War has been declared. Armies have been marching into a boutique retailer and leaving with bottles of cheap milk.
Nosh, a high-end food retailer with six stores, has declared a price-war on milk. It is selling a 2L bottle for $2, which is 50c less than its cost price. A Pak'n'Save store across the road from the Nosh outlet in Hamilton met the challenge head-on and matched the $1 a litre deal.
Nosh reportedly are selling a lot of milk and one presumes they are hoping to sell a lot of other things while the milk bargain hunters are in their stores. How long they can go on losing money on milk remains to be seen. They are holding their price until the end of this month but have not ruled out extending the deal.
According to media reports, Nosh wanted to make the point that retailers are making a higher retail margin on milk than they are on soft drink. In that respect they are correct. Before the discount offer, Nosh sold a 2L bottle of milk for $4.45, which is a mark-up of 76 per cent above its $2.50 cost price (a profit margin of $1.95). Other specialist retailers are selling the same milk for about $3.50 (or 40 per cent more than the $2.50 cost price) and significantly less than Nosh's own normal retail price.
Federated Farmers say retailers are adding on average about 20 per cent to milk. According to our calculations, that's on the low side. Most retailers, especially the specialist outlets like Nosh before the price discount, will be making more.
When we conducted a New Zealand-wide survey of food pricing a couple of years ago we found a huge variation in pricing depending on regional competition, the retail outlet and the brand. We concluded then that the cheapest way to buy milk was to take advantage of loss-leader promotions by specialty food outlets and fruit and vegetable retailers. Typically, they sold milk at their cost price to bring consumers into their store. The next best way was to buy a house brand from a supermarket.
So, how do the numbers shape up for others in the milk industry? According to Federated Farmers, farmers receive 65c for each litre of milk sold in New Zealand. So for every 2L bottle, the farmer ends up with $1.30. From that they have to pay their business costs (interest on debt, fertiliser, wages, machinery costs) and have something remaining as a reward for their initiative and effort (and getting up in the middle of the night to go milking).
By deduction, and assuming a 2L bottle costs retailers about $2.50, the milk processor is therefore receiving $1.20. From this they pay for all of their costs (sending tankers out to collect the milk, wages, electricity, plant repairs and replacement, marketing, delivering the processed milk to stores, and so on).
As a rough guide, we think it fair to say that the revenue from milk is roughly divided equally between the producer (farmer), processor and retailer.
Upon reflection, the Nosh milk war is probably going to be more skirmish than war. It's certainly a fine example of how well loss-leader advertising can attract media attention when the product involved is as controversial as milk. The challenge for Nosh will be setting a price for its milk after the fighting ends.
Frank and Muriel Newman are the authors of Living Off the Smell of an Oily Rag in NZ. Readers can submit their oily rag tips on-line at www.oilyrag.co.nz.