Australia is now set to have a prosperous and expanding frozen vegetable processing industry. Three years ago the whole industry was set for the scrap heap.
The rapid recovery is one of most remarkable Australian business success stories of the last decade and is a model for all areas of Australian food processing and many other industries.
In recognition of what has taken place Australia’s largest frozen vegetable processor Simplot is now set to invest $60 million to $70m in Australia particularly in Tasmania.
The frozen food turnaround underlines that the problem with Australian business is not -- I repeat not -- the overall Fair Work Act, although it is true that the shift and penalty rate sections of that act are a problem for a great many industries.
The biggest problem for Simplot (and most food processing enterprises) was not the unions or the Fair Work Act but the management of Simplot. But we need to start the story from the beginning. Food processing has been in decline in Australia for decades and most of the big internationals found managing food plants in Australia too hard and they relocated overseas.
Then in 2011, around three years after Ian McLeod became CEO of Coles, McLeod decided that one of the ways he could get a marketing advantage over Woolworths was to be able to state that his home-brand frozen vegetables were grown and processed in Australia.
But the Australian food processing industry, including frozen vegetables was a total mess and nowhere near as competitive as New Zealand or anywhere else in the world -- it was much cheaper to buy overseas.
But McLeod believed that managing director of Simplot Terry O’Brien had recognised that the old ways of managing Simplot had to change. McLeod and O’Brien did a deal whereby for five years after 2011, Coles would pay Simplot above the imported cost of frozen food and canned corn but during that time O’Brien would fix Simplot and make it globally competitive. It was a huge gamble because no major had been able to make Australian food processing economic. O’Brien knew if he failed most of Simplot in Australia would be scrapped and the Coles experiment would have been futile.
Marketwise it worked, Australians preferred locally made product provided it was price competitive. And so a year or two later Woolworths duplicated the deal but its grace period was three years, meaning both agreements now end about in about 18 months’ time.
Those agreements to try to save the inefficient Australian frozen vegetable industry were a vital first step.
Then it was up to O’Brien to totally transform Simplot. What most Australian companies these days do is go off to the Business Council and demand that the Business Council get the Abbott government to change the Fair Work Act.
Unfortunately the Business Council does not know any better. But O’Brien realised that to fix Simplot his first step could not involve attacking unions or Fair Work. The first and biggest problem was the Australian management of the Simplot company.
O’Brien told me this week that some years ago, union officials had confided in him that his biggest problem was not the unions but Simplot’s management. At the time he didn’t believe them but he does now. O’Brien began a total transformation of the management of the company, recruiting better managers.
Some of the appointments came from executives of inefficient large food processors who had been sacked because they ‘rocked the human resource boat’ and told the truth.
O’Brien took a second initial step concurrent with the management change. Simplot owns an enormous food processing plant in Bathurst, New South Wales and O’Brien reduced that food processing plant to canning corn and kept its operations on a ‘9-to-5’ time table that avoided shift allowances. That was not the best way of fixing Bathurst but it stopped the bleeding and with the help of the Coles-Woolworths agreements enabled the plant to keep going. Later he may return to Bathurst.
Once good managers were put in place the company and Bathurst was taken off shift allowances, O’Brien was then able to begin talking with his workers.
Simplot has major frozen vegetable plants at Ulverstone and Devonport, Tasmania. Like the other Simplot plants, management had been weak and had caved in to union demands over a long period of time to a point where very few decisions could be made at Ulverstone and Devonport without union approval.
Processing was high cost and there was little plant flexibility and therefore no opportunity to justify investment. But when better managers were put into the plant they were able to gain the trust of the workforce and explain just how precarious everyone’s position was.
The unions had been right about the quality of management. The workforce began to have faith in the new hires. And then came the onerous task of organising an enterprise bargaining agreement involving four plants, their unions and the workforce. It wasn’t easy, particularly as union shop stewards at plants wanted to keep their powers. But the final Simplot agreement showed that if you have the right managers you can organise an agreement within the Fair Work Act that lifts productivity dramatically.
The tradition in most food processors, including Simplot, was that pay rate increases were 4 per cent per year. In the next three years under the new Simplot EBA that has been negotiated the increase will average 2 per cent. But more importantly the complex award-related plant management decision-making process has been dismantled so that, while there must be genuine consultation, in the end management, rather than the unions, makes the decision. And that was made possible because the new managers demonstrated to the workforce that they knew what they were doing and had the same aim -- to keep the plant alive and prospering. When it comes to maintenance a key provision in the new enterprise agreement is that while routine maintenance will be undertaken within the plant, when large maintenance is required it can be put out to tender and the tenderers do not have to pay the same rates as the plants’ maintenance people. This was another big breakthrough.
Finally, for new employees retrenchment benefits were capped at one year’s salary. It will take 13 years for this to be a factor because it takes 13 years to reach one year’s salary on retrenchment. However it was an important item of principle.
Weak managers all over Australia have allowed unions to use retrenchment as virtually a retirement benefit and in affect signed the death warrant for many plants.
It was not an easy negotiation and fascinatingly at a crucial time the ACTU was pressuring Tasmania senator Jacqui Lambie to vote in a certain way in the house. Lambie understood the value of Simplot to employment in Tasmania so told the ACTU that she would not discuss anything with them until the bans and work-to-rule activity at Simplot were removed. An agreement would have been reached anyway but Lambie helped speed it up -- very few Tasmanian left-wing politicians have ever understood how you boost employment in Tasmania.
The big drawback to the Simplot deal is that O’Brien did not tackle shift allowances and penalty rates. He believed flexibility and smaller pay rises were more important. Simplot’s Ulverstone operation is a modern plant that runs 24 hours a day and that high utilisation lessens the impact of shift allowances and penalty rates. At Bathurst penalty rates are not economic but at this stage there is no need for them so O’Brien kept the whole issue off the table. One day to expand Bathurst it may be necessary to bring shift allowances back to the table.
We are about to have a Productivity Commission hearing into the Fair Work Act. Enormous amounts of effort will be required from many people. Most of it will be a waste of time, because they will not address the biggest issue -- management. Those wanting to improve productivity should look at what happened at Simplot and go and do likewise. The only thing that needs to be addressed by the Productivity Commission is more flexibility in shift allowances and penalty rates.
Meanwhile the fall in the Australian dollar means that the higher prices agreed by Coles and Woolworths are now competitive with New Zealand. And farmers in Tasmania are starting to expand, whereas before they were looking at closing.