Many economists claim that competition is a force for good in the long-run. A market with fierce competition can exist but, on what grounds? Bigger retail players always have a tendency to get rid of the smaller ones to increase the market share. Is the structure of the market affecting the decision of buyers? Are the small grocery retailers in UK losing ground? Is the poor paying more? The report introduces market structure in UK, its characteristics and impact of competition.
What is a market structure?
A market structure is the characteristics of a market which can affect the behaviour of businesses within the market and also influence the outcome of a market in terms of economic efficiency and the welfare of consumers. The four basic market structure models are: perfect competition, monopoly, monopolistic competition, and oligopoly. (Ref)
UK grocery Market and Characteristics:
UK grocery market is worth £150.8bn for the calendar year 2010, an increase of 3.1% on 2009. There are 91,509 grocery stores in the UK. (IGD ref) These are split into four sectors, which are Convenience Stores, Traditional Retail, Hypermarkets or supermarkets and online channel. The UK's four largest multiple retailers (Asda, Morrison's, Sainsbury's and Tesco) control over 70% of the grocery market and the number of stores of the Big Four has more than doubled since 2000 making it as oligopolistic market in nature as indicated in the below diagrams.
Oligopoly market occurs when just a few firms share a large proportion of the industry. Since the market is determined by the major 4 players, they tend to compete on price and non price activities thereby either being interdependent (decision on price and output) or creating barriers to entry which in turn affects small players around the market by diminishing the range of shops such as specialist stores or independent small grocery shops.
In short, Oligopoly can be defined as a market structure where there are few enough firms to enable barriers to be erected against the entry of new firm. (Sloman) As a result of the fierce competition or price war in attaining the majority market share, grocery players in UK are non collusive in nature but enables a healthy competition. At the same time the structure of consumer society is changing leading to an increased demand for a more varied retail structure.#p#分页标题#e#
Discussion and Analysis
Competition is a central part of microeconomics. It is through competition an economies supply and demand progress is determined and there by allocating efficient manner of pricing. If this so, then whether the goods supplied to consumers in the economy at the lowest price consistent with the quality of service and preferences consumers want? Grocery Competition can be analysed in a way by aligning it with Porters Five Force Framework as shown in fig 3.
Potential EntrantsFigure 3:
Threat of new entrants
Specific gaps in entry barriers
High level of Rivalry among existing firms
Bargaining power of Buyers
Bargaining power of Suppliers
Retailer power increasing
Threat of Substitutes
The Degree of Rivalry
Economics predicts that rivalry between companies in an oligopoly should drive profits to zero. Competition Commission (CC) report claims that supermarkets are not charging excessive prices and are not earning excessive profits. Then how a company like Tesco have the largest market share in UK? The main driving factors grocery retailers fiercely compete for its market share are thorough price, range and service, or by retailers being diversifying themselves to non-grocery products and services to attract more customers; a shift to premium products or penetrating to compete with convenience stores thereby achieving the highest market share.
Tesco is clearly the market leader with 30.7% market share
ASDA, Sainsbury's & Morrison's are in strong competition
The middle sized retailers such as Co-op have a convenient market with 7.9% (Smale 2009)( dru ppt)
In an oligopolistic market, competition is either on price or on no-price based activities. If price was to be the main consideration among the major 4 supermarkets, then the time of Price war has gone by. Competitors in their price-setting policies follow the price cut but not the price increase (SLOMAN). This could be explained better with "The kinked demand curve" model suggests firms will be profit maxi misers.
So what is the rivalry on? As per Porter's force of rivalry, each of these retailers is seeking to make a profit between its relationship with customers or buyers, there by convincing customers that it offers the best value for money in shopping, and seeks to maximise the gap between the income obtained from shoppers and the costs of supplies and value-added inputs involved.#p#分页标题#e#
All the players in the market are trying to achieve profit via different strategies targeting at particular retailers (e.g. Lidl, Aldi, and Netto). M&S and Waitrose play an all together different game to survive and holds a good position in the market. This is one of the reasons why grocery market in UK is being attracted by new players even after being non-collusive in nature.
Interdependency of Firms can be visible with price cuts by Tesco in response to ASDA on milk (Kavanagh 2010). Wal-Mart's acquisition of ASDA in 1999 led to more "Every Day Low Pricing" in ASDA stores, with price cuts in "Known Value Items" (e.g. milk, bread, bananas). Tesco and Morrison quickly followed suit. Morrison's acquisition of Safeway led to harmonizing price cuts of some 12-14%. Since 2004, Sainsbury's have deliberately cut 6000 prices in order to regain customer loyalty and market share. (Ref). IGD claims that low prices are the key motive to drive 58% consumers to a shop. So if more than half can be drawn on price, grocery players are on a right track. Studies indicate that 68% prefer to be loyal shoppers. For example, 32% of shoppers agree that Tesco has become 'too powerful', 56% accept that shopping at Tesco is 'better than shopping at any other supermarket' and 48% agree that it "sells good quality food at low prices". (Ref. Grocer)
Can low price setting drive customers in? In 2005 by ASDA, Sainsbury's and Tesco were found to have an illegal agreement on basic products (bread, cheese and milk) to attract customers which inevitably lead to smaller profits for the farmers and groups who supply such products to the supermarkets (Kavanagh 2010) (dru ppt)
Does this all mean the retailers are playing with the mind set of consumers? Shoppers are not homogeneous, with different attitudes or needs across different consumer groups. So how do the big players meet different needs and wants? If not priced based what other forms of competition can be seen in oligopoly market?
Advertising: TESCO was ranked fifth and ASDA 12th in 2008 (Andrews 2008)(dru ppt) spending in advertisements to raise the profile of their product and try and increase brand loyalty, if successful this will increase market sales. Alternatively they could introduce loyalty cards or improve the quality of their after sales service.
Augmented benefits such as cash machine, parking, petrol stations, medical pharmacy, café, toilets and 24 hours etc.
Is Mergers reducing choice or is it benefiting the consumers?
Morrisons' acquisition of Safeway in 2004;
Tesco's acquisition of the convenience store operators T&S Stores in 2002 and Admin stores in 2004;
Sainsbury's acquisition of the Jacksons, Beaumonts and Bells convenience store chains in 2004;#p#分页标题#e#
In 1999 The Manchester School of Management predicted at present rates there would not be a single independent food store left in the UK by 2050. (ref)
Store format or Land size: In 2005, the number of larger format stores (>40,000 sq. ft.) increased by 12%. TESCO, ASDA, Sainsbury's to add 2.5 m sq ft of land and Morrison - 2m sq ft.
Premium product lines (eg Finest, Taste the Difference) and better customer service.
The Threat of entry:
The most important barrier to entry is the difficulty in getting planning permission to open a new supermarket thus restricting consumer's choice. Big players in the market have land acquired suitable for siting new stores and not releasing them to competitors thereby preventing entry of rivals. Tesco may have cornered the market for certain goods; the new supermarket will not be able to find cheap, reliable suppliers. Tesco also has the advantage of economies of scale.
Tesco Metro and Sainsbury's Local have been successful in driving out many small stores from the market. In 2000 the four largest supermarkets owned 54 convenience stores in the UK but, by 2005, this figure had risen to 1,306. (Ref) The Cost of entry to compete the major supermarkets is expensive and high which restrains the entry into this by new players.
New pattern on Shopping: Entry to the sector by some supermarkets has contributed to this growth, but symbol groups (for example, Spar, Cost-cutter) have also gained market share.
The Threat of Substitutes
1.5 million Households now make use of internet shopping for groceries. The value of online food and grocery is forecast to nearly double from £3.2bn in 2008 to £6.2bn in 2013 (Why consumer's pdf ref)â€¦
Substitution that relates to something that people can do without (cigarettes, alcohol). For instance, Tesco has competition from companies like Sainsbury that can provide substitutes for their goods. This drives the price of groceries down for customers of both companies.
Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry as Porter (refer to the diagram). The most important determinants of buyer power are the size and the concentration of customers.
Tesco, Sainsbury and ASDA have massive level of buyer power over farmers and food processors. Buyer power (consumers view) acts to force prices down. If rice is too expensive in Tesco, buyers will move to Sainsbury. Buyers have a price advantage when they buy in large volumes as it increases their bargaining power. In the UK grocery provision market, the buyers i.e. supermarkets, wholesalers etc. buy in huge volumes and hence are able to tailor a deal with their suppliers.#p#分页标题#e#
Supplier power is an important part of the Porters five forces model. Implications for Tesco are many. Supplier power is wielded by suppliers demanding that retailers pay a certain price for their goods. If retailers don't pay the price, they don't get the goods to sell. But large supermarkets, like Tesco, have an overwhelming advantage over the small shopkeeper-they can dictate the price they pay the supplier. If the supplier does not reduce the price, they will be left with a much smaller market for their produce. The retailer's use of own-label as an alternative input leave manufacturers with little bargaining power, and frequently complaining of "retailer tyranny". In the UK grocery provision market, suppliers are constantly under pressure from big market players to reduce the price of their product. Tesco has delisted 11 out of 18 bread product lines that Premier, Hovis Bread Producer, produces due to rise in prices on loaves of bread by 5p-10p (Lucasand and Felsted 2010) (druv ppt)
The Association of Convenience Stores (ACS) has reported that supermarkets may first "obtain better terms from suppliers to such an extent that suppliers are forced to charge higher prices to their customers". Second, supermarket "buyer power could undermine the viability of the wholesale distribution network serving independent stores"
Impacts of Competition:
Impact on suppliers: Big supermarkets exercise control over suppliers
Negotiating power favours supermarkets as it is easier for them to change suppliers than for suppliers to find new customers. For instance, in 2000, the top five supermarkets accounted for an average of 65.5 % of UK sales for a group of large suppliers; among Tesco's 2,600 suppliers, the largest accounted for only 2.6 % of its purchases (CC, 2000).
Own brand products reflect increased collaboration between retailers and supplying firms, and have enabled second-ranking food manufacturers to compete against the brand leaders.
There are concerns that the large supermarkets, driven by fierce competition, take a short term, cost-minimizing view which threatens the long-term health of the domestic supply chain.
Impact on Consumers
Dependence on the price-setting policy of the dominant companies (dairy pricing case)
Benefits in terms service and product range and more affordable with very high levels of customer satisfaction (CC 2000) ref.
Consumer awareness has increased on health issues. Supermarkets increasingly support organic food and the Fair-trade mark.
Impact on retailers
New entrants - barriers to entry.#p#分页标题#e#
Decline in number of specific grocery shops.
Local convenience stores and corner shops cannot compete.
The UK food and grocery market will be worth £170bn by 2013. Oligopolies are generally discouraged in the face of a dominant group that seeks to keep out any competitors, yet oligopolies are actively encouraged when there is a danger of one member (often Tesco) breaking away and establishing a new, more successful monopolistic business. Ultimately, while the supermarkets are capitalistic businesses designed to make as great a profit as possible, they are in conflict with the Competition Commission, which seeks to ensure that the market is shaped in such a way as to provide the maximum possible benefit to the consumer (Wood, 2009). Market conditions will begin to improve in 2010, and are predicting further improvements through to 2012, when the London Olympics will deliver a timely boost to the grocery sector and the broader UK economy.