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Appendix 5A.5 Market DefinitionBWG Group Ltd.Joint Committee on Enterprise and Small Business Leinster House Dublin 2 FAO: Donie Cassidy, Chairman Re: Oireachtas Committee’s Examination of the Grocery Market 24 January 2004 Dear Chairman, We refer to your letter of 2 December 2004 inviting BWG Foods Ltd (BWGFL) to give its views on the comments made by the Chair of the Competition Authority, Dr. John Fingleton, to the Joint Committee on 10th November 2004. BWGFL is pleased to have an opportunity to respond to the comments made by Dr. Fingleton as we believe these broad and general comments misrepresent and over-simplify the structure of the grocery market in Ireland and BWGFL’s share of that market. Our comments are set are in detail below. SPAR and MACE - 7% of Irish Grocery Market As we indicated in our previous submission, BWGFL supplies in excess of 550 SPAR and Mace stores throughout Ireland, all of which are owned and operated by independent retailers. These customers account for just over 7% of the total Irish grocery market which is a far cry from the “dominant position” that Dr. Fingleton alleges. Moreover, it is important to stress that our business success is ultimately based on their success and through constant innovation in relation to centralised purchasing, distribution, marketing supports etc. BWGFL strives to ensure that our customers can compete head on against other retailers in the Irish grocery market. We believe that this partnership approach is pro-competitive as it has helped to facilitate the continued survival of the independent local businesses in urban and rural locations around Ireland. It has also meant, that unlike the situation in other countries, Irish consumers benefit from extensive choice in relation to their grocery needs. The Relevant Market In responding to the assertion that BWGFL has a “high market share of the convenient food market”, it is essential to address the issue of the definition of the relevant market at the outset. Consumers choose from a combination of different outlets and are not confined to any one, particular type of outlet. There is a range of outlets serving the grocery market and each of these outlets strive to meet the needs of all shoppers whether they are purchasing on a weekly or a “top-up” basis. For example, multiples often have specific cash registers for shoppers who are purchasing less than 10 items. Many symbol outlets stock a wide range of groceries aimed at shoppers purchasing on a weekly basis. BWGFL therefore believes that in terms of grocery products, customers and suppliers view the market as the grocery market which comprises a wide range of competitors including: •Multiples (Dunnes, Tesco, Superquinn, Marks & Spencers, Iceland etc). These account for over 50% of all grocery sales (BWGFL notes that Tesco claimed to have 25% share of the total grocery market in its evidence); •Discounters (Aldi and Lidi), which account for over 5% of the market; •Symbol groups such as Centra, Supervalu, SPAR, EUROSPAR and SPAR Express, Mace, Londis, Londis TopShop, Cost Cutter, Quik-Pick; •Independent grocers (including fascias such as Day Today, Vivo, Nearbuy, Gala and XL Stop n Shop); •Retail outlets on petrol forecourts (including Esso on the Run, SuperQ, Statoil, Fareplay and Shell Select Stores); and •Others, such as tobacconists, newsagents, butchers, greengrocers etc, which carry a limited range of grocery items. It is important that Irish consumers have this range of outlets available to them to ensure consumer choice and the outlets operated by BWGFL provide a very important service in both urban and rural Ireland in this context. Traditional distinctions between the different retail formats are becoming increasingly blurred as market participants seek to compete for a wider share of consumers grocery spend by spanning as many retail formats as possible. The reality on the ground is that the major multiples are opening smaller stores (as well as their traditional large ones) and the symbol groups are opening larger stores (as well as their smaller ones). For example, the multiples have opened smaller stores such as Tesco Express, Tesco Forecourt and Superquinn Select (and one might pose the question as to why they would adopt this strategy if they do not view them as a competitive threat and if they did not consider that consumer trends will give rise to smaller more convenient supermarkets over coming years). The Committee will be aware from the evidence presented that many multiples are opening longer than they have before, are located centrally (unlike in the UK where planning restrictions require the large multiples to be based outside of built-up areas) and provide added value services that have been traditionally associated with the symbols (such as in-store coffee and sandwich facilities). Moreover, the range of retail formats offered by the symbol retailers covers the full spectrum of outlet, again to meet the changing needs of customers and to remain competitive in a dynamic marketplace. Within the SPAR symbol group, for example, there are a range of formats including SPAR, EUROSPAR and SPAR Express and the size of the retail outlet can range from 2,000 square feet to 15,000 square feet (we note that Dr. Fingleton did not include our larger supermarket format EUROSPAR which accounts for 20% of BWGFL’s SPAR turnover in the so-called “supermarket” market). Dr. Fingleton in his submission states that “supermarkets” and “convenience” stores do not compete in the same market. Dr. Fingleton does not define the terms “supermarket” or “convenience store” but equates the latter with shops where customers will “top-up their weekly shopping” near their home or work and can charge a premium because of “location, faster service or later opening”. However, this ignores the fact that the grocery market is extremely dynamic and, as discussed above, retail formats have changed significantly in recent years in response to consumers changing lifestyles and shopping patterns. Dr. Fingleton states that “because [supermarkets and convenience shops] provide different services and charge different prices, it is reasonable to treat the supermarket and convenience sectors as separate markets for analysing competition”1. We believe that this approach is not reasonable or practical and indeed if this distinction were to be used, then it could be argued that Lidi and Aidi, who have a different strategy in relation to service and prices, do not compete with Tesco, Dunnes or the other supermarkets, or that Marks and Spencers, who stock exclusively own-label brands, are in a separate market from Tesco and Dunnes. This would be illogical and not reflective of market realities. BWGFL believes that the Competition Authority’s position is undermined by the fact that there are a wide range of retail formats in the grocery market competing for the same customers. All these retail formats impose competitive constraints on each other. Moreover, as discussed above, it is not possible to exclusively link the multiples with the supermarket format and the symbol groups and independent retailers exclusively with the convenience sector. In terms of supply of product, there are several options open to retailers including developing their own distribution network, sourcing supplies either exclusively or non-exclusively from an independent wholesaler such as Musgraves, BWGFL, Stonehouse, Mangan Brothers, Barrys of Mallow and ADM Londis or sourcing supplies directly from food processors and local sources as well as from a number of independent Cash and Carries, such as 4 Aces and Leydens. As wholesale margins are reflected in retail prices, it is essential that the independent wholesale sector is competitive to ensure that smaller retailers can compete effectively with the larger multiples. It is therefore not possible to consider the independent wholesale sector in isolation from the distribution networks operated by the multiples or to consider the wholesale sector in isolation from the retail sector. This is a fundamental flaw in the market definition put forward by the Competition Authority. Dr. Fingleton provides no evidence to support his definition of the relevant markets. It would appear that he has simply assumed that a distinction that has been made by the UK Competition Commission in the context of its examination of the UK grocery market also applies in Ireland. We believe that the UK Authority’s conclusions are flawed and have been strongly disputed within the retail sector in the UK. In any case, as many of those who have already given evidence to the Committee have stressed, the Irish market is not the same as the UK market; the dynamics are different; consumer demand and buying patterns are different; the structure of the market is very different and the nature of competition within that market is also different. Thankfully, we still have a very vibrant, dynamic and competitive independent retail sector in Ireland and we believe that BWGFL has played an important role in achieving this. The Competitive Environment Dr. Fingleton intimates that a justification for considering the supermarket and convenience sectors as separate markets is that players in those markets can essentially price independently i.e. operators in the convenience sector can raise prices without losing such a level of business to the supermarket sector as to make it unprofitable to do so. BWGFL strongly refutes this allegation. The commercial reality is that the supermarkets, in setting their prices, cannot afford to ignore the pricing strategy of smaller retailers. Similarly, the convenience sector has to provide a cost-competitive alternative to the supermarkets, in terms of price, quality and service, otherwise they will simply go out of business. BWGFL, as a wholesaler, does not set retail prices. It is the decision of each individual symbol retailer to set retail prices throughout their stores. Nevertheless, as part of its support service, BWGFL provides recommended retail prices to its symbol retailers. These competitive recommended prices are set following detailed analysis of pricing in all sectors of the market. As indicated above, the Irish grocery market encompasses a broad spectrum of retail formats. BWGFL believes that it is not possible to draw a distinction between supermarkets and other retailers or suggest, as Dr. Fingleton does, that they do not exert a competitive constraint on each other. Indeed, if the Committee were to ask the proprietor of a village shop who his or her competitors are, they would not just point to the convenience shop down the road, but would also include the local SuperValu, Tesco, Mace, Lidl etc. In this context too, if one were to enquire of the local butcher who his competitors are, we contend that he too would cite the supermarkets and the convenience shops amongst his rivals. So, to assert that these retailers - whatever their format - do not compete against each other and do not exert a competitive constraint on each other is simply not accurate. Moreover, any effort to draw a distinction based on the assumption that supermarket groups cater largely for the “weekly shop” while the convenience sector caters for “top-up” shopping is also unsound. This distinction fails to take account of the very wide variation in shopping patterns that exist in practice and the ability of smaller stores to cater for consumers’ weekly shopping needs. A proportion of the 550 SPAR and MACE retail outlets that we supply cater not only for “top-up” shopping but also for “one-stop” weekly shops. The 27 larger format EUROSPAR stores we supply (averaging in excess of 8,000 sq. ft) together with larger SPAR and MACE stores are examples of “one-stop” shops. While some smaller outlets may not be able to carry the range of products that the large supermarkets do, and do not benefit from the economies of scale and scope enjoyed by the multiples, they do, nevertheless, strive to provide as comprehensive a range of branded and own brand products as possible. They also strive to be competitive on the core “basket” of groceries offered to consumers to try to maximise the amount of the consumer’s grocery budget that is spent in their shop. This is particularly the case in relation to Known Value Items (KVIs). These are grocery products which are purchased frequently, such as staples, and where the consumer will know and remember the price. Irish consumers display a high degree of price awareness and will switch outlets, on the basis of KVI price differences. All retailers including the smaller convenience outlets operate products promotions across a range of categories. Again this illustrates the point that all are competing with one another. It should also be stressed that independent retailers are not in a position to distinguish which category a customer may fall into when he/she steps into the shop and therefore cannot set different prices for “one-stop” shoppers or “top-up” shoppers. Prices are set to compete for a share of the grocery budget. The smaller shop formats will incur higher overhead costs compared with the large supermarkets, and this may be the reason why the price of some products are higher than those in the supermarkets and not because convenience shops achieve a “premium” as Dr. Fingleton asserts. Moreover, the independents seek to compete on more than just price and compete on quality of service, location, opening hours and so on. They may try to distinguish their offering in this way - but it is still because they are competing with the supermarkets and not just the other “convenience” store down the road. BWGFL’s Market Share The independent wholesale sector supplies approximately 48% of the total Irish retail grocery market, as the multiples typically use their own vertically integrated distribution system. BWGFL supplies approximately 550 outlets under the SPAR and MACE umbrella. The total number of retail outlets in the State is estimated to be in the region of 9,000 - which means that BWGFL supplies just over 6% of the total number of retail grocery outlets. BWGFL estimates that the combined retail turnover of both its SPAR and MACE customers represents approximately 7.5% of the total Irish grocery retail market. This is the figure that BWGFL uses for its business planning and clearly bears no relation to the 34% share of the “convenience retail” market that the Competition Authority suggests that MACE and SPAR outlets has. Dr. Fingleton refers in his presentation to the fact that the wholesale grocery market is “dominated” by BWGFL and Musgraves, and infers that there is little or no competition from existing or potential entrants. We would strongly dispute these claims. As discussed above, Dr. Fingleton’s definition of the market as “convenience distribution” is fundamentally flawed. Moreover, it ignores the strength of the multiple’s own networks and other independent wholesalers in the market. Dr. Fingleton also suggests that the fact that some independent retailers are part of symbol groups may act as a barrier to entry to new grocery wholesalers. BWGFL disputes this claim. The strength of the symbol groups has been overestimated by the Authority. As discussed above, there are a number of other significant players besides Musgraves and BWGFL in the market. These include ADM Londis, which supply Londis and Londis Top Shop stores; Mangans, which supplies MACE Stores in Connaught/Ulster and Clare and all Vivo stores; Barry’s of Mallow, which supplies Costcutter and Quik-Pick stores; as well as a number of independent Cash and Carry businesses such as 4 Aces and Leydens. These wholesalers collectively supply thousands of independent retailers. In addition to the wholesale suppliers, many independent retailers source their own products and receive direct supplies from manufacturers. Moreover, the Authority’s comments ignore the fact that many independent retailers are not members of symbol groups and frequently select their source of supplies from a multitude of suppliers, including Cash and Carries, directly from food processors and local sources. BWGFL therefore does not agree with the Authority’s views on entry barriers. The success of BWGFL’s wholesale business depends on the success of the retailers it supplies. These retailers are subject to strong competition from the broad range of retail outlets operating in the grocery market. BWGFL does not own or control them and retailers can and do switch between wholesalers and between symbol groups if they are dissatisfied with the service and price being offered2. Shelf Life Magazine noted that independent retailers do “chop and change” between wholesalers and between symbol groups. Moreover, competition to sign up independent retailers to symbol and fascia groups is intense. For example, Gala which only entered the market in the latter half of the 1990s, now has over 100 stores and Barry’s of Mallow has more than doubled the number of outlets under its Costcutter and Quik Pick symbols in recent years. All the other wholesalers have also reported significant growth in number of outlets. This suggests that, contrary to Dr. Fingleton’s insinuation, switching is not uncommon and barriers to entry and expansion are not significant. Furthermore, as indicated above, many of the traditional multiples are now expanding the range of retail formats they use to meet the grocery needs of Irish consumers. This again serves to illustrate that the Irish Grocery market is not static and that it cannot be split simply into two sectors of supermarkets and convenience outlets. Therefore to claim that BWGFL dominates any element of the Irish grocery market is totally inaccurate. Finally, as the Committee has already heard from various other sources, the Tansey, Webster and Stewart report into the sector showed that the wholesale grocery business operates on very low and tight margins. This does not suggest a market where “dominant” players are exercising market power and extracting monopoly profits. Conclusions BWGFL believes that an analysis of the Irish grocery market reveals a competitive marketplace with plenty of choice for consumers and retailers. The market is dynamic and constantly adapting to change. Market participants are embracing new retail formats to compete for a wider share of consumers grocery spend. Internet shopping, 24 hour shopping, the continued entry and expansion of the “heavy discounters” and a heightened awareness of price are some of the factors that are contributing to an evolution of the market place. BWGFL believes that it provides a cost-efficient and competitive alternative for consumers and retailers in this evolving market place. We thank you for the opportunity to respond to Dr. Fingleton’s comments. Your sincerely, Leo Crawford Group Chief Executive
1 Opening Statement to the Joint Committee on Enterprise and Small Business by the Chair of the Competition Authority, John Fingleton, 10 November 2004. 2 For example, in 2001, 20 stores ended their trading relationship with BWGFL. |
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