The profitability of food and grocery suppliers operating in Australia is “significantly below” international competitors, a report has claimed.

The study from KPMG, undertaken at the request of the local industry association The Australian Food and Grocery Council, claims to show how supermarkets have seen “steady growth” in turnover while sales fall among suppliers.

Between 2010 and 2012, the profitability of Australian food and grocery suppliers fell 28%, the report, which the AFGC called a “health check” on the sector, showed.

AFGC CEO Gary Dawson said the report represented a “watershed” in the debate over the “viability of Australia’s largest manufacturing sector”.

In recent years, suppliers in Australia, both domestic and multinational, have complained about the buying power of the country’s largest grocers. Some have also cited the strength of Australia’s currency, which has led to competition from imports.

Dawson said the sector had faced numerous challenges, including falling retail prices, as well as high costs, the high Australian Dollar and increasing competition from imports.

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“Previously we have had plenty of anecdotal evidence of how tough the market conditions have become for food and grocery suppliers. This report provides the hard data to assess market trends and chart a way forward for this critical industry. It presents real data from real companies operating in Australia, as well as providing comparisons with international benchmarks,” Dawson said.

He said the report showed suppliers were “significantly increasing the funding of price discounting among retailers”. Trade spend, he said, had increased 6.4% per year over the past four years.

Dawson claimed suppliers were spending less on marketing and R&D and focusing on containing labour and operating costs.

“The overall picture is one of suppliers having to adjust rapidly to the shift in market conditions by investing in improvements to manufacturing systems to boost productivity and reduce labour and energy costs, and the funding of retail price promotions to try and maintain volume,” he said.

“Looking forward the ability of the Australian food and grocery manufacturing industry to increase its competitiveness and win export opportunities will require a continued focus on cost containment and capacity rationalisation, greater collaboration with retailers to drive growth and share the benefits of supply chain efficiencies, and a rebalancing of trade spend to boost brand building and innovation.”

Earlier this week, Australia-based food manufacturer Goodman Fielder forecast another year of falling core profits as it increases its marketing investment to support product launches.

Australia’s largest retailers Woolworths Ltd and Coles have announced a series of price cuts in sectors like bakery and dairy – central to Goodman Fielder’s business -in recent months.

Alongside the trading update, Goodman Fielder also reported the renegotiation of a private-label bread contract in Australia, believed to be with Coles. Goodman Fielder CEO Chris Delaney described the deal as “another strategic milestone in the continued turnaround of our baking business”. Delaney had reportedly threatened to stop supplying Coles if the retailer did not pay more.

In April, we interviewed the CEO of Associated British Foods, which owns Australian food company George Weston Foods. For his comments on trading in Australia, click here.