The Groceries Order
Monday, April 2nd 2007
John Evans
The Competition Authority
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
What was the
Groceries Order?
GO as an RPM Mechanism
1.
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.
2.
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.
3.
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.
History of the
Groceries Order
The Early Orders - 1956
1.
The 1956 Order (came into effect in 1958) following a recommendation from
the Fair Trade Commission (FTC).
2.
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);



3.
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.
The Early Orders - 1973
1.
1966 FTC review of grocery trade – no change despite call for ban on sales
below cost.
2.
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.
3.
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%.
4.
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.
Early Orders – 1978/1981
1. The Restrictive Practice Commission (which had replaced
the FTC) conducted reviews in 1975 and 1978, leading to
the enactment of two Orders in 1978.
2. First 1978 Order - Fresh and frozen foods removed from the
scope of the Orders.
3. 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).
4. 1980, RPC again considered and rejected banning sales
below cost, but 1981 Order strengthened provisions relating
to the advertisement of sales below cost.
The 1987 Groceries Order
1. 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.
2. Context:


Price war “put H. Williams out of business’’;
RPC criteria appears to have been based on notions of ‘fairness’ (for producers).
3. 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”
The Groceries
Order Debate
Leading up to the Removal
1.
1991 Review by RPC
 Recommended removing the ban;
 Minority report by Myles O’Reilly.
2.
1991 Competition Law introduced:
 Contained provisions relating to the abuse of a dominant position (Section 5)
 In particular, relating to predatory pricing.
3.
1993 and 1995 Internal Review by Department of Enterprise, Trade and
employment – recommended removing the Order
4.
1996 Competition and Mergers Review Group were divided – majority were in
favour of removal.
5.
2005 Public Consultation on the Groceries Order – Department of Enterprise,
Trade and Employment.
Arguments for the
Retention of the Order
1. 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.
2. The ‘Employment’ argument:
 The removal of the Order will result in a loss of jobs in the
grocery trade.
3. 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.
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.”
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.”
National Competitiveness Council
“Ireland’s 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 domesticallygenerated 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.”
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.”
Competition
Authority
Arguments
Three Separate Headings
1. 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.
2. Effect - the effect of the Groceries Order is to reduce
competition and increase prices (tends to impact
lower income groups disproportionately); and,
3. Proportionality - the Groceries Order does not meet
and is not necessary to achieve the claimed benefits.
Price Index on Food and Drinks Consumed at Home
(June 01- June 05)
For € 100 spent in June 2001
Overall
Items Covered by
the Order
Items Not covered
by the Order
2001
100.0
100.0
100.0
2002
103.1
103.7
101.4
2003
102.4
107.0
100.9
2004
100.1
107.5
99.4
2005
98.9
107.4
94.9
4.5%
7.4%
-5.1%
%
Growth
Over period
Source: Derived from CSO data (rebased by The Competition Authority)
Income groups from lowest 10% of households to top 10% of households
0 -10%
10%20%
20%30%
30%40%
40%50%
50%60%
60%70%
70%80%
80%90%
90%100%
Average
Househol
d
A
Weekly food costs
in June 2005
€43.23
€64.47
€80.29
€88.21
€99.39
€109.4
4
€114.9
1
€125.9
2
€132.89
€148.38
€100.74
B
Food costs without
Groceries
Order
(June 2005)
€39.25
€58.54
€72.91
€80.11
€90.26
€99.39
€104.3
5
€114.3
5
€120.68
€134.75
€91.49
C
Weekly savings in
June 2005
€3.97
€5.92
€7.38
€8.10
€9.13
€10.05
€10.56
€11.57
€12.21
€13.63
€9.25
D
Annualised
Savings 2005
€206.4
9
€307.96
€383.5
4
€421.3
9
€474.8
0
€522.8
1
€548.9
1
€601.5
0
€634.82
€708.82
€481.25
E
Weekly
June 2005
€130.7
7
€214.71
€307.0
4
€408.4
5
€520.7
3
€635.1
1
€760.4
6
€915.1
9
€1,139.3
2
€1,758.7
4
€679.02
F
Saving as %
weekly budget
3.04%
2.76%
2.40%
1.98%
1.75%
1.58%
1.39%
1.26%
1.07%
0.78%
1.36%
G
Saving
to
the
economy (2005)
budget
of
Source: Analysis of The Competition Authority based on CSO data
€577.49
million
Proportionately
1.
Foods deserts arguments and Employment arguments.
2.
Predatory pricing arguments:
3.

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."
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”
The Removal of the Order
1. In 2005 – confluence of consumer interests:
 National Consumer Agency;




Competition Authority;
OECD;
Consumer Strategy Group;
National Competitiveness Council;
 Eddie Hobbs!
2. Interesting from an Irish political economy point of
view – Consumer v. Producer Interests.
3. The Order was finally removed on March 20th 2006.
Life after the
Groceries Order
The Grocery Monitor
1.
Ministerial Request and the 2006 Social Partnership
2.
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.
3.
The



4.
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.
Level 1:
Producers, manufacturers, imports etc…
Supply
Level 2:
Wholesale
Cash and
Carry
Non-affiliated
wholesalers
Wholesale
divisions of
franchise
groups
Verticallyintegrated
retailers
Level 3:
Retail
Non-affiliated stores:
‘convenience’ stores
Forecourt stores
Retail Franchise
Operation of franchise
groups/Franchisee:
‘one stop’ stores
‘convenience’ stores
Forecourt stores
103
CPI
102.5
102
101.5
Non-GO Items
101
Non-GO and GO
Items
100.5
100
99.5
99
GO Items
98.5
98
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Concluding
Comment
Concluding Comment
1.
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.
2.
The nature of the debate changed over time:
 From one concerning notions of ‘fairness’ among producers;
 To a more consumer focused debate.
3.
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.
Useful References
1. Department of Enterprise Trade and Employment (2005), The
Restrictive Practices (Groceries) Order 1987: A Review and Report
of Public Consultation Process.
2. Forfas (2004), National Competitiveness Council - Annual
Competitiveness Report.
3. Consumer Strategy Group (2005), Consumer Strategy Group
Report: Making Consumers Count.
4. Collins A, and Oustapassidis K. (1997), Below Cost Legislation and
Retail Performance, Agribusiness Discussion Paper No 15.
5. 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.
6. 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.