Nick Herbert is clearly pretty upset with our criticism of his proposal for a Supermarket Ombudsman. But, most of his arguments in response are pretty spurious.
The comparison Mark made on the TPA blog to the price-fixing that emerged from the First World War wasn't to suggest that the Conservatives were planning on putting exactly that set of rules and regulations in place. It was simply making the case that Government intervention in agricultural markets tended to cause more harm than good and reanimating that principle is a very dubious idea. Those policies, just like the regulator being proposed by the Liberal Democrats, will also have been rationalised as attempts to defend the interests of consumers. But, they wound up proving entirely counterproductive.
This is particularly important because Nick can set out what he expects a Supermarket Ombudsman to achieve, and frame its objectives narrowly to address a particular perceived market abuse, but once such a quango is established it can steadily expand its remit and intervention in the market.
The Competition Commission actually found that most of the criticisms of the supermarkets didn't stand up to scrutiny. Some examples:
"Many parties raised the strong market position of Tesco as a matter of concern. We did not find there to be competition concerns that apply to Tesco over and above those that apply to other grocery retailers."
"We found that large grocery retailers, particularly the four largest grocery retailers and especially Tesco, generally obtain lower prices from suppliers than wholesalers. We concluded that these differences in supplier prices in themselves do not give rise to an adverse effect on competition (AEC). Further, we did not find evidence that lower supplier prices for the four largest grocery retailers resulted in higher supplier prices for other grocery retailers and wholesalers."
"We concluded that the current and projected financial performance of the grocery wholesaling sector did not support a finding that the financial viability of the sector was threatened."
"We did not find that the pattern of below-cost selling by large grocery retailers represented behaviour that was predatory in relation to other grocery retailers and did not find that it was likely to have unintended consequences that would represent an AEC. Further, we did not find that below-cost selling was likely to mislead consumers in relation to the overall cost of shopping at a particular grocery store. We found that temporary promotions on some products, including fuel, to attract consumers and increase total sales (commonly referred to as ‘loss leading’) may represent effective competition between retailers and may benefit consumers by reducing the average price for a basket of products."
"Competition concerns have only been raised with us in the context of the vouchering activities of one grocery retailer, Tesco. We did not find that these activities were predatory or would otherwise have an AEC. Similarly, we did not find that the fuel price discount vouchering of large grocery retailers had an AEC. In our view, vouchering campaigns, in the absence of predatory behaviour, represent effective competition between retailers that benefits consumers by reducing their shopping bills."
"We found that Sainsbury’s and Tesco’s expansion in convenience store retailing was likely to have been supported in large part by their existing advantages in terms of brand reputations, low purchasing prices and distribution networks. We did not find their expansion in this sector to be anti-competitive, and to the extent that it has resulted in increased competition, consumers will have benefited. Further, we did not find that Sainsbury’s and Tesco’s expansion in convenience store retailing weakened the competitive constraint on Sainsbury’s or Tesco such that it led to a deterioration in their retail offer (either at their convenience stores or other grocery stores) or a loss of choice in grocery stores for consumers."
Sorry to pull such a large number of quotes from the report, but it is important to make clear that it is dominated by evidence of a well-functioning market, with fierce competition to attract customers. You can see that in the fortunes of the different supermarkets recently, with Tesco losing ground to other supermarkets then recovering after it improved its proposition to consumers, for example by strengthening the Clubcard scheme.
Even in the supply chain, the aspect Nick has focussed on, it is a bit of a mixed bag:
In light of that, one might say that the best way for many suppliers to respond is to differentiate themselves by offering a better product, at a better price to win back some market power of their own, as some suppliers clearly have. That won't always be possible, but it will probably be the free market response to supermarket market power that does more to balance it out than any Ombudsman. It is quite well established in economic theory and history that market power, when not enforced by the state, is often a dynamic phenomenon. Beneficial innovation is often driven by a tussle between participants for power in markets (see this paper from Harvard economist Philippe Aghion). And, there is definitely an upside for consumers in the supermarkets being able to drive a hard bargain on their behalf:"We concluded that, based on the size of grocery retailers, wholesalers and buying groups relative to suppliers, together with the evidence on supplier pricing and margins, all large grocery retailers, wholesalers and buying groups have buyer power in relation to at least some of their suppliers. However, we found that the buyer power of even the largest grocery retailers may be offset by the market power possessed by suppliers of the most prominent branded goods."
"Grocery retailers’ buyer power is of benefit to consumers since part of the lower supplier prices arising from this buyer power will be passed on to consumers in the form of lower retail prices. We did not find that the financial viability of food and drink manufacturers was under threat as a result of the exercise of buyer power by grocery retailers."
"While the evidence that we reviewed did not indicate that there had been a declining trend in UK grocery suppliers’ product innovation over recent years, it was difficult to draw conclusions given the different influences on investment and innovation."
They think that it might affect innovation, which might affect prices. However, in the immediate term - which matters considering the current state of the economy - supermarket buying power is probably a good thing for consumers. This is quite a thin case to premise new regulation on and Nick shouldn't be surprised that those of us generally sceptical when people tell us they can make the world a better place by intervening in the market think it is likely to prove counter-productive. The potential upside seems quite limited and uncertain while the potential downside, particularly if the Supermarket Ombudsman expands its remit over time, is quite large.
The only other concern in the Competition Commission report is about how planning policy may be creating local monopolies. That is largely a problem of too few supermarkets, not too many.
In the end, there is a reason why this, particular Competition Commission report has been seized on. It is a way of trying to appeal to the "Tescopoly" crowd of patrician snobs who hate supermarkets for catering to consumer demand for convenience and low prices, the same agenda that saw Phillip Blond calling for supermarkets to be broken up. Nick found one part of the Competition Commission report which allowed him to indulge that little constituency and producer interests with the imprimatur of the commission's support.
The reality, as the Competition Commmission acknowledged, is that supermarkets are overwhelmingly a force for greater competition and value for consumers. Just yesterday, the Times reported:
"School badges emerged yesterday as the latest, and most unlikely, battleground in the supermarket price war.
Uniforms with bespoke embroidered crests, loathed by many parents for pushing up the price of schoolwear, are being targeted for the first time by Tesco.
Britain’s biggest retailer is promising to undercut specialists by at least 40 per cent. It already offers a £3.75 school uniform without a crest. It is believed to be the first time Tesco has offered a bespoke clothing service."
That is the reality of what supermarkets mean in most consumers lives. They steadily confront a million little local monopolies and cut prices for customers, allowing the income of the poorest Britons to go a little further each time. There are few perfect markets in the real world, the grocery market is one of the better ones.
On some of the smaller points about whether this is a new quango or whether we shouldn't mind because the board is going to be funded by a levy on the supermarkets: Nick uses the same trick to insist that this isn't an expansion of the quangocracy that the Government have across the sector, creating quango conglomerates so that the number is falling while the cost steadily rises. David Cameron's call for a bonfire of the quangos should mean an end to that kind of thing. And, plenty of quangos are funded by levies, that doesn't mean they don't count. In fact, last July Nick cited the levy boards in a list of DEFRA quangos:
"Echoing Conservative leader David Cameron similar pledge earlier this week to cut Britain's 790 quangos, Mr Herbert added: "Our overall strategy of delivering more for less will be applied in DEFRA."
"There were seven executive agencies within DEFRA, on top of an additional nine bodies like the Agricultural Wages Board, two levy boards, the Environment Agency and Natural England, to name only a few, said Nick Herbert."
