Coles’ $105m milk deal shows supermarket supply chain power

Coles’ recent $105 million deal with Saputo highlights the growing power of major supermarkets in consolidating supply chains at the expense of middleman processors. The deal involves the acquisition of processing plants that were part of Murray Goulburn’s failed attempt to enter the market for drinking milk. 

Saputo wanted to sell these assets as part of its ongoing rationalization strategy after purchasing Murray Goulburn in 2019. Coles and Woolworths have been taking control of their supply chains, particularly in markets like milk, where the farm base is widely dispersed.

The rise of house-brand milk from the Coles push into $1-a-litre milk in 2011 has put financial pressure on processors like Murray Goulburn, Bega, and Lactalis, as house-brand milk replaced branded milk. 

Bega, the second biggest milk processor, has diversified into non-dairy products like vegemite and peanut butter, but its market value has fallen from a share price of $5.24 a year ago to $3.75. Dairy farmers are doing okay, but their numbers are dwindling due to a variety of factors, including demographics, Covid-19 labor shortages, floods, and higher feed costs.

While milk is still a drawcard for supermarkets, the story is different when looking at the Dairy Australia figures. Retail milk sales of 1.4 billion litres retail at $2.7bn against 164,000 tonnes of cheese at $2.6bn. 

Saputo’s retreat from the market milk in Australia is no surprise, given its global leadership in cheese, particularly mozzarella for pizza. Global prices for milk are falling due to increased production volumes in Europe and China, which means prices are down. At the moment, it makes sense for retailers to take control of their supply chains, and dairy farmers see them as a better choice, offering long-term contracts on competitive terms. 

However, farmers are also aware of their position in the value chain and that they might not always have a seat at the table when the wheel turns.

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