Retail-Related Import and Distribution Study
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Retail-related Import and Distribution Study May 2009 CONFIDENTIAL DRAFT: Import and Distribution Study 1 TABLE OF CONTENTS List of Figures and Tables................................................................... iii Executive Summary............................................................................. v 1. Introduction ...............................................................................1 The Ministerial Request .................................................................. 1 Context ........................................................................................ 1 Methodology ................................................................................. 3 Aim of the Report .......................................................................... 5 Structure of the Report .................................................................. 6 2. Currency Movements and Price Differentials...............................7 Introduction.................................................................................. 7 Price Differentials .......................................................................... 7 The Cost of Doing Business........................................................... 13 Exchange Rate Pass Through ........................................................ 15 Concluding Comment ................................................................... 20 3. Market Power in Chains of Distribution.....................................23 Introduction................................................................................ 23 Seller Power ............................................................................... 24 Buyer Power ............................................................................... 25 The Interaction of Seller and Buyer Power in Chains of Supply .......... 27 Concluding Comment ................................................................... 29 4. Import and Distribution: Groceries ...........................................31 Introduction................................................................................ 31 Products..................................................................................... 31 Retail Level and Wholesale Level ................................................... 31 Supply Chain .............................................................................. 38 Concluding Comment ................................................................... 51 5. Import and Distribution: Clothing .............................................55 Introduction................................................................................ 55 Products..................................................................................... 55 Retail Level................................................................................. 55 Supply Chain .............................................................................. 58 Concluding Comment ................................................................... 64 6. Import and Distribution: Pharmaceutical Products ...................67 Introduction................................................................................ 67 Products..................................................................................... 67 Retail-related Import and Distribution Study i Retail Level................................................................................. 68 Supply Chain .............................................................................. 70 Concluding Comment ................................................................... 75 7. Conclusion ................................................................................77 Background and Context .............................................................. 77 What Factors Cause Prices to be Different Across Borders? ............... 77 Are Prices in ROI and NI Converging?............................................. 78 Final Comment............................................................................ 81 A. The Minister’s Request..............................................................A1 B. Narrowing the Scope of the Report...........................................A3 C. Summary of Submissions Received.........................................A10 D. Stakeholder Meetings .............................................................A13 E. The Law and Distribution Arrangements.................................A15 F. Nordic Study of High Food Prices in Six Nordic Countries – Executive Summary ................................................................A30 Retail-related Import and Distribution Study ii LIST OF FIGURES AND TABLES List of Figures Figure 1: Price Differential between the ROI and NI for Goods Surveyed .. 8 Figure 2: Consumer Prices (HICP) in the ROI and the UK, 2000-2008 .... 10 Figure 3: Food and Clothing Prices in the ROI and the UK, August 2008 – January 2009 .................................................................... 10 Figure 4: Price Level Indices in the ROI and the UK, 2007 (EU15 = 100) 11 Figure 5: Value of the EURO versus the STG and the US Dollar ............. 16 Figure 6: Imports from STG, Dollar, EURO regions and the Rest of the World, 2007. ..................................................................... 17 Figure 7: Grocery Retail Supply Chain ................................................ 33 Figure 8: Depiction of Traditional Importation Routes in Grocery Retailing ....................................................................................... 40 Figure 9: Clothing Supply Chain ........................................................ 59 Figure 10: Retail Pharmacy Sales in the ROI......................................... 67 Figure 11: Pharmaceutical Products Supply Chain ................................. 71 List of Tables Table 1: Biggest Price Differentials between ROI and NI (excluding VAT). 8 Table 2: Operating Cost Profiles by Retail Format (excluding the costs of goods).............................................................................. 14 Table 3: Summary of Variance: Dublin versus Comparator Cities ......... 15 Table 4: Exchange Rate Pass-through Elasticities ............................... 18 Table 5: Top Ten Suppliers of Grocery Goods..................................... 39 List of Tables from Appendices Table B.1: CPI Categories and Expenditure Weights (Goods Only) ........... A4 Table B.2: Submissions by Retail Businesses ........................................ A6 Table B.3: The Shortlisted Retail Categories Ranked by Expenditure Weight ....................................................................................... A7 Table B.4: Annual Percentage Change in Volume of Sales of Retail Businesses (December 2008) .............................................. A8 Table C.1: Breakdown of Submissions................................................ A10 Table D.1: Meetings with Representative Bodies and State Agencies ...... A13 Table D.2: Meetings with Retailers..................................................... A13 Table D.3: Meetings with Suppliers .................................................... A14 Retail-related Import and Distribution Study iii Retail-related Import and Distribution Study iv EXECUTIVE SUMMARY The Tánaiste’s Request On 25 th February 2009 the Tánaiste and Minister for Enterprise, Trade and Employment, Ms. Mary Coughlan, TD, asked the Competition Authority to carry out a study of the retail-related import and distribution sector. The Tánaiste’s request was made in the context of a steady increase over the previous 12 months in the difference between prices in the Republic of Ireland and Northern Ireland. As sterling depreciated relative to the euro, price surveys and anecdotal evidence suggested that a substantial price differential had emerged on a wide range of consumer products, from kettles to ketchup. Large numbers of price-conscious consumers in the Republic of Ireland were travelling to Northern Ireland to take advantage of the lower prices available there. Policy-makers were naturally concerned as to why retailers in the Republic of Ireland were not lowering prices, especially prices of goods coming from the UK. Retailers claimed that higher costs of doing business in the Republic of Ireland contributed to the price differential. In response to these claims, the Tánaiste asked Forfás to undertake an analysis of the costs of running retail operations. Forfás’ research, published in December 2008, found that, while the cost of doing business in the Republic of Ireland was 25% higher than in Northern Ireland, this would only account for a 5-6% price difference, approximately. Some retailers then claimed that a substantial portion of the price differential could be explained by the fact that their suppliers in the UK would not pass on exchange rate benefits. Subsequent to these new explanations by retailers for the persistent price differential, the Tánaiste asked the Competition Authority to undertake this study. Scope of the Report The Competition Authority pursued its inquiry into the retail-related import and distribution sector along two complementary lines. The first line of inquiry focused on the broader economic environment, exchange rate movements, and when market power can be harmful in a supply chain. The second line of inquiry focused on the supply chains to the grocery, clothing and pharmaceutical sectors. The Competition Authority relied on a wide variety of information