tag:theconversation.com,2011:/ca/topics/retail-price-wars-14318/articlesRetail price wars – The Conversation2018-03-07T05:25:15Ztag:theconversation.com,2011:article/929962018-03-07T05:25:15Z2018-03-07T05:25:15Z‘Down down’ and ‘cheap cheap’ are gone gone: why supermarkets are moving away from price<figure><img src="https://images.theconversation.com/files/209274/original/file-20180307-146691-1t7au5j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Coles was once the market leader thanks to its 'down down' low pricing marketing. </span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>On January 26, 2011, Coles fired the first shot in what would soon be dubbed the <a href="http://localejournal.org/issues/n2/Locale%20n2%20-%2007%20-%20Keith.pdf">“supermarket price wars”</a> by reducing the price of its own-brand milk to A$1 per litre. Woolworths fired back, triggering seven years of intense price competition. </p>
<p>But now Coles has waved the white flag, indicating a move away <a href="http://www.afr.com/business/retail/coles-shows-its-softer-side-as-living-costs-bite-20180306-h0x2gc">from price-based marketing</a>, to a focus on other attributes, such as sustainability, local produce and community. </p>
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<figcaption><span class="caption">Coles’ new ad campaign.</span></figcaption>
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<p>Research shows if price is the main selling point, <a href="https://www.canstarblue.com.au/food-drink/stores/supermarkets/">shopper loyalty decreases</a> and customers become more conscious of price. Price wars are also <a href="https://theconversation.com/predicting-the-last-brand-standing-in-the-supermarket-price-wars-32556">costly for retailers</a>.</p>
<p>While operational costs (wages, rent, bills) remain fixed or go up, prices can’t keep coming down. You eventually run out of margin.</p>
<p>Coles recent <a href="http://www.wesfarmers.com.au/docs/default-source/asx-announcements/2018-half-year-results-announcement.pdf?sfvrsn=0">half yearly results</a> reflect this, with a drop in earnings of 14.1% from A$920 million to A$790 million. </p>
<p>In contrast, Woolworths announced an 11.1% increase in earnings for <a href="https://www.woolworthsgroup.com.au/icms_docs/189600_2018-half-year-results-presentation.pdf">their supermarket business</a>. But Woolworths dropped their “cheap, cheap” price cutting campaign <a href="https://mumbrella.com.au/woolworths-ditches-cheap-cheap-in-favour-of-new-always-at-woolworths-tagline-325378">nearly two years ago</a>. </p>
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Read more:
<a href="https://theconversation.com/down-down-but-not-different-australias-supermarkets-in-a-race-to-the-bottom-48151">Down, down but not different: Australia's supermarkets in a race to the bottom</a>
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<p>Other retailers also get caught in the cross fire of price cutting. Case in point is Aussie Farmers Direct, which fell into administration this week <a href="https://www.aussiefarmers.com.au/">saying they were</a>:</p>
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<p>…no longer able to compete against the domination of the major two supermarkets.</p>
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<p>While it may be overly simplistic to blame the two big supermarkets for the downfall of Aussie Farmers Direct, price conscious consumers and thin grocery margins certainly contributed. </p>
<h2>How this strategy came about</h2>
<p>Supermarkets are now looking beyond price to stand out. </p>
<p>Both Coles and Woolworths are very similar in the brands they offer, prices, layouts, weekly specials and online channels. The move away from price gets shoppers thinking about what is unique to each chain. </p>
<p>So, rather than price, the focus has shifted to <a href="https://www.woolworthsgroup.com.au/page/media/Press_Releases/Free_Fruit_for_Kids_at_Woolworths/">service quality, social programs</a> and <a href="https://www.coles.com.au/sfs/assets">connecting with the community</a>. </p>
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Read more:
<a href="https://theconversation.com/unit-pricing-saves-money-but-is-the-forgotten-shopping-tool-61379">Unit pricing saves money but is the forgotten shopping tool</a>
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<p>Shoppers who are continually exposed to loyalty program logos, may eventually stop noticing these logos, or “switch off”. This is because of a behavioural tendency called <a href="https://www.verywellmind.com/what-is-habituation-2795233">“habituation”</a>. </p>
<h2>What these new strategies are trying to sell</h2>
<p>So, if Coles are no longer selling themselves on price, what are they selling?</p>
<p>Coles’ new approach is more subtle, selling themselves through aspirational stories and employing <a href="https://www.designsociety.org/publication/34585/a_theory_of_affective_experience">classic advertising techniques</a> to do it. </p>
<p>These techniques are used in advertising to convey positive feelings and emotions associated with a particular experience. A simple way to achieve this in advertising is to feature people telling their own stories – as seen in the new Coles advert launched this week. </p>
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<figcaption><span class="caption">Woolworths ad campaign.</span></figcaption>
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<p>With the Commonwealth Games near, both supermarkets are also featuring sports stars in their marketing. Woolworths <a href="https://mumbrella.com.au/woolworths-features-apple-hungry-wheelchair-athlete-in-first-commonwealth-games-ads-500319">new campaign features</a> athletes and their connection with fresh food, positions the company, once again, as “Australia’s Fresh Food People”.</p>
<p>Meanwhile, Coles have partnered with Uncle Toby’s for their <a href="https://www.coles.com.au/sfs/assets">Sports for Schools</a> campaign. Their advertisements feature an array of young, fit, attractive and successful athletes linking the athletic success with the purchase of products from Coles.</p>
<p>By moving away from price and focusing on a story telling strategy, both supermarkets can engage consumers with a process called <a href="https://books.google.com.au/books?id=gWfVlJAp31wC&pg=PA292&lpg=PA292&dq=Internalization+endorser%E2%80%99s+position+on+an+issue+as+their+own&source=bl&ots=etMsCJ8v2H&sig=SSVql3GEe9bYINgh1T0TDjOYjA8&hl=en&sa=X&ved=0ahUKEwiG86fNmNnZAhWoiVQKHRkmCXsQ6AEIJzAA#v=onepage&q=Internalization%20endorser%E2%80%99s%20position%20on%20an%20issue%20as%20their%20own&f=false">“internalisation”</a>. This is where people accept the endorser’s position on an issue as their own. </p>
<p>Internalisation is a powerful psychological mechanism because even if the source used in the campaign is forgotten, the internalised attitude usually remains. Price doesn’t create this effect. </p>
<p>While food prices won’t necessarily go up any time soon, consumers shouldn’t expect to see any further significant price drops. Instead, Coles and Woolworths will draw attention to other important attributes. </p>
<p>Faced with the expansion of Aldi <a href="https://corporate.aldi.com.au/fileadmin/fm-dam/pdf/Press_Release/2016/ALDI_Media_Release_2016_Business_Update_311016__for_website__11_.pdf">across South Australia and Western Australia</a> and <a href="https://www.smartcompany.com.au/industries/retail/kaufland-australia-hiring-local-staff/">the entry of German supermarket Kaufland</a>, Coles has recognised they can’t keep fighting a battle on price alone.</p><img src="https://counter.theconversation.com/content/92996/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Coles plans to compete with competitors by moving away from low prices to a focus on other attributes, such as sustainability, local produce and community.Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of TechnologyLouise Grimmer, Lecturer in Marketing, Tasmanian School of Business and Economics, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/699362016-12-19T02:23:59Z2016-12-19T02:23:59ZBrick-and-mortar retailers should nix deep discounts to make most of jittery shopping season<p>Brick-and-mortar retailers have been on a bit of a roller coaster ride this holiday season as early expectations of strong consumer spending were weighed down by the uncertainty prompted by the election. </p>
<p>That’s on top of the usual jitters about the slow demise of Black Friday and more consumer cash gravitating to online retail. </p>
<p>That has made projections about this year’s holiday shopping season <a href="http://time.com/money/4551914/2016-holiday-shopping-season-deals-trends-sales/">more of a guessing game than usual</a>, but one aspect has now become clear: The rush by retailers to deeply discount merchandise will likely not prove to be beneficial to these retailers in the long term. </p>
<p><a href="http://link.springer.com/article/10.1007/s11747-015-0467-0">My research in “business to business” marketing suggests</a> that instead of enacting ever-steeper price cuts that erode margins, both major retailers like Macy’s and small mom-and-pop stores would be much better off leveraging their physical presence as a source of strength rather than weakness by focusing on the personal touch that only they can provide. </p>
<h2>From robust to jittery</h2>
<p>Prior to the elections, analysts were predicting <a href="https://www.bostonglobe.com/business/2016/10/04/holiday-sales-expected-percent/TzM3EZ0dj1Cxh0k2ZBAwdP/story.html">robust</a> holiday shopping with spending expected to increase by 3.6 percent amid a strengthening economy. </p>
<p>It was a smart guess. Even though income remains unevenly distributed, <a href="http://www.wsj.com/articles/u-s-nonfarm-payrolls-rose-178-000-in-november-unemployment-rate-4-6-1480685541?mod=djemalertMARKET">unemployment has fallen</a>, the <a href="https://www.statista.com/statistics/200463/us-poverty-rate-since-1990/">poverty rate has dropped</a> and housing prices <a href="http://www.wsj.com/articles/u-s-home-prices-set-a-record-in-september-case-shiller-says-1480428083">have mostly recovered</a>. Thus, economic factors were looking positive for the holiday retail market.</p>
<p>Then Donald Trump was elected as U.S. president. Immediately, shoppers <a href="http://www.cnbc.com/2016/11/18/shoppers-cut-back-their-spending-in-days-after-the-election.html">cut back</a> spending, and some predicted <a href="http://adage.com/article/cmo-strategy/trump-win-means-holiday-sales/306683/">a drop</a> in purchases of big-ticket items due to the uncertainty. Pundits even said that “<a href="http://www.usatoday.com/story/money/2016/11/09/after-election-some-consumers-no-mood-shop-holiday/93550176/">post-election trauma</a>” meant consumers were too depressed, worried or stressed to shop.</p>
<h2>The shift online</h2>
<p>Another complication for retailers is the continued upending of traditional shopping patterns. </p>
<p>Some analysts have even been predicting the <a href="http://www.businessinsider.com/black-friday-is-dying-a-slow-death-2016-11">demise of Black Friday</a>, once touted as the most important shopping day of the year for physical retailers. The Wall Street Journal <a href="http://www.wsj.com/articles/retailers-vie-for-black-friday-dollars-1480071604">reported</a> that in-store sales on the Friday after Thanksgiving appear to have declined this year, quoting a retail analyst as saying that in 40 years, “I’ve never seen the crowds this soft on Friday morning.” </p>
<p>But the data suggest we’re probably not seeing the death of Black Friday. Rather, why should consumers venture out? If all that was being touted by physical retailers was price discounts, all the real deals – and there were many – were available online. <a href="http://www.usatoday.com/story/money/2016/11/27/online-sales-overshadow-stores-4-day-shopping-frenzy/94510322/">USA Today reported</a> that 44 percent of consumers shopped online during the four-day span of the Thanksgiving holiday, a 4.2 percent increase from 2015. And Black Friday online sales jumped 22 percent to US$3.34 billion, breaking $3 billion for the first time. </p>
<h2>The power of the personal touch</h2>
<p>So what can brick-and-mortar retailers do to attract customers? </p>
<p>Certainly not offer more deals – you can’t beat the ease of online comparison shopping. But many retailers, fearing the worst, seem to <a href="http://www.wsj.com/articles/inventory-check-we-went-to-the-stores-1480701344">have gone overboard</a> with discounting, even though all the same deals were available online. </p>
<p>So even as consumers were <a href="http://www.cnbc.com/2016/11/27/black-friday-deals-pulled-in-more-shoppers-but-they-spent-less-nrf-data-shows.html">filling their baskets</a> over Black Friday weekend, they may have been spending less due to the multitude of deals. </p>
<p>Having already given deep discounts, retailers should hold the line on additional cuts. Those discounts may be good for customers, but they come at the cost of retailer margins. With repeated discounts, consumers learn to postpone buying in anticipation of imminent deals, leading to a vicious cycle of discounts and deal-buying.</p>
<p>Instead, retailers <a href="http://link.springer.com/article/10.1007/s11747-015-0467-0">should employ the human touch</a> – since <a href="https://faculty.fuqua.duke.edu/%7Emela/bio/papers/Ataman_Mela_Van_Heerde_2006.pdf">research shows</a> that discounting is not likely to help much in the long term – and create a holiday atmosphere that gets consumers in the festive mood. Personal shopping assistants who actually talk to shoppers and share ideas and expert advice make the experience more special and enjoyable, as does hiring local musicians to play and entertain those waiting in long lines.</p>
<p>In other words, physical retailers can stand out by selling the “experience” of the holiday – something you can’t get with a smartphone or computer. By focusing on crafting the best possible customer experience, retailers <a href="http://www.mmaglobal.org/publications/MMJ/MMJ-Issues/2005-Spring/MMJ-2005-Spring-Vol15-Issue1-Chatterjee-Chaudhuri-pp1-16.pdf">can better build brand trust</a> and make it more likely shoppers will choose to come back rather than shift their purchases online. </p>
<h2>Growth and uncertainty</h2>
<p>In general, retailers face two competing forces this holiday season: generally positive economic news and feelings of uncertainty and unease that prevent these consumers from opening their wallets much. Basically things are better, but many people don’t necessarily feel better.</p>
<p>Right after the election, the force of uncertainty was dominant. By Thanksgiving, the pendulum of public perception seemed to have swung the other way. Thus, in my view, it is increasingly likely that we will see that predicted 3.6 percent increase in consumer spending this holiday season. </p>
<p>Brick-and-mortar outlets can share that bounty by going beyond the discount to creating a full shopping experience. Still, as we have learned this year, perceptions can be fickle and could shift before the New Year.</p><img src="https://counter.theconversation.com/content/69936/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sharmila C. Chatterjee does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A mix of economic unease and fears of the growth of online shopping is pushing retailers to offer ever-steeper discounts, but there’s a better strategy to make it through the holidays in the black.Sharmila C. Chatterjee, Academic Head, Enterprise Management Track; Senior Lecturer, Marketing, MIT Sloan School of ManagementLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/670192016-10-13T16:39:59Z2016-10-13T16:39:59ZClash of the consumer titans as Unilever puts price squeeze on Tesco<figure><img src="https://images.theconversation.com/files/141655/original/image-20161013-3953-7idemx.jpg?ixlib=rb-1.1.0&rect=3%2C211%2C1931%2C1263&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Will Marmite shortages drive consumers towards inferior brands?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/chriswaits/16737827102">chriswaits</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>When companies as large as Tesco and Unilever clash, there are bound to be some sparks. Unilever, the world’s third-largest consumer goods company and producer of <a href="https://www.unilever.co.uk/brands/?page=3">scores of British products</a>, has pulled deliveries to Tesco, the UK’s largest supermarket chain, after Tesco refused to accept Unilever’s 10% product price increases. The result has been that <a href="http://www.bbc.co.uk/news/business-37639518">shelves have been emptied</a> of loved brands, from cleaning products to Marmite and Pot Noodles.</p>
<p>Certainly price increases aren’t unexpected, given the pound has <a href="http://www.tradingeconomics.com/united-kingdom/currency">fallen almost 20% against the Euro</a> since the vote to leave the European Union in June. Suppliers can blame increased costs on the falling value of sterling, costs that must be passed on to the consumer. However, in my view this is more an arm wrestle between Britain’s largest grocery retailer and it’s largest supplier. While the outcome is unknown, it provides an interesting real-life case study of the industry.</p>
<p>Tesco was the unchallenged “<a href="http://www.thegrocer.co.uk/channels/supermarkets/tesco/tesco-to-be-customer-champion-dave-lewis-issues-rallying-cry/371090.article">champion of the consumer</a>”, an image carefully cultivated by chief executive Sir Terry Leahy which helped the company grow from 16% share of the grocery retail trade to more than 30% over ten years. But the economic crash had a devastating effect on Tesco and the grocery retail trade, as consumers switched to discount retailers such as Lidl and Aldi. </p>
<p>Alongside this trend, Tesco lost its way, as consumers <a href="http://www.bbc.co.uk/news/magazine-23988795">turned against its dominance of the high street</a>, while shopping patterns changed from the weekly “big shop” to smaller, more frequent shopping trips. Finally, an accounting scandal revealed how the bonus culture had <a href="https://www.theguardian.com/business/2016/sep/09/sfo-charges-former-tesco-directors-with-fraud">corrupted its business practices</a> and damaged relationships with both suppliers and consumers.</p>
<p>Unfortunately, the arrival of new chief executive Dave Lewis, who moved to Testo from Unilever, came at the same time as Tesco’s largest-ever profit warning, <a href="http://www.bbc.co.uk/news/business-32408661">£6.4 billion</a>, and as investor Warren Buffet made damning comments on regretting investing in Tesco. Lewis has since focused on customer service and trying to get back in touch with the Tesco shopper.</p>
<p>Two years on, Tesco’s new challenge comes from its number one supplier – and there are risks and rewards for both businesses. </p>
<p>Unilever can claim it is protecting the quality and image of its products by nudging prices up – which will of course also help the company’s bottom line. But in some cases consumers have deserted these household brands, switching to “me-too” unbranded imitators from the likes of Aldi, which even uses similar-looking product packaging to reinforce the price comparison. </p>
<p>The risk is that Tesco and other supermarkets instead start to emphasise their own-brand product ranges, which have been repositioned from cheap and cheerful to low price but high quality. While, in some cases, the Unilever brand is difficult to replace (Ben and Jerry’s ice cream, Pot Noodle, or indeed Marmite for example) – for many others, I’m not so sure that anyone would notice if it was missing from the supermarket shelf. </p>
<p>For Tesco, the big risk is that consumers shop elsewhere. This is a gamble that I’m sure it will have considered: its online shop prompts buyers to choose from a range of alternatives alongside the “out-of-stock” message. The second risk is that this prompts other heavyweight suppliers such as Proctor and Gamble, GSK or PZ Cussons to increase prices, too, squeezing already thin margins even further.</p>
<p>If Tesco can ride the storm the benefit is enormous: the firm will be able to exert more clout as a retailer and begin to reclaim the “champion of the consumer” title that it lost.</p>
<p>It doesn’t seem right to blame Brexit for forcing prices up in this case as it’s unlikely that any supply chain costs would have been sufficient to warrant a 10% price hike in the few months since the referendum vote. As Unilever’s chief executive Paul Polman has himself pointed out, a successful business <a href="https://www.ft.com/content/e6696b4a-8505-11e6-8897-2359a58ac7a5">focuses on the long-term</a>, rather than short-term quarterly profits. Watch this space.</p><img src="https://counter.theconversation.com/content/67019/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Joseph McGrath does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Tesco tries to fend off Unilever’s price hikes – and Marmite lovers aren’t happy.Joseph McGrath, Principal Lecturer in Marketing, Liverpool John Moores UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/364302015-02-01T19:06:45Z2015-02-01T19:06:45ZToo big to care: will Coles and Woolies lift their game in 2015?<p>Coles and Woolworths spent much of 2014 defending their behaviour in court. The Australian Competition and Consumer Commission (ACCC) <a href="https://www.linkedin.com/pulse/2014-year-supermarket-wars-alexandra-merrett">brought several actions against one or both of them</a> throughout the year for breaching undertakings, misleading consumers and bullying suppliers. </p>
<p>The regulator scored a huge victory late last year when Coles <a href="http://www.abc.net.au/news/2014-12-15/coles-accc-reach-settlement-on-supplier-conduct/5967476">conceded it had behaved unconscionably</a> towards suppliers. </p>
<p>The case actually involved two separate claims. Both concerned allegedly unreasonable demands by Coles for payments from its smallest suppliers. </p>
<p>The ACCC and Coles were ordered to mediation and quickly reached an agreed outcome, subject to the judge’s approval.</p>
<h2>‘Deliberate, orchestrated and relentless’</h2>
<p>Just before Christmas, Justice Michelle Gordon delivered her <a href="http://www.austlii.edu.au/au/cases/cth/FCA/2014/1405.html">decision</a>. Accepting the proposed settlement, she ordered penalties against Coles in the order of A$10 million plus more than A$1 million in costs. </p>
<p>In her decision, Justice Gordon repeatedly described Coles’ conduct as “deliberate, orchestrated and relentless”, and questioned the maximum penalty for unconscionable conduct. At A$1.1 million per contravention, she observed, this was “arguably inadequate for a corporation the size of Coles”.</p>
<p>In addition to the substantial penalties, Coles gave undertakings to the ACCC. These will allow more than 200 small suppliers to engage in an audit process, examining whether Coles’ demands for payments were justified and – if not – enabling repayment.</p>
<h2>Was Woolworths doing the same thing?</h2>
<p>Even as Justice Gordon was reviewing the submissions of Coles and the ACCC, <a href="http://www.smh.com.au/business/retail/woolworths-accused-of-bullying-suppliers-into-paying-millions-for-cheap-cheap-campaign-20141217-1293tt.html">there were reports</a> that Woolworths was behaving unconscionably.</p>
<p>Those claims concern Woolworths’ “Cheap cheap” advertising campaign and seem somewhat similar to some of Coles’ alleged conduct: leaning on suppliers to bridge a perceived “profit gap”. </p>
<h2>Wasn’t there a code of conduct to deal with this?</h2>
<p>Lurking in the background to these various allegations was the Grocery Code of Conduct. This document – largely negotiated between the Australian Food and Grocery Council, Coles and Woolworths – was released as a draft in late 2013, and then put to <a href="http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2014/Improving-Relationships-Food-Grocery-Sector">public consultation by Treasury</a>.</p>
<p>Much of the conduct at the heart of the case against Coles, and the more recent allegations against Woolworths, falls within the scope of the code. For example, under Treasury’s consultation draft, the major chains:</p>
<ul>
<li>couldn’t demand payments for wastage (where stock is lost or damaged), as Coles did</li>
<li>couldn’t retrospectively amend agreements with suppliers, as Coles did and Woolworths is alleged to have done</li>
<li>couldn’t de-list stock other than for “genuine commercial reasons” – something Coles confessed to doing, and Woolworths is accused of doing.</li>
</ul>
<p>The code also seeks to limit the ability of supermarkets to demand their suppliers contribute to the costs of promotion, which seems to be subject of the accusations against Woolworths.</p>
<p>Intriguingly, while Coles’ conduct pre-dates the code’s negotiation, the allegations against Woolworths clearly post-date it.</p>
<p>There were strong rumours towards the end of 2014 that the code would be prescribed under the Competition and Consumer Act. This would mean that a party that agreed to be bound by the (voluntary) code but then breached it would also breach the law. But the rumours came to naught and the code remains in limbo.</p>
<h2>So how is 2015 likely to play out?</h2>
<p>The ACCC is certainly not hanging around waiting. ACCC Chairman Rod Simms has repeatedly said <a href="http://www.theaustralian.com.au/business/opinion/accc-chief-rod-sims-declares-war-on-woolworths-and-coles/story-e6frg9io-1226395996914">supermarkets are a top priority</a> for the regulator. But the ACCC has been quite strategic in the way it has pursued potential claims.</p>
<p>The concerns that the average person on the street tends to have about the major supermarkets relate to their market power: we like $1 milk or 85c bread, but worry about what it means for farmers; private labels are okay, as long as we can still buy our favourite brand; and does the strength of the majors mean the independents are being muscled out?</p>
<p>These sorts of issues are typically addressed under the competition provisions of the Competition and Consumer Act – most often via the regulation of mergers, the misuse of market power prohibition and other provisions that restrict conduct that substantially lessens competition.</p>
<p>Despite the ACCC’s intense scrutiny of the major chains, no competition case has been brought against either in the last 15 years. Instead, the ACCC seems to be targeting “low-hanging fruit”, in the form of consumer protection and unconscionable conduct cases and breaches of undertakings.</p>
<p>The ACCC may have several reasons for adopting this approach, not least that competition cases are notoriously long, complicated, expensive and uncertain. Even hard-fought wins can turn out to be pyrrhic victories. </p>
<p>In the 1990s, Safeway (Woolworths) was accused of bullying conduct against bread suppliers and the ACCC successfully prosecuted it for misusing its market power and obtained substantial penalties. But the alleged victims received no compensation, and the case took more than nine years to resolve. The ACCC’s unconscionability action against Coles was clearly far more effective for the small suppliers involved.</p>
<p>But there are downsides to taking the competition provisions out of the mix. As noted by Justice Gordon, the penalties are significantly lower. The ability of the court to constrain future conduct via injunctions is also affected, because reframing bullying conduct from a misuse of market power to unconscionability means the court is not actually examining the cause of the competition problem.</p>
<p>That said, this strategy could well be the case of death by a thousand cuts. Coles in particular took several hits in 2014 and it looks like Woolworths could be in for some heat in 2015. If the code of conduct is prescribed, there could be even more trouble to come.</p><img src="https://counter.theconversation.com/content/36430/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexandra Merrett does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Coles and Woolworths spent much of 2014 defending their behaviour in court. The Australian Competition and Consumer Commission (ACCC) brought several actions against one or both of them throughout the…Alexandra Merrett, Competition Lawyer; Senior Fellow, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/360322015-01-12T06:22:15Z2015-01-12T06:22:15ZHard Evidence: is the UK heading towards mega-dairy farms?<figure><img src="https://images.theconversation.com/files/68501/original/image-20150108-23812-vfbg44.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Is Daisy doomed to a life indoors?</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-196815971/stock-photo-cow-in-farm.html?src=csl_recent_image-1">Tanathip Rattanatum</a></span></figcaption></figure><p>The dairy sector in the UK is going through a period of high uncertainty. Not only are suppliers having to cope with retail price wars and the fact that milk prices are being reduced by the <a href="http://www.farmersguardian.com/home/hot-topics/dairy-industry/why-are-uk-milk-prices-falling?/67400.article">increasing alignment</a> of domestic and world dairy prices, they are also facing the fact that milk quotas <a href="https://www.gov.uk/end-of-the-milk-quota-scheme">will be eliminated</a> in March, which promises to fully expose the sector to market forces. </p>
<p>So it is not surprising that recent discussions have focused on how the dairy sector in the UK should adapt. <a href="http://news.bbc.co.uk/panorama/hi/front_page/newsid_9294000/9294893.stm">Some view</a> the future as inevitably going towards mega-dairy farms, imitating those existing in the US, where thousands of cows are milked under huge sheds without seeing the sun, in something that is closer to an intensive factory than a farm. </p>
<p>Whether this comes to pass depends on whether these mega-dairy farms are the only solution to maintain the competitiveness of the sector and therefore its survival. In the UK there are just a handful of dairy farms with herds of over 1000 cows, whereas in the US they can be ten times that size. The prospect raises two questions: are farms whose practices resemble mega-dairies, including feeding cows in-house all year round, more profitable, and does this necessarily mean low animal welfare standards?</p>
<h2>Don’t chew cud, chew numbers</h2>
<p>First some context. The <a href="https://www.gov.uk/government/statistical-data-sets/agriculture-in-the-united-kingdom">average price</a> received by farmers in 2014 (up to October) was 32.17p/litre (though it can vary by over 10p/litre depending on the nature of a farmer’s supply contract). This is much about 6.7 times higher than the average milk price received in 1973, though in fact the price has fallen since then once you adjust for inflation. This doesn’t take into account the effect of the cost of production, however. If the cost of production has fallen faster than the wholesale price of milk, this might not be a problem. </p>
<p>Unfortunately historic production costs are not available. But we do have historic feedstuff costs going back to 1988 from the department of agriculture, which are the highest component of costs (more than double labour, which is second). So these can give us some idea of what has been happening. As can be seen from the chart that I have used these figures to plot below, this suggests that the true price of milk that farmers receive has fallen since 1995. </p>
<p><strong>The true farmers’ price of milk</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/68476/original/image-20150108-23816-1t2o26m.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/68476/original/image-20150108-23816-1t2o26m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/68476/original/image-20150108-23816-1t2o26m.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=275&fit=crop&dpr=1 600w, https://images.theconversation.com/files/68476/original/image-20150108-23816-1t2o26m.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=275&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/68476/original/image-20150108-23816-1t2o26m.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=275&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/68476/original/image-20150108-23816-1t2o26m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=346&fit=crop&dpr=1 754w, https://images.theconversation.com/files/68476/original/image-20150108-23816-1t2o26m.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=346&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/68476/original/image-20150108-23816-1t2o26m.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=346&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Cesar Revoredo/Defra</span></span>
</figcaption>
</figure>
<p>The decrease in milk prices reflects how competitive the sector has become, partly because retailers drive down prices and partly because of increasing competition from other food products. The chart below shows the decline in purchases of milk products, driven by a strong decline in the consumption of full-fat milk that has not been replaced by skimmed milks (note that cheese consumption has been rising but not very strongly). </p>
<p><strong>UK weekly dairy consumption per capita</strong> </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/68478/original/image-20150108-23810-16jgkco.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/68478/original/image-20150108-23810-16jgkco.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/68478/original/image-20150108-23810-16jgkco.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=242&fit=crop&dpr=1 600w, https://images.theconversation.com/files/68478/original/image-20150108-23810-16jgkco.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=242&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/68478/original/image-20150108-23810-16jgkco.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=242&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/68478/original/image-20150108-23810-16jgkco.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=304&fit=crop&dpr=1 754w, https://images.theconversation.com/files/68478/original/image-20150108-23810-16jgkco.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=304&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/68478/original/image-20150108-23810-16jgkco.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=304&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Family Food/Defra</span></span>
</figcaption>
</figure>
<p>This drop in demand for milk products has led to a structural adjustment in the sector, reducing both the number of dairy cows and dairy farms in the UK. Here’s the trend going back to the mid-1990s:</p>
<p><strong>Dairy farms and dairy cows</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/68479/original/image-20150108-23798-l1pnkh.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/68479/original/image-20150108-23798-l1pnkh.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/68479/original/image-20150108-23798-l1pnkh.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=280&fit=crop&dpr=1 600w, https://images.theconversation.com/files/68479/original/image-20150108-23798-l1pnkh.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=280&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/68479/original/image-20150108-23798-l1pnkh.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=280&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/68479/original/image-20150108-23798-l1pnkh.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=352&fit=crop&dpr=1 754w, https://images.theconversation.com/files/68479/original/image-20150108-23798-l1pnkh.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=352&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/68479/original/image-20150108-23798-l1pnkh.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=352&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">DairyCo/Defra</span></span>
</figcaption>
</figure>
<p>Notice that the number of cows has been falling more slowly than the number of farms. This implies that the number of cows per farm has been growing, which might suggest that we are heading towards mega-farms. It is also worth pointing out that there has not been a corresponding drop in the volume of milk being produced. This is because yields per cow have been growing steadily thanks to a combination of technological advances and more high-yielding cows. </p>
<p><strong>Milk production and yields</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/68480/original/image-20150108-23786-3b8sim.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/68480/original/image-20150108-23786-3b8sim.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/68480/original/image-20150108-23786-3b8sim.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=328&fit=crop&dpr=1 600w, https://images.theconversation.com/files/68480/original/image-20150108-23786-3b8sim.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=328&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/68480/original/image-20150108-23786-3b8sim.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=328&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/68480/original/image-20150108-23786-3b8sim.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=412&fit=crop&dpr=1 754w, https://images.theconversation.com/files/68480/original/image-20150108-23786-3b8sim.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=412&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/68480/original/image-20150108-23786-3b8sim.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=412&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Defra</span></span>
</figcaption>
</figure>
<p>A <a href="http://www.ncbi.nlm.nih.gov/pubmed/25306285">recent UK survey</a> by Scotland’s Rural College found that of the country’s 863 dairy farms, the traditional British dairy management style of all-summer grazing and winter-only indoor feeding was practised by less than a third of respondents, and on average, herd sizes were larger within systems that feed indoors. This would mean that the proportion of cows being milked in such farms will be rather higher. </p>
<p>This decline in grazing has happened in many countries. Reasons include difficulty in controlling feed rations for high-yielding animals, uncertainty of grass supply in some countries, practical difficulties such as walking distances and lying times, and the availability of a stable labour force. High-yielding cows <a href="http://www.ncbi.nlm.nih.gov/pubmed/25306285">can also demand</a> up to five times as much energy, which can be difficult to achieve by a grazing and silage-based diet. This can mean that some additional feeding is required.</p>
<h2>Moo-ney, moo-ney, moo-ney</h2>
<p>But if this is the trend, what about profitability? Interestingly well managed grazing-based farms do not seem to be less profitable than those that rely more on indoor feeding. Milkbench+, the dairy benchmarking agency, found it is possible to produce milk efficiently at almost any scale and at any level of outputs, as detailed in this figure: </p>
<p><strong>Profitability and herd size</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/68486/original/image-20150108-23792-vycb3.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/68486/original/image-20150108-23792-vycb3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/68486/original/image-20150108-23792-vycb3.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/68486/original/image-20150108-23792-vycb3.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/68486/original/image-20150108-23792-vycb3.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/68486/original/image-20150108-23792-vycb3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/68486/original/image-20150108-23792-vycb3.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/68486/original/image-20150108-23792-vycb3.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://www.ncbi.nlm.nih.gov/pubmed/25306285">Milkbench+</a></span>
</figcaption>
</figure>
<p>But while the above figures are based on profitability per litre of milk produced, a very important point is that most probably very small herds will not provide sufficient income for owners. This can make the size of the enterprise a key aspect, depending on the farmer’s objectives. </p>
<h2>The welfare question</h2>
<p>Grazing-based systems have on average fewer cows than farms with indoor-based feeding systems. And certainly, housing and management style can affect the welfare of dairy cows. It <a href="http://www.theguardian.com/uk-news/2014/oct/02/-sp-battle-soul-british-milk">has been reported</a> that the British public is opposed to indoor dairy systems – though many will not be aware that traditional British systems have cows spending winters indoors anyway. </p>
<p>The Farm Animal Welfare Council <a href="http://www.ncbi.nlm.nih.gov/pubmed/25306285">says that</a> housed dairy cows in the UK can have an acceptable standard of welfare as long as suitable housing is provided together with skilled animal husbandry and veterinary practice. Nevertheless, continually housed dairy cows can be <a href="http://www.ciwf.org.uk/farm-animals/cows/dairy-cows/welfare-issues/">susceptible to</a> a range of health issues in feet and legs and are at greater risk of health disorders such as mastitis and retained placenta. </p>
<p>There are techniques that may lower the incidence of some health issues, however. And dairy cows maintained in grazing systems may also be at risk of health issues such as lameness and milk fever and are also exposed to prevailing weather conditions.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/68512/original/image-20150108-23801-14xubwm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/68512/original/image-20150108-23801-14xubwm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/68512/original/image-20150108-23801-14xubwm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=841&fit=crop&dpr=1 600w, https://images.theconversation.com/files/68512/original/image-20150108-23801-14xubwm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=841&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/68512/original/image-20150108-23801-14xubwm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=841&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/68512/original/image-20150108-23801-14xubwm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1056&fit=crop&dpr=1 754w, https://images.theconversation.com/files/68512/original/image-20150108-23801-14xubwm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1056&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/68512/original/image-20150108-23801-14xubwm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1056&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Milky as charged?</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&searchterm=milk&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=96837358">Somchai Som</a></span>
</figcaption>
</figure>
<p>There are still a variety of dairy management systems in use but there does certainly seem to be a clear trend towards farming that feeds more time indoors. If larger farms don’t necessarily mean more profitability – or lower welfare standards, thanks to our UK legislation – it may well be that farmers are making up for lower margins by seeking to generate more income from their holdings. </p>
<p>A couple of positive closing thoughts: We always have the option of buying our dairy products from farmers that support higher welfare standards. And a shift towards larger indoor farms is unlikely to result in US-style mega-dairy farms – we simply don’t have the space.</p>
<p><em><a href="https://theconversation.com/uk/topics/hard-evidence">Hard Evidence</a> is a series of articles in which academics use research evidence to tackle the trickiest public policy questions.</em></p><img src="https://counter.theconversation.com/content/36032/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bethan's PhD is funded by the Scottish Government.</span></em></p><p class="fine-print"><em><span>Cesar Revoredo-Giha does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The dairy sector in the UK is going through a period of high uncertainty. Not only are suppliers having to cope with retail price wars and the fact that milk prices are being reduced by the increasing…Cesar Revoredo-Giha, Senior Economist and Team Leader of Food Marketing Research, Scotland's Rural CollegeBethan Thompson, PhD Student, The University of EdinburghLicensed as Creative Commons – attribution, no derivatives.