Trends in 2016?
At Toro Liberty, we trust you enjoyed some time off over Christmas/NY period and had the chance to reflect on the opportunities and challenges that 2016 holds. Many commentators publish their views on market trends each year, and with good reason. For as long as there have been markets, they have behaved more like a herd of sheep than a collection of independent decision makers. Why else can we all relate to a fear of missing out (FOMO) so fluidly?
This doesn’t mean that trend following is a fool’s errand. Every day businesses attempt to implement a range of different strategies for improvement. When you see a competitor succeed, your first instinct may be to incorporate the lessons of their success into your own business. Furthermore, your customers are also likely to follow trends, which has major implications for their spending behaviour.
Rather than provide a shopping list of trends, we have handpicked a few which believe are relevant to many of our clients.
Australian as a delicatessen?
A falling Australian dollar and a good reputation has led to strong pricing for many Australian foodstuffs
The push to leverage China’s demand for ‘wholesome’ Australian products will continue, driven by Australia’s reputation, for clean, high quality production. This has implications for both producers and retailers. For example, on the producer side, A2 Milk Ltd has experienced two profit upgrades in just two months after they successfully leveraged their brand into China.
Woolworths have also started selling goods in China, using a website named Tmall. It’s not hard to see why. The Australian Broadcasting Corporation (ABC) provided the following price comparison:
After years of food price deflation, could the tide finally be turning for Australian producers and manufacturers?
Australian as a delicatessen?
Low growth + increasing complexity => brownfields expansion + M&A
The world remains in a low growth environment. In October 2015, Maurice Obstfeld, of the IMF said "Six years after the world economy emerged from its broadest and deepest post-war recession, the holy grail of robust and synchronized global expansion remains elusive."
In this environment, the incentive for greenfields expansion projects remains low. Of course, there are always pockets of growth that reward ‘ahead-of-the-curve’ investors, but we are seeing a trend of success for those redeveloping or expanding existing assets and business segments. In keeping with our agricultural thematic, it is worth looking at the case of Beston Global Ltd, who purchased much of the assets of United Dairy Power Group out of administration. The assets were acquired for $4.5m in August 2015; just 19 months after the previous owner had paid $70m (which included Mozzarella manufacturing assets and a cheese shredder not purchased by Beston). These assets are currently operating at 4x the rate of production Beston expected. Such rapid ramp-up would be difficult to achieve for a greenfields investment in a new plant.
Another key driver behind the trend of brownfields expansion is the increasing complexity and scale required to compete in many of the sectors we are advising. Sticking with agriculture, profitable producers we have spoken to are leveraging a vast array of capabilities not possible for traditional operators. These include genetics management; geographical diversity; delivery and management of nutrient at plant/ crop level; the ability to develop, distribute and market innovative products; and the implementation of increasingly complex technology.
Scale of quantity is not enough to succeed in many industries anymore. Businesses require a broader range of capabilities to compete.
Return of manufacturing to Australia
Australia’s skilled workforce and weaker currency are creating opportunities for Australian manufacturing
As Australia prepares to forfeit the last of its car manufacturing plants, the outlook for Australian production of manufactured goods has begun to improve. The lower Australia dollar, our skilled workforce and access to cheap resources will help drive production back on-shore.
One dynamic business we’ve spoken to has been able to adapt in the medium term by shifting production between geographies based on currency movements.
Further examples of manufacturing returning to Australia centre around high-tech industries. Australia has two carbon manufacturing success stories; Carbon Revolution and Quickstep. Quickstep has a 16,000 sqm state of the art aerospace composite manufacturing plant at Bankstown Airport in south-west Sydney. They manufacture high-tech components for BAE Systems, Lockheed Martin, and Northrop Grumman.
Quickstep manufacture components for the F-35 Lightning II Joint Strike Fighter:
Figure 1: F-35 Lightning II JSF Fighter
Better access to capital for early stage businesses
Political will power, cultural change and success of innovative funding models should improve access to early stage growth capital
Malcolm Turnbull has finally generated momentum to reform the regulation of fundraising in Australia. Whilst the details are not yet certain, the scope includes:
Easing restrictive regulations in relation to Employee Share Schemes
Tax concessions for early stage investors in innovative start-ups
Changes to the ‘loss carry forward’ rules for start-up vehicles
Reform of bankruptcy laws
Introduction of a safe harbour for directors from personal liability for insolvent trading
Increased facilitation of crowd funding
We welcome these reforms and also recognise the importance of changing our cultural attitude towards risky, early stage investments. It is important not only to create access to funds, but to remove the stigma associated with failure, which is a necessary reality of innovation. For more information: http://innovation.gov.au/page/national-innovation-and-science-agenda-report
Two business attracted our attention last year with their use of innovative funding models; although we must caution that these models are not broadly applicable.
Honey Flow creators Stu and Cedar Anderson ran one of the world’s most successful crowd funding campaigns on Indiegogo, raising $12.2m in ~6 weeks, despite having an initial target of just $70,000. Under this model, they retained 100% of the company and now have the funds to develop a scale manufacturing capability in conjunction with a Brisbane-based injection moulding company, Evolve Group. Honey Flow’s choice in utilising a Brisbane-based manufacturing company once again demonstrated Australia’s new found competiveness.
Finally, we look at the possible acquisition of S Kidman & Co, Australia’s largest private landholding using crowd sourced, fractional property investment via innovative platform DomaCom. If this deal succeeds it will be an interesting test of the financing model, which is targeting SMSFs. This model may work with a large asset which will be passively managed (rented out in this case), although we do not expect this type of funding model to replace the role of experienced investors undertaking due diligence to find investments that meet their personal objectives.
All the best in 2016.