There is no doubt that Australia is a tough place for a food manufacturer to do business. Competition between two powerful local food retailers is putting pressure on domestic and international suppliers. In this month's just the answer, Ben Cooper discusses the challenging trading conditions with Kate Carnell, chief executive of industry association the Australian Food and Grocery Council.

just-food: Heinz recently described Australia as an "inhospitable" market. Why are things currently so tough for food suppliers?

Carnell: I don't think there's any doubt that Australian food manufacturers are under an extraordinary amount of pressure at the moment. We've also got an Australia dollar higher than the American dollar so imports cheaper than ever. We've got costs going up at a higher rate than inflation. We've seen the cost of petrol and diesel escalate and in a country like Australia that’s a very real issue. And we've got the highest level of market concentration of supermarkets in the world apart from New Zealand.

just-food: Has retail concentration become more of a problem recently? If so, why?

Carnell: Coles and Woolworths Ltd have round about 80% of the market; that has increased significantly over the years. Now that's huge market concentration. For a long time Coles were very definitely the second-rung player. But since the change of ownership [Wesfarmers acquired Coles in 2007], there's been quite a significant turnaround at Coles, [and] the competition between the two has escalated. What that's meant to manufacturers is that they are being much more aggressive in their relationship with their suppliers than we've seen before in Australia. Both retailers are looking at increasing private label to the same sorts of figures you would see in other countries such as the UK. We've seen growth in private label from about 15% in 2003 to 25% in 2010. 

just-food: Would greater retail diversity and the entry and growth of new players, like Aldi and Costco, help?

Carnell: Fairly obviously it's important. The problem in the supermarket space is that to compete with Coles and Woolworths with the level of market dominance they've got, you've got to get the sites. If the sites are all tied up where the major populations are, then how do you actually get the footprint? For any new player to come to Australia and to try to compete in the full-line supermarket space the challenge for them is going to be trying to get the sort of locations they'd need to be able to compete. Aldi is not a full-line supermarket. They're predominantly a private-label operator. So is Aldi a lifeline for brand manufacturers? Well, no. Costco have been in the market for a few years now but it's not your full-range supermarket that people do their weekly shop at. They're not in the Coles and Woolworths space.

just-food: Do you feel that the Australian Competition and Consumer Commisison is protecting suppliers from the concentration in the retail market?

Carnell: Sorry. The ACCC has done nothing. In fact, they have allowed and supported Coles and Woolworths getting bigger.

just-food: Is the ACCC's attempt to block the acquisition of Franklins an example of that?

Carnell: We haven't been able to get our head around the ACCC's view of this. It shows just exactly how the ACCC think. They don't think 'whole of industry'; they think very flat so they determined the Metcash deal was bad because it reduced competition in the wholesale market. It's fundamentally because of the brief that the ACCC have got in Australia. The Metcash deal showed it again. They were only willing to look in that narrow space, not that potentially IGA/Metcash getting bigger would be a good thing for the whole market.

just-food: So how much scope does the ACCC in fact have to protect suppliers?

Carnell: There is a requirement, as there is for everyone, not to engage in unconscionable conduct but unless under the Competition and Consumer Act somebody can demonstrate unconscionable conduct, the Act doesn't do anything. That's a very, very high bar and of course in the supermarket space in Australia, because of the level of domination, it's a brave supplier that's willing to take that on.

just-food: Are suppliers fearful of complaining about the power of the major supermarkets?

Carnell: When you've got true market failure it's extraordinarily difficult for any company to put up their hand and say there's a problem, which I suppose is the reason the Heinz comments have been out of the blue a little bit, because they were made internationally, not here in Australia. On the whole, manufacturers here won't put their hand up.

just-food: Do you and your members welcome Heinz's remarks?

Carnell: Heinz said it as they saw it and I have to say they wouldn't be unique in their views of the Australian market. 

just-food: Do you think the government should brief the ACCC to take more account the effect of retail concentration on suppliers, or is that a forlorn hope?

Carnell: The answer is yes, it should happen, and is it a forlorn hope, probably. But that's the reason we're pushing for a supermarket ombudsman or adjudicator, and a co-regulatory code of practice. Now a supermarket ombudsman could obviously sit inside the ACCC legislation or it could sit separately, that's a matter for debate, but unless there is something in this space, there is no real option for suppliers to take any action, shall we say, with any level of protection.

just-food: Is there political support for that?

Carnell: At the moment I'd have to say not much. That doesn't mean there's opposition either. It just means there hasn't been as much as we would like. Equally, I think, all major parties and the independents can see the problem. We'll be doing all in our power to ensure a code a practice, an ombudsman. But I think that really the industry is going to have to look a bit broader than just that as some sort of magic bullet to solve this problem.

just-food: In what sense?

Carnell: The industry in Australia probably hasn't invested as heavily in plant and equipment and in innovation as we should have. This is a really tough time to do that but the industry's got to get more efficient [and] focus on innovation, the sort of products that aren't baseline commodity products because it's very hard to compete in that space with both private label and pretty cheap imports.

just-food: In fact it's a time when the industry really needs to be attracting inward investment from multinationals, so Heinz saying Australia is an inhospitable market must be a concern?

Carnell: You asked me whether I welcomed those [comments] and I didn't say I welcomed them. We certainly don't want to see Australia as a bad place to invest because it's actually not a bad place to invest.

There's a world of things we've got going for us in Australia. Australia's economy is a damn sight better than most others in the world, our unemployment rate is low, we have a stable government, a good regulatory environment, we produce great primary produce at pretty reasonable prices and we're very close to the Asian market. So our challenge is really showing our point of difference, to get dollars into Australian manufacturing.  

A very large percentage of our companies, of my members, are multinationals, so when they make investment decisions they're making them globally. What's the reason that they put that extra fifty, hundred million into Australia? We've got to give them that reason.