Tag Archives: Competition and Markets Authority

In Lewis Carroll‘s ‘Through the Looking-Glass’ Alice takes part in a race with the Red Queen only to discover that despite running constantly she remains in the same place. The Red Queen is not sympathetic: ‘A slow sort of country!’ says the Queen. ‘Here you see it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast!”

Do you run to stay in one place or do you sprint to expand your business?

And that is the dilemma facing all Market businesses. Do you run to stay in one place or do you sprint to expand your business? You certainly can’t afford to be complacent and stand still or you’ll be going backwards. That same challenge is faced on a grander scale by the ‘Big four’ Supermarkets. Between them they sell some 70% of UK groceries – Tesco has 28% of market share, Sainsburys has 16%, Asda 15% and Morrison 10%. If you factor in the ‘LADS’ (Limited Assortment Discounters i.e. Aldi 7% and Lidl 5% ) then less than 20% of the UK groceries market is up for grabs and where do you run TO? They have to keep running to stay in one place and keep their shareholders happy. ‘Where next?’they constantly ask themselves

If you are a truly international player like Walmart then you can play on an even bigger, global scale

Well, you can keep one step ahead by buying-up your competitors (Morrisons and Safeway) or buying better distribution (Sainsburys and Asda) or simply building more stores (Tesco in Eastern Europe). If you are a truly international player like Walmart then you can play on an even bigger, global scale. That seems to be one reason for the massive £12 billion Sainsbury/Asda merger announced at the end of April.

UK retail is arguably over-provided with supermarkets

Walmart bought Asda back in 1999 as a way to expand into the UK. But Asda has stubbornly lingered in third place because UK retail is arguably over-provided with supermarkets. The shift online has left many towns and shopping centres with ‘bricks ‘n mortar’ stores chasing Shoppers who have shifted online. This led to the downfall of Woolworths and BHS and has left House of Fraser and Debenhams struggling. As early as 2006 Walmart discovered their American retail formula did not work in Germany and sold-off 85 stores and took a billion-dollar hit.It clung on to its investment in Asda for another 10 years whilst privately conceding it was going nowhere so when Mike Coupe, the CEO of Sainsburys suggested a merger they must have jumped at it.

The merger of Asda and Sainsburys will with one leap knock Tesco into second place

The merger of Asda and Sainsburys will with one leap knock Tesco into second place. It will also enable Walmart to pocket £3 billion in cash whilst still retaining 42% of shares in the new business. That £3 billion can then beshovelled into the unconsolidated and rapidly-growing economies of India and China that ARE crying out for supermarkets. That’s globalisation for you.

And there’s another big reason behind the merger: Amazon.

Go online and search for Amazon Fresh Grocery. Amazon is only now establishing itself in the UK groceries market but in the USA it has bitten big chunks out of Walmart. Amazon works on wafer-thin margins and is building seriously big distribution centres around the UK for next day deliveries – bicycles, baked beans or bread. Take your pick. It challenges the Big Four because it is all online without the bricks ‘n mortar overheads. There are rumours it could simply buy its way into the UK groceries market by purchasing Ocado.

You could almost feel sorry for the Big four

This has prompted wry comments from retailers such as Sebastian James, Chief Exec. of Dixons PC World and Carphone Warehouse. He has been widely praised for his mergers and relocation out of town to fight-off Amazon’s online dominance of the electrical goods market. He knows better than most what motivates Amazon and made the pointed comment that:“Why is Amazon getting into the food market? Does it really think it can make money by selling food online? Definitely not. It’s all about getting customers addicted to Amazon Prime and the rest of the Amazon online offer. Amazon doesn’t want to make money out of food and that could make it a big threat for supermarkets.” You could almost feel sorry for the Big four. Their sales are likely to be hit in the same way they have made traditional Market Halls suffer over the last 10 years.

There are a lot of very worried Supermarket suppliers

According to a Sainsburys’ statement both Asda and Sainsbury will continue to trade as separate brands with Argos concessions being put into Asda stores. Not surprisingly, Sainsburys’ shares leapt 20% at the announcement whilst Tesco and Morrisons fell by 3%. Sainsburys announced the new, combined network of 2,800 stores will enjoy operating cost savings of £500m p.a. so employee trades unions are understandably nervous – the merger affects 330,000 jobs. And there are a lot of very worried Supermarket suppliers. The Federation of Small Businesses is pressing for assurances the £500m savings won’t simply be achieved by pressurising suppliers into lower prices ‘a la Tesco’.

The CMA will be looking at whether replacing the Big four with the Big three will be good or bad for Shoppers and Suppliers

The merger is expected to be completed in about 18 months after first obtaining approval from HMG regulator, the Competition and Markets Authority. The CMA will be looking at whether replacing the Big four with the Big three will be good or bad for Shoppers and Suppliers. Sainsburys/Asda are likely to suggest the rise of the ‘LADS’ plus online competition like Amazon still guarantees variety of choice and low prices for shoppers. The CMA will also have to assess whether the 2,800 stores need to be reduced in number. It can impose takeover conditions to ensure Shoppers get a choice of retail outlets in their area. The ‘proximity test’ could bar the merger from operating two or more stores within a mile or a five-minute drive of each other. Some estimates suggest at least 80 Asda stores are located within a mile of a Sainsbury outlet so may have to be closed. This would be bad news for institutional Landlords as well as employees.

‘We’re in the money…’

Mike Coupe has good reason to look pleased. The merger could be a brilliant move, knocking Tesco sideways at a single stroke (and increasing the value of his share options by about £600k). Unfortunately Mike then dropped a clanger. Whilst waiting to be interviewed by ITV someone switched on the microphone and he was broadcast happily singing to himself ‘We’re in the money…’ – the hit song from the musical ‘42^ndStreet’.

In April this year the shiny new CMA (Competition and Markets Authority) emerged from a union of the former Office of Fair Trading and the Competition Commission. People are watching it closely: Initial shock revelations include someone has been price-fixing galvanised steel water tanks and online review websites are not trustworthy. Well there’s a surprise. Whether or not the CMA gets around to reviewing something worthwhile such as supermarket tactics to bankrupt independent retailing remains to be seen.

Review websites often ‘lose’ poor feedback in return for sponsorship

According to the CMA some 25 million shoppers use review websites such as Amazon and TripAdvisor to ‘inform’ their purchases but many of the reviews are rigged. Review websites often ‘lose’ poor feedback in return for sponsorship, whilst manufacturers offer rewards for favourable reviews and post criticism of competitors. None of this comes as a surprise to anyone over 8 years old but encourages genuine shoppers to post outrageous comments about some products. I recommend Amazon’s eye-wateringly funny review of ‘Veet for Men Hair Removal Gel Cream’ at www.amazon.co.uk/Veet-Men-Hair-Removal-Cream/dp/B000KKNQBK

Someone who does believe in frankness and honesty is the (Canadian) Governor of the Bank of England, Mark Carney

Someone who does believe in frankness and honesty is the (Canadian) Governor of the Bank of England, Mark Carney. Last month he gave a highly critical after-dinner speech to city bankers to coincide with publication of the ‘Fair and Effective Markets’ review by HM Treasury. His speech left the audience squirming uncomfortably on their well-padded behinds as they remembered how the (now disbanded) Financial Services Authority failed to reign them in prior to the financial crisis. Carney was not averse to a bit of self-criticism either, describing how the Bank of England allowed the crisis to develop. ‘The Bank’s contribution fell short…and neither identified the scale of risks in the system nor spotted gaps in the regulatory architecture’ he said. Arcane governance had blurred accountability and more would now be done to strengthen control. He added: ‘and that includes 10 years in Wormwood Scrubs for any of you guys with your hand in the till’ - or something like that. Former Governor of the Bank of England Mervyn King, former FSA boss Hector Sants and former Chancellor of the Exchequer Gordon Brown chose not to comment.

The Treasury review proposes extending criminal sanctions from investment bankers to foreign exchange traders

Chancellor George Osborne also spoke at the dinner. He publicly supported Carney with: ‘The public rightly asks: Why is it after so many scandals so few individuals face punishment in the courts? Individuals who fraudulently manipulate markets and commit financial crime should be treated like the criminals they are.’ The Treasury review proposes extending criminal sanctions from investment bankers to foreign exchange traders plus harsher penalties, something shareholders in RBS and Lloyds would doubtless like applied to reckless executives. City of London Lord Mayor, Alan Yarrow said upholding professional standards should be the norm. ‘It’s like a supermarket with no security cameras – if someone takes something without paying, it’s still theft. There is no escape. People should uphold professional standards irrespective of whether the regulators are there or not.’ Well, actions speak louder than words Alan. We’re waiting.

Pickles made few friends amongst local councils whilst spearheading local government spending cuts

Meanwhile, having won a clear majority in the general election the Prime Minister reshuffled his cabinet without needing to consult his coalition partners. Eric Pickles, plain-speaking head of the Department of Communities and Local Government was promoted to the House of Lords with a Knighthood and an ‘anti-corruption role’ which sounds a bit South American. To replace him David Cameron promoted Greg Clark (47) to become Secretary of State for Communities and Local Government. Described as a ‘soggy left’ Conservative from Middlesborough, the former Financial Secretary to the Treasury has a hard act to follow. Pickles made few friends amongst local councils whilst spearheading local government spending cuts and the 2011 Localism Act which gave community groups the right to take over council-provided services. His enthusiasm for the ‘Big Society’ agenda bolstered a reputation as a vocal critic of local government, particularly after the child sexual exploitation scandal in Rotherham and local governments’ ineffectual response to the 2014 floods. Greg Clark faces an equally tough time at the DCLG as he now has to implement a second round of even deeper cuts to reduce the governments spending deficit.

Canadian lobsters are now in the front line thanks to Smartphone technology

And finally: Another Canadian product has also been in the news – Lobsters. In the struggle to attract consumer spending Canadian lobsters are now in the front line thanks to Smartphone technology. Shoppers in Newfoundland can now use smartphones to scan live lobsters in fishmongers tanks to discover where their seafood is from and who caught it and when.

Tracing food back to source is not a new idea but using QR code tags to provide customers with this level of detail is

The traceable lobster program is part of thisfish.info, an initiative of Ecotrust Canada, an environmental charity. Each lobster caught by a participating member is tagged with a unique QR code which customers scan for information about the catch – when and where it was caught and by what method, plus a biography of the fisherman. Tracing food back to source is not a new idea but using QR code tags to provide customers with this level of detail is. Some Newfoundland restaurants have been serving QR-coded seafood for a couple of years and boosting sales by linking into wider consumer trends. A spokesperson said: ‘Customers love a glimpse into the lifestyle of the person who provided their supper that night. Where they live, how old they are and how long they’ve been fishing. Consumers are focusing more on where their food comes from, if it is sustainable and healthy and whether the people who catch it are paid fairly’.

No lobsters were available for comment.

Supermarkets suffer the same problems as market traders – but on a grander scale. This includes underestimating how long it takes to generate turnover and profit sufficient to cover borrowings. We’ve all seen the enthusiastic but inexperienced start-up who lasts 6 months before the savings run out and he does a midnight flit leaving unpaid rent and suppliers behind. ‘Turnover is for egotists but profits are for realists’ is a classic saying – and a classic argument for cheaper bank loans and more tax breaks. Hopefully George Osborne will consider both now he doesn’t need to worry about re-election.

It took Aldi 25 years to generate enough turnover to become the UK’s sixth largest retailer

It took Aldi 25 years to generate enough turnover to become the UK’s sixth largest retailer. This was confirmed by first-quarter figures showing they’ve secured 5.3% of the retail grocery sector. That puts them ahead of Waitrose (a mere 5.1%) but still a long way short of Tesco at 28%. But every little helps.

What a pity they’re German, not British

At the same time Aldi announced ambitious expansion plans with another nine London stores in 2015 and a nationwide target of 1,000 by 2022. Contrast this with Tesco who ditched 40 + planned openings in the UK plus more abroad before posting a £6.4billion pre-tax loss. The fact that Aldi is both foreign and privately-owned simply rubs salt into the wound. It is not subject to corporate shareholder pressure for increased profits, year-on-year so could take it’s time to understand an overseas market. What a pity they’re German, not British.

It cost Tesco £1.2billion in write-offs when they pulled out in 2013

Asda retained their second place at 17% whilst Sainsbury held on at 16% but is suffering the same fall-out from overseas expansion that characterised Tesco under former Chief Executive Phillip Clarke. Tesco thought the best way to maintain turnover profits was overseas so launched their all-new ‘Fresh ’n Easy’ brand in blue collar USA. But they underestimated just how ‘mature’ US consumers are and that car workers in Detroit don’t understand self-service checkouts. It cost Tesco £1.2billion in write-offs when they pulled out in 2013.

Sainsbury’s venture into the unsophisticated retail economy of Egypt went dramatically wrong

Maybe Sainsbury’s new CEO, Mike Coupe should have considered this last year when he took over from long-standing predecessor Justin King. Sainsbury’s venture into the unsophisticated retail economy of Egypt went dramatically wrong when the Egyptian Courts charged JK with some (admittedly very dubious) allegations of embezzlement. Unfortunately Sainsbury had got into bed with a local developer who then went bust which cost them a modest £111million in write-offs after 18 months. But the ex-partner continued to pursue Sainsbury for alleged embezzlement so when Mike took over he travelled to Egypt to appeal against a guilty verdict. He very sensibly caught the return flight before the outcome of his appeal was announced which was just as well because he was sentenced to two years in Cairo Clink in his absence. There’ll be no more Egyptian sightseeing holidays for Mike unless he wants to do it in handcuffs.

This is not what one expects from a FTSE100 Company

The amazing thing is that investors learnt about this from the media, not from a Shareholder announcement. This is not what one expects from a FTSE100 Company and must rank alongside JK’s 2007 denial of Sainsbury colluding with suppliers to rig dairy product prices. Until two months later that is, when he announced a £26million out of court settlement with The Office of Fair Trading to avoid prosecution. Hmmm…….

Taking your eye off your home turf and forgetting what you do well may be a big mistake.

It seems the bigger you get the more confident you are that size alone will enable you to do a better job than the locals, even if you choose the right partner. Taking your eye off your home turf and forgetting what you do well may be a big mistake. Tom Jones (yes, THAT Tom Jones) was top of the bill in Las Vegas for 40 years before being offered a lucrative partnership in a new Hotel development. He’s no fool when it comes to business and turned it down, saying: ‘What do I know about running Hotels – I’m just a boy from the Valleys who can sing a bit’ which was not unusual.

The ‘Big Four’ Supermarkets are now faced with an inquiry by the Competition and Markets Authority

The fallout of all this is going to get worse says Begbies Traynor, the corporate insolvency practitioners. They suggest 1,400 wholesalers face imminent collapse as price wars escalate and buyers cut out the middlemen and deal direct with producers. After all, someone has to pay for the ‘£1 deals’. More worryingly they predict a bleaker picture still when Aldi and Lidl capture up to 20% of market share as predicted. They point out that: ‘The majority of Aldi and Lidl’s packaged stock is own-brand sourced from overseas, so struggling UK suppliers could find themselves squeezed even further’ – particularly if Sterling continues to strengthen whilst the Euro goes South. To add to Sainsbury problems the ‘Big Four’ Supermarkets are now faced with an inquiry by the Competition and Markets Authority (successor to the OFT and Competition Commission). This was triggered by a so-called ‘super complaint’ lodged by ‘Which?’ magazine alleging they systematically mislead shoppers by reducing pack sizes without reducing prices and make seasonal offers where the ‘previous higher price’ only applied out of season etc etc. I can’t help thinking this will only restate the bleeding obvious and result in a few adjustments to the Pricing guidelines and Groceries code of practice.

Mind you, a bit of adjudication in favour of shorter payment periods for suppliers would be welcome. Tell me about it.