It's almost four years since Coles fired the first shot in the "milk wars". On Australia Day 2011, Coles announced it would cut the price of its private label milk to $1 a litre. The move was driven by then managing director Ian McLeod, and arch-rival Woolworths was forced to follow suit.

Soon milk processors and farmers were screaming about the potential death of the industry, as retail prices hit 20-year lows. Such was the outcry, a senate inquiry was launched into milk pricing.

Even today Lion, one of the biggest players in the industry, fears the damage $1 milk is doing to the industry.

"As a company that fundamentally believes in the inherent goodness of dairy, there is something not quite right when milk is cheaper than water," said Peter West, managing director at Lion Dairy & Drinks.

At grassroots level, the impact of the milk wars has been tangible. Within two years, Queensland had lost more than 50 dairy farmers, most of whom walked away for good.

Industry data obtained by Fairfax Media shows the extent of the impact of the milk wars on dairy giants Lion and Parmalat, which have had sales of their key domestic brands plunge by $175 million a year.

In 2008, when McLeod arrived in Australia, Lion and Parmalat controlled almost half of Australia's milk sales in dollar terms.

The three biggest brands - Pauls, which is owned by Parmalat, and Pura and Dairy Farmers, owned by Lion - had a combined $660 million share of Australia's annual $1.44 billion fresh milk industry.

"They also produced private label, so it was a cushy little duopoly and they dominated the industry in Australia," one supermarket executive said. "It was what you call a nice little earner."

That same executive said Lion and Parmalat were being squeezed in a "perfect storm" in the milk wars, and it could reach a point soon where one walks away.

Most are pointing to Lion as the one most likely to go, because it has signed much shorter-term production deals to produce milk for the large supermarket chains.

Lion, for its part, says it's here to stay as a dairy player. "We have a clear three-year strategy to improve performance and deliver sustainable profit growth," said West. "Core to this strategy is a focus on high-value categories that are growing strongly, including specialty cheese, milk based beverages and yoghurt."

West points out that Lion dominates milk sales to coffee shops in Australia, and would look to grow such markets  "We accept that $1 a litre milk is a market reality, and what it has done is made us be clearer in our choices," he said.

ISI-Aztec sales data, taken from the check-outs of Australia's biggest supermarkets, shows sales of the Pauls brand have fallen from a 20 per cent share in 2008 to 17.2 per cent of the market at the end of last year.

Pura, which had 14.4 per cent of the market, is at just 6.4 per cent now. Its sister brand Dairy Farmers has slipped from 11.5 per cent to 10 per cent.

With annual fresh milk sales stagnant at $1.44 billion, it means the three big brands have lost a combined $175 million a year in sales revenue.

The lost revenue has gone in two directions - some consumers have turned to cheap private label milk, and others to A2 Milk, which now had 9.3 per cent market share.

A2, which claims to have health benefits for some consumers, could pass Dairy Farmers soon to become the second-biggest grocery milk brand in the country, and its success has sparked an ugly war for survival.

Lion moved to protect its dwindling premium milk sales by adding the claim "naturally contains A2 protein" to its labelling, in an attempt to trade off A2's key selling point.

Parmalat went a step further, and engaged corporate spinners Crosby Textor to try to discredit the science behind A2 by planting negative stories in the media.

Even now, Parmalat's Australian website contains a section called "Dairy rivals label A2 milk a scam".

Peter Nathan, the chief executive of A2 Milk, shrugs off the attacks. He sees a point where one of his rivals will be forced to exit the milk industry in Australia.

"It is clear that consumers are increasingly not perceiving any meaningful differentiation between mainstream brands from Lion and Parmalat and private label milk," Nathan said.

"This trend is likely to result in retailers driving further consolidation in the mainstream segment. Putting it bluntly, retailers won't need both Lion and Parmalat mainstream brands in their stores in the future."

What happens to Lion and Parmalat will depend on the supermarkets.

The $1 milk war has proved a loss leader for Coles and Woolworths, but Woolworths has dipped a toe in the high-margin end of the market by releasing its upmarket Farmers Own label of regional milk.

Woolworths is negotiating directly with dairy farmers in the Otways region of Victoria, Margaret River region of Western Australia, and Manning Valley in NSW.

Volumes are low, but if Farmers Own is successful Parmalat and Lion will face another challenge to their business models.