Supermarkets are not milking dairy farmers dry: the myth that obscures the real problem


Gary Mortimer, Queensland University of Technology

Australia’s federal agriculture minister, David Littleproud, has called for a boycott of supermarket-branded milk. He is angry about lack of support for a “milk levy” of 10 cents a litre wanted by the dairy industry to support drought-stricken farmers.

Fellow National Party colleagues have called for nothing less than a royal commission into the supermarkets’ support for farmers. Nationals leader, and deputy prime minister, Michael McCormack, has said he is open to the idea.

Amid intense price competition across many supermarket categories, the price of milk stirs passions like nothing else.

But calls to boycott supermarket-branded milk are misguided; and a royal commission would not be money well-spent.

The widely held belief that supermarkets are hurting dairy farmers by driving down the price of milk is incorrect.

It overlooks basic supply chain dynamics and the findings of the 18-month-long inquiry by the Australian Competition and Consumer Commission, which was ordered by then federal treasurer Scott Morrison to investigate the low milk prices paid to dairy farmers.




Read more:
Helping farmers in distress doesn’t help them be the best: the drought relief dilemma


Indirect relations

Looking at the supply chain for fresh milk helps show why the retail price of supermarket-branded milk does not determine the price paid to farmers as some claim.

There are many players within a food supply chain: producers, processors, wholesalers, retailers and consumers.


Fresh dairy supply chain volume map:
Department of Agriculture, Fisheries and Forestry

Dairy farmers typically sell their milk to processors, who then sell to supermarkets. There is a relationship between the supermarket and processor, not supermarket and farmer. Whether the supermarket sells a litre of milk at $2, $3 or $4 has no direct relationship on the price the processor pays to the farmer.

In the words of the final report of the competition watchdog’s Dairy Inquiry, “the farm-gate price paid to farmers for milk used to fulfil private label milk contracts is not directly correlated with private-label milk retail prices”.

Blame dairy processors

The ACCC’s report does identify a range of market failures due to bargaining power imbalances and information asymmetry, but these are crucially between dairy farmers and processors.




Read more:
Murray Goulburn and Fonterra are playing chicken with dairy farmers


Dairy farmers’ weak bargaining power means any higher price paid by supermarkets to processors would not necessarily result in higher farm-gate prices. The ACCC report notes that farmers get no more money for the milk that is sold at higher retail prices (such as branded milk).

Processors, not supermarkets, set farm-gate prices in response to market conditions (global and domestic demand), at the minimum level required to secure necessary volumes. Farmers are not paid according to the type or value of the end product their milk is used in. They are paid the same price for their raw milk regardless of what brand goes on the container.


Distribution of revenue from sale of private label vs branded fresh drinking milk:
ACCC Dairy Inquiry

Also blame consumers

Supermarkets are under pressure to keep food prices low, particularly on staples such as bread, milk and eggs. This is evident from the fact that campaigns to get shoppers to exercise their power as ethical consumers quickly run out of steam.




Read more:
We are what we eat: the demise of the ethical grocery shopper


In April 2016, for example, national attention on the plight of dairy farmers led to a campaign encouraging shoppers to leave “supermarket branded milk” on the shelves. In a single month the supermarket brands’ share of milk sales dropped from 66% to 51%. Then it began to rise again. Within a year it was back to nearly 60%.


https://datawrapper.dwcdn.net/NyTIZ/1/


Adding to confusion

While a milk levy to directly help farmers during the drought has many supporters, the disconnect within the supply chain means it is near impossible for retailers to pass the money directly to the intended beneficiaries. That, again, depends on those who buys the milk from the farmers – the processors.

Despite this, and because the ACCC inquiry’s findings have so far done little to dispel myths about the price of milk, retailers such as Woolworths have seen it as prudent to embrace the levy idea and publicly demonstrate support for dairy farmers.




Read more:
Time to get regulation back into Australian dairy?


All the additional proceeds from its “Drought Relief” milk go back to processor Parmalat, who is responsible for distributing the money to suppliers in drought-affected areas. Coles, meanwhile, has slapped a 30 cent levy on its three-litre milk containers, with the funds going to the Coles Drought Relief Fund.

These measures arguably add to continuing confusion about how the milk market works and the relationship between farm-gate and retail prices.

In the court of public opinion the supermarkets probably had no option but to go along with the charade.

A minister for agriculture, however, should know better.The Conversation

Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of Technology

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Love them or loathe them, private label products are taking over supermarket shelves



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Supermarkets are stocking more of their own brands even as they shrink stores.
Shutterstock

Gary Mortimer, Queensland University of Technology and Louise Grimmer, University of Tasmania

Coles is aiming to have private label products make up 40% of its product range over the next five years. This increase will apply across multiple tiers of products, with a focus on quality, innovation and new strategic global relationships.

More supermarket-owned brands will mean lower prices for consumers and greater margins for the retailer. But the move could significantly impact Australian suppliers as their branded products are delisted and supermarkets seek out cheaper manufacturers overseas.




Read more:
Phantom brands haunting our supermarket shelves as home brand in disguise


In Australia, private label products currently account for 18.1% of all retail dollar sales. The proportion is similar in North America (17.7%).

This is significantly less than supermarkets in other countries. Private label products account for 41% of supermarket sales in the UK, 42% in Spain, 36% in Germany and between 27 and 32% in most other European countries.

Why private labels?

In one academic study, 85% of the retailers surveyed said “improved margins” was their main reason for investing in private label products.

A private label product with features and quality parity with national brands may cost retailers 40% to 50% less to manufacture and distribute to customers.

Some American convenience stores claim gross margins of up to 72% on private label bottled water, for instance, compared to 45% on branded alternatives.




Read more:
Woolies private label strategy will play directly into the hands of Aldi


Overall, supermarkets see an 8-10% premium on margins for private label products over branded ones.

Private label products also help retailers differentiate themselves from competitors by giving them unique products.

Private labels have increased their footprint across many retailers, including discount department stores, liquor and convenience stores and traditional full-line department stores like Myer.

The flipside of private label expansion

The main fears about the continued growth of private label brands are that it could discourage suppliers from innovating with their products, jeopardise the livelihoods of smaller, independent suppliers, and ultimately result in less choice for consumers.

Consumers are currently benefiting from increased competition. Progressively higher-quality private label products are available at much lower prices than branded products.

Just a few years ago then Woolworths CEO Grant O’Brien said the company would put customers “before” suppliers.

Some researchers suggest that increasing private label ranges could impede innovation in the food industry. This is largely because branded manufacturers will have less incentive to invest in new products only to have them copied by the contract manufacturers who produce private label goods.

But a recent report from the European Commission actually found innovation in the food supply chain is not under pressure. And a quick wander through any major supermarket will illustrate the effort supermarkets are making to improve quality and introduce new product lines.




Read more:
Woolworths and Coles should heed simplicity lesson from Aldi


Smaller, local independent brand manufacturers and wholesalers could be exposed to “delisting” – where a supermarket does not renew a supply contract in order to free up shelf space for its own private label alternatives.

Naturally, if Coles is aiming to increase the proportion of its own branded products, minor brands will be the ones to disappear from shelves, not major brands like Coke, Cadbury or Nescafe.

As for less choice, most shoppers will not notice the difference, or may enjoy the shopping experience more.

Supermarket shopping is notoriously a low-involvement, mundane and habitual task. Shoppers often visit the same supermarkets, buy the same products and browse the same aisle. In fact, studies continue to demonstrate that the “abundance of choice” is problematic for many shoppers, who simply seek an “optimal choice”.

Research shows that when faced with a “good, better and best” option, people choose the one in the middle. This is why we see supermarkets offering very basic generic private label products all the way through to “select” and “finest” options.

Accordingly, a successful private label strategy hinges on leveraging perceptions of both price and value. Private label products are a key weapon for Coles and Woolworths to compete with Aldi and Kaufland for price-sensitive customers.




Read more:
House-brand push boils down to capitalism’s crisis


Australian supermarkets previously looked to local manufacturers to produce their private label ranges. However, Aldi, Kaufland, Costco and Lidl have found success by leveraging their global sourcing strategies, providing both quality and economies of scale, and so lower prices.

This appears to be on the cards for Coles. It has also announced a wish to develop new strategic global relationships to realise its 40% private label target.

This suggests that Coles may overlook local manufacturers, instead seeking out international manufacturers to produce some ranges.




Read more:
‘Honey, I shrunk the store’: Why your local supermarket is getting smaller


Coles’s announcement comes as supermarkets are getting smaller in the face of rising costs. Together, these trends could have long-term implications for the Australian grocery industry.

The ConversationThe presence of more private label goods will likely require domestic manufacturers to themselves produce more private label goods to minimise offshoring. But, in doing so, manufactuers will commoditise themselves, thereby giving retailers even more power.

Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of Technology and Louise Grimmer, Lecturer in Marketing, Tasmanian School of Business and Economics, University of Tasmania

This article was originally published on The Conversation. Read the original article.

‘Down down’ and ‘cheap cheap’ are gone gone: why supermarkets are moving away from price



File 20180307 146691 1t7au5j.jpg?ixlib=rb 1.1
Coles was once the market leader thanks to its ‘down down’ low pricing marketing.
http://www.shutterstock.com

Gary Mortimer, Queensland University of Technology and Louise Grimmer, University of Tasmania

On January 26, 2011, Coles fired the first shot in what would soon be dubbed the “supermarket price wars” by reducing the price of its own-brand milk to A$1 per litre. Woolworths fired back, triggering seven years of intense price competition.

But now Coles has waved the white flag, indicating a move away from price-based marketing, to a focus on other attributes, such as sustainability, local produce and community.

Coles’ new ad campaign.

Research shows if price is the main selling point, shopper loyalty decreases and customers become more conscious of price. Price wars are also costly for retailers.

While operational costs (wages, rent, bills) remain fixed or go up, prices can’t keep coming down. You eventually run out of margin.

Coles recent half yearly results reflect this, with a drop in earnings of 14.1% from A$920 million to A$790 million.

In contrast, Woolworths announced an 11.1% increase in earnings for their supermarket business. But Woolworths dropped their “cheap, cheap” price cutting campaign nearly two years ago.




Read more:
Down, down but not different: Australia’s supermarkets in a race to the bottom


Other retailers also get caught in the cross fire of price cutting. Case in point is Aussie Farmers Direct, which fell into administration this week saying they were:

…no longer able to compete against the domination of the major two supermarkets.

While it may be overly simplistic to blame the two big supermarkets for the downfall of Aussie Farmers Direct, price conscious consumers and thin grocery margins certainly contributed.

How this strategy came about

Supermarkets are now looking beyond price to stand out.

Both Coles and Woolworths are very similar in the brands they offer, prices, layouts, weekly specials and online channels. The move away from price gets shoppers thinking about what is unique to each chain.

So, rather than price, the focus has shifted to service quality, social programs and connecting with the community.




Read more:
Unit pricing saves money but is the forgotten shopping tool


Shoppers who are continually exposed to loyalty program logos, may eventually stop noticing these logos, or “switch off”. This is because of a behavioural tendency called “habituation”.

What these new strategies are trying to sell

So, if Coles are no longer selling themselves on price, what are they selling?

Coles’ new approach is more subtle, selling themselves through aspirational stories and employing classic advertising techniques to do it.

These techniques are used in advertising to convey positive feelings and emotions associated with a particular experience. A simple way to achieve this in advertising is to feature people telling their own stories – as seen in the new Coles advert launched this week.

Woolworths ad campaign.

With the Commonwealth Games near, both supermarkets are also featuring sports stars in their marketing. Woolworths new campaign features athletes and their connection with fresh food, positions the company, once again, as “Australia’s Fresh Food People”.

Meanwhile, Coles have partnered with Uncle Toby’s for their Sports for Schools campaign. Their advertisements feature an array of young, fit, attractive and successful athletes linking the athletic success with the purchase of products from Coles.

By moving away from price and focusing on a story telling strategy, both supermarkets can engage consumers with a process called “internalisation”. This is where people accept the endorser’s position on an issue as their own.

Internalisation is a powerful psychological mechanism because even if the source used in the campaign is forgotten, the internalised attitude usually remains. Price doesn’t create this effect.

While food prices won’t necessarily go up any time soon, consumers shouldn’t expect to see any further significant price drops. Instead, Coles and Woolworths will draw attention to other important attributes.

The ConversationFaced with the expansion of Aldi across South Australia and Western Australia and the entry of German supermarket Kaufland, Coles has recognised they can’t keep fighting a battle on price alone.

Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of Technology and Louise Grimmer, Lecturer in Marketing, Tasmanian School of Business and Economics, University of Tasmania

This article was originally published on The Conversation. Read the original article.