Milk market tough for butcher
The Mad Butcher says its milk price special of $1 a litre is going well, although the chain is losing money on the deal.
On Monday the retail meat chain began discounting the milk, undercutting supermarkets which sell milk for about $2.45 a litre minimum.
"We're doing it as a loss leader. Some Pak'nSaves and Countdowns have matched us in prices but only in stores that are near us," Mad Butcher chief executive Michael Morton said.
There are Mad Butcher stores around the country including in Christchurch.
The offer is valid only until this Sunday and is for purchases of Cow & Gate 2 litre milk only. Customers are limited to two 2 litre bottles per family per day.
The company sources its milk from Goodman Fielder. Fonterra supplies virtually all the fresh milk in New Zealand, including to Goodman Fielder.
Foodstuffs public relations director Antoinette Shallue confirmed some individual stores had reacted to competitive milk pricing in their local market, but the supermarket group had not taken a national position.
"There will always be products where we compete really aggressively and bread and milk are examples of this. We know that at $1 per litre we would be losing money as it is well below our wholesale cost," Shallue said.
The milk price-cut follows Countdown's decision in mid-July to drop the price of its Homebrand bread range to $1 a loaf for a year.
Coriolis Research managing director Tim Morris said he did not think the supermarkets would follow the Mad Butcher's example. It made good sense for the Mad Butcher because specialist retailers had to "constantly bring attention to themselves".
Morris said supermarkets made good money on milk because they sold a lot of it.
"A fast nickel is better than a slow dime, in American parlance," Morris said.
Morton said every retailer who bought milk had been "hounding" the suppliers to drop the price of milk. "There's a lag between the time global dairy prices fall and the price of milk drops.
"It's like petrol, it always goes up when the price of oil goes up, but it's a bit slower to come down," Morton said.
He said the Mad Butcher adopted a similar loss-leading strategy with meat. There were some items "we definitely lose money on".
The price cut would not matter to farmers as they would receive the same price for their milk, he said.
Federated Farmers dairy chairman Andrew Hoggard agreed farmers would have "no problem".
"Farmers don't have a problem with loss leaders as long as they get paid. For the stores it's just about getting people in through the door.
"Anything which encourages people to drink nutritious milk has got to be good," Hoggard said.
New Zealand, with its system of vertical integration, was in a different situation to Australia, where supermarkets have been jousting for the past three years with offers of $1 a litre for milk.
Hoggard said it was a buyer's market in Australia. As a result of poor returns to farmers, the Queensland dairy industry had been devastated and some dairy co-operatives were resorting to flying fresh milk to China for better prices.
New South Wales co-operative Norco airfreights 16,000 litres of milk a week to Shanghai, where it fetches $8-9 a litre. Freight costs are a $1 per litre and tariffs and GST are then applied.
Meanwhile, the Mad Butcher chain is expanding, with three stores opened last financial year and another to open in Nelson in October. This will bring the total to 39 stores nationwide.