Dairy Farming Group Disappointed by ACCC Milk Decision

ACCC enquiries have revealed evidence that Coles’ purpose in reducing the price of its house brand milk was to increase its market share by taking sales from its supermarket competitors including Woolworths.

Jul 25 2011 --- The Australian Competition and Consumer Commission announced that it considers there is no evidence that Coles has acted in breach of the Competition and Consumer Act 2010 (CCA).

“The major impact of the reduction in milk prices since January seems to have been a reduction in the supermarkets’ profit margins on house brand milk. These price reductions have benefited consumers who purchase house brand milk”, ACCC Chairman Graeme Samuel said.

The ACCC has been conducting industry wide enquiries with dairy market participants including industry associations, milk processors, supermarkets and independent retailers to assess whether Coles is or has been in breach of the two predatory pricing provisions of the CCA.

Section 46(1) prohibits businesses that have substantial market power from taking advantage of that power for the purpose of (a) eliminating or substantially damaging a competitor, (b) preventing the entry of a person into a market and/or (c) deterring or preventing a person from engaging in competitive conduct in a market.

And section 46(1AA) prohibits businesses with a substantial share of a market, from selling goods or services for a sustained period at a price below the relevant cost of supply.  As with s46(1), to breach this provision there must be evidence that a business acted with an anti-competitive purpose.

“It is important to note that anti-competitive purpose is the key factor here. Price cutting, or underselling competitors, does not necessarily constitute predatory pricing. Businesses often legitimately reduce their prices, and this is good for consumers and for competition in markets”, Mr Samuel said.

ACCC enquiries have revealed evidence that Coles’ purpose in reducing the price of its house brand milk was to increase its market share by taking sales from its supermarket competitors including Woolworths.  This is consistent with what the ACCC would expect to find in a competitive market.

After Coles price reductions, Woolworths and other supermarket retailers have also reduced prices for house brand milk.

The ACCC’s enquiries show that there is a significant variation between respective costs of supply and operating margins among supermarket operators. 

“As to the relationship between dairy farmers and milk processors, it is the case that some processors pay some farmers a lower farm gate price for milk sold as supermarket house brand milk.  However on the evidence we’ve gathered over the last 6 months it seems most milk processors pay the same farm gate price to dairy farmers irrespective of whether it is intended to be sold as branded or house brand milk.”

“On that front, the ACCC has recently issued a draft decision proposing to allow dairy farmers associated with Australian Dairy Farmers Ltd to continue to collectively bargain with milk processors for a further 10 years. This strengthens the position for farmers when negotiating with processors over milk prices”, Mr Samuel said.

The ACCC will continue to monitor conduct within the dairy industry and grocery sector for signs of anti-competitive behaviour.

The ACCC does not usually comment on individual matters that it may or may not be investigating. However, given the substantial publicity generated by this issue, the ACCC considers it appropriate to provide these general comments on its findings.