Tuesday, March 29, 2011

Ahead of Woolworths & Coles at the Senate Inquiry today...

From 9.30 am
Watch Here

Shane Wright, economics editor of the West Australian poses this question:

Does WA need a dairy industry?

Now before you start mailing in dry cow pats in anger, I am not advocating it’s time for the State’s remaining dairy farmers to walk off the land and take up jobs driving trains for Fortescue Metals or BHP Billiton (although financially they may be better off doing just that).

But with a Senate inquiry looking into the milk price war now being waged by the nation’s major retailers the heavy focus has been on the poor plight of dairy farmers with precious little attention given as to whether we should have them in the first place.

This would be the same industry that got a $2 billion assistance package in 2000 to end taxpayer-funded subsidies for drinking milk which was paid for via an 11 cent a litre levy on all milk for the best part of nine years (it was only ended by the Rudd Government).

Dairy farmers in WA quickly become an endangered species post-deregulation, evidence that they were only being kept afloat by the subsidies with only the most efficient and financially viable still alive.

Now those remaining farmers have raised concerns that the Coles $1 a litre pricing policy will drive them out of business leaving the people of Perth only sipping UHT milk.

Much has been made of claims that some parts of the country won’t have fresh drinking milk if the price war continues.

The situation in France, where every monsieur, mademoiselle and madam drinks UHT milk, was highlighted as an example of what is about to hit the milk drinking public of Australia.

By any measure the high percentage of UHT milk use in France is high at about 96 percent of total consumption.

But some witnesses to the milk inquiry (and some of the senators) tried to draw a link between the French experience with the supermarket structure of Australia. Pity that claim doesn’t stand up to any examination...

France is the second largest milk producer in the European Union (and one of the 10 largest in the world). The place is awash with milk.

The use of UHT appears more a cultural issue - little history of milk as a beverage, not a heavy focus on breakfast cereals – than a supermarket power issue. The fact France has high per capita consumption levels of cheese and butter suggest locals like dairy, just not as a drinking product.

Across the Channel in Britain UHT use is less than nine percent. And Britain is the third largest milk producer in the EU.

There’s no suggestion that competition among the supermarket chains in France and Britain has led to this huge discrepancy in UHT usage.

But somehow that argument is supposed to fly in Australia.

I don’t think so.

Often through the inquiry and public commentary on the issue Coles is made as the evil-doer, forcing its competitors into matching its pricing structure.

Consider the submission made by Woolworths.

The company has made much of its concerns that farmers will be driven to the wall.

In reality, it appears Woolworths is frightened that its differential pricing arrangements are the only thing in danger of disappearing.

Woolworths, before the price war, was offering its HomeBrand line of milk at around the $1.14 a litre mark.

But it also has its Woolworths brand which was on the market at about $1.47 a litre.

For that extra 33 cents a litre there is a small amount of extra fat (creaminess) in the milk but also a great wad of extra profit margin for our friends at Woolworths.

Instead of trying to argue to customers that for that extra 33 cents a litre customers who bought Woolworths brand over HomeBrand were getting a better product, the company surrendered to the threat posed by Coles and slashed its prices down to the $1 a litre mark.

Indeed, the company only cut the one litre cartons of Woolworths brand to $1 from $1.47. For two litre containers prices fell to $2.29 from $2.67 and for three litre containers the price is now $3.29 rather than $3.96 previously.

"We have publicly expressed our concern that this rapid price drop is unsustainable for the Australian dairy industry," the company’s government relations manager Nathalie Samia wrote.

But there was no gun being held at the heads of Woolworth officials (or those at other major retailers including at IGA) forcing them to slash prices in line with Coles. If they so believed in the unsustainability of $1 a litre milk then Woolies wouldn’t or shouldn’t be offering it.

It was a choice made by those companies that they had to compete with Coles.

That is largely in part because Woolworths, Aldi, IGA and others know that consumers see very little difference in milk.

Milk is, largely, a bulk commodity just like iron ore and coal (although I wouldn’t put splash of iron ore on my Corn Flakes in the morning).

Some, like the West’s Rob Broadfield, will argue long and loud that cheap milk turns a potential cup of coffee heaven into something approaching a mug of bitumen but most of us don’t have the same refined taste buds as Mr Broadfield.

All we want is some white stuff for the morning cereal, a bit to put in the coffee, and maybe if we’re feeling the heat a milkshake for a mid-arvo pick-me-up.

And we actually want it at the lowest price possible.

Unfortunately for WA dairy farmers, it’s clear milk drinkers are more impressed by low prices than much more expensive branded varieties.

Consumers already have a choice when they walk into a Coles or Woolies or an IGA – and they’re voting for the cheap unbranded stuff.

That means for dairy farmers and their processors the focus has to be on product differentiation, convincing shoppers that their higher priced milk is worth purchasing.

On that front they have failed so far.

But it’s much easier to criticise big bad Coles than have a look at your own marketing efforts.

Dairy farming has to be one of the toughest farming gigs going around.

It’s constant, it’s hard, the returns are low and you’re effectively selling something that by its very nature is the same as just about anyone else’s.

And the land dairy farmers are using now may be more productively used for other agricultural pursuits.

Perhaps the question is whether West Australians want, and are prepared to pay for, a dairy industry.

This is an argument not as simple as a supermarket chain selling cut-price milk. This is an argument over how an industry goes about selling itself.

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