Lecture 34.
The Groceries Order

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What we want to learn about this topic

• Many European countries have regulations designed to try to protect small retailers from competition from large multiples (loi Galland in France, Groceries Order in Ireland until end-2005)
• We examine the Groceries Order debate and the arguments which led to the repeal of the 1987 Groceries Order in early 2006.
• Key questions
  • What was impact of the Order on competition?
  • What was impact of the Order on prices?
  • What was impact of the Order on slowing structural change and defending position of the independent retailer?

Short introduction to the issues

Long history of regulating competition in the retail grocery trade.

Selective dates:

• 1956 Order prohibited resale price maintenacne, collective price fixing by suppliers and wholesalers, withholding supplies from a retailer
• 1973 advertising price of goods below cost was prohibited
• 1987 Order represented a fundamental shift by introducing a ban on below invoice price selling

Ink was no sooner dry than Order was reviewed:

• 1991 Fair Trade Commission recommended y 2-1 majority to abolish the Order
• 2000 Competition and Mergers Review Group
• 2004 National Competitiveness Council
• 2005 Department of Enterprise Trade and Employment Public Consultation Process
• 2005 Joint Oireachtas Committee on Enterprise and Small Business
• 2005 Consumer Strategy Group

Groceries Order – effect on competition

Order intended to prevent below-cost selling seen as a predatory device which would ultimately limit competition

Order makes it illegal to sell particular grocery products below the net invoice price

Predatory pricing anyway illegal and very unlikely in the retail trade. Predatory pricing should be distinguished from practice of loss leading. Loss leading not necessarily welfare-reducing (Walsh and Whelan).

But GO did not prevent below cost selling, it prevented selling below net invoice price. It effectively reintroduced resale price maintenance by allowing manufacturers to set retail price. Off invoice discounts could not be passed on to consumers.

Groceries Order – effect on retail structure

Ireland has more concentrated retail structure than UK which does not have GO. Supermarkets do not compete directly with the independent sector which is now concentrating on convenience. Retail development can be partly controlled through planning guidelines.

Groceries Order – effect on prices

Hard to disentangle effect of GO from other influences on food prices. Food prices have risen less than general inflation….. But GO prices have risen faster than non-GO prices….. And Irish prices higher than elsewhere.

Collins and Oustapssidis (C&O) show impact of Order econometrically. Their hypothesis was that the GO increased retailer gross margins in the affected product categories. They tested this hypothesis in the 'processed and preserved fruit and vegetables' sector. They constructed an average weighted retail price for 13 items and compared this to wholesale price index for NACE 414 sector to construct a 'processor-retail price spread'. They estimated an econometric model as follows:

• Retmar = Const+Cr4+Advgval88+GDPCP+Sterl+Legis +Dum414
• Retmar = retail margin
• Cr4 = concentration measure
• Advgval = measure of retailer advertising intensity – the more advertising, the smaller the margin
• GDPCP = control for changing demand conditions
• Sterl = dummy for exit of sterling from EMS
• Legis = dummy for period when GO was in effect

The model was estimated using quarterly data from 1984 to 1994. They found a positive sign on the LEGIS variable suggesting that the GO increased retailer margins by 4.6 percentage points.

Outcome

The Minister Micheal Martin announced repeal of the Groceries Order in November 2005. At the same time, the Government agreed to strengthen provisions of the Competition Act in relation to the grocery trade. (There is a short summary of the new provisions in the 2006 Competition (Amendment) Act in the OECD report on Irish competition policy for 2005-06, see pp. 3-5). Such practices include resale price maintenance, unfair discrimination and the payment and receipt of advertising allowances and "hello money". The Competition Authority has been asked 'to review and monitor the structure and operation of the grocery trade for the foreseeable future to see how it responds to the new legislative environment'. The first report on this Grocery Monitor Project is due in 2007.

Reading suggestions

Gerry Donnelly, The impact of the restrictive practices (Groceries) Order on Competition in the Irish grocery trade, Paper read to the Social and Statistical Inquiry Society of Ireland, March 2006.

Report of the Consumer Strategy Group, Make Consumers Count: A New Strategy for Irish Consumers, Forfás.
(Chapter 5 deals with the Groceries Order- html version)

Department of Enterprise, Trade and Employment, 2005. The Restrictive Practices (Groceries) Order 1987: A Review and Report of Public Consultation Process.
(argues against retention of the Groceries Order)

Joint Oireachtas Committee on Enterprise and Small Business, Interim Report on the Impact of Grocery Multiples on the Grocery and Retail Markets and its Effect on Consumers, Small Grocery Retailers and Small Grocery Suppliers, Third Report, March 2005.
(argues in favour of retention of the Groceries Order)

Walsh, P. and Whelan, C., 1999, A Rationale for Repealing the 1987 Groceries Order, Economic and Social Review, 30, 1, January, 71-90.

Collins, A. and Oustapssidis, K., 1997, Below Cost Legislation and Retail Performance, Department of Food Economics Agribusiness Discussion Paper No. 15, UCC.

Competition and Mergers Review Group, 1999, Discussion in Relation to Groceries Order, Dublin, Department of Enterprise, Trade and Employment.

Competition Authority, 2000. Response to the Competition and Merger Review Group Report on the 1987 Groceries Order, Discussion Paper No. 10, Dublin.

Competition Authority, 2005. Submission to the Minister for Enterprise, Trade and Employment on the Groceries Order, Dublin.