The supermarket price war is damaging local food growers and grocery makers, holding them back from feeding Asia's "dining boom".
Analysis of the country's $111 billion food and grocery sector shows profits fell in the four years to 2013, with sales down despite greater spending by manufacturers on promotions and discounts offered by Woolworths and Coles.
The research was conducted by KPMG for the Australian Food and Grocery Council, which represents many food, drink and grocery makers.
Suppliers are being squeezed by the market power of the two major supermarket chains, and high costs, council chief executive Gary Dawson said.
The amount they spend on promotions and discounts being offered by supermarkets has grown four per cent every year, but that is not producing a greater volume of sales, he said.
Many smaller manufacturers who do not do business with Woolworths and Coles have achieved sales and earnings growth, the analysis showed.
"Without a viable domestic food processing sector Australia will not fully capitalise on the opportunities of the Asian dining boom," Mr Dawson said.
A growing middle class in Asia is driving rising demand for food and groceries, but local growers are losing market share in China, Indonesia, Thailand, Malaysia and Japan, Mr Dawson said.
That has mainly been caused by the high Australian dollar and high production costs.
But greater investment is needed to grow and improve the productivity of local producers and manufacturers, the AFGC said, and most spending by businesses is currently aimed at just staying afloat.
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