Are the CMA concerned that Poundland will buy 99p Stores then become the £1.01 store?

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April 22, 2015 by Paul Goldsmith

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I will start this with a question: against whom do Poundland compete? Is it other pound shops? Maybe. Is it 99p Stores, whose 1p difference was literally their USP? Those might seem the obvious answers, but how about you think about where a customer DOESNT ship because they shop at Poundland. I would imagine, and be prepared to bet, that it is a supermarket. This is why the Competition and Markets Authority’s (CMA) refusal to approve Poundland’s takeover of 99p Stores so bizarre.

Poundland announced their agreement with 99p Stores in February, saying that they would pay £47.5m and create £7.5m of shares in Poundland to pay for the 251 shops. The CMA decided to look into the merger, and most commentators at the time thought it would be a formality. It now turns out that this is not so. Poundland have been asked to sell 80 of the 99p Stores shops, in locations where they both exist close together, or to walk away from the deal, or Poundland can appeal. It appears that Poundland will choose the latter. So they should.

Poundland has been successful because of the simplicity of their offer. For all of what is on offer in their stores, you pay a pound. Because they buy in such bulk, they are able to get some very good deals for this. The stores are cheap to run, because you don’t need to put prices on stock, which means you need fewer staff, and checkout is quicker as everything costs the same. As people go around the stores, they can work out very easily how much they are spending, as they can just count the items in their hand or in their basket. This has meant that people have been shopping there instead of shopping at supermarkets.

Supermarkets, remember, operate at a massive scale, meaning that they buy in far bigger bulk than Poundland can, yet the simplicity of Poundland’s business model has enabled them to offer some very good deals. This doesn’t mean they are perfect, as sometimes it has been found that in fact Supermarkets offer a better deal, particularly on large items. For instance, it was found that a box of Cornflakes at Poundland held 250g, but you could get 750g at Tesco for £1.98, which is much cheaper. It was even found that Tunnocks Tea Cakes were cheaper at Waitrose than they are at Poundland. But, when you charge a pound for ever hint, you cannot sell in bulk, so it is very difficult to use that comparison. It is also worth remembering that Waitrose can buy in far bigger bulk than Poundland, so some products can therefore be cheaper. Poundland believes that research shows that they are 40% cheaper on average against 1000 branded products.

A way to keep this the case and for Poundland to be able to offer even cheaper deals is to allow them to grow. With the difficulty of finding new properties to do that with (partly because of the amount of land and buildings owned and held empty by Supermarkets) it makes perfect sense for Poundland to buy a company that not only has those good locations, but also have staff who are used to working in and selling in a similar shop. To suggest, as the CMA have, that the purchase of 99 Stores raises competition issues suggests that Poundland’s competition was just shops such as 99p Stores, Poundstretcher and Poundland. This is just not the case.

To consider the ridiculousness of this case, it is possible to argue that by its nature the deal is against consumer interests as, of course, prices at the 99p store will rise by 1p. This assumes that they were selling exactly the same products, so for example the same number of Kit Kats, but for 1p less, which wasn’t necessarily the case. Can i assume now that the CMA are worried that in the future Poundland will raise their prices to £1.01?

It is simple, if people find that Poundland aren’t offering a good deal, the country is covered in discount stores and supermarkets to where they can go. Saying that 99p stores were effectively the only option will take a lot of explaining.

 

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4 thoughts on “Are the CMA concerned that Poundland will buy 99p Stores then become the £1.01 store?

  1. Peter Wallich says:

    Whilst this is a much lesser case, as the average consumer will not care deeply about a 1p/2p loss, this article opens a whole debate regarding capitalist philosophy.

    On the one hand, a free market should allow collaborations and mergers between companies. If this is not the case, the market is arguably no longer truly free as the government are gaining control over it.

    On the other hand, the formation of monopolies (particularly in more serious cases than this, such as the recently-proposed U.S. cable company merger), could arguably also destroy the free market, due to the inability of new companies to compete with giant monopolies.

    So this begs the question: is it freer for the government or a group of large companies to have control over a potential monopoly, and is one of these options a ‘true’ free market and the other not?

    The general consensus seems to be that the government should have some control over very large potential monopolies, showing a moderate approach, however the question is interesting and almost paradoxical nonetheless.

    Like

  2. Petrus says:

    Whilst this is a much lesser case, as the average consumer will not care deeply about a 1p/2p loss, this article opens a whole debate regarding capitalist philosophy.

    On the one hand, a free market should allow collaborations and mergers between companies. If this is not the case, the market is arguably no longer truly free as the government are gaining control over it.

    On the other hand, the formation of monopolies (particularly in more serious cases than this, such as the recently-proposed U.S. cable company merger), could arguably also destroy the free market, due to the inability of new companies to compete with giant monopolies.

    So this begs the question: is it freer for the government or a group of large companies to have control over a potential monopoly, and is one of these options a ‘true’ free market and the other not?

    The general consensus seems to be that the government should have some control over very large potential monopolies, showing a moderate approach, however the question is interesting and almost paradoxical nonetheless.

    Like

    • Adam Smith himself admitted that the free market could lead to monopoly power and government intervention would be required then.
      But my point is that Poundland buying 99 Stores does not a monopoly make. Poundland competes with all the supermarkets, grocers and other Pound shops. I think the CMA have used the wrong definition of the market here.

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      • Petrus says:

        I completely agree with you on this point, and I think your article has correctly pointed out that not only is this not a monopoly but furthermore, even if it were, it probably would not be a great idea for the government to intervene over 1-2p.

        Like

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