Brand Australia: Domestic Industries in Need of a Makeover

In 2009, the Australian Government put out a $20 million tender to find a new brand to redefine and enhance Australia's global image as a provider of quality goods and services. It certainly may be needed. During 2009, Australia's brand took a beating in industries as diverse as wine, wool, and international education.

Australia's wine exports are worth $2.4 billion and account for about 8.1% of total global wine exports. Historically, Australian wine has been attractive to overseas markets for its quality and price. This has changed, however. The growing output by new low-cost wine producers, like Chile, and the appreciating dollar have reduced the ability of Australian wine to compete on price.

Now quality is under threat. Wine producers are suffering from an oversupply of grapes and unfavourable weather conditions resulting in a poorer quality product. Added to this is declining global demand. These conditions are leading to the production of cheaper, poorer quality, mass-produced vintages, undermining Australia's reputation as a high-quality wine producer.

Regaining and maintaining a consistent reputation for quality wine is now the major challenge for Australian wine producers. The industry is expected to rise to the occasion. While export revenue dropped by nearly 18% in 2008-09, IBISWorld forecasts that exports will achieve a small recovery in 2009-10.

Like wine, wool had a tough 2009 as well. Australia is the world's largest producer of wool. While Australia has long been associated with the production of high-quality wool, the importance of this industry and the value of wool exports have been steadily declining.

In 2009, wool production fell by around 10% reaching an 80-year low. Behind this decline was a shrinking sheep flock, as drought and weak world wool prices took their toll. Also damaging the industry is a campaign by some high-profile international groups to end the mulesing of Australian sheep. During 2009, the list of global retailers joining the boycott of Australian wool grew as farmers struggled to implement alternatives to current mulesing practices. The Australian wool industry is expected to continue to slide as sheep farmers turn from wool production to sheep meat production in response to stronger prices for lamb and mutton.

Australia’s higher education sector, which has benefited from over $8.1 billion per year in tuition fees from international students, incurred bad press in 2009 as well. Recent challenges to Australia’s reputation as an education provider have emerged, including serious issues regarding the regulation of private colleges in the Vocational Education and Training (VET) industry and concerns about the safety of Indian students. India is Australia's second-largest market for education exports. In addition to these factors, the high value of the Australian dollar has dampened demand from many key export markets. In 2009, the combination of these factors resulted in enrolments from India plunging by 46% and those from Korea, Brazil and the United States each dipping by about 20%.

While the immediate future may be rocky for Australia’s education exports, strong enrolment in VET and English Language Intensive Courses for Overseas Students courses – popular as a starting point before further higher education study in Australia – bode well for the long-term. Furthermore, despite these troubles, exports are expected to be an average of 10.7% per year over the five years to 2010. IBISWorld forecasts the coming five years will see slower but still strong revenue growth averaging 6.7% a year.

Life Insurance Industry Selling Life

The Life Insurance industry stands ready to protect Australians against the financial risks associated with death, disability and trauma. Yet the Australian population is close to 70% underinsured for life risks. Recent changes in income levels, mortgage debt and the cost of living have outgrown spending on insurance. Over the decade to 2009-10, premiums declined by an average of 2.3% a year. The reduction in family sizes, lengthening of life expectancies, growth in superannuation savings and perceived high cost of insurance have pushed life insurance premiums into the category of unnecessary expense in the minds of many consumers.

But now there may be a change in that mindset. The global financial crisis not only undermined job security and wealth creation after an extended period of prosperity. It also delivered a reminder of the need for adequate protection in case life serves up an unwelcome surprise. With consumers feeling increasingly vulnerable, demand for various income-protection policies (for death, disability and critical illness) spiked in 2008-09.

The news was not all good for the Life Insurance industry. The Life Insurance industry's revenue is generated from premium income and investment earnings on this income. These investments are significantly exposed to the performance of the sharemarket and interest rates.

What a difference a year makes. In 2009-10, investment income is set to leap into the black again, contributing $10.6 billion to revenue. The fear factor delivered by the financial crisis means that premium income is forecast to grow by 11.5 %. The combined result will be a 194.7% increase in 2009-10 revenue for the Life Insurance industry.

The industry now has the opportunity to provide education and promote insurance to a market more receptive to the underinsurance message than it has been in the past. This message may also include changing the perception of superannuation as the major vehicle for achieving lifetime financial security. IBISWorld forecasts that premium income will expand by an average rate of 2.2% per annum to $53.2 billion over the five years to June 2015. Gains in premium income will come from increased prices following reinstatement of healthier underwriting practices and stronger demand.

The largest providers of life insurance in Australia have recognised the potential for improvement and are all jockeying for position in the wealth management sector. The top four players currently account for around 73% of premium income. With ANZ taking over ING's Australian operations and AXA Asia Pacific likely to end up in the pocket of either NAB or AMP, the industry is re-shaping and consolidating.

Investment earnings are also forecast to improve. Over the next five years, earnings are expected to average $15.8 billion a year, more than double the average investment earnings generated in the five years to 2009-10. Life is looking up.

Franchises Forever a Favourite

The opening of the first franchised McDonald's outlet in Australia in the early 1970s marked the formal beginning of the Franchising industry in Australia (report X0002). Forty years on, the industry has about 1,200 franchisors and nearly 90,000 franchisees. The number of franchise operators has grown by an average of 6.1% a year over the past five years and the number of franchisees has grown by a yearly average of 6.8%. Australia now has the greatest number of franchises per capita, with three times as many franchises per person as the United States.

Revenue for the industry is derived from the production of goods and services under a franchise licence and from franchise fees paid to the franchisor. IBISWorld estimates that franchise fees alone will account for about $12.3 billion in 2009-10. With the addition of revenue from the sales of goods and services, total industry revenue over the past five years is estimated to have increased from $138.09 billion in 2004-05 to $171.0 billion in 2009-10.

The total market share of the four largest players in the industry is less than 4%. McDonald’s Australia has approximately 85,000 staff members in 780 stores. About two-thirds of these stores are franchised, while the remaining are company owned. KFC and Pizza Hut are subsidiaries of Yum! Restaurants Australia Pty Ltd. The company operates about 600 KFC stores in Australia and New Zealand, of which over two-thirds are franchised. Pizza Hut operates about 325 stores in Australia, of which about 80.0% are franchised. Retail Food Group is regarded as one of the largest retail food franchisors in Australasia, operating the franchise systems to Donut King, BB’s Cafe, Brumby’s Bakeries and Michel’s Patisseries. The company operates about 1,000 franchised outlets across Australia. It also has five outlets in China.

While fast-food franchises were the first and remain the key players in the franchising industry, in the 1990s they were joined by an influx of retail trade franchises. Now the nature of the industry is changing again, with service-based franchises growing the fastest.

Service-based franchises include travel agencies, domestic and industrial cleaning, and gardening services. Demand for these services has been fuelled by rising disposal incomes; time-poor, cash-rich consumers; and growth in the number of women returning to the workforce.

At the same time, the new franchisees to provide these services are baby boomers approaching retirement age who want to increase their savings, retirees wanting to re-enter the workforce and people seeking the flexibility of being their own boss.

Franchised businesses are relatively affordable, with total median start-up costs for a new franchised outlet at about $100,000. The majority of initial arrangements are for a fixed term, most commonly five years.

It's not all smooth sailing. A growing number of businesses with aspirations of franchising their business model have experienced difficulty in attracting suitable franchisees and securing affordable retail sites. Contract disputes between franchisor and franchisees have been met with a series of government reviews and ongoing consultation regarding the Franchising Code of Conduct.

Despite these hiccups, IBISWorld expects the number of franchisors to grow by about 3.9% a year to 2014-15. These new entrants are just as likely to be washing dogs and clothes, as entertaining children and pampering consumers.

The Lucky Country
By David Massage, senior financial analyst

(Appeared in BRW January 28, 2010)

Australia is often referred to as the lucky country, a phrase originated by author and social critic Donald Horne in 1964. The words have been used in numerous ways to describe everything that is great about our nation - our weather, our lifestyle, our geographic isolation from the world’s trouble spots. However, 46 years ago Horne used the phrase ironically to point out what he saw as a lazy derivative society lacking innovation and enterprise.

The term is now used without the sarcasm. Sound macro-economic policies and structural reforms over almost three decades have increased Australia’s responsiveness to shifts in the global economy and delivered world-class financial, legal and political systems.

Australia has changed substantially since the 1960s through immigration, particularly from Asia, and economic reforms. The result has been a decade and a half of uninterrupted economic growth with low inflation and low unemployment. Even in the face of a global financial crisis (GFC), the Australian economy has held up exceedingly better than most of its developed market peers.

The headline figures for this year’s IBISWorld/BRW 1000 list reflect that resilience, with Australia's biggest enterprises increasing their turnover by an impressive 8.9%, to $1655.2 billion. Of the list’s 32 industry sectors, only seven recorded falls in revenue. The best-performing sectors were mining, petroleum and chemicals, retail, food, agriculture, forestry and fishing, which all recorded total revenue growth of more than 20%. Manufacturing, which accounts for almost 200 companies on the list, achieved revenue growth of more than %.

Partially offsetting these strong performers were the insurance and services (to finance and insurance) sectors, which bore the brunt of the global banking and sharemarket turmoil, falling 9.5% and 16.8% respectively.

Natural resources and energy companies remained well represented on this year’s IBISWorld/BRW 1,000 companies list. The two mining giants, Rio Tinto and BHP Billiton, occupy first and second places respectively. BHP, which had topped the IBISWorld/BRW 1,000 for five consecutive years, lost its mantle of “lord of the list” to Rio.

Rio recorded total revenue of $78.9 billion, up 82.6% from the previous year. This strong performance can be fundamentally attributed to the first full year of the combined Rio and Alcan operations. Rio’s net profit took a 49.7% hit as a result of the final quarter of 2008 when the evolving crisis in the global financial system brought a dramatic slide in economic activity and in the demand and price levels for most of Rio’s products.

Second-ranked BHP generated revenue of $63.5 billion, down 15.4% from the previous year, while its net profit slumped 61.8%. This was due to a fall in commodity prices and less demand for the company’s products as a result of the GFC. Wesfarmers rounded off the top three on this year’s list with total revenue of $51.2 billion, up 51.9% for the year, thanks to a full year’s contribution from Coles, Target, Kmart and Officeworks following its acquisition of Coles Group in November 2007.

Australia’s banks, which only had limited exposure to risky housing and financial assets in the United States, all figured prominently in the top 10 positions. Commonwealth Bank of Australia (ranked 5) reported revenue of $39.4 billion, up 6.4%; National Australia Bank (ranked 6) $37.5 billion, up 9%; Westpac Banking Corporation (ranked 7) $35.3 billion, up 5.5%; and Australia and New Zealand Banking Group (ranked 8) $29.5 billion, down 20% for the year.

The Big Four banks were lucky to escape the GFC relatively unscathed. During 2009, Australian companies (including all the major banks) raised $100 billion of new equity for the year. This ranked Australia second behind the US, despite the Australian market being only 2% of the total value of global equities. As a result, it spared the banks some nasty loan provisions and, combined with the level of bad debts being considerably lower than first expected, helped shore up capital levels.

Australia’s latest slice of luck has been the growing prosperity of East Asia. One out of two of Australia’s export dollars are now earned in East Asia, and three out of four in the Asia-Pacific region as a whole, which is also the destination for more than half of Australia’s foreign direct investment.

The International Monetary Fund has forecast growth of 7.3% in 2010 for developing Asia, up from an estimated 6.2% in 2009. China is expected to grow at 9%, up from 8.5% in 2009. Growth in the region's economies is expected to greatly outpace advanced economies such as the US and Europe, as well as other emerging regions.

China’s industrial development has created an insatiable appetite for Australian minerals and fuels, while the rise of the region’s consuming middle class has created new and growing markets for its agribusinesses and food producers beyond Japan.

The world’s fastest-growing economy has played a significant role in shielding Australia from the worst of the financial crisis. China’s huge fiscal stimulus package resulted in commodities speculation, price boosts and demand for Australian exports. Moreover, some of the government stimulus money pumped into the Chinese and Australian economies found its way into Australian equities, which raised prices and helped swell consumer and business confidence. The stimulus also helped preserve domestic demand, limiting the rise in unemployment.

The IBISWorld / BRW 1000 companies will account for nearly half Australia's revenue of $3.6 trillion this year, which makes for a good representation of how the nation's profitability is travelling. At first glance the profit figures do not make for good reading. Overall net profit was down 42.8% to $67 billion, with 10 industry sectors recording net losses of 30% or more. The worst performing sector on the list was the construction industry with net profits plunging a staggering 96.7% from the previous year.

Fiscal 2009 was a year to forget for the construction and development industry. All developers from Westfield down to the local builder have had to put new projects on ice. It was only a cash injection from the Federal Government that kept many of these companies afloat. For the real estate investment trusts, nearly $20 billion was gouged from investors just to keep the vehicles operating.

However, looking at the profitability of Australia's largest enterprises over the past five years, the picture is a bit rosier. Taking a wider sample of Australia's top 1250 revenue earners, the average return on shareholder funds after tax (ROSF) over the five-year period was 13.3%. This was only 0.1% lower than the five-year average to 2006, despite the GFC in fiscal 2009. More than two-thirds of enterprises performed better than the 10-year bond rate (5.4%) while close to a quarter of Australia's largest enterprises performed better than world's best practice, which is four times the bond rate. Profitability across the industry sectors varies considerably. The best performers over the five years to 2009 were the communications (telecommunications & postal) industry, with an average ROSF of 33.7%, and the mining industry, with an average ROSF of 19.6%. The laggards are all government owned or dominated, averaging less than 8% ROSF: utilities (7.8%); education (4.3%); government administration (1.8%); and health and community services (0.4%).

The business operating environment has changed somewhat in 2009, paving the way for a record number of new comers to the IBISWorld / BRW 1000 list. The most notable debutant is discount German supermarket chain ALDI, which is proving to be a new force in Australia's billion-dollar grocery sector. ALDI's 200 stores generated revenue estimated at $2 billion for the year, ranking it at 138 on the list. ALDI, which arrived in Australia in 2001, has already captured approximately 3% of Australian grocery sales, and has plans to grow by at least 25 new stores a year along the east coast.

Another high profile arrival is Zuellig Healthcare Holdings Australia (ranked 119) with total revenue of $2.4 billion. The company holds one of Australia's largest pharmacy products and services providers, Symbion Pharmacy Services.

Many of the newcomers to the list are the result of acquisitions made during the year. They include: Lion Nathan National Foods (ranked 113); Holcim Australia (ranked 151); Building Supplies Group Holdings (ranked 229); Cliffs Natural Resources (ranked 277); and CPPIB Communications (ranked 857).

The list of departures on this year's IBISWorld / BRW 1000 demonstrates what was arguably the worst year for the global economy since the Great Depression. 11 companies fell off the list as a result of going into administration. Three of the more high profile casualties that were finally put out of their misery were the debt-laden Babcock & Brown, ABC Learning Centres and Allco Finance Group. 60 companies dropped off due to missing the $249 million revenue cut-off. The most notable of these were the ASX listed financial services organisations AXA Asia Pacific and AMP. There were also a number of departures due to mergers and acquisitions. The most prominent was the merger between banking heavyweights Westpac and St George.

Australia's economy is well placed to take advantage of the recovery now that the worst of the downturn is over. A combination of rising business investment, higher housing prices, better terms of trade and growing consumer confidence all point to good growth for the next 12 months.

Shane Dingley, managing director of Business Brokers Queensland

Name: Shane Dingley
Title: Managing director Company: Business Brokers Queensland Website: www.businessbrokersqld.com.au

Business Brokers Queensland is the leading professional service provider for the sale of small businesses in Queensland. Their award-winning approach focuses on professionalism, transparency and integrity. The company's accolades include National Business Broker of the Year 2009 and Queensland Business Broker of the Year in 2008 and 2009.

What challenges do you face?

Uncertainty is the biggest challenge faced by us both as business brokers and business owners.

As business brokers, our success relies on buyers and sellers having confidence in the market. Potential buyers must be confident in the strength of the industry they are looking to invest in, as well as confident in their ability to generate a profit from the business they are seeking to acquire. Business owners considering selling must be confident that the time is right for them to sell and that they will achieve the price their business is worth.

Because we work across a range of industries, it is imperative that we maintain our ability to provide accurate and timely market information to buyers and sellers to guide their decisions and back up our recommendations. This is more important than ever before as we continue to work to overcome the loss in confidence that occurred in late 2008. For Business Brokers Queensland, this confidence drop resulted in a reduction of the number of buyers (partly because the banks were not lending) and more owners deciding to hold off the sale of their business until conditions improved. While the number of sales we have brokered in 2009 exceeded that of 2008, the importance of continuing to provide accurate and timely market information to both buyers and sellers has remained an integral element of our business practice.

As business owners, the biggest challenge we face is having access to information to guide our own investment decisions. For example, prior to the November 2008 we did a lot of work to position Business Brokers Queensland for growth and we were ready to invest further into our own growth strategy. We established a competitive advantage with the 2009 Australian and Queensland Business Broker of the Year (Ron Frank) and the 2008 Runner Up Queensland Business Broker of the Year (John Galea) on staff. We also changed our business-development program with the result that the percentage of new business being generated from referrals was at an all-time high. With the uncertainty around the impact of the global financial crisis, we could not commit to any significant investment into our business. However, it was important for us to maintain the momentum that we had built and to know when the right time was to make the next step.

How does IBISWorld help you overcome challenges?

As business owners, we want to grow our business but we need the intelligence to know how best to do that. We use IBISWorld regularly to access information to guide our growth.

Over the past 12 months in particular, the insight we have gained from IBISWorld reports has been invaluable in guiding our decisions. We have used this information to add to our market intelligence and help us time our cash investment in the business. Using IBISWorld has also resulted in the decision to focus on the development of strategic partnerships as our main business development strategy.

For our clients, IBISWorld gives us insight into industry trends that can raise confidence in both our buyers and sellers. For example, we are currently marketing a $1.3 million telecommunications business and IBISWorld's reporting suggests significant expected growth in this sector. This has not only impacted on the marketing of this business, it also gives us confidence as brokers in the deal.

In a time of uncertainty where owners weren’t listing, buyers weren’t buying and banks weren’t lending, the ability to have access to accurate and timely market information for our business and for the business of our clients has been integral to our operation and has continued through the recovery as our business continues to grow.