As the Coronavirus pandemic continues to escalate in the UK, the government has been forced to introduce a range of drastic measures, including severe restrictions on movement of people to ensure social distancing. Supermarkets have also been forced to act as they experienced panic buying and struggled to keep up with supply. They responded by starting to impose limits on the number of certain items an individual consumer could purchase and by reducing the range of products they made available. In addition, supermarkets contacted the government to suggest that competition law should be relaxed to allow the rival chains to coordinate their response to the ongoing situation.
WM Morrison, the forth largest supermarket retailer in the UK, was one of the key players lobbying for this change. Their chief executive, David Potts, argued that “There will be legislation that works perfectly in peacetime and not so well in wartime.”
The supermarket industry is in fact a market where the UK competition authorities have expressed considerable concerns in the past regarding a lack of competition (see for example the 2008 market investigation and the recent decision to block the merger between Sainsbury’s and Asda). The supermarkets also previously made similar demands for a relaxation of competition law in the event of a no-deal Brexit.
Despite this, the government has agreed to temporarily relax elements of competition law to help supermarkets respond to the Coronavirus crisis with the Environment Secretary, George Eustice, stating that:
By relaxing elements of competition laws temporarily, our retailers can work together on their contingency plans and share the resources they need with each other during these unprecedented circumstances.
In moves supported by the Competition and Markets Authority, laws enabling them to do so will soon be passed through Parliament. Supermarkets will be allowed to:
- share data with each other on stock levels
- cooperate to keep shops open
- share distribution depots and delivery vans
- pool staff with one another to help meet demand.
It is also expected that the Groceries Code Adjudicator will take a pragmatic approach to rules previously in place to prevent the big supermarket chains abusing their power over suppliers. These rules previously prevented supermarkets from stopping orders from a given supplier without reasonable warning. However, it is now accepted that they may need to do so in order to focus on supplying a restricted range of essential products.
Such relaxation of competition laws has been rare, with previous examples being measures taken in 2006 for the maintenance and repair of warships and in 2012 during the fuel crisis. In contrast, typically competition law is extremely hot on preventing agreements between firms. This is due to the fact that they distort competition and prevent the considerable benefits that can arise for consumers when firms compete to offer the best deals.
In the extreme situation the UK is currently in, the government’s stance appears to be that there are sufficient other benefits from restricting competition between supermarkets and allowing some degree of cooperation. It is then important that the form of cooperation between the supermarkets is restricted to narrow areas that will help to ensure the continuity of supply. In particular, it would be worrying if the supermarkets started discussing the prices they charge. Already food prices may rise due to increased demand and a potential shortage of supply. Furthermore, many consumers will see their income reduced. Therefore, it is important that coordination between supermarkets doesn’t result in further increases in prices.
It is therefore reassuring that the Government made clear that the relaxation of competition law:
will be a specific, temporary relaxation to enable retailers to work together for the sole purpose of feeding the nation during these unprecedented circumstances. It will not allow any activity that does not meet this requirement.
The Competition and Markets Authority has also stressed that they will not:
tolerate unscrupulous businesses exploiting the crisis as a ‘cover’ for non-essential collusion. This includes exchanging information on longer-term pricing or business strategies, where this is not necessary to meet the needs of the current situation.
Once the current crisis is over, it will also be important that the competition authority closely monitors the supermarket sector to ensure that cooperation between the supermarkets ends and normal competitive conduct is resumed.
Articles
Questions
- Outline the effects agreements between firms to raiser prices have on economic welfare.
- What are the pros and cons of allowing cooperation between the supermarkets in response to the Coronavirus crisis?
The online market for food delivery has grown rapidly grown in recent years. Deliveroo was founded in 2013 and has become one of the most recognised brands in this market. It now has a presence in around 100 towns and cities in the UK. In addition to offering customers restaurant cooked meals delivered straight to their homes, Deliveroo also provides a grocery store delivery service, for example in partnership with the Co-op.
Despite Deliveroo’s strong brand, the market leader in online restaurant delivery is actually Just Eat. Just Eat’s business model is built on it acting as an intermediary between restaurants and consumers who can use Just Eat’s website or app to order take-aways. This is in contrast to Deliveroo which also provides the delivery service. This means that Just Eat’s service is more viable in smaller towns. Deliveroo’s other main rival is Uber Eats.
Having been founded in the UK, Deliveroo has subsequently expanded its operations to around 10 other countries. However, this global expansion resulted in Deliveroo making losses of almost £200m in 2017. In part as a result of these losses, Deliveroo decided to look for new investment and by May 2019 had raised £450m. Deliveroo intends to use this money to fund its continued international expansion and to improve the service it provides. This includes growing its delivery-only kitchens business, which enables it to be less reliant on links with traditional restaurants.
Amazon was one of the big investors in Deliveroo, although the exact amount it invested is unknown. Interestingly, both Amazon and Uber have previously made approaches to buy Deliveroo outright. For Amazon this latest move may be a first step before looking to fully acquire Deliveroo.
Despite this not being a full merger or acquisition, it was still investigated by the UK Competition and Markets Authority (CMA). Its remit allows it also to examine situations where an enterprise gains a ‘material influence over the policy of another’. This was the case with Amazon’s investment which, despite only allowing it to become a minority shareholder, enables it to participate in the management of the company.
Last week the CMA announced that it had completed its initial investigation and that it had concerns about the investment. Andrea Gomes de Silva, CMA Executive Director, stated that:
If the deal were to proceed in its current form, there’s a real risk that it could leave customers, restaurants and grocers facing higher prices and lower quality services as these markets develop. This is because the significant competition which could otherwise exist between Amazon and Deliveroo would be reduced.
The CMA has two specific concerns. Firstly, it is worried that competition in online restaurant delivery will be harmed. Amazon had started competing with Deliveroo in this market in 2016 when it launched Amazon Restaurants. However, it shut this down two years later. The CMA uncovered internal documents from Amazon suggesting that it continued to monitor closely this market. Therefore, the CMA believed that Amazon re-entering the market was a distinct possibility and argued that this would be a substantial boost for competition. The CMA’s concern was that its investment in Deliveroo would make this re-entry less likely.
On the other hand, there is a counterargument to the CMA’s which says that Amazon’s entry through investment, even if only at this time resulting in minority ownership of Deliveroo, could itself boost competition. This is an important trade-off the CMA should take into account.
Secondly, the CMA is worried that Amazon’s investment will also harm competition in online grocery store delivery. Here, Amazon and Deliveroo are two of the leading players in the market. The CMA believes that, as the market grows in the future, competition between the two could intensify. However, the investment in Deliveroo would put this in jeopardy.
At the time of writing, Amazon and Deliveroo have five working days to offer proposals to the CMA to address these competition concerns. It will be interesting to see how they respond to the CMA and whether a full-blown investigation follows. If it does, this may eventually lead to the CMA blocking Amazon’s investment.
POSTSCRIPT: Amazon and Deliveroo did not offer a proposal to address the competition concerns and so on 27th December the CMA referred the case for a full-blown investigation.
To be continued.
Articles
Questions
- What are the key features of competition in the online market for food delivery?
- What are the pros and cons of Just Eat’s business model in comparison with Deliveroo’s?
- What are the potential advantages Amazon has over the other players in the online market for food delivery?
The USA has seen many horizontal mergers in recent years. This has turned industries that were once relatively competitive into oligopolies, resulting in lower output and higher prices for consumers.
In Europe, by contrast, many markets are becoming more competitive. The result is that in industries such as mobile phone services, airlines and broadband provision, prices are considerably lower in most European countries than in the USA. As the French economist, Thomas Philippon, states in a Guardian article:
When I landed in Boston in 1999, the United States was the land of free markets. Many goods and services were cheaper than in Europe. Twenty years later, American free markets are becoming a myth.
According to Asher Schechter (see linked article below):
Nearly every American industry has experienced an increase in concentration in the last two decades, to the point where … sectors dominated by two or three firms are not the exception, but the rule.
The result has been an increase in deadweight loss, which, according to research by Bruno Pelligrino, now amounts to some 13.3 per cent of total potential surplus.
Philippon in his research estimates that monopolies and oligopolies “cost the median American household about $300 a month” and 
deprive “American workers of about $1.25tn of labour income every year”.
One industry considered by the final two linked articles below is housebuilding. Since the US housing and financial crash of 2007–8 many US housebuilders have gone out of business. This has meant that the surviving companies have greater market power. According to Andrew van Dam in the linked Washington Post article below:
They have since built on that advantage, consolidating until many markets are controlled by just a few builders. Their power has exacerbated the country’s affordable-housing crisis, some economists say.
According to research by Luis Quintero and Jacob Cosman:
… this dwindling competition has cost the country approximately 150 000 additional homes a year – all else being equal. With fewer competitors, builders are under less pressure to beat out rival projects, and can time their efforts so that they produce fewer homes while charging higher prices.
Thanks to lobbying of regulators and politicians by businesses and various unfair, but just about legal, practices to exclude rivals, competition policy in the USA has been weak.
In the EU, by contrast, the competition authorities have been more active and tougher. For example, in the airline industry, EU regulators have “encouraged the entry of low-cost competitors by making sure they could get access to takeoff and landing slots.” Politicians from individual EU countries have generally favoured tough EU-wide competition policy to prevent companies from other member states getting an unfair advantage over their own country’s companies.
Articles
Questions
- What are the possible advantages and disadvantages of oligopoly compared with markets with many competitors?
- How can concentration in an industry be measured?
- Why have US markets become more concentrated?
- Why have markets in the EU generally become more competitive?
- Find out what has happened to levels of concentration in the UK housebuilding market.
- What are the possible effects of Brexit on concentration and competition policy in the UK?
Firms are increasingly having to take into account the interests of a wide range of stakeholders, such as consumers, workers, the local community and society in general (see the blog, Evolving Economics). However, with many firms, the key stakeholders that influence decisions are shareholders. And because many shareholders are footloose and not committed to any one company, their main interests are short-term profit and share value. This leads to under-investment and too little innovation. It has also led to excessive pay for senior executives, which for many years has grown substantially faster than the pay of their employees. Indeed, executive pay in the UK is now, per pound of turnover, the highest in the world.
So is there an alternative model of capitalism, which better serves the interests of a wider range of stakeholders? One model is that of employee ownership. Perhaps the most famous example of this is the John Lewis Partnership, which owns both the department stores and the Waitrose chain of supermarkets. As the partnership’s site claims, ‘when you’re part of it, you put your heart into it’. Although the John Lewis Partnership is the largest in the UK, there are over 330 employee-owned businesses across the UK, with over 200 000 employee owners contributing some £30bn per year to UK GDP. Again, to quote the John Lewis site:
Businesses range from manufacturers, to community health services, to insurance brokers. Together they deliver 4% of UK GDP annually, with this contribution growing. They are united by an ethos that puts people first, involving the workforce in key decision-making and realising the potential and commitment of their employees.
A recent example of a company moving, at least partly, in this direction is BT, which has announced that that every one of its 100 000 employees will get shares worth £500 every year. Employees will need to hold their shares for at least three years before they can sell them. The aim is to motivate staff and help the company achieve a turnaround from its recent lacklustre performance, which had resulted in its laying off 13 000 of its 100 000-strong workforce.
Another recent example of a company adopting employee ownership is Richer Sounds, the retail TV and hi-fi chain. Its owner and founder, Julian Richer, announced that he had transferred 60% of his shares into a John Lewis-style trust for the chain’s 531 employees. In addition to owning 60% of the company, employees will receive £1000 for every year they have worked for the retailer. A new advisory council, made up of current staff, will advise the management board, which is taking over the running of the firm from Richer.
According to the Employee Ownership Association (EOA), a further 50 businesses are preparing to follow suit and adopt forms of employee ownership. As The Conversation article linked below states:
As a form of stakeholder capitalism, the evidence shows that employee ownership boosts employee commitment and motivation, which leads to greater innovation and productivity.
Indeed, a study of employee ownership models in the US published in April found it narrowed gender and racial wealth gaps. Surveying 200 employees from 21 companies with employee ownership plans, Joseph Blasi and his colleagues at Rutgers University found employees had significantly more wealth than the average US worker.
The researchers also found that the participatory management practices that accompanied the employee ownership schemes led to employees improving their communication skills and learning management skills, which had helped them make better financial decisions at home.
But, although employee ownership brings benefits, not only to the employees themselves, but also more widely to society, there is no simple mechanism for achieving it when shareholders are unlikely to want to relinquish their shares. Employee buyout schemes require funding; and banks are often cautious about providing such funding. What is more, there needs to be an employee trust overseeing the running of the company which takes a long-term perspective and not just that of current employees, who might otherwise be tempted to sell the company to another seeking to take it over.
Articles
Report
Questions
- What are the main benefits of employee ownership?
- Are there any disadvantages of employee ownership and, if so, what are they?
- What are the main barriers to the adoption of employee ownership?
- What are the main recommendations from The Ownership Effect Inquiry? (See linked report above.)
- What are the findings of the responses to the employee share ownership questions in the US General Social Survey (GSS)? (See linked Global Banking & Finance Review article above.)
The ‘Big 4’ supermarkets in the UK – Tesco, Sainsbury’s, Asda and Morrisons – have a 69.5% share of the Great Britain grocery market (see data link below). The next four – Aldi, Co-op, Lidl and Waitrose – have a 23.8% share. If two of the Big 4 were to merge, would there be a significant decline in competition? This is a question the Competition and Markets Authority (CMA) has been considering in the light of Sainsbury’s planned £7.3 billion takeover of Asda (owned by the US retailing giant, Walmart).
In a recently published provisional report, the CMA argues that “the merger could lead to a substantial lessening of competition at both a national and local level.” The CMA has concerns that the merger:
…could lead to a worse experience for in-store and online shoppers across the UK through higher prices, a poorer shopping experience, and reductions in the range and quality of products offered. It also has concerns that prices could rise at a large number of Sainsbury’s and Asda petrol stations. …The combined impact means that people could lose out right across the UK and that the deal could also cost shoppers through reduced competition in particular areas where Sainsbury’s and Asda stores overlap.
Sainsbury’s and Asda currently have a combined market share of 31.2%. This is slightly larger than Tesco’s 27.7%. But would this give the merged companies too much market power? Would there not still be intense competition between the new Big 3? 
And, with the growth in the German discounters, Aldi and Lidl, as well as competition from Waitrose, the Co-op, Marks & Spencer and Iceland, would there be any significant decline in competition and choice and a rise in prices?
To answer this, it is crucial to define the grocery market. The CMA argues that the major competitors to any Big 4 company are the other Big 4 companies, rather than the German discounters or other supermarkets. Unlike Aldi and Lidl, the Big 4 have a range of facilities, such as fish and meat counters, delivery and a large range of branded products.
At a national level the CMA finds that the merger would reduce competitive pressure, so that a Big 3 would be less competitive than the Big 4, with higher prices and with reduced quality, range of products and in-store services.
At the local level the effects are likely to be serious. Often the consumer has very limited choice of supermarkets at a local level. If a particular area has just two supermarkets, Sainsbury’s and Asda, then the merger of the two could result in a substantial loss of competition. The only alternative for consumers in such areas would be to use small shops, which tend to be more highly priced anyway and do not compete head-to-head with the supermarkets, or to drive to another area or to shop online, depending on how far rival supermarkets are prepared to deliver. Similar arguments apply to supermarket petrol stations, where the only competition to supermarkets is from roadside petrol stations, often selling more highly priced petrol.
In response to the CMA’s findings, Sainsbury’s chief executive, Mike Coupe, claims that they focus too much on competition between the Big 4 and do not take into account competition from Lidl and Aldi, both of which are expending rapidly and now have a combined market share of 12.8% (compared with 10.7% two years ago).
Sainsbury’s and Asda also claim that there would be considerable scope for economies of scale, with lower costs being achieved through purchasing and logistics. In a joint statement they state that:
Combining Sainsbury’s and Asda would create significant cost savings, which would allow us to lower prices. Despite the savings being independently reviewed by two separate industry specialists, the CMA has chosen to discount them as benefits.
The two companies and other interested parties have until 13 March to respond to the provisional findings. The CMA will then issue its final report by 30 April 2019. If it sticks to its provisional findings, then either the merger will be blocked or the merging companies would have to ‘sell off a significant number of stores and other assets – potentially including one of the Sainsbury’s or Asda brands – to recreate the competitive rivalry lost through the merger.’ This might be very difficult to achieve as the new buyer would have to be big enough to provide effective competition to the remaining Big 3. Perhaps this could be an opportunity for Amazon to move into in-store grocery retailing. Or there may be some private equity company that would like to do the same.
It is likely that if the CMA sticks to its ruling, the two supermarkets will apply for a judicial review of the CMA’s decision.
Articles
Competition and Markets Authority Report
Data
Questions
- In what market segments do the Big 4 supermarkets compete?
- Research earlier investigations of the supermarket sector by the UK competition authorities. What were their findings?
- In what ways might the proposed takeover of Asda by Sainsbury’s affect consumers’ interests (a) at a national level; (b) at the local level?
- What is the ‘GUPPI index’? How is it calculated and how is it used in assessing the effects of the proposed takeover? (See pages 88–91 and 109–11 of the CMA’s Provisional Report and pages I5–I15 of the Appendices and Glossary.)
- Distinguish between horizontal and vertical mergers. How is the distinction relevant in drawing lessons from the Tesco takeover of Booker for the Sainsbury’s takeover of Asda?
- Rather than blocking the takeover, one alternative would be for the CMA to permit it, subject to the sale of specific stores where there are problems of the merger limiting competition in a particular locality. Do you think that this would be a better alternative than blocking the takeover? Explain.