Retail rip-off – what the milk market should teach us about regulating the marketplace

Dairy farmers are back in the news; the processors who buy their production to sell on to supermarkets and food manufacturers want to push through a substantial price reduction that will see most farmers getting paid well below their cost of production.   Clearly this is not sustainable; if the processors succeed many farmers will be forced out of business, inter alia increasing our trade deficit in dairy products despite our having one of the world’s best climates for it.

To the extent that imports are involved I would bet a substantial amount that they are driven by lower welfare standards overseas and/or devious transfer pricing schemes whereby most of the profit ‘just happens’ (/sarc) to arise in subsidiary companies based in tax havens that provide a ’service’ but never actually handle the milk at all.   Clearly, this is enormously beneficial to those involved but, equally clearly, it’s not in the public interest.

The problem is not that milk is ‘too cheap’.  Rather it is because well over 100% of the profit in the industry that should be equitably spread through the supply chain has been appropriated by the buyers.  (It’s over 100% since the farmers’ loss adds to the buyers’ profits).   They are able to do this because the supermarkets at the top of the food chain have the power to dictate terms so forming an effective oligopsony as described in an earlier post.   This has enabled them to pump up gross margins year by year; they rip off consumers while pretending to be their friend.

On the figures provided by the BBC adjusted to a single litre (and which are consistent with the time series included in my earlier post – see above link) supermarket make a gross profit of around 15 pence/litre which is nearly 30% of the selling price.   The BBC lamely ducks the issue of how much of this makes it to the bottom line as net profit but we can make a reasonable guess.  Logistics, store overheads etc. will all be minimal as it’s handled in bulk and sales are predictable.  Also we know (earlier post) that in the mid 1990s supermarkets got by on gross margins of only 1 or 2 pence.  So we can be very sure that the vast majority of the gross profit translates into net profit meaning that the supermarkets are achieving a ‘economic rent’ (roughly the excess profit above what they would get in a genuinely free market) of at least 12 pence per litre or around 25% of the selling price.

That is HUGE; if the margins on other goods are broadly similar (and I think many are) then this is a big part of the cost of living – especially for those on limited incomes.

So what is to be done?  If you are a plutocrat then nothing; for everyone else reducing prices raised by oligopoly is an even bigger prize than increasing personal allowances for the low paid.   Getting retail right also has a very direct bearing on other issues including Clone Towns and Mary Portas’ Review of the future of high streets.  But what can be done?

Any solution must start from the fact that the core issue is an imbalance of power.  So, for instance, suggestions that producers should differentiate their product miss the point – some limited differentiation around the edges may be possible but milk is fundamentally a commodity product.  Ditto an ombudsman or Food Market Regulator: having someone looking over the supermarkets shoulder, so to speak, may lead to limited interventions but it leaves the bad dynamics in place.

The first thing to say is that size is a problem in itself.  Retailing is a complex and demanding business but not exactly rocket science.  Nor does it require global companies with the resources required to design a new jetliner or get a new drug to market.   But it does benefit from economies of scale – largely (though not entirely) because the bigger you are the easier it is to bully producers – which means that the big get bigger and the small go extinct unless they can hang on in some niche.   Therefore left to its own devices a retail sector will evolve into an oligopoly where a small handful of large firms, all with similar cost structures, dominates the market.  In effect, regulation of the marketplace becomes privatised for the benefit of the biggest participants and freedom to evolve without limit in response to the market’s internal dynamics eventually ends in a market that is neither free nor fair.

So, the first conclusion is that the size of retailers should be limited.  This could be done in several ways, for instance by legislating that retailers must divest operations above a market share of, say, 20% in any one local authority area or 5% nationally.

The other way that retailing has traditionally been regulated is by mandating an equal price at either the wholesale level (US practice) or the retail level (UK practice).

The US Robinson-Patman Act  (and see also here) prohibited price discrimination by, in simple terms, requiring that the same price and other terms be given to all purchasers of goods for resale except insofar as the cost of supply is genuinely different.  The effect is to put all retailers on a level playing field with respect to their purchases.   The most obvious consequence is that large and small retailers can coexist which means that they are all kept honest by competitive pressure; many corner stores would think themselves in heaven to get ADSA’s margins and would gladly undercut them to increase sales – provided they could buy competitively!  A less obvious consequence is that producers who depend in large part on selling to retailers are not under the bully pressure that has characterised the UK in recent years; there is no particular advantage for a strong retailer to beat them into the ground as the retailer gets no advantage from so doing – any lower cost they negotiate has to be given equally to other retailers.  Another result is that it helps maintain a reservoir of small firms – and small firms are almost always the most innovative.

One of Reagan’s first actions on becoming President was to eviscerate enforcement of antitrust (i.e. anti monopoly) legislation to allow brute force to rule in the marketplace.   The fallout from this has been one of the biggest drivers in the subsequent growth of inequality.

In the UK regulation was accomplished by Retail Price Maintenance (RPM) until the 1964 Resale Prices Act which made most such agreements illegal.  (Libertarians ought to – but mostly don’t as far as I know – object to the RPA’s  flouting of privity of contract.)   RPM put the onus on producers to set competitive prices vis-a-vis their rivals while helping preserve a diverse retail scene but large retailers can still get better terms.  Absent RPM producers have no control over price which compromises their marketing and puts most on the back foot.   Interestingly, RPM survived for books until 1995 since when its demise has helped drive a huge concentration in retailing matched by a corresponding defensive concentration in publishing despite which most publishers are over a barrel, held to ransom by the few surviving retailers.

So, we face a stark choice; if we want a competitive market in goods we have to legislate to create and maintain a competitive marketplace.  If we don’t restore effective competition in the marketplace we can’t have a properly functioning market in goods.

 

The vulnerable are being ripped off and the OFT notices – but what will they do?

Glory be!  The Office of Fair Trading (OFT) has belatedly noticed that the public is being ripped off by the intentionally misleading deceitful pricing practices of ‘Big Retail’.

The deceitful practices concerned are a fraud on a monumental scale and are highly regressive in their impact yet few people have noticed what’s going on – they’re hidden in plain sight.  

If the OFT’s line of thinking is followed through and abuses are ended, the public stands to gain more financially than most left-leaning politicians ever dreamt of and, even better, the benefit will be greatest for the poorest and most vulnerable and done with no administrative overhead or perverse incentives … but, there’s a problem.  The OFT can only go so far on its own; it will soon reach the point (has already reached?) where it needs political muscle behind it and ultimately that will mean primary legislation.  In the meantime, I’m not holding my breath or expecting much to come from this move per se.   Only  when the political classes get behind this thinking will they move forward.  This is something that Lib Dems inside and outside of Parliament can and should get involved in.

The pricing practices the OFT is talking about include such tactics as  bogus reference pricing (e.g. was £9.99, now £4.99),  drip pricing (popular with budget airlines), volume offers (e.g. 3 for 2), free offers (buy X, get Y free), complex offers (containing multiple components like mobile phones) and a whole menagerie of others.  The BBC’s report is here and the OFT’s report is here.

For years the OFT has, like most regulators, been notably spineless for two related reasons.  Firstly, they were cognitively captured by a libertarian view that any regulation was automatically a bad thing, that it would interfere with the ‘natural’ workings of the market which was (wrongly) presumed to be always and everywhere beneficial.  Secondly, like all bureaucrats (and I have experience of this in a large company context) they try to intuit what the boss wants and deliver accordingly but sometimes misunderstand badly.  So, if the boss talks approvingly of  ‘regulation lite’, they may think that really means ‘regulation absent’ (especially when they have a libertarian-leaning mindset) when it may be that what he is actually opposed to is regulation badly and clumsily done by no-nothing jobsworths – a different proposition altogether.   Either way, you don’t readily go up against a powerful elite that has the ear of the boss.

Post the financial crisis the belief that markets should be left to themselves and that consumers are uber-rational calculating machines ceaselessly and accurately computing the optimal choice has become impossible to sustain except for a tiny band of true believers and this changes the mood music which, in the long run, changes everything.

Accordingly, the OFT has actually done some behavioural studies to see if deceitful pricing changes consumers’ perceptions in the real world as opposed to the fantasy world of the free marketeers and surprise, surprise it does as almost any normal person could have told them.   The OFT does not offer an estimate for the scale of the losses sustained by consumers but it is clearly huge or retailers would not spend so much time and energy on deceitful pricing.

Initial responses to the OFT’s report are instructive.  The British Retail Consortium (BRC), a lobby group for Big Retail (and a very effective one in my opinion) quoted by the BBC (see above link) advances counter arguments which are as full of holes as a Swiss cheese. 

Their man says, “Consumers … have all the information they need … “.   Err, no they don’t.   The whole point about deceitful pricing is that it aims to confuse and obscure the most important single bit of information in a buying decision – the price and hence the value.  Most people, even highly numerate ones, find it very difficult to work out which is the best buy from a range of competing offers and pack sizes.  This is a difficulty intentionally created by Big Retail - see for example here and here.

He goes on to say, “Discounts and promotions are part of our highly competitive retail market and customers benefit from them.”   Err, no again.   Anyone who ever did Economics 101 will know that ‘perfect competition’ exists only where, among other things, all parties to a transaction have the same good information about it.   Muddying the water on pricing means that consumers have very bad information and that the market is very imperfect.   A market with lots of offers is therefore one that doesn’t work very well for consumers.  According to the BRC, a record 37% of fast-moving consumer goods are currently under offer.  Well, yes.  Times are tough, but many of these offers are designed to avoid admitting that reference prices are too high and should be tumbling in a recession as severe as this one.

The BRC’s final reported claim is a classic piece of lobby BS.  “BRC members… would have nothing to gain from attempts to mislead and any extra legislation or over enforcement on this issue would therefore be pointless.”   Really!  So, they spend oodles of money on deceitful pricing of one sort or another purely for fun and no commercial gain.  How unique!  How remarkable!   So, can we take it that they will not oppose any legislation?  I think not!

Robert Peston’s blog has a more nuanced take on the OFT’s report.  He reports the boss of one of the largest fashion retailers as saying that any ‘visible price increases’ just will not happen – they will be ‘dealt with’ (i.e. hidden) in the product mix.  Is that t-shirt that’s double the price of the one you bought last year simply twice as expensive for the same quality or is it double the quality or somewhere between?  Will you know?  Are you supposed to know?

Peston goes on to anticipate the push-back from free-marketeers who think that unwary consumers deserve any plucking they get.  As he says this may not be a problem for the super-rich but it certainly is for those with a limited income.  I would add that the growth of deceitful pricing over recent decades is one of the factors behind growing inequality.   He gives a big hint that he thinks prices could be lower if retailers didn’t put so much effort into fooling people (he is right about this) and thinks that we would all be much better off if a “what you see is what you get’” rule applied.  I agree with him. 

Unfortunately, the OFT’s proposed remedy is not up to the task; although they are clear that many of these misleading practices are illegal, the OFT says that they will crack down only where the consumer detriment is considerable.  This perilously like saying that retailers will be allowed to continue ripping off the public so long as they only do it a little bit and that some law breaking will be tolerated.    Hence, firms that set out to cheat will have an edge on those that aim only to be what the OFT calls ‘fair dealing’ - or, in other words, the system will reward cheating.  This sets up a regulatory nightmare that is biased to fail.  

We should instead straightforwardly outlaw deceitful prices with penalties structured to fit the crime so that they simply don’t pay.  For example, to control bogus claims that something is ‘free’ legislate to allow the customer to demand it (and only it) free as advertised.  No external policing would be then be necessary.

Economies of bullying

The government has belatedly reacted to the long-running scandal of the supermarkets’ treatment of their suppliers by announcing that it will establish an ombudsman to enforce a new code of practice.  Unfortunately, it misses the point, is the wrong solution and won’t work.   The Lib Dem plan is little better.

Something certainly needs to be done; the market may perhaps have been competitive 20 years ago but it’s evolved into a very unhealthy oligopoly where a tiny group of companies sit astride the route to market for a significant fraction of the nation’s primary output.  As the supermarkets diversify this increasingly includes manufactured goods, not just food products.   Like medieval robber barons they are making a good living off their control of vital trade routes.  

What they say goes and they have become notorious for their high-handed treatment of suppliers; they long-since moved from the economies of scale to the economies of bullying.   The supermarkets justify their behaviour by saying that they merely aim to get the best price to pass on to their customers.  Like hell they do!   If you think you benefit just look at how, for instance, milk margins have changed over recent years.  

 

(If the details are hard to read click here for a link to the original.  Blue is farmgate price, red is processor gross margin and green is retail gross margin.  The timeline runs from Jan 1994 to Jan 2009)

Retail prices have risen by around 50% over the last 15 years and this is almost entirely due to a massive increase in retailers’ gross margins – the difference between their buying price and their selling price.  Over the same timespan farmers have done a splendid job keeping prices roughly level despite high cost inflation; the only substantial uptick in farmgate prices in over ten years was in 2007 as a result of soaring fuel prices.  The only winners in this business are the supermarkets; consumers are emphatically not winners.

This has come about because in the ‘markets are God’, ‘deregulated’ world we have lived in since Reagan/Thatcher, size is hugely important in retailing.  Of course, size isn’t the only thing that matters (and the big retailers are pretty smart and well-managed companies by any standards) but, other things being equal, if you are bigger than your rivals you can screw your suppliers for better prices leading to higher gross margins.   It may be only a few percentage points advantage, but in retailing that is a LOT; if maintained over several years it amounts to an unbeatable advantage and before long the bigger players are in a position to squelch and/or buy out some of their competitors and tighten the noose on the rest.  In simple terms that is why the two biggest firms, Tesco and Asda, have captured so much of the growth in the market.  The others struggle to keep up.

Moreover, the established players face little threat of competition from innovative new entrants or rivals with a different proposition – for instance higher quality or local produce or pack sizes tailored for one person households etc.  (There is a partial exception to this; foreign firms like Aldi and Lidl that are already powerful players in their home markets can make some inroads but I would like to see home grown competitors given the same opportunity).

So at one and the same time we have a market that is highly competitive in some ways and highly uncompetitive in other ways.   The big firms constantly push against each other – but only within limits; one firm might win customers by slashing the price of, say, milk, but they know that their rivals, with similar cost structures, would simply retaliate.  The end result of any such plan would be to shoot oneself in the foot so it rarely happens.   Instead what we get is a follow-my-leader situation where the biggest player, the one with the most buying power (Asda by virtue of its Wal Mart link), sets prices just a fraction lower than its rivals to keep the high ground while simultaneously maximizing gross margins.  The other players match prices where they can but commonly resort to confusion marketing - deals designed to obscure the actual price.  Hence Asda advertising tends to emphasis ’everyday low prices’, the others tend to advertise ‘offers’ and ‘deals’.

For suppliers the impact is life-defining, often life-threatening, so they have been the source of most complaints.  Customers are less aware; retail spending is only a part of their total spend, confusion marketing is a powerful weapon and supermarkets constantly advertise what good value they give while discreetly endorsing the notion that the alternative (and hence the benchmark) is the corner shop even though this is patently nonsense.  The debate is framed as suppliers (and small shops) wanting to push prices up while the (virtuous) supermarkets struggle to keep prices down.   

Progressives have made a huge error in not challenging this framing head on.   It has allowed the supermarkets to inflate their margins at the expense of both suppliers and the public.  They are protected from real change as long as the public believes that they are a ‘Good Thing’ because in a world of focus group-driven politics what masquerades as political leadership is actually just following public opinion. 

How much might the public benefit if the competition was working properly?  Aldi and Lidl claim to be around a third cheaper which is co-incidentally (or perhaps not!) exactly the same saving that customers would make on milk if gross margins returned to their former level.  The biggest winners of a more competitive market would be those on low and fixed incomes  because food is a bigger percentage of their disposable income.  These are the very people we should help most.  (A rhetorical question:  are trends in retailing part of the reason that inequality has increased so much over the last 30 years?)

Despite the failure to push back against the oligarchs’ clever framing, a background of mounting complaints has at last forced some action.  There have been several investigations since 2000 leading eventually to a referral to the Competition Commission and a report by them in 2008 recommending the establishment of an ombudsman to resolve disputes between supermarkets and their suppliers.   Just months before an election the Conservatives, followed by Labour have come out in support of an ombudsman, a move Tim Farron correctly dismisses as a “fig leaf solution”.  

Indeed it is.  It completely misses the point about retail margins and selling prices and there is no reason to think it will be an effective mechanism even on the supply side; the farming community is distinctly underwhelmed.   

Regulators, whose task it is to intervene in the market, are a poor tool at best especially when confronted by powerful and politically-connected regulees.   They are at perennial risk of regulatory capture and/or being neutered by a nod and a wink from government that itself has been captured by vested interests and only wants only ‘light touch’ regulation (despite what it may say for public consumption).   We have seen just how badly this can all go wrong with the financial meltdown; why would this case be any different?

The BBC reports (via the first link in this post) that the ombudsman is to have a budget of just £1.3 million per annum, only enough for a staff of perhaps 15 or so plus a modest amount of consultancy.   While I do not believe that size equals efficiency (often it’s the opposite in fact), this is simply not credible as a team to monitor thousands of suppliers and tens of thousands of products.   Moreover, even if suppliers’ complaints are initially anonymous, the ombudsman cannot investigate far without it becoming obvious who the complainant is and so risking retaliation by the supermarkets.  

The most we can expect is a handful of high-profile cases to ‘prove’ the ombudsman is effective while real change is deferred for another ten years.

Unfortunately, Tim Farron’s proposal is little better; his call for an ‘Independent Food Market Regulator’ is just a toothier version of the ombudsman and would suffer all the same drawbacks except that its very existence would imply a government more committed to action. 

Does that mean that the situation is hopeless?  Not as all; only that it requires a different approach but unfortunately this post is already too long so it will have to wait for another day.  (Hint: the root of the problem is that size is an important determinant of competitiveness – the large get larger and the small get smaller - until the market degenerates into an oligopoly that it no longer serves the public interest).

How unfriendly prices can damage your wealth

Quickly now, at your local supermarket which is better value - 4 rolls of paper towels for £2.79 or 6 for £4.29?

Most people take some pride in being careful shoppers but it’s not easy when you have to do sums like that in your head (especially if you have a fretful toddler in tow).   These are what my wife, a chartered accountant, calls ’unfriendly numbers’ meaning ones that don’t lend themselves to mental arithmetic.   

This is no accident;  you’re not supposed to compare them because unfriendly numbers and similar tricks are at the heart of the ‘trick and trap’ sales strategy now universally used by Big Retail.   The objective is to induce customers to overpay by confusing or misleading them about the price of items and, in particular, which about choices are best value.  

Although there are laws against misrepresentation Big Retail has discovered you can comply with the letter of the law while frustrating its purpose by exploiting psychological tricks.  These tricks don’t fool everyone all the time but they don’t have to.   It’s a matter of averages;  as long as they work for some people some of the time they serve their purpose and my guess is that they actually work for most people most of the time. 

Nor is it just supermarkets that resort to price confusion strategies;  it’s endemic in many sectors.  Did the banks selling worthless securitized sub-prime loans really want price transparency whereby their customers would have understood the real value of what they were buying?   Do you really understand your telephone bill?  (Do you think you are supposed to?)   Confusing customers about true value is one of the oldest tricks in the book.  

Just how effective this can be in the case of supermarkets was dramatically illustrated by the BBC’s Watchdog consumer program this last week (video – package begins at about 40 minutes).   They arranged for three couples to buy a list of just six items as cheaply as possible from a mocked-up supermarket stacked with retailing tricks taken from real life.   The cheapest it was possible to buy the list was just £11.96 but the three teams spent £14.52, £21.10 and £21.27 – equivalent to truly eye-watering premiums of 21%, 76% and 78% respectively over the best possible price.   While this obviously wasn’t a properly conducted scientific test it does show the effect of this chicanery is pretty huge.  Moreover, it’s reasonable to infer that it will disproportionately trap those lower down the social (and educational) scale.   

Watchdog’s package concludes with a spokesman from the British Retail Consortium (the lobby group for Big Retail) trying very unconvincingly to blame it all on ‘mistakes’.   The fact is that when your sales are in billions making just 1p more in every pound become hugely profitable and the supermarkets have a massive incentive to turn deceit  into a strategy.

Is it possible to estimate, however roughly, the scale of excess revenues garnered by the supermarkets?   Obviously not from Watchdog’s little test of the efficacy of ‘trick and trap’ which is, in any case, only one of many strategies employed.   However, we can get one estimate of how much cheaper supermarkets could be from Aldi and Lidl both of which claim to be around a third cheaper than the established competition.  Combine this with supermarket sales of around $90 billion and you get excess revenues of £30 billion – equivalent to a staggering £500 per annum for every person in the UK.

Is this a reasonable figure?  The supermarkets and their apologists would obviously say not but Im going to stick my neck out and say that, for all that it’s a bit approximate, I suspect it’s about right.   But even if it’s a substantial overestimate, it still dwarfs anything the government has yet come up with to help ordinary folk as opposed to bankers.  

Oligarchs or people: hopefully that will be the choice at the next election.

By the way, the answer to the question at the head of this post is that the 6-pack costs 2.2% more than the 4-pack on a per unit basis.

Supermarket cuckoos

Tracy Corrigan, who writes for the Telegraph on banking and the like,  is excited.   While walking her dog on Sunday she discovered that a Tesco Express is about to open, not 50 yards from her house.   She foresees a future liberated from the boredom of ordering the same items week after week online because she can’t think what else to buy.  Shopping in-store she will find all sorts of goodies.

She thinks her position is, “actually rather radical” and goes on to explain that there are numerous websites dedicated to the “negative impacts of supermarket power” (none are mentioned, but see Tescopoly) and declares she is mounting a counter-insurgency following up with the quite remarkable (and wholly unsubstantiated) assertion that, “The small number of large chains in this country makes competition more intense.”

Yet what is most interesting about this piece is the comments.   If you analyse them into pro on the one hand and anti or neutral on the other then, on a rough count, they divide nearly 2:1 against Tesco.  If you exclude the neutrals and overseas comments, then the antis have it by over 4:1.   Does this mean that things are about to change in Tescoland? 

I think it might.   Since the supermarkets first arrived here in the sixties they have benefited from a favourable political and commercial environment – albeit one that has evolved and changed greatly since then – and this has underpinned their success.   However, nothing stays the same for ever and the economic case for supermarkets in their present form evaporated some time ago.  Good PR on the part of the supermarkets, a widespread belief that the market is always right (or at least much righter than anything else) and the dreadful habit of UK politicians of all parties to follow rather than lead have protected the supermarkets from any political fallout from loosing the economic case.    While the comments on Tracy Corrigan’s piece don’t prove that public opinion has definitively changed any more than the first swallow proves that spring has finally arrived it is, nevertheless, a clue;  two years ago the balance of pros and antis would have been very different.    

To understand how and why things have changed consider the stages that have got them from then to now.

Stage 1.   Government policy was changed in the sixties to favour the growth of ‘big retail’.    The hope was that powerful retailers would force suppliers to deliver better prices and quality (at the time they had a deserved reputation for supplying shoddy goods).   A particular aim was (and is) ’cheap food’ – a policy that presumably dates back to the Corn Laws.   Thus, when the first supermarkets arrived from the USA in the mid sixties (remember the supermarket scene in The Ipcress File in which an early specimen is clearly the height of contemporary cool) they were welcome as a way of galvanising both the retail sector and also the rest of the supply chain.

Stage 2.  The supermarkets became established and a few pulled ahead of the pack, gaining additional market power with size and thus started delivering on their early promise as they used their market power to bear down on dozy suppliers and extract better prices.   Rapidly rising car ownership boosted this process mightily by enabling supermarkets to concentrate on fewer, larger stores as did the emergence of IT systems to manage on a larger scale.   The scale of each store is such that they could sell at prices approximating to wholesale although it is more profitable to trouser most of the benefit and give customers only enough to maintain a small price advantage.   Nevertheless, the gap between supermarkets and traditional shops becomes very obvious.

In other words, the supermarkets had the huge advantage of a lower-cost business model, enabled by rising car ownership, computerised stock control etc. and backed by supportive government policy.

Stage 3.  Government welcomes the rise of supermarkets as a vindication of its policy and comes to see supermarkets very much as a ‘Good Thing’, especially so since so much of the rest of the economy was in near meltdown (it turned out that big retail, instead of knocking domestic producers into shape, simply sourced from overseas).  Supermarkets stand out as one bright spark in the pervading gloom.  Meanwhile, the winners among them grow rapidly by a combination of organic growth and acquisition because it turns out that the most important factor for success is size (because of the increased buying power and therefore lower buying prices).   The contrast between supermarkets and surviving corner shops becomes extreme.

Stage 4.   The winning supermarkets are now an oligopoly, dominating their market and dictating terms to both suppliers and customers.  Suppliers notice this (of course!) but customers don’t as the supermarkets carefully maintain the illusion of good value helped by supporters who continue to benchmark them against surviving corner stores although this is patently nonsense.  They start moving into other sectors helped by their vast cash flow and footfall.  Voices start to be raised against them and their practices but these are mainly couched in nostalgic terms (e.g. they are horrid, are mean to suppliers, devastate the High Street, etc.).   Many of these are good points but none cut  much ice with a government (as distinct from many MPs) still wedded to the idea of a cheap food policy and naively convinced they are delivering it.   The supermarkets actively foster the ‘we are cheap, we are on the hard-pressed customers’ side’  meme by constantly advertising price reductions, BOGOF offers etc.

Stage 5.   Abuses of market power become the norm.   The much publicised unfair contracts with suppliers are the inevitable result of the concentration of buyers; with so few supermarkets growers confront an oligopsony.   On the selling side, BOGOF and other offers are used to confuse shoppers about what constitutes a fair price; absent resale price maintenance, marked prices purporting to be RRP (recommended retail price) are often no more than Aunt Sallys - deliberately intended to deceive.  This can only mean that consumers are paying substantially more than they should.   Moreover there is evidence of outright price-fixing (also here and here) which is almost inevitable when the number of competitors becomes too small.   Also on the selling side, predatory pricing is used to crush competitors as the All Party Parliamentary Small Shops Group has reported (pdf – see page 25).   The tactics are utterly disgraceful but they get away with it. 

In other words, the supermarkets commercial advantage now derives from exploiting their excessive market power and they have become oligarchs.   A Conservative friend (also a councillor and on his planning committee) concedes that they are above the law.   The fluffy fledgelings of yesteryear have turned out to be cuckoos to the bewilderment of their poor parents.

Stage 6.  Most people still believe the supermarkets’ claim to be benefactors which provides ‘high cover’ for them in that government will not act if it thinks they are still well-regarded by the public.   In any case, government and opposition have been captured by a market fundamentalist philosophy that persuades it that ‘the market is always right’.   In theory they should understand that oligopolies frustrate the workings of a market but in practice this view leads to them cheer-leading for any private sector firm, however abusive.   Calls for reform fall at the first hurdle because they typically propose administrative solutions  (for instance the creation of a regulator, ombudsman or Code of Practice) despite the incredibly poor record of such approaches.

Stage 7.  Regulators like the Competition Commission and the OFT (Office of Fair Trading) that might go after them for abuse of market power in fact shelter them, even acting as enablers on occasion – for example by allowing Tesco to make convenience store acquisitions that, given its high market share should be ruled out, on the spurious grounds that ‘convenience’ shoping is different from ‘one-stop’ shopping so Tesco doesn’t really have a very high market share at all!   

This is partly because, like the government, they are influenced by market fundamentalists and naturally assume that everything must be just dandy and in part because, as good bureaucrats, they believe that, whatever the law might say, the reality is that the Government approves of the supermarkets and doesn’t want to spoil the party.  (This are, of course, essentially the same reasons that the FSA/Bank of England/Treasury troika utterly failed to regulate the City!)   To be fair, the regulators are belatedly getting a little tougher, but only marginally.

So, we have arrived at a point where a Good Thing from a few decades ago has evolved into a Bad Thing today.   It suits the supermarkets mightily but it’s bad for the nation as a whole - producers are being ground into the mud and consumers are being overcharged.    The comments on Tracy Corrigan’s piece suggest a growing public appetite to do something – even if exactly what remains unclear. 

Time for a change I think.

Better than Half Price!

A short while ago my local Sainsburys had some lovely looking Scottish raspberries (yum, yum, my favourite!) with a big red sticker advertising them to be ‘Better than Half Price’.  Could this be too good to be true?  Probably!

My analytical side kicked in;  was ‘Better’ to be construed as meaning better for me, the customer, or better for Sainsbury’s shareholders?  Probably the customer I concluded but my wife insisted that it was strawberries we needed anyway.  Fortunately the strawberries were unambiguously ‘Half Price’.

But then I reflected what does ‘Half Price’ mean anyway in the context of a highly seasonal product?  Is it half the price of strawberries flown in from halfway round the World or half the price of strawberies grown in the UK in midwinter or what? 

In reality since they are packed specially for Sainsburys there is no reference price to be half of and Sainsburys can claim whatever it wants.  In the end we decided to go instead to our local independent greengrocer where a slightly larger punnet turned out to be substantially cheaper even though it was full price!

The week before it was lager.  They had a huge pile in a prominent location labelled ‘Manager’s Special’.  Great! I picked up a pack but then thought to check it against the price on the ordinary shelf (a slightly different pack size).  Good call - the ‘Manager’s Special’ was far more expensive.

Yesterday it was printer paper at WH Smith who were advertising a ream as ‘Half Price – Only £3.49 – formerly £6.99′.   It’s a while since I bought any, but I remember that when I did it was the exact same brand at £2.99.  Naughty, naughty!     

And so it goes.  To be fair I’m not picking just on Sainsburys or WHS here.  All the supermarkets (and indeed ‘Big Retail’ generally) are up to these tricks.  I go to Sainsburys because I dislike it less than Asda which is the next nearest.

However you slice it this is a deceit - and not just a minor or accidental one at that.  It’s a systematic, organized and large-scale deceit on the consumer perpetrated with the intention of fleecing him or her of the maximum amount of money while masquerading as the patron saint of low prices.

Which raises an important question.   In a liberal democracy is it acceptable for systematic deceit to be an organizing principle of a major industry, especially when it is quite clear that this is largely at the expense of customers and suppliers alike?

I think not.