Coles strikes giant milk supply deal

Posted by AFN Staff Writers on 10th April 2013

Major Australian supermarket Coles has entered long-term supply partnerships with two Australian dairy co-operatives, Murray Goulburn Co-operative Co. Limited (Murray Goulburn) and Norco.

Coles has signed a ten-year contract with Murray Goulburn, which is Australia’s largest dairy co-operative. The contract will see Coles private label milk supplied by Murray Goulburn’s Devondale brand in Victoria and New South Wales (NSW) from July 2014.

Devondale processes approximately one third of Australia’s milk production and represents 2,500 member farms. The deal with Coles marks Devondale’s entrance to the daily milk market, where previously the brand has produced mainly Ultra High Temperature (UHT) milk, butter spreads and cheeses.

Separately, Murray Goulburn will also relaunch Devondale-branded daily pasteurized milk, through an initially-exclusive agreement with Coles. Coles has also agreed to restock Devondale cheese from June 2013.

Coles also signed a five-year deal with Norco, which has 161 supplying farms. The deal will see the co-operative supply Coles Brand milk in NSW, South-east Queensland and Victoria.

Dealing directly with Coles is a big shift for Norco, which purchased its milk sales, marketing and distribution operations back from New Zealand-based dairy giant Fonterra in November 2012. Prior to the buy-back from Fonterra, Norco was restricted contractually from dealing directly with retailers.

Good deal for consumers

Coles said that co-operative arrangements were a win for consumers because the length of the contracts means the supermarket would be able to sustain affordable milk prices. “Our customers want fresh Australian milk for their families and they want to know that the price will remain affordable in the future,” said John Durkan, Coles Merchandise Director.

“Our job is to provide a quality product at a competitive price and at the same time ensure that the dairy industry supplying Coles in strong, innovative and customer-focused. These new contracts with Australian farmer-owned businesses deliver on all these fronts,” Mr Durkan said.

Benefits for farmers

Coles said the deals were good for farmers too, because they offer dairy farmers greater price transparency.

The milk price paid by the supermarket under this agreement will lock in a premium that will deliver additional profits to dairy farmers over the life of the contract. The premium is not affected by price fluctuations in international dairy markets or movements in the Australian currency, and the contract contains rise and fall provisions to protect the premium farmers receive.

“This contract not only benefits our dairy farmers but also means consumers can now have greater confidence that there is a direct link from the farm to the supermarket shelf,” said Brett Kelly, Norco CEO.

Murray Goulburn said because it is a co-operative, Devondale farmer-shareholders will see 100 per cent of the profits from the Coles agreement through higher farm-gate returns.

“The daily pasteurised milk segment is currently mainly supplied by foreign-owned companies that repatriate their profits to overseas shareholders,” said Gary Helou, Devondale Managing Director. “The entry of Australia’s farmer-owned co-operative into this market segment cuts out the middle man and delivers profits directly to farmers,” he said.

“This is a logical growth opportunity that extends Devondale’s domestic presence in consumer markets and is expected to lock in returns that will be paid to farmers through higher farm-gate prices. These higher prices will benefit all dairy farmers,” Mr Helou added.

The new long-term contracts between Coles and the dairy co-operatives come not long after its rival Woolworths announced it would buy milk direct from farmers in Western Australia.

Australian Food News reported that the move by Woolworths had been met by criticism from dairy industry players.

Future investments

Murray Goulburn has seen an increased period of change, since Gary Helou took over as Managing Director in October 2011. The ‘revamp’ of the Devondale brand is part of a larger strategy, which Mr Helou said in the Company’s 2011-2012 Annual Report involved “simplifying our organisational structure, upgrading people’s skills, significantly lowering our costs, removing idle assets and balancing our business portfolio.”

The new deal with Coles shows that the domestic market, which made up 51 per cent of Murray Goulburn’s $2.4 billion 2011-2012 sales revenue, has not been forgotten in the Company’s strategy.

As part of the push to grow the Devondale brand, Murray Goulburn said that Devondale will invest in new processing plants, and take on new farmer-shareholders to actively grow its milk supply to meet the demands of the new contract.

Devondale will invest approximately $120 million in the construction of two state-of-the-art milk-processing plants in Melbourne and Sydney.  Murray Goulburn said it would be the “most significant investment in dairy processing technology since the dairy industry was deregulated in 2000.”

The Company said the new plants will incorporate the world’s latest processing technology to deliver the highest possible quality standards, while also assisting to position Devondale as Australia’s most efficient producer of daily pasteurised milk.

Earlier this week, Australian Food News reported that Murray Goulburn also planned to increase its Ultra High Temperature (UHT) milk production through an expansion of its processing site at Leongatha in Victoria. Murray Goulburn said the UHT processing expansion would help it meet export market demands for Australian milk.

Coles has signed milk deals with Aussie dairy co-ops