Understanding the ‘profit pie’
Last week a major news outlet suggested that data does not back up farmers’ claims that the industry is in crisis. The data they were referring to, was a predicted 3% increase in production due to improved growing conditions. They suggested that an increase of gross regional value of produce and predicted increase in demands from consumers for fruit and vegetables meant the sector was in a growth phase.
For too long, ‘productivity’ has been used as the measurement of success in the horticulture sector instead of ‘profitability’. Until we start measuring profitability how can we speak about the sustainability of an industry?
Understanding the ‘profit pie’ in horticulture is crucial to cut through the rhetoric and drama that surrounds the numerous inquiries into supermarkets and price gouging.
Neil Rechlin, Partner at NextGen Group and trainer in negotiation skills explains the ‘profit pie’ in this way.
“Over time, the amount of food and drink consumed per capita remains broadly static. For suppliers and retailers to continually grow their profits relies on two dynamics – sell more or spend less. The retailers clearly compete with each other to steal market share (sell more) and push hard on their suppliers for better prices (spend less). Suppliers, in turn, do the same.”
In the case of horticulture this ‘profit pie’ is defined as the overall profit available from planting the seed to receiving payment at the checkout - regardless of who harvests that profit.
By way of a simple example, if a tin of beans costs $1 to make, 25c to store and ship, gets sold for $2 to the retailer and the retailer sells it for $4 to the consumer, then the available profit, or profit pie, is $4.00 - $2.00 - $0.25c - $1.00 = $0.75.
In this instance the retailer obtains 81.25% of the profit pie and the supplier 18.75%.
In most global grocery retail environments, the profit pie split is around 50:50. In Australia in non-fresh it is around 65:35. In fresh meat and dairy the split is typically closer to 90:10. In some fruit and vegetable categories we are seeing 105:-5. This means the retailer makes all of the profit and the grower makes a net loss.
A small net loss is, in some instances, a preferable option to a massive loss through not selling any of the harvest. The retailers know this and are currently using this vulnerability to their advantage.
Without understanding what profit is available to which party along the supply chain it is difficult to point a finger at any one party for behaving poorly, or in some of the more extreme scenarios, likely unconscionable behaviour.
A retailer will always claim they are not behaving poorly in their negotiations with growers as they can lean into the argument ‘they had no visibility of the grower’s position’. Whilst it should be obvious that the position is likely to be unfair, without data it is difficult to prove, and without this proof it is likely that the retailer’s position will be difficult to challenge.
Sound familiar? No wonder growers are at tipping point.
