Are supermarkets efficient markets ? Or are they crowding out innovation?
All the evidence I have seen is that large monopolies prevent the development of new innovative small and mid-size companies. My thesis is broader however. That certain monopolies in consumer exposed sectors can actually block the development of new products and services, reduce opportunities and slow job creation in the economy.
My experience of the supermarket.
When I was a kid, in NSW partly, but also Melbourne and Tasmania I remember fondly our second supermarket.
The first was Woolworths. Although a noble attempt, this was an early 80s supermarket, and never quite delivered on the multitude of goods, glistening on the shelves. We then had a Franklins (discount groceries) which was good for cheap stuff, not so good for quality.
Finally we got our second. A large Coles supermarket (which a decade or so later, expanded). In many ways, this reduced our cost of living, as bonuses, freebies (steak knives and Bohemia Crystal), stock choice and variety made the Coles supermarket super fun, and super value.
Coles forced our green grocers to change. Our local grocers like to put their thumb on the scales. The main local butcher sold a mish-mash of meats, some aged (but not in a good way). So Coles seemed clean and safe, and to a kid — magical (and fun).
But now supermarkets have changed.
Once their purchasing power made them the cheapest.
Now it seems supply costs make them the most expensive.
Where once you went their for range, now it’s dominated by questions such as ‘what happened to XYZ product?’
Where once they were mid-size floor-plans, now supermarkets are huge floor plans.
Supermarkets are also empty more than I recall.
Let’s flesh out the last observation. The number of people per square metre in the local supermarket is lower than the number of people per square metre in the local market, one wonders whether free market theory works at all in this case.
Does the supermarket ‘compete’? As the duopoly now creep from 40% towards 50% of recorded Australian retail transactions, isn’t it time to ask is there a benefit here? Where?
One of the reasons for Victoria’s dominant retail sector is that small retail businesses continually introduce new suppliers to the market. Retail small markets represent the best way to do this — as argued by the market holders themselves in this the Age article.
Monopolistic bureaucracies on the other hand like to deal with bureaucracies. They can slash supplier margin, and make all products more the same (for economies of scale).
From an economic view we may have a collusive monoposony of sorts (in this case, 2 buyers that indirectly set prices for sellers).
In Australia, the government appointed ‘watchdog’ the ACCC have attacked the opposition to the duopoly (IGA-Metcash), but have done nothing against the duopoly.
This is an economic problem, and explains why the retail sector is less dynamic in areas where giant shopping malls or only market stalls dominate.
Reduced transactions.
My own experience of supermarkets is I regularly walk out without buying the products I want. Mainly this is because they replace more and more with pre-packaged fattening pseudo foods. Ice cream without much cream or milk. Meat pies with little meat. Lower price milk of inferior quality.
Value is an issue. Bread that costs 200% more than a baker, and verges on inedible. Expensive vegetables regularly 100-300% more than market prices.
So if the supermarket wanted more of my dollar, it loses around 40-90% every week to the markets, IGA or Aldi.
But it seems the supermarket does not want that money? It would rather decide which products I can or cannot buy, rather than providing it’s presumed mission of being a ‘one stop shop’.
This is flawed analysis by supermarkets. Because the supermarket is not serving customers, and is leaving transactions (and thus GDP) behind.
It is also not rewarding suppliers that develop innovative products. The monopsony only rewards cost reduction of supply, and only temporarily (all suppliers forced to reduce costs). This is a Walmart model.
Are supermarkets creating GDP?
It does seem that the duopoly strategy is more about maintaining a monopoly by occupying real estate, than actually competing in the free market sense on products. And as this is the main motivation, the supermarkets are not maximising sales or national GDP contribution (except by raising prices of targeted goods, but this significantly reduces demand).
It seems that current supermarket strategy also destroys shareholder value mid-term, and customer value right now.
There is a profit and social food opportunity here. Rarely those are aligned.
Trade creating innovation.
Luckily for me, there is a local market or an Aldi nearby.
But in most Australian cities except Melbourne, Hobart and Adelaide, there are no markets.
And where there are no markets, there is little retail innovation.
Keep innovating,
Christopher Hire
Christopher Hire is the Executive Director of innovation agency, 2thinknow.
UPDATE: Following publication of this analysis, on 29 August 2011 Heinz indirectly confirmed the problems outlined within at a US analyst briefing. Heinz pointedly attacked the supermarket industry for creating a inhospitable environment for suppliers, due in part to white label products impacting available consumer choices.
Read here: http://www.theage.com.au/business/heinz-blasts-supermarket-power-20110829-1jie4.html