CASE STUDY 2: Supermarkets
The Competition Commission enquiry into supermarkets, which began in April 1999, followed a nine-month investigation by the Office of Fair Trading (OFT) into the major supermarket chains’ business activities. The OFT identified three major areas of concern: the use of barriers to entry, the lack of effective price competition, and the relationship between the large supermarket chains and their suppliers.
The main issue concerns the major supermarket chains’ huge buying and selling power. They have been able to drive costs down by forcing suppliers to offer discounts. Many suppliers, such as growers, have found their profit margins cut to the bone. However, these cost savings have not been passed on from supplier to shopper. The supermarket chains have adopted a system of ‘shadow pricing’, a form of tacit collusion whereby they all observe each other’s prices and ensure that they remain at similar levels: often similarly high levels rather than similarly low levels! This has limited the extent of true price competition, and the resulting high prices have seen profits grow as costs have been driven ever downwards. Since the OFT referral, the £6.7 billion take-over of Asda by Wal-Mart, the world’s largest retailer, with a reputation of being a ruthless price cutter, promised to change the whole issue of pricing in the supermarket sector. …show more content…
Of the supermarket chains, Asda has always been one of the cheapest. With the Wal-Mart take-over, the drive to cut prices gained fresh momentum. Asda planned to slash prices on hundreds of products, with most seeing some price reduction. Tesco in response, striving to maintain its position as the UK’s number one supermarket retailer, launched its own price-cutting campaign. It was determined not to get left behind in the price cutting war. Despite these apparent price wars, the Competition Commission was still concerned that competition was being restricted. It sought to answer a number of questions. Is price competition is limited to a relatively small number of frequently purchased items, and at stores which face the most local competition? Are cost reductions ‘being rapidly and fully passed through to consumers’? Is ‘the pattern of prices and margins across different types of product, including branded and own label products, related to costs …show more content…
By March 2006 the OFT had uncovered more substantive evidence of the potential abuse of market power in the grocery sector by the supermarkets. Specifically it noted four issues.
• Supermarkets have acquired many plots of land near their own stores to prevent rivals from buying the sites. The rivals are often unable to find alternative sites in the area because of planning restrictions.
• The power to drive down the prices paid to suppliers has increased since 2000. This makes it more difficult for convenience stores to compete, given that their wholesalers often do not have equivalent power to drive down prices from suppliers.
• A possible distortion of competition by charging high prices where there is little or no competition and charging lower prices, often below cost, where competition is more intense.
• Entry into the convenience store sector. With brands such as ‘Tesco Metro’ and ‘Sainsbury’s Local’, supermarkets have been successful in driving out many small stores from the market. So far, the result has tended to be lower prices, ‘but this may have been at the expense of choice of store at the local
The Competition Commission enquiry into supermarkets, which began in April 1999, followed a nine-month investigation by the Office of Fair Trading (OFT) into the major supermarket chains’ business activities. The OFT identified three major areas of concern: the use of barriers to entry, the lack of effective price competition, and the relationship between the large supermarket chains and their suppliers.
The main issue concerns the major supermarket chains’ huge buying and selling power. They have been able to drive costs down by forcing suppliers to offer discounts. Many suppliers, such as growers, have found their profit margins cut to the bone. However, these cost savings have not been passed on from supplier to shopper. The supermarket chains have adopted a system of ‘shadow pricing’, a form of tacit collusion whereby they all observe each other’s prices and ensure that they remain at similar levels: often similarly high levels rather than similarly low levels! This has limited the extent of true price competition, and the resulting high prices have seen profits grow as costs have been driven ever downwards. Since the OFT referral, the £6.7 billion take-over of Asda by Wal-Mart, the world’s largest retailer, with a reputation of being a ruthless price cutter, promised to change the whole issue of pricing in the supermarket sector. …show more content…
Of the supermarket chains, Asda has always been one of the cheapest. With the Wal-Mart take-over, the drive to cut prices gained fresh momentum. Asda planned to slash prices on hundreds of products, with most seeing some price reduction. Tesco in response, striving to maintain its position as the UK’s number one supermarket retailer, launched its own price-cutting campaign. It was determined not to get left behind in the price cutting war. Despite these apparent price wars, the Competition Commission was still concerned that competition was being restricted. It sought to answer a number of questions. Is price competition is limited to a relatively small number of frequently purchased items, and at stores which face the most local competition? Are cost reductions ‘being rapidly and fully passed through to consumers’? Is ‘the pattern of prices and margins across different types of product, including branded and own label products, related to costs …show more content…
By March 2006 the OFT had uncovered more substantive evidence of the potential abuse of market power in the grocery sector by the supermarkets. Specifically it noted four issues.
• Supermarkets have acquired many plots of land near their own stores to prevent rivals from buying the sites. The rivals are often unable to find alternative sites in the area because of planning restrictions.
• The power to drive down the prices paid to suppliers has increased since 2000. This makes it more difficult for convenience stores to compete, given that their wholesalers often do not have equivalent power to drive down prices from suppliers.
• A possible distortion of competition by charging high prices where there is little or no competition and charging lower prices, often below cost, where competition is more intense.
• Entry into the convenience store sector. With brands such as ‘Tesco Metro’ and ‘Sainsbury’s Local’, supermarkets have been successful in driving out many small stores from the market. So far, the result has tended to be lower prices, ‘but this may have been at the expense of choice of store at the local