Woolworths Limited (ASX: WOW) has revealed plans to bypass milk processors – a move which has been supported by the National Farmer's Federation and defies recent perceptions that the supermarket giant is an exploiter of local dairy producers.
Recognising that consumers are not happy with how the company treats local farmers, Woolworth's new plan would mean higher returns for the producers, without the added costs involved with processing intermediaries.
Woolworth's rivalry with Coles, owned by Wesfamers Limited (ASX: WES), has caused major headaches for suppliers and manufacturers around the country, with both organisations selling goods at incredibly low prices (some products are being sold at below-cost levels to attract customers).
Since the beginning of 2011, both supermarkets have been selling milk for as little as $1 per litre – a level which Andrew Hall, Woolworth's director of corporate and public affairs, has admitted is unsustainable for the dairy industry.
The proposed deal however, would have Woolworths purchase the products directly from the farmers and then contract out the processing task. This initiative would give Woolies more control over its milk sources and how much farmers are paid.
These products would be branded as "Farmer's Own", which would be marketed as "exclusive to Woolworths" instead of as a Woolworths brand. The company hopes Farmer's Own will appeal to consumers who want to buy cheap milk yet still support local farmers.
Before the plan can go ahead however, authorisation must be secured from the Australian Competition and Consumer Commission (ACCC).
The ACCC is currently investigating Woolworths and Wesfarmers for anti-competitive behavior, with their low pricing schemes putting excessive pressure on smaller supermarket chains such as Costco, Aldi or Metcash's (ASX: MTS) IGA stores.
Whilst investors flock to the blue chip stocks in what is being deemed the "Blue Chip Bubble", Woolworths shares have gained 36% since this time last year. On Monday, Independent equity broker CLSA downgraded Woolworths to Sell from Underperform, believing that the company's share price was no longer attractive.
Foolish takeaway
Should Woolworth's plan succeed, consumers may purchase Farmer's Own products in a move to support our local farmers, which would give Woolworths an edge over its rivals in the dairy department. Investors and consumers alike however, could turn their back on the branding should the company start imposing extra conditions to the deal.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
