Are these price reductions really good for all of us?

In 2012 there was an outcry, which is still echoing, about the decision by the two big retailers in Australia to dramatically reduce the price of their home milk brand to just a $1 per litre.

This was effectively the first salvo in the price reduction war that has now had Coles permanently reducing 100 products in it’s supermarkets and now having the same price reduction for Milk in it’s convenience store outlets.

For customers this can amount to significant savings each week and has driven prices of items at other supermarkets down as well, making the budget just a little less stretched for most homes. So it is a win, right?

The problem is that the lower prices are either meaning that suppliers are now going to be paid less so that the supermarkets can keep their normal margins, or the supermarkets are absorbing the loss in order to drive traffic into their stores.

If suppliers are being paid less and costs like grain and feed are going up (as they have over the last year due to a rise from the US), how are businesses like the milk farmers to continue to grow or even survive?

The outcry that has been heard about the price drops has been coming not only from farmers and their associations but also from consumer groups. One of the questions being asked by all of these critics is “if the farmers go, where is the product going to come from?” The answer is obviously overseas.

Australians are inherently bias toward purchasing Australian products, so this price reduction could be a long term gamble on the part of the retailers. There is also a strong feeling in the community that they do not want to have cheaper prices if it means that farmers and others suffer as a result.

Therefore is the reduction of prices actually a good thing for all of us?

With this new price drop on the 100 products by Coles, the Merchandise Director, John Durkan, is certain that it will be good for suppliers as people rush to buy the lower priced items. This will cause increased demand and therefore sales for the suppliers. The basic principle seems to be that there may be a lower price being paid to the suppliers but because of the increased demand the suppliers will still be fine.

There is an Australian saying “that the proof of the pudding is in the eating”. This means that we simply have to wait to find out whether the prediction of increased sales is actually going to have the beneficial effect that is being predicted or if the farmers and their associations are right.