Price Determination in the Australian Food Industry A Report

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DAIRY – PACKAGED MILK Overview of the product The packaged milk market consumes about 17 per cent of total milk output according to 2003 numbers. Packaged milk is a traditional product category on which much of the industry production technology and culture was originally based – a commitment to service the fresh milk needs of the community. Significant changes have been seen through the chain as a result of technologies which have improved milk qualities, logistics systems capabilities and shelf life, as well as changes in consumer preferences towards greater convenience and health consciousness. The history The industry has a background history of regulated prices through the chain at points which included factory gate, wholesale and back of store, and retail. The last piece of pricing regulation was removed on 1 July 2000 with the removal of farmgate regulated prices for milk used in packaged milk products. The product–market mix About 55 per cent of packaged milk sales in the domestic market are made through major supermarket chains. The product mix has changed significantly over the past 10 years towards products with lower fat content, although white whole milk dominates volumes. Figure 6. Milk product mix % 100 80 other Price Determination in the Australian Food Industry A Report 60 40 20 0 1990 2002 Year Source of data on this and next page: Dairy Australia 2003 Drivers of pricing flavoured reduced fat low-fat whole A number of factors have significantly altered pricing in the packaged milk value chain in recent years: • deregulation of pricing and supply laws that existed at state level, which included farmgate, wholesale and retail prices; • major retailers moved to national supply contracts in packaged milk; • the existence of excess capacity in milk packaging operations in the three major processors, coupled with increased awareness by retailers of the costs of milk production and processing; • the use of private label products at a discount from proprietary branded products underpinned a gain in market share by chain retailers; 20
• growth in consumer adoption of larger pack sizes with 3 litre containers now almost as popular as 2 litre in supermarkets; and • increasing competition from health beverages including waters, juices and other functional drinks. Figure 7. Growth in large pack sizes, litres sold per quarter, average Figure 8. Growth in private label milk, 2 litre, litres sold per week Litres Litres sold per quarter (average) Litres Litres sold per week (2 Litre) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 25,000 3L 2L 20,000 15,000 10,000 5,000 brands private label 2000 2003 0 1993 2000 2003 Figure 9. Packaged milk: Major drivers of prices and costs Packaged milk is a high-profile case study in the evolution of supply chain pricing in fresh food products. The analysis however must take account of the dynamics of the packaged products in the context of the wider industry. 1. Farm production factors • Production volumes are relatively stable year to year. • National production is strongly seasonal in low-cost production regions where milk is mostly used to manufacture commodity products. • Milk used in packaged milk must meet a consistent daily supply requirement, incurring higher supplementary feeding costs. • Highly perishable raw product requires prompt processing or conversion to storable form. 4. Regulation and compliance • Increasing costs of compliance with environmental, welfare and food safety requirements for milk producers and processors. • Competition constraints on further consolidation of processing sector. 2. Value-chain integration • Integration of activities along the chain to the extent that cooperatives are engaged in milk processing. • Increasing scale efficiency of milk plants has occurred in past five years. • Greater concentration of ownership of processing capacity. • Removal of regulation has created a commercial market at the farmgate level, increasing the variety of sources of milk to processors. Farm production Processing Distribution Retail 5. Trade impacts • Growing share of total industry production committed to export market reduces the long-term average return for raw whole milk. • Limited exposure to potential import competition from extended and long-life milk products which do not have strong consumer support. • Overall returns to farmgate strongly influenced by world commodity returns for bulk products, which in turn influence the margin paid for milk designated for packaged milk usage. Marketing 6. Technology and innovation • Increasing capital intensity of the farming sector. Changing cost structures in the processing sector. • The transparent farmgate prices and costs enable a greater understanding by processors and marketers of the scope for different sourcing options. • Significant investment in applied technology and innovation in milk production. 3. The marketing approach • Increasing differentiation of milk products into functional and convenience beverages to resist strong competition from other beverages. • Increasing investment by major processors in distribution channels to convenience retail markets to retain a substantive volume of higher margin business. 7. Retail market dynamics • Increasing share of the total milk category for chain retailers. • Development of a national milk buying market by chain retailers. • Rapid growth in the share of supermarket sales of the private label milk lines, priced significantly lower than branded lines. • Strong price-based competition between chain retail and convenience channels for packaged milk sales. • Strong competition from an increasing range of health-based drinks. Price Determination in the Australian Food Industry A Report 21
Page 1: Price Determination in the Australi
Page 4 and 5: © Commonwealth of Australia 2004 T
Page 6 and 7: FOOD AND AGRICULTURE BUSINESS GROUP
Page 8 and 9: FIGURES Price Determination in the
Page 10 and 11: Price Determination in the Australi
Page 14 and 15: • The current focus of retail cha
Page 16 and 17: • assertions as to market power i
Page 18 and 19: Overview - main drivers of prices i
Page 22 and 23: Food lines The analysis of food pro
Page 24 and 25: Figure 1. Overview of the approach
Page 26 and 27: Figure 2. Corporate profitability I
Page 28 and 29: Figure 4. Major drivers of prices a
Page 30 and 31: 5.3 The greater influence of prevai
Page 34 and 35: Figure 10. Whole milk, 2 litre, sup
Page 36 and 37: Prices through the chain Our analys
Page 38 and 39: Figure 16. Natural cheddar cheese:
Page 40 and 41: Farmgate prices Farmgate prices are
Page 42 and 43: DAIRY - ANALYSIS OF PRICING OF DAIR
Page 44 and 45: Figure 25. Dairy butter and blend s
Page 46 and 47: ‘Step-ups’ are paid by several
Page 48 and 49: THE MEAT SECTOR Analysis of the det
Page 50 and 51: The approach taken The pricing anal
Page 52 and 53: The changing value chains - various
Page 54 and 55: The approach taken Assumptions used
Page 56 and 57: Figure 39. Lamb market sales, ’00
Page 58 and 59: Figure 41. Lamb: Major drivers of p
Page 60 and 61: Observations The price comparison s
Page 62 and 63: Figure 46. Pork products, supply ch
Page 64 and 65: Figure 48. Value and cost-adding fr
Page 66 and 67: Supply chain management Wholesale m
Page 68 and 69: Figure 51. Fresh vegetables: Major
Page 70 and 71: FRESH HORTICULTURE - WHOLESALE MARK
Page 72 and 73: FRESH HORTICULTURE - ANALYSIS OF PR
Page 74 and 75: market access - in the United State
Page 76 and 77: The industry’s product mix The ke
Page 78 and 79: PROCESSED FRUIT AND VEGETABLES Anal
Page 80 and 81: Figure 69. Frozen vegetables, peas,
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PROCESSED PINEAPPLES - ANALYSIS OF
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Figure 75. Fresh fruit, with juice,
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GRAIN AND OILSEED PRODUCTS Analysis
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Figure 79. Flour, 1kg, supply chain
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Figure 82. Share of retail price of
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OILSEEDS - OVERVIEW Background The
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Figure 87. Oils and fats, supply ch
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The amount represented by the retai
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Industry risks The key area of risk
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• The major cost faced by egg pro
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Figure 96. Consumer price index, fo
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• Many such operators have indica
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SUGAR PRODUCTS Analysis of the dete
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Figure 103. White sugar, 2kg, suppl
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Projected export returns for the co
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• Export prices are driven by glo
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Retail prices • The average retai
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Industry risk • The overall retur
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4. The performance of Australian fo
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THE PERFORMANCE OF AUSTRALIAN VERSU
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THE PERFORMANCE OF GLOBAL BRAND MAN
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THE PERFORMANCE OF PRIMARY MANUFACT
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Our purpose in preparing this secti
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GROCERY RETAIL - WHAT DETERMINES PR
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The consumer trend towards eating o
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GROCERY RETAIL - PERFORMANCE OF GRO
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6. Issues for consideration ISSUES
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PRODUCER INTEGRATION Does integrati
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Industries have in several cases ta
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Examples include: • 1 litre milk
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Figure 132. Targeting the stomach H
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MAJOR ADJUSTMENT - WHAT’S HAPPENI
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THE IMPACT OF DROUGHT The sector Di
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Price Determination in the Australi
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Oczkowski, E, Murphy, T 1999, Influ
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Price Determination in the Australian Food Industry A Report

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