Anthony Batty asks if we really need the Competition Commission to promote competition between UK supermarkets.
In the news recently, the UK’s Competition Commission has been flexing its muscles in the area of supermarkets. Somerfield may have to sell stores, after buying what Morrson’s did not want after acquiring Safeway (a one-time subsidiary of the American supermarket company).
Do these people really feel that by virtue of the fact a supermarket has two stores within some arbitrary distance they have a monopoly? Or are able to raise prices and earn large profits? For starters the barriers to entry for say Iceland to open a new store are simply planning permission. If they feel customers would use the shop I am sure at least one of the major players would open up a store. Not to mention continuous competition from supermarket home delivery, local shops and the fact people may just drive another few miles if they do not like the selection they are offered. Supermarkets are one of the most competitive areas in the modern economy, if a company does not keep pace with the efficient supply chain, changing demand (such as the low carb craze that swept through the UK) it will find itself the target of a takeover bid, or in administration. This is not because of the work of government departments; rather it is the free market at work. Only through this competition can we find which stores give us what we want, at a price we are prepared to pay. If one firm is not performing we go elsewhere, if prices are too high we use an alternative retailer. There simply is no need for bureaucrats to be in charge.
I do agree however, with the basic premise of more competition. For this reason I find myself reverting to a point made by the late Screaming Lord Sutch, why is there only one Competition Commission? (In his day, the Monopolies and Mergers Commission.) Surely in the interests of competition we should have several. By allowing new entrants and getting rid of the protected monopoly that exists at present, firms can choose between different conclusions and suggestions. Lower administration costs and fewer worries about whether or not an action will be allowed, means lower prices for consumers. In that way we will have free and fair trade, without the diktats that are not in the interests of firms or consumers.
Alex says “Supermarkets are one of the most competitive areas in the modern economy”
I don’t buy this at all. Consumer choice is geographically limited and is therefore highly limited within the sort of area you might be prepared to travel for shopping. There has long been evidence of faux price wars beween UK supermarkets which often enjoy prices well above those in other countries. This might be attributed to higher costs in the UK, but it’s made easier for the supermarkets that all their local competitors have similar costs. Businesses which have to compete internationally, suffer high costs in the UK and have to compete with the whole world.
No, supermarkets in the UK have a pretty easy time compared to so many other industries.
Indeed.
Even note the name.
super. markets. 😀
I’m afraid you aren’t making a lot of sense, HJHJ. Why would everyone having the same sorts of costs make life “easier” for the supermarkets? It just means they have to compete at a different level. It seems fairly apparent that the high cost of diesel relative to the rest of Europe contributes to higher prices. If I were to magically remove all the tax on diesel (if only), prices at supermarkets would drop by a huge amount.
Have you even thought of places like LIDL or ALDI, and their interesting way of cutting superficial costs?
Also, if the price wars aren’t “real”, why is Tesco consistently cheaper than Sainsbury’s, for example? What does Sainsbury get out of this “arrangement”?
The low-carb craze had a very limited sales impact in the UK, and the effects it did have were concentrated on food processing companies (eg Slim-Fast sales took a hit). There was little or no own-label low-carb movement in the UK, and I’ve not heard it suggested anywhere that it had any impact on supermarket dynamics.
The wider trend towards ‘masstige’ products (eg quality own-label ready meals, which Tesco can do well but where ASDA and Morrisons are struggling) might be a better example…
In my little corner of South Florida (Miami) there are two chains of supermarkets Publix and Winn-Dixie, both major players in the Southeastern US. There are other chains in Florida one have them have been able to make inroads in the Miami area.
Within 2 miles of my house are 4 large Publix supermarkets, two of them less than two years old and one of just opened and referred to by my kids as “Uber-Publix” for its sheer size and offerings. If you extend the circle to 5 miles there are probably 10 Publix and 3 or 4 Winn-Dixie markets not to mention several warehouse “clubs”, a sprinkling of small chains and one-off markets. None of these stores is ever empty during opening hours.
Despite the fact that the major stores all belong to the same two chains they compete with the other chain and and the warehouse stores and effectively compete within their own chain. As a result we are rewarded with ready availability of everything we could possibly need or want and the quality and prices are excellent.
The solution the Competition Commission is looking for is to leave things alone and let the marketplace decide who thrives, who survives and who sinks. Now thats what the word competition means.
Nathan,
It’s easier for the supermarkets than it is for many other businesses which have to contend with the high cost of the pound (it’s high because our interest rates are higher than other countries in order to counteract largely public sector induced inflation) compared to their overseas competitors. Thus they have an easier time (i.e less harshly competitive) than a typical goods manufacturer competing against suppliers from around the world, for example. Supermarkets also don’t have to compete with competitors paying a tenth of the minimum wage here – manufacturers do. If we could all buy our groceries from Wal-Mart in the US whilst living here, most of our local supermarkets couldn’t compete.
I’m not saying that they don’t compete – I’m saying that the environment in which they operate is much less harshly competitive than it is in many other businesses.
Your diesel point is erroneous – total taxes on road transport are not particularly high by European standards.
Dunno about England, but all you need to know about the competitiveness of the supermarket business here in the states is reflected in their margins.
Said margins are brutally low. Ergo, the business is competitive.
My gripe with supermarkets is that within their finite volume they will have a dozen brands of, say, fabric conditioner, each with subdivisions of smell, colour, size etc plus an own-brand fabric conditioner and a bargain-bucket level fabric conditioner. I, however, don’t want fabric conditioner. I have come shopping for dubbin. There is no dubbin at all.
Lousy market forces marginalising the leaky-booted cheapskate idiot section of the shopping public.
Online ordering and home delivery will become the standard operating model. Once this overtakes the old fashioned trip to the store, I foresee a risk of anti-competitive practises among those few stores which remain in traditional form in our high streets. After all, look at the choice, quality of produce and prices which prevail in our small neighbourhood shops- generally risible.
But for an increasing majority of the population, access to a range of competitive outlets is good, and will only get better.
The lack of competition with supermarket is down to the planning system in the UK. Since land for building large supermarkets is hard to acquire, expensive to buy and get planning permission for, supermarkets put a huge amount of effort into lobbying politicians.
The regulator is trying to correct a problem caused by regulations, in other words trying to correct government failure, not market failure.
RC Dean,
I believe that supermarket margins here are more than double those in the US. In general, notwithstanding some short term difficulties (e.g. Morrisons takeover of Safeway), they are some of the most profitable businesses in the country. Even Sainsbury’s, which has been woefully badly run in recent years, has never failed to make a profit. It has become more competitive in recent years, but it’s hardly cutthroat.
Wolfie, in my home town, Ipswich, all the largest supermarkets – there are Sainsbury’s/Homebase, Tesco, and ASDA – are located just outside the town proper, or were when originally built. Perhaps this has been to avoid the probles you bring up?
Anyway, as a general point, I’ve always wondered how on earth people prove that a monopoly is occurring. How come these commissions can prove that any company is charging a monopoly price? Surely the only way you can prove a monopoly price is being charged is by saying, “no – this is the price the should be being charged.” But it is surely the lesson of the socialist calculation debate that you cannot, from outside the market, decide what price commodities should be selling at. Even Marx said this. So how can they prove that there is a monopoly?!
What has the UK’s Competition Commission done in lowering the barriers to entry? Is it legally possibly for someone with… say a roadside fruit stand to expand into the supermarket business. Some say that it is impossible for a mom and pop fruit stand to compete with the big guys like Walmart. I say… suck on this!
Jungle Jim’s
It seems that a little mom and pop fruit stand guy is now installing a MONORAIL
I’m actually an employee of Somerfield, and I’d have to say that I’m disappointed to hear that the company may be forced to sell some of these stores.
The company has been focusing a lot of effort in the fresh and convienence areas in the last few years. And its infuriating to see that Tesco (which is 7 times the size of Somerfield) is able to buy an entire chain of such convience stores but does not incur the rath of the Competition Commission.
It just doesn’t seem fair.
Richard G
From what I remember, Ipswich has a very nice Sainsbury’s. Out of town, or edge of town sites are logical for big warehouse style shops and a lot cheaper than redeveloping town centre sites and more convenient too if you consider most of your shoppers want to carry their shopping in the car and need big car parks.
In the UK we seem to have some strange misconception that the whole country is covered in concrete and politicians have responded to that with tighter planning laws. The upshot is that all the good sites that are available have been taken up by supermarkets. A competitor can’t just buy up a field and build a new supermarket.
Planning laws have got a whole lot more restrictive since the 80’s in the UK. Most towns in the South East are bounded by Green Belt or at least planning restrictions such as strategic gaps.
The unintended(?) consequence is that new entrants cannot enter the market to a significant degree and this protects supermarket profits.
In addition, with planning guidance now saying that all new commercial development should happen in town and city centres to stop people needing to use cars, the cost of entry gets even higher.
Monty
I wouldn’t rush out and invest money on online ordering and home deliver — at least not in the US and were perhaps the most convenince-oriented people the universe 🙂
When the online ordering/home delivery thing first got started I didn’t see the WebVan/PeaPod guys succeeding. They knew the Internet, but they had zip understanding of the grocery business. I figured that as soon as the grocery guys figured out the Internet they WebVan/PeaPod guys would be history.
Afterall, the grocery guys alread understood the acquisition, warehousing and distribution of a very, very low margin commodity. Well, the WebVan guys are gone and PeaPod is as good as gone. In our case, Publix started an online ordering/home delivery operation with great fanfare about two years ago. I figured if anyone would make it work it would be them. But as they say, it is history, quietly shutdown last year.
Home delivery might make a comeback, but its hard to see how. The technology guys can’t make it work and the grocery guys can’t make it work. Who’s left, UPS?
HJHJ writes that the supermarket business is “hardly cutthroat”.
Forgive my bluntness – too much coffee – but the fellow is talking nonsense. If you look at the businesses of Tesco, Sainsbury, and the others, margins are incredibly tight. Any cursory reading of their quarterly results would confirm this. I know several people who have worked at firms like ASDA, and they say they have never known a business so brutally competitive.
There are plenty of problems such as the planning system, as Wolfie eloquently put it. But the abuse heaped on supermarket chains seems out of kilter with the real nature of the problem. Anyway, if their margins really were so big, why are not direct delivery businesses and other would-be competitors moving in?
In the US gross margins of 7% are considered FANTASTIC in the grocery business, and that was in the pre-WalMart era of the late 80s.
Home delivery IS starting to pop up here too. We prefer (when we have the money; below a certain amount the delivery percentage gets to be too onerous) to get our groceries online from our local chain, Basha’s. They have the best produce and meat sections in town, and delivery fees for the month have always been less that the cost of car ownership. Their other big competitors in AZ, Albertsons and Safeway, are tiptoeing into online delivery, too.
The webvan/peopod guys certainly did NOT know how to run such a low margin business, and the grocery stores earlier trials often failed because of technology failures, but as the internet matures those issues have largely started to go away, and they are (re)entering that market space.
It took my wife and I a while to get used to not picking out our own produce and meat, but the stuff they choose is better than anything at their competitors, so why WOULD I want to venture out into the AZ heat and smog?
If they really want to protect consumers and deliver lower food prices I suggest they force the EU to stop protecting agriculture. There is more “Cash on the Table” there than in all the supermarkets profits put together.
What wolfie said. Where does the concreted-over-country misconception come from? Don’t people look out of the window when they fly?
I have noticed this and found it pretty weird – in the UK, you go to a little village in the middle of nowhere and you find terraced houses surrounded by hundreds of hectares of fields (which are uncompetitive in a global marketplace.)
It’s almost as like the government has some sort of secret ‘we must keep the country able to self-sustain in terms of foodstuffs’ plan, as if they’re planning on something like WW2 happening again and food imports being torpedoed en-masse.
The long term planners here seem both to be worried about overcrowding of roads (so curtailing development that encourages people to use cars) while being simultaneously concerned about infrastructure overuse in cities (where population density is increasing faster than the ability of the infrastructure to cope) but while further encouraging people to overpopulate, presumably to stop the social security pyramid scheme from collapsing.
It’s all a bit counter-intuitive.
Johnathon,
You misunderstand me. I did not say that the supermarket competition in the UK is ‘hardly cutthroat’ because I am somehow against supermarkets. I am not against supermarkets at all – far from it.
I made this statement simply because, in the UK, this is clearly true. The level of margins (not a particularly good general measure, incidentally, as it does not provide a valid comparison with other types of business), ROI and profits of supermarkets in the UK is very high by international standards. This is well documented, despite your erroneous claim about “incredibly tight’ margins in UK supermarkets. Yes, supermarket margins are low compared with most other businesses, but the nature of the business means that a high ROI can be made on relatively low margins. May I ask whether you have a business background?
Compare with the world PC market or the memory (esp. DRAM market). There is no way that supermarkets in the UK operate in anything like as competitive a market.
Mr Steele,
Thank You for your response. In the UK there are two online/delivery models. The biggest is the sector started by the major supermarket chains such as Tesco and ASDA. They have applied their existing expertise in Grocery retailing to the web sector, and it is working very well.
The other is the arrival of speciality online retailers, mainly offering luxury groceries and exotic items not normally available from the major outlets. Their continued viability has yet to be demonstrated, but I can vouch for the diversity and high quality of their produce.
I am somewhat inclined to agree with HJHJ (to some extent at least)… if you take a trip to one of the many street markets in London, for example the one on North End Road in Fulham every Saturday, you can buy meat and veg for between 20% to 50% less than in Sainsburys or Waitrose on the King’s Road. Perhaps those supermarkets are unusually expensive due to the fact they are in Chelsea, but that is one HELL of a difference. Maybe it is a mistake to only compare how supermarkets compete with each other… contrary to what many folks seem to think, there are alternatives which are not to hard to find if you care to look.
Perry,
I know a few people in the supermarket business. I asked one of them about the price of fruit and veg which struck me as extraordinary high in UK supermarkets when I returned from working and living in Belgium. He was quite open – he said that all supermarkets traditionally tended to make very high margins on fruit and veg and that none of them saw any advantage in changing the situation (unsurprisingly). Fruit and veg are not generally ‘KVIs” (Known Value Items), so consumers tend not to compare them. The fact that this hasn’t really changed tells you that competition between supermarkets cannot be all that intense.
There is no doubt that the supermarket business has become more competitive in the UK in recent years, but in this respect it is some way behind other countries. I think that this is best illustrated by the fact that even UK supermarkets known to be badly managed in recent years (e.g. Sainsbury’s and Safeway) have still managed to be surprisingly profitable. In the case of Sainsbury’s their former US subsidiary (Shaw’s) lost money, however. UK supermarket crises occur when they have performed poorly and grown less quickly than better managed supermarkets. In many other industries, they would have made losses.
Incidentally, I don’t think the fact that the supermarkets you mention are in Chelsea is much of a factor. Supermarkets tend to price nationally, except where tactical reductions are necessary to respond to local competitors (they have been known use predatory pricing to drive out local competitors).
I like supermarkets (well not Tesco, even though I concede that they must be well run compared to most competitors) but let’s not pretend that they always offer great value. Where I live, it is very difficult to find a local butcher. When I visit Lincoln (where there are still many butchers) I am reminded of how much better the choice and quality of meat is and how much cheaper. I suspect that because the pace of life there is somewhat more gentle, shoppers have more time and inclination to value other factors above convenience.
I think Tesco richly deserve their premier position in the UK, their stores tend to be well organised, well managed and very well marketed indeed. Whoever does their store planning also seems to be able to get away without the obligatory local council “bribery” that is so prevalent in Sainsburys’ or (as was) Safeways’ planning – a prime example must be the awful Lubyanka-style council estate off Chalk Farm Road in Camden, built by Safeways in the mid 90’s in order to be able to obtain planning permission to build a store in Camden.
As for tired, poor old Sainsburys they really do seem to have dropped the ball on how to run a business. Their latest gimmick “The Sainsburys Market” demonstrates a remarkable incompetence from just about every single aspect you can imagine. Staff are allocated to stand behind counters and appear as ‘experts’ – a risible experience was asking a member of staff what a good Brie was, only to be asked, “is that the one that looks like Camembert, only cheaper?”, while their wine ‘expert’ wisely now limits his skill to just operating the white wine chiller for customers rather than showing off his ability to suggest that Crozes Hermitage was an “excellent Grand Burgundy”. It would almost seem that Sainsburys and the other food chains accept that they can not compete with Tesco or Morrisons now and have settled for a ‘norm’ of second-rate service and pricing, a great shame when you consider how relatively effortless the market leaders make it look.
Never mind, as Perry states it only helps to drive consumers back to local grocers and such local shops as the excellent North End Road market offers, and I infinitely prefer to buy wine in Oddbins now than in a supermarket.
Julian,
If you are thinking of buying wine in a supermarket, Waitrose is head and shoulders above the rest. The size of the bigger chains makes it very difficult for them to offer more interesting wines produced in lower quantities. Waitrose also have by far the best team of buyers.
There is something about Tesco that I dislike intensely, although I concede that they clearly know and service their market very efficiently. For me it’s Waitrose for a civilised experience, quality and well-informed staff, and ASDA because it straightforwardly concentrates on value.