Studies of the impact of the Asian economic crisis in the agrifood industry in Indonesia, Malaysia and the Republic of Korea—reported by Australia’s Supermarket To Asia Council—assess how the three economies are coping, the likely speed of recovery, the changes occurring in each of their food markets and strategies for Australian companies to adopt.

The Council reported that Asian food markets are very important to the Australian agrifood industry, with exports to more than 20 Asian countries in 1997–98 earning $10.4 billion. The Council’s goal is to increase the value of exports over the next five years, but crucial to success is understanding the significant policy and structural changes resulting from the Asian economic changes.
 

The three food-specific studies

Funding by RIRDC was supplemented by Supermarket to Asia Ltd and the Department of Industry, Science and Resources (DISR). The research was contracted to the Australian National University and the Meyers Strategy Group, which worked with researchers in the three countries to produce several background papers on each economy.

Developed, coordinated and managed by Dr Brian Johnston, Projects Director at Supermarket to Asia, the reports warn that rapid changes are still occurring in the three countries and the information—collated in September–November and published in December—could date quickly.

Indonesia

Many people became unemployed or had their incomes reduced. Food prices have also risen, and consumers have been forced to revert to basic food items such as rice and wheat noodles to survive.
 

Indonesia’s medium-term outlook for growth is poor—between two and seven years for the economy to recover. Widespread high unemployment is expected for some time. The country will depend heavily on aid for basic needs such as food, as well as for infrastructure investment.

Indonesian consumption patterns had been changing before the crisis, because of rising incomes. Demand for staple foods such as rice, cassava, maize and sweet potato was falling, and use of wheat and pulses, fruit and vegetables, and meat was rising. These trends are expected to re-establish once the economy recovers.

Agricultural and food policies also have changed, with the agrifood sector—production, processing, retailing and food service—now receiving higher priority from the Indonesian Government. Agrifood is viewed as a means of helping the economy recover, as it is a large employer of relatively unskilled labour and provides food for the population.

The retailing and food service industries have been hard hit. Before the crisis they were growing rapidly, particularly in Jakarta. In the cities, traditional ‘wet markets’ were gradually being replaced by more modern supermarkets and retailing operations.

Rapid growth in food services, particularly fast-food outlets, has now been curtailed, with many closing in the past 12 months and products being repositioned to cater for lower incomes, e.g. increasing use of local products where possible.

The short-term outlook for some Australian food exports such as meat is poor, while demand for other products such as grains has held up.

Malaysia

Before the downturn, the economy had grown strongly for more than a decade, with the average income per person rising to above US$4000. Consumers were moving away from the traditional rice-based diet to Western-style foods. With a population of nearly 22 million and an urbanised society, Malaysia had become an important food importer.

Food retailing and food service sectors were booming. Supermarkets and food service establishments had grown rapidly and many large overseas operations had become firmly established. Malaysians were seeking wider choice and better value goods and services. A third of households were regular supermarket shoppers, compared with only 1 in 10 in 1995. They were becoming increasingly familiar with Western-style foods, including bread, butter and margarine, breakfast cereals, milk and milk products, and beef.

Since the onset of the crisis, Malaysians have switched to cheaper sources of food, including local foods when available, due mainly to higher imported product prices and the income effects of the crisis. This has been encouraged by the Government’s ‘Buy Malaysian’ campaign.

The crisis has greatly affected the food retailing and food service sectors. Margins are being squeezed, some larger retailers have closed, and foreign operators (mainly from Europe and the United States) are taking over local operations. In the food service sector, five-star hotels and restaurants are most affected, with overcapacity compounding problems.

Republic of Korea

The value of the currency almost halved at the start of the crisis (October 1997–January 1998), unemployment rose from 2.7 per cent in 1997 to an estimated 8.2 per cent in 1998, and consumption (which grew by 3.1 per cent in 1997) was expected to decline by 11 per cent in 1998.

Falling domestic demand saw imports of all products except wheat and ‘other crops’ decline during 1998. However, there was an increase in the competitiveness of Korea’s exports due to the lower exchange rate, and exports rose in 1998 by 10.9 per cent.
 

Rapid industrialisation and rising personal incomes before the crisis led to changes in diets and eating habits. Per person consumption of staple foods such as rice fell, while consumption of vegetables, fruit, meat, milk, and cheese rose sharply. Food retailing and food service grew rapidly in response to demand for better quality and more diverse foods. Between 1991 and 1995, the food service market grew by 47 per cent.

The economic crisis has dampened prospects for the food industry in the short term, with many consumers moving away from luxury items to basic food from the traditional ‘wet markets’. The food service market has been hard hit and demand for food ingredients slumped by 30–40 per cent during 1998.

As the economy and incomes recover during 1999 and 2000, the previous move towards wheat and cereal products, meats, fruits and vegetables, is likely to resume. As self-sufficiency ratios for these products are low, food imports will resume their growth.

While the agrifood market is moving towards moderate liberalisation, many aspects of food importing remain subject to government intervention. This includes import management regimes for 83 agricultural commodities, quarantine regulations for plant and animal imports, and country of origin labelling, import licensing and quotas.

There also are areas where the market works against Australian food products, causing them to be less well known and less accessible to Korean consumers. One area is a preference for US products, which partly reflects consumers’ lack of familiarity with Australian products. Another area reflects Korea’s policies and measures such as the reinspection required for imported foods and the health food registration process.

Future strategies for Australian agrifood companies

The opportunities lie in greater trade and investment with Indonesia, Malaysia and Korea (particularly two-way investment) and the resulting business. Current circumstances suggest investment links are more attractive, especially in Korea.

The challenges are how Australia and its competitors position themselves to meet changing institutions and policies in the three countries. In Korea in particular, a big challenge is for Australian agrifood exporters to familiarise local consumers with Australian products.

By examining the implications for Australian food exporters of developments in the three countries, the researchers identified five strategies:

• keep markets open;

• position Australian products;

• reduce costs through the supply chain;

• establish joint ventures and in-country investment; and

• understand the market and competitors.

Keeping markets open

In Malaysia, markets can be kept open by encouraging continuation of an ‘open economy’ approach to recovery. Any attempt to restrict or remove WTO-agreed access and tariff reduction schedules should be strongly opposed. Australian Government agencies such as the Department of Foreign Affairs and Trade, Austrade and State agribusiness agencies need to continue to monitor developments closely over the next 12 months and report developments to the Australian agrifood industry.

In Korea, establishing a government bilateral agreement on market access for Australian food is proposed. Also suggested is highlighting how Korean and Australian industry can develop complementary inspection systems for imports, and knowing which Korean Government agency and officials manage imports of Australian agrifood.
 

Positioning Australian products

Reducing costs through the supply chain

Establishing joint ventures and in-country investment

Joint ventures and in-country investment should be established in Indonesia, given its lower currency and more open investment environment, to share new technologies, increase market penetration and gain better control of distribution and product quality. In Malaysia, they should take advantage of the lower value of the currency and be used to develop key food retail, service and distribution chains with established companies in the Asian food market.

In Korea, small-scale producers, in particular, should be targeted for joint ventures and in-country investment, to take advantage of the low value of Korea’s currency and the relaxation of investment restrictions.

Understanding the market and competitors

In the three countries, Australia needs to invest in reliable market intelligence, and evaluation of how key companies at the forefront of developments in food retailing and service are managing and instituting change to meet current challenges. Agrifood companies should take advantage of the information and services of Austrade, the Department of Foreign Affairs and Trade, Supermarket to Asia Ltd and other Federal and State government agencies.