Tescopoly | Every Little Hurts?

The scale of Tesco superstore has become a sore subject in recent years. Before we explore the Economics behind the Supermarket giant Tesco – let’s recap on a little history of how this company was founded.

The Gentleman that founded Tesco was Jack Cohen in 1919 and to put that into perspective this makes it 7 years after the Titanic sank! Jack “the lad” was an owner of market stalls, he purchased a shipment of Tea from T.E Stockwell and combined these initials with the first two letters of his surname. The first “Tesco” store was opened in 1929 and within a decade there was a further 99 stores opened.

Tesco now has stores in 14 different countries (however has recently pulled out of America) so let us re-phrase that…. ‘Tesco now has stores in 13(!!) different countries’.

The term Tescopoly refers to the “Monopoly” that Tesco has on the UK. There are many groups that have formed an alliance against Tesco due to its Economic power making smaller businesses insolvent by taking away their customers.

The opposition of the Tescopoly has become strong due to ‘Market Power’ of Tesco. This, in Economic terms this refers to the ability of Tesco to act in the marketplace in ways that their rivals can do little or nothing about.

For instance, Tesco has the ability to charge different prices in their stores depending upon whether the local competition is strong or not. Supermarkets have the luxury of selling some items below cost. Let’s illustrate this by proposing a Tesco store opens in close proximity to a florist, Tesco can drop the margins on it’s flower bouquets in order to attract customers away from the florist. This would be an example of abuse of Market Power.

Economists are very interested in the Supermarket’s buying power, that is: the relative bargaining power between firms and their suppliers.

The larger suppliers are said to have an advantage over smaller suppliers in so far as they are often able to extract more favourable terms from them.

The pure size of the Supermarkets enables them to buy in bulk and demand discounts from dairy farmers or clothing suppliers for example. So it is possible for Supermarkets to bully suppliers and dictating deals on discounts.

This came to light when the UK’s ‘big four’ (Tesco, Sainsburys, Asda and Morrisons) was charged with colluding among themselves on fixing the price of dairy products such as milk and cheese.

For much of the past decade food prices have fallen in real terms (this means without factoring inflation). This can be traced to the efforts of the Supermarkets to increase their market share by buying produce cheaper and passing that saving onto the consumers at the checkout. Arguably this saving comes at the cost of others.

The Supermarkets have long been linked to suppliers employing migrants/ under age workers who are desperate enough to work for less than minimum wage. This is a direct consequence of the buying power of the Supermarkets who hide behind their subcontractors, in this instance giving the supplying subcontractors no choice but to pay their workers less as Supermarkets drive down prices at the factory and farm gates.

In summary, the Tescopoly has brought food prices down over the last ten years by using their market power, they have created more jobs within the UK however this may be at the expense of small business owners. Some call the sourcing of cheap labour abroad ‘modern day slavery’ however others will argue they are providing jobs that would otherwise not be present which in turn can raise the standard of living in these countries.

It is clear that the Supermarkets operate under a ‘zero-sum game’ in which someone wins and someone loses.  The question is, are you for or against the Tescopoly?