BMI View: The Australian economy continued to slow in Q115, and we maintain our 2015 real GDP growth forecast of 2.3% (versus 2.7% in 2014). The country's worsening terms of trade and unwinding investment boom continue to act as major headwinds to growth. Back in 2011, global food manufacturer Heinz (before it was bought by 3G Capital and subsequently merged with Kraft Foods in 2015) publically criticised the structure of the retail market and said it was a very difficult environment for suppliers. Although spending levels are high on a per capita basis, the relatively small size of the consumer market (population of 23mn) and the structure of the retail market will continue to temper Australia's appeal for global manufacturers.
Headline Industry Data (local currency)
2015 per capita food consumption = +0.7%; forecast 2014 to 2019 = +1.3% compound annual growth rate (CAGR).
2015 soft drinks sales = +2.3%; forecast 2014 to 2019 = +2.6% CAGR.
2015 alcoholic drinks sales = +2.0%; forecast 2014 to 2019 = +2.4% CAGR.
2015 mass grocery retail sales = +3.3%; forecast 2014 to 2019 = +4.1%.
Key Industry Trends And Developments
Government to Enforce Food Origin Labelling: It was announced in mid-2015 that the Australian government is set to implement a new country of origin food labelling system from 2016. Under the new rule, domestically processed foods will carry a label displaying a green and gold kangaroo and triangle icon, with a bar chart revealing the number of Australian ingredients used in the product. Imported products will be re-packaged with a country of origin label. Food firms are also being encouraged to include additional information on their labels. The new scheme is expected to cost businesses AUD37mn (USD27.4mn) a year, while consumers could also need to shell out AUD0.01 more for every AUD5 (USD3.71) they spend, reports FBR.
Wine Australia Unveils Strategic Review : In mid-2015 Australian wine industry body Wine Australia committed to invest AUD35mn (USD26.8mn) annually over the coming five years under its Strategic Plan 2015-2020, released on July 1. The move is aimed at boosting demand and premium paid for Australian wine, together with increasing the competitiveness of the industry. Winemakers in Australia are continuing to face difficulties, with 85% of growers not likely to meet or exceed their production costs in 2015. The Winemaker's Federation of Australia 2015 vintage report indicated that the situation was most serious in the Hunter Valley in New South Wales, where 94% of growers are facing excessive production costs.
New Food and Grocery Code : In mid-2015 there were unconfirmed press reports that German discount giant Lidl is contemplating entry onto the Australian market. Reportedly the retailer has applied for trademark protection in the country and has contacted local logistics companies to establish the necessary infrastructure to open stores. Any such move will place increasing pressure on the country's two largest retailers, Woolworths and Coles.
Risks To Outlook
The key risk to Australia's economy remains the potential bursting of the domestic property market boom. While we would not suggest that the housing market is in a bubble, valuations are very stretched, and affordability is very low. Should we see prices begin to decline, the process could become self-reinforcing as banks tighten lending standards and default rates rise. Given the importance of the Australian housing market in increasing overall credit in the economy, declining house prices could usher in a period of intense deflation and deleveraging.