With Australia continuing to have some of the fastest growing food prices in the developed world, you have to wonder if Australian consumers are being milked by the major supermarket chains.
After all, Coles and Woolworths control over 87% of Australian supermarkets over 2,000 square metres. That clearly gives them plenty of market power which allows them to push up grocery prices and hence Australia’s food inflation.
Sometimes, however, they keep us guessing about their real agenda. So while we are hearing a lot about fresh milk prices coming down, we don’t hear much about what’s happening with other prices being charged elsewhere in the supermarket or at petrol bowsers linked to Coles or Woolworths.
Let’s start with fresh milk prices. Here we shouldn’t get too excited as the devil is always in the detail and we need to ask a few questions.
First up, if fresh milk prices can come down now why didn’t they come down before? Lower prices today must mean that we were being gouged when prices were higher.
Of course, the major supermarket chains have rushed out to say how great they are in lowering generic brand milk prices. They claim that they are listening to their customers who are looking for price savings. Naturally, it’s a welcome relief that the major supermarket chains may be listening to their customers on milk prices, but why haven’t they listened before?
The sceptical customer will ask if the major supermarket chains are listening to consumers on the price of other products. We have seen petrol prices shoot up opportunistically despite the strong Aussie dollar and the Singapore benchmark price we use to calculate local prices having remained consistent in recent weeks. Yes, international crude oil prices have jumped but local prices are instead linked to the refined price of petrol out of Singapore.
So petrol prices have jumped quickly and the major retailers have been able to increase their average retail petrol profits during the past year. Now Coles and Woolworths are quick to say that the cheaper generic brand milk is not being paid for by higher petrol prices. No surprises in that reply, but let’s not forget that it’s the same parent company that sells milk and petrol. So from a parent company perspective, any loss of revenue on milk can easily be offset by consumers being gouged on petrol.
The same logic applies if lower generic brand milk prices are being offset by higher grocery prices elsewhere in the supermarket. That’s obviously a game that Coles and Woolworths could play. They can go out and publicise cheaper generic brand milk to get customers through the door and once consumers are there they will buy other products at inflated prices.
This is the old “loss leader” trick. Get customers hooked by a super special and then fleece them on other products. It’s the oldest trick in the book and consumers shouldn’t be fooled.
These days a loss leader strategy by large companies like Coles and Woolworths may have very serious legal implications under our competition laws. Under the Birdsville Amendment drafted by the author and enacted by Federal Parliament a company having a substantial market share cannot sell a product below the company’s cost for a sustained period if that has an anti-competitive purpose like trying to drive out a competitor.
In this case below-cost pricing, more commonly known as predatory pricing, is designed to destroy competition. What happens when the competition is destroyed? Well of course the price of the product goes up. That’s clearly bad news for competition and consumers.
Are Coles and Woolworths selling milk below cost? Well, we don’t know and that’s why our competition regulator, the ACCC, needs to ask them some tough questions. Also, the recently announced Senate Inquiry into milk prices should be a valuable opportunity for the Senators on the Committee to ask probing questions and for Coles and Woolworths to explain themselves.
In the meantime, there is a more worrying side to the lower generic brand milk prices. The real question is who is actually funding the lower prices. We know that if it’s the chains funding the lower prices then there’s the danger that consumers could get gouged on other products sold by the chains.
Just remember that there’s no such thing as a free lunch. Consumers can pay for a so-called discount one way or another and advertised discounts on a few products shouldn’t distract us from the real question. Are struggling Aussie families paying more overall for groceries? Of course they are given the food inflation figures from the OECD.
Now there is another concern and that’s where the lower generic brand milk prices end up being funded by the dairy farmers. Our dairy farmers are the best in world, but they are doing it very tough as they have been screwed down for years on the price they get for their milk.
If lower generic brand milk prices at the supermarket mean that dairy farmers are forced to take a further cut in the farmgate price of milk, then we will see even more of them leave their farms. That’s the scariest part of what‘s happening with milk prices. If we lose any more dairy farmers, then we risk losing access to fresh milk.
In many countries, consumers are forced to buy Long Life milk rather than fresh milk. This change has even been pushed by the big overseas supermarket chains as Long Life milk means lower handling costs and higher profit margins for the supermarkets. For these overseas consumers, fresh milk has become a luxury item.
So in the rush to cheaper fresh milk prices by Coles and Woolworths, let’s not forget our dairy farmers because if we lose them we end up paying a higher price by losing our world class access to fresh milk.
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