Opinion

Supermarkets milking the limelight in latest dairy price war battle

By RJ Whitehead

- Last updated on GMT

Related tags: Dairy industry, Milk

Supermarkets milking the limelight in latest dairy price war battle
Just as Woolworths announced in Australia this week that its third-quarter revenue had risen 2.5% largely due to increased sales of milk, its arch rival, Coles, revealed it had signed new contracts with two dairy farmer co-operatives.

Through these back-to-back announcements, it is clear that Australia’s infamous supermarket milk wars are as lucrative as they are unlikely to cease.

Woolworths’ overall sales for the three months to March 31 rose to A$14.42bn—up from A$14.07bn a year earlier—in spite of an atmosphere of caution among consumers still holding back on discretionary spending. 

The company has aggressively discounted staples like milk as a means to shield it from weak consumer confidence. This in turn has led to a fierce battle with Coles that has divided opinion in Australia.

The two supermarkets operate pretty much as a duopoly, accounting for some 80% of the supermarket business. Some consumers and observers believe their end-game is to wipe out smaller traditional convenience stores while further shutting out chains in that category like Aldi, Franklins and Costco. 

The fight began in January last year when Coles cut the price of a litre of milk to A$1 for its home-brand line. This sparked a reaction in kind by Woolworths that moved on to other staples like bread and tea.

It's a tactic to drive people into [the supermarkets] – particularly those who might typically shop at a competitor's store – designed to grab market share​," according to Paul Patterson, head of marketing at the Australian School of Business at the University of New South Wales, at the time. “It’s a short-term gimmick​.”

However, it is also a tactic that nervous farming unions have argued might well squeeze out dairy producers by driving down margins. To continue with the cut retail prices—which Woolworths itself has admitted are unsustainable—the supermarkets are likely to squeeze their suppliers in an already low-margin business.

This, however, has given traditionally farmer-friendly, patriotic Australian consumers a dilemma—should they follow their hearts and back the dairy industry, or favour their purses and take advantage of the low prices? 

As the debate rages on, both supermarkets have been finding ways to mitigate potential fallout from the dairy industry. This is why a couple of weeks ago Woolworths and dairy farmers in the Manning Valley, New South Wales neared an agreement that will see the two sides dealing directly. 

If this move gains regulatory approval, this will be the first time supplier and supermarket will have cut out the middle man, thereby saving costs.

And at the same time as Woolworths announcing its increased sales, Coles’ also dumped the middle man by signing contracts with farmer-owned dairy processors Devondale and Norco. The company said it promises to provide “a better deal for thousands of east coast dairy farmers including long-term contract security and higher farm gate prices​.”

Using suitably patriotic rhetoric when announcing the deals, Coles’ merchandise director, John Durkan, said: “Our customers want fresh Australian milk for their families and they want to know that the price will remain affordable in the future. Our job is to provide a quality product at a competitive price and at the same time ensure that the dairy industry supplying Coles is strong, innovative and customer focused. These new contracts with Australian farmer-owned businesses deliver on all these fronts​.” 

But this move hasn’t improved the mood in all circles. In an opinion piece in The Australian, John Durie wrote: “The farmers are just pawns in the game​. [Coles’] aim is to drive down prices for the benefit of Coles, not to help Australian farmers​.”

At the moment there is a great deal of speculation about what will happen next with some players, like Queensland Dairyfarmers Organisation chief executive Adrian Peake suggesting the move might bring the milk war to an end, while others, like Durie, worry about where this puts the processors like Parmalat and Lion Nathan, which were both elbowed out as a result of the deal. There have also been suggestions that Kirin, Lion’s Japanese parent, might reassess its expensive foray into Australian dairy.

There is no doubt that the latest moves by Woolworths and Coles directly into the dairy industry are part of an intensive PR campaign. Having already shaken up the dairy industry with their own-brand cuts, they are doing so again barely a year afterwards. Only time will tell what effect shocks of this magnitude will have on the industry, but given the pace with which things have been moving of late, we won’t have to wait long.

Have your say: What's your take on the supermarkets, the prices and the co-operatives? Let us know in the box below.

Related topics: Business, Oceania, Dairy

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