Tuesday, June 27, 2006

Supermarkets and symbolism

Richard Huzzey reminds me of the discussion at Stephen Tall's blog on the subject of supermarkets.

Stephen and Richard are both right, although they seem to disagree with each other. We shop at supermarkets. We find them convenient. Their prices are sometimes lower than small shops and sometimes higher, which is unremarkable.

But we are wary of the power that they have, we fear encroaching monopolies. I worry that they have worked out, using my loyalty card, exactly what sort of 2 for 1 deals I am a sucker for, and how best to distract me from paying attention to the price of something.

By all accounts suppliers get a rawer deal than we customers. This is called "driving down prices for the benefit of customers", which is true up to a point. But sellers as well as buyers have to be able to go somewhere else for competition to work properly.

Green councillor Matt Sellwood calls supermarkets an ethical and environmental disaster zone.

A rare admission perhaps from a green that competition is ethical, since excessive power in the marketplace is a problem. And of course, environmentally, their impact is enormous, as is their throughput of goods.

What I'm not so clear about is if the same amount of goods were sold through smaller shops, whether that would be any better for the environment. Smaller shops would, presumably, need more deliveries. And to visit the number of shops needed to carry the range of a supermarket would presumably require more transport of the customer. Or perhaps some of our small shops could expand, becoming, er, supershops?

What I'm hoping to illustrate here is that it is a mistake to think along the lines "X is doing something we don't like - we should fight against X" as Matt is doing. This is treating supermarkets as a symbol of all that is wrong with the world. And yet that I can fill the fridge without even having to leave the house is something that is right with the world. If X, supermarkets, were stopped from doing this thing we don't like, others may still do it, and we may find that they have also been prevented from doing things we do like - letting us get groceries after a late council meeting for example.

Rather than attacking the symbol, we should focus on the behaviour. A supermarket using a million carrier bags is no different from a thousand small shops using a million carrier bags. (Although my last Tesco online came in 25 bags for fewer than 75 items. They offered to take them back after I complained but who knows if they will get used again.) Overpackaged junk food is the same wherever it is sold. Driving to the shops is the same whatever kind of shop it is. Corner shops are not exactly trade union fiefdoms either.

Monopolistic and monopsonistic power is tackled through competition authorities. Such authorities need to weigh up carefully the costs and benefits of intervention. This is economic rocket science. I see no way for a little blog to give a convincing argument either way on whether more intervention is necessary. I hope the authorities are getting it right, and I am powerless to help them.

Although supermarkets are often more expensive than small shops, particularly when we ignore special offers and Known Value Items, this does not mean that they are not exerting a general downward pressure on prices. If there were no supermarkets, other shops would charge more. And let me be clear: low prices for food and goods in general is a good thing. If you think JSA of £57.45 a week is hard to live on now, think what a price hike would do. If you want to put benefits up because prices have gone up, you will be worsening the poverty trap. And also for the rest of us, having lower prices is like being richer. (Richer is better - if you don't agree, send me a cheque.)

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9 comments:

Martin Young said...

I don't think anybody is suggesting that supermarkets aren't exerting a general downward trend on prices. That, surely, is part of the problem. When prices are driven below the value of the goods it will create hardship for the supplier. The supplier may fold, or it may merge with other suppliers, taking us one step closer to a monopoly or duopoly on food supply.

You're also assuming that an array of geographically dispersed small shops is the only alternative to the supermarkets. Not true.

Joe Otten said...

Martin,

I'm not sure what you mean by "the value of the goods".

There are lots of suppliers and a few large supermarkets, so I don't see how we're at risk of monopoly suppliers.

Rather than making assumptions about the possible alternatives to supermarkets, I'm trying to see what it is about the difference between supermarkets and other kinds of shop, that may be the problem. The size of the chain? The size of the stores? The number of product lines? The geographical placement?

Change all of these and you change a supermarket into a corner shop. So if there is a problem with supermarkets, it must be in one or more of these specific features. Competition problems obviously relate to market share, but the others are not clear.

Martin Young said...

By "value of goods", I mean the price at which good can be produced (and sold) where everybody who adds value gets an equitable return for their work. For instance, I recall a few years ago that milk prices were under severe downward pressure from supermarkets in response to perceived customer demand. Milk producers were going out of business (or they said they were, spin, spin) because the price charged to consumers by supermarkets was lower than the value of the goods; the price was unsustainable.

Clearly the value is hard to quantify but there's a clear principle at work here.

Re: number of suppliers, there are a couple of issues which distort the market:

In a market where there are few suppliers and consumers, classical demand and supply economics simply doesn't work. Informal ad-hoc cartels grow up, producers are unable to sell to other consumers without massive risks and costs. The barriers to entry are high because of supermarket demands for quantity, homogeny and track record so innovation is stifled and the status quo reigns. A greater number of producers and consumers is better because it enables market forces to actually work.

IMO, of the characteristics of supermarkets you list the closest to the real problem is the size of chain. In particular that they're both vertically and horizontally highly consolidated.

That is to say, becuase they control the whole supply chain (through vertical integration), preceived consumer demand is transmitted directly to producers rather than being diluted though (for example) distributors and wholesale markets.

This wouldn't be such a bad thing but the accompanying horizontal integration means that suppliers have little opportunity to switch to other sales channels.

It is the combination of H&V integration that causes the problem. As long as our legislation is biased towards such big companies so the problem will continue.

Joe Otten said...

I don't see how useful your concept of value is. Supermarkets were choosing what price to charge. If they are behaving competitively, this price will reflect consumer demand. If a market price is too low for some suppliers to survive, this means there is overproduction. But more likely this was just supermarkets playing hardball.

I would have thought cutting out the intermediaries and transmitting consumer demand direct to producers would be a good thing.

And horizontal integration - retailing a wide variety of product lines - doesn't itself make it any harder for a producer of one product type to find alternative outlets.

So, I think all this integration is efficient. It means we get cheaper goods with less time spent shopping.

This just leaves the abuse of a dominant market position made possible by having a large market share. This is a problem, but it is difficult to see how big a problem, or whether a cure would be worse than the disease.

Joe said...

The move towards supermarket shopping has certainly led to a break down in community, with many small shopping areas local to me, finding it impossible to survive (or only able to do so as a row of estate agents, charity shops and pound shops. However, the real issue is where the time would come from to be "able" to shop locally.
I would be rushing from my 9 to 5 to pick up supplies from the local High Street - where the shops would be shutting by, oh, 5! In an age where we are all time-poor, we have to be more expansive in our thinking about the way in which we live.
However unethical supermarkets are - and like you, I have experienced an internet delivery (Sainsbury's this time) where there were almost as many carrier bags as items - they fit into the way we chose to live our lives. They offer the convenience that is necessary - rather than desirable.

Martin Young said...

My concept of value is useful, I think, because it marks the point where downward demand pressure on prices starts to put suppliers out of business.

If the supermarkets were working in a classic free market then, yes, putting suppliers out of business would be a sign only of oversupply. However, they're not. Their near-monopoly position means that they can exert more pressure than would normally be possible in a genuinely free market because of the scarcity of other sources of demand.

Continuing the milk example, clearly there is not an oversupply at the moment: we don't have milk lakes; having less milk available would most probably be a Bad Thing. The effect of the supermarkets' price pressure cannot therefore sensibly reduce supply but rather it forces consolidation. Eventually there will be only as many suppliers as there are supermarket chains and that's the end of the market in any meaningful sense. It's possible the supermarkets will then buy the dairies thus obliterating the market altogether.

IMO, with national and global companies like Tesco, we're starting to see the endgame of what a large scale free(ish) market economy yields, not at friendly textbook supply and demand curves.

Regarding efficiency, if the supermarkets are pushing so hard for efficiency, how come I can buy the same things cheaper an farmers' markets and in box schemes?

Is it because large supermarkets only appear to be efficient because there's little to compare them with? After all, the supermarkets' aim is not to offer cheap food to consumers but to maximise profits. Inter-supermarket competition should make these two things isomorphic but Tesco's soaring profits show that it is not in such a competitive market as it would have us believe.

The solution I'd advocate is not to interfere in the market directly but to rebalance the fiscal and legislative environment so that it stops favouring continuous consolidation (no medicinal cure, just stop taking the poison).

Joe Otten said...

Martin,

I think we agree on most of this. The downward pressure on milk prices is coming from supermarkets not customers. But do you have any figures on consolidation in milk production? I think it is more likely that the supermarkets have realised that enough farmers will cling (irrationally according to the textbooks) to a loss-making business.

Farmers markets are a response to supermarkets - an attempt to beat the efficiency of scale with the efficiency of cutting out the retailer altogether. They probably wouldn't exist without the supermarket.

And while I agree that there is an imbalance in regulation that hurts small business, I don't think it explains the existence of supermarkets - I think they would still exist, and be much the same, if the regulation were fair. Because they do bring genuine efficiencies along with everything else.

Joe,

Poundshops :) - funny how they're not mentioned as examples of valiant small shops. The poundshop business model is much like the supermarkets' use of 2 for 1 offers etc. Psychological warfare against the consumers perception of prices.

Martin Young said...

You're right, I think we mostly agree, just not on the magnitude of the effect better regulation might have.

I haven't been able to quickly track down historical figures for milk market consolidation but I did find this report, a current news item at the Dairy Reporter (HIGNFY material, if ever I saw it), which includes the text below.

"Robert Wiseman’s takeover of Definitely Devon’s liquid milk business shows how consolidation on Britain’s dairy industry is continuing amid tension with competition authorities.
[...] The group already holds around 22 per cent of Britain's liquid milk market, supplying around 1.3bn litres of milk annually."

Joe Otten said...

In the news today: Sunday trading regs not to be changed - still to favour small shops.

So its not all one way.