Milk wars: pointing the finger at Coles and Woolworths

Liberal MP Bill Heffernan with Coles boss, Ian McLeod at the Senate inquiry into grocery prices on Tuesday. AAP

Coles and Woolworths are fighting a price war on milk, beer and now chicken. Why?

With the emergence of Aldi and more recently Costco, we’re seeing the two big supermarkets worried about losing some of their 80% combined market share.

Targeting particular products within their retail line is a really clear strategy based upon focussing on items that will have the strongest salience in the minds of the consumer, rather than lowering prices across the board.

Is this also a move to limit the power of suppliers?

There are two strategies that are being played out simultaneously. One is the external competition from the emerging Costco and Aldi.

Despite the fact that Costco and Aldi don’t currently have a huge market share, Woolworths and Coles want to ensure consumers think about them, not Costco and Aldi, as the choice for price.

The other one is in-house brands, which the big two grocery retailers have been focusing on for about five years.

The reason they have been pushing these is because they can negotiate much higher margins when dealing with suppliers and producers and extract higher profits, as opposed to national brands.

Even within the in-house brands the two retailers have really been pushing segmentation. So they have different levels, it’s not just Black and Gold or Woolworth’s Home Brand.

What has been the response from suppliers?

I can imagine suppliers are feeling the pressure to sell below the cost of actually making the goods just so they can survive, as they have to rely on the supermarket chains for their market share.

So then the issue becomes not just about the needs of individual consumers - it raises a bigger question about whether the economy is structured around a supply chain that runs from the supplier along to the consumer. Just because the consumer is getting a low price on milk, bread or roast chook, this doesn’t mean that everybody benefits in the long run.

What are the long-term implications for consumers?

The long-term implication is that we will see an even more obvious duopoly in the grocery market. Yes, in the short term consumers will get lower prices. But as the two big retailers have dominant market share, they are able to play with prices across their entire product range, and that is where consumers will lose.

The bottom line is that these are business decisions - they’re not for the benefit of consumers.

The consumer will miss out in terms of choices they may otherwise have, particularly as the in-house brands start to dominate. They may be moved across towards in-house brands and the variety will be reduced. And when there is less choice, retailers can start raising prices across a whole range of other products.

Will the price war move to other staples?

Yes, but predominantly those items where they have in-house brand control.

As they start moving on from products where they don’t have in-house brands they won’t be able to apply as much pressure.

Obviously they tried to put the pressure on Foster’s, but they are also looking at creating their own beer and wine brands.

One of the things that we will see is that they will continue to focus on the big sellers - the regular purchases.

The long-run problem is that in a price war, if both retailers are doing the same thing, then nobody really benefits because everybody is just matching everybody else.

A price war is not sustainable for either the organisation or consumers. It’s not a good long-term strategy, but this strategy is not about pricing — it’s actually built around branding. It’s about confirming in the mind of the consumer that Woolworths and Coles are low-cost providers, as well as being high-quality.

What is the impact on the supply chain?

By default you end up having to level out demand. So for instance if this strategy goes across to perishables, you’ll start to see products of a lower quality.

There will also be a higher turnover of those products. So, as well as the impact on the suppliers, you’re creating an impact on the product itself, because you’re creating demand for products that may not be able to be met with normal supplies. One impact may well be that the low cost products will need to be supplemented in some way, with poorer quality ingredients, or ingredients that you would not normally expect in a “fresh” product.

As people are forced towards certain types of products, the products themselves will need to level out to meet demand throughout the year. The quality that the retailers would be aiming for is best described as an ‘average’ - not too good, and there won’t be the different seasonal cycles that you would otherwise see, particularly with fresh fruit, milks, breads and meats.