Retailers (Discounts) (Hansard, 13 May 1981)

§ Mrs. Sally Oppenheim

The report is published today.

The commission has carried out a wide-ranging investigation of the extent and effects of the preferential terms on which goods are supplied to some retailers. The investigation covers the nature and scale of the preferential treatment given, including price discounts and rebates; the relation between preferential prices and cost savings; and the effect of the practice on manufacturers, retailers and consumers. The commission finds that preferential treatment for large multiple retailers is substantial and widespread. Although cost savings on large transactions can be considerable, discounts are not closely related to these savings and often result primarily from the bargaining power of large retailers. The commission does not, however, consider that in general the practice has in recent years been harmful to the public interest. Price reductions have on the whole been passed onto consumers and the practice has encouraged competition among both manufacturers and distributors. The commission recommends against specific legislation to control the practice at present. It emphasises, however, that the scene is continually changing and that further concentration in retailing might give rise to concern. In some circumstances individual cases of discrimination may already be against the public interest and the powers under the Competition Act or the Fair Trading Act would be very useful and would permit individual investigations.

The reference was made in July 1977 under section 78 of the Fair Trading Act 1973. This provides for a general investigation of the effect on the public interest of practices which appear to be uncompetitive or associated with monopoly situations. There are no powers of control flowing directly from such an investigation, but the commission may make recommendations for the Government to consider. The reference in this case required the commission to report on the supply of goods to some retailers at lower prices or with some additional benefit not provided to other retailers, where the price reduction or the value of the benefit cannot be attributed to savings in the suppliers' costs.

The definition of the practice in the reference requires the commission to consider the differences in the terms and conditions for the supply of goods to retailers and whether those differences are justified by cost savings. For practical reasons—as suggested by the Government at the time of the reference—the commission's investigation concentrated on groceries and certain other products where discounts were thought to be significant, including toothpaste, beer, and paint. The commission found that a wide range of special terms were available, including discounts from published 270W prices, retrospective rebates, favourable credit terms, special delivery services, and shelf-filling or price-marking services. The value of special terms varied from product to product, for instance, being high in the case of bread, biscuits, and paint, and relatively low in the case of cigarettes. The commission stresses the difficulty of measuring the average value of special terms, but gives certain illustrative figures. For 12 selected manufacturers the cost of special terms was 6.6 per cent. of total sales, while for their top four retail customers it was 9.2 percent.

Cost savings to be set against the preferential terms included economies in distribution, in the cost of the sales network, in the administrative costs of handling large accounts, and sometimes in manufacture. The commission found that few firms attempted to measure these cost savings as a basis for pricing decisions, and the commission itself found it was not feasible to make a statistical analysis. Terms were decided by commercial judgment, taking into account overall marketing considerations and the relative bargaining strength of the parties. No clear line could be drawn between preferential terms reflecting positive commercial advantages to the manufacturer and those arising from the exercise of "muscle" by the retailer. From previous more detailed inquiries, however, and from a general assessment of the evidence and representations received, the commission concludes that discrimination beyond the level justified by cost savings is considerable both in prevalence and in degree. In assessing the effect of the practice on the public interest, the commission considers its impact on consumers, manufacturers, and retailers.

The commission is satisfied that hitherto the practice has been to the benefit of consumers. Prices from manufacturers to retailers have in general been lower than they would otherwise have been, and effective competition in retailing has ensured that prices to consumers have also been lowered. The commission acknowledges that the reduction in the number of retail outlets has had disadvantageous consequences particularly to consumers whose mobility is restricted, but the contribution of discriminatory discounts to this development has been small.

In relation to manufacturers, the commission considers that the bargaining power of retailers has encouraged competition and efficiency in concentrated industries where competitive pressures might otherwise be limited. The commission considers the possibility that pressure on manufacturing profits might discourage investment and research, but concludes that many other factors have contributed to the decline in profitability in recent years. There is little evidence that discounting practices have affected investment or research.

There have been major changes in the distributive trade in the last 25 years. Large multiple retailers have expanded their share of the market at the expense of wholesalers and independent retailers. This is a result of many social and economic circumstances. In recent years the extent of price discrimination has been a contributory factor but not in itself a decisive one. Smaller retailers have, moreover, responded to competitive pressures by providing more specialised products, greater convenience, or by forming purchasing groups. Independent retailers will continue to exist. The commission expresses concern at the possibility that concentration might reach a point at which effective competition would be reduced, but finds no evidence that this point has yet been reached.

271W

In view of its overall findings on the public interest, the commission does not consider that any general measure of prohibition or regulation is necessary or desirable. Its examination of measures applied in other countries also leads it to the view that it is difficult to apply such measures without adverse effects on competition or serious practical problems, particularly in allowing for genuine differences in costs.

The commission does, however, recognise that further concentration in retailing could give rise to concern, and considers that it is important to keep a particularly close watch on future mergers in the distributive trades. There could also be particular instances of discriminatory discounts—as the commission itself has found in previous investigations—which might operate against the public interest. The commission does not consider that the existence of discrimination in itself would constitute sufficient ground for investigation, but in combination with other circumstances, such as exceptional market power or exclusive dealing, it may require detailed assessment. The Competition Act and the Fair Trading Act provide powers for investigation and, in certain circumstances, for controlling the activities which have been investigated, but if it emerges that there are instances which need to be controlled but cannot be dealt with under the existing powers it will be necessary to consider whether new legislation is required to extend them.

The extent of discounts to retailers has been a matter of controversy for some years now. I welcome the commission's report as a valuable analysis of the problems involved. I shall take account of the commission's recommendations in assessing further developments or proposals in this field. The Director General of Fair Trading will be giving careful consideration to the possibility of investigations under the Competition Act. Further study is required of the other specific suggestions referred to in the report.