UK supermarket sector is an oligopoly - Essay Example

?UK Supermarket Sector is an Oligopoly Table of Contents 0 Introduction 3 2.0 Key Issues of an Oligopoly Market with Respect to the UK Supermarket 4 2.1 Firms in the UK Supermarket 4 2.2 Barriers to Entry in the UK Supermarket Sector 6 2.3 Earning of High or Above-Normal Profit in the UK Supermarket Sector 8 3.0 Justification of the Subjection of Markets to Competition Commission 11 4.0 Evidence of Probing of the UK Supermarket Sector 12 5.0 Conclusion 14 References 15 Bibliography 18 1.0 Introduction The research paper is a detailed report on the critical evaluation of the citation that “UK supermarket sector is an oligopoly”. The segment of the supermarket in the UK falls under the Competition Commission’s authority. The Commission is bestowed with the responsibility of ensuring the activeness of competition in the market, with the objective of meeting the needs of the consumers. The entire functioning in the supermarket is looked after by the Commission. Although the commission tries to disrupt the impacts of oligopoly, there is evidence that there is prevalence of oligopoly in the UK supermarket sector. This is because the supermarket sector in the UK is predominantly operated by a few firms, i.e. Tesco, Sainsbury’s and ASDA. The rapidity of the deliberation with regards to oligopolies concern has gained acceleration during the past five years. The supermarket sector in the UK falls under the category of grocery market that had accounted for a total market share worth ?146.3 billion in the year 2008. Supermarket sector is the largest sector among all other sectors under the grocery market in the UK and it accounted for a total of 73 percent of the sales in grocery market. In the UK grocery market, the three biggest chains are Tesco, ASDA and Sainsbury’s that accounted for a share of 67.9 percent (Li, 2008). In this research paper, the UK supermarket sector will be analysed with reference to the performance of the three giants in the market. The belief that the supermarket in the UK is dominated by oligopoly will be critically evaluated in this research paper. 2.0 Key Issues of an Oligopoly Market with Respect to the UK Supermarket In this section of the research paper, a generic overview of the characteristics of an oligopoly market will be undertaken with the aim to get a clear understanding of the facts of the UK supermarket sector. The most important characteristics of an oligopoly market are existence of a few firms, high barriers to entry or stiff competition and earning of high or above-normal profit. 2.1 Firms in the UK Supermarket It has already been mentioned earlier that the UK supermarket’s four biggest chains are the Tesco, ASDA, Sainsbury’s and Morrisons. The share of these chains in total accounts to 67.9% of the grocery market. This data explains that more than half of the market share belongs to these chains and thus resembles the scenario of an oligopoly market. The data about the operational efficiencies of the three topmost chains will support the fact that the UK supermarket sector is an oligopoly. 2.1.1 Market Share and Performance of Tesco in the UK Market Tesco is the third largest retailer in the world and is the topmost in the UK; and at present it is observing a steady recovery in the consumer market segment in the UK. The expectation is supported by the sales figure during the period September-November, 2010. The market share of Tesco had grown up to 30.7 percent during the year 2010. According to the article published in Bloomberg Business week, the sales that boosted up during the period of Christmas last year had been initiated by the shift in the preference of consumers to products with better quality. The performance of Tesco in the UK market provides evidences of dominance in the supermarket sector (Shannon, 2010). 2.1.2 Market Share and Performance of ASDA in the UK Market ASDA, with a market share of 16.8 percent is the second largest operator in the UK supermarket sector. Although its performance level declined as it faced competition from its rival Sainsbury’s, it managed to regain its position with the initiative that provided guarantee that its prices will be lower than that of its rivals. This scheme of ASDA helped to increase its market share as sales increased by 1.6 percent during the last quarter of the year 2010. Thus, it can be observed that ASDA also plays a dominant role in the supermarket sector of the UK (The Independent Business, 2011). 2.1.3 Market Share and Performance of Sainsbury’s Sainsbury’s became the one among the UK’s top four retailers in the sector of supermarket whose market share increased in twelve weeks that ended in February 20, 2011. It stands at the third position in the UK’s supermarket sector and its share of the market stands at 16.5 percent. On comparison of this figure with that of the ASDA, the prevalence of neck-to-neck competition can be observed. The sales figures of Sainsbury’s have been initiated by the Christmas period that has bestowed the retailer with ‘better than expected’ figures of sales. The transactions during the period of Christmas grew at an all time high of 24.5 million Pound (Grierson, 2011). The dominant power of the topmost firms can be visualised from the following figure that depicts the market share of each of the firms present in the sector. The larger market share of the four firms inclusive of Morrisons puts light on the fact that few firms prevail in the UK supermarket sector. Source: (Li, 2008). 2.2 Barriers to Entry in the UK Supermarket Sector The entry barriers for the new entrants can be analysed by the concentration ratio of the UK supermarket sector. The analysis of the concentration ratio shall also provide scope for the assessment of growth perspective of the market. The data presented below shows the market share of the top ten chains in supermarket for the period from the year 2004 to 2008. In the table depicting the data, four-firm and five-firm (C4 and C5) ratio of concentration has been shown that helps in measuring the competitiveness between two most important firms in the market. Source: (McCloud, 2011). It is evident from the data depicted in the above table that the concentration ratio had increased every year from 2004 to 2008. Among the data, the most significant one is the increment from the year 2007 to 2008 where a percentage point of 9.90 had been observed, both for C4 and C5 concentration ratio. This movement is attributable to the increment in the market share of the four topmost chains of supermarket from the year 2007 to 2008. However, the increment in the market share for the four chains has been due to a number of factors such as spending of the consumers, desire of the consumers to buy healthy and fresh products for improving the habit of eating and many other similar factors. Another important factor that contributed towards the increased market share is that of the expansion of chains in the rural and suburban regions of the country. The expansion factor has provided for greater accessibility of the consumers to the supermarket in a higher proportion in the country. The above discussion on the levels of concentration suggests several implications in the industry of supermarket in the UK. The increasing concentration ratio in the UK supermarket generates high entry barriers for the new entrants in the industry. The entry barriers lead to the reduction in the choice of the consumers. Additionally, the strong holding of position in the market by three firms suggests that there is chance that retail prices are influenced by these firms. This aspect of the UK supermarket sector raises the concern of the Competition Commission in terms of investigation into the industry. The investigation has even resulted in code of conduct which is self imposed and implemented by the bigger supermarkets. The creation of the code of conduct has provided stabilisation in the essential goods’ prices. However, the smaller chains in the supermarket sector are still facing hurdles in the industry that is initiated by the competition over market reach and pricing. The entire scenario with respect to the barriers to entry in the supermarket results in limited scope for the smaller companies in gaining market share (McCloud, 2011). 2.3 Earning of High or Above-Normal Profit in the UK Supermarket Sector The earnings of the top players in the UK supermarket sector have been high despite the global economic downturn due to the recession. The topmost players, i.e. Tesco, ASDA and Sainsbury’s have earned enormous profit in this period and this is the reason as to why the concern has been raised regarding the issue that UK supermarket sector is an oligopoly. In this section of the research paper, the earnings of the three giants in the supermarket sector will be discussed for providing support to the fact. 2.3.1 Discussion on the Earnings of Tesco According to the Chief Executive of Tesco, Sir Terry Leahy, there is presence of little danger for the occurrence of the effect of a double-dip recession. The biggest giant of the UK supermarket has earned the highest return consecutively even after the occurrence of the economic downturn. Records reveal that Tesco has earned underlying profit before tax of 3.4 billion Pound for the year that ended on February, 2011. The figure is a 10.1 percent increase over the last year’s profit. The Chief Executive mentioned that the company has “weathered the storm” and is in a good position to earn profit with the recovery in the global economy. Even the company plans of creating a total of 16000 jobs worldwide inclusive of 9000 jobs in the UK itself. These details suggest that the economic downturn that impacted almost every units of the world was unable to put an impact on the performance of Tesco. This is the indication of the presence of oligopoly in the supermarket (Wearden, 2010). 2.3.2 Discussion on the Earnings of ASDA The report of an article in the ‘Daily Mail’ states that the profit of ASDA for the year 2009 had massively jumped from 520 million Pound to 798 million Pound. That is an immense jump in the profit by 53 percent. Although the company has been experiencing slower growth than its rivals in the current fiscal year (2010-11), the huge earning during the period of recession is a matter of concern. ASDA is considered as a low-cost firm and this is the reason that it is able to set lower price than their rivals for regaining the enormous growth amount. ASDA has taken up a move for taking itself out of the slowed down rate of profit. The move includes lowering of prices as the company promised to its customers that they receive a fair value of the deal and the value that they will pay would be lower than their rivals’ asked price. This move of ASDA has been presumed to decrease the level of competition as it is observed that ASDA has tried to regulate the price in the market. This undertaking of strategies regardless of the fear of any loss suggests that the market in which the company operates is an oligopoly market (Mail Online, 2010). 2.3.3 Discussion on the Earnings of Sainsbury’s Sainsbury’s has successfully performed during the period of recession with the use of certain strategies that kept them away from the impact of recession. Sainsbury’s is considered the recession winner as it recorded strong growth in earning profit over the year by broadening the product ranges and applying more promotional tools to attract customers. The year that ended on March 21, 2009, has earned Sainsbury’s a recorded sale that rose 4.5 percent from the previous year. Along with the sales, the revenue earnings also climbed up to 20.4 billion Pound and rose by a percentage of 5.7. Profit before tax rose by 11.3 percent and grew to 543 million Pound during the fiscal year 2008-2009. Even after the impacts of recession, Sainsbury’s planned to increase the pace of its opening up convenience stores that included 50 shops for the year 2009-10 and 100 for the year 2010-11. Sainsbury’s also decided to pay a dividend up to 13.2 percent per share which is an increment of 10 percent from the last year (2007-2008). Thus, it is evident that Sainsbury’s also falls under the category in the UK supermarket sector that performed unexpectedly better than the smaller firms in the sector (Wilson, 2009). Thus, from the discussion over the logical reasoning of the fact that the UK supermarket sector is considered an oligopoly, it is evident that the performance of the firms in the market represents the prevalence of the conditions of oligopoly in the market. 3.0 Justification of the Subjection of Markets to Competition Commission The Competition Commission considers those markets for investigation that depicts characteristics which restrict the prevalence of competition in the market. The policy of the Office of Fair Trading (OFT) has been formulated that take up only those market whose features seem to restrict the competition. The guidance of the OFT explains that the reference for a market investigation is appropriate for dealing with the implicit coordination in the market that bears characteristics of oligopoly. The OFT also indicates that the investigation would involve features that prevail in an industrywide manner or multi-firm conduct. The OFT reviews the criteria with respect to their emergence according to the case law of prohibition under Chapter II if it appears that it is inadequate to tackle a single firm whose operations have impact on the prevalence of competition. The OFT will also make an inference for investigation if the situations are such that it abuses a dominant position under the Article 82 EC or the prohibition under Chapter II (Whish, 2008). There are a number of fields of application of relevant theory in the UK supermarket sector that accounts for investigation of the Competition Commission. The foremost area is the matter of market structure. There are a huge number of firms that prevail in the UK supermarket sector, but from the description of the market presented earlier, it is evident that only a few firms account for around 75% of the total market share. The industry is mentioned to have a ‘5 firm concentration ratio’ of 75%. Thus, there is a clear implication that the market is an oligopoly market that represents competition among only a few firms and occurs when there is prevalence of dominancy in the industry. The industry is gradually becoming more concentrated in the past few years and this indicates that the market shares of the prevalent giants are further rising (Bized, 2011). 4.0 Evidence of Probing of the UK Supermarket Sector The food inflation in the UK supermarket has hit a rate of 4.6% annually in the month of February as against an average in the euro zone of 1.5%. According to a detailed report in the ‘Guardian’, the supermarkets in the UK could be surveyed by the government for increasing the prices of food above the prevailing rate of inflation. The prices of food in the UK economy are rising faster than any other economies under the OECD. This might lead to the perception of the government that food inflation is excessive and unfair. The scenario also suggests that the major retailers as that of Tesco and Sainsbury’s are interested in increasing their profit margins through the sales of food and also through the utilisation of their dominant position in the market. Thus, it is evident from the present scenario in the UK supermarket sector that the Competition Commission can indulge in regulating the market performance if conditions occur that the oligopoly players are taking advantage of their dominant position and thus decreasing the level of competition (Wearden, 2011). 5.0 Conclusion The discussion all throughout the paper suggested that the citation that the ‘UK supermarket is sector is an oligopoly’ is true. The statement has been supported by various articles and papers that provided several evidences of the prevalence of characteristics of oligopoly in the UK supermarket sector. The analytical review of various articles related to the topic concerned has been presented in the paper that has initiated in taking the supportive side to the issue. The three giants of the UK supermarket sector: Tesco, ASDA and Sainsbury’s have been found out to be dominating the industry. The conditions prevailing in the market along with the dominating position undertaken by the giants restrict the stiff competition to prevail within the industry. The situation also restricts the new entrants to enter the market and pertaining to this condition, the acting of Competition Commission comes into being. The Competition Commission follows certain norms and with respect to any violation of the standards takes actions. Another objective of the research paper was to find those sectors that are most likely to be searched by the Competition Commission. From the research, it is evident that the UK supermarket sector bears those features that are liable to call for the probing of Competition Commission on the grounds of restricting the level of competition to prevail. In this research paper, evidence of probable probing of the UK supermarket sector has also been provided for supporting the theoretical aspects of the findings. References Bized, 2011. Acquisitions, Competition, Market Power and Regulation. Current. [Online] Available at: http://www.bized.co.uk/current/mind/2003_4/131003.htm [Accessed March 10, 2011]. Grierson, J., 2011. Sainsbury’s Christmas Sales Better than Expected. The Independent Business. [Online] Available at: http://www.independent.co.uk/news/business/news/sainsbury’ss-christmas-sales-better-than-expected-2182472.html [Accessed March 10, 2011]. Li, E., 2008. Supermarket Chains and Grocery Market in the UK. EU-China. [Online] Available at: http://www.ceibs.edu/bmt/images/20100319/23714.pdf [Accessed March 10, 2011]. Mail Online, 2010. Low-Cost Supermarket Chain Asda's Profits Surge after a Stellar Year. Daily Mail. [Online] Available at: http://www.dailymail.co.uk/money/article-1318324/Low-cost-supermarket-chain-Asdas-profits-surge-stellar-year.html [Accessed March 10, 2011]. McCloud, K., 2011. Review of the Concentration Ratio in the UK Supermarket Industry. Ivory Research. [Online] Available at: http://www.ivoryresearch.com/ken-mccloud.php [Accessed March 10, 2011]. Shannon, S., 2010. Tesco U. K. Sales Growth Accelerates Ahead of Holiday. Bloomberg Business Week. [Online] Available at: http://www.businessweek.com/news/2010-12-07/tesco-u-k-sales-growth-accelerates-ahead-of-holiday.html [Accessed March 10, 2011]. The Independent Business, 2011. ASDA Price Guarantee ‘Threw Rivals’. News. [Online] Available at: http://www.independent.co.uk/news/business/news/asda-price-guarantee-threw-rivals-2222368.html [Accessed March 10, 2011]. Weraden, G., 2010. Tesco Rings Up Rings up Record Profits. Guardian. [Online] Available at: http://www.guardian.co.uk/business/2010/apr/20/tesco-rings-up-record-profits-again\ [Accessed March 10, 2011]. Wearden, G., 2011. Supermarkets Warned of Food Price Enquiry. Guardian. [Online] Available at: http://www.guardian.co.uk/business/2011/mar/01/supermarkets-warned-of-food-price-inquiry [Accessed March 10, 2011]. Whish, R., 2008. Oligopoly Theory and Economic Evidence. Competition. [Online] Available at: http://www.eui.eu/RSCAS/Research/Competition/2006%28pdf%29/200610-COMPed-Whish.pdf [Accessed March 10, 2011]. Wilson, A., 2009. Sainsbury’s Enjoys Profit Growth as it Proves Recession Winner. The Telegraph. [Online] Available at: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/5316531/Sainsbury’s-enjoys-profit-growth-supermarket-proves-recession-winner.html [Accessed March 10, 2011]. Bibliography International Institute for Environment and Development, 2004. Race to the Top. [Online] Available at: http://www.esmeefairbairn.org.uk/docs/RaceTopreport.pdf [Accessed March 10, 2011]. Sanderson, R., 2007. UK Supermarket Sector Shows Stronger Growth-TNS. Reuters. [Online] Available at: http://uk.reuters.com/article/2007/10/16/supermarkets-britain-tns-idUKL1669923220071016 [Accessed March 10, 2011]. Sibun, J., 2010. OFT Probe into Supermarket Price Fixing Claims Shelved. The Telegraph. [Online] Available at: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8142092/OFT-probe-into-supermarket-price-fixing-claims-shelved.html [Accessed March 10, 2011]. Read More