The Groceries Order

1
The Groceries Order

• Monday, April 2nd 2007
• John Evans
• The Competition Authority

2
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
3
What was the Groceries Order?
4
GO as an RPM Mechanism

• The 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.

5
History of the Groceries Order
6
The Early Orders - 1956

• The 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.

7
The Early Orders - 1973

• 1966 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.

8
Early Orders 1978/1981

• The 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.

9
The 1987 Groceries Order

• Another 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
10
The Groceries Order Debate
11
Leading up to the Removal

• 1991 Review by RPC
• Recommended 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 Order
• 1996 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.

12
Arguments for the Retention of the Order

• The 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.

13
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.

14
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.

15
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.

16
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.

17
Competition Authority Arguments
18
Three Separate Headings

• Object - 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.

19
(No Transcript)
20
(No Transcript)
21
Proportionately

• Foods 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 business justification if there is a
  plausible case, could there be other plausible
  explanations?
• Feasibility of recoupment can short term losses
  can be recovered through charging higher prices
  in the medium to longer term? Depends on entry
  conditions and ultimately dominance.
• Pricing below cost what measure of cost?
• A simple ban on sales below some ad hoc measure
  of cost will on balance be anticompetitive.

The American economist Harold Demsetz wrote "The
attempt to reduce or to eliminate predatory
pricing is also likely to reduce or eliminate
competitive pricing beneficial to consumers."
22
Colm McCarthy

• The basic scary story goes like this. If big bad
  retailers are free to cut prices, without the
  restraint of the Groceries Order, they would do
  so with ferocity, drive out the smaller
  competitors (ultimately all competitors), just
  one would survive and this rapacious monopolist
  would then screw the consumer for ever more.
• The story has been around since about the
  Eighties, and the beginnings of pro-competition
  and antitrust legislation in the US and Europe.
• While not quite as venerable as the Grimms' Fairy
  Tales, the predatory-pricing bogeyman is out of
  the same tradition, and has about as much
  evidence to support it.
• Can you think of a single monopoly currently
  screwing Irish consumers which won its position
  through a successful predatory pricing campaign

23
The Removal of the Order

• In 2005 confluence of consumer interests
• National Consumer Agency
• Competition Authority
• OECD
• Consumer Strategy Group
• National Competitiveness Council
• Eddie Hobbs!
• Interesting from an Irish political economy point
  of view Consumer v. Producer Interests.
• The Order was finally removed on March 20th 2006.

24
Life after the Groceries Order
25
The Grocery Monitor

• Ministerial Request and the 2006 Social
  Partnership
• Unusual Request
• To monitor on an ongoing basis
• Unusual for an ex ante regulator
• But perhaps not surprising given the history
  multitude of reports and review groups.
• The Grocery Monitor three aspects
• Market structure at Retail and Wholesale levels
• Business Practices Pricing behaviour and
  Vertical Integration (franchise arrangements)
  and,
• Barriers to Entry and Expansion.
• At a minimum aim is to raise the level and
  nature of public debate by putting the
  appropriate information in the public domain.

26
(No Transcript)
27
(No Transcript)
28
Concluding Comment
29
Concluding Comment

• Between 1956 to 1987, Government policy in
  relation to the grocery reversed largely due to
  consistent lobbying by producer interests
• Only one of the multitude of reports and reviews
  recommended a ban on below cost selling
• It took a further 19 years to reverse it again.
• The nature of the debate changed over time
• From one concerning notions of fairness among
  producers
• To a more consumer focused debate.
• The Groceries Order was a public restriction on
  competition what if were private
• Possibly criminal under Competition Law
• See Ford Dealers case 30,000 fine plus twelve
  months suspended sentence.

30
Useful References

• Department of Enterprise Trade and Employment
  (2005), The Restrictive Practices (Groceries)
  Order 1987 A Review and Report of Public
  Consultation Process.
• Forfas (2004), National Competitiveness Council -
  Annual Competitiveness Report.
• Consumer Strategy Group (2005), Consumer Strategy
  Group Report Making Consumers Count.
• Collins A, and Oustapassidis K. (1997), Below
  Cost Legislation and Retail Performance,
  Agribusiness Discussion Paper No 15.
• Walsh P.P, Whelan C. (1999), A Rationale for
  Repealing the 1987 Groceries Order in Ireland,
  The Economic and Social Review, Vol.30, No.1,
  pp.71-90.
• Walsh P.P, Whelan C. (1999), Loss-Leading and
  Price Intervention in Multi-Product Retailing
  Welfare Outcomes in a Second Best World, The
  International Review of Law and Economics,
  Vol.19, No.3.