Jan 25, 2018 in Economics

Market Definition

The level to which it is important to carry out analysis of market definition in retail sector will depend upon the competition being analysed. In particular, if the focus of a competition is a monopoly situation, the main reason for analysing the market structure at the retail level will be to observe whether the retailers are likely to enter upstream themselves or bargain away any monopoly rents. For this case comprehensive definition retailer market is unlikely to be needed. There are two ways of defining market. Supply side substantiality and demand side substantiality. The supply side substantiality looks at the expected behaviour of suppliers in response to price rise. For example, if suppliers of product A can easily move to a relevant market for B when B’s prices rises, then the suppliers are in relevant market for A, because the monopolist seller will not be able to sustain a rise in price, meaning that A’s price constrained by these suppliers. The other market definition is based on consumer response to price rise. For example, if consumers are willing to substitute product F for product G when product G price rises, then F is in relevant market for G, because the market dominant of product G would not be able to sustain a rise in price meaning that G price is sustained by product F.

United Kingdom is dominated by large multiple supermarket chains

Their size, visibility and influence have made them the focus of much attention. Below is a summary of the market structure;

Sales of drinks and food account for 65% of the total. Non- food grocery and non-grocery sales are becoming increasingly every passing financial year. Non- groceries account for ¾ of sales that are made in superstores and supermarkets. The large part of the remainder is accounted for by convenience retailing, with 7% of that being accounted by the traditional retailers. Sales through UK grocery outlets generates a revenue of up to 120 billion pounds which represent  half of all the sales valued at 240 billion Euros which includes 13% of total household expenditure. Profit margins of the main supermarkets ranged between 2-4 % in the year 2004/5. In UK Tesco is currently the leading grocery store with commanding and market share of 30% share of the non convenience UK grocery market. During the late 20th century, Tesco and Sainsbury enjoyed similar market shares of between 20-25%, nut since then Sainsbury have lost to Tesco. Most of the multiple growths have been organic, with the exception Morrison’s after attaining acquisition back in 2003. In 1999, Wal-Mart acquired ASDA, the world largest retailer. In recent studies shows that Tesco has the largest market share in majority of Britain’s districts and in the rest is usually the second. Tesco largest market share are in Inverness holding 51% and in Milton Keynes with a share of 50%. Consequently in areas that Tesco dominates its second rival is up close showing stiff competition.

Convenience retailing is consolidating

The large supermarkets and stores have began to compete strongly in this market share. For example, (Sainsbury, Tesco)have merged with existing stores and chains. While doing so, they are increasing market share by opening new stores and providing better service within those newly opened branches. The merging have resulted from the need to develop economies of scale, opportunities to reduce costs and increase sales by applying best practise to these new supermarkets and finally the need to acquire best quality supermarkets. The supermarkets are well sited, well stoked and attractive which are ideally placed to meet consumer needs for on the move shopping and for top ups.

The imbalance of bargaining power that exists between supermarkets and their suppliers fosters abusive practises. The abuses are financial in nature and they tend to create uncertainty for suppliers. The main abuses which the suppliers face are enlisted below. The supermarkets require the suppliers to be on the list of suppliers which add extra costs to the supplier and the risk of stocking new products are passed to the suppliers. The suppliers are faced with the threat of de-listing if they deny honouring the reduction of prices or making other payments and concessions. These types of threats create uncertainty, inhibit their ability to plan and weaken their bargaining power of their products. The supermarkets charge slotting fees which add extra costs to the supplier and consequently the risk of stocking is passed to the supplier.

The supermarkets are practising unethical business practises by demanding extra discounts or payments from the suppliers, which the supermarkets argue that the extra charges are for packaging, remodelling and retailer initiated promotions, this has got impacts to the supplier for the unexpected expenditure. The supermarkets do not only stop there but they proceed by demanding  retrospective payments or after sale rebates which result in deducting a particular percentage of the total sales of a particular supplier for that year, compensating for profit margins being less than expected. Failure of sales of the products the supermarkets return the unsold goods to the suppliers, these results to the forecasting errors passed back to the supplier. The supermarkets and chain stores make late payments to the suppliers which have already been delivered and sold, adversely affecting supplier’s cash flow therefore leading to additional costs and uncertainty over how many the suppliers will be paid. Retrospective discounts on agreed terms and prices, changes to quantity, unscheduled promotions or to outsell rivals puts the suppliers profits under pressure, or distorting consumer’s perceptions of product value and may result to demands for lower prices from other customers.

Prices  of goods in supermarkets are lower than the prices of the same goods in non supermarket outlets, and the completion authorities see consumers ability to obtain lower prices, at least in shorter as beneficial. If the consumer prices are lowered to unsustainable levels, then for shorter supplies will go down so that buying prices and later retail prices will have to increase. Lowering of prices on the long run may have negative impacts on the retail prices. If the suppliers prices are lowered by the supermarkets, will cause the suppliers to be less viable but in the short run the retail prices will drop, but when it is a long term practise there will be reduced supply resulting to buying prices to hike leading to retail prices to increase and having impacts on the quantity and range. These impacts the consumers in that they will have to adjust to their normal buying habits and shift their consumption quantity or spend more on the same product. This affects the choice they make and their perceptions of what might constitute detriment.

On April 1999, Stephen Byers published the completion commission report on the supply of grocery from multiple stores. From my review of the competition commission I can say that taking all matters into consideration, the commissioner are satisfied that the industry will undergo broadly competitive and that no excessive profits are earned or overall excessive prices are not being charged. The general profitability of the supermarkets had been decreasing before the publishing of the competition commission whilst to its publication and enforcement the profitability has been increasing since then.  Since its enactment, there have tremendous changes in the industry, the competition commission has resulted to entry of Wal-Matt which is a notable remark and a number of price cuts which have boosted the general saving of the consumers and have saved them a proximate of 1 billion Euros. From my own opinion I believe that for a perfect market share, competitive market is the best way of securing a good deal of customers. From recent observations, the grocery industry is broadly competitive and i recommend the competition commission to be enacted as a law of the land.

Since the commission was passed, the relationship between supermarket chains and their suppliers have changed since they are guided by the code practise which puts the suppliers and the supermarket on clearer and more predictable terms. Since then the voluntary code has been abolished that was in adequate and did not bind by the law. The competition commission has also resolved a different problem which was persistent selling of the supermarkets of products below the costs or price flexing. The commission did so by proposing that the supermarkets need not to take actions on the price flexing because the options available would have negative impacts to the consumer buying habits and would be a disproportionate problem to the supermarkets.

The following changes have occurred in that retailers should ensure that the standards of terms are documented in which they do business. The supermarkets are required to give prior notice to the suppliers if the terms of conditions need to change. The suppliers are paid on time (specified time) this has saved most suppliers any unwanted expense and cost and created an assurance that they are paid. The supermarkets and stores should give suppliers practical notice of any intentions to change the price that had been previously agreed upon and that the supermarkets have abolished the unethical practise of requesting retrospective discounts or over rider. The repackaging, designing costs are now a burden to the chain stores and should not be transferred to the suppliers. After the commission was passed supermarkets are required to notify the suppliers of any changes in volume order, changes in any of supply chain procedures, changes in the specification of the products and the chain should compensate the suppliers for any loss acquired due to lack of notifications. 


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