Tesco abuse of dominance?

Time Magazine

From the Irish Times,

Irish suppliers claim Tesco seeks up to €500,000 to stock goods

TESCO HAS been demanding millions of euro from Irish suppliers over the past two months in return for the continued stocking of their products on the supermarket’s shelves.

The country’s biggest retailer has been telling individual suppliers they must pay sums of up to €500,000 in order to have a presence in its 119 stores around the country, The Irish Times has learned.

Suppliers have complained of demands made by other large retailers but say those made by Tesco are much bigger in scale and breadth. Three suppliers have told The Irish Times they were asked to pay substantial six-figure sums to have their products relisted on Tesco’s shelves, or to keep them there.

Asked about the payments, Tesco said last night that “normal negotiations are under way with a range of suppliers”.

Demands for “pay to play” money are not illegal but push up prices for consumers. Leading suppliers claim they are being “bullied” by the UK- owned retailer but declined to speak on the record in case they suffered further.

However, economist Jim Power, who chairs the Love Irish Food campaign, which was set up to promote domestic brands, called on the Competition Authority to investigate.

He said he was aware of the pressure suppliers were being put under. “This cannot be allowed to happen because it will destroy an important strand of the fabric of Irish society. Irish suppliers cannot be pushed out of the market as part of the Tescoisation of society. There’s a difference between what’s not illegal and what’s not in the best interests of our society.”

Minister for Enterprise Mary Coughlan is expected to bring in a code of practice for the grocery trade shortly and to appoint an ombudsman to referee disputes.

Last year, there was controversy when Tesco switched to sourcing many products directly from the UK, thus putting Irish producers and distributors under pressure. The move funded wide-ranging price cuts and sparked a price war with rivals, but led to claims, denied by the multiple, that Irish produce was being squeezed out by imported rivals.

One supplier said he was told that if he didn’t pay the sum demanded, the space allocated to his products would be drastically reduced. He said he wouldn’t pay.

“This is as bad as last year,” another supplier said. “There are huge levels of distress out there.” He claimed the demands for money were being made against a backdrop of threats that “if you don’t do something, your business will suffer”.

Demands by big retailers for payments were not unique to any one multiple, he stressed, but the sums of money being sought by Tesco were “breathtaking”. Another food supplier expressed dismay at the “arbitrary” demand for money he had received. “This really lies outside the rules of the marketplace,” he said.

With Tesco’s financial year running to the end of this month, suppliers have interpreted the demands as a move by Tesco Ireland to improve its figures after a difficult trading year. The retail market is down by 7 per cent and profits have been squeezed by the price war.

Last year, Tesco made profits of about €250 million in the Irish market, which is one of the most profitable parts of its worldwide retail empire.

Section 5 of the Competition Act states that "Any abuse by one or more undertakings of a dominant position in trade for any goods or services in the State or in any part of the State is prohibited" and that "directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions" is illegal.

There a few things to consider. The first is whether Tesco are in a dominant position in the market. That's certainly debatable but let's presume the SSNIP test wouldn't prevent further investigation.

It then comes to the question as to whether these "up front" moneys would be considered abuse of dominance. On the one hand, it seems extremely exploitative and not as clearly to the benefit of consumers as perhaps simply demanding lower prices from suppliers. On the other hand, if suppliers can afford these payments, perhaps it's just another way of approaching something approximating perfect competition.

What do you think?

silverharp

Just a question, Are Tesco anymore dominant in their market than say Ryanair are in theirs? The main difference is the size of the suppliers versus the buyers. I actually think it would be wrong for the law to be used here, if there is a tenancy for supermarket suppliers to consolidate and become more competitive then business benefits.

As an aside one of my firends is a controller in Kerry group and their particular division is consolidating production to bigger plants due to falling margins. Why do anything to show this down?

nesf

Is it that different to a large retailer looking for a larger discount from a supplier than smaller retailers? Aggressive business practices sure but how does 500K stack against the profits made by the suppliers in their business with Tesco? It's a fairly crucial question.

Ostrom

Time Magazine wrote: »

It then comes to the question as to whether these "up front" moneys would be considered abuse of dominance. On the one hand, it seems extremely exploitative and not as clearly to the benefit of consumers as perhaps simply demanding lower prices from suppliers. On the other hand, if suppliers can afford these payments, perhaps it's just another way of approaching something approximating perfect competition.

What do you think?

Do we have any idea of the financial state of either side(s) with regard to these payments? - Are the figures made public?

This seems to amount to a lump sum transfer between producers. In that case I don't think it should have any much effect on prices/consumer surplus.

If someone wants a dissertation, find out if introducing two part pricing to one side of a two sided market harms welfare on the other side of the market when both sides are multihoming and there is platform competition.