Woolies the white knight unmasked by dairy defenders

Sometimes it’s what you read between the lines that’s the most important. In the cause of reporting about supermarket giant Woolworths’ formal announcement today confirming it’s arranging to directly contract dairy farmers to supply it milk, the most interesting comments are those that appear below the line.

Dairy farmers have shared their concerns about the move but now the ball is well and truly in the corner of Australian shoppers. If the comments from readers of Melbourne newspaper, The Age, are anything to go by, Woolworths’ attempt to mitigate the growing public distaste for supermarket ethics may have backfired.

I’ve picked out a few to summarise the tone of discussion online (my subheadings):

Squeezing the life out of the producers
“This is how they make the real money, had this explained by an insider recently to me. They find a producer and ask them to make their home brand for them along with their own branded premium product. People buy the cheaper version and the premium product disappears so they then just give them the second quality product in their packaging. Then supermarket owns them, they then turn on them and say, now we will pick it up, give u the packaging and labels you just give us the raw product. This means the producer the gets no profit on packaging, transport etc for the goods, and they are cut to the bare minimum of profit, this is how the supermarkets are squeezing the life out of the producers so they have no profit and no hope of improving. I won’t buy home brand, I like choice and supporting Aust companies.”
Commenter: Newcastle Gal

The admission of guilt
“Surprise, surprise I thought it was only several months ago that the supermarket giants (media) told us that the milk companies etc were not being disadvantaged and that the supermarket chains were picking up the losses, now it turns out that the supermarket chains are ripping off our suppliers after all..”
Commenter: Mik of Melbourne

Part of a bigger plan to screw consumers
“I ‘m sure the money that Woolies gets from their gaming machine can well and truly subsidies the milk (* bread). Instead, pay the real price for branded milk and cease this war. The only outcome will similar to Europe where fresh milk is now a luxury, mainly God awful UHT milk on shelves.”
Commenter: nm4047

It’s all about control
“Woolies and Coles will only rip off farmers because you let them. Note the success of Norco on the NSW North Coast, their milk is still selling for a fair bit more than $1 a litre and has withstood the “home brand” assault. Sales only dropped by 1-2% compared to the 25% drop of brands in the cities. Norco and the communities they support care for farmers, because they are farmers. Woolworths don’t care about farmers, by dealing directly with farmers they are hoping to break up the co-op models that are beating them in the rural areas and drive the farm-gate price down.”
Commenter: dude

And then there’s this from someone who obviously knows the dairy industry very, very well:

“Actually, it’s a combination of marketing ploy and the knowledge that Queensland and Western Australia are close to real domestic supply troubles if they keep losing dairy farmers.
Not being privy to Woolworth’s strategy in this move, this is what I suspect will occur.”

“(1) They’ll target large scale farmers or encourage investment in large scale farming for their direct supply. Good economics on their part but increases the exposure for the suppliers since return on their investment will be solely dependent on Woolworth’s assessment of a fair price.

“(2) They’ll concentrate on areas where they aren’t up against strong competition and where’s there’s excess manufacturing capacity available. Both WA and Queensland fit the bill here.
Victoria would be a less attractive option with its reliance on export markets and dominance by co-operatives and farmer owned supplier groups. South Australia has a small localised industry and is attracting interest from Victorian based co-operative Murray Goulburn. Tasmania has good production prospects but transport is an ongoing issue. So probably WA and Queensland.

“(3) Once they’ve got a foothold, it’ll be a balancing act. Do they squeeze their fresh milk suppliers or do they loss-lead and extend their range of products by trying to increase both their supplier base and their range of manufacturing options? More ‘supermarket own’ brands would probably be their ultimate goal but not at the cost of having to carry the brands for a long time before a return on investment. I’d say their ideal is complete vertical integration but they know that can backfire big time if you don’t control enough of the market.

“One thing for sure. This is about Woolworths not about the farmers. And let’s face it, that’s what all businesses are about- not just supermarket owners”
Commenter: David of Leongatha

All in all, I’d call it an unmitigated PR flop. On the other hand, those commenting online on a story in The Age are hardly a representative sample of Australians. It’s inevitable that farmers will be recruited by Woolies (and Coles, in turn, no doubt) but whether Aussies will buy either the rhetoric or the “fair” home-brand milk is far from a sure thing.

Is Woolies the dairy farmer’s white knight?

Woolworths has announced it plans to contract dairy farmers directly, with the promise of better farm gate returns. While a first for Australian dairy, this is not new in the UK where many of our supermarket executives earned their stripes. On a study tour of the UK, prominent Victorian dairy farmer Roma Britnell spoke to many English farmers about their experiences, so I was delighted when she agreed to answer a few questions for Milk Maid Marian.

Roma Britnell

Roma Britnell

MMM: What are the supermarkets proposing?
Roma: The supermarkets are thinking about setting up direct supply contracts with a select group of farmers in response to the public’s concerns that they are hurting farmers.

I saw a really good example of this in England after coops failed and processing companies became dominant. The supply contract I looked at was with Waitrose, a boutique up-market supermarket. Only a small number of farmers had the opportunity and got a few cents more than the rest of the English dairy farmers. They have to have a very flat supply and the quality standards are very demanding.

When I first explored this concept, the farmers were not too unhappy. Now, the supermarket’s demands are getting too difficult to accommodate. A lot depends on the relationship between the negotiators of the group and the company manager but because the group is small, the farmers are at a disadvantage.

MMM: Is this common overseas?
Roma: I didn’t see this anywhere other than in the UK. What I did see and look for were ways the farmer could maintain influence up the supply chain. I found the answer was simply to own as much of the supply chain as possible so long as this was managed efficiently and monitored carefully.

This is what has traditionally gone wrong, and the “co-op” model is wrongly blamed as the reason instead of the inefficiency and lack of the owners (farmers) making sure the business performed.

Co operation comes in many forms and I looked at companies like Glambia that are part co-op and part company.

I found many good businesses that were going well operating as a co-op, including Arla. Neither co ops or companies are immune from failure. The management rather than the structure is key. On the other hand, the farmers that sit on co op boards need to be highly skilled business operators at an international level.

MMM: What do you expect will be the opportunities and threats for dairy farmers who contract directly with the supermarkets?
Roma: The farmers who have a direct supply contract will earn more than the rest of Australia’s dairy farmers. Eventually, however, the increased costs are likely to match the added reward.

Consumers will buy the milk believing they are doing the “right thing” by dairy farmers but the reality is that direct supermarket contracts are rarely truly in the farmer’s favour. As with all things, the ones in early will initially get some benefits short-term but long-term it’s unlikely to be the case.

Such a small group of farmers has little chance of negotiating on an equal footing – brute strength is needed to deal with giants the size of Australia’s supermarkets.

MMM: What are the opportunities and threats for Australian dairy farming as a whole?
Roma: This opportunity for a favoured few poses enormous threats to Australian dairy. If the English experience is repeated here, the often unrealistic demands supermarkets impose on their contracted farmers will become the norm over time. They will say its customer driven. Its supermarket driven; to get the edge on their competitor and in turn the long-term costs to the industry are too large to keep the industry viable. Do we need more of this?

There are many other threats that take a long-term view of the situation to consider.
However the principle remains that dairy farmers are individual businesses who seem to struggle to work as a team. If we did, we would have the clout to position ourselves ready for the oncoming food boom. It has been a long time since the demand for food was greater than the supply. Dairy industries around the world are positioning themselves in readiness for this. Us …well I don’t think we are going to be in a position ready to pounce. Sad really to miss opportunity but a good strong group of focused farmers would be the way to achieve success.

My last comment to demonstrate my findings is cemented from my experience just this week whilst in New Zealand. The country has a minimal domestic market with a strong, well organised cooperative that exports a large amount of milk. So very like Australia in that respect. Yet they have the highest domestic milk price of any country in the world. Go figure!

Will Curtis Stone come to the rescue of Aussie farmers and foodies?

Coles is pushing prices down, down, down to help the Aussie battler, right?

Actually, it appears the driving force behind Australia’s supermarket wars is something much more prosaic – supermarket ROI. According to the Sydney Morning Herald:

“A report released in March by the Merrill Lynch analyst David Errington warns that the big three retailers, Coles, Woolworths and Metcash, will need to boost their earnings by $1.3 billion in the next three years if they are to make an acceptable return on the billions of dollars of investments made on acquisitions and capital expenditure. This is on a total earnings before interest and tax (EBIT) pool of $4 billion for the retailers.”

“In the past year, the profit growth of the entire sector has shrunk. Errington’s report says that in the first half of this financial year, the three food retailers delivered a combined EBIT growth of $150 million, a far cry from the $400 million-a-year earnings growth required to make an acceptable return. It will be interesting to see what the full-year earnings will be when the sector reports in the next few weeks.

“If Coles, Woolworths and Metcash fail to generate suitable returns on capital in the next couple of years, investors’ patience will run out and the groups will suffer a significant de-rating.

“It goes a long way to explaining the intensifying price war among the supermarket chains as they try to snatch market share to justify their investments.”

Doesn’t sound like the hostilities will ease up any time soon, does it? In the meantime, we can expect more and more private-label products – especially dairy – to flood the shelves of Coles and Woolworths.

Research by IBIS World Australia reported in the International Business Times showed that, already, “Up to 68 per cent of butter sold in the two supermarkets is private label, while for sugar it is 67 per cent, 56 per cent for bread, 55 per cent for fresh milk and 53 per cent for eggs”.

Alarmingly, the researchers predicted that “by 2017, the share of such products would make up one-third of total supermarket sales”.

Why am I alert and alarmed? Because this is bad news for anyone who cares about good food. When price becomes the only differentiating factor, quality must suffer right along the food chain and the ones who will ultimately feel the pain will be the little people – the farmers who grow the food and the consumers who eat it.

So where does this leave the foodies of Australia? I’ll let you draw your own conclusions.

No need to worry, I guess. Celebrity chef Curtis Stone will save us all. His spin doctors, Thrive PR, say this:

“And don’t think that Curtis is just a face when it comes to his partners like Coles. He is an active contributor behind the scenes to their business and marketing function. Their success is his success.”

Then again, maybe he’s blissfully unaware of the damage to Australian food caused by “his success”. I intend to appeal for help by emailing him at contact@curtisstone.com and am sure he’d love to hear from you, too.

While you’re at it, don’t forget to sign Lisa Claessen’s petition to Coles CEO, Ian McLeod by visiting http://www.change.org/en-AU/petitions/coles-up-the-price-of-generic-brand-milk-to-a-sustainable-rate-of-return-for-all

Cranky questions for the NFF about Woolies and the Blueprint

The NFF has “welcomed a new major partner in the Blueprint for Australian Agriculture: Woolworths”. Yes, one of the two giant supermarket chains that has slashed the value of milk to less than that of water is now helping to chart our farmers’ futures. My future, my children’s futures.

"It’s a matter of funding..."

In a media release, NFF president Jock Laurie said: “Having Woolworths on board will ensure that what consumers believe are the key issues for Australia’s food producers are captured in the Blueprint”. I felt betrayed. After the red mist settled, I wrote a list of six cranky questions and called the NFF. Admirably, the NFF’s Ruth Redfern has responded.

Would love to hear what you think! You can also participate in the Blueprint at http://www.nff.net.au/blueprint.html

1. How do you anticipate farmer reactions will be to Woolworths’ involvement as a “major partner” in the Blueprint for Australian Agriculture?
We hope that farmers see Woolworths’ involvement in the Blueprint as positive. From our perspective, having Woolworths on board as a partner means that we can reach more farmers and more people in the supply chain with what we believe is a very important project.

Importantly, being a partner in the Blueprint does not mean that Woolworths has any more input into the outcome than any other single participant in the process. They have the same amount of input and the same opportunity to contribute as you do – so if you’re a farmer or anyone else with an interest in, or involvement with agriculture, and you haven’t attended a Blueprint forum or completed the online survey yet, please do so – as the more input we get, the stronger the outcome will be for our sector.

2. What is the rationale for such high-level involvement of Woolworths?

Having Woolworths (and Westpac, our other major partner) on board will allow us to take the Blueprint to as many people as possible. It’s a matter of funding – running a project like the Blueprint requires money, and as the NFF is a not for profit organisation, we couldn’t do this without support. By sponsoring the Blueprint, Woolworths and Westpac are actually putting money back into agriculture by supporting a project that will help us achieve a strong and sustainable future.

The important thing is that the agricultural sector makes the most of this opportunity. Blueprint is about giving everyone that has an interest in agriculture the opportunity to say what they believe the sector should look like in the future, and what we need to change or do now to get there. If you don’t contribute, you’re missing the chance to say what you think our future should be, or to raise the issue/s that are of most importance to you and/or your business.

3. Has Coles been invited to participate and, if so, what has been its response?

Earlier this month, we posted letters about the Blueprint to 500 organisations and businesses in the agricultural sector – including Coles as they are part of the agricultural supply chain, and all the banks that work with agricultural customers – encouraging them to participate in the Blueprint and to pass information on to their staff, customers, suppliers and networks.

At this stage we haven’t heard back from Coles, but we do hope that they participate – just as we hope that all other people and organisations in agriculture and the supply chain participate. If they do chose to take part, they will have an opportunity to contribute that is equal to every other participant – be it a farmer, the owner of an agricultural supply business, a truck driver, a food manufacturer, or a retailer, like Woolworths.

4. Aren’t we already painfully aware of the demands supermarkets place on suppliers?

The Blueprint provides an opportunity for suppliers to raise these, and any other issues they see as critical for agriculture to overcome.

5. Why should a supermarket have such an important role in setting the agenda for Australian agriculture when so much of our produce is exported?

There are two important things to take into account here. The first is that Woolworths will have no more input into the Blueprint than any other single person, business or organisation that chooses to attend a forum or complete a survey. They are simply helping us make the Blueprint a reality. Setting the agenda belongs to everyone who takes part – so the more input we receive, the more representative and inclusive the outcome. It’s up to us, as an agricultural industry, to set our own agenda – that’s really what Blueprint is all about.

The second is that while 60 percent of our produce is exported, 40 percent of what our farmers grow is consumed domestically – so both the export and non-export supply chains are important stakeholders in the Blueprint process.

6. The two supermarket chains control 40% of Australia’s retail sales and are in the midst of a price war. How can Aus ag resist the push for lower and lower prices?

Having a strong and competitive retail sector is very important – for suppliers and for consumers. Ensuring farmers receive competitive prices for their produce – be it those farmers who are supplying their produce to supermarkets or those farmers who are shipping bulk commodities off-shore – is expected to emerge as one of the key issues in the Blueprint process.

The casualties of the milk war still to be counted and breaking news says they will grow

Media coverage of the senate inquiry’s report on the milk war by Coles suggests there have been only victors but this only tells half the story, for every war must have casualties. Instead, my reading of the report is that the government feels there is not much it can do about the fallout.

Gobbledegook like this:

…the ability for processors to ‘walk away’ from negotiations with collective bargaining groups (as highlighted during the committee’s 2010 inquiry), market realities such as the number of drinking milk processors in some areas and the fact that the processors must deal with the two major supermarket chains that dominate the grocery sector, can mitigate the benefits of collective bargaining arrangements.

and this:

Much of this information, however, concentrated on concerns about shifts in sales away from the processors’ branded milk products to the discounted supermarket private label milk. As a matter of overall principle, these types of free market outcomes should not be a matter for government. Many private label grocery products have grown in share in recent years…It should not be a matter for public policy to protect brands that consumers no longer value. It also does appear that the steadily increasing sales of private label milk—which have more than doubled their share of sales in supermarkets over the past decade—is a trend that is unlikely to be reversed.

…actually means that dairy farmers are standing right in the path of the cross-fire as Coles and Woolies spray litres (or should I say “rounds”?) of discounted homebrand milk at each other.

On top of all this, there are news reports that private labels will soon occupy far more supermarket shelf space. It won’t be just dairy farmers in the firing line. All of Australia’s food manufacturers and producers should see this milk war as simply an opening salvo.

How ironic then, that the most articulate description of the milk war’s impact comes from Woolworths:

…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.