Develop two question and suggested the answer
Pricing Strategies 4
Q1) How does lowering prices of milk affect income of dairy farmers in Australia?
Stiff competition in the Australian milk market paved way for competitive pricing strategies. According to a report by price water house coopers, more than seventy-two per cent of the milk sold at Coles was at one dollar per litre. Woolworths gained ten million litres in extra sales of their branded milk after implementing the reduced pricing strategy. This reduction in price boosted the volume of the sales for both supermarket chains (Palda, 1971)
As the amount of milk in the market increased by 100- hundred million litres, Coles experienced an eleven per cent increase in the volume of milk sold. Woolworths on another hand increased the volume of milk sold by 3.7 per cent. Despite the rise in the capacity of sales the value of sales decreased by two per cent for each company. Coles private label share of the milk market peaked at just above fifty-six per cent in 2011 and then fell back to 50.7 per cent in the 3 months leading to February 2013. This level is where it was before the price wars began in 2011(Morris & Morris, 1990). The private label share of Woolworth remained at the same level during this period of price war.
This reduction in prices adversely affected the dairy farmers, with many farmers having to cease operations due to the low-profit margins. Farmers received only 5 per cent of what the consumer is charged on some cases. The pricing strategy adopted by the supermarkets is unstable over the long term. Majority of the farmers will look for alternative ways of earning a living (Schindler, 2012). The production of milk will drastically decrease and the demand will increase. This will cause a rise in the price of milk before reducing again when the production stabilizes. Lowering prices does not necessarily increase the value of sales. This decrease is clear from the drop of value in sales of milk by the two chains during this period of price wars. The income of the dairy farmers reduces when price of milk lowers since the grocery chains buy the milk from them at low prices.
Q2 What strategies do milk suppliers in Australia use to counter competition?
Competition by firms offering similar products may trigger actions such as lowering price by the competing firms. The move aims to lure customers into buying the reduced products. Smaller businesses may be forced out of business since they cannot lower their profit margin. The move may achieve its primary purpose but will have consequences. The amount of sales will increase, but the value of the sales may decrease drastically (Zhang, 2005).
Coles and Woolworths are the two largest supermarket chains in Australia. At the beginning of 2011, Cole’s supermarket lowered the price of its label brand to one dollar per litre. Woolworths followed suit by reducing the price of its private brand to match that of Coles. Both companies claim a huge market share. The move by Coles initiated a similar move by Woolworths (Schindler, 2012).
The milk suppliers reduced their profit margin to between two and three per cent. Reports indicate that an individual in Australia consumes an average of one hundred and two litres of milk annually. This is a very viable market for producers and suppliers. The supermarket chains are in a move to collaborate directly with farmer owned groups. This move will eliminate secondary suppliers of milk in the chain of milk distribution and increase the profit margins for the supermarkets (Schindler, 2012).
Grocery chains lower prices of selected goods to entice customers to their store. The chains hope that the customers will end up spending on other products that will boost the sales of the company. Obtaining milk directly from producers and lowering prices are the two major approaches used by the Australian grocery chains to face stiff competition.
Morris, M. H., & Morris, G. (1990). Market-oriented pricing: strategies for management. New York: Quorum Books.
Palda, K. S. (1971). Pricing decisions and marketing policy. Englewood Cliffs, N.J.: Prentice-Hall.
Schindler, R. (2012). Pricing strategies: a marketing approach. Thousand Oaks, Calif.: Sage Publications, Inc.
Zhang, Z. J. (2005). Pricing strategies. Boston: McGraw-Hill Custom Publishing.