Supermarket Milk: When Cheap 1$n’t Best.

There are very few items in Australian fridges that are consumed as regularly as drinking milk. A staple item of most shopping lists, consumption of drinking milk is estimated to be 105 litres per capita. Average private-label milk prices have been stable at $1.02-per-litre since early 2011 when supermarkets embarked on a strategic milk war, whereas branded-milk averages at $2.16-per-litre; over 100% more expensive. Yet private-label brands have recently accounted for 64% of fresh full cream milk and 51% of modified fresh milk sales.

So why doesn’t $1 milk capture in an even greater market share?

Not all Milk is the same.

Generally speaking, prices represent the financial cost to the consumer and the financial benefit to the retailer (Iacobucci 2013). Selecting a method of pricing, such as cost-plus pricing, high-pricing or competitor-based pricing, depends on a lot of factors. As pricing involves a trade-off between costs and benefits, private-label milk, at $1-per-litre, targets consumers who want very affordable basic drinking milk without added benefits or perceived advantages associated with branded-milk. It’s priced on a cost-plus basis. Most branded-milk, such as Paul’s Organic Milk, target customers who desire additional benefits such as certified organic quality, better taste or, in the case of A2, more digestible milk, and are priced higher for this distinction. Consequently, there is a greater price diversity in branded-milk. Cost can be determined by both a financial cost and a convenience cost to the consumer; Milk Bars still sell drinking milk products despite charging higher prices because consumers living locally are willing to pay more for the convenience of not travelling further to buy milk.

Cow automation farming agricultural

Woolworths and Coles supermarkets operate in an oligopolistic competitive market setting, meaning they sell mostly identical or substitutable products. Therefore, pricing product lower than, or similarly to, market competitors is another significant pricing influence. If one was to exclusively sell a unique product, then consumers wanting to buy this product would be price-takers and must pay the listed price or forego buying the product. Specialty milk producers such as A2 could market their unique product as a high-end milk and charge $7-per-litre but, without providing a significant benefit that is worth the extra spend, most consumers are likely to instead pursue other milk products or non-dairy milk substitutes.

Milk demand Inelasticity… to a point.

Price elasticity of demand is also an important determinant in milk pricing because, ignoring product diversity, Australian milk prices can be broadly increased or decreased without a relative change in sales. Therefore, milk has a relatively inelastic demand within current price ranges.

demand curve milk 1

However, based on its highly regular consumption (demand) and good availability (supply), milk is highly price competitive as a result of strong market competition. Milk sells at an average price of $1.59 per litre. If milk prices jump to $10-per-litre, many milk consumers would still purchase milk out of necessity (think of Melbourne’s coffee culture) but consumption would probably diminish or other milk substitutes might capture this market segment. Elasticity also varies with customer segments (McTaggart et al., 2012). Therefore, despite an inelastic demand at the lower end of the pricing scale, pricing must be set appropriately to ensure consumers both elect to buy and can afford milk products, whilst also ensuring production costs and margins are factored in.

milk inelasticity

Low pricing can also signal to the market that a product is not as prestigious, or is cheaper in quality, when compared to similar products in the market. Brands such as Pura Milk, priced higher than private-label milk without added benefits or significant product differentiation like the A2 brand (apparently) maintains a market share because of the perception that their basic milk offering is somehow more premium or better quality than cheap $1-milk. Taste is also a contributing factor.

Moral Combat!

Recent publications alleging the financially damaging effects of low-priced milk on Australian dairy producers, who are forced to accept low wholesale pricing in order for the large supermarkets to afford the reduced retail price, caused a public backlash against low-priced private-label milk, resulting in sales dropping from 64% by volume to just 50% in a matter of weeks. By boycotting private-label milk, although potentially short-term, consumers have signalled to retailers that they prefer to buy milk perceived to offer a more ethical outcome for producers. Here, concerned private-label-milk consumers value the producers’ benefit higher than their own, demonstrating the importance of ethicality over price in consumer choice.

milk fridge

Therefore, many factors contribute to milk price-setting and pricing varies according to customer segments. $1-milk-pricing is attractive to segments that desire low-cost basic drinking milk but are not willing to pay extra for added benefits that many branded-milk products offer, nor affected enough by perceptions of moral ambiguity to switch from buying private-label milk.

Cheapest pricing in a competitive milk market does not guarantee total market share, especially when perceived as ethically questionable, but does still appeal to the majority of consumers.

– JakeD
ID: 213200605

 

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