The impact of the war in the Middle East is rippling through global supply chains, with one of Australia's leading dairy manufacturers, Bega Group, feeling the pinch. In an insightful interview with Alan Kohler on the That's Business podcast, Bega Group CEO Peter Findlay shared his concerns about the rising costs his company is facing.
Findlay highlighted the 10% increase in costs due to supply chain shocks, including higher packaging costs and the price of resin used in plastic production. He explained that these costs are not just limited to packaging but also extend to factory cleaning chemicals and rubber used in machinery.
"It's critical for us to be able to get packaging for our goods," Findlay emphasized, underscoring the importance of these materials to Bega's operations.
The company is also facing increased costs for dairy, as farmers grapple with soaring diesel and fertilizer prices. Bega is committed to supporting its farmers, but as Findlay notes, "different farmers in different regions have very different cost structures," making it a complex issue to navigate.
The impact of these rising costs is already being felt by consumers, with Bega passing on "a large chunk" of the extra costs. However, Findlay also mentioned that the company is absorbing some costs at this stage, a strategy that may not be sustainable in the long term.
"We're sort of evaluating that every month," he said, highlighting the dynamic nature of the situation.
Australia's major supermarkets, Woolworths and Coles, have already increased the price of home-brand milk, and Woolworths CEO Amanda Bardwell has warned of further price hikes across various products in the coming months.
The broader economic landscape is also feeling the effects, with headline inflation accelerating to an annual rate of 4.6% in March, up from 3.7%. The Reserve Bank of Australia has responded by increasing the cash rate to 4.35% to tackle inflation, anticipating further secondary price increases.
Findlay expects additional pressures on Bega, with workers likely to push for higher wages to cope with surging inflation. He noted that the company has already made significant changes, including reducing its workforce and the number of food factories in Australia, which has helped improve productivity.
Despite these challenges, Bega Group's financial reports show positive growth, with revenue up 5% and net profit up 55% for the half-year to December. Findlay attributes this, in part, to a "wellness" trend, with dairy products like yogurt and cheese benefiting from a renewed focus on high-protein diets.
"Protein is one of the biggest trends we've seen in the last decade," he said, highlighting the potential for continued growth in this area.
In conclusion, the war's impact on global supply chains is a complex issue with far-reaching consequences. Bega Group, like many other businesses, is navigating these challenges, and its approach to cost management and adaptation provides an interesting case study. The company's ability to adapt and its focus on supporting its farmers and consumers will be key factors in its long-term success.
