Competition is the basis of a healthy capitalist economy. The proposed Ladbrokes/Coral merger highlights the question of when regulators should permit reduced competition, explains John Pal.
The mooted Ladbrokes acquisition of Coral is likely to bring the Competition and Markets Authority (CMA) calling with an inquiry. A successful acquisition would lead to Ladbrokes controlling at least 45% of physical betting shops across the country. The move is perhaps not a surprise with Ladbrokes struggling with falling revenues and profits and Gala Coral hit by falling revenues from its retail businesses.
The rationale for acquisitions such as this can lead to more efficient businesses – essentially by culling head office staff, in particular. But the purpose is also to eliminate store duplication – and there will be a need for the victor to dispose of excess stores. This is achieved by closing stores due to overlap or, in the case where a local monopoly would ensue, then being compelled to sell the outlet on to a competitor.
We saw this in the case of Morrison’s acquisition of Safeway, when the Yorkshire-based company had to sell specific stores and other operators including Waitrose gained entry to new markets. The CMA’s predecessor body, the Office of Fair Trading, decided in 2009 that the Co-operative Group had to make 128 store disposals to ensure adequate local market competition in the grocery sector after it acquired the Somerfield chain, comprising 877 stores.
Another area of interest with the purported Ladbrokes takeover comes in the guise of concern over the future of the high street. Whilst the Portas Review generated lots of publicity and brought the increasingly precarious nature of some town centres to the top of the political agenda, albeit temporarily, it appears that the pilots instigated by Portas have achieved little.
We can expect more acquisitions and mergers in retail and this will impact on high streets. Whilst betting shops had for long been the preserve of secondary locations, they are now much more prominent and can add footfall to a high street, sometimes until as late in the evening as 10 pm. However, it is expected that any closures of Ladbrokes or Coral stores could be taken up by smaller operators, such as Bet Fred and Paddy Power, in locations where they may not already be represented. This would be similar to the situation with the Woolworths closure – almost all of its shops were transformed into new stores, mostly in the value sector (the ‘pound shops’). This avoided a big increase in high street vacancy rates.
The major operators in the grocery sector – Tesco, Sainsbury, Asda and Morrisons, the ‘Big 4’ – will be watching closely any decision of the CMA in relation to the Ladbrokes-Coral case. The grocery sector bears a striking similarity to the betting sector. The ‘Big 4’ are responsible for at least 70% of the grocery market.
In the past, the failure of the competition authorities to stem the rise of Tesco, in particular, led the grocer to gain almost 50% of the market in Inverness. Moreover, Tesco’s takeover of 800 T&S stores in 2002 was waved through by then Trade and Industry Secretary Patricia Hewitt. It could be argued that the margins enjoyed by Tesco throughout the 2000s and early 2010s were symptomatic of excessive market power, with the grocer accounting for over 30% of market share at one point.
The ‘Big 4’ have grown through both organic means and acquisitions in recent decades. But they seem unlikely to have it their own way anymore. In particular, the CMA is dealing with a super complaint from consumer group Which? into grocery pricing, which the CMA must formally respond to by 19 July.
The focus of the Which? complaint is not the lack of competing grocery outlets, but rather the problems faced by consumers in making choices in the market because of lack of price transparency. Which? complains of “confusing and misleading special offers”, the difficulty in comparing the cost of individual products and the practice of some retailers of reducing the size of packs as an (obscured) alternative to raising prices. In addition, the CMA was requested by Which? to examine the so-called ‘price matching’ schemes.
The CMA was asked by Which? to consider whether these various practices provide a “confusing and opaque” environment that damages “consumers’ ability to obtain best value and make informed purchasing decisions”. It is now for the CMA to decide what changes, if any, are needed to enable consumers to make properly informed choices and obtain best value.
But that is not the only challenge facing grocery retailers. The Big 4 are anyway being squeezed, with the growing strength of Lidl, Aldi and Netto. (However, Netto’s new presence in the UK is through a joint venture with one of the Big 4 retailers – Sainsbury’s.) Ironically, Netto is itself dealing with a possible CMA investigation of its attempt to acquire just three stores from the Co-operative Group in Yorkshire.
One way or another, the retailing environment is actually becoming more competitive.