We should bring down food prices by allowing greater competition, writes John Fingleton
Ireland is becoming the most expensive country in the European Union. Food items are no exception to this trend. For a food-producing nation, whose farmers are increasingly concerned by farm gate prices, this is paradoxical and raises serious questions about the level of competition in distribution and retailing of food in Ireland.
Two pieces of legislation restrict competition in these areas. The Groceries Order prevents retailers from selling below the invoice cost and thus restricts price competition. The Retail Planning Guidelines prevent shops over a certain size from opening, which prevents entry to the market, especially by those retailers who use superior efficiency, scale and innovation to drive prices down. The combination of both measures undoubtedly means higher prices and reduced variety for consumers.
The primary beneficiaries of a restricted marketplace, the incumbent expensive suppliers, will never want more efficient or lower price competitors to enter the market. New entry would force their prices down, reduce their profits, ease pressure on property values, and oblige them to be more responsive to changing consumer preferences.
Not surprisingly, existing distributors and retailers will lobby heavily to prevent increased competition and can be expected to hide their self-interest behind a professed concern for consumers' interests. A particular favourite, well illustrated by taxis and pharmacists, is the use of scare tactics to frighten the general public into thinking that competition would damage consumers.
Three spurious scare tactics are particularly widespread in regard to competition in retailing.
The first is that larger retailers eliminate local convenience stores. This is not true. Convenience stores and supermarkets are not in direct competition. Supermarkets offer lower prices for a large weekly or monthly shop, which is totally different from the service, convenience or specialisation that a small or local retailer can supply. Experience in other countries (e.g. France) suggests that consumers would buy from both types, perhaps doing a large shop once a month, and supplementing this with local shopping in convenience and specialist stores.
Local shops have continued to expand profitably despite the success of supermarkets like Aldi and Lidl. Indirectly, more competition in the supermarket sector would force convenience stores to be more responsive to consumer needs. That can only be a good thing.
The second scare argument is that superstores would use low prices to eliminate competitors and later raise prices. This is not true for several reasons. First, there are many existing supermarket chains with strong market positions. Second, the removal of restrictions on entry would mean that retailers in the sector would constantly live under the threat of further new entry. Third, vigorous competition and merger enforcement provides a safeguard against monopolisation.
Allowing larger stores to enter would lead to lower prices permanently, not just in the short run, because it would tend to push down retailing costs generally. Moreover, loss leading is enormously pro-competitive because it enables more efficient stores to signal this clearly via lower prices. Many of the consumers who respond to loss-leading products are likely to be keenly aware of being overcharged elsewhere, and are not therefore likely to be easily ripped off on their overall basket of groceries.
A third scare argument is that large retail outlets increase infrastructure and congestion costs. This does not stand up to scrutiny. Larger retail outlets are unlikely to generate higher infrastructure and congestion costs than providing for the same increase in retail capacity via smaller outlets. Town centres are already frequently congested, and adding retail capacity in these congested areas will most likely impose further social costs. Instead of banning superstores, normal planning rules should apply in the retail sector. The planning processes should never be used to protect existing suppliers from new entrants.
Greater competition would oblige existing supermarkets, convenience stores and food distributors (less visible but no less important to the customer) to provide variety and value . With competition, markets are led by consumer preferences, and suppliers must be responsive to changes in those preferences. Instead of trying to oppose competition, existing suppliers should see it as an opportunity better to serve their customers in a more challenging retail environment.
The protectionist scaremongering we now hear from representatives of existing distributors and retailers are identical to those made against Ryanair almost 20 years ago. At that time, many consumers genuinely feared the unknown and were persuaded that new entry would lead to chaos or disruption. Instead, the airline market has expanded, contributing to tourism and exports, and fares have fallen enormously. Consumers can have confidence that greater competition can deliver similar benefits in the retail and distribution markets.
If food prices in Ireland could be brought to the average EU level, it would, for example, be equivalent to a 2 per cent pay increase for the average industrial earner. The benefits would be even more pronounced for the poorest, who spend a higher proportion of their income on food; equivalent to a 4.6 per cent increase in income for a couple living on a non-contributory old age pension. This translates to €550 a year. Greater competition in the distribution and retailing of food would lead to a substantial increase in real living standards for all Irish consumers.
Dr John Fingleton is chairman of the Competition Authority
Economic Comment: Business and Finance, page 5