Investigation Into Albert Heijn's Dominant Market Position Within

Investigation into Albert Heijn’s dominant market position within Amsterdam and whether it enables them to set prices significantly higher than its competitors’ Sean Blundell - 10398252 Abstract With a market share estimated to be around 30%, Albert Heijn is the indisputable market leader of the Dutch supermarket industry. It is a ubiquitous force throughout the Netherlands, especially within the city of Amsterdam, accounting for approximately 65% of all stores within the area. This spatial control, coupled with the evident lack of competition, may enable Albert Heijn to set prices significantly higher than its competitors, especially in those locations where competition is lacking. This study aims to provide evidence into the matter, via the analysis of prices. Over a four-month period, the prices of 35 items were collected from a sample of Albert Heijn stores and two of its competitors, Vomar and Dirk van den Broek. A largely descriptive statistical approach was adopted to analyse the data, with an adjusted Lerner index being utilised as the main method in distinguishing Albert Heijn’s market power. The overall Lerner index was found to be 0.1005, signifying that Albert Heijn does have considerably more market power than its competitors. Further analysis was focused on differentiating between AH’s pricing in locations where there is competition compared to those where competition is absent. Prices were found to be higher in locations without competition, however, this difference was found to not be statistically significant. 1. Introduction Anyone who has spent an extended period of time in Amsterdam will be all too familiar with the ever-present Albert Heijn (AH). The supermarket retailer founded in 1887, has grown into a distinguished market leader within the Netherlands, capturing approximately 30% of the market (Loon, 2014). A recent investigation into the Netherland’s supermarket industry by the news corporation Z24, revealed that Albert Heijn is the dominant chain in the 25 largest cities. Furthermore, it highlighted the fact that for over half of Amsterdam’s inhabitants (52.8%), AH is their closest supermarket. This was not only the largest proportion of people closest to AH across all the cities, but also the highest amount for any of the supermarkets examined (Loon, 2014). Albert Heijn is an inescapable presence in the daily life of Amsterdam residents, regardless of their decision to shop there or not. An integral part of the motivation behind this research is the degree of choice available, as it can be posited that the Amsterdam grocery shopper has a very restricted choice set. A quick glance at figure 1 reveals both the abundance of AH stores, and how extensively distributed they are throughout the city of Amsterdam. This makes them the convenient choice for shoppers, as regardless of their location, they can be assured an Albert Heijn is in close proximity. Therefore, due to their availability and pervasiveness, shoppers are drawn in to AH’s supermarket before prices or product offering come into the decision-making process. This being said, Albert Heijn does offer a wide array of different products, with most goods being differentiated further with respect to quality. This, alongside organised and well-kept stores, helps AH provide, on average, a satisfying shopping experience. But what if you are not a satisfied customer? The most obvious solution is to shop at a different supermarket chain; but this highlights another issue surrounding the choices available to consumers. Two of AH’s biggest competitors in the Netherlands are Vomar and Dirk van den Broek, whose store locations in Amsterdam are provided in figure 2. Now, when compared with figure 1, this reveals quite an alarming fact regarding these competitors: that they are far less numerous, and far less evenly distributed across the city. None of the competitors are located within the canal rings, and are both scarcely present in the southern regions of Amsterdam. This leaves Albert Heijn essentially, unchallenged in these areas, while its substantial establishment of stores is likely to deter entry from competitors. Therefore, if consumers wish to switch away from AH, they are most likely to find it inconvenient to do so. This evidence strongly suggests that AH has a spatial monopoly within Amsterdam. Due to the insubstantial presence of competitors, the market influence they possess is likely to be limited; thus AH’s spatial dominance may translate into a market share dominance. This market Figure 1: Location of AH stores Figure 2: Location of Dirk van den Broek & Vomar Stores share dominance may then enable AH to exploit their position by setting prices higher than they would be under a competitive market setting and also alter prices to the disadvantage of the consumer. Therefore, this thesis aims to provide further information into the potential harmful impact of AH’s powerful position within Amsterdam, via the analysis of prices set by AH, Dirk van den Broek, & Vomar. First-hand data collected over a four-month period will undergo a variety of statistical tests. One of the fundamental tools that will be utilised is an adjusted version of the Lerner index, which will be used as a method of calculating the market power of Albert Heijn. This, along with the additional results generated, should provide an enhanced insight into price competition within the Amsterdam supermarket industry, and more importantly whether Albert Heijn sets prices significantly higher than its competitors. An ancillary enquiry will be made into whether AH’s store prices differ when in the presence of competitors. It is hypothesised that those stores without competition in close proximity will set higher prices than those with local opposition. The following literature review will provide intrinsic background information that will strengthen understanding and enable an effective evaluation. Section three will provide a detailed description of the methodology. The results will then be presented and evaluated in section 4. The final section concludes by providing an overview of the results and the key arguments established. 2. Literature Review A cause for concern that has grown over the last decade has been the increase in market concentration within the supermarket industry (Burt, 2010). This increased concentration creates the opportunity for supermarkets to develop and strengthen their own brand. Jan-Benedict et al. (1997) analysed Albert Heijn’s own store brand, ‘AH Huismerk’, in relation to the leading national brands. They discovered that as the concentration of the market specific to the product increases, the gap between the brand loyalty of national brands and AH Huismerk increased, corresponding in a higher divergence in prices as well. The reasoning given, is that those products existing in a more concentrated market face less competition, possess more market power and are therefore more able to set higher prices. This research is corroborated by Connor & Peterson (1992), who use an adjusted Lerner index within an empirical model, to reveal that as market concentration increases, the national brand to private label price margin widens. Since those studies, however, Albert Heijn’s number of outlets has grown and with it AH Huismerk, which now boasts almost 7000 products (Ah.nl, 2015). Due to AH Huismerk extensive growth and AH’s dominant market position within the Netherlands, it could be argued that AH Huismerk could be perceived as a national brand rather than a private label. An indication of this can be seen in certain product categories (e.g. Coffee), in which AH products score highly on brand loyalty. The market share of AH Huismerk products gives a clearer quantitative measure supporting this statement. For example, AH Coffee, which has a high brand loyalty, accounts for approximately 15.1% of the total sales in the retail coffee market (Dekimpe & Marnik, 1997). Therefore, if Albert Heijn has been able to transform its private label brand into a recognised national brand, at least for those products competing in a concentrated market, its prices for AH Huismerk goods may be substantially higher than competitors’ private label prices. This feasible position arguably enabled via AH’s overall market supremacy, may be compounded by the high concentration of the overall supermarket industry. This position may also be an extremely profitable one when taking into consideration that supermarkets tend to place higher retail margins on private label products than on comparable national brands (Albion, 1983; Connor & Peterson, 1992). To examine this, this paper will analyse the price margin between selected Huismerk products and competitors’ corresponding private label products. Despite the long history of spatial competition, with its origin dating back to the pioneering work of Hotelling (1929), little attention has been given to studying competition among firms who are able to set up multiple stores. This is presumably due to the analytical complexities that would arise if it were taken into consideration. However, in reality retailers are able to open multiple branches and a large number do, with those owning four or more outlets accounting for over half the total retail business in the United States (Pal & Sarkar, 2002). The majority of research on the matter has been concentrated on price competition, which yields the result that firms locate all stores at the same market point (Martinez-Giralt & Neven, 1988). This does not reflect the real world situation accurately, which prompted Pal & Sarkar (2002) to carry out their analysis with firms competing à la Cournot. They found that stores of competing firms might agglomerate at finitely many locations, which is consistent with the clustering of stores seen in reality. Dasci & Laporte (2004) highlight that operating multiple stores gives firms an instrument to apply a form of price discrimination by setting different prices at different stores. They observe, that a proportion of retailers have systematic price differences among their stores that cannot all be accredited to special offers or sales.

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