Work: Supermarket Dominance

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Supermarket Report

Have supermarkets become too big to the extent that they are damaging competition?

Introduction

The dominance of the major supermarkets in the 1990’s

The dominance of the major supermarkets, and the adverse consequences for competition, has been criticised for many years.   Unfair competition has been tolerated by UK regulatory authorities.  Predatory pricing was permitted as goods were allowed to be sold for less than half what they cost the supermarket, on the basis that this practice benefitted the consumer.  The interests of the independent shopkeeper were overlooked (Lang and Raven 1995), (Lang et. al. 1995).  In 1995, The Office of Fair Trading allowed supermarkets continued expansion because the major food retailers were not close to 25 per cent of the national grocery market; a definition which has been used to define a monopoly. This was despite supermarkets dominating many local markets.  Competition was being undermined given that food “shopping is a local, not a national activity” (Lang and Raven 1995).  “Geographic markets for the sale of supermarket products are inherently local, (as) most consumers frequent supermarkets within a few kilometres of their home” (Cotterill 2006:19).  This allowed the major supermarkets to hinder the opposition in the locality through the use of predatory pricing discussed above.  More recently, the number of local communities who have opposed planning permission for major supermarkets suggests that many people believe that supermarket domination has affected retail competition (Simms 2007). 

The report will develop an analysis of UK grocery retailing from 2000.  It will then outline how the major supermarkets have remained dominant.  In terms of economic theory, the oligopolistic structure of the industry has been maintained and the leading supermarkets have strengthened their position.  The political framework in which the supermarkets operate has inconvenienced the ‘big four’.  However, neither the Competition Commission nor the Office of Fair Trading has seriously threatened the main grocer’s market status.  While planning policies have restricted the growth of out-of town stores, the supermarkets have used the restrictions to their advantage with mezzanine floors built within hypermarkets and convenience shops opened in urban centres.  Therefore, there is evidence that competition has been hindered with limited opportunities for new entrants into the market.  In economic terms, the industry is not a ‘contestable market’; it is one where independent food retailers have suffered greatly.  Nevertheless, the grocery market has recently become more competitive with firms outside of the ‘big four’ performing strongly (Ruddick 2013). 

The Oligopolistic Structure of UK Food Retailing

The oligopolistic market structure, where the grocery market is dominated by a few large food sellers, provides evidence that the supermarkets have become too big and have restricted competition.  The current situation is one which favours dominant firms which have benefitted from economies of scale.  These firms are large, relative to the market as a whole, so that it is only possible for a few to operate in the industry (Sloman 2007).  The dominance can be seen with the greater proportion of retail sales that have been accounted for by a smaller “number of retail organisations” (Burt and Sparks 2003:239). 

The concern was that the retail oligopoly could lead to “one or two chains which have the potential to use their market power to maintain their position at the expense of others” (Burt and Sparks 2003:242).  After 2000, it was suggested that only Asda and Tesco would dominate the UK grocery market.  The entry of Wal-Mart was seen as a turning point in the operation of the UK retail market.  This was because, arguably, only Tesco would be able to match Asda-Wal-Mart’s bulk-buying capability (Fox and Vorley 2004).  These two companies would achieve savings from buying more cheaply from suppliers, and these savings would be passed onto customers to protect market share.  The implication is that other retailers would not be able to purchase goods as cheaply from suppliers.  Smaller grocers would not be able to offer the same low prices compared to Asda and Tesco.  This analysis was pessimistic as Sainsbury’s and Morrisons, with its acquisition of Safeway, remained competitive with Asda and Tesco.  However, the major four supermarkets have been able to restrict grocery competition as they have been most able to exploit their suppliers (Simms 2007).

The leading four supermarkets have been able to undercut the competition.  Arguably, Morrisons was able to under-price its smaller rivals further with its acquisition of Safeway.  This allowed it to “increase (its) throughput in its food processing and food packaging subsidiaries” which should have lead to lower prices in its shops (Bevan 2006:193).

The Role of the Competition Commission

The Competition Commission allowed Morrisons to takeover Safeway given that it was smaller than Tesco, Sainsbury and Asda.  However, this has led to four large supermarkets rather than a previous ‘big three’.  The Competition Commission can be seen as ineffective on the basis of Morrisons' takeover of Safeway. Indeed, “the 1998 Competition Act and the 2002 Enterprise Act have made interventions (in the UK grocery market) more difficult” (Anderton 2008: 415).  One of the concerns is the difficulty in measuring the extent of current monopoly abuse. The Competition Commission has not prevented the major supermarkets from continuing their dominance; rather it has allowed defensive mergers to take place.  This was the case with the merger of Morrisons and Safeway.

The damage to retail competition can be seen with the fate of the former Safeway supermarket chain in the early 2000’s.  The former Chief Executive believed that an independent Safeway could not compete on price, given the buying power of Asda and Tesco.  Safeway was dismissed by Asda’s executives as not an ‘effective constraining competitor’ for Sainsbury and Tesco (Bevan 2006:192).  In other words, that Safeway could not compete.  This is an admission by one of the ‘big four’ supermarkets that other rivals were not competitive and that rivalry had been damaged.  The next section will examine how the leading supermarkets have achieved domination through their ability to acquire suitable locations for their stores.

Planning Policy and the Dominance of the Major Supermarkets

The ‘big four’ supermarkets have occupied valuable retail locations. Competition has been marginalised because smaller retailers have faced barriers to growth as they have not had access to important retail locations (Burt and Sparks 2003).   The larger firms have had larger reserves of capital with which to purchase land.

Planning policy has restricted competition in other ways.  The major supermarkets’ ‘out of town’ stores encouraged consumers to shop in one place which discouraged people from going to other retailers (Reynolds and Cuthbertson 2004).   This acted as another ‘barrier to growth’ for potential rivals to the ‘big four’ supermarkets.  Also the growth in car ownership meant that consumers frequently only made one major shopping journey a week (Bevan 2006). 

The “planning regulation PPG6 (was) designed to protect the provincial high streets of Britain” (Bevan 2006:100).  However, stronger planning regulation has contributed to the success of the ‘big four’.  They have used large stores to dominate the market, given that other potential rivals were less able to build large stores (Wood et. al. 2006).  Additionally, the major supermarkets have circumvented planning restrictions as UK planning law has not prevented them from expanding their floor-space with “mezzanine floors ... constructed within existing superstores” (Wood et. al. 2006:10).  This gave the major supermarkets the opportunity to sell more and dominate the competition to a greater extent.

Convenience Shops 

Another example of where the major supermarkets have become dominant to the extent of damaging their rivals is convenience shopping.  The main supermarkets have undermined the independent sector, in particular, because they have developed their own convenience stores.  Arguably, Tesco is confusing the public through the use of ‘shadow brands’ (Goodley 2010).  Tesco’s One Stop convenience chain could be used to disguise Tesco’s strength as customers may not realise that the brand belongs to Tesco.

Again, there has not been significant state intervention to reduce the power of the supermarkets.  The big four have used smaller stores and convenience shops as a method of increasing their market share.  “One of the attractions for the supermarkets is that buying convenience stores has, so far, not raised competition issues” (Seely 2012:7).  However, state intervention has been required to “improve competition in local markets” (Seely 2012:7).  Possibly, Tesco’s expansion into convenience shop retailing did not require state intervention.  It was thought that Tesco would “continue to account for only a small proportion of national convenience retailing” (Office of Fair Trading 2002).  Nevertheless, with organic growth, with opening a shop at a time, Tesco now has a strong presence and its dominance in many local markets has increased.  Tesco’s national market share has reached 30% (Wylie 2011).  The competition concerns, over Tesco, also apply to the other supermarkets amongst the ‘big four’.   In 2013, Morrisons acquired existing shops to be used as convenience stores (Roland 2013).  This could have the affect of damaging local competition if patterns of lower or predatory pricing are repeated.  The Competition Commission claimed to be sympathetic to competitive pressures affecting independent retailers (Competition Commission 2008).   Nevertheless, it concentrates on the argument, made on page one, that “there is rivalry between (large) retailers which (will) benefit the consumer” (Competition Commission 2008).  It is though difficult to argue that the major supermarkets do not reduce competition from independent shops.  This topic will be addressed in the next sections. 

The Theory of Contestable Markets

The Competition Commission’s viewpoint can be questioned as the UK grocery market, does not exhibit the real threat of competition from new-entrants, so it cannot be described as a “contestable market” (Sloman 2007:124).  There are high barriers to entry in the British supermarket industry as the large stores have been difficult for smaller rivals to replicate.  The UK grocery market is one which is difficult to contest because “the costs of entry (and exit)” are high and it is also difficult to enter the market quickly (Sloman 2007). The increase, in size and consequently the power of the supermarkets has helped them to shape the market to their advantage so that it has become less contestable. Arguably, it would be better if food retail markets approximated to perfectly competitive markets as this should mean cheaper prices for consumers. Grocers, such as those in covered markets, which sell homogenous goods, operate in such competitive markets. This competition is arguably superior to the frequent non-price competition of the major supermarkets.  The concern is that the supermarkets’ power allows them to thrive using “non-price competition” such as voucher schemes (Anderton 2008:430).   The markets and independent shops rarely provide a viable alternative to the major supermarkets. 

The Damage to Independent Food Retailing

The supermarkets have undermined competition from independent shops for decades (Simms 2007).  Arguably, the expansion of supermarkets has also contributed to the closure of small shops, with the closure of 12,000 independent local stores in 2010 (Vallely 2011).  However, despite clear damage to the independent sector the situation is more complicated than those closures suggest.  In southern England, there was some evidence of small shops remaining “robust to competitive supermarket opening” in the early 2000’s (Wrigley et al. 2009).

The Changing Face of UK Food Retailing

However, the dominance of the ‘big four’ supermarkets has receded with the recent recession and the emergence of strong discount competition.  The end of 2013 is a significant period, in UK grocery retail, as the big four supermarkets have all lost market share to competitors (Butler and Bowers 2013).  This suggests that, recently, not all smaller competition has been affected by the major supermarkets.  Some of their rivals have improved sales at the expense of the big four. 

The Threat to the ‘Big Four’ from the Discounters

Since the recession of 2008, the ‘big four’ have faced competition from continental European discounters.  Lower disposable incomes have led to customers trading down in food.  Customers of the major four supermarkets have frequently chosen discount supermarkets instead.  Shopping at Aldi can be seen as “smart shopping" (Steenkamp et. al. 2009). The big supermarkets have been threatened by Aldi which has managed to offer lower prices through a lower cost operation (Emsell 2011).  This is in comparison to the major supermarkets.  The Competition Commission is accurate when it argues that competition from Aldi is benefitting the consumer.  However, the commission has not addressed the need to intervene to regulate the supermarkets; such as breaking them up into smaller units.  Rather it has hoped that low price competition, such as that from the continental discounters can compete successfully with the ‘big four’ supermarkets. 

Conclusion

There have not been sufficient changes to the legal framework to challenge the dominance of the big four supermarkets.  The supermarkets have been able to grow significantly in the context of non-interventionist policies.  Their growth has remained unchecked despite having to sell-off stores when they have made takeovers; such as Morrisons' acquisition of Safeway. It has therefore been suggested that there needs to be greater state intervention in the UK grocery market (Lang and Heasman 2004).  One caveat can be provided, though, in the supermarkets’ defence. Arguably, it is not the supermarkets which have been damaging the consumer but the customers themselves.  Supermarkets have been accused of destroying small shops. However, customers have “opted for supermarket shopping” and this “was responsible for the closure of ... many independent retailers” (Bevan 2006:47).  Therefore, customers, as well as supermarkets, have to take responsibility for the general decline in UK grocery competition.

References

Anderton, A., (2008), Economics, Fourth Edition, Harlow, Causeway Press

Bevan, J. (2006), Trolley Wars: The Battle of the Supermarkets, London: Profile Books

Burt, S. and Sparks L. (2003), Power and Competition in the UK Retail Grocery Market, British Journal of Management, Vol. 14, p. 237-254 

Butler, S. and Bowers S. (2013), Britain's big supermarkets lose ground to cut-price rivals and upmarket grocers: Tesco, Sainsbury's, Asda and Morrisons see market share fall as shoppers switch to Aldi, Lidl and Waitrose

Competition Commission, (2008), Groceries Market Investigation – Final Report

Cotterill, R. (2006), Antitrust analysis of supermarkets: global concerns playing out in local markets, The Australian Journal of Agricultural and Resource Economics, 50, pp. 50-72

Emsell, P. (2011), Aldi – “The No Frills Retailer”, University of Huddersfield Repository

Fox, T. and Vorley B. (2004), Stakeholder Accountability in the UK Supermarket Sector

Goodley, S., (2010), Tesco's One Stop angers rivals with 77-store purchase

Lang, T. and Heasman, M. (2004), Food Wars, The Global Battle for Mouths, Minds and Markets, Earthscan, London

Lang, T., and Raven H.  (1995), Cheap food - at a huge price: The supermarket revolution is bad value for society

Lang, T., and Raven H. and Dumonteil C. (1995), Off our Trolleys? Food retailing and the hypermarket economy', London: Institute for Public Policy Research 

Office of Fair Trading, (2002), Proposed acquisition by Tesco plc of T & S Stores plc

Reynolds, J. and Cuthbertson C. editors (2004), Retail Strategy: The View from The Bridge, London: Butterworth-Heinemann

Roland, D. (2013), Morrisons eyes expansion in south as snaps up Blockbuster stores

Ruddick, G. (2013), Sunday interview: Lidl's UK boss Ronny Gottschlich

Seely, A. (2012), Supermarkets: Competition Enquiries into the Grocery market, Business and transport Section, House of Commons Library 

Simms, A. (2007), Tescopoly: How one shop came out on top and why it matters, London: Constable and Robinson

Sloman, J., (2007), Essentials of Economics: Fourth Edition, Harlow: Prentice Hall

Steenkamp, J. B. and Kumar, N. (2009), Don’t be Undersold, Harvard Business Review, December, Vol. 87, Issue 12

Vallely, P. (2011), Don't moan about supermarkets – act

Wood, S. Lowe, M. and Wrigley N. (2006), Life after PPG6, Recent UK Food Retailer Responses to Planning Regulation Tightening

Wrigley, N., Branson, J., Murdock, A. and Clarke, G. (2009), Extending the Competition’s Commissions findings on entry and exit of small stores in British high streets: implications for competition and planning policy

Wylie, C. (2011), Price war hits Tesco market share

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