Last week, Coles announced that it would extend its direct milk contracts into SA and WA. Coles already has 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 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 well and is currently paying over 75c/L.
The current supply contract is between Coles and Norco in south east Queensland and northern NSW and between Coles and Lion in Far North Qld. I think it can only be a matter of time before Coles moves to a direct supply agreement here.
The important questions 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?
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 long term.
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.