White stuff and lightning

An article by Shane Wright in the West Australian (via Peter Martin) has given me a bit of a rethink about the “milk war”. I am seeing more parallels with the retail of milk and electricity retail markets.

Perhaps I should take this as notice to think about energy markets less and to get out more…

Essentially, for most consumers of milk and pretty much all consumers of electricity, the product is a simple one and all we care about is price. The role of milk producers and electricity retailers, however, is to compete on anything but price. Here lies the tension between marketing and consumer benefit.

In milk, the agents that control the product are not the farmers, but the producers and retailers. The producers buy the milk (raw product) from the farmers, bottle and market it, and then pass the product onto the retailer.

The processors, along with the retailers, have the motivation to make as much profit per bottle of milk as customers are willing to pay. So they ‘create’ different products. Extra creamy. Light. Lite. Lite Start. Extra Light. Extra Lite with added calcium. Added Omega-3. Heart-healthy milk. You get the idea.

Without denying that some customers do want some variation (I buy lite white even though I’ve been informed that the difference is negligible to your overall diet. It feels healthier, like I’m doing the right think. Damn marketing), it is questionable how willing we are to pay for it. And until now, due to the overloading of ‘products’ this hasn’t been tested because the numerous options were allowed obscure price differences and avoid competition on price. (i.e. confusopoly)

Not anymore. Coles have led a price war, cutting milk prices below cost. This has been followed by the major retailers. (Though the quickie-mart near my home still sells 1L for $3.20. I still buy it. Letting the team down).

What has been the result? Wright reports that we’re reaching for the cheap stuff. As he says:

All we want is some white stuff for the morning cereal, a bit to put in the coffee, and maybe if we’re feeling the heat a milkshake for a mid-arvo pick-me-up.

As an aside, the biggest difference I have noticed between supermarkets in Australia and the UK is the ubiquity of own-brand products on supermarket shelves. Australian supermarkets must be salivating at the idea of more control up the supply chain, and I suspect breaking the back of milk processors may have influenced Coles decision to kick-off the price war.

Farmers were the loudest of the early critics, but as Stephen King has pointed out, lower milk prices equals higher demand for raw milk products equals higher prices for farmers. The losers are those skimming the cream off the top (sorry), that being the processors and retailers. That is, those that try to convince us that milk is more than the white stuff for the morning cereal.

How does this relate to electricity? In energy markets we are constantly lectured by retailers that too much regulation will stop the development of ‘new products’. This would be a horrible thing, we’re told, because it would stop the market from playing its role.

The problem is, ‘new products’ are still the same electricity. It’s just that the pricing between products and retailers becomes so confusing that customers are unable to shop around and compare… therefore stopping the market from playing its role.

As far as I’m concerned, it’s all white stuff and lightning.

Update: Woolworths admit that they can sell milk at $1/L without selling below cost.

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