It's not the first deal with farmers, and it won't be the last

First it was the milk wars. Now, it is the spin war around the milk wars.

First it was the milk wars. Now, it is the spin war around the milk wars.

Woolworths used the forum of the Royal Easter Show to launch a deal that involves buying milk directly from dairy farmers in what it described as an Australian supermarket first.

Coles is miffed. It says it has had a direct buying relationship with a number of dairy co-op producers for a couple of years.

Thus, the Manning Valley farmers, who have lodged a collective bargaining agreement to deal with Woolworths, before the Australian Competition and Consumer Commission shouldn't have to worry about it being approved.

Engaging directly with the supermarket undoubtedly works for some dairy suppliers. One industry supplier likened it to taking out a fixed-rate loan - it might not be the best outcome but it contains certainty of terms for the supplier.

The deal doesn't cut out the middle man because the milk still needs to be processed. But instead of the processors buying the product, manufacturing it and then selling it on, the processors are simply paid a toll.

Coles' direct dealing with dairy suppliers is a little different because these co-operatives already have processing facilities.

Both Coles and Woolworths have been engaged in direct relationships with numerous primary producers and the trend will probably continue.

Meanwhile, the results delivered on Wednesday by one of the biggest dairy processors, Fonterra, demonstrated how badly this part of the industry is faring.

Fonterra's local business "had to contend with a very competitive retail environment", that was in part responsible for the division's profit falling 32 per cent.

The company said the supermarket push into private labels was increasing competition and rationalisation of shelf space had been a feature.

As a result Fonterra said, there were winners and losers among its various butter, cheese and yoghurt brands. Fonterra is now in the process of rationalising its Australian manufacturing and reducing the number of brands it is offering.

The supermarkets say the rationalisation of the manufacturers' operations has more to do with the fact that they acquired expensive, inefficient plant at a time when markets were regulated.

That may be true but the growth of private-label dairy products has exacerbated the problem.

All these concerns form part of the investigations being undertaken by the ACCC into the market power of supermarkets.

Among the issues suppliers raised was how, as house brand retailers, the supermarkets could retain Chinese walls with their suppliers who are also competitors. Detractors said suppliers needed to furnish the supermarkets with detailed information about product innovation and pricing in regular meetings.

This could open the way for supermarkets to formulate their own private-label product strategies which could undermine their own suppliers.

It's akin to the telco industry where Telstra owns the network that supplies infrastructure to retailers it competes with.

After years of protest the government ultimately decided to build a new wholesale network and solve this structural problem.

The trouble for the ACCC is that these issues are hard to police and even harder to prove.

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