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.