Coles has copped a backlash after the competition watchdog alleged the supermarket giant had short-changed drought-stricken dairy farmers by millions of dollars.

On Thursday, the Australian Competition and Consumer Commission (ACCC) revealed that Coles would pay $5.25 million to New South Wales dairy co-operative Norco, after allegedly failing to pass on the full 10 cent per litre milk price hike it claimed would go to farmers.

The ACCC investigated claims that Coles reduced its payments to Norco under the retail price increase, implemented to support drought-hit farmers, to just 3.5 cents per litre in April after Norco raised its prices by 6.5 cents per litre.

Coles has agreed to pay Norco farmers $5.25 million within seven days. Photo: ACCC

This was despite Coles’ ads claiming it would “pass the extra 10c per litre to processors who will distribute all of the money to the farmers who supply them with milk for Coles Brand”.

“Coles allowed farmers, consumers and the Australian public to believe that its 10 cents per litre price rise would go straight into the pockets of dairy farmers, when the ACCC alleges this was not the case for Norco farmers,” ACCC chairman Rod Sims said.

“We are pleased that Norco farmers will now receive additional money, commencing within seven days.”

Mr Sims said the ACCC would “be keeping a very close eye on Coles to ensure they follow through on this commitment, and we are not ruling out future litigation if necessary”.

In a statement to media, Coles said it “respects the regulatory process but disagreed with the ACCC’s interpretation of these issues”.

Australian Dairy Farmers chief executive David Inall told The New Daily  the situation was “extremely disappointing”.

“Dairy farmers want to work collaboratively with all sectors of the supply chain. They expect honesty from companies,” he said.

“We don’t want to have to go through legal action to get fair and reasonable prices.”

Mr Inall praised the consumer watchdog for taking action to hold Coles to its promise.

“It’s really important to ensure dairy farmers receive that full 10 cents [price] increase,” he said.

The ongoing price war waged by big supermarkets on private-label milk products including milk, yoghurt and cheese, is unsustainable for the dairy industry as farmers’ input costs (feed, energy, labour and water) are rising, Mr Inall said.

“We have an unprecedented pressure cooker for rising input costs and farm gate returns aren’t able to cover that,” he said.

[Milk products] shouldn’t be loss-leaders at the back of the store. Those prices need to increase.’’

Consumers wanting to support dairy farmers should avoid private label products and buy branded products instead, Mr Inall said.

“Where you can, buy those products. That’s the first and simplest step to support farmers,” he said.

In 2018-19, Australia’s milk production fell below nine billion litres for the first time in more than 20 years.

At the same time, there are reports of a mass exodus of farmers from the industry.

Low retail margins on milk products are “definitely having a significant impact on the farmers”, IBISWorld senior industry analyst Matthew Reeves said.

Woolworths, Coles and Aldi’s decisions to stop selling $1-a-litre milk in response to industry pressure hint at how unsustainable such low prices are, he said.

“They’re realising that’s not viable in the long term because farmers are taking the hit.”

‘Consumers would be right to be upset’

Deakin University retail and marketing expert Michael Callaghan said Coles “made themselves look pretty stingy in the way they implemented their promoted 10 cent per litre campaign and consumers would be right to be upset at being misled”.

“I think Coles were quite clever in promoting their additional subsidy of farmers,” Dr Callaghan said.

“Where they went wrong was in playing the creative accountant when price rises were announced by Norco two weeks after the agreement was made.

“Price rises happen on all commodities, on a routine basis, that Coles decided to subsume the price raise into their well-publicised 10 cent per litre campaign, is, in my opinion misleading – despite what Coles might claim.”

Dr Callaghan said Coles management were “naive in the extreme to think that their actions would be viewed positively by their customers, especially those who acted on their campaign in good faith”.

“I would have thought the PR savvy that led them to the promotional campaign in the first place would have sounded very large alarm bells with the decision to subsume the price rise into the campaign,” he said.

“Surely someone in Coles management said, ‘This is a bad idea, if it becomes public we’ll look like Scrooge McDuck’.”