Not such Good Value

We all know that British supermarkets are highly competitive and give outstanding value for money.  And how do we know?  We know because they told us so.

 

If you smell a rat you are right.

 

What we actually have are 4 near-identikit firms who maintain an illusion of competition but actually have no real interest in duffing each other up and every interest in maintaining a system that suits them just fine.  What they actually do is to use their size and power to roll over and squelch any upstart competition that emerges so ensuring that real competition is minimised and that they are left with free reign to beat up their suppliers and achieve ever greater margins.

 

As Cheshire dairy farmer Ray Brown told the BBC:

 

“If you [the farmer] are lucky you get 26-27 pence per litre, it’s the same price as we were getting 11 years ago.

 

“Supermarkets have a big score to settle there. The consumer then was paying 40 pence per litre, currently they are paying 57-58 pence.”

 

He’s absolutely right.  This means that consumers are being overcharged by a minimum 45% by the supposedly ‘competitive’ supermarkets (and that’s only using the reference point of 11 years ago).  Could there be any clearer evidence of market failure?  Could there be any clearer justification for a strong anti-monopoly response from Govt?

 

I think hard-pressed families (and farmers!) deserve some answers and some action.

 

In this context the publication yesterday of the latest investigation by the Competition Commission is yet another depressing example of the utter uselessness of the established system of regulation (see also Northern Rock etc).   Predictably, and in line with established form, the results will not worry the supermarkets.  Not that they actually wrote it as such but they do seem (as David Boyle suggested recently in this excellent piece on monopoly) to have successfully framed the issues in ways that play right into their hands.  It’s appears that in the rose-tinted World of the Competition Commission the supermarkets are basically virtuous and hence deserving of all possible support—which they are naturally pleased to give with just the lightest possible rap on the knuckles.

 

For instance a principle plank of the CC’s proposals is that planning applications for new stores or store extensions should be made subject to a ‘competition test’.  At first this seems reasonable until you stop to think that using Planning to address a Competition issue is basically barmy.  Moreover, it does nothing to address established local abuses—for instance Tescopoly reports that Tesco is the dominant retailer in 67% of postcode areas and has a greater than 50% market share in 5 areas.  (In contrast note that the CC had earlier concluded that over market shares of over 8% lead to abuse).

 

Another main plank of the CC’s proposals is that a supermarket ombudsman be appointed to oversee and where necessary enforce a stronger code of practice for dealing with suppliers.  Predictably the supermarkets are engaging in heavy breathing and talking ominously of costs of “hundreds of millions … which could be passed on to the consumer”.  To say this is a bit rich in view of their soaring margins on for instance milk is an understatement.

 

Actually, I too am opposed to the idea of a revised code of practice but for a very different reason.  It’s an administrative solution for a problem that requires a market solution and as such it simply won’t work for its intended purpose—although it might well provide lots of new civil service jobs!

 

David Boyle is absolutely right—Lib Dems should make this issue their own.

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2 responses to this post.

  1. Posted by Geoffrey Randall on 2 May 2008 at 8:43 am

    Your piece encapsulates what many people feel about supermarkets, but betrays little real understanding. You end up by saying that we need a market solution. What do you think has produced the current situation – government planning? Tesco has attained its dominant position because it is better run as a business than the others, and therefore has attracted more consumers. (Incidentally, if it has a dominant market share nationally, it is bound to be dominant in many local areas.)

    The supermarkets did not frame the issues for the Competition Commission: it did so itself, within its statutory remit. If you actually read the report, you will see this clearly set out

    Reply

  2. Posted by liberaleye on 7 May 2008 at 5:24 pm

    Geoffrey,

    Actually I’m a great admirer of Tesco’s retailing and business skills but it should never be forgotten that markets work according to rules designed by humans and, depending on those rules, can serve some participants better than others. In the UK the way the system works for the last few decades has suited the big multiples particularly well and farmers and consumers rather less well; change the rules and you change the outcome. This possibility opens the door to a ‘market solution’ that might actually work.

    Incidentally, you have clearly misunderstood my point about ‘frames’. David Boyle put it rather better in his piece and James Lowman of the Association of Convenience Stores made essentially the same point in different words in his response to the CC

    Reply

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