Devil’s Advocate: In defence of Tesco
Columns, Devil's Advocate, Features - Posted on Thursday, September 2, 2010 22:17 - 7 Comments
By Omer Ali
In his most recent piece, my fellow columnist, Mikhail “Domestic Extremist” Goldman, decries the growth of supermarkets at the expense of independent retailers. In this article, I argue that, despite a deficit of charm, supermarkets are in fact better for everyone (except, arguably, for the displaced shopkeepers that is).
To begin with, the convenience of large retailers must not be overlooked. Indeed, supermarket shopping is neither work nor leisure but rather a necessity that one would rather not do, but must. By housing an extensive selection of goods in one place, large retailers substantially decrease the amount of time spent shopping. Furthermore, since many sites of supermarkets are located out of town, congestion in city centers is reduced. The online shopping facilities offered by more and more supermarkets are the epitome of convenience. Saving shoppers the journeys to their stores and back, these new facilities likely reduce carbon emissions as well. Further, to the benefit of the consumer, supermarkets drive down the cost of the goods they sell. They do this in three ways:
1) Through their ability to take advantage of economies of scale: because of their size, supermarkets can use fixed investments more fruitfully. For example, a forklift truck is more productive in a larger warehouse than a smaller one where it is likely to be under-utilized. The large distribution networks, as well as the enhanced logistics of these supermarkets, substantially reduce the transport cost per item. Precisely because these organizations are profit-driven, their operations brook no waste.
2) Supermarkets have more bargaining power with suppliers than do smaller retailers. This was mentioned as a disadvantage in my erstwhile colleague’s column but is in fact an advantage. By being able to choose freely between suppliers of non-branded goods, those who sell their products at the lowest price get selected. This is obviously beneficial for consumers who pay a lower price, but I will argue later that it is also beneficial for society as a whole.
3) Big retailers compete against one another, hence depressing prices. Consider the case where there is a fruit seller, a butcher, and a canned food seller in a town. Each has a monopoly over their product segment, and therefore charges higher prices than they would have, had there been another competitor. Now consider the case of three supermarkets. The overlap in their products range induces competition, which puts a downward pressure on prices. Despite Tesco’s perceived market dominance, it is not a monopoly. Instead, the industry is characterized by oligopolistic competition, where a few large players compete against one another for market share. This, combined with the ease of entry into the industry (foreign firms like Aldi and Lidl have been making steady progress into the UK market) means that competition is rife.
The majority of the products sold by large retailers such as Tesco are foodstuffs and, as has been amply shown in countless surveys and studies, the poorer a household is, the larger portion of its budget is devoted to food. Higher food prices would therefore affect poorer households disproportionately, a point to bear in mind when contemplating the aesthetic appeal of a rustic independent retailer, whose prices would inevitably be higher than those of a large one.
Although the benefits outlined above concerned consumers, suppliers also benefit from contracting with large retailers. In their absence, producers are limited to marketing their products in their immediate surroundings. If they do manage to secure contracts with other independent retailers farther afield, they are likely to be contracts for small quantities, since single shops are unlikely to order in bulk. As such, overhead costs (transport, administration etc) are likely to cut into the producer’s profit, or increase the price of their goods. Large retailers allow producers access to a market that they would otherwise have little or no chance of reaching. This is especially true for producers in developing countries.
The exploitation of producers, a real enough issue, is however unconnected with the type of retail outlet. It is the underlying contracting arrangements that matter. The Kenyan flower export industry is a case in point.
The delivery of flowers is an exigent business; flower growers in Kenya enjoy regular access to the European market. Producers deliver large quantities of fresh flowers, which are shipped to Amsterdam. From this central depot, the flowers are then distributed to small shops across Europe. What determines whether or not the Kenyan producers are exploited is the underlying contractual arrangements and not the type of retail outlets at the end of the supply chain.
Having said that, producers can only get to enjoy all the benefits I’ve enumerated provided that they are selected by the retailer. This would of course depend on their price relative to that of other producers. Taking efficiency as criteria, society would want exactly those producers with the lowest price to be selected by the retailer. That is the producer that has found the most cost-effective way of producing a particular good. Provided that there are no externalities (see explanation below) in the production process (a heroic assumption), and that a regulatory floor is established (such as a minimum wage, health and safety regulations and quality-control standards for example), this producer would be the one that can produce the good using the least amount of resources
The assumption that there be no externalities in the production process is important. A firm has ‘externalities’ when some commodities or services used in the production process are not accounted for in the price paid by the consumer. For example, when the production of a plant pollutes a publicly-owned lake at no cost, it has a negative externality on the community. This effect is ‘external’ because it is not accounted for by the firm. When deciding how much of the good to produce, the cost of polluting the lake is not factored in, and the firm ends up producing more than it would have, had it paid for the use of the clean water from the lake. If all costs are taken into account, i.e. if there are no externalities, then the producer with the least costly good is also the one that would be the most environmentally friendly in this case.
By virtue of their mere size, large retailers are important for the economy. The largest four retailers in the UK, Tesco, Asda, Sainsbury’s and Morrison’s, collectively employ more than half a million people. Although some independent retailers do lose out when faced with competition from these behemoths, the economy on the whole gains. Researchers at the Catholic University of Chile found that the net effect created by the entrance of a large retailer into a local market in Chile increases employment by about 300 jobs. This total effect accounts for the jobs created by the retailer itself, those created by other parts of the production chain, and also takes into account the job losses due to small retailers exiting the market or downsizing. Some of the negative impact such restructuring has on extant small retailers is dampened when some join the operation by contracting for the big retailers rather than competing.
We must remember, however, that these are companies whose very raison d’etre is the pursuit of profit. This is not, whatever Marx or Bakunin say, intrinsically bad; in a competitive environment where externalities are absent, the incentives provided by profit maximization actually promote social welfare. In their pursuit of profits, large retailers will cut costs and increase revenue by all means available to them. There are however several ways to avoid undesirable outcomes such as the transgression of workers’ and animals’ rights, degradation of the environment and the compromising of consumer health. The first such method is regulation. In the UK for example, although retailers as well as other companies would like to pay some of their employees even lower wages, the law establishing a ‘minimum wage’ stops this from happening. Similarly, legislation regulating consumer health is extensive and transgressions are harshly punished.
Apart from regulation, which is heavy handed, consumers wield enormous power over retailers. They can reward good behaviour (and punish the bad) by appropriately switching their custom. Although less incisive and tangible than regulation, the effects of consumer pressure are real. In the recent past, companies producing cosmetics have had to respond to consumer demands for higher ethical standards; in the UK, energy companies faced pressure from consumers over their prices in 2008; even Apple has had to contend with consumers’ discontent with its iPhone 4. If an issue is of particular importance to consumers, shifts in demand ‘incentivise’ companies to respond accordingly. Retailers only exist because of consumers’ demand for them. Analogously, one must have to face the fact that UK consumers, as a whole, might not value the presence of independent retailers as much as the Domestic Extremist would like to see (or believe).
Independent retailers, however, are part of the heritage and culture of town centers throughout the UK and the world. They have, understandably, a sentimental value. This qualifies them to be categorized as ‘cultural goods’. By making this category, a case can be made for their protection (similar to languages that are on the brink of disappearance but that have some claim to nationalistic or cultural significance). the current Secretary General of the European Research Council, Andreu Mas-Colell, argues that it makes sense to preserve these retailers as representations of a bygone age but not to actively promote their expansion, which would be working against the current of consumer demand and the market. So in the same way that steam locomotives still operate as tourist attractions, a number of small independent shops could be supported to remain open in the face of increasing pressure from larger retailers.
It seems that rather than arguing against large retailers, the Domestic Extremist’s argument should be for more stringent regulation coupled with a policy of preserving some retailers as cultural icons. Large retailers are commercially successful because they are ever more efficient at satisfying consumer needs. The numerous occasions of a planned boycott campaign floundering in the face of a Tesco store opening its doors is a testament to the irresistible hunger for their services. It does not make sense to strive to stifle the development of a concept that is clearly wanted. The intense competition and hunt for profits, however, is likely to engender newer ways of cutting costs and regulation should thus be introduced to establish some minimum standards, whether in employee rights, environmental standards or health and safety.
Like any other activity, retailing evolves. The early 20th century saw self-service replace the much slower process of shopping that involved customers asking for products, while a store assistant scurried about behind the counter gathering them. This new method of shopping saves time and money for both customers and shopkeepers. It is an improvement and hence has persisted. Similarly, large retailers save time and money for customers and are proving to be more profitable than smaller operations. My guess is that they’ll continue to exist and, in the same way we can’t imagine dictating our shopping list to a hapless clerk, future generations will be unable to picture doing their weekly shop at an independent retailer. The Domestic extremist might not like it, but his call to arms, though clearly well-intentioned, is doomed to fail.
Omer Ali is an economist based at the University of Warwick and writes on economics, politics and world affairs. He is a former editor of the Voice Magazine. His “Devil’s Advocate” column appears every other Thursday.
7 Comments
Mik
Jim
Mik,
Do you ever shop at any of these “transnational corporate empires”? A yes answer might be somewhat hypocritical.
Sara
Having recently moved to France, where one experiences the real costs of the alternative to supermarkets – the much pinned for ‘butcher-baker-grocer-fishmonger’ etc model, my feelings about the large British supermarkets were restored. Not only doesn’t take me at least 3 times as long to buy the things I need now, but the small shops, who have an effective monopoly with local residents, charge incredibly high prices and have very low standards of service comparied to the, albeit very much more standardised, British model. Critics should try the alternative to understand the advantages supermarkets convey. The supermarket success lies in their providing what the customer wants at the best price, which in any free Market economy will lead to the dominance of oligopoly players where there are true economies of scale
Som
YEAH! POWER TO THE PEOPLE!
J
Provocative article. I’d have found the argument more convincing if there’d been some attempt to pre-empt the obvious criticisms (many of which have now been raised by Mik) – particularly on the quesion of externalities, which you gloss over although they are crucial to this issue, and your problematic idea of ‘efficiency’. To put it simplest, large companies saving money doesn’t mean savings are passed onto consumers – this would rely on a host of ideal conditions, including perfect information and competition, which don’t really exist in the real world. What we get instead is effective cartelisation, weak regulation, and the narrowing of choice. I wouldn’t use this as an argument – would have to take a look at studies – but in my experience, local groceries in working class areas have always been much cheaper than supermarkets in the same areas for most products, especially fruit and vegetables.
Omer
Thanks for the comments. I’ll attempt to address some of the points raised.
On supermarkets not being the cheapest for every single product, this is undoubtedly true. So fruits and vegetables could be cheaper elsewhere, but in general for a typical ‘basket’ of goods, supermarkets will be cheaper than individual stores.
As I’ve outlined above, supermarkets are profit making businesses that respond to incentives. Wasting resources such as fuel or edible food is financially costly and is unlikely to be tolerated. Furthermore, there is no reason to believe that by virtue of a shop not being a supermarket its owners would care less about the look of their aisles.
If the problem is that pressure from supermarkets makes producers cut costs by engaging in unacceptable business practices then the solution is surely to regulate producers rather than allowing uncompetitive retailers, that leave producers undisciplined, to exist.
I don’t see why supermarkets are more likely to sell unhealthy food. Nutritional issues aside, the point being made that supermarkets find it affordable to sell out of season and exotic produce whose transport produces large amounts of pollutants is a valid one. It is affordable however because the cost we’re concerned about (the pollution) does not factor into the supermarket’s calculations. So the solution is to make it take account of the pollution externality rather than shut it down.
Yes, when I said producers benefit from their interaction with supermarkets, I did mean financially. Unfortunately this is of first order importance. A farmer can be financially secure yet unconcerned with growing organic produce or engaging with the local community. However, they would not be able to operate and pursue other goals either if they weren’t financially secure in the first place.
Another valid point: consumers don’t make their choices in a vacuum but are in reality buffeted by a myriad of forces. But this is not a problem. The sheer number of factions coveting their custom makes their effective manipulation extremely difficult. The many marketing experts mentioned are not employed by one entity and their employers’ agendas don’t often coincide. As such, I am unconvinced about there being an acute and deliberate influence on consumer behaviour exerted by one party.
Calling for the end of capitalism may be an overreaction to a problem that can be resolved by smarter regulation and more consumer awareness. The latter is already on the rise.
Any work is better than starvation. I agree that the conditions and pay are not acceptable and there should be pressure to improve them. In the past, consumer pressure has achieved this in other markets; I see no reason why the same approach shouldn’t be applied to supermarkets.
I totally agree that some independent retailers offer a more rewarding shopping experience to those who can afford the time and money. This is a reason to preserve them as cultural goods, not an argument against supermarkets.
The domestic extremist may be right about the barricades being more fun but I’m unsure about their yielding results. A more effective response to some of the issues raised concerning the detrimental impact of supermarkets on producers is the fair trade movement. In order to join, producers in developing countries must satisfy certain requirements that ensure that their operations are run in an ethical manner. In return, they are paid a higher price for their produce which is then sold in developed country markets. Since its inception in the early 90’s, the fair trade label in the UK has made inroads even on the shelves of villainous Tesco. Consumer pressure can play a decisive role in increasing the uptake of fair trade products by supermarkets.
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I know that you’re the “Devil’s Advocate” but selling your soul to the rich and powerful does you no favours.
“To begin with, the convenience of large retailers must not be overlooked.”
Convenient for consumers with cars and money. Not necessarily for anyone else. Tescopoly note that “NCH the Children’s Charity found that travel costs to go food shopping added 23% to the shopping budget of low income families.” Not so convenient after all.
“Further, to the benefit of the consumer, supermarkets drive down the cost of the goods they sell.”
Again, your argument revolves around benefits to the consumer whilst neglecting everyone else. It doesn’t benefit producers. This drive to reduce prices, inevitably, has an effect on the quality of the goods. For example, “retailers’ practices are contributing to, or exacerbating, the inequalities that exist between the diet and health of more affluent and less affluent customers.” Again, your arguments only work for the affluent, middle classes, not poor people. Supermarkets are not always the cheapest sources of healthy food: “A survey by Sustain in 2005 showed that a basket of fruit and veg at a supermarket in Walthamstow cost £2.50 more than the equivalent at a market.” And locally-produced food is fresher and has fewer transport costs (both monetary and in terms of carbon emissions/pollution).
“Precisely because these organizations are profit-driven, their operations brook no waste.”
Nice idea but not actually true. No waste in monetary terms but plenty of waste of energy, resources and edible food, as I pointed out in my article. As you later, covertly, admit, this is partly because of an externalisation of the costs of pollution. It is also because wasting resources to overpackage is OK as long as it sells, and wasting good food is OK if that is what it takes to give the impression of a pristine vegetable aisle. Ever had a look in a supermarket bin? I recommend you give it a try.
“By being able to choose freely between suppliers of non-branded goods, those who sell their products at the lowest price get selected. ”
And how do they manage that? Inevitably, by paying the lowest wages and cutting the most corners regarding health and safety and environmental protection.
“Big retailers compete against one another, hence depressing prices.”
You assume a market economy is good. I don’t. I offer small, independent shops as a less bad option, not a solution.
“Higher food prices would therefore affect poorer households disproportionately, a point to bear in mind when contemplating the aesthetic appeal of a rustic independent retailer, whose prices would inevitably be higher than those of a large one.”
But it is also worth looking at the impact of these lower priced goods: “the majority of promotions such as two-for-one offers being for ready meals and junk food, and rarely for fresh fruit and vegetables”. Supermarkets make money out of selling snacks, junk food and high salt items at low prices – these are not essential foodstuffs and they are damaging the health of poor people. It is also worth considering that locally produced foods will have lower transport costs associated with them, so could end up being cheaper than products shipped around the world. Supermarkets frequently sell apples from South America or South Africa rather than from the local orchards. Are you really trying to convince us that this is a better choice as far as the environment and local economies are concerned? An apple fresh from a local orchard would certainly be of better quality and nutritional value than one that has been shipped thousands of miles.
“Although the benefits outlined above concerned consumers, suppliers also benefit from contracting with large retailers.”
Only in a capitalist sense of making more profit. In the sense of enhancing the food security of their local communities and making organic, human-scale connections then they would be better off remaining local.
“The exploitation of producers, a real enough issue, is however unconnected with the type of retail outlet.”
Not strictly true. Without supermarkets creating massive demand for a certain type of cheap, don’t-ask-questions-about-it’s-origins product, the suppliers might not be buying in that same product.
I think many of the mistakes that you make are, as is typical with many neoliberal economists, in assuming that consumers make their own decisions, logically and independently of outside influence. That is simply not the case, hence the armies of psychologists and marketing experts employed to guide product placement, and create artificial desires for products. The supermarkets are very much in control of what kinds of products are consumed.
“Taking efficiency as criteria, society would want exactly those producers with the lowest price to be selected by the retailer. ”
Again, it all boils down to money with you guys. But many people would be willing to pay a little more for a habitable world without massive suffering and exploitation.
“Provided that there are no externalities (see explanation below) in the production process (a heroic assumption), and that a regulatory floor is established (such as a minimum wage, health and safety regulations and quality-control standards for example), this producer would be the one that can produce the good using the least amount of resources”
And when can you ever, under neoliberal capitalism, correctly assume these premises? We know that production moves to unregulated places to keep costs down. We know that companies seek to externalise the environmental and human rights impacts of their business as much as possible. Nothing short of the end of capitalism will change that. Business is motivated by profit not being nice.
“By virtue of their mere size, large retailers are important for the economy.”
Another reason that many people want to bring them down.
“We must remember, however, that these are companies whose very raison d’etre is the pursuit of profit. This is not, whatever Marx or Bakunin say, intrinsically bad; in a competitive environment where externalities are absent, the incentives provided by profit maximization actually promote social welfare.”
Hilarious. Have you actually read any of Marx’s work?
“In the UK for example, although retailers as well as other companies would like to pay some of their employees even lower wages, the law establishing a ‘minimum wage’ stops this from happening.”
So the companies move their activities to countries where there is no such regulation and armies of desperate people looking for work, any kind of work, to avoid starvation. How does this promote social welfare?
“Apart from regulation, which is heavy handed, consumers wield enormous power over retailers. They can reward good behaviour (and punish the bad) by appropriately switching their custom. ”
The problem with this is that a) consumers have to have complete knowledge about how the products they buy are produced to be able to act in their own and the planet’s interests and supermarkets have a vested interest in preventing this education from happening and b) the people who end up consuming these goods are not the people who are being fucked over by them. The people whose wallets matter most to the supermarkets, the affluent middle-classes, benefit from the system of global exploitation that is neoliberal capitalism. Why would they bite the hand that feeds? Boycotts recreate the economic hierarchies of capitalism because people with the most spending power have the most clout.
“Analogously, one must have to face the fact that UK consumers, as a whole, might not value the presence of independent retailers as much as the Domestic Extremist would like to see (or believe).”
My argument is not that consumers value independent retailers – it is that they operate at a more person-to-person, less alienated level than the giants. They can have a pro-social function and circumvent some of the worst excesses of capitalism through credit, through passing on out of date foodstuffs to those who need them, etc which never happen in supermarkets. I relate to humans as people, not as consumers.
“It seems that rather than arguing against large retailers, the Domestic Extremist’s argument should be for more stringent regulation coupled with a policy of preserving some retailers as cultural icons.”
If I was a capitalist, perhaps. I’m not – I argue for attack on the supermarkets as part of a larger attack on the capitalist system. All of the exploitation, destruction and broadening of class divides that the supermarkets bring about are effects of the alienating economic system that underlies them, unleashed on a massive scale. My call for a return to small scale capitalism is not an endorsement of it but an attempt to neuter the more rampant excesses of retail capitalism.
“Large retailers are commercially successful because they are ever more efficient at satisfying consumer needs.”
And creating them.
“The numerous occasions of a planned boycott campaign floundering in the face of a Tesco store opening its doors is a testament to the irresistible hunger for their services.”
As argued above, this is actually more to do with a lack of knowledge about and complicity in the exploitation on which Tesco is founded.
“The Domestic extremist might not like it, but his call to arms, though clearly well-intentioned, is doomed to fail.”
People can’t shut their eyes and stay in their comfort zones for ever. The capitalists have to keep inventing ever more intricate ruses for diverting attention from their crimes. An enormous effort goes into diverting attention from the massive wealth that this country’s ruling classes and leading capitalists have expropriated from other peoples around the world. For now, the middle classes can be bought out with a gaudy Tesco Extra for their convenience and money to spend in it but the foundations that these economic relations are built on are extremely precarious. At some point they will collapse and all hell will break loose. Just look at the economic collapse in Argentina and how the middle classes were suddenly left penniless. The result was mass unrest. Look at the insurrections in Greece. So far the world order has managed to intervene and keep the lid on these flashpoints but with declining energy resources and a failing economic system the possibilities for rebellion are increasing.
Join us on the barricades, Omer. It’ll be more fun than being the capitalists’ bitch.