Coles had slashed the price of more than 5000 grocery staples under its Down Down campaign, in some cases funding the discounts out of its own pocket.
Sales had risen for nine consecutive quarters, an extra 1 million customers were streaming through the checkouts each week and same-store sales were growing around 6 per cent each quarter – more than twice as fast as Woolworths’.
But for Durkan and his boss, Coles’ $55 million man Ian McLeod, it wasn’t enough.
Sales had risen for nine consecutive quarters, an extra 1 million customers were streaming through the checkouts each week and same-store sales were growing around 6 per cent each quarter – more than twice as fast as Woolworths’.
But for Durkan and his boss, Coles’ $55 million man Ian McLeod, it wasn’t enough.
Woolworths was still beating Coles on a crucial metric, sales per square metre, discounter Aldi was cutting a swath through the East Coast grocery market, luring even middle-class shoppers into its no-nonsense stores, and Coles needed to prove to customers that it was serious about reducing their cost of living.
It was a time for a shake-up and Durkan, a 17-year veteran of the UK grocery scene, didn’t have far to look for inspiration.
In the UK, retailers Asda and Sainsbury had slashed the price of milk in a fruitless attempt to slow the march of Aldi and Lidl. Asda had led the charge, selling two-pint bottles of milk for the nice round number of £2.
«There are only five or six products in a supermarket that people generally know the price of – milk, bread, bananas, avocados and toilet paper,» said one former Coles source involved in developing the strategy.
In the UK, retailers Asda and Sainsbury had slashed the price of milk in a fruitless attempt to slow the march of Aldi and Lidl. Asda had led the charge, selling two-pint bottles of milk for the nice round number of £2.
«There are only five or six products in a supermarket that people generally know the price of – milk, bread, bananas, avocados and toilet paper,» said one former Coles source involved in developing the strategy.
Cheap milk was the obvious choice – it’s a staple product that most consumers buy every other day and helps drives traffic into stores.
Durkan and McLeod felt $1 a litre private label milk had a nice ring to it and decided to make a splash by announcing milk price cuts on Australia Day 2011.
Sources say Durkan and McLeod were warned at the time about the potential impact on the dairy industry, particularly for farmers in the northern states, where almost all production goes into drinking milk rather than export milk.
The price and volume of branded milk would inevitably fall, they were told, squeezing processor margins and limiting their capacity to pay more at the farm gate.
Durkan and McLeod felt $1 a litre private label milk had a nice ring to it and decided to make a splash by announcing milk price cuts on Australia Day 2011.
Sources say Durkan and McLeod were warned at the time about the potential impact on the dairy industry, particularly for farmers in the northern states, where almost all production goes into drinking milk rather than export milk.
The price and volume of branded milk would inevitably fall, they were told, squeezing processor margins and limiting their capacity to pay more at the farm gate.
However, Durkan and McLeod were adamant it was the right way to go to build customer trust in Coles’ everyday low prices strategy.
After all, farm gate milk prices were rising because of growing global demand. And Coles was funding the average 33 per cent price reduction, trimming its own margin from 20¢ a litre to around 3 or 4¢, rather than forcing processors to take a cut.
It was even giving some processors, such as Lion and WA-based Harvey Fresh, a small price rise, while saving consumers $1 million a week.
Durkan, McLeod and Coles’ parent, Wesfarmers were unprepared by the backlash that followed – particularly from Wesfarmers’ own primary producer shareholders.
After all, farm gate milk prices were rising because of growing global demand. And Coles was funding the average 33 per cent price reduction, trimming its own margin from 20¢ a litre to around 3 or 4¢, rather than forcing processors to take a cut.
It was even giving some processors, such as Lion and WA-based Harvey Fresh, a small price rise, while saving consumers $1 million a week.
Durkan, McLeod and Coles’ parent, Wesfarmers were unprepared by the backlash that followed – particularly from Wesfarmers’ own primary producer shareholders.
There were calls for a Coles boycott and some Wesfarmers shareholders came close to getting enough numbers to call an extraordinary general meeting.
Within months of the Australia Day announcement, Durkan and McLeod were hauled before ACCC and Senate inquiries and forced to defend their strategy.
McLeod was defiant – «Coles’ customers rightly expect us to keep prices for essential grocery items as low as possible. We will continue to put the interests of our customers first, by delivering on our commitment to offer quality and value.»
«They genuinely felt they hadn’t done anything to hurt any individual dairy farmer and there was a lot of frustration about some of the claims that were being made,» one former Coles source said.
Within months of the Australia Day announcement, Durkan and McLeod were hauled before ACCC and Senate inquiries and forced to defend their strategy.
McLeod was defiant – «Coles’ customers rightly expect us to keep prices for essential grocery items as low as possible. We will continue to put the interests of our customers first, by delivering on our commitment to offer quality and value.»
«They genuinely felt they hadn’t done anything to hurt any individual dairy farmer and there was a lot of frustration about some of the claims that were being made,» one former Coles source said.
«But it took a lot of money out of the profit pool, leaving little for farmers or processors.»
Five years later, consumers have embraced $1-a-litre private-label milk and Coles, Woolworths’ and Aldi’s house brands now account for about 63 per cent of drinking milk sales, according to Dairy Australia.
But dairy farmers are still up in arms, saying Coles’ strategy has permanently devalued the price of milk in the eye of the consumer and accusing Coles of stripping more than $220 million a year out of the milk profit pool. The fact that Aldi is selling private label milk for $1 a litre rarely rates a mention.
The average price of white milk is now $1.34 a litre, taking into account private label and branded prices, cheaper than bottled water and soft drink.
Coles’ decision to back farmer-controlled co-op Murray Goulburn Group by signing a 10-year private label milk supply contract looked like a public relations coup in 2014.
However, that deal also backfired for Coles this month when Murray Goulburn was forced to cut farm gate prices by 15 per cent to below the cost of production.
Murray Goulburn’s problems are largely self-inflicted, as management failed to take into account rising milk production in the EU and a growing stockpile in China when they made overly optimistic price and volume forecasts at the time of an initial public offer last year.
Coles says its private label milk contract accounts for only 6 per cent of Murray Goulburn’s production.
Five years later, consumers have embraced $1-a-litre private-label milk and Coles, Woolworths’ and Aldi’s house brands now account for about 63 per cent of drinking milk sales, according to Dairy Australia.
But dairy farmers are still up in arms, saying Coles’ strategy has permanently devalued the price of milk in the eye of the consumer and accusing Coles of stripping more than $220 million a year out of the milk profit pool. The fact that Aldi is selling private label milk for $1 a litre rarely rates a mention.
The average price of white milk is now $1.34 a litre, taking into account private label and branded prices, cheaper than bottled water and soft drink.
Coles’ decision to back farmer-controlled co-op Murray Goulburn Group by signing a 10-year private label milk supply contract looked like a public relations coup in 2014.
However, that deal also backfired for Coles this month when Murray Goulburn was forced to cut farm gate prices by 15 per cent to below the cost of production.
Murray Goulburn’s problems are largely self-inflicted, as management failed to take into account rising milk production in the EU and a growing stockpile in China when they made overly optimistic price and volume forecasts at the time of an initial public offer last year.
Coles says its private label milk contract accounts for only 6 per cent of Murray Goulburn’s production.
Nevertheless, Coles has been blamed for locking the processor into a barely profitable long-term contract.
Durkan’s attempt to repair the reputational damage this week by launching a new brand of milk and donating 20¢ from each sale to Victoria’s dairy sector has also been condemned as a cynical stunt.
The move would raise just $2.5 million – including a direct $1 million contribution from Coles’ Nurture Fund.
If Durkan increased the price of Coles’ private label milk by 20¢ a litre it would raise $145 million nationally.
But it would be an admission of defeat. And $1.20 a litre private label milk doesn’t have the same ring to it as $1 a litre.
Durkan’s attempt to repair the reputational damage this week by launching a new brand of milk and donating 20¢ from each sale to Victoria’s dairy sector has also been condemned as a cynical stunt.
The move would raise just $2.5 million – including a direct $1 million contribution from Coles’ Nurture Fund.
If Durkan increased the price of Coles’ private label milk by 20¢ a litre it would raise $145 million nationally.
But it would be an admission of defeat. And $1.20 a litre private label milk doesn’t have the same ring to it as $1 a litre.
Source: Afr
Link: http://www.afr.com/business/retail/coles-1-a-litre-milk–masterstroke-or-mistake-20160519-gozeq1