The visible hand in economics

Progressive puts the squeeze on wholesalers: What does this mean for consumers?

Posted on: July 18, 2008

Normally, when we hear that a supermarket is putting the screws on its suppliers it is a good thing for consumers. When supermarkets get better prices for wholesale products, some of those savings will be passed on to consumers!

However, this case of squeezing the wholesaler does not appear as consumer friendly. Progressives are telling wholesalers that there product cannot be “promoted” by other store types at the same type that Progressive is promoting it. If they the wholesaler breaches this “no-clash” agreement, then they are liable for the cost associated with Progressives lowering the price to meet competitors.

Now how could this lead to lower competition? Well the first thing to realise is that this implies that the wholesaler can only “discount” his product at one store type at a time – therefore, reducing competitive pressures on the retail end.

Progressives policy effectively allows Foodstuffs and Progressive to price discriminate between customer types (based on store loyalty or transaction costs) by having rotating promotions. Those who hold little loyalty to a store type will go to the store where the product is on special, while those who were in the habit of going to a certain store type would sometimes pay the higher price. By putting in this form of price discrimination, supermarkets will be able to increase their effective margins, making consumers worse off.

Furthermore, it allows Foodstuffs and Progressives to “pre-commit” to not attacking each other in terms of “specials”. Ultimately, this feels like a way of increasing tacit collusion in the supermarket industry (by removing the choice to deviate – as the wholesalers hands are tied!) – and that is exactly the way that I would complain about it.

Do you guys have any other ideas about how this could be viewed as anti-competitive, or do you think it is pro-competitive in some way?

4 Responses to "Progressive puts the squeeze on wholesalers: What does this mean for consumers?"

There’s a broader context here.

Woolworths, or more accurately a lack of competition in the supermarket area, could be at least partly to blame for Australia’s comparatively high food inflation.

See this story:

Hi Bill,

If we view the Australian and New Zealand supermarket industries are two separate markets then the story you have linked to is not too important. Given that incomes are higher in Australia, then it makes sense that food prices will be higher – irrespective of the level of competition in the markets.

When thinking in a general “inflation” context, it is important to separate true inflation out from relative price movements. If a lack of competition leads to more of the burden of wholesale food price changes falling on consumers, then the relative price of food, from the consumers perspective, will change by a larger amount.

If we believe that higher relative prices for goods such as fuel and food suppress domestic demand, then we might be able to state that a lack of competition in the supermarket industry reduces “inflationary pressures”.

However, if this is the case it is a pyrrhic victory – as the lack of competition causes greater volatility in the price level anyway 🙂

As a result, I believe that the anti-competitive view of any change in supermarket policy is the key thing to keep an eye on.

We are wholesalers, but luckily for us we are not in the food business and are not at the mercy of the supermarkets. Its really up to the government to step in to stop this. The supermarkets are businesses like any other, they will screw their suppliers for as much as they can get. Its just business at the end of the day.

“The supermarkets are businesses like any other, they will screw their suppliers for as much as they can get”

I don’t think many people realise how much power supermarkets have over there supply chain – I’m sure that the situation you face in the UK is just the same as the situation here.

The strange thing we see in this situation though is that the whole increase in cost pressures for wholesalers get passed on to the supermarket, and then passed on to consumers.

This is because the supermarket extracts all the surplus from the trade with their wholesalers – implying that wholesalers only “break-even”. If costs rise, then the break-even point increases by the same amount – implying the supermarkets have to pay the whole increase in costs or the wholesalers will just leave the market. As a result, the current data shows that the price wholesalers are charging has risen strongly – which leads people to the conclusion that wholesalers are the ones in charge when they are not.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Add to Google
%d bloggers like this: