Everyone “knows” that big businesses collude in order to raise consumer prices – and the larger the business, the more it can demand. In that case, what is everyone to do with the merger of two UK supermarket titans, Sainsbury’s and Asda, which is forecast to lower food prices for British families?
The merger would see number-two supermarket Sainsbury’s purchase number-three competitor Asda, which is currently owned by Walmart. The £7.3 billion ($9.9 billion U.S.) “tie-up” (which consists of £3 billion in cash and 42 percent of the company’s stock) would edge out Tesco as the largest supermarket in the UK. Together, they would share 31 percent of the market and a combined revenue of £51 billion ($70 billion). The Competition and Markets Authority (CMA) is currently investigating whether the deal serves the national interest.
Obviously, with a larger share of the food industry – a commodity everyone needs to survive – their first act will be raising prices, right?
In fact, Sainsbury’s CEO Mike Coupe has promised to lower the price of everyday household items 10 percent by “leveraging the buying power of the combined business.” That pledge, provided he keeps it, would save families an estimated £500 million ($650 million U.S.).
But why would a larger business lower prices? Even a true monopoly may lower prices – if it serves its own interests to do so. Companies are in business to make money, not to punish consumers. As Ludwig von Mises explained, if cutting prices will let a true monopoly generate higher profits by selling more items (or increasing business volume) than it can at a higher price, it will cut the final cost. It only makes sense.
Of course, the combined Sainsbury’s-Asda business will be a long way from a monopoly, even if Coupe keeps his vow not to close any of the 2,800 stores and let them remain separate brands. “I have no concerns at all about the size of these retailers,” said Groceries Code Adjudicator Christine Tacon. They have found that economies of scale and increased buying power allows them to make a higher profit while reducing the amount people have to spend to feed their families.
Experts say their action may just trigger a round of grocery price reductions across-the-board. Part of the reason behind the merger is to compete with German discount grocery stores Aldi and Lidl, which have seen massive growth and intend to roughly double the number of their combined stores in the UK by 2022.
“Discounters Aldi and Lidl have suggested the margin they make was dictated by prices at other supermarkets,” said James Brown of pricing specialist Simon-Kucher, “which means if Sainsbury’s and Asda drop their prices, the discounters will follow.”
In other words, as the market price drops, discount chains must drop their prices even lower to maintain their competitive advantage. It only makes sense.
These discounts take place before any Brexit dividend as the UK leaves the EU customs union – which imposes tariffs of up to 18 percent on imported goods – and strikes free trade agreements with exporters. That lowers UK food bills and helps developing nations prosper.
However, that dividend would disappear if the UK remains inside the customs union, as proposed by Labour Party leader Jeremy Corbyn and some Tories. On Sunday night, Foreign Minister Boris Johnson called the idea of staying in a customs union “crazy,” because it “would make it very, very difficult to do free trade deals.”
“If the EU decides to impose punitive tariffs on something the UK wants to bring in cheaply, there’s nothing you can do,” he added.
Those who care about human flourishing should support measures that lower food costs, which fall heaviest on the poor.
(Photo credit: Elliott Brown. This photo has been cropped. CC BY 2.0.)