The Power of Supermarkets Over Scotland

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By Margaret and Jim Cuthbert

In February 2008, a written declaration was adopted by a majority of Members of the European Parliament requesting the European Commission to investigate and remedy “the abuse of power by large supermarkets operating in the European Union”. With yet more increased concentration of supermarket stores in a few retailer chains, the relationship between retailers and suppliers had been changing all over the EU, resulting in abuses of buyer power by supermarkets. What we will show here is how, seven years on, Westminster is failing to grapple adequately with these problems in the UK.

This article, therefore, deals with a different aspect of the supermarket industry from the article we wrote in Bella last September, which was mainly concerned with the very small percentage of supermarket sales which were of Scottish produce.

It is estimated that, in Scotland, the average household spends £53.20 a week on food and non-alcoholic drinks (ONS, Family Spending). Most of that money is spent in supermarkets, who, in addition, sell us tobacco, alcoholic drinks, footwear and clothing: in Scotland, as in the UK, the grocery trade is dominated by four major chains, Asda, Morrisons, Sainsbury’s and Tesco. Together they are responsible for 73.4% of the UK grocery market. In recent years discount grocers like Aldi and Lidl have been making strides: even so, Aldi and Lidl accounted for only 8.4% of the market in November 2014. In other words, the major supermarkets account for a substantial part of our weekly spend.

Small suppliers of goods where the brand is not well known have very limited access to markets except through supermarkets: and even big suppliers such as Nestles rely on supermarkets to stock their products. The stranglehold that the large supermarkets exercise becomes clear when you realise that the four large supermarkets who supply over 70% of UK groceries, are supplied in their turn by around 7,000 suppliers – and sell their products to around 25 million households. Supermarkets use their power to exact a price from suppliers for stocking their produce – and that price depends on the strength of the supplier. This practice is not confined to the UK. In 2008, a European survey by Stichele and Young found evidence of extremely large payments by suppliers to supermarkets in countries like Italy and France.

The potential abuses of power that supermarkets can use against suppliers are well documented in a House of Commons briefing paper: (August, 2012). They include:

  • demanding (or taking) fees to be on a list of suppliers
  • using the threat of de-listing if the supplier does not do what they have been asked
  • charging slotting fees for particular shelf space
  • making late payments
  • returning produce that has not been sold, even when far too much was demanded in the first place
  • demanding compensation if profits made are less than expected
  • demanding extra payments when new stores are opening, and for promotions.
  • low cost selling or deep discounting (e.g., two for the price of one) where it is the supplier who bears the cost.
  • retrospective changes to agreed terms
  • demanding that suppliers limit their supplies to the supermarket’s rivals.
  • Altogether, the practices aim to transfer risk to the supplier and away from the supermarket.

Twice in the last fifteen years, the UK’s Office of Fair Trading has asked the Competition Commission to carry out an investigation into competition in the grocery market. The first investigation, in 2000, led to the creation of a Code of Practice as a means of regulating practices between supermarkets and their suppliers. In general, this was found to be toothless. The second, in 2008, again found problems in the relationship between supermarkets and suppliers. The report of this investigation concluded that:

“the transfer of excessive risk and unexpected costs by grocery retailers to their suppliers through various supply chain practices if unchecked will have an adverse effect on investment and innovation in the supply chain, and ultimately on consumers.”

This report highlighted the need for a revised Code, (which was subsequently introduced in 2010), and recommended that grocery retailers should themselves establish an Ombudsman’s office to monitor and enforce the Code. Failing that, it should be imposed, and the Ombudsman should be given the power to levy significant financial penalties on the retailers for non-compliance. Eventually in June 2013, the UK Government established a Groceries Code Adjudicator with a remit to “ensure that large supermarkets treat their direct suppliers lawfully and fairly, investigate complaints and arbitrates in disputes”. On 2nd February 2015, the government finally announced that, subject to parliamentary approval, it aimed to give the adjudicator powers to impose fines of up to 1% of annual turnover on any supermarket breach of the Code.

So what exactly are the terms of the Code? The Code covers all grocery retailers with groceries turnover in excess of £1 billion a year:

  • Grocery retailers are prohibited from making retrospective adjustments to terms and conditions of supply.
  • They are prohibited from entering into arrangements with suppliers that result in suppliers being held liable for losses due to shrinkage.
  • They are required to enter into binding arbitration to resolve any dispute with a supplier arising under the Code.
  • They are required to keep written records of all agreements with suppliers on terms and conditions of supply.
  • They must provide to the body monitoring and enforcing the Code any information as it may reasonably require in pursuit of its functions, including complaints from primary producers.

It turns out that the Code has been broken regularly. A survey of grocery suppliers by YouGov in June 2014 for the adjudicator found that:

  • 40% of those taking part said their supply agreements or terms of supply had been retrospectively varied.
  • 37% complained about unjustified charges for consumer complaints.
  • 35% reported a delay in payment.

So far the adjudicator has dealt with three major complaints. One was a debiting of a number of suppliers’ trading accounts by Morrisons as part of a move towards convenience stores and internet sales without those suppliers having first agreed to participate in the scheme. The money was reimbursed and it was accepted by the adjudicator that this was not Morrisons requiring a listing fee. Another was a complaint against what appeared to be a Tesco practice of asking suppliers to pay for eye-level display. Tesco said the requests had been made in error. The third was a case concerning the Co-op where the Co-op demanded compensation payments for loss of profit due to what they regarded as a service level breach. The adjudicator found there to be no evidence of any breach and the Co-op withdrew its demand.
In no case, however, has there been much “naming and shaming” and there is no real power as yet to impose fines.

Stichele and Young found, in their survey, that abusive practices by supermarkets had led to some suppliers going out of business or surviving on very low profit margins. In particular, farmers were especially vulnerable, as their products had a short shelf life, and this could be exploited by large retailers in bargaining negotiations.

Against this background, the decision by Christine Trecon, the adjudicator, announced on 5th February this year that she was going to investigate Tesco for abuse of market position: this is very much to be welcomed. It is worth noting, however, the government’s recently announced intention to give the adjudicator the power to fine will not apply retrospectively to this investigation.

In general, however, even with the power to fine, investigations like this are unlikelty to be enough. The degree of concentration in the industry is such that abuse of power, and abuse of market position, is probably inevitable. So the solution to the underlying problem would almost certainly involve some kind of anti-trust legislation, to prevent any one firm having too much of the market, and so would imply the break-up of some of the large chains.

This would increase competition, but at some potential loss of economies of scale. However, the arguments in favour of large supermarkets because of economies of scale are probably overdone – for example, once you concentrate your distribution network too much, there are large environmental costs of hauling the same produce up and down motorways.

And breaking up the large chains would, in the other direction, have distinct benefits:

a) For the labour market: it would alter the balance between employer and employee back in favour of employees.
b) For the supply chain: it would alter the balance between the supplier and the supermarket retailer.
c) For innovation: it could encourage far greater innovation in products.

Overall, however, the big question is whether Westminster would ever be willing to introduce the required legislation. Given their track record, this looks extremely unlikely. If so, here is yet another argument for more devolution – or independence. And tackling the problem at a Scotland level would have the advantage that we could try to design a solution to tackle the problem that even a medium sized store can dominate the retail market in small towns.



Categories: Commentary

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22 replies

  1. Great follow up to the ‘Supermarkets and Scottish Produce’ report you posted here a few months back
    Thanks for the info

  2. Reblogged this on Bampots Utd.

  3. The price of milk and water comes to mind.

  4. In our area there has been a rise of small retailers sales and a big fall in Tesco, asda and morrisons. I’m sure if the people of Scotland are held to ransom by the supermarkets then they just might tell them where to go. One week a local Tesco store lost in the region of £18k because an event being held was put in jeopardy so people voted with their feet and wallets. I do the same, now other retailers get my business and I no worse off than before.

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  6. The issue, as the Cuthberts point out, is the use of effective anti-trust legislation. In the United States the belief in competition is at least sincere; and the US has strong anti-trust legislation to prove it. In Britain we talk about about “competition” all the time; but nobody actually believes in real competition in the UK, hence there is no anti-trust legislation and British regulators have only too typically been found to serve the interests of the industry they regulate, rather than competition – or the interests of the consumer. Britain is the intellectual homeland of the natural monopolist and cartelist; there is virtually no hope of Westminster doing anything here, for these are the interests Westminster serves; first and last.

    Supermarkets have benefitted very substantially in recent years in business rates, against the High Street, because there has been no rate revaluation; while High Street values have declined and supermarket values have increased, the supermarkets have not paid the price for their huge competitive advantage; the High Street is effectively therefore paying a competitive surcharge for their failure to match Supermarket competition. This is not a battle the High Street can win; not least against ‘free’ on-site car-parking.

    Bill Grimsey, an experienced retailer, claimed that Supermarkets would thus save £1.3Bn in taxes 2015-17, against the struggling High Street retailers (Telegraph, 28 October, 2013: ‘Business rates policy ‘boosting supermarkets at expense of high street shops’); yet it is claimed any taxation of supermarkets will lead to higher food prices; a self-serving, emotive and cynical appeal by vested interests.

    Some time ago there was a failed effort to levy supermarket car-parks. This may be the way to proceed as long as supermarkets are unfairly benefitting from a business rate advantage over High Streets. Often supermarkets time-limit the use of a supermarket car-park; as if they are operating a private car-park. If they are, this ought not to be a tax-free perk of operating a supermarket. One simple way for government (at a Scottish level) to attack the unfair advantage of supermarkets (over the High Street – which they have effectively destroyed) is specifically target and tax the car-park separately at a higher rate in establishing the business rate; this could simply exclude all other business properties, particularly through the sheer scale of the car-park of the large out-of-town or hypermarket operations; it should be possible to establish a cut-off number of car-parking spaces where operating scale gives large economic advantages. If there is a tax advantage to supermarkets for the vast use they make of land and retail space in a given community, we may find that it is the “free” (sic) car-park that has given the supermarkets so much of their advantage in the market place, in planning etc., etc.

    • It’s an interesting idea, though I think the price would need to be pitched quite high to shift consumer preference back to the high street – shoppers already have to pay to park there – maybe £10+ per hour? But that might just mean people concentrate their shopping into one weekly batch.

      The hard discounters are making inroads, Aldi and Lidl alreay have a large share of the German market, but one plank of their strategy is to stock a much smaller range of goods (greater economies of scale, fewer transactions, leading to recduced costs) so even less need for a mix of suppliers.

  7. The market pressure from Lidl and Aldi forces the majors to rethink a strategy that set out to provide effectively a total retail offer that seemed singularly determined to destroy the High Street. It does not deliver low prices because it is essentially expensive to carry the bloated logistics that is the result of attempting to invade every conceivable market segment to justify the scale of the out-of-town, retail city-within-a-city of the hypermarket.

    Aldi and Lidl have shown that a narrow, more focused offer is the only one that actually delivers lower prices to consumers.The Supermarkets are not price competitive (save among themselves – their price comparisons are narcissistically focused on themselves alone), nor are they efficient for consumers, and they blight the urban centres they have left behind (ironically they are returning with small, but expensively priced city shops).

    This also reminds us that the major Supermarket chains are not competing against the High Street, but in effect have been allowed to build an uncompetitive and unfair advantage against the High Street retailer (who is now sandwiched between the hypermarket and the internet suppliers and cannot compete on price or convenience with either; i.e between such as Amazon and Tesco), assisted by a system of planning that promises new jobs, business rate income for building hypermarkets, and thus seduces local authorities to assist the Supermarkets (local authorities which have idly watched their town centres die).

    • Certainly agree about Aldi & Lidl. I do all our shopping and switched to Lidl about 2 years ago. Their fruit & veg and fresh meats, although not presented as well, are just as good and noticeably cheaper. For other things you have to be prepared to try previously unheard of brands. For branded stuff my family wants like Ryvita & Weetabix I go over the road to a B&M, then for stuff like shampoo and shower gel I go round the corner to Semichem. A wee bit like the old-fashioned way of going up the high street. All-in-all I reckon that shopping this way costs about 65-70% of getting it all from one of the big supermarkets. I know this because occasionally I get lazy and do all the shopping at Morrisons – and am shocked at the bill.

      • The hard discounters aren’t an answer to the Cuthberts’ concerns.

        They still aim to have large market shares, for customers to do most of their grocery shopping with them, and to keep prices very low. They also stock a far smaller product range (Aldi reporting 1,350 compared to up to 40,000 at standard supermarket) and use more own-brand products, so you would expect less need/opportunity for smaller producers.

  8. And it’s not just grocery retailing that’s gone out of town – it’s retail in general, along with entertainment. Towns, cities, council areas fear losing out on that spending to other areas so are happy to get the strip mall or mall development.

  9. Shopping is done by household. At the last census almost 70% of households were couples or singles. The supermarkets like to sell in bulk, which is wasteful for the 70%.

    I use the local butchers, baker and the monthly farmers market for vegetables and fruit. I have not yet sourced everything away from the supermarkets, but I now go in with a list and try to stick to it. If I manage to get out without any impulse purchases, I treat myself to some chocolates from the local artisan chocolatier.

    I find this is good for both my finances and my waistline.

  10. Bit too busy to read the entire article, but can I point out that ‘the four major operators’ (a) are in competition with each other, so (b) the 73.4% of the market they command has to be divided into 4, an average of less than 19%, which (c) compares favourably with the relative newcomers’ 8.4% (though logically, (d) that also has to be split down to a 4.2% average per company).

    • PS And how well are Asda, Morrison, Sainsbury’s and Tesco doing in Aldi’s and Lidl’s native Germany, since we are talking about European supermarkets?

  11. I’m not sure about this. Some years ago, for complicated reasons, I went to an industry presentation by Tesco. Their speaker was emphatic that Tesco was always on the side of the customer – i.e. you and me.

    I can see that suppliers would prefer that supermarkets were on their side, by way of paying them higher prices. These would benefit the supplier, but disadvantage the customer who’d be faced with bigger grocery bills.

    As long as we all want cheap food, suppliers are going to be squeezed by the retailers. But that isn’t their fault. It’s ours.

  12. “In February 2008, a written declaration was adopted by a majority of Members of the European Parliament requesting the European Commission to investigate and remedy “the abuse of power by large supermarkets operating in the European Union”.

    Hm, yet in 2015 the same EC (I think Competition) has just given Spain an ultimatum of one week to cancel the tax on large supermarkets.

    • Just to add, if they don’t cancel this “environmental” tax, the EC will open an investigation that could end up in small shops, currently exempt, having to repay the tax retrospectively, since it is interpreted by the EC as state aid incompatible with EC regulations.

  13. Thank you for this important article.

    Two points at the heart of this issue, that you cover but not strongly enough in my view, are that:

    – The big four have become too big to effectively regulate. This is absolutely fundamental. We all know that the current situation is bad for suppliers, employees and local economies (i,.e., the integrity of the whole economy). To move things forward on a practical level we really need to have a good look at the power dynamics and relationships between the super markets and the State i.e., those with the hard power to do anything meaningful about the current situation.

    – The “economies of scale” argument is one of the standard lines trotted out to defend big business. At best it is a out dated idea, any gains of which are far out weighed by lost efficiency and all the negative externalities outlined in your article above – at worst it is pure neo-liberal propaganda. The highly successful business man, Ricardo Semler proved this when he made radical structural changes to his business empire. He suggests that,

    ‘In times of robust economic growth we have found our divided plants make more money than they did when they were larger. And we have also found that smaller plants bounce back from bad times or a crisis much faster than larger ones. From all of this I have come to believe that economy of scale is one of the most overrated concepts in business.’ – Ricardo Semler

    Divide and Prosper

    Semco divided its plants into smaller units. Workers in these units then chose to organise themselves into ‘cells’: teams of workers who assembled groups of different machines and ‘fashion[ed] a product from beginning to end giving them accountability for the product’s quality and an the enormous satisfaction that comes with a complete task.’

    Because workers now had, in effect, a ‘basket of jobs’, the appropriate salary for this array of skills was agreed. The cells took over quality control, and also hiring and firing.

    Semler agrees that not being able to order in bulk was more expensive for each unit. But then the smaller units carried less inventory (‘some of our units turn over their complete inventory 17 times a year, as against an industry average of slightly more than three such rotations.’) Products might take longer to produce, but delivery times still fell. There was no longer any need for expensive and time-consuming quality control departments.

    http://jonathangifford.com/maverick-ricardo-semler-10-key-democratic-changes-semco/

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