Executives from supermarket giant Coles are likely to face a grilling today when they appear before a Senate Committee inquiry into the price wars sparked by Coles’ decision to slash milk prices to $1 a litre.
Milk processing giant National Foods has warned in a submission to the inquiry that the move was unlikely to increase consumer demand for milk, and would therefore drag customers away from smaller independent retailers and towards Coles and Woolworths, which has matched Coles’ price cuts.
“Consumers have not paid such a small amount for one litre of fresh white milk for more than 20 years. The price is simply too low for the Australian dairy industry to be sustainable,” National Foods said in its submission.
“The decision to discount fresh white milk is driven by their desire to attract each other’s customers and to draw customers away from the non-grocery channel.
“In the short-term, the decision means consumers pay less for their milk. However, the short-term benefits of the price reduction are likely to be far outweighed by longer-term detriments in the non-grocery channel and in regional Australia.”
National Foods argues that small businesses including local milk bars, takeaway food shops, corner stores, coffee shops and newsagents use fresh milk as a product to bring customers into their stores to buy other items.
If their milk-buying customers are lured to supermarkets, there will be a “number of direct and detrimental consequences for the non-grocery channel,” says National Foods.
Of course, the milk giant’s concern is not all for these small retailers.
It admits that its entire milk supply distribution network – which includes more than 600 distributors (mostly small businesses and franchisees) – would be hurt if the milk price war continues.
“The inelastic demand for fresh white milk means that a reduction in the price of fresh white milk is unlikely to materially increase the demand for milk. Consequently, a reduction in the price of house brand milk to $1 per litre will not result in more fresh white milk being sold, or increase the earnings of dairy farmers or processors. It will merely increase the supermarkets’ share of the milk that is sold.”
In Woolworths’ submission, the supermarket giant has tried to distance itself from blame for the price wars, saying it matched the shock price drop by Coles to ensure it remained competitive and remains concerned on the effect on the milk supply chain.
“Woolworths is concerned that the end result of this rapid price drop has effectively forced an unnecessary round of massive changes onto the Australian dairy industry without adequate consideration about the medium to long-term impact of these changes,” the company says in its submission.
“This price move has effectively re-based the price of white of milk across Australia overnight, and for an unknown period into the future, which also potentially devalues the whole milk category in the eyes of the consumer. In effect, the consumer baseline for price is now at 1990s levels, but with 2011 input costs for all parts of the supply chain.”
However, Woolworths does say the price war has emphasised the competitiveness of the retail sector and says any legislative changes considered as a result must involved “commitment from all stakeholders along the food supply chain, from the farm to the retailer”.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
