Putting retail competition on a level playing field
Publicerad: 2011-05-30
Handelkraft 2011
Independent retailers in Europe face a challenging competitive environment, not least because of the growing presence and market power of integrated chain-store retailers.
By being members of a group, though, they can pool resources and in principle benefit from economies of scale and scope sufficient to allow them to be efficient and effective competitors.
DESPITE INCREASED competitive pressure, independent retailers remain a key feature of modern retail markets, adding greatly to the plurality and diversity of retail markets in Europe. The groupings that represent them are in themselves very diverse in nature, differing in their size, geographic coverage, scope of activities, range of services provided, and ownership structure. The largest groups tend to be apex organisations representing the interests of independent retailers largely as a trade body, such as ACS in the UK, FCA in France, and ZGV in Germany. Other large groups include international associations (like Spar, Intersport, and Euronics) and large grocery and general merchandise groups (such as ICA, Edeka, System U, Kesko, and Conad), whilst smaller groups tend to be nationally operating specialist groups.
THESE INDEPENDENT retailer groups vary considerably in their organisational structure, composition and activities. Their scope ranges from plain buying groups to symbol groups or (quasi-)vertical chain systems. Their ownership structure ranges from retailer-owned cooperatives, wholesaler-led voluntary associations, to mixed ownership public limited companies. In regard to their functions, some associations simply represent groups of independent retailers, others represent retailers directly, and yet others both groups and individual members. Their services range from joint purchasing to joint marketing activities, and may cover logistics management and other services to members, such as training.
THE TYPES OF agreements between organisations and independent retailer members can also vary greatly. Coordination can range from explicit contractual agreements, to voluntary service offers (such as for know-how transfer, information services, lobbying, and training) to much looser informal agreements between central office and independent retailers. Common contractual arrangements cover mandatory price negotiations, marketing agreements, joint purchasing obligations, brand licensing agreements, store planning arrangements, and the allocation of exclusive territories. Price recommendations may also feature and might cover suggested prices (e.g. on a schedule or menu of price points) or maximum resale prices, which may be limited to promotions, private label or exclusively supplied brands.
THE AGREEMENTS and arrangement offer significant economic benefits. In particular, cost savings arise from economies of scale in purchasing, logistics and marketing, which benefit consumers through lower prices, a larger choice of products, a recognisable/trusted retail brand, and unified store image. To achieve these benefits it is necessary for independent retailers to cooperate and pool resources and gain bargaining power to compete effectively against fully integrated chains. The absence of such agreements would mean greater costs and higher purchase prices for independent retailers.
AS A DIRECT consequence of these agreements, independent retailer groups support and promote benefits not just for their members but the economy more generally through advancing:
• Efficiency – via scale economies from pooling resources
• Innovation – via experimentation and entrepreneurship
• Diffusion – as a channel for new products and processes
• Competition – as a challenge to the increasing dominance of integrated chains
• Diversity – as organisational forms adaptive to the needs of different communities and localities
• Consumer choice – flexible to local needs and serving locations where other retail forms avoid
BY THEIR VERY nature and reason for their formation, these groups are intended to be pro-efficiency and pro-competitive forces. Their collective resources and market presence allow for scale economies. Individual retailer efficiency facilitates competing more effectively in local markets. Effective competition ensures efficiency benefits are passed on in the form of lower prices, better service levels, wide product choice, and retail outlet diversity; all to the advantage of consumers.
YET, INDEPENDENT retailer groups facing a rising tide of competition from the growing dominance of integrated chains in many EU member states. These integrated chains benefit from economies of scale at store and group level, marketing advantages from a common retail brand, and benefits from complete vertical and horizontal control. All of this can add up to put integrated chains in a powerful virtuous circle of growth, where increasing market share provides scale economies which facilitates a stronger competitive position against rivals leading to yet further growth in sales, and so on.
CRUCIALLY, INTEGRATED chains have also benefited from a favourable competition policy towards retail mergers and the internationalisation of fully integrated groups, despite concerns over the combination of growing buyer and seller power potentially distorting procurement and retail markets.
IN CONTRAST, legal restraints and policies hold back independent retailer groupings. In particular, these groupings face discriminatory legal treatment in regard to permitted vertical and horizontal control and limits to pro-competitive agreements on joint purchasing and joint marketing, combined with legal uncertainty hanging over existing agreements where arbitrary market share thresholds are used in EC rules and guidance on vertical and horizontal agreements.
THIS AMOUNTS to discrimination based on organisational form, serving against retailer groups that work together by means of agreements rather than by direct, single ownership.
FOR EXAMPLE, independent retailer groupings face limits on joint marketing, such that exact or minimum retail prices cannot be jointly set as this would be viewed as illegal vertical price fixing. Also groups with high market share (greater than 30%) may be restricted on implementing maximum or recommended retail prices. There are also limits on joint purchasing obligations, typically allowing only agreements that cover up to a maximum of 80% of purchases for a maximum duration up to five years. Stringent limits also apply to allowable horizontal cooperative agreements (where the collective market share does not exceed 15%) compared to integrated chains which face no restrictions on organic growth and limited restrictions on mergers (for combined share less than 40%).
THESE RESTRICTIONS do not apply to fully integrated retailer groups that have been, with few exceptions, freely allowed to grow and increasingly dominate markets, often at the expense of independent retailers.
INDEPENDENT RETAILERS by their nature may suffer disadvantages over fully integrated store chains, arising from the lack of complete control and fully integrated decision making that comes only with common ownership. However, at issue is public policy and law that can exacerbate these disadvantages – merely because of the form of association and agreements used as a means of working together for a common good. Such policy discrimination if not appropriately addressed is likely to harm independent retailers and in the process undermine the intensity and vibrancy of competition in retail markets. The consequence for consumers will be reduced diversity and plurality in the retail sector, which has for so long been the mainstay and source of retail innovation, entrepreneurship and general competitive drive.
TO BE CLEAR, independent retail groups do not require special treatment and unduly favourable policies. They just need a level playing field, with requisite legal certainty over their arrangements, to allow them to achieve sufficient efficiency benefits and consistency in their marketing image to enable them to compete on effective terms. If they can obtain this, then there is a much greater prospect that procurement and retail markets across Europe will remain competitive to the definite and continuing advantage of consumers.
IN ORDER to allow independent retailer groups to compete on a more level playing field, the public policy treatment of independent retailer groups needs to change in four critical respects.
FIRSTLY, THE SET of agreements used by independent retailer groups should be assessed on their collective and overall net economic effect (rather than assessed individually and in isolation from one another) and without regard to the specific legal form that specific agreements take.
SECONDLY, RETAIL, procurement and wholesale markets should be appropriately defined in respect of their geographic and product/service scope, but even when critical market thresholds are exceeded, agreements (e.g. on maximum or recommended retail prices) should be allowed when they offer clear consumers benefits and provide independent retailers with pro-competitive and pro-efficiency benefits.
THIRDLY, JOINTS purchasing arrangements (as horizontal agreements amongst retail members) and purchasing obligations (as vertical agreements between wholesaler and retailer members) should be assessed on their merits and with regard to the nature and strength of the benefits offered, being allowed, even in an unrestricted form without percentage and time limits, where they do not distort or restrict competition to the ultimate detriment of consumers.
FOURTHLY, ALLOWING fixed retail prices as either vertical (i.e. trading) or horizontal (i.e. co-operative) agreements in independent retailer groups should be considered for short-term promotional purposes when they are indispensable in providing consumer benefits from advancing inter-group competition, ensuring consistent value-for-money propositions being offered, promoting efficiencies in respect of joint purchasing and joint commercialisation, and where there is no prospect of this engendering collusion to raise prices.
PROVIDING APPROPRIATE and clear policies that support or at least do not hinder arrangements for independent retailer groups should not be seen as merely ensuring that diversity or variety of organisational forms is maintained but, much more crucially, that the long-term health and vitality of retail competition is preserved and preferably enhanced.
THE CALL HERE for ending or at least limiting policy discrimination is not about protecting competitors, but rather about protecting competition. The present discrimination operating against independent retailer groups, compared to the freedom enjoyed by integrated chains, represents a perverse handicap system. Independent retailers already at a potential competitive disadvantage because of their organisational form, by working though agreements rather than under single ownership, are handicapped by competition rules that limit their ability to compete effectively with integrated chains.
BY ENSURING a more even playing field that provides greater opportunity for effective competition, retail markets are likely to remain vibrant and innovative, and continue to support entrepreneurship and a wide choice of different retail forms to the greater benefit of consumers and the wider economy.
By Professor Paul Dobson, Head of Norwich Business School, University of East Anglia, UK