Make markets work for fair-dealing businesses, says Adrian Costain, MD, Pareto Retail

It may not have previously appeared on your radar, but the draft OFT 2006 plan now open for consultation fails to emphasise specifically the goal of making markets work well for fair-dealing businesses.

This omission, contemporaneous with the arrival of John Fingleton to head the Office of Fair Trading, would appear careless. The OFT board concluded, after consultation last year, that there was too much focus on making markets work well for consumers and not enough on making them work well for fair-dealing businesses - although this concept must surely be implicit in all work undertaken by this competition authority.

Surely, the OFT would act systematically to prevent the misuse of market power or the creation of barriers to investment in the convenience sector? Well, perhaps not, as the National Audit Office concluded in a recent review of the competition enforcement activities of the OFT: “The organisation faces a specific challenge in assisting small businesses to complain when they are a victim of anti-competitive behaviour.”

May we expect, then, Fingleton to rekindle the flames for fair-dealing businesses? Recent statements have dismayed the independent sector. In Fingleton’s view, the benchmark is “whether the market is acting in the interests of consumers” (The Grocer, December 10, p32). Specifically, in the case of Tesco’s 40% voucher scheme against Proudfoot at Withernsea: “Consumers get something at a 40% discount, so how are they harmed? Presumably, the argument is that you drive out rivals and raise prices later.”

Perhaps Fingleton is being disingenuous. The argument about predatory activity has long been accepted, even in the US, because a national chain with deep pockets can otherwise systematically eradicate local retailers through discounting campaigns. Moreover, it is often alleged that it can be helpful for a
dominant national player to indulge in this kind of behaviour, not least because, if tolerated by the regulator, it could enable it to roll out a ‘sell out or else’ policy to other regional players.

In an inquiry letter to the ACS, Fingleton asked whether there were any examples of a multiple taking over from an independent retailer and actually increasing prices or reducing the range?

I personally believe that there are. I have visited many former independents that have been taken over by the multiples and it seemed to me that in a significant number of instances prices were higher and the ranges narrower. I can’t believe that sales always increase, reflecting customer benefit, on this basis. Therefore, if thorough pricing and range analyses were done at these stores, I strongly suspect some results would confound the contention that letting the multiples run amok in the c-store sector will always deliver better choice and best value.

As things stand, it is economically quite rational for large retailers to harness the toxic combination of buyer and seller power to increase margins and thus investment returns, despite their inferior efficiency in the neighbourhood context against good local independent retailers.

Shareholders always demand growth. Eventually this must lead to an increase in margins if it cannot be achieved in any other way. Businesses with dominance can impose those increases. If left unresolved, this travesty of fair-dealing justice will lead to the multiples leveraging their market power accumulated as supermarkets to capture 100% of the c-sector in due course.

It is in neither the grocery industry’s nor the OFT’s best interests to allow matters to continue to degenerate in 2006. Indeed, the OFT is signatory to the Enforcement Concordat - and the core principles of good enforcement policy include setting specific performance standards, openness, proportionality and consistency. In terms of these principles, even the OFT must accept that its performance for the independent c-store sector last year was lamentable.

Let’s hope to see a determination by the OFT this year to ensure that markets work well for fair-dealing businesses. Take time to respond to the consultation draft plan on the OFT’s web site by February 6.