Big supermarket multiples are poised to move into the mid-range convenience shop sector - watch out Centra and Spar. Joe Humphreys examines the likely fall-out from abolition of the Groceries Order
Small shopkeepers reeling from the news that the Groceries Order will be abolished early next year face another body blow this morning when Tesco opens its latest convenience store in Ireland.
The shop, at the Shannon Banks, Athlunkard on the Clare/Limerick border, is just the fourth such "Express" style store to be opened by Tesco since its arrival in the country in 1997.
More such outlets are expected as the British-owned multinational seeks to advance its strategy of diversification in the Irish market. Already branching into petrol, clothing, hardware, and credit cards, the supermarket giant is seeking to get a foothold in convenience food and groceries - a hugely lucrative market in Ireland's "cash rich, time poor" economy.
Tesco will be better able to compete with convenience store market leaders Spar, Centra and SuperValu thanks to the abolition of the order.
The company plans to charge the same prices in its Express stores as in its supermarkets, which greatly benefit from bulk-buying.
More intense competition in the convenience market is, however, just one anticipated result of the abolition of the order. Consumers can expect a raft of new marketing ploys as the rule-book is effectively shredded next year.
The major retail chains have been tight-lipped about their exact plans since last week's decision to rescind the order, which had banned below-cost selling. However, Dunnes Stores has already fired a warning shot across the bows of its competitors by announcing a two-for-one offer on its own-brand milk - a move that has drawn an angry reaction from the Irish Farmers' Association.
Director of Consumer Affairs Carmel Foley said she had received a complaint about the issue "and we are investigating it in the normal way".
The notoriously secretive Dunnes Stores, which was criticised last year for refusing to attend an Oireachtas committee that had been investigating the order, is understood to have decided to cut short the milk promotion to avoid further criticism.
However, the incident raises concern that retailers are already treating the order as gone. The temptation to breach the order will intensify in the coming weeks with multiples viewing the Christmas shopping season as a key opportunity to poach customers from their rivals.
Ms Foley says her office will continue to investigate complaints until the order is abolished, something not due to happen until at least next Easter.
However, retailers may choose to push the boat out further on the assumption that a piece of law heading for the dustbin might not be so keenly policed.
Ms Foley rejects the suggestion that she will turn a blind eye to breaches of the order but, she says: "I have always been struck by the fact that I have never received a complaint from a consumer about below-cost selling."
Dunnes, which has about 22 per cent of the Irish grocery market, has traditionally been more aggressive than Tesco in using well-publicised single-product discounts. The British-owned multinational, which has about 26 per cent of the market, boasts of offering discounts on a broader range of products over a longer period of time. The rival strategies reflect the fact that Dunnes is a relatively tiny operator in global terms, while Tesco Ireland is part of an international group that made pre-tax profits of almost €3 billion last year.
Notwithstanding its competitive advantage, however, it would be hard for Tesco not to react to sudden - and potentially illegal discounts - like last week's milk price cut if they were to continue unpunished.
What is clear, above all, is that the promised abolition of the Groceries Order has introduced a new degree of uncertainty into the retail trade.
Industry sources said they did not expect any dramatic change in business strategies, nor indeed any major drop in prices, in the coming months.
However, more aggressive discounting is expected to slowly emerge - and that means opportunities for savings for consumers who are willing to shop around.
One impact of the order had been to skew discounts in favour of fresh vegetables and fresh and frozen meat, on which sales were permitted below net invoice price.
With the order going, such products will be subject to fewer special offers, and may even rise in price as retailers target other products for discounting.
In what is due to be a more cut-throat environment, retailers are also expected to front-load savings, and put less-emphasis on long-term discount schemes like loyalty cards. Consumers may find themselves getting fewer money-off vouchers and cash-back rewards.
While the multiples will be keen to retain their loyalty cards, which provide valuable information on shopping patterns, some industry figures are predicting the demise of short-term saving schemes whereby customers are given "stamps" towards a gift. It will be somewhat ironic if the Grocery Order does away with such promotions given that the regulation had been introduced in 1987 to stem the demise of H. Williams, a supermarket chain that famously traded on Green Shield stamps.
With the abolition of the order, the multiples are also due to put greater emphasis on selling own-brand products above branded goods. The latter are often fixed in price by wholesalers, and thus offer retailers less scope for discounting. Consumers expecting British or European-average grocery prices in Ireland soon should not hold their breaths, however.
Tesco, which claims to have reduced its prices by an average of 2 per cent last year, still admits to selling in the Republic at prices which are up to 10 per cent higher than those in the UK. The multinational blames the differential on operating costs in the region of 15 per cent greater in the Republic.
Nonetheless, a spokesman for Tesco said gradual reductions would follow the scrapping of the order. "We believe that the abolition of the order is very good news for consumers. We have reduced thousands of prices over the past few years and this will enable us to do more of that and at a faster pace," the spokesman said.
It is hard to avoid the conclusion that Tesco, along with German discounters Lidl and Aldi, will be the big winners from the abolition of the order.
Dunnes will come under further pressure to sell out to a multinational with deep pockets, perhaps one of Tesco's chief rivals in the UK, Asda or Sainsbury. Superquinn, meanwhile, appears to have settled for the niche "artisan" market, competing with the likes of Marks & Spencer.
Consumers should, of course, gain from lower average prices. There is, as Tesco described in a submission on the Groceries Order to the Department of Enterprise, Trade and Employment, a "virtuous circle", at least in the company's eyes.
It says: "Economies of scale can facilitate savings throughout the whole supply chain with resultant cost benefits from suppliers which can be passed on in terms of lower supplier prices and thereby lower prices for consumers."
Not everyone is so keen on this dynamic, however. Apart from suppliers, who complain of being squeezed out of business to fund Tesco's profits, environmental groups and third world development agencies are becoming increasing critical of the multinational's tactics in the UK.
Whether anyone is listening to them in another matter. Tesco gets an estimated one in every eight pounds spent in Britain's shops. Irish consumers are similarly expected to vote with their feet.