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Why the Australian food sector is robust in a pandemic

April 29, 2020

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Why the Australian food sector is robust in a pandemic

Australian food has held up well in the COVID crisis. We’re back to fully stocked supermarket shelves and supply chains are catching up to demand. Despite a difficult 10 years, Australia’s food sector has proven to be robust – so how did we get here? 

Australian food has held up well in the COVID crisis. We’re back to fully stocked supermarket shelves and supply chains are catching up to demand. Despite a difficult 10 years, Australia’s food sector has proven to be robust – so how did we get here? 

Doing your weekly shop at the local grocer, butcher, or baker is something of a novelty these days. For most of us, a trip to Coles or Woolies is the main, if not only way, we do our food shopping. 

In the past 30 years, the supermarket-led food sector has performed well. Compound annual growth rates of food sector revenues have grown more than 6% – well above the GDP.

However, when Aldi and Costco rolled out, Coles and Woolworths felt the heat. It led to fierce competition on price which reduced annual revenue growth of the major supermarkets to around 2-3%. 

The intensity of supermarket competition is now levelling out. Aldi’s store rollout is pretty much complete across Australia. Other contenders like Kaufland have decided not to enter the Australian market. Steady population growth and modest levels of inflation are also playing a role in the easing competition. 

In the pandemic, the food sector has an advantage over other industries in that it’s essential. Supermarkets have been able to keep their doors open. The cash flow has fed through the whole supply chain.

So which food companies are presenting good investment opportunities for now and the longer term?

Coles
Coles has seen its best ever numbers and it’s not just attributed to the short-term stockpiling of groceries. Coles has been steady since it doubled profits to $1.4 billion a year after the Wesfarmers acquisition in 2007. Since the demerger, Coles has maintained a strong financial position, excellent cash flows, and low levels of debt. 

The supermarket is looking to invest its profits into modernisation of its supply chains, including two automated distribution centres and a partnership with Ocada, an online fulfilment specialist. These investments aim to reduce costs by $1 billion by 2023 and should generate good ROI and dividends.

Grocery delivery
Coles and Woolworths have both got long-established home delivery options that operate at scale. However, the sudden lockdown meant such a rapid increase that they had to shut down their services. 

As a result, meal kit providers like Marley Spoon had a massive boost. Its share value jumped 208% in March after having been down 83% since its 2018 IPO. 

“We’ve spent years building and evolving our supply chain to provide customers with consistent and reliable food deliveries every day,” said Marley Spoon Australia’s MD, Rolf Weber.  “The supply chains we have set up are well suited for situations like the one we’re currently facing.”

 

Alcohol delivery 

With the forced closure of all nightlife and wineries, alcohol delivery has exploded. ASX-listed WINEDEPOT is on track to hit record numbers of orders. 

“Our platform and depot network has been designed specifically to scale,” said CEO Dean Taylor. “People who have resisted buying online until now realise how easy and convenient it is and they’ll never turn back.”

 

Food staples
Morgans analysts Tom Sartor and Andrew Tang pointed to food staple producers as some of the most resilient to the economic fallout of COVID-19.  As well as Coles, they said Freedom Foods, A2 Milk, and Inghams are a few companies that are set to come out strong. A2 Milk has had a 3000% gain in share value since 2015. 

 

High quality protein
Portfolio managers like David McNamee from Altor Capital look at a few things in food and agricultural investment: excellent quality products and market resilience. 

Now that there are fears of a meat shortage in the USA, Canada, and Brazil due to forced closures of processing plants in these nations, who produce 65% of the world’s meat trade. Australia could also swoop further in on this opportunity.

Seafood producers are also performing well thanks to demand from Asia. Tassal and Huon Aquaculture Group are two Tasmanian salmon farming companies that Goldman Sachs have tipped as good performers. Tassal has tripled its value since 2012.

 

The future is in the food surplus
Mark Van Dyck, the MD for Compass’ Asia Pacific branch, said it’s high time the next generation of companies leverage the food surplus and jump into the Asian market.  

There is growing demand across Asia, especially in China, for food production transparency and better quality. There are also opportunities in Singapore, a country that imports 91% of its food. 

The market was already favouring produce from countries like Australia with good reputations as food producers. The coronavirus pandemic could put fast-acting Australian food producers in a lucrative position. 

 


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