The Big Box vs the Black Box

Despite misgivings about the growth of giant retailers, as reviewed in a previous post, the Competition Commission’s new enquiry is unlikely to shake up UK supermarkets any more radically than its earlier probes in 2000 and 2003. Even though it has detected some anti-competitive practices – such as big chains pressuring suppliers to sign exclusive deals, and buying land to stop rivals building stores on it,  the Commission can allow these if consumers are judged to benefit. The ‘Big Four’ can claim they do, through persistently low prices and now from the environmental and nutritional improvements they promise to wring from already lean supply chains.

So why do we still feel uncomfortable stepping through Tesco’s (or Sainsbury’s, Asda’s and Morrisons) ever more prevalent sliding doors, when they can claim to be cutting our bills without crucifying our consciences?

Economists, when allowed to look beyond the Competition Commission’s brief, also look at big retailers macro-economic effects. Supermarkets have been a major vehicle for the recent slowdown in UK, European and American inflation. There is controversy over the source of their cost savings (genuine efficiency gain, or squeezing of suppliers and employees under threat of low-cost outsourcing). But there is little doubt over the disciplining impact on the retail price index, which covers items mainly sold through the Big Four, with their 75% share of UK grocery sales.

The wide and persistent trade deficits run up by the UK and US also owe much to supermarkets, who trawl the world for lower-priced industrial products and more exotic foods. Former IMF Research Director Kenneth Rogoff, in a recent Project Syndicate comment, notes that more than 10% of US imports from China pass through leading US store chain WalMart (parent of Asda in the UK). WalMart produces 2% of US GDP and has been the world’s biggest employer since 1999, its 1.2m payroll giving its CEO more people to rule over than the King of Swaziland.

Rogoff also observes “ with some disbelief “ that ‘big box’ retailers led by WalMart account for half the past decade’s US productivity growth differential over Europe. Wider changes to the distribution system, largely driven by big supermarket purchasers, are responsible for another 25%. The humble shopkeepers seem to be responsible for much more of the much-vaunted productivity revival than high-technology innovations, flexible labour market reforms, educational improvements, corporate reorganisation by activist shareholders, or any of the other more commonly cited sources of greater efficiency.

This finding has echoes of a 1980s productivity paradox, when economists Stephen Roach and Robert Solow observed that massive American investment in information and communication technology (ICT) appeared to have done little to boost US productivity growth, except in the ICT industry itself. Similar discoveries were made in Europe, prompting an enquiry by the Department of Trade and Industry. Now it seems that supermarket groups ‘big boxes’, rather than technologists ‘black boxes’, are behind the recently superior productivity performance in the US and UK. If the rest of the EU, and Japan, want to match this Anglo-Saxon performance, they may need to drop their planning restrictions and allow a faster move from the market to the supermarket economy.

Wal-Mart remains as intervention-proof across the Atlantic as is Tesco in the UK, because it has delivered consistently lower prices to consumers (charging on average 25% less for food than its rivals, on the figures Rogoff quotes). Should these giants now be praised for generating the productivity gain that ultimately determines how fast our standards of living rise? That’s a difficult story to tell to the WalMart employees, notoriously paid 30% below the retail average, and often dependent on welfare top-ups to afford the goods in their own stores, according to material from Congressional enquiries.

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