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Supermarkets and the price of wines
What is the Competition Commission and how does it work?
THE Competition Commission’s inquiry into supermarket power and its effects on food and drink retailing has issued an “emerging thinking document”. This focuses on the four largest supermarkets in Britain (Tesco, Sainsbury’s, Morrisons and Asda), those who supply their goods and those who compete with them. The final report is expected in November.
The background is complaints from suppliers together with public anxiety over Morrisons’ takeover of Safeway and more recently, allegations that Tesco abuses planning regulations. Added to this are concern about the effects of food on health; the future of high streets, rural shops and British farming; wages and working conditions in developing countries; and a deteriorating global environment. One of the commission’s problems is its inability to take up all these issues.
Our focus is on selling alcoholic drinks, particularly wine, at less than they cost to produce. Low-cost sales by supermarkets are currently concentrated in three areas: tinned and packet food; alcohol; and a mix of other items including home entertainment and health and beauty products.
Below-cost selling among the ten largest retailers accounts for up to three per cent of turnover. With wine, however, this is closer to 50-60 per cent. Discounting in the drinks trade was originally a seasonal gesture to consumers in order to boost Christmas and New Year sales.
In 2002, following earlier complaints, the commission sponsored a voluntary code of guidance allowing promotions of this sort, provided they were ‘reasonable’. However, ‘reasonable’ was not defined. Those who complain to the commission face two hurdles. Firstly, they have to prove that anti-competitive practices have occurred and secondly, they must show that someone was harmed.
The commission, however, has imposed a third barrier of its own. Even if harm is proved, it has to be sure that its intervention will not damage competition. In effect, the agency set up to promote competition may fail to take action on valid complaints because this might interfere in an already defective market!
Setting aside this mad logical contortion, there is a difference between special offers promoting interest in new or re-branded products and semi-permanent cut price selling that covers half the market or more. Worse still, the commission accepts that suppliers are reluctant to come forward in a “climate of fear” that comes dangerously close to abuse of monopoly power.
In the case of wine, oversupply gives retailers the whip hand. This means that the point at which market forces end and exploitation begins is hard to define. But the effects are, nonetheless, real. The first is that the producer is effectively being forced to sell his product at a loss. The second is on the consumer’s notion of price and, through it, value. Taking a £7.99 wine reduced to £3.99, how do we know the original price was, in fact £7.99? Was it originally £3.99, £7.99 or some intermediate price?
The commission’s defence is that it has to concentrate on the overall picture rather than individual issues within the retail trade. But the concentration of loss leading within a narrow range of products makes it practically impossible to form an accurate picture. Without specific case studies, the final report will be compromised in favour of the large retailers.
It is significant, however, that milk is an exception to this general rule. Like wine, it is produced by a large number of small suppliers who must sell to a small number of large retailers. The commission is conducting a special study on this. The significant difference is that wine is produced outside the UK and can therefore be ignored, whilst British farmers can’t. There is an element here of national protection. Is the Competition Commission sufficiently serious to seek out overseas victims of this bullying and bring the culprits to account? Or does it come under the wider view of the European trade commissioners?
Without more robust control of these practices, we can wave goodbye to a healthy, independent wine market. |
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