Milk Wars

AT A GLANCE

• Grocery white milk sales are up around 6% since the heavy advertising of the discounted private label milks started. Convenience sales, and other traditional route channels, have not surprisingly been impacted, with market data indicating a significant drop in sales of white milk.


• One way in which C&I outlets have responded to the challenge of aggressive supermarket milk pricing is by the increased use of promotional deals and two for one offers.


• Now more than ever, out of stocks cannot be allowed to disappoint would-be consumers.


• While full cream milk continues to be the leading SKU, C&I outlets must not ignore the consumer trend towards better-for-you products such as low fat and specialty milks.

How can C&I profits avoid getting caught in the price-cut crossfire?

If ever two words (other than ‘tobacco tax’) were needed to sum up the challenges being faced by today’s convenience and impulse outlets, the words would certainly be ‘white milk’.

The aggressive moves by the leading supermarkets to seize market share has left many small operators shaking their heads and wringing their hands. Coles led the way back in January by slashing its unbranded milk price to $1 a litre, making it all but impossible for C&I outlets to compete. With one of their staple products and key sales drivers under siege, small outlets have been left hanging on and asking: “What can we do?”

It’s a good question.

There is evidence of channel shift occurring in the market. Grocery white milk sales are up around 6% since the heavy advertising of the discounted private label milks started. Convenience sales, and other traditional route channels, have not surprisingly been impacted, with market data indicating a significant drop in sales of white milk.

The unknown factor is how long this shift in sales may continue, and the fact that it is possibly temporary offers some cause for hope. However, Coles’ worryingly catchy “Prices are down and staying down” slogan doesn’t do much to inspire confidence.
The immediate and instinctive response of under-the-cosh outlets may be to attempt to fight ‘fire with fire’ and adjust milk pricing downwards. However, a glance at the information in the table below - which was presented by the National Association of Retail Grocers to the Senate Economics References Committee’s recent inquiry into dairy pricing - shows that C&I outlets simply cannot compete with the big boys.

	Coles	Independents
Processor cost to produce:	$1.40	$1.40
Distribution/vendor cost (per unit)	$0.04	$0.10
Marketing cost (2% of wholesale)	Nil	$0.07
Wholesale price to Coles (private label)	$1.50 (approx)
Wholesale price to independents (branded)		$3.50
Coles retail price	$2.00
Independents’ retail list price		$4.29

In many opinions, the fact that the same product is being sold at different prices is unjust. The argument has been made that the prices the milk processors are selling house branded product to the supermarkets for are not sustainable. It seems that the only way the milk processors can keep going is by clawing back some money from every other kind of retailer in the form of inflated wholesale prices, meaning that small outlets are effectively subsidising the supermarket giants.

Sustainable or not, fair or not, the reality is that the convenience channel simply has to deal with the immense buying and bargaining power of the all powerful supermarkets.
The milk price war though could scarcely have come at a worse time for convenience and impulse outlets. The tough economic conditions have meant that the public is more likely than ever to opt for lower prices over convenience.

And when milk sales fall in convenience so do the sales of other products. It’s a challenging time. There are those in the convenience and impulse world who are questioning whether this is now the time for a radical overhaul of the way outlets view themselves and present themselves. As the tentacles of the giant supermarkets spread yet further and their cut-price grocery offering becomes accessible to a greater number of on-the-move customers, so the power of the convenience channel’s ultimate ace in the hole ... convenience ... is slowly being eroded.

There are some who suggest that a pricing review of items being heavily discounted in supermarkets such as bread and milk is not an adequate enough response by C&I outlets. Should, they ask, the pricing of the breakfast cereals that the milk goes on, and the products that go on the bread also be looked at?

Key Differences

There is some discussion that the assault on C&I grocery sales so intense that a virtual revolution in the channel is required and outlets should be looking at changing their focus in order to recoup lost grocery revenue from other areas. There is already a growing trend towards C&I outlets improving both their hot food and hot beverages offerings as they seek to pull customers from quick service restaurants and cafes.

Nonetheless, however much C&I outlets have evolved it is difficult to imagine – at least in the medium term – that they would cease relying on early morning ‘we’ve just run out of milk’ customers. The milk war may have shaken the convenience world but even the most price sensitive customers are living increasingly frantic lifestyles where convenience still sometimes outweighs perceived better value.

The key difference between the convenience and grocery channels is the shopper mission or the reason for the consumer's visit. Supermarkets have a larger proportion of 'planned' visits and therefore shoppers often buy larger volumes and pack sizes to last a longer amount of time.

Convenience has a higher proportion of 'top up' or 'emergency' shops, and pack sizes will often be smaller. While one litre and two litre containers tend to deliver greater volume in smaller outlets, two litre and three litre hold most share in larger supermarket outlets.

For white milk sales in the convenience channel, it is all about range and availability. Loyal branded shoppers generally do not shift channels unless there is a reason to do so and the biggest frustration for milk shoppers is out of stocks.

If white milk sales are more sluggish than usual because of the price war, it is important that C&I outlets capitalise on the customers who are already in store and who may buy the product. Out of stocks which have long been one of the main drivers of missed purchases cannot be allowed to disappoint would-be consumers.

A focus on product adjacencies and location will also help to drive further sales of not only milk but also lift other categories. The convenience retailer needs to look at how they can turn milk into an impulse purchase and capitalise on the fuel-only shoppers.
Purchase can be encouraged by giving greater accessibility to shoppers with front of store, open-faced fridges. Effective in-store marketing is another key component of growing any store’s milk sales and the use of point of sale materials can remind shoppers that they may need more supplies.

Added value

White milk is a category with extremely high penetration, and a larger proportion of customers will walk out of a store with a carton or bottle of white milk than almost any other product. The good news is that Dairy Australia statistics suggest that the average Australian consumes a whopping 102 litres of milk a year, yet - compared to many European countries - Aussies still consume a relatively modest amount of white milk.
With the health and wellness trend on the rise, there should be further optimism that white milk sales, regardless of the channel through which the product is purchased, will continue to rise.

As we know the once simple white milk category has become a whole lot more complicated recently with the growing popularity of modified and specialty milks. While full cream milk continues to be the leading SKU, C&I outlets must not ignore the consumer trend towards better-for-you products such as low fat and specialty milks.
The big dairy companies such as National Foods and Parmalat have obviously responded to this changing demand. National Foods boasts market-leading brands including Dairy Farmers Full Cream, Shape and Lite White, alongside the Pura range which included Full Cream, Light Start and Tone. For its part, Parmalat produces market leaders such as PhysiCAL, Pauls Full Cream, Pauls Smarter White Milk and Pauls Zymil.

It has been shown that consumers who are loyal to a particular modified milk brand will change retail outlet if their preferred brand is unavailable. Having the desired brands on display at all times is crucial in order to keep customers loyal and to maximise category value.

Added value products such as specialty milks and smaller pack formats will generally provide operators with greater margin opportunity, while large pack formats in full cream and low fat will generate volume and wider penetration.

While it is clearly important for operators to ensure that consumers can purchase an adequate repertoire of products across a variety of pack sizes, space restrictions means it is very difficult for them to match the supermarket’s range. C&I outlets need to maintain an appropriate range that is not one dimensional. They are really competing for the same top-up shopper as the major grocery stores, and therefore the products on offer need to reflect the consumer's desire for choice.

Another way which C&I outlets have responded to the challenge of aggressive supermarket milk pricing is by the increased use of promotional deals and two for one offers. The bundling of certain brands of packaged bread with two litre milk cartons for $5 for example, has been very successful for some outlets.

As the most recent Australian Association of Convenience Stores (AACS) report notes, the widespread use of promotional merchandising such as two-for-one offers has seen the average amount of items sold in convenience outlets rise to 2.1. The report says that in 2010 a total of 26% of shoppers purchased on promotion, with the penetration of promotions continuing to increase over the past five tears. Last year saw an amazing 44% increase over 2009 levels of promotions in store.
These deals can help stores lift basket size and keep the till rolls spinning. How sustainable this level of promotion is in the long term is, of course, another question.

In the convenience world in general - and in the white milk world in particular - these are indeed interesting times.

* C&I Retailing would like to thank Parmalat for supplying information for this article.

Total Take Home White Milk (>899mL excluding Soy and UHT Milk).
Top 15 SKUs represent 67.6% of total Value.

Product	Manufacturer	Brand
Pauls F/Cream Milk PVC 2l	Parmalat Aust Ltd	Pauls F/Cream
D/Farmers F/Cream Milk PVC 2l	National Foods	D/Farmers F/Cream
Pura F/Cream Milk PVC 2l	National Foods	Pura F/Cream
Pauls Smarter White Milk 2l	Parmalat Aust Ltd	Pauls Smarter
D/Farmers F/Cream Milk PVC 3l	National Foods	D/Farmers F/Cream
D/Farmers F/Cream Milk Pet 1l	National Foods	D/Farmers F/Cream
D/Farmers Lite White Milk PVC 2l	National Foods	D/Farmers Lite White
Pura Light Start Low Fat HPDE 2l	National Foods	Pura Light Start
Pura F/Cream Milk Carton 1l	National Foods	Pura F/Cream
D/Farmers Lite White Milk Pet 1l	National Foods	D/Farmers Lite White
Rev Milk PVC 2l	Parmalat Aust Ltd	Rev
Pauls Trim Milk Bottle 2l	Parmalat Aust Ltd	Pauls Trim
Pauls F/Cream Milk PVC 1l	Parmalat Aust Ltd	Pauls F/Cream
Pura F/Cream Milk PVC 3l	National Foods	Pura F/Cream
Pauls Smarter White Milk 1l	Parmalat Aust Ltd	Pauls Smarter

Source: Aztec Data