The Groceries Order

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The Groceries Order. Monday, April 2 nd 2007 John Evans The Competition Authority. Overview. What was the Groceries Order?. History of the Groceries Order(s). The Groceries Order Debate. Competition Authority Arguments. Life after the Groceries Order. Concluding Comment. - PowerPoint PPT Presentation

Transcript of The Groceries Order

  • The Groceries OrderMonday, April 2nd 2007

    John Evans

    The Competition Authority

  • OverviewHistory of the Groceries Order(s)The Groceries Order DebateLife after the Groceries OrderConcluding CommentWhat was the Groceries Order?Competition Authority Arguments

  • What was the Groceries Order?

  • GO as an RPM MechanismThe Grocery Order prohibited the resale of certain grocery goods, along all stages of the supply chain, below the invoice price for those goods:In effect the Grocery Order was a Resale Price Maintenance (RPM) Mechanism;The practice of RPM, in any market, is typically regarded as anticompetitive;Enforced by the Office of the Director of Consumer Affairs.Example: consider a jar of baby food:Invoiced at 2.00 by a wholesaler to a retailer;Retailer receives end of year off-invoice loyalty discount worth 0.20 per jar;The retailer has to charge a minimum resale price equal to the net invoice price of 2.00;But, the real cost to the retailer of 1.80 protected margin is 0.20.Restricts Competition - how?Wholesaler from the example, can effectively set the retail price for different retailers that it trades with thereby restricting competition among retailers;But, negotiate different discounts with different retailers.

  • History of the Groceries Order

  • The Early Orders - 1956The 1956 Order (came into effect in 1958) following a recommendation from the Fair Trade Commission (FTC).The Order applied to a variety of grocery goods and contained provisions that:Prohibited RPM;Prohibited collective price fixing by suppliers and wholesaler (at the time many retail prices were set by the State);Prohibited refusal to supply based on supplier dissatisfaction with resale price;But allowed refusal to supply where retailers resold below the wholesale price;Also contained fairness provisions but allowed suppliers to distinguish classes of customers.Competition:Some pro competitive elements to the 1956 Order;But, competition among retailers restricted by the state to significant extent through price controls;Motivation was some notion of fairness relating to producers, not consumers.

  • The Early Orders - 19731966 FTC review of grocery trade no change despite call for ban on sales below cost. In 1970, following a large number of complaints from the industry, the FTC undertook another review of the grocery trade:The FTC reported in 1972 and a new Order was enacted;1973 Order banned advertising of sales below cost for food groceries;But not sales below cost;1973 Order did not revoke the 1956 Order, but amended it so that suppliers could not refuse to supply food groceries.Context:At this point supermarkets had arrived and multiples were developing;Pressure from many quarters but especially from small retailers for protection;For example, RGDATA wanted a ban on sales below cost plus 5%.FTC rejected, for the third time, calls for a ban on sales below cost anticipating that:Defining below cost would be difficult; It would restrict competition.

  • Early Orders 1978/1981The Restrictive Practice Commission (which had replaced the FTC) conducted reviews in 1975 and 1978, leading to the enactment of two Orders in 1978.First 1978 Order - Fresh and frozen foods removed from the scope of the Orders.Second 1978 Order:Reinstated provisions allowing suppliers to refuse to supply where resale was below cost;Introduced a definition of below cost selling as selling below the net invoice price (did not account for off-invoice discounts and rebates).1980, RPC again considered and rejected banning sales below cost, but 1981 Order strengthened provisions relating to the advertisement of sales below cost.

  • The 1987 Groceries OrderAnother review by the RPC in 1986:Considered that the ban on advertising of sales below cost had become ineffective;Recommended ban on sales below cost.Context:Price war put H. Williams out of business;RPC criteria appears to have been based on notions of fairness (for producers).The RPC did:Recognise that the definition of cost as the net-invoice price was inadequate;Accept that there was a trade off between protecting producer interests and restricting competition:

    Although we have examined the effects of a prohibition in considerable detail, they are difficult to predict with certainty.We cannot overlook however, the views of manufacturers and independent retailers that it would make a significant difference to them

  • The Groceries Order Debate

  • Leading up to the Removal1991 Review by RPCRecommended removing the ban;Minority report by Myles OReilly.1991 Competition Law introduced:Contained provisions relating to the abuse of a dominant position (Section 5)In particular, relating to predatory pricing.1993 and 1995 Internal Review by Department of Enterprise, Trade and employment recommended removing the Order1996 Competition and Mergers Review Group were divided majority were in favour of removal.2005 Public Consultation on the Groceries Order Department of Enterprise, Trade and Employment.

  • Arguments for the Retention of the OrderThe Food Deserts argument:The removal of the Order will result in elimination of small shops from the retail landscape undermining vibrant town centres and creating urban and rural food deserts.The Employment argument:The removal of the Order will result in a loss of jobs in the grocery trade.The Consumer Protection Argument:The removal of the Order will allow large multiples to engage in predatory conduct, drive smaller shops from the market and ultimately raise prices.

  • Consumer Strategy Group Report 2005

    Since 1987, the Groceries Order (GO) has prohibited selling many items at below the invoiced price. This measure was introduced in order to protect smaller independent stores who could not compete efficiently with large multiples directly on cost. The number of independent grocery retail outlets declined considerably between 1977 and 2002.Many arguments have been put forward for both the retention and the abolition of the Groceries Order, but the current situation operates against the interests of consumers.

  • National Consumer Agency

    Consumer demand for convenience shopping indicates that there is no reason to believe that independent shops and chains will not continue to service both rural and urban communities. There have been several reviews of the Groceries Order since 1987, and most have concluded that the Order is a bad deal for Irish consumers. The Groceries Order is now well past its sell by date. It should be abolished so that the consumer can benefit.

  • National Competitiveness Council

    Irelands ascent through the consumer pricing ranks is partly due to fluctuations in the value of the euro, which is out of the control of Irish policy makers. But it also stems from high domestically-generated prices, particularly in the non-traded services sector. Decisions by government, its agencies and regulators have also contributed adversely to inflation. This has damaging implications for the enterprise sector and the ability of Irish firms to compete in foreign markets.

  • Chambers of Commerce of Ireland

    this is a highly complex issue, the key points of which have been obscured in the debate to date. CCI agrees with retailers that below-cost selling is wrong. However, our analysis suggests that the Groceries Order does not address this issue at all. Rather it is a ban on below invoice cost selling an anti-competitive practice that prohibits businesses from passing on to the customer, discounts that they receive from suppliers in the form of an end of year invoice.

  • Competition Authority Arguments

  • Three Separate HeadingsObject - the primary objective of the Groceries Order is to restrict competition:Reduces competition at the retail level by restricting retailers scope to compete on price;Weak competition at the retail level tends to feed back up the chain of distribution to wholesalers, manufacturers, producers etc.Effect - the effect of the Groceries Order is to reduce competition and increase prices (tends to impact lower income groups disproportionately); and,Proportionality - the Groceries Order does not meet and is not necessary to achieve the claimed benefits.

  • Price Index on Food and Drinks Consumed at Home(June 01- June 05)For 100 spent in June 2001 OverallItems Covered by the OrderItems Not covered by the Order2001100.0100.0100.02002103.1103.7101.42003102.4107.0100.92004100.1107.599.4200598.9107.494.9% Growth Over period4.5%7.4%-5.1%Source: Derived from CSO data (rebased by The Competition Authority)

  • Income groups from lowest 10% of households to top 10% of households0 -10%10%- 20%20%-30%30%-40%40%-50%50%-60%60%-70%70%-80%80%-90%90%-100%Average Household AWeekly food costs in June 200543.2364.4780.2988.2199.39109.44114.91125.92132.89148.38100.74BFood costs without Groceries Order (June 2005)39.2558.5472.9180.1190.2699.39104.35114.35120.68134.7591.49

    CWeekly savings in June 20053.975.927.388.109.1310.0510.5611.5712.2113.639.25DAnnualised Savings 2005206.49307.96383.54421.39474.80522.81548.91601.50634.82708.82481.25

    EWeekly budget June 2005130.77214.71307.04408.45520.73635.11760.46915.191,139.321,758.74679.02FSaving as % of weekly budget3.04%2.76%2.40%1.98%1.75%1.58%1.39%1.26%1.07%0.78%1.36%

    GSaving to the economy (2005)577.49 millionSource: Analysis of The Competition Authority based on CSO data

  • ProportionatelyFoods deserts arguments and Employment arguments.Predatory pricing arguments:The plausibility of the alleged predation - ex ante and an ex post analysis does the alleged predation makes economic sense - market facts - Did the alleged victim go out of business? Did prices drop dramatically only to be raised subsequently? A busines