Milking it for all it’s worth

My first reaction to Coles’ recent milk discounting was that this is good news. Milk is not a huge expense for our family; we buy all our milk at the deli. But for those doing it tough, paying $1 a litre for milk (and lower prices for several other staples) could conceivably make a real difference.

To my surprise, this seems to be a minority view. My wife and my 17-year-old daughter both view Coles’ behaviour with deep suspicion, arguing that it could damage those good-hearted dairy farmers and leave consumers eventually paying higher prices. They looked suspiciously at me when I started to argue the other side of the case. Their view also seems to be the dominant one in the mass media. There’s now a Senate inquiry into cheap milk.

The farm lobby has no doubt helped tilt the way people see all this, but so has consumer group Choice. To my surprise, Choice claims that regulators should investigate whether Coles is engaged in predatory pricing. Says Choice: “It is difficult to see why any retailer would sustain such losses if it were not seeking to eliminate or damage its competitors”. Confronted by lower milk prices,  Choice has claimed that “consumers always say they enjoy cheaper food, but not if farmers are paid less as a result”, and fretted that the discounting could hurt corner stores and other retail outlets.

This turns out to be the thrust of many media stories, and it’s odd. For starters, Coles claims it sells only a tiny proportion of Australia’s milk, a claim which is probably true if only because it is so easily checked, but which also accords with the shopping habits I see every day. (Update: Coles says it sells five per cent of Australian milk production, which would give it about a quarter of the Australian drinking milk market. Half our milk production goes overseas.)  That mean Coles has zero hopes of successful predation. If Choice does not understand this, it is not doing much of a job as the voice of the consumer.

Besides, if the farmers have a beef about prices, shouldn’t it be with the milk processors, who actually pay them – and with whom Coles seems to be driving a hard bargain? Coles has even reportedly claimed that processor Fonterra welshed on a deal to provide extra money to farmers.

And of course, to the extent that lower milk prices squeeze the middleman and drive higher milk demand, farmers should eventually receive higher revenue for milk, all other things being equal.

But in reality, milk demand is not that price-sensitive. Coles’ milk discounting is unlikely to sell much more milk, or steal many milk sales from delis, small grocers, service stations or even Woolworths. My bet is that selling more milk is not Coles’ game, any more than cornering the milk market is.

What is Coles’ game? I’m fairly sure that Coles is trying to become seen as a cheap place to buy the staple items – milk, bread, toilet rolls and the like – while charging big margins on the items that actually make up most of our shopping dockets. A lack of profits on milk sales is very likely incidental to its broader branding aims.

This “low-high” strategy is one of the three basic retail marketing strategies. (The others are “low-low” or “everyday low prices”, as pursued by Aldi and Bi-Lo and Bunnings and the US WalMart chain, and “high-high”, the premium route taken by David Jones and at least one of the four local grocers I use.) It’s a different order of manipulation than predatory pricing.

And Choice? Choice might have chosen to explain why Coles is actually discounting milk, aiming to educate consumers about how they are marketed at. Or it might have celebrated the outbreak of competition, to leave itself better-placed the next time some retailer tries something genuinely dirty.

Instead, Choice has milked this discounting episode to feed unlikely stories about predatory pricing.

Disclaimer: I buy groceries in all sorts of places, but I like Coles and Woolworths: they’re generally cheaper than their many smaller competitors for my dollar, they’re easy to get around, and they have most of the stuff I want. So this whole post could be hopelessly biased.

Update: Facts on pre-discount milk prices are surprisingly hard to find, but this buyer’s account on a babycare forum suggests Coles has made rather less dramatic cuts than most people might think.

About David Walker

David Walker runs publishing consultancy Shorewalker DMS (shorewalker.net) and is an editor and writer for hire. David has previously edited Acuity magazine and the award-winning INTHEBLACK business magazine, been chief operating officer of online publisher WorkDay Media, held policy and communications roles at the Committee for Economic Development of Australia and the Business Council of Australia and run the website for online finance start-up eChoice. He has written on economics, business and public policy from Melbourne, Adelaide and the Canberra Press Gallery.
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14 Responses to Milking it for all it’s worth

  1. derrida derider says:

    It’s not biased, David – it’s obvious common sense. I cannot imagine what Choice thinks they’re doing; I cancelled my subscription years ago when they came out in support of forcing people to buy expensive rubbish for cars – ie “support the Australian car industry”.

    And it still never ceases to amaze me how easy it is for vested interests to make the public believe black is white.

  2. rog says:

    I think that Coles game is to be controversial, to be seen to be beating down prices, to promote awareness of the Coles name.

    And it worked.

  3. I agree that this discounting is probably a loss leader on a staple good. It’s not coincidental that you usually have to walk a fair way into a supermarket to find the milk, passing lots of other merchanidise.

    But is there any example of a permanent loss leader, or will this price war, like all price wars, eventually fizzle out? The only possible example that springs to mind is ‘free’ parking at shopping centres.

    • David Walker says:

      It’s May 2016 and milk is still $1 a litre. The price war may indeed eventually fizzle out, but it’s taking its time.

  4. hrgh says:

    You’re right to question CHOICE, I’ve been concerned about a number of their positions over the last year or so.

    For example, advocating the removal of electricity retail price regulation in NSW, without evidence of a competitive market and when the three biggest retailers where about to be purchased by existing competitors.

    Not sure whether CHOICE suffers from a narrow ideological approach (compounded by cutting the policy team), or pandering to a subscription membership base. Or both.

  5. Victor Trumper says:

    Coles are merely doing what happened in the UK not so long ago and wow they have got some new pommy executives.

    What a coincidence.

    Predatory pricing is talked about a lot but evidence is hard to find to substantiate it.

    Farmer’s prices haven’t fallen and their production would rise substantially whilst these prices continue.

  6. Doug says:

    Coles and Woolworths have about 70% of the grocery market in Australia – I don’t see why they would have substantially less of the milk market.

    When retailers have that much of the market I start to get concerned about concentration of buying power. the difficulty in working out the strategic issues and whether the farmers will get squeezed is that the milk processing industry is also highly concentrated as most of the coops have been consolidated.

    Market models that assume you will get a good outcome might be right but it would seem to depend in this case on the relative market power of the milk processors versus the big two retailers.

  7. Cameron says:

    Rog has read this right. The dairy lobby has played right into Coles’ hands. They have had more free publicity this past fortnight then any marketing budget could buy. And it is all on message – food is cheap at Coles.

    In reality though, they have simply matched (and rounded off) Aldi’s pre-discount war price of $2.07/2L, and in various local grocers $1L was easy enough to find.

    Doug, the milk market is actually a dairy market heavily dominated by a few very large milk processors. Coles does not buy milk from individual farmers (unless they are part of the processing coop). There are two markets here.

    Further, if Coles had market power, why wouldn’t they already be buying their milk for less and charging higher prices?

    My more detailed thoughts are here
    http://youngeconomists.org.au/blog/2011/3/17/media-confusion-over-the-milk-price-war.html

  8. Tom N. says:

    Alas, CHOICE is something of a law unto itself, and is full of soft-Left interventionist types; it certainly does not represent the interests of consumers-as-consumers. Indeed, by claiming to be the “Australian Consumers’ Association”, it is arguably guilty of false advertising!

  9. David Walker says:

    Extra data dug up in response to Doug @ #6 above: The ACCC has estimated that about 23 per cent of Australia’s milk goes to drinking milk (50 per cent is exported, and more goes to butter, cheese, powdered milk etc). Coles says its own-brand drinking milk represents about five per cent of Australian production, which would give it around 22 per cent of the drinking milk market; Woolies may have a similar share. On these numbers both Coles and Woolies must have larger all-brand shares of milk sales than I had guessed. On the other hand, drinking milk takes up a smaller slice of milk production than I had guessed.

  10. Nich Hills says:

    I’m pretty much with Andrew Norton (#3).

    Each week Coles pushes a glossy catalogue into my letter box. It’s colour printed and the design, production and delivery can’t leave much change from $1.50. But I pay nothing for this catalogue! Yet defenders of the free market will tell me that it is in Coles’ interest to do this to maintain/expand their market share and, incidentally, make me a better informed consumer.

    And now Coles do another cross subsidy of their operation – by reducing the price of their milk from $1.40 to $1 a litre. Unlike their subsidising of me with a catalogue which is accepted practice, this cross-subsidy creates an uproar!

    Incidentally, the blogosphere is (justifiably) concerned about the duopoly of Woolworths and Coles. And yet much less concern is expressed about the duopoly of milk processors Parmalat and National Foods. It is the milk processing duopoly’s own milk brands, and the super profits they generate, that seem most threatened by the supermarkets’ house brand pricing.

  11. DailyMagnet says:

    David – I think your first instinct was right, but you might need to look elsewhere – the cheaper milk will be helping a lot of people a whole lot.

    It’s just a shame they(all the major gorcery shops) don’t apply the same policy to their grossly over-priced fruit and vege, and meat, without which, the population will shrivel up and die – hence the high prices… we already know the farmers don’t collect much out of those things but the public doesn’t think about it unless it is in the news.

  12. Tel says:

    Yes it’s a cross subsidy but really guys, have you bought a colour printer lately? The printer costs next to nothing and comes with EMPTY ink cartridges but the replacement ink costs more than the original printer… and they do tricks like building chips into the cartridges to reject attempts at refill and lock out third party replicas.

    I remember there was a parliamentary inquiry into the banking industry recently… no one cared, least of all the banking industry.

    It’s just a shame they(all the major grocery shops) don’t apply the same policy to their grossly over-priced fruit and vege, and meat, without which, the population will shrivel up and die

    http://www.pendleham.com.au/market/index.html

    … and some thousands of other independent butchers, some better than others.

    Use the kind of fridge that drys air, get a big stainless steel tray, buy one really big slab of beef, put those three together. Every day wash the tray and turn the slab of meat over, lasts for weeks. Anyhow, salt is cheap, vinegar is cheap, even pepper is relatively cheap (compared with all of recorded history), and if you go to one of the Indian warehouse shops curry powder is cheap too. The only reason anyone pays a high price for meat is convenience and laziness.

    We eat very, very well in Australia, and I’m not bothered by that one bit!

  13. Nicholas Gruen says:

    DD, while I agree with you on this, I’m pleased to see you’ve remained upright and resistant to evidence I gave you long ago that Australian cars are not substandard (which of course is a different matter to whether we ought to treat their makers as charity cases, which we shouldn’t).

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