NZ headed for milk price war, says broker

New Zealand could be set for a milk price war as competition in the supermarket sector heats up, according to brokering heavyweight Goldman Sachs JB Were.

Goldman Sachs retail analyst Phillip Kimber said the entry of Australian supermarket chain Woolworths into the New Zealand market, via a A$2.5 billion ($2.68 billion) takeover of Foodlands , could open up a fierce price contest on fresh milk -- the third largest product category in local supermarkets.

Foodlands owns the Countdown, Foodtown and Woolworths chains, while rival Foodstuffs has 55 per cent of the market with its Pak 'n Save, New World, Write Price and Four Square chains.

In Australia, Woolworths has a supply contract with National Foods over home-brand milk.

Mr Kimber said Woolworths may look to duplicate that here, leading to lower shelf prices aimed at boosting its market share.

Retail milk prices are higher in New Zealand than in Australia, despite similar payment rates to farmers, broadly similar tax rates and lower levies in New Zealand.

Dairy giant Fonterra is keeping a close watch on the situation, trying to predict Woolworths' next move.

Last week Fonterra said in a submission to the Commerce Commission -- where it was making its case for buying Kapiti Fine Foods from Foodstuffs -- that National Foods may be about to expand into the Auckland market with a milk-processing plant.

That would give it entry into the retail milk sector and allow it to take advantage of the contract it has to supply Woolworths with house-brand products.

National Foods has declined to comment on its plans.

"National Foods is always looking for growth but at this stage we have no comment to make on a milk programme in New Zealand," managing director Ashley Waugh told The Australian newspaper.

Fonterra tried to buy National Foods last year, but eventually pulled out of a bidding war with Filipino giant San Miguel.

Kapiti Fine Foods has $60 million of revenues and can produce up to 18 million litres of ice cream annually and up to 200,000 litres of milk daily.

As part of the deal, Fonterra gets rights to supply Pam's brand milk in the lower North Island.

In August, Fonterra acquired top brand, Anchor milk, in a complex swap deal with New Zealand Dairy Foods.

Currently, Fonterra's main competitor in the fresh milk market is Graeme Hart's New Zealand Dairy Foods, which has the Meadow Fresh brand and is set to be sold into Goodman Fielder, a subsidiary of Burns Philp.

- NZPA