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You are here: Home > Current Topics > Mind your Business > 13 October 2003 |
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Safeway and Morrisons: The takeover has not yet gone through however; following the announcement by Morrisons other potential buyers - including the other main supermarkets - entered the 'race'. As a result, the Competition Commission investigated the issue. The Commission found that, of the major supermarkets, only Morrisons should be allowed to proceed with a potential takeover of Safeway. This does not rule out another potential buyer. Philip Green, billionaire owner of Top Shop and British Home Stores (BHS) has also expressed an interest in Safeway. The Commission has recommended that if Morrisons are successful in their bid that they will have to sell off 48 Safeway stores to ensure that competition is not compromised. The Commission rejected the other bids because it was felt that no matter how many stores it insisted were sold off, there would be insufficient grounds to believe that the public interest would not be served and, through the creation of a fourth major competitor in the market, the bid by Morrisons represented the most appropriate way forward. The process now is for Morrisons to put its bid to the shareholders of Safeway for agreement - the final price may be higher than was anticipated in January and this was around £3 billion! But this is not likely to be a smooth ride for Morrisons, apart from other bidders there is still the potential for the likes of Asda to launch an appeal against the decision of the Competition Commission - watch this space as they say! 
How much longer will this be a familiar sight in the UK? |
There are a number of areas of relevant theory in this story. The first is the issue of market structure. The retail grocery market contains many hundreds of firms but as the figures above highlight, five firms account for 75% of the total sales in the industry. The industry is said to have a 5 firm concentration ratio of 75%. If the takeover goes ahead this will become a 4 firm concentration ratio. This implies that the market structure is an oligopoly. Oligopoly refers to competition between the few and occurs where a few large firms dominate an industry. We must not forget however, that there are a large number of much smaller firms in the industry - indeed part of the reason for analysing such markets may be to see what happens to these smaller players who may not be able to compete. This is an example of a market that has become more concentrated over recent years - this means there are fewer businesses in the industry and their market share is rising.
Oligopoly theory highlights a number of characteristics; non-price competition is strong, high levels of branding and brand loyalty; prices tend to be stable, high degree of interdependence between the main rivals - all of them watching what the other is doing and seeking to react and pre-empt their rivals; high of barriers to entry; strong emphasis on advertising; economies of scale; a possible price leader whose actions are followed by rivals and the potential for collusion. Many of these features can be observed in the leading supermarkets - remember the 'product' they are selling is not just the items you can buy in the store like bread, eggs, jam, cheese, beer etc but more the whole experience of shopping. Grocery shopping is not an activity that too many people enjoy for its own sake so the firms are acutely aware of how people experience their trip to the supermarket!
Firms who dominate the industry in this way tend to benefit from considerable economies of scale. In gaining these economies there are lots of complaints by those in the supply chain about the treatment they receive at the hands of these big buyers. Farmers in particular have complained that they are put under huge pressure to deliver higher and higher quality and standardisation at lower and lower prices and that they are effectively bullied into submission by the power of the supermarkets who drive prices to them down but do not pass on the same price rises to consumers. Other firms who complain are the small grocers who find it very difficult to compete - especially as supermarkets are now moving into non-food items as well as groceries. As a result, local shopping facilities are reduced and lead to the death of other facilities in small towns and villages.
Because of the potential problems caused by large firms dominating an industry in this way, the Competition Commission and the Office of Fair Trading (OFT) monitor the activities of businesses to ensure that competition is maintained and that the public interest is protected. Investigations into whether business activity acts in the public interest centres on four broad areas; prices, choice, innovation, quality and availability. There have been concerns that since the passing of the Enterprise Act 2002 that the 'public interest' criteria will become less prominent and that the main concern will be over the impact on competition alone. (There is an overview of this Act on the OFT Website - see the link below) Whatever the outcome of this Act, the OFT have been involved in a number of high profile cases recently that highlight its importance in regulating the behaviour of firms in industries where they may have considerable market power although some would argue that these powers are not strong enough!
Total 40 Marks
To do this question, first identify the key features of an oligopoly. You can get this information from any main business studies or economics textbook as well as the hints in the 'Theory' section above. Once you have these - ensure you understand them! Try to find examples of cases where the main supermarket chains have shown such characteristics. For example, Tesco introduced its 'Clubcard' some years ago - Sainsbury's criticised the move suggesting it was a gimmick but after the Clubcard appeared to be a success launched their own version! Is this an example of non-price competition and brand leadership? There should be plenty of scope here for sound application of theory to real events! 5 marks for the theory, 5 for the application and the examples used and 5 for the analysis of the market.
This question is encouraging you to read the report of the Competition Commission - albeit a summary - it is useful in that it gives a flavour of the investigation and the thinking behind the judgement. You will see the decision is based on issues around price and choice - the key to answering the question therefore is to explain these points in terms of the theory. Why for example, would the takeover of Safeway by Tesco lead to higher prices? Would it lead to less choice? Would suppliers be in a weaker position as a result of the takeover by anyone other than Morrisons? (Economies of Scale will be highly relevant here!) The existence of (abnormal) profits of the likes of Tesco may be useful in supporting your arguments - look up why firms are able to make abnormal profits in the long run! 5 marks for the summary of the Commission's findings, 4 marks for finding the knowledge that relates to the summary and 6 marks for the application and analysis of the summary.
For this answer, you will need to look at some of the related news articles about Asda's appeal. Asda must base its claim on the fact that if it took over Safeway it would not lead to the sort of problems that the Commission raised in its report - which you have read about in regard to question 2 above. Therefore, base your arguments around these points. Why, for example, would Asda be able to argue that they would not further limit competition and cause prices to rise or be above normal market limits? 4 Marks for finding out about Asda and 6 marks for the analysis and evaluation of their case.
Total 40 Marks
