods, which produces a range of food ingredients, is also bullish about the future after achieving 15 per cent annual sales growth in recent years.

And WA’s biggest smallgoods maker, George Weston Foods, says it has already recovered from difficult trading conditions.

Food manufacturers have been affected by the same pressures as many other industries in Western Australia.

The resources boom has pushed labour costs, staff turnover and the Australian dollar higher in recent years, making it harder to compete against imports.

Food manufacturers have also been squeezed by rationalisation in the grocery industry, including the break-up of Foodland, the trend to private label brands and the constant pressure from Coles Myer and Woolworths to lift supply chain efficiency.

These changes contributed to D’Orsogna suffering a small drop in sales revenue last year to $81.1 million and a sharp fall in net profit (see page 10).

Jandakot-based FFI Holdings, which produces chocolate, confectionery, bakery and smallgoods products, was hit last year by the higher cost of sugar and other inputs and was also affected by rationalisation in the grocery sector.

“Flat sales and reduced profit margins significantly affected our profits from food operations,” chairman Rod Moonen wrote in the 2006 annual report.

“While generally our various food business units performed well and enjoyed sound growth, overall sales were held flat by the rationalisation of a number of product lines by the major retail chains and increased competition from imported products.”

In contrast to companies such as D’Orosgna and FFI, which focus on the domestic market, Ball Noodles focused on export sales.

Established four years ago by the Ball family and Japan’s TOHO group, Ball was meant to typify the future of manufacturing.

It identified a market niche, invested in capital equipment, focused on product quality, and added value to Australian wheat.

Sales grew steadily to about $5 million but the business failed to generate adequate returns.

Director Charlie Ball confirmed the manufacturing plant closed last month and said the business had been sold to offshore interests.

The challenge for WA food producers is to compete against the big international companies that have acquired iconic WA brands such as Watsonia, Peters & Brownes and Masters Dairy.

But even the big players are not immune from market pressures.

George Weston, for instance, owns the Watsonia smallgoods business, which claims 55 per cent market share in WA.

It expanded its operations in this state last year by purchasing the number three producer, Adelphi and Globe Smallgoods.

The vendor, Craig Mostyn Group chief executive David Lock, said the sale reflected the increasingly national nature of the grocery market.

“The retailers primarily want to have national suppliers and we weren’t big enough to be a national supplier,” Mr Lock said.

For George Weston, the acquisition allowed it to close Adelphi’s Bellevue factory and consolidate manufacturing at Spearwood, where it has invested $5 million upgrading the equipment.

The consolidation helped George Weston improve the profitability of its meat and dairy business, which owns major smallgoods and dairy brands in several states.

This was disclosed by its parent company, Associated British Foods Plc, which said last week: “It is also encouraging to see the improvement in profitability of the meat and dairy business in Australia after two difficult years that saw the consolidation of production facilities and challenging trading issues”.

While Craig Mostyn sold out of the smallgoods sector, D’Orsogna managing director Brad Thomason said his company was determined to become a bigger national supplier.

He said most of D’Orsogna’s growth in recent years had come from its ability to grow outside of its home state, and it has developed a strategic plant to support further expansion.

Mills & Wares owner KH Foods (formerly Keith Harris & Co) aspired to become a national bakery goods supplier but its plan hit the rocks.

The national expansion strategy was launched in 2003 and included buying Mills & Wares and expanding in other states.

The strategy helped KH lift sales to about $100 million but left it with a crippling debt, making it reliant on the support of major shareholder Washington H Soul Pattinson and Company.

KH is planning a rights issue to retire debt and stem its current losses.

Anchor Foods, with annual sales of about $30 million, is a minnow in the food industry but marketing manager Lloyd Constantine believes it has found a successful niche.

He said Anchor was a nationally focused business working very closely with the major retailers.

Mr Constantine acknowledges the industry is more competitive than ever.

“You can’t take your eye off the ball for a second,” he said.

One of the keys to Anchor’s success, he said was the strength of its brands, which include Lighthouse and Snowflake flour.

“There is a trend to private label brands, but if your brand is strong enough, there is a role for them,” Mr Constantine told WA Business News.

He said some of Anchor’s brands were helped by their longevity, but the company also had to invest in innovation, provide effective marketing support to retailers, and generate increased sales.

“You need to engage with those trends, not fight against them.”

Mr Constantine added that Metcash, which bought Foodland’s wholesale business, had sought to look after the WA market.

“They support WA brands,” he told WA Business News.

Mr Moonen said the trend to private label brands was one of the biggest issues facing the sector, but believes it can create opportunities for niche suppliers.

“We do lots of private label work, we have introduced new products in the current year,” he said.

FFI competed against imported products by highlighting the quality of its food products, Mr Moonen said, adding that FFI spread its risk by producing branded products as well as supplying private label brands and the industrial market.