THIS WEEK’s report by the Competition Authority on the retail sector is timely, given the noisy price wars currently taking place in the grocery trade. The State’s biggest food retailer, Tesco, has forced the pace with price cuts on thousands of items.
Competitors have followed suit to a greater or lesser degree. Extravagant claims have been made but one awaits the next cross-Border survey by the National Consumer Agency to see whether prices have really dropped by as much as retailers are claiming. Nonetheless, official figures show food prices dropping 2 per cent between January and May at a time when they have started rising in the UK.
Can prices fall even further? The Competition Authority believes competition can be improved through Government action to reduce the costs of doing business. However, its latest report has little to say about the profit levels of the large retailers and suppliers which are a closely guarded secret throughout the industry. An internal business plan obtained by The Irish Times earlier this year showed that Tesco Ireland makes more than 9 per cent profit, well above normal retail margins in the US and at least 50 per cent more than elsewhere in the retailing giant’s operations.
Tesco, as part of its new strategy, is squeezing suppliers and sourcing cheaper products outside Ireland, and then passing on the resulting savings to shoppers. Savings are welcome, but surely the Competition Authority should be intervening more strongly to find out whether the retailers could also be passing on some of their own margins in the form of lower prices?
The prevalence of promotional payments by suppliers to get shelf space in retailers’ stores is inimical to the interests of consumers. Some suppliers have claimed they are being coerced into making these payments by powerful retailers, but there have been few formal complaints. If suppliers want their grievances to be taken seriously, it is time they went public on them.
While the food price war has been good for consumers, it carries a cost elsewhere. Distributors and producers have had to cut jobs and some food manufacturers have closed down. Some observers have questioned the continued viability of the Irish food sector when the retail sector is increasingly controlled by large multiples making buying decisions outside the State. Others predict a “race to the bottom” with the drive for cheap food giving rise to concerns about food safety and other health issues.
Meanwhile, smaller independent stores are continuing to close while the grocery market becomes even more concentrated. In this context, the most likely new entrant to the Irish market is Asda, owned by the world’s largest retailer, Walmart; its entry would lead to greater market concentration rather than less.
Price reductions are to be welcomed, but it would be good to know that they are being brought about by retailers running their businesses efficiently and settling for reasonable margins rather than by making life intolerable for suppliers.