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Despite a 33% rise in the population over the last 20 years, fresh milk consumption has risen by just 8% or 45m litres.
Over the same time, the average retail price of a litre of (whole) milk has increased by only 4.5c/l. So why, given a growing market and no increase in supply, has the retail price of milk not increased?
What this shows is that milk is inelastic and people don’t drink more milk as the price goes down. So, given this simple rule of economics, why do retailers continue to promote milk at discounted prices which have now fallen to as low as 65c/l in some supermarkets?
Reasoning
It would be foolish to believe it is to sell more milk. The benefit of such a strategy would not add much to the bottom line of supermarkets given the margins associated with milk. Industry sources suggest it costs around 35-40c to bring a litre of milk ex-farm to the supermarket fridge. Given the farmer average price for liquid milk last year of 38c/l, total production costs are around 75c/l.
One of the big drivers of low prices has been supermarkets promoting own-label milk at the expense of branded competitors, particularly over the last 10 years.
It is estimated that more than six in every 10 litres of milk sold in Ireland is now own-label. Last year alone, own-label milk in 2l packs was retailed at an average discount of 27% on the processors’ brands.
The reason supermarkets continue to discount milk is (maybe surprisingly) not about milk but about footfall.
The low prices are used to drive footfall, allowing them to sell higher-margin products such as shampoo and chocolate. This increases the supermarket’s market share and boosts profits.
Market
The three largest retailers – Tesco, Supervalu and Dunnes Stores – hold over two-thirds of the grocery retail market. It can be assumed that they each hold a similar proportion of the fresh milk market, with some outperforming their overall market share in liquid milk.
The German discounters, Lidl and Aldi, hold a further 23% combined. This means five retailers control almost 90% of the market for fresh milk in Ireland.
With so few players, why is the price of milk not more controlled? The answer lies in the competition that these supermarkets are under from each other to maintain market share. This is especially true given the rise of Aldi and Lidl, who have taken 23% of the market or around €100m of fresh milk business from the others.
Some 80% of the market is processed by three processors – Glanbia (210m litres), Arrabawn (70m litres) and Aurivo (80m litres, all estimates).
The remaining 20% is by a further nine suppliers, where seven supply less than 20m litres each. These serve more local markets. Omagh-based Strathroy Dairies process in excess of 200m litres.
Given the concentration at processing level for a large share of the market, it would be right to think suppliers have some power over the large retailers.
However, the supermarket model of awarding short-term annual supply contracts along with the move to own-label has shifted the power to the retailers.
This has had the effect of creating competitor behaviour at processing level to capture or maintain market share.
Supply
There are more than 10 liquid milk plants on the island of Ireland. In the south alone there are eight. This means that there is an installed capacity much greater than the market.
The supermarkets use this against suppliers. After all, a milk plant with no customers becomes very expensive if there is no milk going through it.
This leads to a processor battle where farmers are actually fighting against themselves to keep plants alive.
Then there are the farmers. While there are 18,000 dairy farmers, as few as 1,800 of them produce milk on a liquid contract.
One other change over the last 20 years has been liquid milk imports. In most markets, the liquid milk that is sold is produced in the same country. Over this time in a relatively stable market, milk imports have risen from no imports to a situation today where one in four litres of milk is now imported. Some sources suggest this figure is even higher.
However, this figure doesn’t take into account that a large proportion of imported milk originates in the south.
The discounters have been the main outlets for liquid milk imports.
It’s worth remembering that only 6% of our national milk output is for the liquid market and that we export 90% of our milk production.
The liquid milk market has an estimated value of €517m. While the structure of the sector should help to control prices, it is being used to squeeze the last drop out.
Sustainability
Only three months ago during Storm Emma, shoppers experienced what it feels like to have no milk.
The continuing discounting by some retailers to drive down the price of milk for no gain on direct milk volumes is questionable in the long term.
It undermines the viability, sustainability and security of the fresh milk supply chain.
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