For those who have made the wise move of ignoring the mainstream media and are getting all your news from MacroBusiness to maintain sanity, then you may have missed the spectacle that is the ‘Greatest Grocery Marketing Campaign in History’.
On Wednaseday Coles dropped the price of some fruits and vegetables, and a Google news search showed 293 articles on that topic that night. Apparently when retailers drop prices it is a news event.
But aren’t Coles simply continuing their ‘down, down’ marketing campaign? That’s what Woolworths CEO Grant O’Brien has suggested is the real truth:
“Reducing prices in produce is really no news,” he told analysts in a conference call after the release of the retailer’s first-half sales figures.
“If you take a basket of items which are on promotion in our store and compare it to the items that are on promotion in Coles stores you’ll get a 29 per cent difference in favour of Woolworths customers.
“It’s a promotion that happens every day of the week in retail land.
“To say it’s a huge reduction and market changing or game changing is, in a way, to mislead.”
The ABS figure on fruit and vegetable prices seem to suggest that Coles is getting plenty of mileage out of the post-natural disaster adjustment to local fruit and vegetable prices, as shown by the price index from the CPI:
Round one of Coles’s public relations campaign, the ‘milk wars’, ended with a Senate inquiry, which ultimately found that, apart from a small group of Queensland farmers who contract to Parmalat for processing, farm incomes in the Australian dairy industry were not being affected by more aggressive retail competition.
It is important to understand market power at each point in the supply chain. For dairy producers and processors facing both domestic and export markets, the domestic buyers of milk products have no market power to force sales to occur below the alternative export price. This was one key finding of the Senate inquiry. In Victoria and Tasmania this is particularly the case, but as you can see from the graph below, while in Queensland, New South Wales and Western Australia, drinking milk is the primary dairy product:
But with national pricing policies, I see no reason why supermarkets can’t pay different prices for milk supply, and even out margins over their whole business (readers, if you have inside information on this please let us all know) . After all, Coles and Parmalat can’t squeeze Queensland dairy farmers so much that they will stop supplying fresh milk. And in case anyone missed it, 3L of milk at ALDI, before the $1 per liter milk war, was $3.09. But I heard nothing about this from the farm lobby groups.
What many observers fail to realise is that supermarket shelf prices do not always closely reflect the production cost price. The mark-up of each product can be very different, while pricing promotions, including loss leaders, happen all the time. Retailers in different sectors adopt quite different pricing strategies. Just like Apple computers charge obscenely higher prices for small upgrades, supermarkets price discriminate in a way that makes their store appear more attractive to customers as a total package.
If you were a supermarket, which goods would you cut margins on to get customers in the door? Personally, I’d go for milk, bread and fresh fruit and vegetables.
Round two of the campaign is gaining some traction with the Greens and Nick Xenophon, but I think a Senate Inquiry, or even the involvement of the ACCC is a stretch, unless a genuine complaint about misconduct is received.
While round one of the ‘Greatest Grocery Marketing Campaign in History’ ruffled many political feathers, and even had the kids singing the ‘down, down’ song at day care with their giant red hands. Round two, the ‘fresh produce wars’, gained a little media attention, but I doubt it will become a political hot topic. I expect a round three soon enough, probably a meat discount war. No doubt it’ll make 6.30pm trash news television. They should instead wake the country to the Coles marketing strategy.
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