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.

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3 responses to this post.

  1. Posted by Geoffrey Randall on 28 August 2009 at 8:49 am

    This is such a farrago of unsupported assertions, half-truths, and irrelevancies that it is impossible to take them all point by point. In our books (The Grocers 1999 and 2001, and Supermarket Wars 2005) Andrew Seth and I discussed these and other issues, using evidence as far as possible. You really should try looking at some facts some time, for example the profitability of UK supermarkets compared with US and European chains – and examine ROCE as well as margins.

    There is real price competition in the market, from the hard discounters Aldi, Lidl and Netto. They have a vey small share; after a small surge in the recession, they are returning to normal. The consumers prefer the major supermarkets, and if a small minority choose their farmers’ markets and local shops, that’s fine.

    There are real issues in this market, and the OFT has been naive. The debate will not be carried forward by your sort of uninformed rant.

    Reply

  2. Posted by liberaleye on 28 August 2009 at 11:14 am

    I would not expect ROCE to give much insight into the state of the market for various reasons, not least the tendency of costs to take up available revenues just as work tends to take up available time.

    As for the discounters, their arrival from overseas has rather proved my point that, in a more competitive market, prices would fall. The ‘very small share’ of the market that they have taken has nevertheless been enough to force the established players to fight back and the public is benefiting accordingly.

    Are you claiming that the supermarkets are not effectively oligopsonists/oligopolists? Or do you agree that they are, but that it somehow doesn’t matter?

    Reply

  3. Posted by Geoffrey Randall on 20 April 2010 at 3:58 pm

    If you read the book, you would see that I do in fact say that they are. The Competition Commission investigated the industry exhaustively, reporting in 2000 and 2008: again, essential reading if you want to take an informed view. Clearly, you don’t.

    Reply

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