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.