03/02/2011 - 00:00

Bad deal – major retailers can’t take a trick

03/02/2011 - 00:00

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Dairy farmers are getting battered by the retail giants, yet consumers are complaining the loudest.

IT’S a weird world sometimes.

Take Wesfarmers chief Richard Goyder, for instance. This week he is most likely feeling chuffed about the performance of Coles during the past six months, when it doubled the growth of its key supermarket competitor Woolworths.

While the Coles turnaround has a long way to go, this result is a major achievement. Shareholders in Wesfarmers ought to be pleased, which is a lot of people if superannuation funds are included.

Investors are not the only winners.

Three years ago, Coles was a basket case. It was performing badly, giving Woolworths free reign in the market. That was not positive for consumers. The revival of Coles, though, is good news for shoppers; it provides them with a viable choice and forces Woolworths to revise its offer and compete on service, range and price.

A good example of this is the battle over milk.

The supermarket giants are currently heavily discounting milk to convince shoppers to come to their stores. Milk, like bread, is a consumer staple. Stores place these items at the back of the building to force us to walk down their aisles and view the many other products they have on offer. This is an age-old retailing technique, not something invented by supermarkets.

Given the screaming at major retailers for their inability to deliver goods as cheap as those available online, you’d think that they would be congratulated for providing such low-cost milk – something that is much more important to the average household than the price difference between Gant trousers sold here and in the US.

Apparently not. Instead, the supermarkets are battering our dairy farmers and gouging their own customers by tricking them into buying other goods, especially petrol, at inflated prices – at least that’s what it sounds like when you read the mainstream press and listen to talkback radio.

As usual, I am bemused and surprised at this reaction.

Firstly, when the supermarket majors entered the retail petrol business they were heralded as white knights taking on the nasty big oil companies. A few years down the track they are now the bad guys, using innocent dairy farmers as cannon fodder in their battle for grubby oil profits. Are we really so fickle?

Dairy farmers might have a legitimate argument about the lack of options for them to get a good price for their produce, but it is a bit rich for consumers to argue they are being gouged over petrol. Petrol is one of the most transparently priced commodities available. Its price is advertised at strategic locations on every major road*. There’s even a state government scheme to stop petrol retailers matching each other’s prices by forcing them to provide regulators with their prices the day ahead, and keep them that way all day.

And yet people cry foul. Perhaps they ought to stop driving? Or invent a way to run a car on milk – unleaded presumably.

*As an aside, I did note that one fuel station near me had petrol advertised to the nearest 0.9 of a cent per litre, in much smaller script of course than the rest of the cost – giving the initial impression that the price is nearly 1 cent cheaper per litre than it really was. It’s all in the small print, of course, but that is a bit rough when you are driving.

Dairy dilemmas

I HAVE a great deal of sympathy for farmers who are being squeezed by the actions of retailers such as the supermarkets, which are driving the price of milk down.

The nationalisation of the grocery stores has created an extremely lopsided market, which leaves most producers at the retailers’ mercy. Even a return to policies that promote local purchasing still leave most locally owned farmers and processors with little negotiating clout.

Then again, farmers are not immune to this behaviour. Wheat farmers were happy for decades to have a monopoly that forced grain buyers to pay top dollar. Most of those buyers were in the third world.

Similarly, wool farmers got the federal government to support them in a price fixing scheme under which they hoarded wool to drive the global price up. In the long term that failed, and wool production was brought to its knees, losing out to synthetics and cotton.

It is a good reminder that manipulation rarely pays in the longer term, especially if there is any transparency.

The argument from milk producers is that many will be forced out of business and consumers will pay higher prices. This may be true. Perhaps that is what has to happen. If consumers are unwilling to pay enough for the milk to be profitably produced, why should farmers reward them by continuing to provide it?

Milk producers could also change strategy. I have a lot of admiration for our most recent 40under40 winner Sue Daubney. Her family’s Bannister Downs Dairy has taken the independent route and become a branded manufacturer.

Such a move takes risk capital, and many farmers are naturally averse to that by nature. The expression ‘betting the farm’ has real meaning for those who often operate assets that have been held in their family for generations.

The dairy business also has many victims – just look at the struggles at places such as Challenge Dairy – so there’s good reason for milk producers to be wary of becoming processors, even in collective operations where no single farmer takes all the risk.

Bannister Downs’ strategy is to sell a premium product to consumers who are more concerned about taste and quality than price.

Perhaps there are not enough of those consumers to sustain more than one dairy?

Noticeably, many of Bannister Downs’ consumers are cafes. They are businesses that are close to their customers and have been sold on the idea that high-quality milk improves the taste of the coffee.

Then again, many people complain about coffee prices in Perth and the joys of $3 cups in Melbourne. Beware who’ll get caught out when that particular consumer revolt takes place.

Thankfully, I can’t imagine Mr Goyder would consider going into the cafe business. He’s probably had enough consumer hypocrisy for one career.

• mark.pownall@wabn.com.au.

 

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