The Form of Market Structure which Describes the Supermarket Chain in the UK - Essay Example

Introduction Supermarkets are discernible due to their propensity to operate self-service retailing structured in distinct departments for all majorconsumer products, mostly grocery food items and other household goods while providing a discount pricing structure, high value supply chain, and sometimes own branding (Fox, 2004). The UK supermarket market structure is best described as oligopolistic, whereby a small cluster of heavily capitalized stores controls a significant share of the market sales. This big four: Tesco, Asda, Sainsbury’s, and Morrison’s have an over 75.8 percent market share in the grocery market segment [See Table 1] (Newswire, 2009). These have led to many analysts accusing them of taking advantage of their market power to evolve an unfair advantage. The Competition Commission (CC) confirmed this indicating that they indeed enjoyed higher gross profits as compared to similar firms in other countries, though their return on capital employed (ROCE) was substantially lower (Smithy, 2002). Table: 1 - UK Supermarkets’ Market Share Figures (August 2009) Tesco (TSCO.LN) 30.60% Asda Wal-Mart (WMT) 17.00% Sainsbury’s (SBRY.LN) 16.10% Morrison’s (MRW.LN) 12.10% Source: http://www.smartmoney.com/ The total UK grocery stores sales in 2005 generated total sales volume of approximately £120 billion, which was an increment of 4.2 percent from the previous year. In this category, grocery items contributed 95, which accounts for almost half of all retail sales and 13 percent in household spending. The Office of Fair Trading (OFT) reported that by 2005, the five largest supermarket chains had a market share of grocery items of approximately 75 percent (OFT, 2006). The OFT reports that the expansion of the large supermarket chains into the convenience store sector (those below 280 sq metres) had considerably expanded this market segment, from 54 stores in 2000 to 1306 by 2005 within the UK market. According to IGAD Research (2009), there are 92,796 grocery stores located in Britain by end of 2008. This are divided into four main segments including: convenience stores; traditional retail; hypermarkets; supermarkets and superstores; and online channel [See Figure: 1]. IGAD Research reports that by 2008, the UK grocery market had grown to £146.3bn, a 4.8 percent rise from 2007. Clarke (2001) reports that the big five supermarket chains account for half of all food retail sales within the UK market while the two largest (Tesco and Sainsbury) command a market share of third of the market share. Due to their predominance, these supermarkets have evolved monopolistic tactics since they control the downstream market or the retail level hence are able to fix prices to generate higher profits by using their market power against the smaller retailers. Figure 1: UK Grocery Market Performance Source: IGD Research 2009 Supermarkets in UK have successfully applied a form of reversal of the marketing chain whereby the stores retail their own brand of mainstream merchandises. Using there oligopolistic powers, the UK supermarket chains have designed there own genetically modified food products by applying GM technology to quash consumers aversion to the products producing their own branded products successfully (Fox and Vorley, 2004). Having their own brands contributes higher profit margins for the and the UK supermarkets has successfully created various brands to become the most effective in Europe at 40 percent of all grocery products as compared to 60 percent in the US. Supermarkets have been accused of avaricious tendencies whereby they procure goods and products, which are supplied from unsavoury quarters or through subhuman measures especially from the developing countries in a drive to secure higher profits. In a drive to improve their corporate image, a project dubbed the Race to the Top (RTTT), a collaborative venture between supermarkets and civil societies has been engaged to set a benchmarking process on equitable supply chain to stem this trend by having a more responsible regime. Pricing Structures According to a report commissioned by the UK Competition Commission (CC) in 1999, major supermarket chains in Britain including Asda, Booth, Budgens, the Co-ops, Safeway, Sainsbury, Somerfield, Tesco and Waitrose had adopted pricing structures and regimes focused on small portions of their products competitively to restrict competition on the major product lines (Commission, 2000). This tactics include requirement tying, bundling, cross-elasticities between their stores and other monopolistic strategies. Another aspect of restrictive pricing strategies used by the supermarkets was price flexing whereby certain supermarkets including by Budgens, the Co-ops, Netto, Safeway, Sainsbury, Somerfield and Tesco employed pricing strategies that were based in diverse geographical price variations. Supply Chain management UK supermarkets have evolved buyer-driven chains thus employing vertical coordination in the supply chain management to attain the right mix of products. Another feature of the supply chain management is to evoke a marketing strategy constructed around trust and accountability whereby a consumer is guaranteed of rebate through effective traceability systems. This reduces the impact of consumers shying away in case of the onslaught of epidemics like the current swine flu (H1N1) virus or SARS from certain products. UK supermarkets also engage in contract directly with farmers for selected consumer products hence enhancing their value chain management and maximising their profits. Bundled Discount Wang (2009) describes bundled discount as “the business practice of selling a bundle of goods at a price less than the total of the individual goods” (Pg.2). He describes how supermarkets have invaded the gasoline market by discounting the price after customers purchased a certain elevated quantity within their grocery stores. In the UK, this practice has the supermarket chains attain a 28 percent market share. This aspect of bundled discounting has been largely criticized by anti-trust regulators as it has driven many small retailers out business. Tying Slade (1997) describes requirement tying as pricing strategy that stipulates a consumer must purchase a second good item apart from the desired one from the same retailer. This gamut is common from the competitive to monopoly market situations. The most common are in franchised products whereby the retailer is forced to purchase packaged products by the franchise holder in addition to the initial desired goods. Choi (2004) alleges that tying arrangements gives monopolistic firms an unfair advantage over other firms by bundling products hence inducing clients to prefer the better-discounted products. Smithy (2002) asserts that cross-elasticities between the networked branches of the same supermarket chain enhance their market power by employing multiple store effects. The intensive competition enhanced by high price-cost mark-ups of the UK has made the largest stores to attain oligopolistic powers (Smithy, 2002). Griffith and Harmgart (2008) however assert that the over-regulation of the UK retail sector has had a detrimental effect on the industry, making lag together with other EU behind US stores due to stringent regulatory regimes and poor application of innovative information and communication technologies (ICT) strategies. This has led to poorer job creation in the sector. Employing data from the Office of the Deputy Prime Minister (ODPM), the authors indicate that land use regulations have particularly impacted negatively to market entry [See Appendix Figure:2]. Conclusion The leading five major stores who have evolved an oligopolistic market structure effectively dictating the prices of diverse products have dominated the UK market structure. The expansion into the concentrated market segment has also driven the smaller stores out of business as the larger chain stores increase the number of their stores. However, some analysts argue that the strict regulatory rules tend to hinder the growth of the market due to too many restrictive statutes hence curtailing even further the prospects of the smaller stores and market start-ups. Supermarkets have nonetheless engaged enviable market strategies that have enhanced their profits, in market structures that improve their value chains and engage in more innovative strategies. References Bank, A. D. (2006). Economic Foundations of the Economic Analysis of Anti-Competitive Behavior and Merger Analysis. Tokyo: Asian Development Bank. Choi, J. P. (2004). TYING AND INNOVATION: A DYNAMIC ANALYSIS OF TYING ARRANGEMENTS. The Economic Journal, 114 (January), , Pp.83–101. Clarke, R. (2001). Buyer Power and Competition in Food Retailing in the UK. Commemorative Issue No. 50, September/October 2001 , Pp.1-12. Commission, C. (2000). Supermarkets: A report on the supply of groceries from multiple stores in the United Kingdom. London: Director General of Fair Trading (DGFT) . Fofana, A. (2006). Measuring Market Power in the UK Retail. LAND ECONOMY Research Group WORKING PAPER SERIES , 28. Fox, B. V. (2004). Global Food Chains—Constraints and Opportunities for Smallholders. Helsinki: OECD DAC POVNET: Agriculture and Pro-Poor Growth Task Team. Griffith, R. and H. Harmgart (2008). “Supermarkets and Planning Regulation” CEPR Discussion Paper 6713. Harmgart, R. G. (n.d.). Supermarkets and planning regulation. Newswire, D. J. (2009). Tesco UK Grocery Market Share Flat At 30.6% 12 Weeks To Nov 29 -TNS. Retrieved December 19, 2009, from SmartMoney : http://www.smartmoney.com/investing/ OFT, T. O. (2006). The Grocery Market: The OFTs reasons for making a reference to the Competition Commission. London: The Office of Fair Trading (OFT). Research, I. (2009). What is the size of the UK grocery market? Retrieved December 19, 2009, from IGD Research : http://www.igd.com/foodservicewholesaling2009,foodservicewholesaling,grocerywholesaling Slade, M. E. (1997). THE LEVERAGE THEORY OF TYING REVISITED. VANCOUVER, CANADA: THE UNIVERSITY OF BRITISH COLUMBIA. Slade, M. (2007). UK Groceries Market Definition. Coventry: The University of Warwick. Smithy, H. (2002). Supermarket Choice and Supermarket Competition in Market Equilibrium¤. Balliol College, University of Oxford , 1-40. Sutton, J. (2006). Market Structure: Theory and Evidence. London: London School of Economics. Vorley, T. F. (2004). Stakeholder Accountability in the UK Supermarket Sector. Final report of the ‘Race to the Top’ project , International Institute for Environment and Development (IIED). Wang, Z. (2009). Supermarket and Gasoline: An Empirical Study of Bundled Discount. Boston: Northeastern University. Appendices Source: Griffith and Harmgart (2008). Figure 2: UK Grocery Retailing - Store Numbers & Sector Value Source: IGD Research, 2009 Read More