Milk and Supermarkets free essay sample

Introduction In recent years, the relationship between supermarkets with UK farmers that called oligopsony is a heated topic in the society. Some people hold the view that the advantages of oligopsony overweigh those disadvantages. Nevertheless, others believed that it is one way that UK farmers controlled by the supermarkets. It is natural that people come from different backgrounds will have various attitudes to the same issue. In the report, the advantages and disadvantages of oligopsony for both supermarkets and UK farmers are discussed. In addition, nowadays the supermarkets in the UK in order to increase the profit, they use different types of marketing methods. Such as intense price competition, loyalty schemes and provides non-food products and service. The smaller retailers were influence by those marketing methods also reported as follows. 1. 0 Oligopsony Oligopsony is â€Å"similar to an oligopoly (few sellers), this is a market in which there are only a few large buyers for a product or service. We will write a custom essay sample on Milk and Supermarkets or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page This allows the buyers to exert a great deal of control over the sellers and can effectively drive down prices. (www. investopedia. com A good example of an oligopsony would be the UK supermarket industry, in which a small number of large buyers (such as Asda, Tesco, and Sainsbury’s) control the UK farm market. Such control allows these supermarkets chains to dictate the price they pay to farmers. 1. 1 The effect on supermarkets According to the BBC news (http://news. bbc. co. uk), Tesco account the UK supermarkets share is 31. 6%, Asda took over 17% in the UK supermarkets share, which is ranked second. The third biggest one is Sainsbury’s, which accounted 15. %. (Appendix 1) The total percent of big three supermarkets took over more than 50% in all the UK supermarket industry. These supermarkets owned market power in two ways which are selling to consumers (oligopoly power) and buying from producers (oligopsony power). in another words, It means that the few firms hav e considerable market power in paying low price for inputs and makes it more difficult for the farmers to make a profit. For example, a big supermarket could contract with a dairy producer that the big one will buy all of product. The farmer agreed with the contract and started to supply the dairy to the big supermarket. Nevertheless, maybe the supermarket pay less and less later, and the farmer just can accepted lower price because the farmer produce too much dairy to supply to the big supermarket and it is not too easy to find a new buyers. Farmers who produced milk, vegetables, or other agricultural products have limited choice range, because in the UK, most of agricultural goods are bought by the big supermarkets. Oligposony gives the big supermarkets bargaining power in use lower prices with farmers. In this relationship, the big supermarkets have the absolute advantages over the farmers. They can made it possible that lower the price of agricultural goods, so that these supermarkets can give a reasonable price for the customers which will help the big supermarkets improve the competition with others competitors. In addition, they also can ask the special requirements for the product quality, the farmers are controlled and forced to accept a lower price of their product. 1. 2 The effect on the farmers Oligopsony this relationship between supermarkets with UK farmers is ensures the agricultural goods can sell to the big supermarkets. Famers have the fixed buyers so they are need not worry about to find new buyers. However, due to most agricultural goods are bought by big supermarkets, the farmers have less choice. Famers used to have some bargaining power on the basis of seasonality. Because there are other competitors, they do not know what price has been offered by other producers and this forced them to offer their produce at a low price to ensure a sale. Especially the perishable foods. The supermarkets â€Å"dictate not only how much they will pay, but also how the produce will be packaged, stored and delivered. †(www. corporatewatch. com) â€Å"The small number of companies dominating both dairy processing (currently six processors control 93% of the industry) and retailing (six supermarkets control 65% of liquid milk and 70-85% of dairy produce sales) means that there is a significant imbalance of market power in the UK dairy sector.. †(â€Å"Supermarkets under fire†, February, 2003). It is easy to know that supermarkets have power in dairy industry in the UK. Though supermarkets have brought buying power to the dairy farmers, however, the big supermarkets in order to increased their power in the dairy sector, they developed own brand milk products. Since 1995, the price of fresh milk has declined; supermarkets have maintained their selling price and increased their profits at expense of both farmers and consumers over the same period. (Appendix 2) â€Å"The National Farmers’ Union has been particularly concerned about the plight of the UK’s dairy farmers. They claim that of the ? 1. 70 which a supermarket customer may pay for two liters of milk, less than 50p will go to the farmers. (http://www. anformeresources. com) Charles Peers who are an Oxford shire organic farmer, he has said â€Å"There are two hundred thousand farmers, dealing with, basically speaking, three supermarkets, two grain merchants, four fertiliser companies. Not a chance†¦.. They’ve got power, real power. † From these, we can seen that oligopsony made it is possible that the farmers are forced to accepted a low price to sell their products, and the big supermarkets such as Tesco, Asda or Sainsbury’s are have the power in the UK market. 2. 0 How the supermarket to boost profits In the past 40 years, the small independent shops shifted to huge supermarket chains. â€Å"In 1960 small independent retailers had a 60% share of the food retail market. By 2000, their share was reduced to 6% while the multiples share increased to 88%. †(Institute of Grocery Distribution, Grocery Retailing 2002) Andrew Simms, who works for the New Economics Foundation, says that: â€Å"we are witnessing the death of small and independent retailers and new retail feudalism is emerging as a handful of brands take over our shopping. † (http://www. corporatewatch. org. k) Though the supermarkets have the market power in the UK, as a business organization, how to increase the profit is the first thing should be considered. In recent years, the huge supermarket chains use various types of marketing methods to increase the profit and the loyalty. Such price competition, loyalty schemes and provide non-food products and service. Supermarkets use various ways to convey price in formation to consumers, The price promotions including price reduction, a percentage discount, a voucher. In 2009, there was a new price war among the big supermarkets in the UK. Tesco planned to launch a new advertising campaign, which will â€Å"compare the cost of customers baskets of shopping against the prices of its competitors. †(http://www. belfasttelegraph. co. uk) Asda has already hold a new wave of discount on thousands of products that including fresh food and household products. And â€Å"100 frozen food products and 200 everyday health and beauty lines, such as shampoo and deodorant, would be sold for ? 1. †(http://www. belfasttelegraph. co. uk) Andy Bond, the retailer’s president and chief executive officer, said: â€Å"2009 is going to be a very difficult year. Sainsbury’s, the third biggest supermarket in the UK, also joined the price war, â€Å"Vowing to grow its Basics range to more than 600 products by the end of January, The supermarket said more than half of these products would be priced at less than ? 1. †(http://www. belfasttelegraph. co. uk) Except the price war, some of the supermarkets in the UK also offer loyalty schemes to attracting potential consumers. Tesco is a good example, every time when they shopping in Tesco, they will get points according to how much they spend. Sometimes, Tesco also listed products that buy one can get 500 points more to increase the demand of this product. Every month, Tesco will sent voucher or coupons to the loyalty card member’s home. The more you spend, the more you get. Using loyalty schemes not only will attracting potential consumers especially female, but also it is a low cost way to know the customer’s lifestyle. When the customer registers the loyalty card, they should fulfill the personal details. Tesco will well know what is popular among the customer depend on these details. Since 1995, the major supermarkets in the UK start provide the non-food product and services such as pharmacies, clothes stores in Asda, petrol retailers, and banking and financial in Tesco. The effect on the supermarkets will be dramatic, especially due to the growing consumer propensity for the â€Å"one-stop† shop. Non-food products and services will help the big supermarkets increased the market share in the UK, and improve the competition itself. What is more, it is also function as reduce the risk of products, as the proverb said: â€Å"do not put all your eggs in one basket. It is means that for a supermarkets, non-food products and services will share the risk with food products. 2. 0 The effect on the smaller retailers