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Loss leading



Affiliated to the buyer clout of large retailers is the tradition of below cost selling or loss leading. There is proof to imply that some retailers sell wares at lower than cost in order to increase market share.


The custom of loss leading by large grocery retailers was examined in the Competition Commission’s 2000 supermarket report. Small retailer firms are worried about the custom of loss leading by large retailers over extended periods of time, because small retailers are not able to compete in this manner for an extended period of time. The firms said that due to the fact that small retailers do not compete on the basis of price they lose market share to large retailers whenever below cost selling or loss leading customs are employed.
The custom of ‘predatory pricing’, in which a company sets its price below cost for a period long enough to force its competitors out of the market, is forbidden by competition law. On the other hand, as pointed out earlier, the buyer clout of large retailers is apt to be such that even without selling at lower then cost, the prices that are charged by large retailers are apt to be unfeasible for small retailers. As a consequence the prices charged by small retailers will appear uncompetitive when opposed to large retailers. For this reason, it is possible that due to the buyer clout possessed by large retailers, even without selling at prices lower than cost, the prices charged by large retailers will be so low that small retailers will find it very hard to match them.


Store format and location of large retailers
Out of town versus town centres

Competition between large retailers and small retailers is usually categorized as being between out-of-town stores and town centres. It has been claimed that shopping centres in out-of-town areas have attracted customers away from more conventional high streets. The preceding few decades have seen a rise in shopping in large, out-of-town stores and shopping centres, which it has been claimed has hasted the downfall of local shops.
The shifting dynamics of retailing, in the grocery sector as a notable example, is shown by an investigation of the different categorizations in the Yellow Pages over time. In the period between 1992 and 2002 there was a rise of 8 per cent in the quantity of retailer entries in the Yellow Pages. During the same period there was a decrease of 20 per cent in Bakers and Confectioners, 40 percent in Butchers, and 59 percent in Greengrocers and Fruit Sellers.


As well as this, retailers, and specially grocery retailers, have increased the range of goods and services they offer. Indeed McGoldrick (2003) discovered that one of the causes that grocery retailers have increased the range of goods they offer is because consumer spending on food has not risen in comparison to expenditure on other items. Items such as CDs, books, clothing, kitchenware, and electrical goods are more and more being sold by large grocery retailers as well as services for instances insurance and banking. As a consequence of these alterations it has been stated that local centres have become delicate and are becoming smaller.


Calculating the impact of these alterations on small retailers (or town centres in general) is hard because of the scarcity of data. Other researchers have tried to examine the effect of large grocery retailers by examining their effect on employment. One research proposes there has been a long-term fall in full-time retail employment in spite of substantial increase in the level of retail sales (whether measured in real or volume terms). Nevertheless, examining at the period between 1982 and 2003 in London, though full-time employment in the retail sector reduced to some extent, part-time employment rose quite drastically. For this reason though full-time employment has reduced to some extent over time, part-time employment has risen which has left total retail employment in London higher in 2003 than in 1982.


Large retailers moving into high street locations
In the past few years large retailers, and especially grocery retailers, have been more and more going back into small format stores in high street locations. For example Ruston (1999) discusses large grocery retailers investing resources back into town centres after years of growth in out-of-town centres.


The small retailer firms showed their worried about large retailers of late moving into high street areas. The firms are worried because they suppose that, particularly with regard to grocery retailing, that small retailers may be incapable to compete with the smaller format stores operated by the large grocery retailers. Without a doubt the New Economics Foundation (2003) comments that Tesco Express stores have supposedly caused reductions in business of 30 to 40 per cent for other local shops. While this number is improbable to be completely strong for every local store going through the opening of a Tesco Express it seems rational to deduce that the move by large retailers will have some effect on the small retailers already on the high street.


One of the small retailer firms informed the researchers that the brand strength of large retailers was a specific concern for small retailers. The firm said that because customers tend to be more accustomed with the goods sold by large retailers, this creates some loyalty to them as compared to small retailers. On top of this, large retailers have loyalty programs, such as loyalty cards, that are developed to enhance customer loyalty. What this implies is that when large retailers set up a small format store on the high street they by now have a specific amount of customer loyalty and as a consequence an edge over small retailers in the area.






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