Liquid milk is most commonly sold to the consumer by general grocery stores. In some countries regulations restrict this service to selected dairy shops. In others, particularly those where liquid milk is rationed, special milk sales centres are constructed.
In most countries the dairy industry does not invest in liquid milk retailing, except for promotion and demonstration centres and automatic vending machines. The grocers sell and sometimes distribute the milk delivered by the plant and are entitled for their services to a surcharge on the milk plant price known as the ‘retail margin’. In countries where the milk plant also delivers milk directly to consumers, the retail margin is absorbed by the plant.
In many countries milk distributors are licensed but only in some are refrigeration facilities required as a condition for obtaining such a licence. In most cases even pasteurized milk is sold by retailers not equipped with cold storage, and so sales hours have to be limited.
There is no common system for establishing retail margins and they vary considerably between countries and even between localities within the same country. Two similar distribution systems may work at different costs as a result of conditions directly related to the system itself; for instance higher costs (and margins) may be the result of too many links and too many small enterprises each with little trade. Distribution techniques may differ considerably as a consequence of variations between costs of labour and capital costs of equipment. High wages may be the cause of high margins, both in relation to other countries and to the producer price in the country in question. The existence of a strong and well supported organization of producers seems to have the effect of keeping retail margins at low level. It appears that distribution of milk, even with the same amount of services rendered, is cheaper in controlled and well organized markets than in those left to their own devices. Given a sufficient degree of flexibility, State intervention through market regulations often seems to have stimulated sound developments. In uncontrolled markets the retailers tend to increase margins and capture a high proportion of the price demanded from the consumer, particularly where and when milk is in short supply. However, governmental control also has its weaknesses particularly since it may tend to maintain outdated regulations. Any market guidance in countries with a well developed dairy industry should be kept simple and should be lifted as soon as the organization of the controlled aspect of marketing has been perfected.
The difficulty in determining precisely all the functions of a retail system and its financial implications is increased by the fact that generally not all known types of liquid milk (pasteurized, sterilized, UHT, packaged or in bulk) are required in a country or a locality. Comparisons of prices and margins are not feasible except over a long period of time. During the last twenty years the consumer price of liquid milk has risen in the majority of industrialized European countries three to four-fold. During this period new packaging systems have become popular and, for practical purposes, it is not feasible to distinguish which part of the price increase is due to inflation and which to the change of technologies. In many countries a system of taxes, levies and subsidies have also developed over the last two decades. They must be considered when the relationships between different cost components are analysed in practice.
The general observations resulting from available data on existing retail systems, and which reflect the situation in developing as well as in developed countries, may be listed as follows:
Simple as well as sophisticated forms of liquid milk are being distributed in both developed and developing countries. The applied retail margins vary from country to country, both in absolute monetary values and as a proportion of the retail price.
In countries with an advanced dairy industry there is a trend to control margins and to keep them at a relatively stable level. This is achieved either by fixing the value of the margin independently of the retail price, or by fixing it as a constant percentage of the retail price.
In countries with no market control the retail margins often tend to increase in proportion to processing costs. Such practices lead to high retail prices and a low share of the overall revenue for the producer.
The consumer price can be considered as consisting of three basic components, i.e. milk procurement (producer price plus transport to the plant), processing (costs attributable to liquid milk processing including packaging plus transport to retailer) and the retail margin. The relationship between these components and their impact on the retail price are shown in Fig. 48. As shown, the milk procurement price does not change with processing costs. The latter reach the practical minimum at a value equal to X1. Below X1 only unpasteurized milk can be sold.
When processing and packaging become more sophisticated the value of X (processing costs) increases beyond X1 and this is reflected in a corresponding increase of the consumer price. The three variants of the retail margin are represented respectively by curves a, b and c. Curve ‘a’ represents consumer price for pasteurized milk with the retail margin fixed at a constant value; curve ‘b’ represents consumer price with the retail margin fixed at a constant percentage of the wholesale price; curve ‘c’ shows the retail margin as a constant percentage of processing costs.
At the retail price equal to y1 the proportions selected as an example in the diagram are:
procurement costs: 2/3 of the retail price
processing costs: 1/6 of the retail price
retail margin: 1/6 of the retail price.
These proportions may be considered as reflecting an approximation of the order of magnitude met for pasteurized milk in cans in countries with advanced dairy industries and well organized markets. In such markets the retail margin for liquid milks of a more sophisticated type is fixed either according to the indications of curves a or b, but never of curve c. In some countries milk plants distribute the product by employing part-time concessionnaires whose commission is generally much lower than margins indicated above.
With increase of processing costs the product becomes more expensive to the consumer. This increase in price is accelerated with the application of retail margins according to curve c, and is slower according to curve a. As shown in Fig. 48, the increase of processing costs from X1 to X3 (which is three-fold) causes a corresponding increase of retail prces, viz.:
1.34-fold for a fixed value margin (Y2/Y1)
1.41-fold for a fixed percentage margin (Y3/Y1)
1.68-fold for margin rate depending on processing costs (Y4/Y1)
Fig. 48 Consumer prices construction
a - retail margin as constant value added to other costs
b - retail margin as constant percentage of all costs
c - retail margin as constant percentage of processing costs
With a low level of processing costs the consumer price is kept low and the producer's share of the retail price is high. This is demonstrated in Fig. 48 at the cost/price levels marked X1 and Y1. Raising processing costs and allowing an increase in retail margins causes a very substantial reduction of the producer's share in the consumer's price, in spite of the fact that the consumer pays much more for the product.
Moderate levels of fixed values for retail margins, irrespective of processing costs, i.e. of the type of milk sold, seem to be the most common in organized milk markets. This practice has been assumed for comparisons in the following chapters of this study and the value for the retail margin has been set at US$32/1 000 litres for all types of milk.
A system of retailing pasteurized milk through automatic vending machines has been introduced successfully in two countries, Mexico and India. This system does not involve retail packaging by the milk plant as the consumer provides his own container and so eliminates one of the substantial items of cost in providing the consumer with safe milk. Other important characteristics tending to reduce cost are that the milk plant sells direct to the consumer and that the milk is handled in bulk up to the point of retail sale.
The system has been described previously* and the main features can be summarized as follows. As applied in India, refrigerated pasteurized milk is delivered by tanker to the vending station which is a simple building as shown, for example, in
Fig. 49 Typical automatic milk vending station
Fig. 50 Automatic milk vending - diagram of equipment
A - customer's vessel
B - push-button panel
C - milk tank
D - CIP vessel
E - room refrigeration unit
F - filling and CIP pump
G - measuring beaker with flow switch control
H - solenoid valve
Fig. 49. This consists of a refrigerated room housing a milk storage tank of the requisite capacity at high level and a small service room for the CIP equipment and such office or storage facilities as may be required. The milk is pumped from the tanker to the storage tank from which it is discharged as required through the coin- or token-operated dispensers as shown in Fig. 50. The estimated costs given below are based on the system operated in New Delhi by the National Dairy Development Board.
In order to arrive at conservative estimates short depreciation times have been assumed giving an annual depreciation of 8% for the building, and 15% for the equipment. Out of the estimated cost of US$ 11 000 for one vending station with a 1 000-litre tank and two dispensers, about 1/3 is for civil engineering works and 2/3 is for equipment. The approximate costs related to capital inputs will thus be per annum:
| US$ | ||
|---|---|---|
| - | depreciation on building | 300 |
| - | depreciation on machines | 1 100 |
| - | interest on initial capital | 1 100 |
| 2 500 |
The approximate annual operational costs (excluding commission to the concessionnaire) are estimated as follows:
| US $ | ||
|---|---|---|
| - | electricity consumption and telephone rental | 600 |
| - | detergents and materials for sanitation | 400 |
| - | maintenance and spare parts, excluding own labour | 600 |
| - | maintenance staff | 200 |
| - | insurance and sundry charges | 100 |
| Total per annum | 1900 |
The two cost components as estimated above thus amount to a total of US$ 4 400 annually. Assuming that any centre is selling on average 80% of its capacity throughout the year, the specific costs of milk retailing in vending machines (excluding commission) will be about US$ 0.015/litre. The commission charge is difficult to estimate: in India it is related to the quantity of milk sold and amounts to 1% of the value of milk. Compared with figures discussed in the first part of this chapter this must be considered as rather low. It seems appropriate for a more realistic comparison that the commission be considered as equivalent to a daily labour cost of 16 hours. With a salary of US$ 0.70/hour (as before) the approximate daily commission amounts to US$ 11.20 or US$ 0.014/litre. The total retail costs by applying automatic milk vending machines thus amount to approximately US$ 29 per 1 000 litres. This figure is clearly generous and will fall by more than US$ 5 with full utilization of the capacity.
