Wednesday, October 5, 2011

know your arsehole!

There are some blogs in Cairns that we prefer not to link to, and among those is that of the Cairns KAP candidate who recently ranted on the infamy of Coles milk discounting. Funnily, the initial post refered to Coles CEO, Ian McLeod, as an *arsehole*, which since seems to have been removed? This is the current post: 
What a disgrace. The head of Coles after his company has an increase of 21% in profits during the much hyped GFC, he actually gets paid over $15million. Now I don't begrudge anyone earning a quid, but this bloke is responsible for his company offering FNQ farmers $0.45/litre for their milk. That price is not sustainable.

His company is currently selling the milk they get from their southern suppliers in the no name brands for $1/Litre. This is designed to cripple the industry and reduce the demand for the branded milk which uses FNQ produced milk. If there is no demand for it, which is what happens if everyone keeps buying no-name milk, they will be forced into taking the unsustainable $0.45/litre or walk off their farms.
So going back to the original point his company had an INCREASE of 21% in PROFITS, during the GFC and on top of the fact that they pay this bloke $15million.

Dick Smith is calling for this bloke to give back to the community. Stuff that, just pay the farmers a decent price Coles/Woolies.
For those of us who prefer a more cerebral approach there have been several posts at Core Economics by Stephen King from Monash University. King has previously held a senior position at the ACCC.

Milkonomics, Milk headlines, Milk pricing and exports, and International milk price controversy!

Among the public bar myths in the KKK rant, there is no direct supply arrangement between Coles and the dairy farmers. Coles arrangement is with the dairy processor. The processor then has an arrangement with the farmers who have ACCC exemptions to negotiate collectively.  As analysed by King in those links, it is the processor who is the likely loser from discounted milk, not the farmer. Although that farmer may be in Vistoria, not Queensland.

As I understand the recent agreement by the processor with Tableland farmers has been struck at $0.51c/litre? Curiously, last week in the UK there was a new agreement between Tesco and dairy farmers under a sustainability agreement. In currency adjusted terms this offers the Tesco milk suppliers a price broadly comparable with the suppliers of Australian drinking milk (ex the Victorian exporters who reap a lower average farmgate price), and below what is now received by Tableland dairy farmers. The agreement was welcomed by UK farmers!

Despite that Tesco are now selling retail at a price below AUD$1/litre which our local farmers are screaming is unsustainable! You can find good historical pricing data at Dairy Australia. There is a chart there (which I have not been able to copy) showing that dairy farmgate prices have nothing to do with deregulation more than a decade ago, and nothing to do with Coles or Woolies either! As StephenKing says, they relate to marginal export prices. 45% of Australian dairy produce is exported, mostly from Victoria, which itself comprises a whopping two thirds of the entire Australian dairy industry. 

The KAP has drawn attention to McLeod's bonus pay as a populist distraction. Coles did indeed increase profit 21% last year but how is that relevant to the GFC, or relative returns, or anything else? Coles has been a massively underperforming business for two decades which allowed the Woolworths juggernaut to explode growth in sales and margins. Coles, under McLeod, has finally managed to turn that around and all consumers in Cairns are the winners from the renewed competion.

Despite the turnaround, Coles still trails Woolworths on most performance metrics, sales per sq metre etc. Woolworths profit margins on sales remain up at 7%, with sluggish sales growth, while Coles is around 4% and sales growing. How is this bad for consumers? The size of the bonus payment can be debated but there is no doubt that if there is a CEO who deserves at least a bonus it is McLeod! Frankly, it's refreshing that at least at Wesfarmers he can earn double his boss for the year!

The KAP also claims that Coles has the purpose of deliberately trying to destroy branded milk supplied by the Tableland farmers. The ACCC have already released a detailed finding rejecting predatory pricing. Lets go back to a comment by Stephen King:

What we are really seeing is another step in cheap home-brand milk driving out the branded milk. This happens in industries where there is little product differentiation so that ‘brands’ are more about perception than real added-value.
Yes, exactly, if you are trying to flog a product on the basis of a brand, or locality, with no actual differention in the product then you have a sustainability problem with your business model! Mungalli Farm now comprise 10% of Tableland dairy production and have difficulty sustaining supply. This is despite prices more than double the home brand of the retailers ..... and those same retailers still stock the Mungalli product! Mungalli product is clearly differentiated and at an entirely different quality dimension!

Finally, I couldn't help but be bemused by the KAP adulation of Dick Smith. I was thinking of this while wandering around Woolworths (picking up any competitive specials) and recollecting a time when Dick engaged in a crusade on Aussie owned food with his own brand. Dick Smith bland cheese slices emblazoned with an Aussie flag! Now I wonder what happened to that brand? Ah, nationalism (regionalism?) the last refuge of the scoundrel ......


As far as I am aware the State electorate of Cairns has no dairy farmers and many low income milk consumers? So, who is the *arsehole* ..... at least in a metaphorical sense?

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