Why is food so expensive in Australia compared to other countries?

So why are Australians’ grocery bills so expensive?

It’s a question that we often ask ourselves when we travel overseas, and find ourselves raving about how cheap the food was.

While there are a number of factors, experts are beginning to recognise that it is partly because shoppers have simply got used to high prices and foodie shows such asMasterChef may also encourage us to pay a premium for food.

THE PROOF

According to The Economist Intelligence Unit’s Worldwide Cost of Living 2014survey, Sydney was the fifth most expensive city in the world to live in. The most expensive was Singapore, followed by Paris, Oslo and Zurich.

When it comes to food prices, news.com.au analysis of the EIU’s data found that Sydney was more expensive than London, New York and Hong Kong if you calculated the price of a basket of food including bread, butter, apples, tomatoes, eggs, mince, fresh chicken, cheese, spaghetti and milk.

According to Numbeo, a website where users contribute data from around the world, grocery prices in the US were 24.85 per cent lower than in Australia. In Singapore they were 18.52 per cent lower, in the UK 12.25 per cent lower, France 9.67 per cent lower and Japan 9.47 per cent lower.

IT’S OUR OWN FAULT … AND MASTERCHEF’S

Most people believe that “market forces” dictate food prices but Brigit Busicchia, a PhD candidate studying the politics of food at Macquarie University, said this was not the complete picture.

“We have got to question why some are happy to pay $5 for a croissant or a loaf of bread in Sydney while in the middle of Paris it costs only one euro ($1.45),” Ms Busicchia said.

People often point to high wages in Australia and while this can be a factor, this did not explain why prices in other high-wage countries such as France were often cheaper.

“It’s nothing to do with wages or price support; it has to do with what is socially acceptable and what politicians think voters will demand,” she said.

“Australian people think that price equates quality. It is often true, but what if price is driven by what the consumer is ready to pay rather than what it actually costs?”

Ms Busicchia said she thought shoppers had also been influenced by shows such asMasterChef or My Kitchen Rules, which encouraged food cults and an acceptance of premium prices.

“Not only are these shows invitations to consume more but they also turn food into a form of entertainment, making us think about food and its value in a very different way,” she said.

But she said there was more to food than just its commercial value and inflating prices created problems for those on a tight budget.

“Food is vital to many of our social and cultural endeavours, not to mention the essential role it plays in our nourishment and survival,” Ms Busicchia said.

WE EARN ENOUGH TO ABSORB THE COST

Senior economist John Ferguson at the Economist Intelligence Unit agreed that Australians had been accepting of high food prices for many years and this was partly due to the strength of the economy.

At the beginning of this decade wages were growing by between 4-5 per cent a year and Mr Ferguson said this meant that price rises could be absorbed.

“I think this made Australian consumers less sensitive to price rises, so they were willing to absorb higher retail prices for things like food,” he said.

“It created a very positive environment for the supermarket sector and allowed them to be confident with mark-ups of their product.”

But if you look at the Economist Food Security Index, Australians spend a modest 10.2 per cent of their total household expenditure on food. This is a lot less than the world average of 34.5 per cent.

Mr Ferguson said this showed wages had increased enough for the average household to absorb price increases, and was possibly why Australians were more comfortable about accepting higher prices.

BUT IT’S NOT JUST ABOUT US

Extreme weather events such as drought and flood have pushed up prices for certain foods in recent years. An example of this was the 2010-11 floods in Queensland, which sent the price of bananas skyrocketing. But Mr Ferguson said it was hard to tell whether price rises were completely reversed once the crisis was over.

“Prices might subside a little but there’s increasing concern among economists that those prices aren’t fully reversed, we need more research here,” Mr Ferguson said.

This will continue to be an issue due to climate change, which is expected to lead to more extreme weather events.

Mr Ferguson said Australia needed more competition as there were only two major supermarkets operating in the country.

However, he said the next two years would be interesting as growth is forecast to slow and this could make supermarkets reconsider their prices.

“I think retail will become more competitive because wage growth is slowing regardless of government policy.”

HOW MUCH ARE SUPERMARKETS TO BLAME?

Woolworths is one of the most profitable supermarkets in the world and Jean-Yves Heude, the former chief executive officer of Kelloggs ANZ, estimates that shoppers are probably paying about 3-3.5 per cent more for groceries due to the dominance of the two main supermarkets in Australia.

Mr Heude now works as a consultant helping businesses adapt to the world’s changing retail environment and said while competition could be better, he thought the difference was marginal.

“Woolworths’s earnings before interest and taxes is 7.6 per cent and this is one of the highest in the supermarket world,” Mr Heude said.

The British supermarket Tesco is on 6.1 per cent, Coles is on 4.8 per cent, and the average for retailers across the world was 3-4 per cent, he said.

He said the dominance of supermarkets Coles and Woolworths in Australia was probably lifting prices by about 3-3.5 per cent, if you looked at the difference between Woolworths’s profit and the world average.

But he said he thought this was marginal and there were other factors that were making a bigger difference to prices.

OUR POPULATION IS SMALL COMPARED TO EUROPE

Mr Heude said he thought Australia’s smaller population compared to Europe was one of the biggest factors.

Europe has a population of 400 million people and over the last 20 years has been targeted as one manufacturing market. This means that businesses are catering to a bigger number of people across many different countries, and so each product becomes cheaper to produce.

A company can have several factories, each dedicated to one technology or line of products.

In contrast, in Australia and New Zealand, which is also seen as one market, the population is more than 10 times smaller.

“In Australia and New Zealand you probably have one factory making all your products,” Mr Heude said.

Australian factories often use smaller machines, which are less cost effective, and several products will be processed on the same lines.

“One of the big issues is the changeover, when you are finished (making) one product and you need to make another product,” Mr Heude said.

“Depending on how similar that product is you might have to clean the line and that might take 12-24 hours. And during that time, the line doesn’t work.”

Australia’s huge land mass is another factor that drives transportation costs. “For example, France has three times the population of Australia and is 15 times smaller, that means its average density is 45 times higher than in Australia.”

WE PAY OURSELVES A LOT

Wages are quite high in Australia compared to other countries.

According to OECD figures, the minimum wage in Australia in 2013 was $21,475. In France it was $20,588, in the UK it was $17,437 and in the US it was $15,748.

Bloomberg reported the real hourly minimum wage for France in 2013 was higher at $11.30 than Australia’s rate of $10.88. In the UK it is $8.40 and the US it is $7.58.

However, Mr Heude said this was a “chicken and the egg” issue because high prices could not be sustained if people did not have the money to pay for the goods so the cost of food ultimately had to be affordable for residents.

REGULATION

Mr Heude said that Australian food regulations tended to be more extreme than those overseas and this meant imports of cheaper products from other countries was restricted.

For example in Europe food that contains less than 0.9 per cent of genetically modified ingredients can be labelled as GMO-free but in Australia it has to be 100 per cent free of GMO products.

So if a company wants to use an ingredient such as flour, imported from overseas, it can face two costly options: either make a specific product in Europe to comply with Australian regulations or make it in Australia.

“From another angle, those regulations indirectly protect employment so you can look at that as a positive thing,” Mr Heude said.

THE GOOD NEWS

The inflation rate of food has actually declined in Australia in recent years after many years of increases.

In 2012 food prices declined by 3.5 per cent, according to the OECD, after seven years of increases from 2005 to 2011.

Mr Ferguson said Australia needed more competition to encourage cheaper prices but said supermarkets already look to be reducing prices, perhaps in recognition of the slower wage increases forecast.

To further push prices down, Mr Ferguson said he would like to see more innovation in agriculture production because this would make crops more resilient to extreme weather events and reduce volatility in the market.

“We need to be more productive with how we use our land,” Mr Ferguson said.

However, Ms Busicchia believes that keeping prices affordable will require political courage.

“Governments may need to negotiate with food industries to contain price inflation,” she said.

She said when international prices for things such as wheat, corn and soy rose sharply, food processors and distributors increased their prices.

“When international commodities prices fall there is never such readjustment unless governments start negotiating with the industry,” she said.

“To be able to monitor how prices develop is very important if one wants to maintain affordability and access.

“Traditionally, Australian governments have preferred not to intervene in the corporate affairs hoping that competition forces will provide the best outcomes for the consumer.”

But she said unregulated market economies always tended towards concentration, monopolies and lack of competition.

For Mr Heude, the answer was not increased regulation. He said if Australians wanted cheaper food prices the country should align its regulations with those in Europe so companies could access cheaper ingredients.

However, he said in order to expand the market in Australia, companies should probably be looking to Asia. “It’s a real opportunity, (Australia and NZ products) have a very good image in Asia of being of a high standard, there is a positive image from a market standpoint.”

This would allow companies to increase the number of products they make and eventually make each product cheaper.

When it comes to the retail market in Australia, Mr Heude said that he did not expect another general supermarket would be able to directly compete against the dominance of Coles and Woolworths but that companies could look at different models.

“There could be more competition, there already is now from Aldi and Costco … you need a different positioning and this allows you to attack from a different angle.”

Source: NewsComAu