Tuesday 13 January 2015

Tesco, milk and the medieval version of markets

Only one company exists from the original Dow Jones Index from a century ago (General Electric).  It is certainly uneasy at the top.  People eventually assert themselves against their overlords and overthrow them.

This is a medieval image of the way competitive markets are supposed to work, but it is the one I gleaned from this morning's rather self-satisfied editorial in the Financial Times.  It is a case of The King Is Dead Long Live the King, as Tesco gives away a a slightly bigger oligopoly of identical formats.

It is comforting to know that, in the end, the great tyrants fall.  They over-reach themselves.  My name is Ozimandius PLC, they might say, before returning to dust.  The problem is that it takes time, and they hold us captive in the meantime because the protections against monopoly are far too weak these days.

And if you wanted to see the evidence you need look no further than the milk producers, especially now that the prices paid for milk are now said to be lower than water.

I don't know about the rest of the Big Four supermarkets, but Tesco has insisted on payment terms for its suppliers of 90 days - not an option for its small competitors.  That particular abuse - and it is an abuse - has provided it with a rolling interest-free loan equal to two months of total stock.

Again, that is a huge competitive advantage not provided to its competitors.

I was involved in the fascinating debate around the two grocery market inquiries over the past decade or more, which seemed at the time to have been almost pointless given the narrow definition of uncompetitive practices that the Competition Commission were using.

I know they were sticking to the letter of the Enterprise Act, but their basic assumptions were faulty: if a company was one way - as far as the regulators were concerned - then consumers must almost always have chosen for it to be so.

There is a kind of naivety about that which explains why monopoly has become such a curse of modern business and a source of such inefficiency and poor service.

But one reform brought through by the final Competition Commission inquiry, and finally forced through by Lib Dems in government, was the Groceries Code Adjudicator.

By coincidence there was an interview with Christine Tacon, the first in the post, in the Evening Standard last week.  She has taken up no case formally yet, but she has tackled a number of abuses more informally - with quiet words in ears.  Tesco was demanding payments for better shelf positioning ad the Co-op was asking suppliers for compensation when failing to meet sales targets.

The problem is that, if the market was really working, then this kind of post would not be necessary.  Nor would we hear so much today, begging the supermarkets to act in the interests of farmers.  The milk producers would be able to go elsewhere to get their milk on the shelves.

As it is, we may soon not have a UK dairy industry at all.  If you believe the Financial Times, this would be the result of free and open markets.  In fact, it is the absolute opposite.

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1 comment:

George Carty said...

The problem with the competition laws is that they fight monopoly power exercised at the expense of customers, but not monopsony power exercised at the expense of suppliers.