Price Determination in the Australian Food Industry A Report

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The consumer trend towards eating out of the home places pressure on major food retailers in achieving growth in food sales from their retail formats and will continue to cause their category managers to seek products which increase the convenience appeal to customers. The five external factors that determine prices (refer figure 123) Supply dynamics The nature of product supply will have a major impact on pricing over time. As noted, pricing will be influenced by the seasonality of availability in fresh product lines, though major retailers attempt to smooth costs by sourcing from suppliers capable of delivering year-round supply. This approach extends to products which are affected by international trade – suppliers holding large quantities of commodity lines in times of export downturn may offer lower prices to move volumes through retail as part of a promotional program (such is the case with block cheese). Retail buyers will have greater ability to influence buying prices in fragmented industries than in those that are concentrated. In fragmented sectors, commodity conditions prevail. The nature and quality of information will have a bearing on pricing. Where there is room to move, transparency on the true costs of products will have a bearing on the contribution that is sought towards category targets. Product attributes The nature of the product itself will dictate the costs of handling and the requirements of display and in-store servicing. Higher product margins will be sought on higher cost lines such as fresh fruit and vegetables, where shrinkage, labour and capital costs require greater gross margins to cover these investments. The effect of competing products Price Determination in the Australian Food Industry A Report Competition for individual products may come inside the store from directly competing lines (for example, meat lines within red meats or between chicken and red meat cuts, or to shift buying patterns to private label from proprietary brands), from different formats (frozen versus fresh vegetables, semi-prepared packaging versus conventional basic product) or from product substitutes (pasta versus rice versus other sources of carbohydrates). The retailer will take account of the contribution of each product to the category and store targets when setting prices. The existence of competing retailers and different formats Major chain retailers compete with a myriad of independent chains and specialty food retailers in buying and selling. Supermarkets use their one-stop shopping, convenience and low prices to attract the consumer at all points and negotiate the best buying prices from suppliers. Work presented to the Senate by the Australian Competition and Consumer Commission regarding prices paid to suppliers by retailers showed that there were two levels of terms accessible by retailers and wholesalers. The commission noted that whilst the major chains did achieve better deals more often than the independent wholesalers, they did not always receive higher terms from the same suppliers. This indicates the market at work with suppliers varying their deals where they achieved best performance for the terms paid, whether the buyers were independent wholesalers or major chain retailers. At a category level, retail products are increasingly competing with the growth in food service demand. 118
Consumer demand factors All retailers are acutely aware that the consumer is very fickle in their shopping decisions and choices as to where to shop. Out-of-step pricing, poor quality of offer or service and empty shelf space each influence the choice of shopping destination. Over time, the consumer preference for convenience and the frequency and purpose of shopping trips are changing. The shift towards a greater demand for products that reduce cooking times and simplify preparation from scratch has seen substantial product innovation and altered price sensitivity compared to the base product. This provides retailer and supplier with opportunities to improve the spread of returns (although how each shares in the make up of returns may differ greatly). GROCERY RETAIL – RETAILER PRACTICES The table below provides examples of how the determinants of retail prices vary, based on the factors outlined above. Retailer strategy (one of the six factors identified in figure 123) is a constant factor in each case. External factors Supply Product Competing Consumer Competing Comment on key determinants features products demand retailers Packaged milk, 2 litre ★★★ ★★ ★★★ ★★★ Milk is a destination product, located at the rear of stores for logistics access. Block cheese ★★★ ★ ★★★ Cheese demand is maintained by a policy of regular discounting. Beef steak ★★★ ★★★ ★★★★ ★★★ ★★★ Pricing of competing meat products. Pork cuts ★★ ★★★ ★★★★ ★★★ ★★ Fresh oranges ★★★★ ★★ ★★★ ★★ ★★★ Frozen potatoes ★★★ ★★ Orange juice ★★★ ★★★ ★★ Cage eggs, 700g ★★★★ ★★★ ★★ ★★★★ The dynamics of egg production and supply, and the activities of competing retailers. Packet rice ★★★ ★★ ★★ Packet sugar ★★ ★★★ A staple product which sees declining consumption. (number of stars represents strength of influence) Price Determination in the Australian Food Industry A Report 119
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Price Determination in the Australi
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© Commonwealth of Australia 2004 T
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FOOD AND AGRICULTURE BUSINESS GROUP
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FIGURES Price Determination in the
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• The current focus of retail cha
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• assertions as to market power i
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Overview - main drivers of prices i
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Food lines The analysis of food pro
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Figure 1. Overview of the approach
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Figure 2. Corporate profitability I
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Figure 4. Major drivers of prices a
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5.3 The greater influence of prevai
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DAIRY - PACKAGED MILK Overview of t
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Figure 10. Whole milk, 2 litre, sup
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Prices through the chain Our analys
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Figure 16. Natural cheddar cheese:
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Farmgate prices Farmgate prices are
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DAIRY - ANALYSIS OF PRICING OF DAIR
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Figure 25. Dairy butter and blend s
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‘Step-ups’ are paid by several
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THE MEAT SECTOR Analysis of the det
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The approach taken The pricing anal
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The changing value chains - various
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The approach taken Assumptions used
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Figure 39. Lamb market sales, ’00
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Figure 41. Lamb: Major drivers of p
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Observations The price comparison s
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Figure 46. Pork products, supply ch
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Figure 48. Value and cost-adding fr
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Supply chain management Wholesale m
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Figure 51. Fresh vegetables: Major
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FRESH HORTICULTURE - WHOLESALE MARK
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FRESH HORTICULTURE - ANALYSIS OF PR
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market access - in the United State
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The industry’s product mix The ke
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PROCESSED FRUIT AND VEGETABLES Anal
Page 80 and 81: Figure 69. Frozen vegetables, peas,
Page 82 and 83: PROCESSED PINEAPPLES - ANALYSIS OF
Page 84 and 85: Figure 75. Fresh fruit, with juice,
Page 86 and 87: GRAIN AND OILSEED PRODUCTS Analysis
Page 88 and 89: Figure 79. Flour, 1kg, supply chain
Page 90 and 91: Figure 82. Share of retail price of
Page 92 and 93: OILSEEDS - OVERVIEW Background The
Page 94 and 95: Figure 87. Oils and fats, supply ch
Page 96 and 97: The amount represented by the retai
Page 98 and 99: Industry risks The key area of risk
Page 100 and 101: • The major cost faced by egg pro
Page 102 and 103: Figure 96. Consumer price index, fo
Page 104 and 105: • Many such operators have indica
Page 106 and 107: SUGAR PRODUCTS Analysis of the dete
Page 108 and 109: Figure 103. White sugar, 2kg, suppl
Page 110 and 111: Projected export returns for the co
Page 112 and 113: • Export prices are driven by glo
Page 114 and 115: Retail prices • The average retai
Page 116 and 117: Industry risk • The overall retur
Page 118 and 119: 4. The performance of Australian fo
Page 120 and 121: THE PERFORMANCE OF AUSTRALIAN VERSU
Page 122 and 123: THE PERFORMANCE OF GLOBAL BRAND MAN
Page 124 and 125: THE PERFORMANCE OF PRIMARY MANUFACT
Page 126 and 127: Our purpose in preparing this secti
Page 128 and 129: GROCERY RETAIL - WHAT DETERMINES PR
Page 132 and 133: GROCERY RETAIL - PERFORMANCE OF GRO
Page 134 and 135: 6. Issues for consideration ISSUES
Page 136 and 137: PRODUCER INTEGRATION Does integrati
Page 138 and 139: Industries have in several cases ta
Page 140 and 141: Examples include: • 1 litre milk
Page 142 and 143: Figure 132. Targeting the stomach H
Page 144 and 145: MAJOR ADJUSTMENT - WHAT’S HAPPENI
Page 146 and 147: THE IMPACT OF DROUGHT The sector Di
Page 148 and 149: Price Determination in the Australi
Page 150 and 151: Oczkowski, E, Murphy, T 1999, Influ
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