Private label milk in Australia
The major supermarket chains sell milk in two formats: private label
milk (also variously known as 'home brand', 'store brand' or 'generic') which usually
carries the name of the supermarket selling it and 'branded' milk which usually
carries the name of the processor.
The price cuts that are the subject of this inquiry were for private label
It is estimated that private label products currently account for almost
25 per cent of all grocery sales, including 20 per cent of those through Coles
A 2010 report released by IBIS World, a market research company, noted that
certain categories of products are particularly suitable for successful
competition from private label products:
... due to the common perception that branded products are
not necessarily of higher quality within specific segments of the supermarket,
particularly the dairy aisle. The same applies to other staples such as eggs,
flour and sugar, all of which have enjoyed solid private label growth, reaching
more than 25% of sales.
Dairy Australia notes:
Private labels tend to gain significant share in what are
termed 'low involvement' product categories—or those where the product
offerings are very similar across the range on the market and the consumer
decision-making process is relatively simple and straightforward.
IBIS World also consider that the 'only way is up' for sales of private
label grocery products, noting that they count for about one third of sales in
the United States and more than half of those in the United Kingdom.
Growth in private label milk post-deregulation
The growth in private label milk can be traced back to the deregulation
of the Australian dairy industry in 2000, when excess capacity in the industry
provided an impetus for growth. The Australian Competition and Consumer
Commission's (ACCC) 2008 inquiry into the competitiveness of retail prices for
standard groceries received evidence from a major processor on the dynamics of
the industry at that time:
Parmalat contended that this provided a strong competitive
tension to the point where the processors were prepared to tender for private
label business at very low prices in order to utilise capacity. Parmalat
considered that wholesale prices were driven down by this excess capacity,
creating a gap between wholesale prices for branded and private label product
which then expanded over time.
The first national contract for supermarket private label milk was given
to National Foods by Woolworths in 2002 (Dairy Farmers held a number of
contracts at a sub-national level with Coles).
The ACCC, in evidence to the committee, remarked that the change in tendering
arrangements by Woolworths had a clear impact on the returns farmers received,
although they were not of the view that this experience is applicable to the
current pricing decisions:
Senator XENOPHON—You referred to the history—that is, that
the dairy farmers have been at the wrong end of history on this in terms of the
impact they have had in the past. Is that correct?
Mr Cassidy—Yes ... I go back to 2000, when Woolworths
changed the arrangements for purchasing home brand milk. They moved to a
national tender, which drove down the price that they were paying for their
home brand milk, and that flowed straight through the chain and ended up with
the farmer. That is the sort of history I refer to, but that is not happening
at the present time.
Since 2000, the market share of the supermarkets' private label milk has
steadily increased. Sales of private label milk have increased from about 22
per cent in 1999–2000, to approximately 50 per cent in 2009–10. Further, in the
plain fresh white milk category, the supermarkets have increased their private
label market share from 27 per cent to the current level of approximately 70
In some areas of Australia, however, the supermarkets' private label
milk is a relatively new phenomenon. For example, Woolworths only began selling
private label milk in their Western Australian stores in 2010.
At its appearance before the committee, the Dairy Farmers Milk Co-operative
(DFMC) provided some interesting insights into how private label milk came
about and grew in market share:
Obviously for many years private label was absolutely loss
making. I was on the Dairy Farmers board when it first started to occur. It was
not done on the margin line; it was done at the request of retailers wanting
some consumer shop choice. We are not against that. The more there the more
buy, you might say. The shelf is about choice. Nobody can control the retail
price of this product and, as we can see now with Coles, that absolutely
happened 10 years ago. It was a pretty keen and loss-making wholesale price.
The sales just boomed. Nobody expected the retail price point to be dropped
that much compared to brand. I know when Dairy Farmers got the contract we just
kept losing and losing money because much more was sold than was ever
anticipated in the contract. But you had to meet the contract.
The increasing divergence between the retail price of branded milk and
the supermarkets' private label milk over the past decade, and its effects on
the dairy supply chain, was also discussed:
... if you go back to 2000, the differential between the
two pools of milk, proprietary brands versus supermarket brands, was roughly
18c a litre. The differential across all sales through the supermarket was
about $44 million. Ten years later at the end of last financial year, that
difference has blown out by about 71c a litre or across the value chain about
$414 million. That is a big chunk of money in terms of the domestic dairy
industry value chain. That is money that is not going back into the value
chain. This latest discount by Coles has actually pushed that differential out
even further. That gives them an absolute price advantage in terms of growing
their own brand market share and it puts greater pressure on the proprietary
brands and that is going to put greater pressure back through the value chain
on, obviously, the farm gate.
One point that needs to be considered regarding the January 2011 price
cuts is that since about December 2009, at least some private label milk
products have been available at near $1 a litre. Prior to the January 2011
price cuts, Coles offered two private label milk brands with different pricing
structures (Smart Buy and Coles brand). Coles have now discontinued the Smart
Buy brand. The January 2011 price cuts means that while the price of the full
cream product Coles retained has been significantly reduced (from $2.47), the
price reduction only amounts to about 4.5 per cent for the now discontinued
product (which sold for $2.09 for two litres). The price cut was more
significant for the low fat product, which was reduced from $2.99 to $2.
The committee received evidence from Coles that the majority of private
label milk sold prior to the brands being consolidated was the Smart Buy
The committee is concerned that, given this evidence, certain advertisements
which focused on the larger price drop may have caused the consumers of the
full cream Smart Buy product to believe they were receiving a bigger discount
than they actually were. These issues were discussed with the ACCC at the last
hearing conducted for this inquiry in October 2011, with the ACCC indicating
that it will examine them.
Perhaps countering arguments related to the majority of the price cuts
being less than five per cent, it could be argued that the January 2011 pricing
decisions have continued the trend in declining retail milk prices, and
reinforced any negative impacts associated with the earlier price reductions. Coles
pointed out that in December 2009 its competitors reduced the retail price for
two litres of private label full cream milk by eight cents from $2.17 to $2.09.
Coupled with the January 2011 price cuts, this represents a total decrease of
over eight per cent in just over a year.
Table 3.1: Supermarket private label milk prices (per
In February 2011 the 11 cent Federal Government milk levy was removed.
Source: Dairy Australia, Australian
Dairy Industry in Focus 2010, p. 44; originally sourced from Synovate
Current private label contractual arrangements
Although Woolworths moved to a national contract in 2002, it has since reverted
to state/regional contracts. After the merger of National Foods and Dairy
Farmers in 2008, virtually all supermarket private label milk was provided by
Since then other processors have gained or regained contracts for particular
The duration of the contracts the processors enter into with the major
supermarkets differ; Woolworths advised that their contracts are for either 12
or 24 months, whereas Coles informed the committee that the majority of
their contracts end in January 2014.
There have been a number of recent changes to private label contract
arrangements. From September 2010, Parmalat began supplying Woolworths' stores
in north Queensland after being awarded the contract previously held by
National Foods. Woolworths' most recent tender process (conducted between
December 2010 and June 2011) resulted in:
- National Foods continuing to supply stores in Victoria, South
Australia, Western Australia and the Northern Territory;
- Murray Goulburn Co-operative continuing to supply stores in southern
New South Wales, the Australian Capital Territory and now also stores in
northern Victoria; and
- Parmalat gaining the contract previously held by National Foods
to supply stores in New South Wales.
National Foods holds most of the contracts to supply Coles' private
These contracts were reviewed in January 2011. An additional development this
year related to Coles' contracts in Western Australia, where National Foods
does not supply Coles. In July it was announced that Harvey Fresh had gained
Coles' private label contract for that state from Brownes Dairy.
Differences between private label and branded milk
In its evidence to the committee, Coles responded to claims it had
received that it 'has watered down its private label milk to save money', and
that there are significant quality differences between its private label milk
and other branded products in the same category:
This is simply not true. Coles abides by standard milk
formulation practices and, in accordance with federal government requirements,
labels the key ingredients in all of its products, including the private label
Coles provided a document that compared the levels of energy, protein,
fat and other specifications between the major supermarkets' private label milk
and selected brands. It indicated that its private label brand has the same
levels of energy, protein, fat, saturated fat, carbohydrates, sugars, sodium
and calcium as one of the processor branded products, and shared similar
specifications to a product offered by another processor.
Coles' position was supported by the Australian Dairy Farmers, which
noted the Food Standards Australia New Zealand's (FSANZ) minimum regulatory
requirements for drinking milk:
In accordance with FSANZ Standard 2.5.1 – Milk, all
packaged cows' milk for retail sale in Australia must meet minimum composition
requirements for milk fat and protein. The standard also allows for milk
composition to be adjusted to comply with the compositional requirements by the
addition of and/or withdrawal of milk components, provided the adjustment does
not alter the whey protein to casein ratio of the milk being adjusted.
The high degree of similarity between private label and branded products
may be a recent occurrence. Previously, when Coles offered two private label
brands of milk—'Smart Buy' and 'You'll Love Coles'—there were slight quality
differences between the two products.
Now that Coles' Smart Buy product has been discontinued, the higher quality
private label product—that is, the product whose specifications are further
away from the minimum standards set by FSANZ—is being sold. However, prior to the
elimination of the lower grade private label brand, a 2009 CHOICE study
- Almost all milk is highly
- Generic brands are much the same
quality as the major branded versions – and a lot cheaper.
Most people will get no real
benefit from the more expensive "milk" products with added extras.
- All milk qualifies for the
description "good source of calcium". There’s between 115mg and 120mg
of calcium per 100mL, regardless of brand.
Nevertheless, whether the specifications of this product will
significantly change in the future is something that may need to be monitored
so consumers stay informed as to what they buying.
Why do processors continue to supply private label milk?
The profit margin processors currently have on private label milk was
raised throughout this inquiry, with a number of assertions made. Coles'
submission argues that National Foods, Fonterra and Parmalat have each
announced profit margins higher than Coles.
Coles also suggested:
In terms of their overall margins, there is an assumption
made that lowering the retail price automatically means that the farm-gate
price will be put under pressure. Our view on that is that there are higher
levels of profitability within those companies overall and they can look for
alternatives to improve their overall efficiency, improve their innovation,
improve their product development and look to other ways to make savings should
they wish to protect the margin, or invest some of it in the dairy industry
here. There are a number of different ways in which they can take action
through their broader level of economic strength, rather than just simply
taking the easy route of squeezing the dairy farmers.
Early in the inquiry, National Foods advised that their margin on Coles'
and Woolworths' private label milk was close to zero, with their overall
profitability on milk sales (generic milk plus National Foods' branded milk)
being approximately two per cent.
National Foods also advised that they were making a loss on their private label
contract with Coles prior to the wholesale price increase paid by Coles in
National Foods (now Lion Dairy & Drinks) has since advised that for the
year ending 30 September 2011, its projected full-year white milk earnings before
interest and taxes (EBIT) margin 'is now expected to be negative'.
Fonterra also objected to statements about the comparative profitability
of milk processors:
It has been suggested that the processors who sit between the
farmers and retailers are the ones who are making unreasonably high margins and
taking value out of the system. Nothing could be further from the truth. Dairy
processing is a capital intensive exercise and those in the industry struggle
with seasonal conditions, price volatility, higher input and energy costs,
higher safety and quality costs, and erosion of margin. Further, developing
market leading dairy brands with consumer propositions around health,
wellbeing, superior nutrition, taste and convenience, requires significant
investment in research and development. Dairy processors in Australia make only
a modest return on their invested capital and this may be a reason why
Australian interests have sold dairy assets to foreign entities in recent
If there is little difference in specification between branded milk and
private label milk (and thus processors risk eroding the market share of their
branded product by supplying it), and the profits for processors historically
associated with private label milk have been low or negative, the question naturally
arises: why do processors continue to supply it? When asked at a public hearing
why they supply it, National Foods' initial response was 'that is a very good
question'. They elaborated:
Since farm gate deregulation in 2000, house brand milk has
become more and more of a reality ... [T]he volume of milk is pretty
inelastic. Consumers in Australia drink 102 litres per head per year or
thereabouts. As more and more milk has transferred to house branded over time,
we have large manufacturing facilities which need scale and volume. We also
have contractual arrangements ... longer term contractual arrangements
with farmers ... it is a volume management issue and it is a cost issue
for us as well.
The ACCC's 2008 report of its grocery inquiry also discussed why
processors tender to supply supermarkets' private label brands:
In confidential evidence provided to the ACCC, processors
indicated that the main reasons they pursued private label contracts were:
- overhead recovery—generating
revenue through private label sales to contribute to fixed costs of running the
- supply relationships with
retailers—supplying private label product provides a stronger relationship and
possibly improves processors bargaining position in relation to branded
- volume—the volume of milk supplied
through private label contracts provides some stability to the business.
Implications for influence of the major supermarkets on the dairy industry
A number of arguments were put forward about how the major supermarkets
can impact the dairy industry by affecting the overall value of the supply
chain, the value of milk as a product and the incomes of farmers. These issues,
in the context of the specific price cuts led by Coles, are explored in more
detail in chapters 4 and 5.
There is limited direct evidence available regarding how the major
supermarket chains can affect farm gate prices. To complicate matters, a number
of seemingly conflicting statements have been made about how the major
supermarket chains can directly and indirectly impact farm gate prices.
Coles has stated on a number of occasions that it is committed to
absorbing the costs resulting from its milk price reductions, and that it does
not have a 'direct influence over farm gate prices because Coles buys milk from
processing companies, not from dairy farmers'.
ALDI also submitted that it:
... has not, and is not considering passing on the costs
associated with this price reduction onto our suppliers.
Coles also noted that because its generic milk accounts for
approximately four per cent of total Australian milk production, 'this suggests
that Coles, by itself, does not have a material influence over Australian milk
However, Coles' share of the drinking milk market is significantly
higher, at about 17 per cent.
While it may be the case that the influence the major supermarkets have in the
manufacturing milk states is restricted by the nature of that market, the major
supermarkets appear to have a greater influence on the value of the supply
chain in the drinking milk production focused regions of Australia. Also, the
observation that Coles' competitors seemingly had no choice but to immediately
match Coles' price cuts, while perhaps supporting arguments of robust
competition existing in the grocery market, demonstrates Coles' influence on
suppliers, such as in the drinking milk market.
Woolworths made similar statements about its contractual arrangements:
Woolworths has no contractual arrangements with Australian
dairy producers. Woolworths does not have any insight into, or control over,
the contractual arrangements, such as price, that dairy processors enter into
with dairy farmers. That is, Woolworths has little or no ability to directly
influence the farm-gate price paid to dairy farmers by processors. To the
greatest extent possible, however, Woolworths does look to support farm-gate
price through ensuring that it does not enter into a Private Label milk
contracts that would, based on Woolworths’ estimates, result in a dairy farmers
receiving less than an economic return for their milk.
Revealingly, however, Woolworths did not share Coles' view on the cost
of the retail price cut being absorbed. Woolworths has made a number of public
statements, including in its submission to this inquiry, which raised concerns
that the price cuts are unsustainable for the Australian dairy industry.
Woolworths explained in its submission:
... we are specifically referring to the fact that 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.
The tender process for private
The supply of private label milk, and the tender process associated with
the contracts to supply it, raises questions about the degree of direct and
indirect influence the major supermarket chains may have on the prices paid to
farmers. Some instances of indirect influence are clear—the shift in demand
from branded milk to private label products as a result of the price cuts
particularly affects farmers on contracts that are structured to balance these
prices. This will be discussed in more detail in chapter 5.
Woolworths' described its tender process to the committee:
The information that we provide to the processors when we are
establishing the tender for milk is the volume of milk that we sell. We provide
that information on a national basis, on a state basis and on a regional basis,
to all of those suppliers. So we are actually providing the volume of white
milk that we sell for a private label product. We are not communicating to the
processing partners the price of what we sell product for. It is a volume based
Given the limited number of private label contracts available, and the
volumes associated with them, it is clear that there is a strong incentive for
processors to win a contract to avoid uncertainty in their business and
significant adjustment of their operations. Accordingly, one dairy farmer
described the tender process as 'a race to the bottom':
The processors are just putting in a price, as low as they
think they possibly can go.
When it was suggested that the processors are not compelled to supply
milk to the major supermarkets at such a low price, the same witness argued:
Who is their other market? We have National Foods with a
billion litres, if they do not supply Coles and they do not supply Woolworths,
who are they going to sell that billion litres to? You do not turn round
overnight and become an exporter. That takes major capital investment.
Paragraph 3.34 noted Woolworths' view that the recent price cuts put the
consumer baseline for retail milk prices at 1990 levels. Perhaps in a further
admission of the direct influence on farm gate prices that the supermarkets can
have through the tender process, Woolworths' submission also included a warning
about future contract negotiations and outcomes:
Ultimately, these prices set a new benchmark, and can be
expected to flow back to processors and farmers as new supply and pricing
agreements are negotiated over the coming months and years.
The meaning and intent behind this statement was pursued at Woolworths'
appearance before the committee:
Senator O’BRIEN—... Is it not fair that I take that to
mean that Woolworths—and your competition as well, I expect—will be forced to
seek lower prices to retain a reasonable margin on the product that you sell in
Mr McEntee—I think the context in which our submission was
written was in relation to the concerns we have with the changing mix of
private label milk at retail and the flow-on effects back through the supply
chain. Woolworths will always negotiate vigorously on behalf of our customer to
offer best value, but our concerns within—
Senator O’BRIEN—Is your submission right or not? Do I
understand wrongly? Can you explain it to me in any different way? It seems to
be saying very clearly that you are going to have to negotiate a lower price.
I just want you to be clear with us. Is that what you are saying or not?
Mr McEntee—What I am saying is that I believe the context in
which the submission was written is agreeing with our concerns about the
flow-on effect back through the supply chain in milk.
Senator O’BRIEN—The flow-on will go back through the supply
chain, so prices will go down in the supply chain.
Mr McEntee—Will flow right through the supply chain.
Senator O’BRIEN—So prices will go down in the supply chain.
That is what you are saying, isn’t it?
Mr McEntee—Potentially it will.
Senator O’BRIEN—Potentially? So the alternative is that they
will stay the same, is it, or will they go up? Is there potential for them to
Mr McEntee—As previously discussed, the way in which the
processor will submit pricing to Woolworths will be based on their costs and
the cost of production back to us.
Senator O’BRIEN—So if the prices to the processors were to go
up and the processors’ price to you, by that necessity, had to go up, does that
mean that the price of milk in the supermarket would have to rise?
Mr McEntee—The price at the supermarket is dictated by the
market price. So, clearly, there are two differences here: there is the cost of
product and there is the sell price of the product. Sell prices are dictated by
the market. We have a central manner in which we check competition prices on a
regular basis. Our commitment to our customers is to provide the best value
Therefore, where the market price is on key value items is where the retail
sales will be. It is a separate discussion from negotiating the cost price of
Senator O’BRIEN—So you could be selling at a loss?
Mr McEntee—We would not sell at a loss.
Senator O’BRIEN—So if the price goes up, you will have to put
your price up at some point? They are contradictory positions that you are
putting to us, in a sense, and I am trying to tie you down to a response.
Clearly, you have to have flexibility in the market, but if your position is
that you have to make a profit on the product and the price has to go up, at
some stage the price has to go up, doesn’t it?
Mr McEntee—As you would appreciate, I do not think I can
predict pricing in a public forum. There are laws that stop me from doing that.
On the other hand, there are clear restrictions on any influence the
major supermarkets may have. A strong consumer preference for fresh milk will likely
mean that the supermarkets will have to continue providing it. An official from
... it would be an interesting strategy for a supermarket
to attempt to steer things in a direction where they are not supplying that
milk while others continue to do so. They could be taking themselves out of a
market which continues to reflect customer demand.
Further, given the perishable nature of the product, supermarkets cannot
realistically import fresh milk:
... the milk has to come from somewhere. The only place
that the milk can come from is from dairy farmers in Australia.
Some of Coles' statements and actions, however, suggest that it can directly
influence farm gate prices:
In an effort to ensure retail milk price reductions would not
adversely impact farmers and to demonstrate our commitment to sustainable dairy
farming, we increased the contract price paid to milk processors shortly before
the "Down Down" price reductions on Coles brand milk.
In February 2011, Coles announced that they had increased the price paid
to WA milk processor Brownes Dairy (owned by Fonterra) by five cents a litre
'to ensure WA dairy farmers are not impacted by Coles' recent cuts to its
retail milk prices'.
Coles explained this action in their submission:
In mid-January 2011, Fonterra offered
Coles a lower price as part of the competitive tender in Western
Australia. In February 2011, Coles subsequently offered to pay Fonterra an
additional five cents per litre if it passed that money direct to their dairy
farmer suppliers in WA. Initially, Fonterra decided not to pass on this
increase to WA dairy farmers but has now agreed to do so.
In perhaps another acknowledgement of its ability to directly influence
farm gate prices, in a letter to the committee chair the Managing Director of
In a theoretical worst case scenario, milk processors [sic]
margins would be affected by no more than a few cents per litre. Given Coles
has just paid them an equivalent price increase there is absolutely no excuse
for processors to squeeze farm gate prices. Processors [sic] profit margins are
already higher than our own in any event.
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