Supermarket direct supply - what it means for the white milk category

Supermarket direct supply - what it means for the white milk category

Agribusiness
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Coles is extending its direct milk contracts into SA and WA and Queensland could follow.

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Last week, Coles announced that it would extend its direct milk contracts into SA and WA. Coles has already rolled out a direct milk supply model with dairy farmers in Victoria, southern and central NSW. Under the direct supply model, the retailer deals directly with farmers on negotiating the farmgate price and milk toll processed for the supermarket.

Direct supply is not new in the Australian market. Woolworths has had a successful direct supply agreement with farmers under its Farmers Own brand for several years. While Woolworths promotes its direct farmers via the label for the Farmers Own brand, it has been circumspect about drawing attention to the relationship between the Farmers Own brand and the supermarket. Woolworths has generally paid Farmers Own farmers very well and is currently paying farmers over 75c/L.

The current supply contract is between Coles and Norco in south east Queensland and northern NSW and between Coles and the Lion in Far North Queensland. I think it can only be a matter of time before Coles moves to a direct supply agreement here.

The important questions that this announcement raises are - what price is Coles prepared to negotiate with its direct supply farmers and what impact will it have on the landscape of the white milk fridge in the supermarket?

Certainly, based on Woolworths' average price to its farmers, the Coles direct supply arrangement could mean a good deal for farmers in Queensland and northern NSW, so long as a highly competitive farmgate price is maintained over the long term and is not just a honeymoon 12-month contract rate.

It will be interesting to monitor how Coles communicates its new direct relationships, as well as how consumers respond at the checkout.

Reading between the lines of its media statement last week, I would hazard that Coles intends to make much of its direct relationships in upcoming campaigns. Overwhelmingly, QDO's market research has indicated that, for consumers, those brands who can demonstrate that they are paying their farmers fairly hold the highest card in the white milk category.

We wait with bated breath.

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