Supermarket milk wars: the hard numbers tell a remarkable story

Milk sales 20160825
Thank you. The most heartening thing about the Australian dairy crisis is the support ordinary Australians have shown for farmers. The remarkable graph above proves what we’ve all seen on supermarket shelves. Real people taking real action.

This graph showing the split between home brand and brand name milk sales comes from Dairy Australia analyst John Droppert, who has answered a handful of questions from Milk Maid Marian with some very telling numbers. Thank you, John! I have added quotes from John in italics. Because they were so fulsome, I have selected some highlights for you.

Is supermarket milk really important to dairy farmers?
To answer this question I asked Dairy Australia how much of the milk that leaves the farm gate ends up in cartons on supermarket shelves. Well, (with apologies to Lara Bingle) that depends on where the bloody hell you are. In Queensland, just about every drop goes to the supermarket. Here in Victoria, about a tenth of our milk ends up in the fridge and another half is turned into other foods like cheese, yoghurt and butter plus ingredients for everything from toothpaste to glue.

MilkSalesByState

So, yes, what happens in the supermarket matters – critically for farmers in Queensland, NSW and WA. It also can’t be ignored in dairy farming powerhouse, Victoria, especially in the light of cheese prices now targeted by Coles to follow milk down, down, down.

The value of milk has fallen

MilkValue

Aussies are drinking less fresh white milk, despite the supermarket discounts

JD: “…it appears that after an initial lift in demand from consumers in response to discounted milk, consumers have become accustomed to paying the reduced price for fresh white milk, and consumption patterns have since reverted back to pre-discounting levels. Therefore, the implementation of this discount pricing strategy has ultimately failed to lead to a sustainable lift in per capita consumption of fresh white milk.”

Using a table of numbers supplied by John, I’ve created a chart showing the decline below:

FreshWhite

Why processors want to supply milk to supermarkets
That graph of falling consumption matched with falling retail prices doesn’t look good but could it be part of a bigger deal? DA’s John Droppert notes that:

“DA’s understanding has been that dairy processors, when faced with adverse conditions in one segment of their market, will naturally look to make decisions in other segments of their business to offset those impacts.”

“With the understanding that processor profit margins were compromised by the consumer shift to private label milk after the $1/litre policy, DA was of the view that the change in market dynamic was likely to have encouraged processors to seek alternate revenue streams – particularly UHT and flavoured milk. It is our understanding that processors consider returns for branded and private label milk across their portfolio of milk (both white and flavoured), while factoring in any efficiency benefits generated by additional private label milk throughput.

“Per capita consumption for both flavoured milk and UHT milk has achieved consistent growth over the last 25 years. DA believes that this has been supported by increased investment by processors in advertising to encourage consumers to purchase more flavoured milk to offset profitability challenges in other parts of the total milk category. We are currently in the process of trying to secure a time series of data showing advertising spend across the liquid milk category in order to verify this claim.”

Again using data in a table supplied by DA, I created the graph below. And wow, look at UHT (in grey) and and flavoured milk (orange)! Those babies might be a small part of the equation but they’re doing the heavy lifting, propping up total consumption.

AllMilk

At the time MG announced it would supply home brand milk for Coles, getting other Devondale products on the shelves – particularly cheese – was certainly considered a triumph for the co-op.

Is the profitability of fresh milk for processors known?
JD: “DA is not privy to retailer or processor profit margins for any manufactured product. There is a widely held belief that processor margins are better for branded product, compared to private label equivalents.”

“DA also understands that there may be an advantage for processors in attaining additional supermarket shelf space for their company branded products in both milk and other dairy categories by supplying private label milk (i.e. a non-financial return). The upcoming ACCC dairy market study is likely to bring some of this information to light, and allow some of these questions to be more definitively addressed”.

Does DA have a position on whether supermarket discounting is a positive or negative for dairy farmers? Why/why not?
JD: “From a DA (services body) perspective, we look at this in terms of impacts along the supply chain back to farmers; the peak bodies (ADF and ADPF) take this analysis into account in projecting an industry position through ADIC. As far as impacts go, there are two levels to look at: the emotional aspects, and the data.”

“Taking the emotional side of the issue into account first, there is no doubt that the discounting of fresh white milk has devalued the perception of product value in the eyes of farmers. To see milk selling for less than the price of something like bottled water has an impact on farmer sentiment that the economic data doesn’t capture. It suggests to farmers that all the hard work, capital investment, and management skill that goes into producing the product is not properly valued, by those selling it, or the wider community buying it.

“From a data perspective, this is a complex issue, and a proper evaluation relies heavily on assumptions in place of open access to hard data relating to profit margins which in most cases is commercial in confidence information held by the processors and retailers. However, DA is concerned that the analysis published in the recent S&O was deliberately misinterpreted to infer that the $1/litre discounting of private label fresh milk has had a positive impact on dairy industry profitability. 

“Data available to DA relating to sales volumes and values does not allow us to derive definitive evidence relating to the impacts on dairy supply chain profitability.  But based on the assumptions noted above (notably around margins) and in our broader fresh milk market analysis, DA believes it is incorrect to suggest that the introduction of $1/litre private label milk has not had a detrimental impact on the dairy supply chain. DA recognises that there is a significant opportunity to improve upon the coverage and robustness of analysis in this space, and believes that the upcoming ACCC investigation will provide a means to obtain the data required to do this.

“What DA can demonstrate though is that per capita consumption of fresh white milk has not increased as a result of the $1 litre pricing policy introduced in 2011.”

A huge thank you to John Droppert and Dairy Australia for answering Milk Maid Marian’s many questions regarding “$1 milk”.

 

 

13 thoughts on “Supermarket milk wars: the hard numbers tell a remarkable story

  1. Highlights the flaws in current selling arrangements and what needs to change to bring stability and sustainable dairy industry

  2. This comment stood out to me, “the implementation of this discount pricing strategy has ultimately failed to lead to a sustainable lift in per capita consumption of fresh white milk.” If the $1 a litre milk has failed to fulfill its purpose, surely it’s time to charge a more realistic price, especially if the dairy farmers are the recipients of the higher prices.

    • I always thought the $1 a milk was to get more people into their store, mind you I really don’t see how that was to work when Woolworths just dropped their price to match Coles. Woolworths has always maintained that they would lift the price back up if Coles did the same.

    • Yet until it hurts processors and retailers it won’t change.
      Given that $1/ litre milk always has been a loss leader for retailers and to a similar degree to MG and regularly voted as the most popular discount item the processors and retailers will not change.
      The ACCC cannot dictate prices to companies.

  3. Reblogged this on Clover Hill Dairies Diary and commented:
    As always another wonderful insight from the milk pit (coal face) of the dairy industry from Milk Maid Marian

    From me i just nod my head with disbelief at this notion by processors that Coles and Woolworths will do the right thing
    “Dairy Australia also understands that there may be an advantage for processors in attaining additional supermarket shelf space for their company branded products in both milk and other dairy categories by supplying private label milk (i.e. a non-financial return).”
    What a joke I look forward to what ACCC find out
    Parmalat supply the $1 milk to Wooloworths which they sell as Woolworths Select. Parmalat’s brand is Pauls. Try going into a Woolworths in my region and buying Pauls Milk. If its there is invariably almost out of date

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  6. Good article (as usual) and many points could be discussed and debated and blogged beyond infinity…

    I am going to pull out one comment by DA that may well go over the head of many.

    “DA also understands that there may be an advantage for processors in attaining additional supermarket shelf space for their company branded products in both milk and other dairy categories by supplying private label milk (i.e. a non-financial return). The upcoming ACCC dairy market study is likely to bring some of this information to light, and allow some of these questions to be more definitively addressed”.

    My understanding is dairy processors (as with all other product suppliers) actually buy/lease/rent space (i.e. they pay the supermarket for the privilege of being there) on the shelves of the big supermarket retailers (in this case fridge shelf space) and better still any milk that is not sold is either repurchased by the processor or never purchased by the supermarket in the first place. The dairy processor carries the cost burden of its own product at the point of retail transaction and pays for the right to have its product on their *sic supermarket) shelves. And yet the processors and retailers have this lopsided $1/milk arrangement that was intended by the supermarkets as a “loss leader” to get consumers in to their stores. Lest we be allowed to comment about positioning of the dairy fridge in relation to the store entrance and the cost of using shelving at various heights, being standing eye level plus or minus one shelf is the most lucrative.

    The more the ACCC inquiry puts a cold hard light of day focus on some practices the better, it can’t happen fast enough and this is just from ONE perspective. Dare we go into dairy processor world to see how they drive risk back into producers.

    *steps down off soap box*

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