Hagar, Kaupás and Samkaup with a 90% market share in the grocery market
The Competition Authority publishes its report today, „Price development and competition in the grocery market“. The report sheds light on price developments over the past six years among suppliers and retailers, and describes the conditions that new and smaller retailers face in price competition.
Barriers to access
A study by the Competition Authority indicates that there are considerable barriers to entry in the grocery market. These barriers are largely due to the preferential terms that grocery stores enjoy with suppliers. Three large retail groups, Hagar, Kaupás and Samkaup, have around 90% market share of the grocery market. Other retailers that are not part of the aforementioned retail groups pay suppliers much higher prices for goods, on average 15% higher than the largest retail group, Hagar, pays its suppliers. Other retailers would therefore have very little mark-up on their sales if they were to match the prices offered by the discount supermarkets within the retail groups. In some product categories, the lowest retail price of the discounters is lower than the purchase price for smaller shops that are not part of the relevant retail groups.
Smaller shops must therefore compete on factors other than price to attract customers, such as a favourable combination of pricing policy, service, product range and location. Such diversity in the provision of grocery shops can certainly be to the benefit of consumers. Their predicament, however, lies in the growing strength of discounters, whose share of total turnover in the grocery market has risen from around 20% in 1999 to about 63% in 2010. Other retailers that do not enjoy terms of trade comparable to those of discounters with suppliers therefore have limited ability to compete on price in the largest and fastest-growing segment of the market.
Many factors can justify different commercial terms for suppliers to retailers. It is therefore natural that large retail chains enjoy volume discounts. For example, a major retailer buys six times the average volume of retailers for common products, and 75 times more volume than the retailer with the lowest purchasing volume. Efficiencies in the distribution system are also a factor. However, this argument is less applicable in cases where suppliers distribute directly to shops and even handle the stocking and shelf presentation themselves.
Price development
The price of groceries has increased by almost 60% at the retail level over a six-year period from the start of 2006 to the end of 2011. The prices of these products have developed in a similar way among suppliers. A comparison of the development of grocery prices, the exchange rate and the production index for food and beverages suggests that the aforementioned increase in grocery prices is primarily explained by external circumstances, and in particular the collapse of the króna following the economic crash in 2008. This is not to say that the aforementioned increase was in all cases normal and inevitable, as stronger competition at both the supplier and retail levels could have led to greater efficiency and lower prices than would otherwise have been the case.
Suggestions
The Competition Authority considers it questionable that suppliers' commercial terms for retail stores are always based on objective criteria. It will often be difficult for suppliers to demonstrate this, not least because the commercial agreements are often not in writing. It is particularly important for suppliers to consider whether price differences for individual retailers result from normal economies of scale or from anti-competitive buyer power. Unfair pricing can also constitute a breach of Article 11 of the Competition Act if the supplier is a dominant undertaking. The Competition Authority encourages suppliers to review their pricing policies in this regard, particularly with regard to smaller grocery retailers. However, at this stage, the Authority cannot take a position on whether a significant price difference between shops, in individual cases, stems from, for example, anti-competitive buyer power of shopping centres and retail chains, or from legitimate economies of scale. A final position on such a matter can only be taken in a separate administrative proceeding, where the nature of the relevant transactions and the market position of the companies involved are assessed.
It is no less important that the government takes action to strengthen competition. Unfortunately, experience shows that The authorities have, with few exceptions, ignored the recommendations of competition authorities to improve competitive conditions in the grocery market. This is particularly true of matters concerning the processing and sale of agricultural products. It is clear that the authorities have not drawn sufficient lessons from the positive effects that experience shows healthy competition can have on various areas of agriculture. In this regard, it is worth noting that the government acted on the recommendations of the competition authorities and abolished tariffs on vegetables, following the exposure of an illegal price-fixing cartel in the production and distribution of vegetables in 2001. To address this, support for domestic producers was introduced at the wholesale level, while market-distorting barriers to entry at the retail level were removed. The positive effects did not fail to materialise; domestic production increased, retail prices fell, and consumption rose. These changes thus improved the situation for both domestic vegetable producers and consumers.
In light of the above, the Competition Authority considers, among other things, that it is very important that the Farm Produce Act is reviewed with the aim of levelling the playing field and increasing effective competition in the markets for agricultural products for the benefit of consumers and society as a whole. Such changes must involve a significant reduction in import restrictions on agricultural products and a reduction in other barriers to entry, without distorting competition between existing competitors. Changes following such a review must, among other things, lead to the facilitation of entry for new competitors, whether they are new domestic producers (e.g. farmers, processing plants and/or meat-processing companies) on the one hand, or importers on the other. Such measures do not have to preclude reasonable support for domestic production, as in the case of the aforementioned improvements to the vegetable market.
See report No. 1/2012 Price development and competition in the grocery market.
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