The more polite economic term used to measure supermarket dominance is called retail concentration. In Ireland, the three top grocery retailers control 70% of the market and if you include the two discounters, five buying companies control 90% of grocery shopping in Ireland. It is a similar situation in the UK, where the big four – Tesco, Asda, Sainsbury’s and Morrisons – control 70%. When Aldi and Lidl are included, six companies control 85% of the UK grocery sales .
This dominance is greatly helped by the positioning of, and subsequent growth in, supermarkets’ “own label” products at the expense and exclusion of branded supplier products.
The justification for retail concentration or dominance is economies of scale. The business model is that larger buying entities can purchase bigger quantities and reduce distribution costs. This supposedly works better for the successful suppliers, who get bigger orders. Furthermore, all of this scale reduces costs and, most critically, consumer prices. In theory.
What it very clearly and damagingly doesn’t do is encourage new product development and innovation. Unlike with a new phone or a new breakthrough drug, a food company wanting to bring a new product to market has to pay for it to be listed on supermarket shelves. The food company also must guarantee the supermarket a return on the product over its first two years. And after all that, if the product succeeds, the company is likely to be asked to guarantee to provide the supermarket with an own-label version, which will be sold at a major discount to the food companies branded product. This is a big ask for even the most established food company let alone a new one.
The low food price fallacy
If the only measure of market efficiency is food price inflation, in Ireland over the last 10 years, albeit against a backdrop of recession and low commodity prices for the most part, food price inflation has been minimal. Over this period, food prices have increased by only 2.5% on average as measured by the Central Statistics Office (CSO).
However, according to a Eurostat report last year, Irish food prices in 2016 were still running 20% higher than the EU average. Interestingly, this is exactly where they were at in 2006 when the Groceries Order was abolished to allow retailers to pass on lower prices to consumers.
Therefore, in relative terms, the increased dominance of the top five grocery retailers, the entry of the discounters and their subsequent growth to almost 20% of the market alongside the growth of own label offerings (which now account for up to 80 % market share in the case of liquid milk), has not changed the fact that Ireland is one of the most expensive countries in the EU for food and groceries.
Much of the perception of low prices is severely distorted by loss-leading, below-cost selling and coupon offers. However, as indicated by the very weak response to calls for better fair trade regulations in Ireland, the overwhelming political perception is that prices in Ireland are low and there is no need for political action.
This buying power or dominance is not only acting as a huge barrier to new product development, it is also affecting the economic sustainability of the farming and food processing sectors. These make up 17.5% of Ireland’s GNP and one job in eight in the Irish economy. There is no political appetite to introduce a more equal and economically efficient structure that would provide a better return for the food supply sector through new fair trade rules.
However, the negative impact of buyer dominance is not confined to economic sustainability of the agrifood sector. Increasingly, the agri-food sector is being challenged to provide improved nutrition offerings and to lower its carbon footprint.
The numbers on the right show the share of grocery spend in Ireland and change year on year.
As any economist will tell you, companies, farmers and individuals respond to incentives. Unfortunately, a recent report by Nielsen shows the impact of buying power in Ireland has resulted in a skewing of consumer purchases in favour of confectionery and impulse products and away from both fruit and veg and fresh meat and dairy products. In 2017, Irish shoppers were spending almost a quarter of total grocery spend on these products versus a health policy recommendation that these should be an occasional purchase.
Payment for shelf space
The reality is this buying pattern reflects the offerings and promotions in supermarkets, which in themselves reflect the ability of multinational confectionery and snack companies to be able to afford to pay for shelf space in contrast to the local fresh product producers. So, while a Nestlé , Mars or Coca Cola is not best pleased to be compelled to pay for end-of-aisle positioning in a supermarket or grocery retailer, they are in a far better position to pay than a fresh food supplier with no brand power and tiny margins on their product.
It is clear that the buying power-based dominance model is not just killing innovation and squeezing the agri-food supply chain, it is also not working in the consumer interest in terms of healthy eating and access to nutrition.
Moreover, given the reality that ability to pay for market share or shelf space will be the guiding principal of the supermarket dominance model into the future, farmers and processors who are closest to agricultural production, who focus on reducing their carbon footprint in recognition of the climate change agenda, rather than being incentivised or rewarded for incurring higher cost, are having to pay greater and greater amounts to get on supermarket shelves.
Dominant buying power has succeeded in capturing monopolistic control (80-90%) of consumer grocery spend. The quid pro quo for this is supposed to be cheap food. However, even this dubious achievement is debatable. The perception of price delivery under the dominance model is distorted by below-cost selling and loss-leading.
It is unquestionable that this dominant model is clearly incapable of dealing with the complexity of consumer demands and producer responses, coupled with the challenges of improving nutrition and health while tackling climate change.
Apples and oranges – how supermarkets stifle food innovation