Have you wondered how you are able to relish a glass of warm milk on a chilly winter morning so cheaply? Have you wondered how a heavy bottle of milk hits your pocket lightly? I certainly do not think of anything more than how well my weekly groceries will be contained within my budget.
But, we all do watch the news and, as responsible consumers, must not shy away from how this happens. It all started when Coles launched the Down-Down campaign in 2011, offering a litre of milk at just a dollar. It was initially a short-term gimmick to lure customers and gradually increase market share (Patterson 2011). This has triggered a series of discounting schemes initiated by competitors like Woolies and Aldi not just on milk, but other staples too.
Williamson (2013) reports that such aggressive schemes have squeezed profits of suppliers, more so of dairy farmers who receive only 35 cents a litre, a mere 4 cent increase over the last twenty years.
So what is causing this plight? It is the supermarkets’ flawed pricing strategies.
Iacobucci (2013 p.107) refers to pricing as an activity of setting a price to a commodity that should be both lucrative and representative of value perceived by target consumers. It is an important component of the 4Ps marketing framework.
Business Queensland (2016) write that businesses may choose from a range of pricing strategies that suit their objectives and that results from market sentiment and demand for their product. They may be:
- Skimming pricing,
- Penetration pricing,
- Value-based pricing,
- Price discrimination, etc.
Penetration to Predation in no time
Marburger (2012 p.89) defines penetration pricing as a strategy where businesses set a very low price, perhaps even lower than their marginal cost of production. This is done in order to maximise market share and attract a broad customer base and loyalty.
This is exactly what Coles adopted and what followed. Initially, the launch of the Down Down campaign in 2011 signified the adoption of this strategy for all its groceries (not just milk), and it worked right away. In the third quarter following the adoption, Coles reported a five-percent growth in their sales, crossing seven billion dollars, much higher than their rival, Woolies.
Marburger (2012 p.91) adds that, although penetration pricing is a safe bet, a risk of losing price-sensitive buyers in the future persists when prices are brought back up. No wonder Coles announced in a few months that they would continue offering milk at a dollar a litre.
And Woolies’ response? A direct and cringeworthy, ‘Cheap Cheap’ campaign offering ‘Australia’s cheapest bread’ at 85 cents, among other goods (Ward 2014). This triggered the beginning of predatory tendencies in an industry dominated by the Big Two, Coles and Woolworths.
Predation and Its Diabolical Effects
Predatory pricing refers to an aggressive strategy employed by organizations whereby they undercut prices so much so that they forgo profits in the short-run in seeking to drive away competition and establish a monopoly (Giocoli 2014 p.45).
The colossal burden of reduced profit margins by predation is passed on to the suppliers who exercise meagre bargaining power.
For instance, many of their food suppliers have complained to the Australian Competition and Consumer Commission of power abuses by the retailers. While one supplier revealed how failure to deliver the stipulated quantity would result in the buyer heavily penalizing him, the other claimed that the retailers would constantly revise the terms of trade to their advantage.
Williamson (2013) adds that, of all the suppliers, dairy farmers are the worst hit. Submitting to the retailers’ pressure, a farmer notices that the industry is now able to milk 200 cows an hour, as against just four not so long ago. But the return on production has not grown proportionately.
Not just suppliers, such predatory pricing strategy is hurting the giants themselves. Burke (2016) estimates that the giants would have to drop their average margins from the current eight percent to a slim three percent, in order to keep employing their pricing strategy. This, though, has already cost Woolworths a billion dollars in losses and corporate restructuring.
Lastly, despite the price cuts, there are always other retailers who still manage to profitably outdo the big two, as reported in the video below.
Don’t we consumers benefit?
As analysed above, the retailers’ predatory instincts are highly unsustainable for both suppliers and themselves.
Although we enjoy confining our spending within our budget every week, Giocoli (2014 p.98) explains that we, too, will suffer in the long-run, as persistent predatory pricing eventually leads to unsustainable margins across the supply chain and reduced output offered to us consumers.
Whether one likes it or not, penetrative pricing strategy culminates in predatory tendencies, harming the supply chain. If this continues, we will not be able to enjoy our morning cup of warm milk any longer.
Yogesh K. Sewani
Burke, L 2016, The war no supermarket wants to have, News Australia, 5 April, retrieved 5 September 2016, <http://www.news.com.au/finance/business/retail/the-war-no-supermarket-wants-to-have/news-story/d82bf59300beb17ab27a6d3315da71d8 >.
Business Queensland 2016, Pricing Strategies, Queensland Government, retrieved 5 September 2016, <https://www.business.qld.gov.au/business/running/marketing/pricing-products-services/pricing-strategies >.
Chung, F 2011, Coles to launch new milk brand to help struggling dairy farmers, News Australia, 17 May, retrieved 4 September, <http://resources0.news.com.au/images/2011/09/05/1226129/359592-coles.jpg >.
Giocoli, N 2014, Predatory Pricing in Antitrust Law and Economics: A Historical Perspective, e-book, retrieved 5 September 2016, <http://deakin.eblib.com.au/patron/FullRecord.aspx?p=1596886>.
Iacobucci, D 2014, Marketing Management MM, 4th Edition, South-Western, Cenage Learning, Mason.
Knox, M 2015, Supermarket Monsters : The Price Of Coles And Woolworths’ Dominance, Black Inc. Books, DEAKIN UNIV LIBRARY’s Catalog., EBSCOhost, retrieved 5 September 2016.
Marburger, D 2012, Innovative Pricing Strategies To Increase Profits, Business Expert Press, DEAKIN UNIV LIBRARY’s Catalog., EBSCOhost, retrieved 4 September 2016.
Montgomery, R 2015, Roger Montgomery, retrieved 5 September 2016, <http://rogermontgomery.com/content/uploads/2015/04/cheap-cheap.png>.
Patterson, P 2011, Milking the Market: What’s Behind the Coles Woolworths Price War, Business Think, 29 March, retrieved 5 September 2016, <https://www.businessthink.unsw.edu.au/Pages/Milking-the-Market-Whats-Behind-the-Coles-Woolworths-Price-War.aspx >.
Ward, M 2014, Woolworths introduces animated birds as it promotes cut price bread, Mumbrella, 19 September, retrieved 5 September 2016, <https://mumbrella.com.au/woolworths-introduces-animated-birds-promotes-discounted-bread-252381 >.
Williamson, B 2013, The real costs of one dollar per litre milk, ABC Adelaide, 22 February, 5 September 2016, < http://www.abc.net.au/local/videos/2013/02/22/3696424.htm >.