Consumer Market Bites

More than just a business strategy

As the owner of a family-owned business, you share many of the same commercial concerns as public companies: strategic planning, finance, tax, compliance, competition, people management, technology infrastructure and, of course, growth.

But you also have an additional layer of concern. Your business strategy must consider the unique needs of the family, including succession and financial planning, tax structuring and legal matters.

Determining the optimal strategy isn’t easy, so having someone who can provide impartial, independent advice is vital if you are going to transform your business vision into reality.

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Our advisers can help you develop and implement a sophisticated strategy unique to your business and family. We use creative analysis and apply rigorous tools to ground our insights, as well as giving us the ability to monitor ongoing performance and make adjustments as required.

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Contact PwC's Private Clients Family, Business and Wealth team, to learn how we can help create a strategy for growth that is right for your family.

Transcript

Anthony Goldsworthy:

Welcome to the second episode of PwC's Consumer Market Bites, where we'll be serving up the latest information on the consumer market sector, in bite size digestible format. I'm your host, Anthony Goldsworthy, and in this second episode, we'll be talking about something that's been dominating the public discussion recently, the cost of living, and hearing from some companies and PwC experts that are at the coal face. Our first guest is Klaus Pamminger, the Chief Operating Officer at GrainCorp, he'll be talking about how agri businesses have been impacted and how farmers are dealing with the increased pressures of cost. Over to you, Klaus.

Klaus Pamminger:

The impacts of global supply chain disruptions are many fold, again, given there are so many different drivers that influence global supply chains and value chains, transport cost is the most obvious one, not just in Australia, but globally. So container freight has gone up significantly, international shipping costs for ocean going vessels has increased significantly, and here in Australia on the back of high fuel prices, but also the demand for transportation has increased significantly, having seen our transport cost somewhere in the order of three times as high compared to what they were two years ago. So we used to move grain for seven cents a kilometre roughly, today we're paying close to 20, 21 cents per kilometre, to haul grain from the interior, to our ports for international or for domestic customers.

Resources, that is raw materials, given the balance between demand and supply globally and taking availability of Ukraine grain exports out of the equation, we have a situation where there's a shortage of grains and oil seeds, and that has seen international and Australian values increase significantly, and that will have a flow on effect into manufactured and consumer goods, in agriculture or food supply chains.

Cost increases Australian farmers are experiencing on their cost of production and their major inputs would be fertiliser. So fertiliser prices are today, at least two to two and a half times the price they were compared to 12 months ago, so significant increase. Other cost increases is in chemistry, may that be herbicides, insecticides, fungicides have increased somewhat as well, not as much as fertiliser. As to energy, the price of fuel diesel has doubled as well in the last 12 months, and that is very much linked to global international energy prices.

What is our strategy to increase prices to our customers? We don't have one, it's not possible. We operate in a market based economy, so commodities, food ingredients are governed by demand and supply and the prices that the market will show to us, and we operate accordingly. We work with our customers and we look to help our customers to reduce those impacts of global supply chain disruptions, and therefore the increased prices, by having multi origin sourcing capability. So grain crop sources, grains and oil seeds in Canada, in Europe, including the Black Sea, although that's not possible today, to make sure we can get to our customers globally, the grain sourced in the most efficient and effective manner.

Linda Venables:

Supply chains like it when they're balanced, when supply and demand are balanced, that's when they're most efficient. And what we've seen in the last two years with COVID, is that Australia as a net importer has had that supply constrained. And that constraint has started to drive up shipping costs for two reasons, one, the backlog, but two, a number of freight providers have decreased the number of vessels that they have. So we've seen freight lanes in some cases, increase in cost by 300% in 2022. We've also had the overlay of fuel increase, up 200% in the last two years. When the vessels get to this country, there is a lot of congestion at the ports, and that's taking more effort from a labour perspective, but it's also slowing down containers and containers are the invisible part of the global supply chain flow. When we import, we need to empty a container before we can send it back again. The delays in bringing those containers in have meant that the penalties associated with hanging onto containers for longer, have driven up de-moorage and detention costs by over 100%.

And one of the challenges of getting those containers de-stuffed is everybody is bringing inventory in enlarged quantities, and we're actually finding it hard to get warehousing space. So what's happening is increasingly warehousing space is coming at a premium, being hired at a spot rate and in precincts that are further and further out because the rest of the warehousing space is full. So that's driving up costs for companies in terms of their rental and the transport distances they're having to move. The second part of the warehousing paradigm is a labour shortage, we're seeing unemployment at its lowest rate, we are seeing the great resignation, there are fewer temporary visa holders than ever, and that means that we're paying penalty rates for that labour. We're having to train people, people are less productive, and of course COVID restrictions are meaning that we have to space out and that's keeping productivity a little lower than usual. So all in all in the freight and the warehousing space, there are huge increases in costs.

Lastly, I'll just talk about fuel and how that import impacts the transport industry. So we've seen fuel increase by 200% in cost, but on top of that, we've seen a shortage of drivers, driver workforce is ageing, and there are fewer and fewer people coming into the heavy vehicle driving arena. And as we look into the future, you can see that the transition to renewable energy that is essential to meet our net zero targets, is going to mean that people are looking at rail as a solution and simultaneously looking to change their fleet to be electric. So a number of costing possibilities are building through that transport arena as well. So that's a quick whip through the supply chain.

Anthony Goldsworthy:

I hope you found those insights valuable. I took away a few key takeaways. Firstly, fuel, warehousing and logistics costs are really going to impact businesses and drive inflation in the short term. Secondly, companies are viewing inflation pressure and high commodity prices as something that are going to be around for the medium to long term. This means decisive action is needed now to shore up your supply chain and mitigate the risks of the cost of your business right away. Thirdly, despite the retailer's best efforts, higher prices are going to flow through to the consumer on the supermarket floor. The food and beverage companies that I'm speaking to are expecting consumers will trade down from well known brands into own brand or lesser known brands, just to reduce their overall cost of shop. This poses an interesting question for your portfolio, are you well positioned to take advantage of this at an increased market share, or do you operate in that higher well known brand space?

And that's it for this episode of PwC's Consumer Market Bites. I'd encourage you to use the comment section below, as well as links provided to provide feedback around what you'd like to hear about next episode. A massive thanks to Linda and Klaus for their participation on this episode. Thank you.