Chocolate and Confectionery Manufacturing in Australia Industry Report

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2 About this Industry 2 Industry Definition 2 Main Activities 2 Similar Industries 2 Additional Resources 3 Industry at a Glance 4 Industry Performance 4 Executive Summary 4 Key External Drivers 5 Current Performance 9 Industry Outlook 13 Industry Life Cycle 15 Products & Markets 15 Supply Chain 15 Products & Services 17 Demand Determinants 18 Major Markets 19 International Trade 21 Business Locations 23 Competitive Landscape 23 Market Share Concentration 23 Key Success Factors 24 Cost Structure Benchmarks 25 Basis of Competition 26 Barriers to Entry 27 Industry Globalisation 28 Major Companies 28 Kraft Foods (Australia) Limited 29 Nestle Australia Ltd 30 Mars Australia Pty Ltd 34 Operating Conditions 34 Structural Risk Index 34 Investment Requirements 35 Technology & Systems 36 Industry Volatility 37 Regulation & Policy 38 Industry Assistance 39 Taxation Issues 41 Key Statistics 41 Industry Data 41 Annual Change 41 Key Ratios 42 Historical Performance 44 Jargon & Glossary IBISWorld Industry Report C2172 Chocolate and Confectionery Manufacturing in Australia August 2010 Naren Sivasailam Organic, fair trade or dark: Chocolate takes on new characteristics to please ethical consumers www.ibisworld.com.au | (03) 9655 3881 | [email protected]

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Chocolate and Confectionery Manufacturing in Australia Industry Report

Transcript of Chocolate and Confectionery Manufacturing in Australia Industry Report

Page 1: Chocolate and Confectionery Manufacturing in Australia Industry Report

2 About this Industry2 Industry Definition

2 Main Activities

2 Similar Industries

2 Additional Resources

3 Industry at a Glance

4 Industry Performance4 Executive Summary

4 Key External Drivers

5 Current Performance

9 Industry Outlook

13 Industry Life Cycle

15 Products & Markets15 Supply Chain

15 Products & Services

17 Demand Determinants

18 Major Markets

19 International Trade

21 Business Locations

23 Competitive Landscape23 Market Share Concentration

23 Key Success Factors

24 Cost Structure Benchmarks

25 Basis of Competition

26 Barriers to Entry

27 Industry Globalisation

28 Major Companies28 Kraft Foods (Australia) Limited

29 Nestle Australia Ltd

30 Mars Australia Pty Ltd

34 Operating Conditions34 Structural Risk Index

34 Investment Requirements

35 Technology & Systems

36 Industry Volatility

37 Regulation & Policy

38 Industry Assistance

39 Taxation Issues

41 Key Statistics41 Industry Data

41 Annual Change

41 Key Ratios

42 Historical Performance

44 Jargon & Glossary

IBISWorld Industry Report C2172Chocolate and Confectionery Manufacturing in AustraliaAugust 2010 Naren Sivasailam

Organic, fair trade or dark: Chocolate takes on new characteristics to please ethical consumers

www.ibisworld.com.au | (03) 9655 3881 | [email protected]

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This industry consists of establishments mainly engaged in manufacturing confectionery, chocolate or cocoa products, with or without sugar. Chocolate is produced from roasted ground cacao beans that are combined with other ingredients like milk and

sugar. Cocoa is a powder produced from cocoa seeds that have been roasted, shelled, and ground. Sugar confectionery is produced by boiling, crystallizing, and moulding sugar or molasses into solid pieces that are usually coloured or flavoured.

The primary activities of this industry are

Chewing gum manufacturing

Chocolate manufacturing

Cocoa products manufacturing

Confectionery manufacturing

Crystallised or glazed fruit manufacturing

Drinking chocolate manufacturing

Liquorice candy manufacturing

Marshmallows manufacturing

Nuts, candied, manufacturing

Popcorn, candied, manufacturing

Industry definition

Main Activities

Similar Industries

Additional resources

The major products and services in this industry are

Chewing gum

Chocolate

Sugar confectionery

About this Industry

C2163 biscuit Manufacturing in AustraliaEstablishments mainly engaged in manufacturing biscuits and cookie products.

C2171 Sugar Manufacturing in AustraliaEstablishments engaged in the manufacturing of cane sugar.

C2175 Snack Food Manufacturing in AustraliaEstablishments mainly engaged in manufacturing snack foods.

For additional information on this industry

www.candy.net.au Confectionery Manufacturers of Australasia

www.confectionerynews.com Confectionery News

www.icco.org International Cocoa Organisation

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Market ShareKraft Foods (Australia) Limited 49.1%

Nestle Australia Ltd 21.5%

Mars Australia Pty Ltd 14.3%

Key External driversdownstream demand from supermarkets and other grocery storesFat consumptionworld price of cocoaworld price of sugarHealth consciousness

Key Statistics Snapshot

Industry at a GlanceChocolate and Confectionery Manufacturing in 2010

revenue

$2.9bnProfit

$197.9mExports

$336.6mbusinesses

179

Annual growth 11-16

2.4%Annual growth 06-11

2.1%

Industry Structure Life Cycle Stage Mature

Revenue Volatility Medium

Investment Requirements Medium

Industry Assistance Low

Concentration Level High

Regulation Level Medium

Technology Change Medium

Barriers to Entry Medium

Industry Globalisation High

Competition Level Medium

FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIx ON PAGE 41

% c

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Revenue vs. employment growth

Business Locations

38.1%NSW

4.2%TAS

24.6%VIC

1.7%ACT

0.6%NT

15.1%QLD

10.3%SA

5.4%WA

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p. 28

p. 4

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Key External drivers Downstream demand from supermarkets and other grocery storesSupermarkets and grocery stores are key stockists of confectionery products. Demand for confectionery by retailers is a function of final consumer demand. This is influenced by factors affecting consumption levels such as health concerns and eating patterns.

Fat consumptionNutritional factors can affect sales relative to substitutes. Generally, increased public awareness about health and nutrition is having an adverse impact on confectionery sales. In particular, the growing popularity of low-fat diets is leading to lower chocolate sales since the average chocolate bar contains a high proportion of fat.

World price of cocoaBesides sugar, cocoa is also a key input into confectionery, especially in chocolate. An increase in the price of cocoa will increase production costs in confectionery manufacturing. This impacts heavily on overall profitability unless firms can pass the increased costs onto final consumers.

World price of sugarSugar is a primary input in the Confectionery Manufacturing industry. Given this, an increase in the price of sugar will inflate production costs. Higher sugar prices will reduce manufacturing profitability unless firms can pass these cost increases on to consumers. Further, as trading conditions in Australia and overseas are

Executive Summary

The Australian Chocolate and Confectionery Manufacturing industry has remained resilient despite a recessive economy, falling disposable incomes, volatile commodity prices and increasing import competition. The advent of the health conscious consumer has required producers to be innovative with their product lines, and adapt them to constantly changing consumer trends. In the five years leading up to 2010-11, industry revenue

increased at an annualized rate of 2.1%, to total $2.9 billion.

The high level of value addition during the production process has enabled the industry’s major players to realize high profit margins and perform well in spite of recessive economic conditions. High brand and customer loyalty commanded by the major players, have also contributed to high profit margins and sales growth. The presence of a mature and stagnant market has seen an

increase in the volume of exports, which is expected to increase by 3.6%, to account for an expected 11.6% of industry revenue. Further, the volatility of key inputs such as cocoa and sugar has also resulted in strong import growth, as producers have had to resort to foreign markets to source their products. The appreciation of the dollar over the current performance period further aided import growth, which is expected to have grown by 5.6% over the past five years.

Further, as economic conditions improve, IBISWorld expects sustained consumption of chocolate and confectionery as consumers choose to indulge themselves in inexpensive, ‘feel good’ luxuries such as candy, in an attempt to ease more pressing concerns such as mortgage or loan re-payments. Strong brand loyalty combined with new product innovations and aggressive marketing strategies will see the industry ride through the current economic storm relatively unscathed. To this end, IBISWorld predicts that the industry will grow at an annualised rate of 2.4% until 2015-16, with revenue totalling $3.3 billion.

Industry PerformanceExecutive Summary | Key External drivers | Current Performance Industry Outlook | Life Cycle Stage

The presence of a mature and stagnant market has seen an increase in the volume of exports

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Industry Performance

recessional resilience From the late 1980s to early 2008, chocolate producers have focused on the trend of ‘premiumisation’, in line with periods of robust economic growth. Consumers, especially in the developed world, looked to trade up to more luxury food products with indulgences in higher priced products and premium brands. The deterioration of the economic climate in late 2008 saw a dramatic fall in discretionary spending as unemployment levels soared and

consumer confidence plummeted. Sales of chocolate and confectionery however, remained firmly resilient as it offered temporary respite from more pressing issues such as loan repayments and falling house prices.

Over 2010-11, as global economic conditions begin to trend upward and developing economies continue to grow, sales of chocolate are expected to remain strong. Amongst the developed world, there exist strong opportunities within

Current Performance

Australia’s sweet tooth has seen the Chocolate and Confectionery Manufacturing industry remain resilient despite being faced with some onerous challenges over the past decade. The industry has had to contend with an increasingly health conscious marketplace, changing dietary trends, rising input prices, increasing import penetration and

recessive economic conditions. There has also been a rise in consumption of healthy substitute products such as snacks, cereals, nuts, yoghurt, and fruit that has further squeezed demand. However, in the five years leading up to 2010-11, industry revenue is estimated to increase by an annualized rate of 2.1% to total $2.9 billion.

Key External driverscontinued

highly competitive, there is usually limited opportunity for manufacturers to implement selling price increases for their products.

Health consciousnessNutritional factors can affect sales relative to substitutes. Generally,

increased public awareness about health and nutrition is having an adverse impact in some traditional confectionery markets such as chocolate. The opposite is true for confectionery promoted on a healthy platform such as sugarless candy and gum.

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Industry Performance

recessional resilience continued

the organic and fair trade segment, which represent the fastest growing segments in the EU, North America and Australia. Presently, fair trade cocoa still captures less 2% share of the world cocoa market, while the organic segment represents less

1% of the world cocoa industry. Further, as evidence of the economic recovery became more pronounced, discretionary spending is also expected to increase with a shift back towards premium brands and indulgent choices.

Consumption trends In 2009-10, industry revenue is estimated to increase by 3.3% to total $2.8 billion, largely driven by the expected recovery of the Australian economy during the latter half of the year. As consumer sentiment and spending begin to be restored to pre-recession levels, chocolate and confectionery demand is also expected to rebound. Further, given the emphasis on healthy eating and living, industry producers are expected to continue to introduce sugar free confectionery and gum, along with dark, organic and naturally produced chocolate products. Prices of key inputs such as cocoa, sugar and milk are all expected to decline over the year, translating into lower retail prices and thus, higher sales growth.

In 2008-09, Chocolate and Confectionery Manufacturing industry revenue is estimated to total $2.7 billion, representing an increase of 130% from the previous year. Following a year of excessively high input prices, especially that of cocoa and sugar, a substantial tempering is expected in the current period. One of the most important developments affecting the industry has been the importance of health and nutrition in driving consumption choices.

Australians have become increasingly wary of their food intake and account for factors such as sugar and fat content, quality of ingredients, packaging etc. before deciding on a brand or product. This has consequently resulted in a number of product extensions and introductions in order to address these changing needs and drive sales revenue. The industry’s major players have responded by introducing low-sugar or sugar-free versions of traditional products such as Wrigley’s sugar-free Extra chewing gum and Eclipse sugar-free mint drops. A recent study conducted by industry publication Retail World, found that 76% of consumers eat mints to freshen their breath or mouth. Given rapidly deteriorating incomes and rising unemployment, chocolate sales are expected to perform modestly, with gourmet and specialty producers being particularly affected.

The 2007-08 year saw industry revenue increase by 1.9% to total $2.7 billion. The year was characterized by unduly high key input prices, with sugar prices increasing by 25.0% and cocoa prices rising by 31.3%. This considerably affected supply levels, which resulted in manufacturers having to raise the

word indicator prices

yearCocoa

($US per tonne) (% change)Sugar (cents) (% change)

2005-06 1,590.6 N/C 14.8 N/C2006-07 1,958.1 23.1 10.0 -32.42007-08 2,572.8 31.4 12.4 24.02008-09 2,800.0 8.8 13.0 4.82009-10 3,300.0 17.9 12.5 -3.82010-11 3,000.0 -9.1 13.0 4.0

SOURCE: IBISWORLD

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Industry Performance

Consumption trendscontinued

average selling price in order to offset the increase in production costs. The industry’s major players were successfully able to pass on majority of the cost increases down the supply chain, evidenced by the growth in revenues. The industry was also aided by new product introductions, particularly in the natural, organic and fortified product lines. Further, the 3.7% increase in household discretionary income over the period, largely drove sales for premium, indulgent, dark and gourmet chocolate products. Chewing gum and mint confectionery also performed well over the year, driven by strong innovation from category leader Wrigley’s.

During the 2006-07 period, industry revenue increased modestly by 1.9% to $2.6 billion. The 23.1% increase in cocoa prices was partially offset by the 32.7% fall in sugar prices. New product

introductions in the sugar-free and diet chewing gum and mint segments stimulated demand for non-chocolate confectionery. The mint category alone grew by more than $27 million over the past three years, driven by clever and timely product innovation that addressed pressing consumer concerns of health and convenience. For example, Wrigley’s introduced Extra Professional, a mint that claims to “clean the tongue and reduce oral bacteria by up to 74%”. Chocolate producers aggressively promoted the health benefits of cocoa and dark chocolate, while also fusing traditional chocolates with fruits, nuts and other functional ingredients such as Mars’ CocoVia range. The 4.6% rise in household discretionary income further aided sales of premium and gourmet chocolates such as Lindt and Ferrero Rocher.

decreasing profitability

Industry profitability is estimated to be 6.8% of revenue recording a marginal decrease of 0.2% from the previous year. The high level of value addition during the production process, combined with a highly concentrated market allows manufacturers high gross margins and lower per unit costs. The increasing level of capital intensity within the industry reduces labour costs, resulting in improved profitability.

The industry’s major players enjoy a

high level of brand and customer loyalty, allowing them to pass on unexpected cost increases down the supply chain with only marginal impact on demand. Further, as branded products also attract a premium price, they are inherently a high-margin sale, and therefore more profitable. Given that majority of the world’s most recognizable chocolate and confectionery brands are owned by the major players, it is a comparatively profitable industry.

Ratio

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Change of process One of the key features of the Australian food manufacturing sector has been the shift from primary processing of raw materials to semi-processing and final processing. This has had a direct impact on elementary confectionery production, as much of this shift has represented value adding initiatives. Today, industry

players themselves are moving into downstream food manufacturing in response to greater demand for convenience by consumers. This trend is expected to persist into the future, especially as improving infrastructure encourages higher primary processing by developing and transitional countries.

Improved access to foreign markets

As a result of improvements in production technology, manufacturers can now distribute confectionery products over longer distances and thus, service wider markets. In the future, ongoing

investment in new processing technologies is likely to result in greater competition between domestic confectionery makers servicing previously distant markets and from rising import competition.

Ethical consumerism The recent emergence of the ethical consumer has seen a shift towards more sustainable methods of production with an emphasis on fair and equitable trading conditions. Given that majority of the world’s cocoa is produced in small farms

in countries with low or very low GDP, the buying practices of multinational corporations have come under scrutiny for unfair and exploitative treatment of cocoa farmers. Consumers have become more wary of where their chocolate is

Health and nutrition One of the most important developments affecting the chocolate and confectionery industry has been the importance of health and nutrition in driving consumption choices. Australians have become increasingly wary of their food intake and account for factors such as sugar and fat content, quality of ingredients, packaging etc. before deciding on a brand or product. This has consequently resulted in a number of product extensions and introductions in

order to address these changing needs and drive sales revenue. Traditionally, most Australian consumers have based purchasing decisions on taste, quality, price and use-by-dates. However, the increasing sophistication of consumers in the past five years has driven greater product development than recent decades. IBISWorld expects this trend to continue as the confectionery industry faces an increasingly dynamic and evolving marketplace.

Organically sweet IBISWorld expects greater development in the area of organic foods that also include chocolate and confectionery. This trend has already begun to take off in the US, United Kingdom and many European countries where consumers can now access a wide variety of organic products in major supermarket chains.

However, the success of organic confectionery in the Australian market will depend on the availability of organically produced inputs such as milk powder and butter. Currently, there are already a number of organic chocolate brands, with more expected to be launched in the near future.

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Ethical consumerism continued

sourced from, evidenced by the rapid increase in sales of fair-trade labelled products that increased 37% in 2006-07. This issue is critical as the ethics of

chocolate production can seriously affect demand for a particular product or brand and erode the credibility of the manufacturer involved.

revenue growth Industry revenue is expected to increase at an annualized rate of 2.4% to total $3.3 billion in 2015-16. In comparison, Industry Value Added is expected to increase at an average of 2.1% over the same five year period. Improved efficiency is expected to be one of the main contributors to the faster growth in IVA. Competitive pressures also seem likely to produce further rationalisation of plants, leading to modernisation, reduced duplication and economies of scale in production. Complementing this trend will be a move toward higher

margin products. IBISWorld expects greater focus on high quality, premium chocolate bars as well as premium priced functional confectionery.

Slightly offsetting these developments will be the expected increase in sugar

Industry Outlook

The future prospects of the Chocolate and Confectionery Manufacturing industry are relatively modest. Over the next five years leading up to 2015-16, IBISWorld estimates that industry revenue will increase at an annualized rate of 2.4% to

total $3.3 billion. Principally driving this outcome is expected to be a function of moderating commodity prices, health and dietary changes, product innovation, and advancements in technology and production.

Market trends Forward indicators suggest that growth in domestic demand will be modest, reflecting a general saturation in overall consumption across industrialised countries. Two key factors expected to affect domestic demand and consequently determine future consumption patterns is the emphasis on health and nutrition in making dietary choices, and the changing demographic profile of the Australian population. The wave of health consciousness sweeping the nation is expected to adversely affect demand for sugar-rich, high-cholesterol products such as sugar based confectionery. However, this has also forced producers to innovate and provided opportunities in growing segments such as low-sugar confectionery, sugar-free chewing gum,

organic and natural chocolate etc. This trend is expected to continue into the next five years, as more products addressing these trends are introduced into the market.

Another key factor expected to affect consumption is the changing demographic composition of the average Australian household. Typically, teenagers are the largest consumers of confectionery products as people tend to develop a preference for savoury food with age. Australia’s ageing population will see the size of this consumer segment fall, leading to lower aggregate sales. Further, as adults living in households with children are also more likely to consumer chocolate and confectionery products, demand from this segment is also expected to fall.

The wave of health consciousness sweeping the nation is expected to adversely affect demand

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revenue growthcontinued

prices over the period. This is primarily due to the vast increase in demand for ethanol which has adversely affected the supply of sugar, thereby increasing its price. However, cocoa, the industry’s other primary input, is expected to decline over the period. Farm gate milk prices are forecast to decrease marginally over the next five years, which will put downward pressure on the prices for the industry’s products. Milk prices are forecast to decrease over the period as global supply growth of dairy products exceeds global demand growth. Although, prices are forecast to remain firm due to continued strong global demand for dairy products, high costs of milk production with forecast continued high feed and oil prices, and low world dairy product stock levels.

Despite overall moderation in raw material and input prices compared to the current period, post-production costs

like advertising are expected to increase in the period. The Australian confectionery industry is highly competitive as indicated by the large number of new product lines introduced by the major producers. Furthermore, in the last few years, brand proliferation in the confectionery market has created the need for extensive promotion and marketing programs. The importance of advertising is set to increase as a growing number of industry players seek a larger share of the industry’s profits.

The industry is expected to remain profitable over the next five years, with an average of 7.0% share of overall industry revenue. This represents an increase of 0.2% when compared to the current performance period. Gains from production efficiencies and lower labour costs are expected to be partially offset by higher spending on advertising and marketing activities.

Production issues IBISWorld projects a moderate rise in the real price of confectionery over the next five years. Price increases will largely stem from the introduction of higher valued product lines, reflecting the growing popularity of specialty and premium chocolates. Real confectionery prices are also set to rise as manufacturers pass on higher input costs to customers.

Production volumes are forecast to increase at an average rate of 1% per annum over the five years to 2015-16. Higher output will depend heavily on exporting activity undertaken by the industry. In the short term, production may fall following the closure of manufacturing plants, including Nestle Australia’s sugar confectionery manufacturing plant in Maryborough, Victoria, after the company discovered that it could produce Kit Kat chocolate bars in New Zealand 10% cheaper than the Australian product.

The coming few years should witness

some changes to the distribution of production. Confectionery manufacturing in Australia will continue to be dominated by a few major ‘mass’ producers. However, scope exists for the establishment and/or expansion of specialist confectionery producers. The next few years should also see the direct entry of a couple of existing importers. Jacobs Suchard for example has tabled the possibility of local plant. Given the company’s interest in Asia, Australia would be a suitable base from which to supply the region, particularly in view of the availability of sugar and milk.

Although chocolate confectionery will continue to dominate local production, there are likely to be some changes in the product mix in the next five years. The chewing gum segment is forecast to increase as it outperforms chocolate and sugar confectionery in sales growth. This trend will reflect underlying changes in consumption patterns as consumers shift from

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traditional confectionery products toward functional/fortified food and healthy snack foods. Underpinning growth in the chewing gum segment will be the ongoing production of gum

products promoted as heaving dental health benefits. This will be further enhanced by the new trend of banning vending machines that offer confectionery in Australian schools.

Production issuescontinued

regulation outlook Confectionery manufacturers are also likely to face greater regulatory restraints over the next five years, especially in relation to product labelling and food safety following increased lobbying from consumer groups. The impact of tighter restrictions on confectionery manufacturers is likely to vary among different segments. To date, larger establishments have been successful in implementing requirements such as those under the Food Standards Code and food safety programs. However, anecdotal evidence shows that costs for implementing legislative requirements can disproportionately affect small manufacturers.

Expected increases in regulatory requirements are likely to increase costs that manufacturers. However, there is scope for confectionery producers to benefit from pre-emptive regulatory compliance, particularly those relating to food labelling. The ‘%DI’ (percent daily intake) front-of-pack nutritional labels have been broadly adopted across

several food manufacturing industries over the past year, and IBISWorld expects an increasing number of firms across this industry to follow suit over the next five years. Further, as confectionery manufacturers face external competition from producers of muesli and snack bars (who have whole-heartedly embraced the new labelling format), IBISWorld believes there is opportunity for producers to highlight the benefits and comparability of their products. For instance, the kilojoules and fat content of some of the industry’s chocolate bars is lower than some nut and muesli bars, thus confectioners have the opportunity to objectively state this through their nutritional labels.

One regulatory area currently being aggressively targeted is chocolate and confectionery advertising. In a survey of Australian parents, the consumer group, Choice, found that 82% parents were in favour of increased government regulation over the way high sugar and fat foods are marketed to children. Choice has joined a contingent of more

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than 50 consumer groups globally backing a voluntary code of practice which includes tight restrictions on television and internet advertising, and has since called on the Australian government to support the proposal. However, the Federal Government has said that it will not change existing

regulations until later this year after the Australian Communications and Media Authority’s report on junk food advertising for children is released. Going into the future, any such ban would extend to confectionery products, and consequently impact the current marketing of the industry’s products.

regulation outlookcontinued

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Industry PerformanceInnovative packaging and product development is stimulating some industry growth

The industry is a market characterised by well-established brand names

Industry growth and consumption over the past decade has been moderate

Growth segments tend to be focused in gourmet chocolate and sugar-free gum

Life Cycle Stage

SOURCE: WWW.IBISWORLD.COM.AU

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Potential Hidden GemsFuture Industries

Quality GrowthHigh growth in economic importance; weaker companies close down; developed technology and markets

Time wastersHobby Industries

MaturityCompany consolidation;level of economic importance stable

Shakeout

Shakeout

Quantity GrowthMany new companies; minor growth in economic importance; substantial technology change

Key Features of a Mature Industry

Revenue grows at same pace as economyCompany numbers stabilise; M&A stageEstablished technology & processesTotal market acceptance of product & brandRationalisation of low margin products & brands

biscuit Manufacturing

Cake and Pastry Manufacturing

Milk and Cream Processing

Sugar Manufacturing

Confectionery and Soft drink wholesaling

Chocolate and Confectionery Manufacturing

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Industry Performance

Industry Life Cycle The Chocolate and Confectionery Manufacturing industry is in its mature life cycle stage, characterised by a saturated domestic market and a range of well established products and manufacturers. Although barriers to entry remain relatively low, the industry is typified by a few, large producers who fiercely compete for market share thus, restricting the number of new players entering the industry. In the five years leading up to 2010-11, there were only an additional five enterprises within the industry.

Industry value added increased at an annualised rate of 0.2% between 2005-06 and 2010-11. Over the same period, real GDP grew by 2.1% and household discretionary incomes increased by 3.6%. This indicates a mature and stagnant industry, one that is growing at a slower pace compared to the Australian economy. Given a high level of saturation, it is imperative for manufacturers to constantly introduce

new products in the marketplace, so as to stimulate sales growth and differentiate themselves from their competitors. This has particularly been the case in the chewing gum and mint segments, with a number of new product introductions and innovative packaging and marketing initiatives being implemented each year.

However, the confectionery market in Australia is reaching saturation. Confectionery has been widely available and affordable for the last century. Consequently, the domestic market is characterised by well-entrenched brands and product lines. It is not surprising that industry sources believe that long-term increases in domestic demand will largely reflect population growth. As the domestic confectionery market matures, more manufacturers will seek growth through exporting opportunities. Asia’s close proximity and its rising disposable incomes make it an obvious export target for Australian producers.

This industry is Mature

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Products & Services The confectionery industry can be broadly classified into three segments: chocolate, sugar confectionery, and chewing gum.

ChocolateChocolate is the industry’s major product category, accounting for approximately 62.5% of industry

revenue. The chocolate segment is highly concentrated and characterised by a small number of well-established brands. The Confectionery Manufacturers of Australasia reported that the top ten selling brands accounted for approximately 70% of sales in 2008. Further data suggests that roughly 40% of total chocolates sold are chocolate

KEy buyING INduSTrIES

C2162 Cake and Pastry Manufacturing in Australia Cake manufacturers purchase chocolate products as inputs into some caking baking.

C2163 biscuit Manufacturing in Australia Biscuit manufacturers purchase chocolate, and other confectionery products as ingredients in some biscuit lines.

F4716 Confectionery and Soft drink wholesaling in Australia Confectionery Wholesalers purchase the output of this industry for distribution to supermarkets, grocery stores and other food service operators.

G5111 Supermarkets and Other Grocery Stores in Australia The key industries purchasing the output of confectionery manufacturers include supermarkets and other grocery stores.

G5112 Convenience Stores in Australia Convenience stores are purchasers of the output of this industry.

H5731 Cafes and restaurants in Australia Restaurants acquire confectionery products as inputs into food production.

H5732 Caterers and Food Service Contractors in Australia The Food Service industry acquires requires chocolate confectionery products as raw ingredients in food production.

KEy SELLING INduSTrIES

C2121 Milk and Cream Processing in Australia The confectionery industry derives its two major raw materials from Milk and Cream Processing

C2124 Milk Powder Manufacturing in Australia The confectionery industry derives a major raw material from Milk Powder Manufacturing.

C2129 butter and Other dairy Product Manufacturing in Australia The confectionery industry derives its key raw material inputs from Dairy Product Manufacturing.

C2171 Sugar Manufacturing in Australia The confectionery industry purchases large quantities of sugar as inputs into chocolate and candy manufacturing.

C2172 Chocolate and Confectionery Manufacturing in Australia Industry players sometimes purchase elementary chocolate products as inputs into high value added production.

C2179 Tea, Coffee and Other Food Manufacturing in Australia The confectionery industry procures one of its major ingredients, cocoa from the Other Food Manufacturing industry.

F4795 Paper wholesaling in Australia Confectioners typically procure product packaging from paper product wholesalers.

Products & MarketsSupply Chain | Products & Services | demand determinants Major Markets | International Trade | business Locations

Supply Chain

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Products & Markets

Products & Servicescontinued

bars. The top three selling bars in Australia are currently Mars Bar, Kit Kat, and Cherry Ripe. Chocolate blocks are another important segment, with retail sales of an estimated $860 million in 2006-07, which is believed to be the highest within the chocolate segment. Gourmet chocolates, in particular dark chocolate have become a new growth segment in recent years, with a number of specialty chocolate cafes opening in most major cities. This has been supported by consumers becoming more health conscious and informed about chocolate.

Sugar confectionerySugar confectionery is the second major product segment, and is expected to account for approximately 28.0% of revenue. This includes, mints, hard candy, sugar candy packs, candy rolls, and medicated candy products. Unlike chocolate, this segment is highly fragmented and caters to niche markets and needs. As sugar manufacturing is less capital intensive than chocolate production, it tends to attract a greater number of small players. Leading brands within this category are Minties, Cool Mints, Jaffas, Snakes Alive, and Fantales. Nestle, Cadbury and Mars (Masterfoods) dominate the market, commanding

around 60% of domestic segment sales.

Gum Gum is the smallest product segment, generating approximately 9.5% of total industry revenue. Gum production in Australia is highly concentrated, with segment leader Wrigley accounting for majority of sales. Brands such as Extra, Juicy Fruit and P.K. have been in existence for over 60 years and have an extremely high level of customer loyalty. However, the introduction of sugar-free gum represented a significant shift in consumption and stimulated demand for gum products. Today, Australian consumers spend around $162 million each year on sugar-free gum, which is likely to continue to grow at a fast pace.

Within each major segment, the breadth of variety is increasing. A maturing domestic market has resulted in greater diversification in the past decade as manufacturers have aggressively defended market share and attempted to tap into the limited opportunities for developing new niche markets. Most notably, this has extended to the introduction of hybrid products that cross over into other industries such as combining biscuits and ice cream, but are classified and included within their respective industries.

Products and services segmentation (2010)

62.5%Chocolate28%

Sugar confectionery

9.5%Chewing gum

SOURCE: WWW.IBISWORLD.COM.AU

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Products & Markets

demanddeterminants

A broad range of factors influence the level of demand for confectionery, such as consumer incomes, trends & preferences and the natural dynamics of the industry.

Discretionary income Typically, a rise in disposable income will increase expenditure on discretionary items such as confectionery. However, an increase in income may also encourage consumers to simply switch to more expensive chocolates rather than increase the volume of confectionery purchased. Given this, a long-term rise in income should see production shift from lower margin to higher margin products (such as premium chocolate).

Pricing and presence of substitutesA rise in the price of chocolate and confectionery can adversely affect demand. For instance, a significant increase in the price of chocolate bars may persuade consumers to switch to sugar-based confectionery instead. Additionally, the presence of alternative substitutes can also influence the level of demand for the industry’s products. Today, there is an increasing range of products competing for the coveted discretionary dollar, such as snack foods, cakes, cereal, and biscuits.

Health and nutritionThe industry’s products have for long, been perceived as unhealthy and harmful due to their high sugar and calorie content and the publicised risk between obesity and heart disease. Increased concern about dental health has also discouraged consumption of candy and chewing and bubble gum. There has however been increasing evidence that certain chocolate, in particular dark chocolate is healthy as it is rich in antioxidants, and can be beneficial in many ways. Some confectionery makers have also responded to consumer concerns by releasing reduced-fat or sugar-free product lines. For example, The Wrigley

Company has been very successful in capturing a large-share of the sugar free market. Its ‘Extra’ chewing gum range currently commands 88% of the sugar-free gum segment. Moreover, a number of industry players are introducing certified organic products to capitalise on this developing niche market.

Innovation and brandingGiven the highly saturated domestic market, clever and timely innovation, branding and promotional initiatives can significantly stimulate demand. The past five years have seen a number of such initiatives, especially in the low-fat, low-sugar chocolate segment and in the sugar-free and functional gum segment. Meanwhile, line extensions have also proven to be a popular method of igniting interest in existing products. In the last couple of years, manufacturers have released white chocolate versions of Kit Kat, Aero bars, and Maltesers.

Seasonality Confectionery consumption is influenced by the seasons, the time of day and the scheduling of special events. Chocolate sales are also seasonal and tend to be highest in the colder months between May and July. Peak confectionery sales are also recorded during special Christian events like Easter and Christmas. Australians are among the largest consumers of Easter eggs in the world. According to the Confectionery Manufacturers of Australasia Limited, the average Australian consumes around ten chocolate eggs each Easter. Other special gift occasion like Valentine’s Day and Mother’s day also generate demand for confectionery, especially boxed chocolate.

DistributionDistribution is an important determinant of demand as confectionery items constitute an impulse purchase, that is, an unplanned or spontaneous purchase. The presence of chocolate, candy, chewing gum, and mints prominently displayed at strategic locations such as

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Products & Markets

Major Markets Australian confectionery manufacturers sell their output to two major purchasing groups: large retail outfits and wholesalers. Large supermarket chains, convenience stores, petrol stations, and department stores typically enter into direct supplier agreements with manufacturers. Recently, the concentration of ownership among these large customers has caused some concern among confectionery producers. Smaller customers like milk bars and specialty shops usually have to source their confectionery supply from grocery wholesalers and distributors.

Retail tradeAt the retail level, consumers may purchase chocolate and confectionery products through two main distribution channels; grocery and route. The grocery channel comprises large supermarkets and other grocery stores, with this segment expected to account for 75.4% of industry revenue. In recent years, an increasing number of large supermarket

and grocery chains are using their enormous buying power to negotiate lower prices from producers, thereby squeezing their margins.

The route distribution channel is much smaller and diverse, ranging from convenience stores, petrol stations to vending machines. The structure of this channel is however changing as more corner stores disappear. The Confectionery Manufacturers of Australasia reported that over 1000 corner stores have closed over the past decade. In the same period, the number of convenience stores has risen by around 30%.

A smaller proportion of industry sales are made to companies in the hospitality industry. Motels, hotels, restaurants, fast food chains and convention centres purchase large quantities of foodstuffs (including confectionery products) for use in their kitchens. Sometimes these are purchased directly from manufacturers at reduced cost. Like supermarkets, large restaurant chains

demanddeterminantscontinued

checkout aisles and vending machines can trigger purchases that may have otherwise not been considered. The pricing of these items also affects demand, as consumers will not pay higher prices for a product that they did

not intend to purchase. Further, as parents make majority of the candy related purchases for their children, higher retail prices may result in increased purchases of private label confectionery products.

Major market segmentation (2010)

75.4%Retail trade13%

Wholesalers and distributors

11.6%Exports

SOURCE: WWW.IBISWORLD.COM.AU

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Products & Markets

International Trade In 2004, Australians consumed 3.7 kg of sugar confectionery and 4.4 kg of chocolate per capita and are amongst the highest snack food consumers in the world. Chewing gum consumption has increased strongly as a result of continued product innovation, for example the introduction of sugar free chewing gum has lifted sales significantly. The consumption of chocolate is also estimated to have increased strongly, as a result of continued media releases and growing evidence on the benefits of chocolate, in particular dark chocolate.

According to Confectionery Manufacturers of Australasia (CMA), nine out of ten Australians consume confectionery on a regular basis. Eighty percent of these consume a combination of chocolate and sugar confectionery. According to industry-based studies, females are the biggest purchasers in Australia, however, this finding may simply reflect the fact the females tend to

be the principle food buyers in most households.

In the five years to 2010-11, the value of imports is estimated to have increased by 5.6% per annum, totalling $785.9 million and comprising 31.9% of domestic demand. In recent years, the flow of imports has risen as more local manufacturers have begun importing products from their sister/parent plants overseas. New Zealand is expected to account for majority of imports, with 15.2%, followed by Singapore (13.1%), Belgium (8.1%), China and Indonesia (7.6% respectively).

International marketIn the five years to 2010-11, the value of Australian exports is expected to have increased at annualised rate of 3.7%, to total $336.6 million, accounting for 11.6% of revenue. In the past five years,

Major Marketscontinued

often wield considerable power in supply relationships with this industry.

Wholesalers and distributorsGrocery wholesalers and distributors are expected to account for 13.0% of revenue. They in turn supply supermarkets, convenience stores, drug and discount stores and other specialty stores. This market is essentially the most important link in the supply chain because relationships with wholesalers

affect the products that are eventually stocked by retailers.

ExportsExports are expected to account for approximately 11.6% of industry revenue. The contribution of exports has declined over the past five years, primarily due to the perishable nature of the industry’s products and unfavourable economic and exchange rate movements.

$ m

illio

n

600

−1200

−900

−600

−300

0

300

1501 03 05 07 09 11 13Year

Exports Imports Balance

Industry trade balance

SOURCE: WWW.IBISWORLD.COM.AU

Level & Trend Exports in the industry are Medium and Increasing

Imports in the industry are Medium and Increasing

The bigger Picture

Of the 499 industries in the Australian economy, 79 have medium exports – but only 35 of those are experiencing an increasing trend as is the Chocolate and Confectionery Manufacturing industry

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Products & Markets

International Tradecontinued

the importance of export markets has grown as producers have taken advantage of growing disposable income in the Asia Pacific Region. However, tariff barriers continue to dampen exports levels for Australia.

Approximately 70% of confectionery exports are chocolate products. Sugar confectionery reportedly accounts for around 22% of total exports with chewing gum making up the balance of total sales.

Imports from...

Total $769.8m

48%Other

8%China

15%New Zealand

13%Singapore

8%Belgium

8%Indonesia

Exports to...

Total $331.1m

45%New Zealand

3%Philippines

24%Other

16%Japan

6%Singapore

6%Hong Kong

Year: 2008SIZE OF CHARTS DOES NOT REPRESENT ACTUAL DATA SOURCE: ABS

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Products & Markets

SOURCE: WWW.IBISWORLD.COM.AU

TAS4.2

wA5.4

QLd15.1

VIC24.6

NSw38.1

NT0.6

SA10.3

ACT1.7

Establishments (%)

Cold zone (<10) <25 <50 Hot zone (<100) Not applicable

business locations 2011

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Products & Markets

business Locations Chocolate and confectionery manufacturing is primarily concentrated along the Eastern Seaboard. It is estimated that approximately 77.8% of production facilities will be situated in the three states of New South Wales, Victoria and Queensland. NSW is estimated to account for the majority of establishments with 38.1%, in addition to 33.5% of all employees within the industry. Victoria is expected to account for 24.6% of all industry establishments, along with 26.0% of all industry employment.

Confectionery manufacturing tends to develop in metropolitan areas. Of those employed in this industry approximately 80% work in cities. Historically, the fragile and perishable nature of confectionery (especially chocolate) has made it necessary for confectioners to establish operations in close proximity to major consumer markets. This trend has continued and today, the majority of Australia’s confectionery makers are

located in the surrounding areas of Melbourne and Sydney. Leading player, Cadbury Schweppes Australia has concentrated most of its production within Melbourne. Its facilities are spread across suburbs like Abbotsford, Prahran, Ringwood, Scoresby and Richmond. An advantage that Victoria has over other states is that it has the highest quality and cheapest milk compared to the rest of Australia.

Although most confectioners are located in capital cities, operations in rural areas currently include the Cadbury Schweppes plant at Claremont in Tasmania and the Mars plant at Ballarat in Victoria. In recent years, the industry’s top manufacturers have concentrated their operations on a small number of sites because high throughput, automatic equipment and almost continuous operation produce significant economies of scale. Products are then transported in bulk form to distribution centres across the country.

Perc

enta

ge

40

0

10

20

30

WA

ACT

NSW N

T

QLD SA TA

S

VIC

EstablishmentsEmployment

Distribution of establishments vs. employment

SOURCE: WWW.IBISWORLD.COM.AU

Perc

enta

ge

40

0

10

20

30

WA

ACT

NSW N

T

QLD SA TA

S

VIC

EstablishmentsPopulation

Distribution of establishments vs. population

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Key Success Factors Marketing of differentiated productsBranding is extremely important within certain market segments like chocolate. Effective marketing helps manufacturers capture maximum market share. Moreover, appropriate marketing of differentiated products avoids over-reliance on core products.

Economies of scopeScope economies achieved by producing a range of confectionery and related products. Economies of scope enable a company to modify its production output in response to changing conditions in various market segments. This can reduce volatility in sales.

Economies of scaleStrong price competition means that economies of scale are

particularly important for those participants not involved in the production of niche products.

Ability to pass on cost increasesThe ability to raise product prices in response to cost increases is limited by high price elasticity.

Establishment of export marketsThe importance of export markets reflects the saturated nature of the domestic market.

Guaranteed supply of key inputsThe price of raw inputs like sugar and cocoa can be highly volatile and is subject to market vagaries. Contracts with suppliers of raw materials such as sugar, milk powder, and cocoa reduce supply volatility.

Market Share Concentration

The Chocolate and Confectionery Manufacturing industry is characterised by a high level of concentration. Although the industry has a number of small to medium sized operators, the majority of its turnover is generated by the major players. In 2010-11, IBISWorld estimates that the top four manufacturers will account for 89.4% of industry revenue. This concentration of ownership is primarily a result of an increase in acquisitions, along with organic growth for a majority of major players engendered by continued product innovation, strong brand loyalty and aggressive marketing.

Concentration also varies between product segments. Chocolate production tends to be heavily dominated by a few foreign owned firms such as Cadbury, Nestle and Mars that account for around 80% of domestic production. Sugar

confectionery and gum production however, is more fragmented and therefore less concentrated.

Typically, the industry’s larger firms tend to specialise in mainstream products targeting the low to mid-price range of the final market. Smaller firms tend to concentrate on specialty products that require short production runs and lower volumes. Despite the presence of smaller firms, confectionery manufacturing is moving toward, larger-scale, concentrated production and consequently has significantly fewer firms than a decade earlier. Today, fewer commercial confectionery manufactures are serving wider geographic markets. Improvement in transportation methods, ownership consolidation, and the development of extended shelf-life products are enabling manufacturers to reduce costs by centralising production facilities.

Competitive LandscapeMarket Share Concentration | Key Success Factors | Cost Structure benchmarks basis of Competition | barriers to Entry | Industry Globalisation

Level Concentration in this industry is High

IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:

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Competitive Landscape

Cost Structure benchmarks

Cost structures vary widely among industry players, depending on their size, scale of production, ease of access to production inputs, level of technology and capital investment etc. Typically, larger the manufacturer, the lower per unit cost of production tends to be. Over the past five years, the average size of an establishment is increasing due to industry consolidation, largely driven by the major players such as Mars’ acquisition of Wrigley.

Profits IBISWorld estimates that net profits will account for 6.8% of industry revenue. The Chocolate and Confectionery Manufacturing industry is characterised by high profit margins primarily due to the high level of value addition during the production process. That is, manufacturers employ considerable resources and costs in terms of capital, technology and branding that translate

into high retail prices that are passed on to consumers. The difference between production costs and prices received for final products is therefore high which is reflected in higher profit margins.

Purchases In 2010-11, purchases are expected to constitute the largest percentage of industry costs at approximately 63.4% of revenue. Key production inputs such as cocoa, sugar and milk represent the biggest expenses and their prices are largely a function of the world market. The past five years have seen dramatic fluctuations in the prices key inputs, especially that of cocoa and sugar, which have affected purchase costs and thus, profitability. Other inputs include flavourings, fruits, nuts, colourings, additives, and packaging materials. Of these, packaging is the largest expense, accounting for around 15% for the purchases of materials.

Industry Costs and Average Sector Costs■ Profi t■ rent■ utilities■ depreciation■ Other■ wages■ Purchases

Industry Costs (2011)

Average Costs of all Industries in sector (2011)

0 100%

6.8Profit

63.416.67.6

3.5

8.1Profit

61.313.711.54.3

INduSTry COdE ANd TITLE 2005-2010 2011-2015

C2121 Milk and Cream Processing • −C2124 Milk Powder Manufacturing • •C2129 butter and Other dairy Product Manufacturing • •C2171 Sugar Manufacturing − •C2172 Chocolate and Confectionery Manufacturing • •Costs for operators in the Chocolate and Confectionery Manufacturing industry are affected by the price of goods and services from supplier industries. IBISWorld has estimated the trends of key input prices over the previous fi ve years and for the coming fi ve years. − is good news for this industry as IBISWorld expects the price of key inputs to fall; • shows where this industry is negatively affected as IBISWorld expects the price of key inputs to rise; - means price changes will not be a key issue for the industry.

SOURCE: WWW.IBISWORLD.COM.AU

SOURCE: WWW.IBISWORLD.COM.AU

1.0

1.1

0.9

0.3

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Competitive Landscape

basis of Competition The Chocolate and Confectionery Manufacturing industry is highly competitive, with the major players fiercely competing for market share. Relatively low barriers to entry further aid competitiveness, as new players enter the industry with niche products and sophisticated marketing strategies. Competition within this industry is primarily based on the following;

PriceThe price sensitivity of consumers in the industry varies between product segments. Although the market is dominated by well established brand names, consumers are still price sensitive and can easily switch their preferences to a lower-priced substitute. The chocolate bar segment for example, is typified by a number of different brands and varieties and is highly sensitive to changes in price. Conversely, the chewing gum segment is less sensitive to price changes as they are of comparatively lower value

and tend to be dominated by fewer producers. Further, the growing segment of low priced, private label brands has made price-based competition more intense, especially given the current economic climate.

QualityThe perceived quality of particular brand will determine the price consumers are willing to pay for it. The industry is dominated with well-established brand names and producers, most of which have been in existence for nearly a century. Consumers are therefore highly brand loyal and have high expectations of quality from the industry’s products, which forms a key base of competition. The sensitivity to quality also varies between product segments. For example, consumers of chocolate products are significantly more discerning to aspects such as quality, texture and taste compared to chewing gum or sugar based confectionery.

Cost Structure benchmarkscontinued

Wages and salariesLabour costs represent the second biggest expense for chocolate and confectionery manufacturers. Wages are estimated to account for 16.6% of revenue and total $482.3 million. Over the past five years, wages have decreased their share of total costs falling from 18.6% of revenue in 2005-06, primarily due to select periods of rapid expansion and increase in employment. Further, as majority of new employment has been focused on food scientists and research and development (R&D) staff who command higher wages, thereby increasing the average industry wage.

Selling, general and administrative costs Expenses relating to selling, marketing, promotions and administration comprise the third largest component of industry costs. Considering the importance of branding in driving sales revenue,

manufacturers invest heavily in aggressive advertising, marketing and promotional activities. As a result, manufacturers have designed sophisticated marketing and advertising strategies that aim to harness the power of their brands to increase customer loyalty and retention rates. These include expensive media advertisements, point-of-purchase tasting and displays, and related promotional costs. Such costs are estimated to account for approximately 5.1% of industry sales.

Other costs Other costs that can significantly affect the industry include overhead expenses such as logistics and distribution, depreciation, interest rates, research and development costs, and utility costs. Collectively, IBISWorld estimates that these costs will represent approximately 8.1% of total industry revenue.

Level & Trend Competition in this industry is Medium and the trend is Increasing

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Competitive Landscape

barriers to Entry The barriers to entry in the Chocolate and Confectionery Manufacturing industry are relatively low, as the absolute cost of entry is not prohibitive. Once again, barriers to entry vary between product segments. Chocolate production is more capital intensive and thus requires higher levels of investment to commence operations. Sugar confectionery and gum production however are more labour intensive and easier to enter, evidenced by the large number of players servicing those segments.

The biggest threat facing potential new entrants is the extremely well entrenched

position of the industry’s major players. These companies enjoy high brand and customer loyalty and have considerable

basis of Competitioncontinued

Relationship with key suppliers Developing and maintaining strong relationships with downstream suppliers is also a critical area of competition. The ability to secure coveted impulse purchase outlets (such as check out isles) and supermarket shelf space has conventionally set market leaders apart from their competitors. Brands with the most recognizable products or packaging placed visibly at strategic locations, have the best chances of maximizing sales at the retail level. As competition intensifies, more manufacturers are expanding their traditional distribution networks to include convenience stores, drug and discount stores, shopping mall kiosks and other venues with high pedestrian traffic.

Innovation and differentiation The ability to be innovative and differentiate a product/brand forms one of the key bases of competition within the industry. Considering the limited opportunities for growth, it is essential for manufacturers to distinguish themselves in order to maintain market share. Changing consumer tastes and dietary trends have further compelled producers to be innovative with packaging, marketing and labelling initiatives. Wrigley’s for example, cites innovation as the most important element in its continued success, and

holds over 200 significant patents and trademarks relating to packaging, chewing gum confection processing, and product formulae. Further, in 2005, Wrigley opened its Global Innovation Centre in northern Chicago, dedicated to the research and development of new products and enhancement of its existing product lines.

Branding and promotionBranding and promotion has historically played an important role in generating sales for confectioners. Generally, manufacturers heavily promote products through mass media advertising and in-store promotion. The latter is particularly important since consumers often purchase confectionery ‘on impulse’. The Confectionery Manufacturers of Australasia found that up to 75% of all chocolate and confectionery sales are made on impulse. Other popular marketing tools adopted by confectioners include prize give-aways and free gifts inside packaging. Major players like Mars Inc. also periodically increase chocolate bar sizes at no extra cost. Such tactics are often employed to ignite new interest in existing product lines. As competition in the branded segment intensifies, more manufactures are exploring non-traditional advertising method including event sponsorship.

Level & Trend Barriers to Entry in this industry are Medium and Steady

barriers to entry checklist Level

Competition MediumConcentration HighLife cycle stage MatureInvestment requirements MediumTechnology change MediumRegulation & policy MediumIndustry assistance Low

SOURCE: WWW.IBISWORLD.COM.AU

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Competitive Landscape

Industry Globalisation

The Chocolate and Confectionery Manufacturing industry is exposed to a high level of globalisation. All of the industry’s major players are owned and controlled by foreign multinationals such as Cadbury (United Kingdom), Nestle (Switzerland), and Wrigley

(USA). The presence of these firms has greatly increased the industry’s exposure to globalisation by introducing technology sharing, trans-national marketing, and global sourcing into the Australian marketplace.

barriers to Entrycontinued

resources to invest in advertising and promotions to protect and grow their market share. Further, the major players enjoy favourable contracts with key suppliers such as grocery stores and supermarkets that maybe difficult for new entrants to secure.

All of the industry’s major players have very strong product portfolios with most of the world’s best known chocolate and confectionery brands being owned between them. Enormous advertising budgets allow them to aggressively promote their products through a range of media outlets that are simply inaccessible

to new entrants. Incumbent firms also enjoy efficiencies created by economies of scale and scope. Lower per unit costs of production and varied product lines combined with high levels of investment in technology and equipment make competition very difficult.

Nevertheless, new entrants have established themselves within the industry, with the majority in the low-priced, non-branded segment. Other smaller players have managed to carve out regional market niches, thereby reducing the directness of competition from the major players.

Level & Trend Globalisation in this industry is High and the trend is Increasing

SOURCE: WWW.IBISWORLD.COM.AU

Trade Globalisation Going Global: Chocolate and Confectionery Manufacturing 1996-2010

Expo

rts/

reve

nue

Expo

rts/

reve

nue

200

150

100

50

0

200

150

100

50

0

Imports/domestic demand Imports/domestic demand0 040 4080 80120 120160 160

International trade is a major determinant of an industry’s level of globalisation.

Exports offer growth opportunities for fi rms. However there are legal, economic and political risks associated with dealing in foreign countries.

Import competition can bring a greater risk for companies as foreign producers satisfy domestic demand that local fi rms would otherwise supply.

Export ExportGlobal Global

ImportLocal ImportLocal

Chocolate and Confectionery Manufacturing 1996

2010

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Player Performance In January 2010 after months of fierce negotiations, Kraft Foods Inc., the world’s second largest food company, acquired the world’s largest confectioner, Cadbury plc for an estimated $18.6 billion. Globally, the group would be number one in the chocolate and sugar confectionery segments and a strong number two in the high growth gum segment. Cadbury’s leading brands, such as Cadbury, Trident and Halls, are highly complementary to Kraft’s portfolio and would benefit from its global scope, scale and array of proprietary technologies and processes. In addition, the acquisition of Cadbury will significantly enhance the strength of Kraft’s presence in the confectionery sector, enabling Kraft Foods to leverage Cadbury’s product development capabilities.

Established in 1824, Cadbury is the world’s largest confectionery company by market share. The company has an estimated 10% share of the international confectionery market, and currently employs more than 50,000 staff in 60 countries worldwide. Cadbury merged with Schweppes, a mineral water business, in 1969 to become Cadbury Schweppes plc. However, on 7 May 2008, the company finalised the separation of their confectionery business from the Americas Beverages business. The de-merger followed a series of disposals by the company during 2007 which were intended to streamline operations. The split meant that the confectionery business was now separate from the North American beverage unit, which is now known as Dr. Pepper Snapple Group (DPS). Cadbury Schweppes Australia Ltd. was a wholly owned subsidiary of UK-based Cadbury plc. However, in March

2009, it was announced that Cadbury’s Australian Schweppes Beverage business will be sold to Asahi Breweries for an estimated $1.1 billion.

The company has a well-entrenched position in the Australian market, with two of its flagship production facilities located in Claremont, Tasmania and Ringwood, Victoria. Cadbury owns a number of iconic chocolate and confectionary brands including; Cherry Ripe, Crunchie, Freddo, Roses, and Dairy Milk that are household brand names and enjoy a high level of customer loyalty. Sustained new product introductions such as Boost, Time Out, and Breakaway have also stimulated demand and consumption.

Despite the recessive climate that dampened spending and confidence over 2009, revenue increased 4.8% to $1.0 billion. Consumers sought respite from the gloom through simple and inexpensive indulgences such as chocolate and confectionery. Cocoa and sugar prices eased, while new product introductions helped sales volumes. NPAT grew dramatically driven by lower production costs, higher volumes of high-margin indulgent products.

In 2008, Cadbury Australia sales revenue decreased by 0.7% to $985.5 million, despite rising world cocoa prices that increased by 37.9% during the year. Growth within the Asia Pacific region, inclusive of Australia, was driven by strong growth in the emerging markets of India, and China, driven by increased chocolate sales. The deteriorating economic climate in Japan, Australia and New Zealand however, partially offset the above gains. Cost cutting initiatives continued during the year, with the

Major CompaniesKraft Foods (Australia) Limited | Nestle Australia LtdMars Australia Pty Ltd | Other

Major players(Market share)

15.1%Other

Kraft Foods (Australia) Limited 49.1%

Nestle Australia Ltd 21.5%

Mars Australia Pty Ltd 14.3%

SOURCE: WWW.IBISWORLD.COM.AU

Kraft Foods (Australia) Limited Market share: 49.1%

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Major Companies

Player Performance Nestle Australia Ltd, a wholly owned subsidiary of Nestle SA of Switzerland, is the world’s largest food and beverage company, employing more than 250,000 staff across 500 sites in 86 countries. Nestle’s Australian operations are part of the Oceania geographic segment, which employs 4,700 staff across Australia, New Zealand and the Pacific Islands. The Oceania segment operates across five product categories: Beverages; Milk Products and Ice Cream; Prepared Dishes and Cooking Aids; Confectionery; and Pet Care. Specific to this industry, the Confectionery segment accounted for 11.8% of revenue in 2008.

Nestle owns some of the country’s most recognized chocolate and confectionary brands including, Aero, Milky Bar, Kit Kat, Smarties, Wonka, Milo, Smarties, Life Savers, Minties etc. Similar to competing producers, Nestle has sought to revamp popular products in order to increase its market share. For example, the launch of the Kit Kat Temptations range that included the introduction of new flavours such as Coconut eclair, Hazelnut Praline and Caramel Fudge, accelerated company growth 7% in the first six months of their introduction.

In 2008, total revenue increased by

Player Performancecontinued

closure of around 10 of the company’s manufacturing sites, and corresponding downsizing of 15% of the workforce by 2011. In addition, Cadbury announced a $135 million proposal to improve the productivity and efficiency at their chocolate manufacturing sites in Tasmania, Victoria and New Zealand.

In 2006 and 2007, Cadbury Schweppes achieved revenue declines of 13.4% and 48.7% for each year respectively. Despite strong growth in the Australian confectionery market, Cadbury attributed the slower revenue growth to a combination of retailer de-stocking and a reduction in their promotional activity.

Cadbury Schweppes rebounded after 2003, with revenue growth of 9.2% and 6.8% in 2004 and 2005 respectively.

The strong results saw revenues reach nearly $2.3 billion, while NPAT reached $234.2 million. The launch of the Boost bar was a major driver behind growth over the period, as it was the top selling medium-sized bar in the grocery channel for that year.

The company posted its ninth consecutive rise in revenue during the year ending December 2003, with total revenue growing by more than 24% to $1.9 billion. However, in the same period, after strong growth in the past four previous years, net profit after tax only reached $61 million as a result of a poor first half year. Lower profitability over the year was related to the company’s acquisition of The Natural Confectionery Co., which played a role in raising total business costs.

Kraft Foods (Cadbury division) – fi nancial performance

yearrevenue

($ million) (% change)NPAT

($ million) (% change)

2005-06 2,233.6 N/C 234.2 N/C

2006-07 1,935.3 -13.4 467.5 99.6

2007-08 992.1 -48.7 172.6 -63.1

2008-09 985.5 -0.7 212.9 23.3

2009-10 1,032.5 4.8 460.0 116.1

SOURCE: IBISWORLD

Nestle Australia Ltd Market share: 21.5%

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Major Companies

Player Performance Mars Australia Pty Ltd is a proprietary company that supplies local and export markets with food, pet care, and snack food products. Although most of Mars’ sales revenue is derived from its domestic operations, the company exports to more than 30 countries. The Australian business began in 1954 with the sale of the Mars bar. The first factory was built in 1967, and operations have since expanded to six manufacturing sites across Australia, and employment of

more than 2,500 staff. The company’s headquarters are located in Wodonga, Victoria. Mars Australia is wholly owned by US-based diversified food wholesaler Mars Inc. Across its product categories, established brands include Pedigree and Wiskas (two of the world’s leading brands of food for dogs and cats respectively), and Masterfoods (herbs, spices and condiments), Dolmio (pasta sauces), Kan Tong (marinades), and Uncle Ben’s (rice, sauces and curries).

Player Performancecontinued

3.3% to $2.7 billion, despite the year being typified by unprecedented and rapid changes in economic environment, rising unemployment and volatile commodity and currency prices. The impact of rising input costs was partially offset by the increase in selling prices, while the company’s flagship branded products, Kit Kat and Nescafe achieved organic growth of almost 10% respectively.

Over the 2007 financial year, the company performed modestly, with revenue increasing by 2.2% to $2.6 billion, and a net profit after tax (NPAT) of $95.2 million. On 24 June 2008, Nestle announced it had sold its yoghurt and dairy dessert business, including its Echuca factory, to Fonterra. The agreement became effective from September, 2008 and Nestle has indicated that a large number of employees will be moving across to Fonterra.

In 2006, total revenue increased modestly by around 3.0% to $2.5 billion, partially due to unrelated declines across major product segments. However, chocolate brands such as Kit Kat showed moderate growth, with other confectionery brands also showing marginal growth. NPAT increased by 17.9% to $60.0 million due to higher average selling prices and lower operating costs.

The 2005 years saw sales revenue increase by 1.7% to reach $2.5 billion, with much of this growth coming from the company’s other food products. In particular, sales were boosted by the launch of the Cheerio’s breakfast cereal in July 2005. The product is currently the top-selling cereal brand in the US market and has generated significant sales in the Australian market. NPAT declined by 62.5% to $50.9 million because of higher advertising costs and investment costs.

Nestle Australia – fi nancial performance

yearrevenue

($ million) (% change)NPAT

($ million) (% change)

2005-06 2,450.1 N/C 50.9 N/C

2006-07 2,523.6 3.0 60.0 17.9

2007-08 2,579.4 2.2 95.2 58.7

2008-09 2,727.5 5.7 86.4 -9.2

2009-10 2,784.8 2.1 162.3 87.8

SOURCE: IBISWORLD

Mars Australia Pty Ltd Market share: 14.3%

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Major Companies

Player Performancecontinued

Specific to the Chocolate and Confectionery Manufacturing industry, the company produces and markets a number of household brands including Mars, Maltesers, M&M’s, Snickers, Skittles and Starburst. The Snackfood operations were established in Ballarat in 1979, and a second manufacturing site was acquired in Melbourne in 1997. Mars Snackfood employs more than 800 associates, and exports to over 12 countries including New Zealand, the Middle East, Japan and markets throughout Asia and the Pacific. Mars’ exports account for more than half of Australia’s total confectionery exports.

Mars Inc. has been adopting a fairly aggressive position as a part of its strategy to raise its competitiveness in the non-chocolate confectionery segment. Recent years have seen the introduction of a number of product extensions, including ice cream lines and various biscuit-confectionery hybrids. In April 2008, Mars Inc., along with Berkshire Hathaway Inc., acquired market leader Wrigley Company, for an estimated $23 billion. The two companies together, are expected to generate sales in excess of $27 billion and unseat Cadbury as the world’s largest confectioner.

IBISWorld estimates that revenue from the company’s confectionery interest’s account for an estimated 18% of its total revenue. No public results for Effem Foods are published at the divisional level; however its confectionery division, Mars, is believed to have performed relatively well during the past decade.

At a broader level, the company’s consolidated accounts reveal a steady upward trend in sales revenue, increasing by an average of 1.5% per annum. During this period, revenue results were helped by a series of acquisitions including the purchase of Kenman Kandy Australia Pty Ltd in late 1997. Kenman Kandy reportedly added an extra $40 million worth of sales or the equivalent to three percent to Effem’s share of the confectionery market.

By 2005, revenue declined for the second year in a row, falling by 5.9% to $1.3 billion. This was largely as a result of an incident that occurred in July 2005 involving an extortion threat that led to the recall of 3 million chocolate bars from more than 5,500 stores across New South Wales stores. In August, the company re-launched the two chocolate bar lines with an extensive mass media campaign. Industry analysts believe that the brief recall cost Mars several million dollars. Revenue in 2006 was still slightly affected from the previous year’s events, falling by 1.3% to $1.30 billion in 2006, while NPAT declined by 41.3% because of increased advertising costs.

Wrigley Company Pty Ltd The William Wrigley Jr. Company is the world’s largest manufacturer of chewing gum, with a 63% share of the world market. The Wrigley Company was founded in 1891 in Chicago, Illinois and has since expanded operations to service over 180 countries worldwide with 22 manufacturing facilities in 14 countries.

wrigley Company Pty Ltd – fi nancial performance

yearrevenue

($ million) (% change)NPAT

($ million) (% change)

2003-04 143.3 N/C 21.1 N/C

2004-05 147.7 3.1 18.2 -13.7

2005-06 151.8 2.8 22.4 23.1

2006-07 165.1 8.8 20.6 -8.0

2007-08 186.9 13.2 24.0 16.5

SOURCE: IBISWORLD

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Major Companies

Player Performancecontinued

The company produces some of the world’s most recognizable confectionery brand names such as Juicy Fruit, Big Red, Wrigley’s Spearmint, Eclipse, Airwaves, Life-Savers, Extra, Orbit, Freedent etc. As of December 2007, the company recorded total sales revenue of $5.4 billion, employing 16,400 people worldwide.

In April 2008, the Wrigley Company was acquired by its major competitor and confectionery giant, Mars Incorporated for an estimated $23 billion. As part of the merger, Mars’ non-chocolate sugar brands including Starburst and Skittles were to be added to Wrigley’s confectionery portfolio in an attempt to increase its competitiveness in the non-chewing gum segment.

In Australia, Wrigley Company Pty Ltd has been manufacturing chewing gum since 1915, and is a wholly owned subsidiary of its US-based parent. With operations in most Australian states, Wrigley employs a workforce of around 328 people. The company distributes a mix of locally produced and imported gum, including the Juicy Fruit, P.K, Arrowmint, Hubba Bubba, Extra and Airwaves brands. Locally, the company invests heavily in advertising and

promotion. Over the past decade, Wrigley has successfully boosted sales via a series of campaigns based on dental hygiene that promoted the benefits of their range of sugar-free chewing gum. Wrigley’s flagship sugar-free brand, Extra, now commands nearly 60% of the local market and the company holds over 90% of the Australian chewing gum market.

The company has since launched several new chewing gum products, mints and premium ‘hard candy’ products. In 2004, the company launched its Extra Drops range of favoured sugarless gums that are also designed to assist dental hygiene. Already a big market in the US, the introduction of sugarless candy grew rapidly in Australia, helped by strong media advertising. More recently, sales have been driven by new products which include, Extra Liquid Blast, Extra Fruit, Extra Professional Mints, as well as continual growth of the Eclipse brand of mints that was launched in 2005. In 2007, Wrigley Australia also launched Solano, a premium ‘hard candy’ product, in order to reduce its reliance on the gum and mints markets.

Mars Australia – fi nancial performance

yearrevenue

($ million) (% change)NPAT

($ million) (% change)

2005-06 1,320.4 N/C 18.8 N/C

2006-07 1,302.8 -1.3 52.8 180.9

2007-08 1,272.2 -2.3 71.4 35.2

2008-09 1,331.2 4.6 121.0 69.5

2009-10 1,293.0 -2.9 79.1 -34.6

SOURCE: IBISWORLD

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Major Companies

Other Companies Ferrero Australia Pty Limited Estimated market share: 4.5%The Italian family-owned and operated Ferrero S.p.A Company was founded in 1946 by Pietro and Giovanni Ferrero. The Ferrero Group now employs around 19,600 staff across 36 operating companies and 15 manufacturing sites worldwide.

Ferrero established operations in Australia in the early 1970’s and became an incorporated company in 1974. Ferrero Australia Pty Ltd operates solely in Australia. Its production facility is located in the rural New South Wales town of Lithgow. From here, Ferrero Australia manufactures the sugar candy, Tic Tacs, and the chocolate table spread, Nutella. In addition, the facility repacks specialty chocolates imported from Italy.

The Ferrero range of products are marketed and sold within Australia to different segments of the retail market. For example, the premium Ferrero Rocher brand of chocolate is marketed as a luxury chocolate for special occasions, while the Kinder Surprise line is marketed towards parents and children as a treat. Kinder Surprise is a confectionery/toy product that was released in the Australian market in the early 1990s. Retail sales of Kinder Surprise are estimated at $17 million.

Employing around 77 people in 2005, the financial position of Ferrero has experienced positive growth in recent years, with the company generating sales revenue of $106.1 million in 2005, an increase of 15.5% from the previous year. In 2006, revenue increased a further 6.2% to $112.7 million, with the number of employees growing to 134. Stronger demand at the retail level is likely to have been a key factor behind the company’s increased sales volume. As of 31 August 2007, company revenue totalled $122.0 million, representing an increase of 8.0%.

Darrell Lea Chocolate Shops Pty Ltd Estimated market share: 4.1%Darrell Lea Chocolate Shops is a proprietary company, and is the largest Australian-owned confectionery manufacturer/retailer. Darrell Lea produces a range of boxed chocolates, confectionery bars, liquorice, rocky road, and other confectionery products. Based in Kogarah, New South Wales, Darrell Lea has approximately 400 retail outlets throughout Australia, and employed around 540 staff as at June 30, 2007. Products are sold to over 1,100 retail outlets worldwide, with Darrell Lea’s key export markets being the UK, US, Canada, South Africa and New Zealand.

In 2000-01 a number of products that were producing minimal sales were removed as a result of a new strategic plan to lift sales, along with the plan to increase export levels. By 2006-07 sales revenue reached $97 million, an increase of 10.2% from the previous year. The company endeavours to grow more substantially over the next two years, with a factory upgrade planned to boost its offshore expansion.

Aussie Sweets Pty Ltd Estimated market share: 1.8%Based in Sydney, New South Wales, Aussie Sweets Pty Ltd is a division of Cumberland Industries Ltd, a not-for-profit disability employment service. The company commenced operations in 1985, manufacturing under five product categories: caramels, fudges, nougats, musk and fruit sticks. The product range has since expanded to 30, and Aussie Sweets provides vocational training and employment to around 500 people with a disability. Sales are predominantly through national bulk confectionery re-packers, private label products and, to a lesser extent, branded products under the Aussie Sweets label. Customers include major supermarket chains.

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Investmentrequirements

Chocolate and Confectionery Manufacturing requires a medium level of capital investment, as measured by the capital to labour ratio. IBISWorld estimates that the capital to labour ratio in this industry is approximately 4.7:1. This means that producers require $4.70 worth of labour for every $1 worth of capital invested. Modern manufacturing plants require high levels of capital expenditure on sophisticated technology and equipment that aim to increase productivity without the need for additional labour. However, this industry requires more labour than related food manufacturing industries due to more complex product sorting and a greater diversity in output.

The level of capital intensity also varies greatly among industry players.

Unsurprisingly, the major producers have invested substantial amounts of capital relating to technology and production over the last decade.

Operating ConditionsStructural risk Index | Investment requirements | Technology & SystemsIndustry Volatility | regulation & Policy | Industry Assistance | Taxation Issues

IBISWorld has scored key elements of industry structure on a scale of 1 to 9 – the higher the figure, the greater the risks to businesses operating in the industry.

Operating conditions in the Chocolate and Confectionery Manufacturing industry are less risky than in other

industries in the Manufacturing division. The industry structural risk index totals 52.4 points compared to 61.9 points for the Manufacturing division as a whole (100 points equates to extremely poor operating conditions).

Chocolate and Confectionery Manufacturing

Manufacturing

Re

venu

e Vola

tility

Barriers to Entry Com

petition Exports

Life Cycle Stage Levels of Assistance Imports

SOURCE: WWW.IBISWORLD.COM.AU

Structural risk Index

Industry relax PointsExportsrevenue Volatility

Industry Pressure PointsImportsLevels of Assistance 61.9

Score

Re

venu

e Vola

tility

Barriers to Entry Com

petition Exports

Life Cycle Stage Levels of Assistance Imports

52.4Score

Capital intensity

0.50

0.00

0.10

0.20

0.30

0.40

SOURCE: WWW.IBISWORLD.COM.AU

Dotted line shows a high level of capital intensity

Capital units per labour unit

Chocolate and confectionery

manufacturing

ManufacturingEconomy

Level The level of investment required is Medium

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Operating Conditions

Technology& Systems

Overall, the industry employs world-standard technology, which has gradually improved over the past decade. The dominant presence of foreign owned firms in the industry has meant that all of the intellectual capital (i.e. technology, process, patents, recipes etc.) is owned by European and American companies. Except for the industry’s largest players, Australian confectionery makers lack the critical mass necessary to conduct basic

research in food science. In many cases, limited funds make the commercialisation of high-technology products in Australia difficult. The concentration of industry ownership also means that most industry R&D is maintained in-house, further restricting the sharing of production innovations. However, some public sector R&D still occurs through government-funded institutions like Food Science Australia.

Investmentrequirementscontinued

However, the relatively simple technology necessary for most confectionery production means that there are still a large number of small producers that heavily depend on labour in the production process. However, across the industry, the level of capital intensity is generally rising. The introduction of new technology and the

adoption of greater automation are inevitably reducing the role of labour in the production process. This is especially true in the larger factories where high speed production lines have dramatically increased throughput, allowing manufacturers to significantly raise production without requiring corresponding increases in labour.

Tools of the Trade: Growth Strategies for Success

SOURCE: WWW.IBISWORLD.COM.AU

Labo

ur In

tens

ive Capital Intensive

Change in Share of the Economy

New Age Economy

recreation, Personal Services, Health and Education. Firms benefi t from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labour skills are key to product differentiation.

Traditional Service Economy

wholesale and retail. Reliant on labour rather than capital to sell goods. Functions cannot be outsourced therefore fi rms must use new technology or improve staff training to increase revenue growth.

Old Economy

Agriculture and Manufacturing. Traded goods can be produced using cheap labour abroad. To expand fi rms must merge or acquire others to exploit economies of scale, or specialise in niche, high-value products.

Investment Economy

Information, Communications, Mining, Finance and real Estate. To increase revenue fi rms need superior debt management, a stable macroeconomic environment and a sound investment plan.

biscuit ManufacturingCake and Pastry Manufacturing

Milk and Cream Processing

Sugar Manufacturing

Confectionery and Soft drink wholesaling Chocolate and Confectionery Manufacturing

Level The level of Technology Change is Medium

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Operating Conditions

revenue Volatility Industry volatility is a function of fluctuations in the cost of raw materials, energy and oil prices, weather conditions, household incomes and changes in downstream demand conditions. Commodities like cocoa, sugar, milk, flavourings, sweeteners and oils represent primary inputs in the production process and any changes in their price impacts industry supply. In

the five years to 2010-11, prices of these commodities have been subject to dramatic fluctuations, which have impacted production costs and thus, profitability.

Chocolate and confectionery maybe classified as a discretionary purchase, implying that demand is non-essential and therefore sensitive to changes in price. Consumers purchase

Technology& Systemscontinued

However, this work typically focuses on technical issues relating to inputs rather than on confectionery research itself.

The basic principles of confectionery manufacturing have altered little over the past century. In chocolate confectionery, cocoa beans are transformed into cocoa butter through a process of cleaning, roasting, winnowing, milling and pressing. Other ingredients like milk and sugar are then added to the cocoa butter. After conching, this mixture becomes milk chocolate that can be used in the production of chocolate bars, blocks, Easter eggs etc. In the case of sugar-based confectionery, glucose, sugar, starch, milk and fat are mixed (in varying proportions according to the specific products), then boiled. Colourings and flavourings are added as required and the mass is then cooled. Once cooled, the product can may be enrobed and/or cut and packed.

Whilst basic production processes remain unchanged, new technology in the industry is focusing on recipe development and automation. Recently, some Australian chocolate makers have been changing their recipes and using new production technology to produce the flavour of top quality cocoa beans from inferior inputs. Elsewhere in the industry, the main technological advances have been made in the areas of computerisation. The introduction of computer directed controls and computer aided design has helped lift equipment to

precise calibration and tolerances. Ultimately this has allowed greater quality control in the confectionery production process.

While the core methodology remains unchanged, businesses continue to refine production processes with the introduction of new machinery and the adoption of applied science. Generally, the adoption of new technology for chocolate production has improved cost and operating efficiencies. Over time, refining technology is becoming more complex with the broadening of the product range and increased product differentiation.

In terms of marketing and distribution systems, E-commerce has been providing manufacturers with improved customer and supplier arrangements, leading to cost savings through better inventory and production planning. In some cases, e-commerce is also being utilised to track exports. So far, the adoption of this tool has been largely confined to major players. Penetration into smaller and mid-sized firms continues to be obstructed by cost issues. Further, the uptake of best practice programs is playing a key factor in ensuring high product integrity in chocolate manufacturing. The introduction of quality assurance programs like Hazard Analysis Critical Control Point (HACCP) has helped the industry improve food safety. High food safety standards play a vital role in preserving the industry’s reputation as a clean and reliable food manufacturer.

Level The level of Volatility is Medium

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Operating Conditions

regulation & Policy Chocolate and confectionery manufacturers must adhere to stringent food and health regulations. These are aimed at maintaining high levels of food hygiene and safeguarding the community against health scares associated with poor food safety. Currently, producers are regulated by Food Standards Australia New Zealand (FSANZ). This regulatory agency is responsible for the implementation of the Australia New Zealand Joint Food Standards Code (“The Code”). Released on December 2002, this code represents the complete set of food regulations for both Australia and New Zealand.

Under the new code, chocolate products must contain at least 20% cocoa and are not permitted to include more than 5% of oils other than cocoa or dairy fats. This replaces previous requirements that placed heavy specifications on the composition of chocolate products. Although the amendments offer greater flexibility to manufacturers, some industry players

are unhappy. They fear that the relaxation of composition requirements will signal an increase in the use of inferior ingredients, which to some extent, has already begun. Industry players have started to modify their recipes and adopt new technology to reproduce the flavour of cocoa beans.

The Code also places labelling requirements on industry players. Importantly, compliance with the Code requires manufacturers to provide information on the percentage share of ingredients used as well as some nutritional information. These requirements have been widely criticized for placing significant costs on the industry. However, with consumer groups intensifying their calls for more nutritional information on food labels, the industry has articulated their intention to improve labelling. IBISWorld expects an increasing number of confectionery manufacturers to introduce front-of-pack, %DI labelling over the next few years, as the debate about the introduction of

revenue Volatilitycontinued

confectionery frequently and for a large number of households, it forms an integral part of their everyday lives. However, due to the presence of a large number of substitute products, demand for a particular brand will still be affected by price increases. The current

economic climate however, has seen an increase in the consumption of chocolate and confectionery products as consumers choose to indulge themselves as a means of nostalgia or escapism without feeling guilty or incurring high costs.

SOURCE: WWW.IBISWORLD.COM.AU

Volatility vs. growth

reve

nue

vola

tility

* (%

)

1000

100

10

1

0.1

Five year annualised revenue growth (%)–30 –10 10 30 50 70

Hazardous

Stagnant

rollercoaster

blue chip

* Axis is in logarithmic scale

Chocolate and Confectionery Manufacturing

A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment.

When a fi rm makes poor investment decisions it may face underutilised capacity if demand suddenly falls, or capacity constraints if it rises quickly.

Level & Trend The level of Regulation is Medium and the trend is Steady

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Operating Conditions

Industry Assistance Government assistance for Australian confectionery manufacturers is limited. Up until the late 1980s, the industry received substantial assistance in the form of tariff barriers. Since then, free market trade policies adopted by successive federal governments has resulted in progressive lowering of tariffs. Today, the general tariff on imported confectionery is just 5%. Meanwhile, imports sourced from nations classified as developing countries are subject to a special tariff of 4%.

In some respects, the Federal Government’s low tariff policy has resulted in reciprocal access for Australian confectioners to overseas markets. Australia’s free-trade agreement with the

United States (2005) is one such example. In the future, a free trade agreement with China has been tabled as a possibility. Given rising disposable incomes and expanding diets in the Asian Giant, improved access for Australian exports could signal significant opportunity for industry expansion in the future.

To some extent, the industry is protected from foreign competition by natural barriers. Historically, Australia’s small domestic market and its geographic distance from Northern Hemisphere competitors have discouraged large volumes of imported confectionery. This competitive advantage is however disappearing as improvements in transportation systems continue to

regulation & Policycontinued

traffic light labelling continues. In addition to the above regulations,

the Australian government has also recently introduced steps to monitor the production of genetically modified food. Since December 2001, all food manufacturers (including confectionery makers) have been required to take reasonable steps to establish whether their raw ingredients contain any genetically modified food. Final food products must be labelled accordingly to provide consumers with adequate information. This move by State Health Ministers was aimed at addressing perceived health and safety issues in the community. Although welcomed by consumers, future testing required for compliance is likely to be costly for manufacturers. Confectionery producers are among those affected by this requirement since they are users of fruit and nuts, as well as dairy products.

On a broader scale, confectionery manufacturers must abide with regulations relating to employment and the environment. There are various laws governing wages and employee rights. Today, most employees operate under Enterprise Bargaining Agreements although these must exceed minimum

state and federal wage floors. Like all manufacturers, confectioners must also ensure that they comply with Occupational Health and Safety Regulations. Manufacturers can face stiff penalties for non-compliance. Finally, Australian confectionery manufacturers must comply with environmental regulations set out by the Federal and State governments. Generally these regulations relate to odours, water usage, wastewater generation and the treatment of waste arising from production.

Failure to comply with regulations, laws and other rules governing confectionery manufacturing can subject industry players to legal action, administrative penalties, and possible recalls of products. It can also result in considerable negative publicity that can damage the reputation and public image of producers. Non-compliance can therefore potentially have a material effect on the earnings and competitive position of firms operating in this industry. It is worth noting that industry sources believe that laws and regulations relating to food production are becoming more stringent, resulting in increasing compliance costs for Australian confectionery manufacturers.

Level & Trend The level of Industry Assistance is Low and the trend is decreasing

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Operating Conditions

Taxation Issues Industry products are subject to the 10% Goods and Services Tax (GST) which is imposed on the supply of most goods and services consumed within Australia. A number of food items are exempt from the GST, however the following confectionery products are GST taxable; chocolate and compound chocolate; chewing gum; confectionery; and crystallised or glace fruit.

GST is paid at each stage along the

supply chain. Under the system, firms are charged GST by upstream suppliers. Similarly, they charge downstream customers GST. At the end of each quarter, firms registered for GST must submit the money they have collected to the Australian Taxation Office (ATO). As a business, they receive tax credits for GST incurred through the purchase of raw materials and other business items.

Most items produced by this industry

Industry Assistancecontinued

reduce importing costs. Currently, there are no government

subsidies or grants targeting confectionery manufacturers. In 1995-96, the Industry Commission (now the Productivity Commission) estimated that confectionery makers received an effective rate of assistance averaging 8%. The current rate is likely to be smaller. Ongoing reductions in tariffs and a change in government policy toward the privatisation of research are likely to contribute to the decline.

Australian confectionery manufacturers can also take advantage of a range of assistance programs offered across the manufacturing sector. In late 2002, leading player Cadbury Schweppes took advantage of the Government’s new Enhanced Project By-Laws Scheme (EPBS). Under the scheme, capital equipment that is either not made in Australia or is technologically superior to Australian-made equipment can be imported duty-free. The EPBS scheme aims to help local manufacturers remain competitive in overseas markets.

At the state level, export driven funding initiatives are also helping confectioners in the export sector. In Victoria, for example, the State government unveiled an export plan worth $11 million dollars in October 2004. Although aimed at the wider food sector, the package includes financial and other forms of assistance open to confectionery manufacturers. The

program is primarily focused on developing capacity in Victorian food manufacturing to meet increasing volume, quality and seasonal requirements of major global buyers in foreign markets.

Finally, confectionery manufacturers continue to benefit from the lobbying efforts and public relations work conducted by peak industry associations. Membership organizations like the Confectionery Manufacturers of Australasia (CMA) have played a prominent role in promoting the interests of the industry since its inception in 1969. Today, CMA has more than 200 member manufacturers. Money raised through the membership fees and government assistance is used to fund policy initiatives and advisory services. For example, in 2004, the association received a $15,000 grant from the government to explore e-business opportunities for confectionery manufacturers.

Key tariffs

Goods Low rate High rate

Sugar and other confectionery

5 5

Singapore, Malaysia, PNG, NZ & developing countries

4 4

SOURCE: CUSTOMS

Level The level of Tax Burden is Medium

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Operating Conditions

Taxation Issuescontinued

are subject to the GST since the Australian Taxation Office has classified confectionery as non-basic food. This means that manufacturers must charge GST on supplies to downstream retailers and customers. However, industry players are still entitled to claim input tax credits for GST paid on purchases.

The introduction of the GST is believed to have increased the tax compliance costs of confectionery manufacturers. So far, higher costs have been associated with the greater administration required for businesses to track and claim GST credits in the supply chain.

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Key Statisticsrevenue

($m)

Industry Value Added

($m)Establish-

ments EnterprisesEmployment

(People)Exports

($m)Imports

($m)wages ($m)

domestic demand

($m)

Production Volume (Tonne)

2000-01 2,146.4 903.5 153.0 134.0 6,288.0 409.4 503.1 415.9 2,240.1 159,836.32001-02 2,310.4 893.6 156.0 136.0 6,154.0 443.3 537.3 389.6 2,404.4 160,878.32002-03 2,538.7 1,009.9 163.0 139.0 6,854.0 450.2 621.9 430.0 2,710.4 162,092.52003-04 2,592.7 1,043.9 165.0 140.0 7,347.0 395.7 578.5 456.6 2,775.5 162,859.52004-05 2,643.3 1,071.9 168.0 142.0 7,865.0 359.3 626.0 468.2 2,910.0 163,861.32005-06 2,619.4 1,065.5 168.0 142.0 8,048.0 282.5 599.3 486.3 2,936.2 166,494.32006-07 2,656.7 1,073.3 171.0 145.0 8,262.0 276.3 625.6 491.6 3,006.0 167,245.02007-08 2,706.5 1,087.5 174.0 147.0 8,465.0 294.5 695.5 491.3 3,107.5 163,709.02008-09 2,741.8 1,081.0 178.0 146.0 8,661.0 318.8 724.8 494.0 3,147.8 164,032.22009-10 2,832.2 1,102.5 181.0 147.0 8,696.0 331.1 769.8 496.4 3,270.9 164,266.82010-11 2,910.0 1,075.1 179.0 147.0 8,745.0 336.6 785.9 482.3 3,359.3 164,347.92011-12 2,972.8 1,110.0 183.0 151.0 8,784.0 358.6 834.8 488.5 3,449.0 166,977.52012-13 3,043.5 1,119.0 186.0 152.0 8,826.0 377.2 896.5 496.8 3,562.8 169,649.12013-14 3,112.6 1,140.0 189.0 155.0 8,867.0 403.1 956.4 501.1 3,665.9 172,363.52014-15 3,196.5 1,165.0 193.0 156.0 9,015.0 428.4 1,022.2 509.5 3,790.3 174,949.0Sector rank 43/147 26/147 85/147 79/145 32/147 46/142 56/141 36/147 43/140 N/AEconomy rank 243/500 200/500 396/500 362/493 254/500 83/221 72/199 231/500 70/197 N/A

IVA/revenue (%)

Imports/demand (%)

Exports/revenue (%)

revenue per Employee

($’000)wages/revenue

(%)Employees

per Est.Average wage

($)

Share of the Economy

(%)2000-01 42.09 22.46 19.07 341.35 19.38 41.10 66,141.86 0.102001-02 38.68 22.35 19.19 375.43 16.86 39.45 63,308.42 0.092002-03 39.78 22.94 17.73 370.40 16.94 42.05 62,737.09 0.102003-04 40.26 20.84 15.26 352.89 17.61 44.53 62,147.82 0.102004-05 40.55 21.51 13.59 336.08 17.71 46.82 59,529.56 0.102005-06 40.68 20.41 10.78 325.47 18.57 47.90 60,424.95 0.102006-07 40.40 20.81 10.40 321.56 18.50 48.32 59,501.33 0.092007-08 40.18 22.38 10.88 319.73 18.15 48.65 58,038.98 0.092008-09 39.43 23.03 11.63 316.57 18.02 48.66 57,037.29 0.092009-10 38.93 23.53 11.69 325.69 17.53 48.04 57,083.72 0.092010-11 36.95 23.39 11.57 332.76 16.57 48.85 55,151.52 0.092011-12 37.34 24.20 12.06 338.43 16.43 48.00 55,612.48 0.082012-13 36.77 25.16 12.39 344.83 16.32 47.45 56,288.24 0.082013-14 36.63 26.09 12.95 351.03 16.10 46.92 56,512.91 0.082014-15 36.45 26.97 13.40 354.58 15.94 46.71 56,516.92 0.08Sector rank 17/147 78/140 61/142 77/147 61/147 23/147 70/147 26/147Economy rank 174/500 88/197 91/221 223/500 220/500 69/500 201/500 200/500

Figures are inflation-adjusted 2011 dollars. Rank refers to 2011 data.

revenue (%)

Industry Value Added

(%)

Establish-ments

(%)Enterprises

(%)Employment

(%)Exports

(%)Imports

(%)wages

(%)

domestic demand

(%)

Production Volume

(%)2001-02 7.6 -1.1 2.0 1.5 -2.1 8.3 6.8 -6.3 7.3 0.72002-03 9.9 13.0 4.5 2.2 11.4 1.6 15.7 10.4 12.7 0.82003-04 2.1 3.4 1.2 0.7 7.2 -12.1 -7.0 6.2 2.4 0.52004-05 2.0 2.7 1.8 1.4 7.1 -9.2 8.2 2.5 4.8 0.62005-06 -0.9 -0.6 0.0 0.0 2.3 -21.4 -4.3 3.9 0.9 1.62006-07 1.4 0.7 1.8 2.1 2.7 -2.2 4.4 1.1 2.4 0.52007-08 1.9 1.3 1.8 1.4 2.5 6.6 11.2 -0.1 3.4 -2.12008-09 1.3 -0.6 2.3 -0.7 2.3 8.3 4.2 0.5 1.3 0.22009-10 3.3 2.0 1.7 0.7 0.4 3.9 6.2 0.5 3.9 0.12010-11 2.7 -2.5 -1.1 0.0 0.6 1.7 2.1 -2.8 2.7 0.02011-12 2.2 3.2 2.2 2.7 0.4 6.5 6.2 1.3 2.7 1.62012-13 2.4 0.8 1.6 0.7 0.5 5.2 7.4 1.7 3.3 1.62013-14 2.3 1.9 1.6 2.0 0.5 6.9 6.7 0.9 2.9 1.62014-15 2.7 2.2 2.1 0.6 1.7 6.3 6.9 1.7 3.4 1.5Sector rank 18/147 39/147 14/147 20/145 36/147 38/142 27/141 50/147 21/140 N/AEconomy rank 97/499 175/500 64/500 101/493 192/500 50/221 38/199 253/500 37/197 N/A

Annual Change

Key ratios

Industry data

SOURCE: WWW.IBISWORLD.COM.AU

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Key Statistics

HistoricalPerformance

Chocolate and Confectionery Manufacturing revenue increased by just over 1.8% per annum between 1980-81 and 1989-90. However, the rate of growth fluctuated from year to year, declining in some years in the first half of the 1980s. Growth was stronger in the second half of the decade, where the industry entered a small growth phase. In part this growth was attributable to the increased number of establishments in the industry. It also resulted from increased advertising, the introduction of new products to supply niche markets, increased exports and some import replacement. These developments enabled turnover to peak in 1990-91 before difficult market conditions resulting from the recession, caused turnover to decline slightly in the early 1990s, during when the industry entered a mature phase.

Turnover increased by just 1.1% over the five years to 1994-95, reflecting the difficult market conditions. Prices declined in 1992 and 1993 not because product prices per item declined but due to increased product volume in each item; that is real price per gram declined. In part this strategy was intended to counter the adverse impact of unfavourable economic conditions on demand. During 1993 there was deep price cutting for sugar products; this also had an impact on the prices of chocolate confectionery. Price discounting continued throughout 1994-95.

By 1997-98, industry revenue increased by 9.1%, as segments of the market remained highly profitable. In particular, chocolate bars as a proportion of total sales continued to expand. It is estimated that chocolate bars accounted for $660 million of total chocolate sales (1998 calendar year). In the same year, sugar confectionery retail sales were valued at $657 million, thus capturing 28% of the confectionery market. This was partially offset by growth in a number of snack food products competing against confectionery for the consumer dollar. Over the twelve months to June 1998, the ABS reported a

staggering 22.5% rise in the value of imported confectionery.

Australia’s confectionery industry continued expansion into 1998-99. The ABS revealed a marginal increase of 0.6% in industry revenue in real terms, as domestic producers also faced stronger competition from substitute foods and confectionery imports. Aggressive marketing campaigns, particularly from salty snacks, contributed to lower sales. Also, the industry battled against imported confectionery that was often cheaply priced. However, during the year, the industry was helped by the world price of cocoa collapsing, dropping by more than 32.6%. This lowered purchasing costs for companies across the industry. Finally, key industry players embarked on high cost advertising strategies. According to the industry association, around $100 million was spent by the industry on brand promotion.

In 1999-2000, the industry delivered a modest rise in revenue of 2.7%. Healthy growth in real household incomes helped life discretionary spending in the local market. Meanwhile, further falls in the price of raw materials and a series of depreciations in the Australian dollar impacted favourably on the competitiveness of local producers. Abroad, the industry achieved a sharp rise of 24.1% in export sales.

After two years of successive growth, revenue among confectionery manufacturers fell in 2000-01 by 7.9% to $1.9 billion. The year witnessed a change in business conditions facing confectionary makers. As much of the world went into a synchronised slowdown, growth in Australia’s real GDP was reduced to 1.8%. This rocked consumer confidence thereby stemming the consumption of discretionary items like confectionery. On the bright side, downstream demand was mildly affected by a change in the taxation of confectionery. In July 2000, the Australian Federal Government replaced the Wholesale Sales Tax with the Goods and Services tax. This produced a minor

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Key Statistics

HistoricalPerformancecontinued

reduction in the retail price of confectionery sales. Tax payable on confectionery fell from 12% to 10%.

Estimates suggest that industry revenue grew in 2001-02, 2002-03, and 2003-04. Moderate growth in economic activity provided the foundation for expansion in the confectionery industry during these years. A subsequent rise in household incomes, combined with historically low interest rates, fanned consumer spending. Conditions were tougher in the global marketplace. There was a strong increase in imports as a result of the drought, partially offset by low sugar prices.

Production increased by 3.4% per annum during the 1980s, somewhat faster than the increase in turnover. This implies that average product prices were declining. The production of chocolate confectionery increased faster than sugar confectionery. While domestic demand grew fairly slowly, exports of confectionery from Australia, although small, grew significantly especially during the latter half of the 1980s. Between early 1985 and 1988, devaluation of the Australian dollar aided the development of confectionery exports and made it less profitable to import confectionery into Australia. However, the production of Jacobs Suchard products in Australia ceased late in 1988 and thereafter these products were supplied from Switzerland (the product range was also extended), as the company was acquired by Philip Morris. Production increased strongly in 1990-91 as higher incomes meant higher discretionary spending which favoured the products of this ANZSIC Class. Production subsequently slowed in 1991-92 as Australia entered recession, but increased in 1994-95 before slowing in 1995-96.

Value added increased much faster than turnover during the 1980s, the average increase being 3.7% annually. This resulted from increased efficiency

associated with industry rationalisation and the introduction of improved technology. This was also reflected in increased productivity. Value added continued to increase in 1990-91 but declined between 1991-92 and 1993-94 as the effects of the recession were felt. Cocoa prices rose strongly in 1993 partly due to concerns about production but also due to concerns about the political stability of some of the major suppliers. Value added declined on average by 2.5% in real terms between 1989-90 and 1995-96.

Industry profitability appears to have increased quite strongly during the 1980s. The profit ratio, that is the ratio of the difference between value added and labour costs to turnover, rose from around 14% in the early 1980s to around 31% in the late 1980s. This was favourable relative to other food manufacturing activities. This also fluctuated along a downward trend during the early 1990s. The profit ratio declined with the recession in the early 1990s. It fell from approximately 30% in 1992-93 to 17.4% in 1995-96. However, it should be remembered that the profit ratio has not had interest, depreciation and tax netted out.

Overseas parent companies often restricted export activity as potential export markets for Australia were supplied direct by the parent. For example, the United Kingdom parent company of Cadbury Schweppes gained full ownership of the Australian company in 1989. The aim of this move appears to have been to integrate the Australian business into the wider group and then to use Australia as a base for expansion into the Asia-Pacific region. Changes in export policy by major companies were partly responsible for the sharp increase in exports in 1993-94. In 1994 a number of small confectionery companies formed Southern Gold Ltd primarily to facilitate export to Asia.

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Jargon & Glossary

bArrIErS TO ENTry Barriers to entry can be High, Medium or Low. High means new companies struggle to enter an industry, while Low means it is easy for a firm to enter an industry.

CAPITAL/LAbOur INTENSITy An indicator of how much capital is used in production as opposed to labour. Level is stated as High, Medium or Low. High is a ratio of less than $3 of wage costs for every $1 of depreciation; Medium is $3-$8 of wage costs to $1 of depreciation; Low is greater than $8 of wage costs for every $1 of depreciation.

dOMESTIC dEMANd The use of goods and services within Australia; the sum of imports and domestic production minus exports.

EMPLOyMENT The number of working proprietors, partners, permanent, part-time, temporary and casual employees, and managerial and executive employees.

ENTErPrISE A division that is separately managed and keeps management accounts. The most relevant measure of the number of firms in an industry.

ESTAbLISHMENT The smallest type of accounting unit within an Enterprise; usually consists of one or more locations in a state or territory of the country in which it operates.

EXPOrTS The total sales and transfers of goods produced by an industry that are exported.

IMPOrTS The value of goods and services imported with the amount payable to non-residents.

INduSTry CONCENTrATION IBISWorld bases concentration on the top four firms. Concentration is identified as High, Medium or Low. High means the top four players account for over 70% of revenue; Medium is 40 –70% of revenue; Low is less than 40%.

INduSTry rEVENuE The total sales revenue of the industry, including sales (exclusive of excise and sales tax) of goods and services; plus transfers to other firms of the same business; plus subsidies on production; plus all other operating income from outside the firm (such as commission income, repair and service income, and rent, leasing and hiring income); plus capital work done by rental or lease. Receipts from interest royalties, dividends and the sale of fixed tangible assets are excluded.

INduSTry VALuE AddEd The market value of goods and services produced by an industry minus the cost of goods and services used in the production process, which leaves the gross product of the industry (also called its Value Added).

INTErNATIONAL TrAdE The level is determined by: Exports/Revenue: Low is 0-5%; Medium is 5-20%; High is over 20%. Imports/Domestic Demand: Low is 0-5%; Medium is 5-35%; and High is over 35%.

LIFE CyCLE All industries go through periods of Growth, Maturity and Decline. An average life cycle lasts 70 years. Maturity is the longest stage at 40 years with Growth and Decline at 15 years each.

NON-EMPLOyING ESTAbLISHMENT Businesses with no paid employment and payroll are known as non-employing establishments. These are mostly set-up by self employed individuals.

VOLATILITy The level of volatility is determined by the percentage change in revenue over the past five years. Volatility levels: Very High is greater than ±20%; High Volatility is between ±10% and ±20%; Moderate Volatility is between ±3% and ±10%; and Low Volatility is less than ±3%.

wAGES The gross total wages and salaries of all employees of the establishment.

Industry Jargon

IbISworld Glossary

ENHANCEd PrOJECT by-LAwS SCHEME (EPbS) Under the scheme, capital equipment that is either not made in Australia or is technologically superior to Australian-made equipment can be imported duty-free.

FOOd STANdArdS AuSTrALIA NEw ZEALANd (FSANZ) Released on December 2002, this code represents the complete set of food regulations for both Australia and New Zealand.

HAZArd ANALySIS CrITICAL CONTrOL POINTS (HACCP) Is a systematic preventative approach to food safety that addresses physical, chemical and biological hazards as a means of prevention rather than a means of final product inspection.

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