Abstract
The purpose of this chapter is to provide an economic analysis of the competitive environment of retailing and of the major dimensions of retailer response to this. These are important aspects of retailing insofar as an analysis of the competitive environment and the behaviour of firms within it allows us to assess whether or not the community as a whole benefits from the system of retailing which we have at the present time. This analysis also sets the scene for the topic of corporate strategy in retailing which is dealt with fully in the following chapter.
‘To found a great empire for the sole purpose of raising up a people of customers, may at first sight appear a project fit only for a nation of shopkeepers.’
Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Vol. II, Book IV, Ch. VII.
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References
See K. D. George, Productivity in Distribution (Cambridge: CUP, 1966) p. 17;
and C. Fulop, Competition for Consumers (London: Allen & Unwin, 1966) pp. 5–8
A very elegant and comprehensive review of the theory of competition is contained in D. Swann et al., Competition in British Industry (London: Allen & Unwin, 1974) Ch. 3.
The author of this chapter in the text has used a practical framework derived from the industrial economics concept of competition in W. S. Howe, ‘Competition and Performance in Food Manufacturing’, in J. Burns et al. (eds) The Food Industry (London: Heinemann, 1983) Ch. 6.
See C. Fulop, Consumers in the Market (London: IEA Research Monograph No. 13, 1967).
See J. C. Palamountain, The Politics of Distribution (Cambridge, Mass.: Harvard University Press, 1955) Ch. 2.
Ibid., p. 38.
The author has analysed these phenomena previously in ‘Bilateral Oligopoly and Competition in the U.K. Food Trades’, The Business Economist, Summer 1973, pp. 77–87.
The productivity differences, for example, are very much a source of intertype competitive advantage between retail outlets of different scale. In the case of labour productivity the advantages are predominantly at the individual store level. Labour productivity in UK retailing on the basis of 1977 data does not rise significantly over firm sizes £100 000 to £100m in terms of annual sales: but labour productivity for firms in this size category is considerably above that for firms having annual sales less than £100 000. See A. D. Smith and D. M. W. N. Hitchins, Productivity in the Distributive Trades (Cambridge: CUP, 1985) pp. 41 and 45.
See Palamountain, The Politics of Distribution, pp. 51–2.
NBPI, Prices, Profits and Costs in Food Distribution (London: HMSO, 1971, Report No. 165, Cmnd 4645) especially Ch. 2.
See K. van Musschenbroek, ‘Developments in the Food Manufacturing and Distributive Industries’, Journal of Agricultural Economics, September 1970, pp. 435–6.
See Howe, ‘The Ending of Resale Price Maintenance’, p, 82 for detailed figures.
See Monopolies and Mergers Commission, Frozen Foodstuffs (London: HMSO, 1976, HCP 674) paras 125–6. It should be noted, however, that at this time a number of food manufacturers were also recognising the increased costs of servicing smaller retailers by raising their minimum order or drop size or by imposing prohibitive surcharges on small orders. See A. C. McKinnon, ‘The Historical Development of Food Manufacturers’ Distribution Systems’, Occasional Paper 7, Leicester University. Geography Department, 1981, p. 16.
See Monopolies and Mergers Commission, Discounts to Retailers (London: HMSO, 1981, HC 311). The subtitle of the report is ‘A report on the general effect on the public interest of the practice of charging some retailers lower prices than others or providing special benefits to some retailers where the difference cannot be attributed to savings in the supplier’s costs’.
See Office of Fair Trading, Competition and Retailing (London: OFT, 1985) Ch. 4.
Ibid., Table 10, p. 26.
Monopolies and Mergers Commission, Discounts to Retailers (1981), para. 7.20.
Quoted in Howe ‘The Ending of Resale Price Maintenance’, p. 83.
The product, and to some extent geographical, diversification strategies of the large multiple retailers may also be seen as an index of the competitiveness of the traditional grocery markets in which advances in market share are increasingly more difficult to achieve. See D. F. Channon, The Service Industries (London: Macmillan, 1978) p. 29.
See W. G. McClelland, Costs and Competition in Retailing (London: Macmillan, 1966) Part II.
McClelland, for example, quotes a survey of 1957 which found that of shoppers who patronised more than one grocer 44 per cent were influenced by proximity, 13 per cent by price and goods each, 9 per cent by service, and 21 per cent vague or unspecified. Ibid., p. 187.
See V. Korah, Monopolies and Restrictive Practices (Harmondsworth: Penguin, 1968) Ch. 6, esp. pp. 195–209
See P. J. McGoldrick, ‘A Multi-dimensional Framework for Retail Pricing’, International Journal of Retailing, 1987, Vol. 2, No. 2, pp. 3–24.
Price consciousness measures simply the extent to which consumers are aware of the price of particular goods through asking them to recall the price at which they were bought. Price sensitivity is a measure of consumers’ reaction to price changes and is akin to the economist’s concept of price elasticity of demand. See the articles by A. Gabor and C. W. J. Granger, ‘On the Price Consciousness of Consumers’, Applied Statistics, 1961, pp. 170–88; Trice Sensitivitv of the Consumer’, Journal of Advertising Research, December 1964, pp. 40–4; and Trice as an Indicator of Quality: Report of an Enquiry’, Economica, February 1966, pp. 43–70.
More recent research in this area indicates that price awareness has declined a great deal over the past few decades, and that this varies considerably both between grocery items (including own labels) and across socioeconomic/age groups. See P. J. McGoldrick and H. J. Marks, ‘Shoppers’ Awareness of Retail Grocery Prices’, European Journal of Marketing, 1987, Vol. 21 No. 3, pp. 63–76.
The price image of a store reflects shoppers’ qualitative or psychological image of a shop or chain and gives rise to their overall evaluation of a shop as, for example, ‘pricey’, ‘value for money’, or ‘cheap and cheerful’. For further analysis along these lines see H. Nyström, Retail Pricing (Stockholm: Economic Research Institute of the Stockholm School of Economics, 1970).
See A. Gabor, Pricing: Principles and Practices (London: Heinemann, 1977) pp. 137–43.
The total contribution of a line of goods is thus the product of the unit margin between selling price and variable cost and the number of units sold.
See R. H. Holton, ‘Price Discrimination at Retail: The Supermarket Case’, Journal of Industrial Economics, October 1957, esp. pp. 16–23.
See F. Livesey, Pricing (London: Macmillan, 1976) p. 122.
W. G. McClelland, Studies in Retailing (Oxford: Blackwell, 1964) pp. 96–7.
Livesey, Pricing, p. 120. The impressionistic dimension of retail pricing is emphasised in the following comment on price levels at Kwik Save grocery supermarkets. ‘Kwik Save’s offer, therefore, depends on a rather subjective view of price. [The chairman and chief executive, Ian] Howe’s claim that customers can save 10 per cent to 15 per cent on their grocery bills seems ambitious, if not actually misleading, particularly in the light of the grocery trade’s gross margin of around 18 per cent. But in retailing, perceptions rather than cold statistics are what matter, and the perception of Kwik Save appears to be of stores where the temptation to over-spend is not strong.’ T. Lester, ‘Kwik Save’s Chain Reaction’, Management Today, March 1989, p. 100.
See H. Nyström, Retail Pricing, Chs 6 and 7, esp. pp. 104–5 and 120–1.
See E. B. Howard and R. L. Davies, Change in the Retail Environment (Harlow: Longman/Oxford Institute of Retail Management, 1988).
See C. M. Guy, Retail Location and Retail Planning in Britain (Farnborough: Gower, 1980) p. 49.
See P. Zusman, ‘The Role of the Retail Trade in the Competitive System’, in D. G. Hague (ed.), Price Formation in Various Economies (London: Macmillan, 1967) pp. 63–4.
See S. Bowlby et al., ‘Store Location: Problems and Methods’, Retail & Distribution Management, September–October 1984, pp. 31–3; November–December 1984, pp. 41–6; January–February 1985, pp. 44–8; and March–April 1985, pp. 40–4.
For a more detailed analysis of this topic see N. Wrigley, Store Choice, Store Location and Market Analysis (London: Routledge, 1988).
A good survey of this is contained in B. Berman and J. R. Evans, Retail Management: A Strategic Approach (New York: Macmillan Publishing Co., 2nd edn, 1983) pp. 185–92;
and some interesting examples are given in M. Dickson, ‘Forecasting Retail Turnover’, in A. West (ed.), Handbook of Retailing (Al-dershot: Gower, 1988) pp. 178–85
Guy, Retail Location and Retail Planning, pp. 54–6.
See L. P. Simkin et al., ‘How retailers put site location techniques into operation’, Retail & Distribution Management, May–June 1985, pp. 21–6.
See G. J. Davies and J. M. Brooks, Positioning Strategy in Retailing (London: Paul Chapman, 1989) p. 41
and data in P. J. McGoldrick, Retail Marketing (London: McGraw Hill, 1990) p. 342
In the case of footwear the prominence of retailer brands stems from vertical integration between shoe manufacture and retailing. See Chapter 6. See data in McGoldrick, Retail Marketing, p. 241; and the useful review of policy in K. Davies et al., ‘The Development of Own Label Product Strategies in Grocery and DIY Retailing in the United Kingdom’, International journal of Retailing, Vol. 1, No. 1, 1986, pp. 6–19.
On this see also the concept of the ‘wheel of retailing’ dealt with in Chapters 4 and 12.
See ‘Price gives way to image’, Financial Times, 21 October 1986.
See Financial Times, 24 January 1987.
H. Nyström, Retail Pricing, p. 70.
See, for example, W. A. Lewis, ‘Competition in Retail Trade’, Economica, November 1945, pp. 202–34;
J. Hood and B. S. Yamey, ‘Imperfect Competition in the Retail Trades’, Economica, May 1951, pp. 119–37;
M. Hall and H. Smith, ‘Further Reflections on Retail Pricing’, Economica, February 1952, pp. 19–30
See J. F. Pickering, Resale Price Maintenance in Practice (London: Allen & Unwin, 1966) Ch. 10. The 1971 NBPI Report on food distribution also noted that where retail outlets faced supermarket competition their net sales margins were significantly lower. See NBPI, Prices, Profits and Costs in Food Distribution, Appendix E, Tables 2, 3 and 5. The relevant data are tabulated in Howe, ‘The Ending in Resale Price Maintenance’, Appendix, p. 87.
See NBPI, Distributors’ Costs and Margins on Furniture, Domestic Electrical Appliances and Footwear (London: HMSO, 1968, Report No. 97, Cmnd 3858) Appendix 10.
T. S. Ward, The Distribution of Consumer Goods (Cambridge: CUP, 1973) Chs 15, 16.
See R. B. Heflebower, ‘Mass Distribution: A Phase of Bilateral Oligopoly or of Competition?’, American Economic Review, December 1956, pp. 274–85;
observations in NBPI, Bread Prices and Pay in the Baking Industry (London: HMSO, 1970, Report No. 151, Cmnd 4428) para. 67; and Musschenbroek, ‘Developments in the Food Manufacturing and Distributive Industries’, p. 436. A study of the US food retailing industry over the period 1970–74 found that the enhanced sales margins associated with increased retailer market shares were explained entirely by increased prices, as operating expenses as a proportion of sales actually rose with increased market share.
See B. W. Marion et al., The Food Retailing Industry: Market Structure, Profits, and Prices (New York: Praeger, 1979) pp. 132–3.
See Monopolies and Mergers Commission, Discounts to Retailers, Appendix 6 paras 9-13; and OFT, Competition and Retailing, Ch. 5. In the OFT survey the gross margins of the multiples were found to be not significantly different from those of independent retailers, and the conclusion from the data was that These results are not inconsistent with the proposition that the benefits of lower buying prices are in general passed on in lower selling prices.’ (para. 5.19).
See Monopolies and Mergers Commission, Discounts to Retailers, Appendix 6, para. 8; and OFT, Competition and Retailing, para. 5.15.
See Monopolies and Mergers Commission, Discounts to Retailers (1981), para. 6.19; and also evidence in respect of trends in food manufacturer and distributor profitability in Howe, ‘Competition and Performance in Food Manufacturing, pp. 115–19, and OFT, Competition and Retailing, Ch. 3.
See Smith and Hitchens, Productivity in the Distributive Trades, p. 120.
See Ward, The Distribution of Consumer Goods, p. 176.
See Monopolies and Mergers Commission, Discounts to Retailers (1981), Appendix 6, para. 13.
See C. W. F. Baden Fuller, ‘Rising Concentration: The U.K. Grocery Trade 1970–1980’, in K. Tucker and C. Baden Fuller (eds), Firms and Markets (London: Croom Helm, 1986) pp. 70–2.
See. W. S. Howe, ‘Competition and Performance in Food Manufacturing’ (1983), pp. 115–19; and OFT, Competition and Retailing, pp. 31 and 34.
Ibid., p. 119.
See R. M. Grant, ‘Manufacturer-Retailer Relations: the Shifting Balance of Power’, in G. Johnson (ed.), Business Strategy and Retailing (Chichester: Wiley, 1987) pp. 43–58.
For some reservations on the application of this see A. Hunter, ‘Notes on Countervailing Power’, Economic Journal, March 1958, pp. 89–103.
See K. Davies et al., ‘Structural Changes in Grocery Retailing: The Implications for Competition’, International Journal of Physical Distribution and Materials Management, 1985, No. 2, pp. 13–14.
See Baden Fuller’ ‘Rising Concentration’, pp. 73–4.
Although multiple grocers had increased their share of the trade from 20 per cent in 1950 to 56 per cent in 1976, this was to rise to 59 per cent in 1980 and 69 per cent in 1986. In particular the market share of the largest four distributors rose from 26 per cent in 1976 to 34 per cent in 1980 and 45 per cent in 1986. See I. Hunt, ‘Developments in Food Distribution’, in J. Burns et al., The Food Industry, p. 139; and A. Burdus, ‘Competition in the Food Distribution Sector’, paper presented at conference on Competition Policy in the Food Industries (Reading University, Department of Agricultural Economics and Management, 10 September 1987) p. 4. The author is grateful to Miss Burdus for a copy of her paper.
See Davies et al., ‘Structural Changes in Grocery Retailing’, pp. 16–18.
See G. Akehurst, ‘“Checkout”: The Analysis of Oligopolistic Behaviour in the U.K. Grocery Retail Market’, The Service Industries Journal, 1984, Vol. 4, Part 2, pp. 189–242.
W. Kay, Battle for the High Street (London: Piatkus, 1987) pp. 86–7.
Interestingly, however, the depressed sales levels in the clothing sector in the autumn of 1989 saw Littlewoods, the seventh largest clothing retailer in the UK, launch its ‘Moneysworth’ sales promotion which involved price cuts of about 10 per cent on its 104 top-selling, price sensitive clothing lines which accounted for 40 per cent of its clothing sales. This move may be seen as a reaction to generally depressed trading conditions brought about by a consumer credit squeeze, and also Littlewoods’ desire to maintain its reputation for keen prices among its traditional customers in the lower socioeconomic groups. See Financial Times, 26 October 1989.
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Howe, W.S. (1992). Retail Competition. In: Retailing Management. Palgrave, London. https://doi.org/10.1007/978-1-349-21716-8_3
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