Price Determination in the Australian Food Industry A Report

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Figure 10. Whole milk, 2 litre, supply chain map Farmer Processor Market Logistics Retail Brand Ownership/Management receival consolidation distribution and logistics Farmer Processor Delivery Franchise Chain Retailer Consumer haul Wholesaler Independent and Convenience Retailer Approx. 11,000 dairy farmers, but only 4000–5000 share directly or indirectly in packaged milk market. • ‘Receival consolidation’ is where milk is consolidatd in regional receival facilities and then tankered to the necessary processing plant. • Packaged milk uses about 17% of the total market. • Three national processors with more than 80% of processing market. • Up to 20 other small niche or regional processors. • Significant overcapacity (estimated at between 2 to 3 times the market) exists in processing sector. • Convenience market retains a strong share of packaged milk market. • Distribution strategies of dairy companies vary, with a mix of company-owned and outsourced or private route operators. • Major route to market is through franchised delivery businesses. • Role of separate wholesale sector is minimal – only to provide paper-based trading on behalf of retailers, without taking title. • Chain retail share of total market increasing to more than 55% of retail volumes. • Increasing share of private label product in chain and independent (IGA) retail. In chain retail estimated at more than 60%. • Steady increase over time in low-fat modified milks which have 27% of volume (whole milk has 56%). DAIRY – ANALYSIS OF PACKAGED MILK PRICING Price Determination in the Australian Food Industry A Report Retail prices for milk Historic regulated milk prices at retail were set on a cost-plus basis. Costs built up through the chain to provide each sector with a deemed appropriate margin which was justified on a costrecovery basis. Since the removal of price regulation, retail prices have broadly fluctuated around those historic levels with gradual increases over time. However, strong price competition remains between retailers, between major chain retail and independent stores and across the beverage category. Retail versus farmgate pricing analysis The dairy industry has emerged from a recent history where regulation supported a practice of setting different prices for ‘manufacturing’ (for milk used in manufactured dairy products) and ‘market milk’ (for milk used in packaged liquid milk products) at the farmgate level. The major adjustment for the industry was moving from a production-push pricing culture into an environment where the returns of the processor and producer were very directly exposed to the consumer market realities of the fresh dairy category. An analysis of the history of farmgate versus retail supermarket pricing over the past six years is contained in the chart below which illustrates pricing for a 2 litre whole milk product. The farmgate price in the chart below is a farmgate price calculated as the average paid by packaged milk processors. 22
As expected, with the loss of regulated arrangements, there was a sharp fall in the farmgate price. Since that time, farmgate prices have fallen (commensurate with a fall in world market prices for dairy products) and average retail prices have risen. Figure 11. Retail versus farmgate packaged milk, $/2 litre equivalent in nominal amounts $ 3.00 2.50 2.00 1.50 retail 1.00 0.50 farmgate 0 July 1998 July 2003 Source: Dairy Australia and Whitehall Associates The gap between farmgate and retail has widened now that world market returns effectively set the benchmark for prices for packaged milk processing. Retail prices The returns from the packaged milk sector have been strongly influenced and driven by the strength of private label growth. The growth has been achieved through aggressive price competition which has seen a widening of the gap between the proprietary and private brand prices in supermarkets. A 2 litre milk product is one which is sold at a little or no margin overall to the processor. It is a volume product that enables the disposal of milk volumes, providing a distribution platform for the sale of profitable low-fat, specialty and flavoured milk products into various channels. With lower margins available from the supermarket sector, processors have made varied responses to the growth in the private label as they have each sought to maintain brand equity in all channels to the consumer. Figure 12. Supermarket segment retail prices, milk, $/2 litre, 1998–2003 $ 2.90 2.70 2.50 2.30 2.10 1.90 1.70 1.50 Source: Dairy Australia proprietary private July 1998 June 2003 Retail prices in the non-supermarket sector are generally higher than those in major retail. However there are frequent instances of discounting of 2 and 3 litre lines by independent stores in order to attract custom. Packaged milk products are now used in many segments of nonsupermarket retail as a loss leader to attract customers to make other store purchases. Price Determination in the Australian Food Industry A Report 23
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 32 and 33: DAIRY - PACKAGED MILK Overview of t
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,
Page 82 and 83: 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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