February 19, 2008
U.K. Probe: Consumers Need More Supermarket Competition
By Bernice Hurst, Managing Director, Fine Food Network
Leaving aside all the ethical arguments about whether or not suppliers and consumers love or hate supermarkets and how much, if any, responsibility they (supermarkets, that is) have to anyone other than shareholders, there are still several important issues arising from the latest investigation into the British way of shopping.
The Competition Commission released its report on February 15, confirming conclusions it reached following a two year study based on whether competition has been “prevented, distorted or restricted” by supermarkets. The UK’s supermarket sector is dominated by four major chains – Tesco, Asda, Sainsbury’s, and Morrisons. Its terms of reference concerning choice defined local as being within a fifteen minute drive for most consumers.
Among
the questions many consider unanswered are the relationship between suppliers
(especially farmers) and consumers, particularly whether they have any sympathy
with one another. It could be said that if one group benefits, the other is
bound to lose with retailers caught in the middle. And while customers can
vote with their wallets, suppliers often have more limited choices.
One proposal
from the Competition Commission calls for the introduction of an Ombudsman
to police the relationship between suppliers and supermarkets and ensure the
suppliers get a fair deal. The Commission admits that there is often a “climate
of fear” among suppliers, which stops them from speaking out when they have
been badly treated by the supermarkets.
Location and the definition of convenient
access are also debatable with arguments raging as to whether planners should
ensure that consumers have a choice of several (different) supermarkets within
a given distance rather than giving approval on a first come, first serve basis.
Or, for that matter, where they should be located in order to make them more
universally accessible.
A new “competition test” would take account of how many outlets a supermarket already has in a particular area but would apply only to those larger than 1,000 square meters and therefore not prevent a combination of different sizes being opened by the same company.
While the devil may be in the detail, the headline pronouncements all displeased one group or another. The Competition Commission may soon find that its work is not yet complete after all.
Discussion questions: Has the clout of the largest food retailers in the U.S. become such that they now hold an unfair sway over CPG manufacturers? Conversely, do small grocers in the U.S. need safeguards to assure they have access to product and fair pricing from CPG category leaders? Do the current trade “imbalances” in U.S. food retailing work to the benefit or detriment of consumers?
- Supermarket powers to be curbed – BBC News
- Whitewash report will fuel supermarket boom – The Telegraph
- Small shops lose out as regulators back power of the supermarkets – The Independent
- Supermarkets emerge unscathed after third major inquiry in eight years – The Guardian
- Tesco condemns watchdog’s move as growth cap on success – The Times
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Discussion Questions
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The Competition Commission’s study proves the Compromise Conundrum, which goes something like this: “Compromise is the solution where no party is entirely satisfied with the outcome.”
What the heck? Everyone knows when one side gets too strong the consumer loses. Just like with oil prices.
Last time I looked, the US had a capitalism-based economy and the UK had a socialism-based economy (with a lot of capitalism creeping in).
I can’t imagine why we would regulate supermarket competition. As Deming used to say, survival is not mandatory. As long as the game is to make the most money by delivering the best product, we should not be regulating anything.
I understand the role of government as setting fair and equitable rules for competition and, of course, for safety, as it ventures into the business world. But I think–and quite strongly–that it becomes dangerous when governments then need to define the results of that competition.
Both the retailers and suppliers evolve over time as one and then the other seems to or actually takes the stronger position. But it’s that very important pendulum that causes innovation, cost savings and efficiency. Not sure how many government programs have those goals….
I think there are adequate safeguards in the U.S.–and probably the UK–to insure that independents are getting a fair shake from most CPG companies. If not, someone will eventually blow the whistle on unfair practices.
Besides, we are already seeing the swing from Wal-Mart to small-mart. Good independents are doing quite well on their own and the last thing they need is more government intervention and having more bureaucrats running around tilting at windmills.
Re: Bernice’s third question, I pose a responding question: “Are there really current trade ‘imbalances’ in U.S.? If that is true, has that not always been the case in the USA only with different sector players controlling the “imbalances?” If so, doesn’t that usually occur in a free enterprise system? When “clout” is achieved by any participant in any competition is it always unfair or is it something everyone prepares for?
Large chains, small retailers and CPG companies are all in a fast-moving river that leads to consumers at a ever-revising finish line. The victory usually goes to the most creative swimmers maneuvering among prevailing currents. Those not innovative in dealing with the whirlpools and eddies, or those who hesitate and await cumbersome government assistance, usually drown. So I say to retailers of all sizes and to CPG companies: Those who hesitate are won.
One of the reasons that consumers perceive the need for more competition, in the U.K. as well as in the USA, is that almost all supermarkets are carrying almost exactly the same assortment of products at almost exactly the same price. In the U.S., for example, the “Safeways of the world” are choosing product assortment from what seems like strictly the top UPC rankings from IRI or Nielsen; and resultfully, this leaves little room for imagination, new products, or new excitement. I would love to see Supermarkets become more open to carrying more niche items, newer more “outside-the-box items,” and to embrace the chance to surprise the consumer with items they did not expect to find at the supermarket.
Most of the USA allows unfettered retail competition because there are few meaningful location growth restrictions. Anyone with enough money can lease supermarket space, buy or lease some fixtures, and open a store. In many European countries, and in a few USA cities, strong zoning laws restrict availability of new large format store locations. So incumbent merchants are protected from new competition (but not from rent increases, unless they own their locations).
Supermarket competition in the USA got a lot sharper when new, nonunion grocery entrants came into each local market (Target, Wal-Mart, dollar stores, drug chains). If Europeans prevent new entrants by keeping the clamps on real estate development, there won’t be the same level of ferocious competition found in the USA. Look at European gross margin percentages: generally they exceed comparable USA retailers.
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The Competition Commission’s study proves the Compromise Conundrum, which goes something like this: “Compromise is the solution where no party is entirely satisfied with the outcome.”
What the heck? Everyone knows when one side gets too strong the consumer loses. Just like with oil prices.
Last time I looked, the US had a capitalism-based economy and the UK had a socialism-based economy (with a lot of capitalism creeping in).
I can’t imagine why we would regulate supermarket competition. As Deming used to say, survival is not mandatory. As long as the game is to make the most money by delivering the best product, we should not be regulating anything.
I understand the role of government as setting fair and equitable rules for competition and, of course, for safety, as it ventures into the business world. But I think–and quite strongly–that it becomes dangerous when governments then need to define the results of that competition.
Both the retailers and suppliers evolve over time as one and then the other seems to or actually takes the stronger position. But it’s that very important pendulum that causes innovation, cost savings and efficiency. Not sure how many government programs have those goals….
I think there are adequate safeguards in the U.S.–and probably the UK–to insure that independents are getting a fair shake from most CPG companies. If not, someone will eventually blow the whistle on unfair practices.
Besides, we are already seeing the swing from Wal-Mart to small-mart. Good independents are doing quite well on their own and the last thing they need is more government intervention and having more bureaucrats running around tilting at windmills.
Re: Bernice’s third question, I pose a responding question: “Are there really current trade ‘imbalances’ in U.S.? If that is true, has that not always been the case in the USA only with different sector players controlling the “imbalances?” If so, doesn’t that usually occur in a free enterprise system? When “clout” is achieved by any participant in any competition is it always unfair or is it something everyone prepares for?
Large chains, small retailers and CPG companies are all in a fast-moving river that leads to consumers at a ever-revising finish line. The victory usually goes to the most creative swimmers maneuvering among prevailing currents. Those not innovative in dealing with the whirlpools and eddies, or those who hesitate and await cumbersome government assistance, usually drown. So I say to retailers of all sizes and to CPG companies: Those who hesitate are won.
One of the reasons that consumers perceive the need for more competition, in the U.K. as well as in the USA, is that almost all supermarkets are carrying almost exactly the same assortment of products at almost exactly the same price. In the U.S., for example, the “Safeways of the world” are choosing product assortment from what seems like strictly the top UPC rankings from IRI or Nielsen; and resultfully, this leaves little room for imagination, new products, or new excitement. I would love to see Supermarkets become more open to carrying more niche items, newer more “outside-the-box items,” and to embrace the chance to surprise the consumer with items they did not expect to find at the supermarket.
Most of the USA allows unfettered retail competition because there are few meaningful location growth restrictions. Anyone with enough money can lease supermarket space, buy or lease some fixtures, and open a store. In many European countries, and in a few USA cities, strong zoning laws restrict availability of new large format store locations. So incumbent merchants are protected from new competition (but not from rent increases, unless they own their locations).
Supermarket competition in the USA got a lot sharper when new, nonunion grocery entrants came into each local market (Target, Wal-Mart, dollar stores, drug chains). If Europeans prevent new entrants by keeping the clamps on real estate development, there won’t be the same level of ferocious competition found in the USA. Look at European gross margin percentages: generally they exceed comparable USA retailers.