MEDIA RELEASE: SPC a story of 'the brand that could': Watkins

The SPC story has many similarities to the children’s tale “The Little Engine that Could”, according to Alison Watkins, CEO of the beverage and food processing giant Coca-Cola Amatil, which owns SPC and saved it from obliteration. “Both are stories about the value of optimism and hard work and both have a lot of heart. We’re not quite sure if we’re over the top of the mountain yet — but we think we can,” Ms Watkins said.

Speaking at the Centre for Independent Studies, Ms Watkins said the struggle and survival of SPC was a story of ‘can do’ attitude and strategic changes with the times.

Full transcript of Ms Watkin’s speech. HD video is also available on request

We have all heard the case put forward that Australia should take advantage of its proximity to Asia, to position itself as “the food bowl of Asia”. In July last year, the Business Council of Australia released a discussion paper entitled ‘Building Australia’s Comparative Advantages’. A supporting report from McKinsey & Company titled, ‘Compete to Prosper: Improving Australia’s Global Competitiveness’ identified agriculture and food manufacturing as a high potential sector of comparative advantage for Australia.

The BCA is currently undertaking an in-depth sector study into the Australian food industry, titled “Building the Competitiveness of the Australian Agrifood Sector”, which I am delighted to be chairing. It is a great opportunity for us to identify actions that will improve the competitiveness of these sectors domestically and globally and ensure they are well positioned to capitalise on rapidly increasing demand from emerging markets in particular throughout Asia. We hope it will be a valuable contribution to the Federal Government’s White Paper on Agriculture Competitiveness.

Australia currently produces enough to feed 60 million people. Whilst we do not have the scale to support supply to the emerging Asian middle class, we can increase our output and we do have a strong reputation for high quality, clean, green products that justify premium prices. In fact the McKinsey Report ranks Australia eighth out of 107 countries on food quality and safety.

THE OPPORTUNITY IS REAL AND WHILST THE FUTURE FOR AUSTRALIAN AGRICULTURE IS COMPELLING, THE FUTURE OF AUSTRALIAN PROCESSED FOOD IS LESS CERTAIN.

The Australian agriculture sector has certain inherent advantages that position it well for future growth. We have plenty of land and water. This natural competitive advantage coupled with decisions made by our Governments over decades to deregulate the sector and encourage free markets have resulted in innovation and improved our competitiveness.

Deregulation of Australia’s domestic wheat market for instance began in 1984 although it has only been a few years since the wheat exporter AWB was finally stripped of its monopoly to export Australian wheat. A deregulated market meant that Australian farmers could sell their wheat to whomever they want.

In 1991 the Australian Federal Government ended 20 years of the reserve price scheme for wool, which had guaranteed growers a minimum return but also led to the accumulation of a huge stockpile of wool that couldn’t be sold and industry debt of $3 billion. Unfortunately for the wool industry and sheep farmers deregulation came too late to avoid a huge amount of damage for the industry.

The dairy industry is the latest in Australian agriculture to be deregulated. In 2000, state borders became irrelevant, quotas, levies and set prices for farm gate price for drinking milk disappeared and restrictions on the interstate movement of milk were lifted.

Today the Australian agricultural sector is one of the least subsidised in the world. Subsidies to our farmers sit at around 2% compared with the OECD average of around 18%. This drove the need for innovation and the Australian agriculture sector embraced the changes and has become much more productive overall.

For example in the Australian wheat sector many innovative initiatives have been implemented since deregulation that have doubled the average wheat yield. Things such as crop rotation, new varieties and no-till farming practices, have all played a part.

The Australian food processors however have had a much harder time, particular those involving greater local value add or transformation. Compared with the agricultural sector, productivity in food manufacturing has been under much greater pressure. There are a number of reasons for this, both external factors and others that go to the “commodity”/producer mentality of many food processors.

Let’s look firstly at the external challenges. Analysis undertaken by KPMG in 2014 concluded that out of 10 developed countries examined (including the UK, US and Germany) Australia’s food processing sector has the highest costs of doing business. Australia was among the most expensive countries for labour costs, facility costs, transportation costs and energy/utility costs.

Adding to the complexity of the situation, in recent years there has been a dramatic shift of value from food suppliers to retailers and consumers. A report issued by Morgan Stanley in October 2014 suggests that Australian food suppliers to the grocery industry declined in profitability by close to 40% in total over the period 2010 – 2014 while retailers grew their profits by 30% in the same period.

The Morgan Stanley findings were supported by a report published by the Australian Food & Grocery Council in May 2014 which concluded that profitability within the Australian food processing sector had reduced collectively by 30% since 2010.

These shifts have resulted in a number of Australian food processors struggling to make an investment case to invest new capital that will enable them to continue manufacturing in Australia. Instead they have decided to close down or relocate their manufacturing offshore. This was the case with iconic Australian brand, Golden Circle and it nearly was the case with SPC.

Golden Circle started out as an Australian pineapple cannery in 1947 and expanded into fruit juice, canned fruit and vegetables. In 2008 it was acquired by international food giant, Heinz, a US based company. Over the period 2011 to 2014 Heinz made the decision to close a number of its Australian manufacturing plants and send more of Golden Circle’s manufacturing to New Zealand to ensure the commercial future of the business. This action resulted in around 500 Australian job losses.

Other examples of Australian food processors moving production offshore include McCains, SunRice and Streets Ice Cream.

The upshot of all this is that while Australia is still a net exporter of processed foods, our processed foods imports have been growing much faster than our exports over the past decade.

SO WHAT MADE SPC DIFFERENT? WHY DIDN’T SPC CLOSE SHOP OR MOVE PRODUCTION OFF-SHORE? WHAT CAN WE LEARN FROM THE STORY OF SPC?

All very good questions. SPC is the oldest and the last Australian owned fruit and vegetable processor. The business was started in 1918 by a group of growers who formed a co-operative called the Shepparton Preserving Company to process their produce in Victoria’s Goulburn Valley.

Four years later another group of nearby growers formed a co-op under the name Ardmona. Cooperatives often don’t move fast and it took until 2002 before SPC and Ardmona merged to form SPC Ardmona.

SPC Ardmona acquired Henry Jones IXL in 2004 uniting some of Australia’s most iconic and loved brands.

In 2005 SPC Ardmona was acquired by Coca Cola Amatil for $750 million. The perfectly logical rationale for the acquisition was that:

CCA could see a growing preference amongst consumers for healthier options and “better for you” products
SPC had a number 1 or 2 market position in each of its key categories; and
There was evidence of the potential growth for this sector through innovation, single serve packs and PET fridge packs.

In the years following the acquisition by CCA, SPC has faced very significant challenges to its ongoing viability. In fact it was hit with a perfect storm which included:

intense import competition;
a sustained high AUD;
a liberal tariff regime leading to dumping by overseas competitors;
increased global sourcing and private label by the major domestic grocery retailers.

These factors created a spiral of decline of reduced volume leading to increased unit costs and excess inventory, requiring increased prices leading to further loss of market share.

The issues facing SPC became so overwhelming that we had to make a choice. We could take the course chosen by other food manufacturers and relocate SPC’s processing in lower cost countries or we could completely reinvent SPC from a “stack ‘em high, watch ‘em fly”, commodity business to one that understood its consumers, engaged with them and responded to changing consumer preferences through innovation, reducing its reliance on the dusty declining canned fruit categories and getting serious about capitalising on the health and convenience trends that are so evidently driving consumers today.

Reinventing the business would enable us to maintain our Australian employment and the value we generate in Victoria’s Goulburn Valley. But it would require serious further investment to modernise plant and equipment in the ageng Shepparton facilities.

That led SPC to seek Victorian and Commonwealth Government financial assistance to retain its manufacturing in Australia; and became part of an intense debate about the merits of governments providing industry assistance.

Had CCA decided to move SPC’s manufacturing offshore the wider ramifications for the Shepparton region would have been devastating. Shepparton is one of the 10 most disadvantaged areas in Australia. SPC employs ~1,500 people in this region and its economic activity indirectly supports around another 2,700 jobs within the region.

Following a period of intense lobbying, the Victorian Government agreed to provide SPC with $22 million of Government funding as part of an overall $100m 3 year investment program committed to by CCA which will result in the implementation of a transformation plan designed to reduce costs, improve productivity, modernise our production facilities, revitalise our brand portfolio and return the business to profitability.

The Federal Government decided not to provide funding for SPC on the basis that governments shouldn’t intervene, which for me held a shade of irony given I’d just been on the receiving end of Joe Hockey’s decision that the government should intervene on the proposed acquisition of GrainCorp by NYSE-listed agribusiness leader Archer Daniels Midland.

We believe that we can create a diversified and sustainable business both in Australia and internationally. Early promise that we might just be on the right track can be seen in SPC’s 2014 financial result which saw the business deliver a significant improvement in earnings after years of significant losses. Over the past 24 months we have:

Relaunched and modernised our logo;
Introduced new “Aussie” consumer friendly packaging; and
Invested in state of the art packaging machinery and new packaged format technology.

We have also launched a range of innovative, “better for you” products with less sugar and salt that consumers have embraced, including:

Our category changing innovation of “Sneaky Veg” products;
Fruit in Coconut Water instead of traditional sugary syrup;
Perfect Fruit — our alternative to frozen yogurt made from 100% fruit; and
Single serve snack packs.

We are drawing on the nostalgic love for SPC that many Australians have and re-connecting consumers with SPC’s history, its provenance and its growers through social media with campaigns such as:

#SPC Sunday; and
#My Family Can, which reached close to a million Australians within 8 days of being posted. It is clear that Australians are at last thinking a lot more about where their food comes from.

There is still a long way to go and time will tell if SPC can deliver sustainable year on year growth. What is certain however is that while CCA owns SPC, there are many others on whom we depend for the business to survive and thrive.

As a management team we need to have the foresight and confidence to identify and enter new product categories and to implement innovative marketing that respects the loyalty and love that exists for the SPC brand portfolio and its positioning as 100% Australian grown and made.

Our Board of Directors recognised the importance of their role not only in approving investment in SPC and ensuring a return for CCA shareholders but also took their corporate social responsibilities very seriously in making that decision.

Our employees also have a vital role to play. We’ve seen great support from most of our people, for example by agreeing to a pay-freeze that has helped us manage our escalating costs. But much more important is creating the culture and work practices that will ensure we have a safe, modern work place.

Our consumers are integral to our success. The SPC Sunday Facebook campaign (Slide 9) for instance, which you can see extracts of on the screen, was started by Newcastle resident Linda Drummond in February 2014 with absolutely zero encouragement from us. She just did it off her own bat and it was hugely formative at a time when the industry assistance debate was raging and retailers were aggressively importing from China and South Africa. The campaign started as a result of a conversation Linda had with a few friends reminiscing about her childhood days of enjoying SPC fruits and ice cream for dessert and became a “call to action”. It went viral and the impact was phenomenal. Sales of SPC branded products increased by more than 50% on the previous corresponding period and demonstrated the power of social media and consumer loyalty.

The support of our retail partners is also essential if we are to succeed. We need their commitment to stock Australian made and grown food products in their stores. Retailers should expect us to operate competitive, modern facilities and we need them to respect and value Australian quality and food safety standards, which do impose a premium. SPC announced in 2014 that it has entered into a 5 year, $70 million agreement with Woolworths. This contract alone will boost SPC’s annual production by 5% and triple the tonnage of Australian grown tomatoes that SPC supplies to Woolworths.

Given that Australian consumers are at last starting to demand more local products, there is a real opportunity for retailers and Australian food processors to work together to build the Australian grown and made brand offering throughout their stores and to communicate this message to consumers.

Last but not least Government has a critical role to play in the future of Australian food processing and that role is not about propping up ailing industries and businesses. Governments can assist in improving competitiveness, promoting investment and growing exports. Some of the examples we will point to in the BCA work are:

Improvements to the regulatory environment to reduce costs;
Following good regulatory processes prior to the implementation of any new regulations, including the completion and publication of a regulatory impact statement;
Moving towards more nationally consistent regulation and responding to the regulatory reform priorities;
Better prioritising research and development to maximise the benefits from the investment;
Continuing to provide alternative avenues for businesses to employ workers to deal with seasonality and skills shortages;
Continuing with broad based economic reforms to create a business environment more conducive to innovation and investment, including tax and industrial relations;
Increasing the Foreign Investment Review Board threshold for all private sector foreign investment from all countries to $1.1 billion;
to ensure that the benefits of trade agreements are fully realised.

The Federal Government’s new Free Trade Agreements with Korea, Japan and China are an excellent example of the important role Government can play. Whilst not a silver bullet the new FTAs demonstrate how governments really make a difference by providing important positive initiatives enabling Australian companies to explore and develop new export and partnership opportunities.

Conclusion

To wrap up today I would like to leave you with a positive message — SPC is the story of the ‘little train that could’. Like many Australian food processing businesses it has encountered many challenges over the past decade — its many supporters have however persevered and adopted a ‘can do’ attitude. It is moving with the times, leaving behind the outdated attitudes of co-operatives that consider processed foods to be a commodity and has moved into a new era of placing the consumer at the forefront of all of its business decisions.

It is an exciting time for SPC and you can feel the excitement amongst our employees, growers, consumers, suppliers and retail partners. We have overcome adversity and I believe a successful and productive future lies ahead.

I’d like to end my presentation today by sharing with you a social media clip from our new SPC #My Family Can campaign which shows you how the near death experience SPC went through does make a difference to a community.

Media Enquiries: Karla Pincott 0411 759 934