oily Rag: Milk Wars

Milk Wars
By Frank and Muriel Newman

War has been declared. Armies have been marching into a boutique retailer and leaving armed with bottles of cheap milk.

Nosh, a high-end boutique food retailer with six stores has initiated a price war on milk. It is selling a two-litre bottle for $2, which is 50 cents less than its cost price. A Pak N Save store across the road from the Nosh outlet in Hamilton met the challenge head on and matched the $1 a litre deal.

Nosh are reportedly selling a lot of milk and one presumes they are hoping to sell a lot of other things while the milk bargain hunters are in their stores. How long they can go on losing money on milk remains to be seen. They are holding their price until the end of February but have not ruled out extending the deal.

According to media reports Nosh wanted to make the point that retailers are making a higher retail margin on milk than they are on soft drink. In that respect they are correct. Before the discount offer Nosh itself retailed a 2 litre bottle of milk for $4.45, which is a mark-up of 76% above its $2.50 cost price (a profit margin of $1.95). Other specialist retailers are selling the same milk for around $3.50 (or 40% more than the $2.50 cost price) and significantly less than Nosh’s own normal retail price.

Federated Farmers say retailers are adding on average about 20 percent on milk. According to our calculations that’s on the low side. Most retailers, especially the specialist outlets like Nosh before the price discount, will be making more.

When we conducted a New Zealand wide survey of food pricing a couple of years ago we found a huge variation in pricing depending on regional competition, the retail outlet, and the brand. We concluded then that the cheapest way to buy milk was to take advantage of loss-leader promotions by speciality food outlets and fruit and vegetable retailers. Typically they sold the milk at their cost price to bring consumers into their store. The next best way was to buy a house brand from a supermarket.

We concluded by saying, “If there is any suggestion of high margins, it is in the sale of the premium brands (Anchor and Meadow Fresh). These products are supported by sizable marketing campaigns and are presented in superior packaging. However that packaging alone does not justify the premium retail price above the same product packaged in a house brand. The reality is the standard blue top milk that goes into the premium priced products is the very same milk that goes into the discount and house brands. It seems many consumers are prepared to pay the premium either because they consider the additional packaging to be worth it, or because they (incorrectly) perceive the milk is of better quality.”

So how do the numbers shape up for others in the milk industry? According to Federated Farmers, farmers receive 65 cents for each litre of milk sold in New Zealand. So for every two-litre bottle the farmer ends up with $1.30. From that they have to pay their business costs (interest on debt, fertiliser, wages, machinery costs) and have something remaining as a reward for their initiative and effort (and getting up in the middle of the night to go milking!).

By deduction, and assuming a two-litre bottle costs retailers about $2.50, the milk processor is therefore receiving $1.20. From this they pay for all of their costs (sending tankers out to collect the milk, wages, electricity, plant repairs and replacement, marketing, delivering the processed milk to stores, and so on).

As a rough guide we think it fair to say that the revenue from milk is roughly divided equally between the producer (farmer), processor, and retailer.

On reflection the Nosh milk war is probably going to be more of a skirmish than a war. It’s certainly a fine example of how well loss-leader advertising can attract media attention when the product involved is as controversial as milk. The challenge for Nosh will be setting a price for its milk after the fighting is done.

Frank and Muriel Newman are the authors of Living off the Smell of an Oily Rag in NZ. If you have a favourite tip then share it with others via www.oilyrag.co.nz or post it to Living off the Smell of an Oily Rag, PO Box 984, Whangarei 0140.

* Frank and Muriel Newman are the authors of Living Off the Smell of an Oily Rag in NZ. Readers can submit their oily rag tips on-line at www.oilyrag.co.nz. The book is available from bookstores and online at www.oilyrag.co.nz.

ENDS

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