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May 10, 2006

Supermarkets and the Competition Commission

I hadn’t seen that the supermarkets have actually been referred to the Competition Commission.

Two years of disruption of the whole sector....but perhaps a price worth paying.

The Office of Fair Trading (OFT) referred Britain's grocery sector to the commission because evidence suggested that some chains were abusing their size by pricing products below cost.

Exactly comparable to "dumping" when used to refer to trade. The correct response to which is "Ta very much". I’ve got a similar sort of thing going on in the day job at the moment. A potential customer is offering a multi-year purchasing contract, good volumes, reasonable margins, but to start with he needs a sample. That’ll cost me $1,500 to supply and no, he won’t pay for the sample.

Is this me dumping goods at below production cost? Yes. Is this "unfair competition"? By the definitions being used here quite possibly. It’s also an entirely normal part of the way that business works. I don’t see the difference, in moral terms, between what I’m doing and a supermarket attracting shoppers with 5p cans of baked beans in order to get the other 100 quid they’re going to spend on their weekly shop.

The OFT also believes that supermarkets are using large "land banks" to stop rival retailers from opening new outlets and said that its concerns were shared by the majority of the 1,200 consumers and businesses who responded to its initial report in March.

Hopefully the report will tell us whether this is actually true. I have no doubt that there are indeed land banks...but then again, how long does it take to get planning permission and to actually build a store? If the whole process takes, say, 5 years and they have 5 or 6 years land in such a bank then they’re just being rational aren’t they? If 50 then perhaps they are trying to deny it to others.

"The buying power of the major multiples skews the market in their favour, and means that scale, not retailing skill, is the critical factor for succeeding in the market."

Tee Hee! You mean that there might be economies of scale in retailing? Shocker!

As I say, this investigation might actually be worth all the effort. We might see a number of the misconceptions about the business explained away.

Update: As the Telegraph’s Business Comment puts it:

But as the OFT admits, the fundamental answer, if there is a lack of competition, has to be more supermarkets, not fewer. You can't improve competition without first improving supply. With this in mind, the OFT reckons the planning system "can reasonably be suspected of restricting or distorting competition", particularly by way of new large-format stores. This is probably not what the green lobby had in mind when complaining to the OFT.

May 10, 2006 in Politics | Permalink

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Comments

No doubt this is really an inquiry into Tesco's market share.

James

Posted by: james C | May 10, 2006 1:23:02 PM

I used to have a problem with dumping, in that certain businesses have practises lowering their prices to squeeze out competitors, who once they leave, just raise the prices again and consumers suffer.

But ultimately, it's down to consumers. If they take the short-term advantage for higher long-term prices, then it's their own problem.

Posted by: Tim Almond | May 10, 2006 1:35:30 PM

Looking at the comment about more supermarkets, we have no more room for them here. It's a small town with a Tesco Extra, Morrisons, Asda, 3 Kwiksaves, Aldi, Lidl, Netto, Co-Op's everywhere, we don't need any more!!!

Posted by: The Morningstar | May 10, 2006 8:55:02 PM