Competition in Retailing

1. Competition in Retailing

2. Market Definition • Product markets versus retailer markets: The relevant product markets shouldbe defined first, and then the relevant retailer market should be defined withrespect to thetype of retailer. • Dimensions of competition: Geographic, price-based, positioning-based

3. FirstRecommendations • Competition enquiries should always start with an identification of therelevant competition issues and then proceed with a preliminary analysisof demand and supply factors: • general characteristicsof consumers • the dimensions of retailer competition; • Theretailer marketshould beseparately identified from the product market; and

4. BarrierstoEntry • Entrybarriers: Prevententry. • absolute advantages • strategic (first mover) advantages. The former include regulatorybarriers to entry. For example, insome retail markets (such as pharmacies and bettingshops), there are regulations restricting the number of local competitors. Similarly, forsome retail products (such as contact lens solutions), there are regulations restricting the types of retailers which can sell the product. • Entry impediments: Delay entry. • Obtaining planning permission • The time taken to form contracts withsuppliers • The time it takes for a new retailer to establish itself with customers,particularly if reputation is important.

5. Competition Assessment • Market structure and merger issues: creation or strengthening of marketpower of retailers, measurement of market power, market shares, barriersto entry and strategic advantages; • Pricing issues: price collusion between retailers, predatory pricing, pricediscrimination, tying/bundling, and loss leading • Vertical issues: vertical restraints, differential discounting, and own-brand competition.

6. Dimensions of Competition in Retailing • Pricing • GeographicLocation • ProductSelection (quality and range of products retailed) • Level and quality of retailer service (including retailer advertising/promotion)

7. Price • In terms of price; retailers attempt to maximise cost efficiency and economies of scale andscope in order to reduce price. • They may also exert bargaining power when dealing withmanufacturers to drive down costs, or bundle products together or price discriminate tocreate the perception of low pricing policies. • Finally, retailers may place great emphasison their competitive pricing with claims such as ‘never knowingly undersold’.

8. ReducingCosts • Manufacturer relationships: Retailers attempt to obtain products from manufacturers atthe lowest possible price. Larger retailers can often achieve this more easily than smallerretailers, partly because they have a greater incentive to shop around for the best deal, andpartly because they have greater bargaining power which they can exploit in theirnegotiations with manufacturers. • Logistics: Retailers attempt to manage store and shelf space at the lowest possible cost.Large retailers may even integrate upwards into distribution in order to enhanceefficiency. • Customer relationships: Retailers will try to find ways of achieving good levels ofcustomer service at the minimum cost.

9. Approaches • Differential pricing: Price discrimination tends to be implemented eitherthrough provision of discounts for certain (broad) consumer categories (such as studentsor pensioners) or by designing retail choices (such as trade-in offers, credit deals, end-of-season sales) in such a way that different consumers choose different options. • Variable mark-ups: A multi-productretailer will generally not do best by setting a common percentage mark-up on all goods,but will prefer to set higher mark-ups for products with lower elasticityof demand, andvice versa.

10. Approaches • LossLeading: Consumers tend to choose between retailers on the basis of their reputation for goodproduct range and general low prices. One method of gaining a reputation for general lowprices under these circumstances is loss leading. By setting low prices on a number ofkey items, and then by promoting these products and their prices, retailers induceconsumers to compare retailers on the basis of the prices of these products. • Upstream restrictions on price: In some retail markets, manufacturers provide arecommended retail price (RRP). The use of RRPs may ease collusion between retailers, in that it provides a focal point price which it is easy to co-ordinate on.

11. Approaches • ‘Never knowingly undersold’ provisions: In order to reduce the need for consumers toshop around between retailers in order to find the best deal on a branded product, someretailers state that if the consumer later finds the same product cheaper elsewhere, thenthe difference will be refunded. This may be an effective method of price competition, but may also facilitate collusion.

12. Approaches • National pricing strategies: Retail chains generally consist of a number of local stores.The degree of competition facing each individual store is likely to vary, and this providesthe retail chain with an incentive to price differently in each local market. However, someretail chains choose instead to set prices nationally. This is clearly costly in terms of theability to exploit market power at a local level, but it may be beneficial for two important reasons: • There may be benefits from having a unified retailer image for the chain (so thatconsumers know before going into any local store that they will be getting the sameprice in that store as elsewhere); and • The desire to exploit economies of scale in price setting, price labelling, andadvertising (by advertising prices nationally).

13. Geographical location • The importance of geographical location means that local market power can be high and the inability tofind an appropriate location can act as a barrier to entry (although the importance of this is often overstated). • When consumers are not quite sure what they want and want to be able to makecomparisons among a number of different shops, retailers can attract customers byclustering together (for example, in a shopping centre or high street); • When consumers just need to obtain a relatively standard (undifferentiated) product asquickly and easily as possible, shops can gain customers by locating close either topeople’s homes or to places that consumers are likely to be passing anyway (for example,newsagents, post offices, convenience stores, and shops in petrol stations); • When consumers want to buy large loads of shopping, or bulky objects, or when theyrequire a very wide choice of products, shops can gain customers by being large andeasily accessible by car (for example, out-of-town supermarkets and large specialitystores).

14. ProductSelection • Level and range of products, in terms of vertical characteristics: where tosituate on4the spectrum between retailing high quality products and low quality products, andwhether to provide an extensive vertical range of products; • Level and range of products, in terms of horizontal characteristics: which sorts ofproducts to sell, and whether to provide a wide horizontal range of these products orinstead to situate in a niche, serving only a segment of the market; and • Product portfolio: whether to provide several different kinds of product (as in out-of-town superstores) or specialise in one kind. A narrow product portfolio indicates aspecialist retailer, whilst a very wide portfolio may signal the use of a one-stop shoppingstrategy.

15. ProductSelectionStrategies • Consumer preference for wide vertical range: When a consumer wants to buy a productbut is not sure how high a quality to buy (given that better products tend to cost more),then the consumer benefits from being able to observe and choose between severalproducts along the price-quality trade-off schedule. Thus, retailers may want to providea wide vertical range. • Consumer preference for wide horizontal range: On the other hand, when consumersknow what they want in terms of vertical quality, but are less sure what they want in termsof horizontal quality, shopping costs provide an argument for maintaining a widehorizontal product range.

16. ProductSelectionStrategies • Consumer preference for wide product portfolio: In both of the above cases, productstend to be substitutes, and a retailer stocks a wide range in order to allow consumers achoice. However, retailers often prefer to stock a wide portfolio of complementaryproducts, especially when any single product on its own would not be worth a shoppingtrip (for example, supermarkets and DIY stores). • Economies of scale and scope: In addition, there are fixed costs involved in dealing with amanufacturer, and thus it may be less costly to take many products from one manufacturerthan to take products from various different manufacturers.

17. Own-brand products In the grocery sector, for example, those retailers which stock the most own-brand products(Sainsbury’s, Tesco and Asda) are also positioned more upmarket than those which focus on brandedproducts (Kwik Save, Aldi and Netto). The nature of this correlation is complex and causation works intwo directions: • the success of a retailer in selling own-brand products is dependent on the reputation forquality that the retailer has; and • the retailer’s reputation for quality depends on the quality of its own-brand products (inexactly the same way that a manufacturer’s reputation depends on the quality of itsproducts).

18. Levelandquality of retailer service • Shop ambience: Retailer service may be simply a matter of providing a clean, efficientand well designed retail environment, which makes the shopping experience morepleasurable. • Point-of-sale service: Point-of-sale customer advice and service can be very important insome types of retailing. • After-sales service • Product promotion: In-store promotions can be crucial to the sales of many products. • Retailer image/reputation: Especiallywhenproduct quality is not immediately observable, the image/reputation of the retailer may play an important quality assurance role.

19. VerticalRestraints • Retail price restrictions: such as RRP and resale price maintenance (RPM); • Manufacturer non-linear pricing: that is, non-linear manufacturer discount schemessuch as franchise fees, quantity discounts, or differential discounts for different retailers; • Quantity forcing: requiring retailers to sell minimum quantities of the manufacturer'sproducts; • Full-line forcing: requiring retailers to carry the full line of the manufacturer’s products; • Exclusive dealing: requiring the retailer not to carry the products of competingmanufacturers; • Territorial exclusivity: which protects one retailer from intra-brand competition fromother retailers within that territory; • Refusal to supply: as a general means of enforcing the compliance of retailers with anykind of requirements set up by manufacturers, or simply as a method of constraining totalsales.

20. VerticalRestraints • More generally, one implication of the shift in the balance of power towards retailers has been a growthin vertical restraints of the sort imposed on manufacturers by retailers, such as: • Exclusive supply: requiring the manufacturer not to supply competing retailers; • Refusal to stock or ‘delisting’: where retailers refuse manufacturers’ products access totheir stores; • Minimum supply levels: where retailers demand minimum quantities from manufacturers(in order to prevent the manufacturer from being able to supply further retailers); • Minimum advertising requirements: where retailers refuse to stock a good unless aminimum amount has been spent in advertising it. • Sunk facility requirements: where retailers refuse to give manufacturers a contract forsupply (especially of own-brand products) until they have sunk costs in productionfacilities.