Boutique store Nosh Food Market in Hamilton's slashing of its milk price is nothing more than a gimmick which could backfire on customers, according to a supermarket boss.

Rob Chemaly, Foodstuffs' Auckland retail general manager, said Nosh was a small, specialist store which meant it could offer deals on the odd product while the majority were priced at a premium.

Nosh has stores in Auckland, Hamilton and Matakana.

The store cut the price of its Cow and Gate milk yesterday to $1 a litre, apparently sparking Foodstuffs' PAK'nSave supermarket in Mill Street Hamilton to match the price.

However, Chemaly told BusinessDay today that the group would not be adjusting its prices to match those at Nosh.

''Nosh's price drop on milk is a great gimmick designed to drive customers into a store where the majority of products are significantly more expensive than your average supermarket,'' he said.

''We don't believe this type of discounting is sustainable and Nosh will no doubt need to recoup the costs by having higher priced meat, fresh produce and other grocery items.''

It was the supermarket's focus to give customers the best deals on all products, not one or two. ''As always, our owners have the ability to set their own prices in-store and it is possible some stores may choose to offer further discounts.''

Foodstuffs owns the New World and PAK'n Save supermarket chains.

Federated Farmers said earlier today it hoped a "price war" will ramp up. The organisation called on retail outlets, and particularly supermarkets, to do the same.

"If dairies can sell milk cheaper and a small supermarket like Nosh can sell it as a loss leader, surely Foodstuffs and Progressive can do the same?" said Federated Farmers Dairy chairman Willy Leferink.

"Federated Farmers hopes this milk skirmish is the first step in a wider retail milk price war between Foodstuffs and Progressive. It's happened in the UK and Australia so why not here?"

Big supermarkets rely on being convenient, Leferink said.

"But convenient doesn't make them the cheapest."

It was obvious that the price of milk was driven by the retail sector. Some stores in Wellington sold two litres of budget milk for $2.99 while others sold the same bottle for as much as $3.65.

"That's not only 22 per cent more but tells me that margins at the retail end are pretty healthy," Leferink said.

Nosh has reduced the price of its Cow and Gate milk by more than 50 per cent and said it will keep the reduced price until the end of the month.

The move prompted daycare centres and kindergartens to erect signs informing parents and caregivers of the reduced price.

Nosh admitted the move was a "token gesture" but said it was immoral for soft drinks to be cheaper for New Zealand families than milk.

"Milk is a basic commodity and should be made available to all New Zealand consumers, not just those who can afford it," Nosh director Clinton Beuvink said.

Nosh is losing about 50 cents on each bottle of cut-price milk it sells, but Beuvink said he hoped the move would "get the ball rolling" for an overall drop in local milk prices.

Progressive spokesman Luke Schepen, whose employer owns Countdown, said there were "no plans at this stage" to cut the price of milk. He accused Nosh of using marketing tricks to "bait customers into walking into their stores".

Consumer New Zealand praised Nosh and said there was no reason why the bigger chains could not do the same.

"We often see service stations and dairies selling milk cheaper than the big supermarkets, so it just goes to show it can be done while still making a profit," said Consumer NZ chief executive Sue Chetwin.

- How much does milk cost in your area?