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Memorandum from Quarterbridge Project Management Ltd (MARKETS 20)
1. Introduction:
Thank you for giving us this opportunity to make a submission to the Committee. Please regard this document as a preliminary submission illustrating the range of challenges facing the retail markets industry. It does not purport to illustrate the full range of policy solutions we believe to be appropriate - those are best dealt with later. This overview is based upon our unrivalled experience of the markets industry throughout the UK and abroad and although we have restricted our comments to the situation in the UK we suggest the committee consider why other countries can support a thriving markets industry - for instance Barcelona, Spain - and the effect of the recently rescinded of the Groceries Order in Ireland. Background information on Quarterbridge projects is attached and we would welcome the opportunity to expand on issues raised in this submission and give verbal evidence to the committee.
At the outset we must express our concern that this inquiry does not restrict it's scope in the same way as the recent Competition Commission enquiry into the groceries sector. The range of issues this Committee should consider are wide and cut across many departmental policy agendas - taxation, food security, the environment, economic development and consumer standards - so it may be tempting to restrict their scope. That would not be appropriate and we trust this inquiry will adopt a more informed approach than the CC and not avoid addressing the most fundamental policy issues. Unlike the Competition Commission we trust this inquiry will acknowledge all of the many representations which will doubtless be made to it.
A review of the policy issues affecting the retail markets industry is long overdue. This inquiry is an opportunity to illustrate the profoundly negative impact that the decline of the industry is having upon consumers and local communities.
2. The failure of UK retail policy:
Since 1945 successive governments have adopted a laisser faire approach to retail policy in favour of unrestricted economic growth. It is only now that the impact of so-called retail consolidation is becoming apparent and it's insidious effect upon consumers, the UK economy and the environment. The catastrophic decline of independent retailing in the UK is typified by a struggling stallholder on a market and illustrates governmental failure to address a range of interconnected policy issues. Unlike many European countries the UK has failed to recognise the importance of retail markets to both the health and social wellbeing of the nation. There has been no overarching policy review of the issues raised by retail consolidation. The work now being undertaken by the Cabinet Office Strategy Unit into food security and energy security is long overdue as we believe the industry has passed the tipping point beyond which it will be unable to recover except with co-ordinated support across many policy areas.
3. The outlook for the UK Markets industry.
The decline of the retail markets industry is self-evident. Trader numbers and viability have fallen as food retailing has become concentrated in the hands of the "big four" supermarket chains - Tesco, Asda/Walmart, Morrisons/Safeway and Sainsburys. Over the last 20 years they have secured over 80% of UK sales of household goods and groceries and a sector which has been a traditional mainstay of the markets industry has been denied to it. This so-called retail consolidation has effectively wiped-out independent retailing, not just markets in many town centres. Shops and market stalls that sold preserves, dry goods, tinned goods and the like are no longer viable because of supermarkets' ability to undercut them by buying-in long shelf-life stock in bulk, direct from the producer. Retail consolidation has forced many traders out of the industry and left the consumer reliant upon a limited range of retailers and their procurement and pricing policies - not a healthy situation. The Office of Fair Trading has only recently begun to take positive action to address these issues but still lacks support. The recent Competition Commission enquiry into the Groceries sector was, quite frankly a waste of time and effort. The fines imposed on supermarket chains by the OFT for colluding to fix the price of dairy products have been laughed-off by the guilty parties and they continue to pursue thinly-disguised predatory pricing policies. Now that the groceries sector is effectively consolidated the supermarket chains are adopting similar tactics to maintain profits by expanding into non-food lines, encouraged by the short-sighted relaxation of planning legislation enabling them to install mezzanine floors in existing superstores. Governmental policy guidance has either been ineffectual e.g. the almost-offhand comment in PPS6 recognising the significance of markets in town centres, or frustrated by the lobbying power of supermarkets and the British Retail Consortium e.g. the failure to pursue a commendable initiative of levying a charge on "free" out-of-town store parking.
In short, the markets industry is being driven into extinction by the failure of successive governments to restrain the supermarkets industry. Whilst supermarkets have been (supposedly) driving down food prices, few politicians have risked standing up to say "at what cost?" Policies that run the risk of increasing food prices do not win votes.
4. The impact of market failures on community provision
Local Authorities have welcomed the additional rates income from new superstore developments but those which own a market i.e. Market Authorities have witnessed a matching decline in the income from their market operations. Fewer traders generate less rent, and fewer stalls represents less choice and variety for the community. These indirect effects are the most insidious and damaging effect of retail consolidation. The low prices offered on markets have always played a vital role in providing for many of the most vulnerable and disadvantaged members of society, especially those with limited mobility and income. The closure of a market directly impacts on their welfare and undermines policies that alleviate poverty. The markets industry is now largely reliant upon elderly shoppers with low disposable incomes as reflected in failing market businesses, stagnant rents and falling occupancy rates. Traders are being forced to leave the industry to seek other ways to earn a living wage.
The argument can be made that supermarket competition forces down prices to the benefit of the consumer but on closer scrutiny this can be seen to be untrue. In reality markets consistently offer a 20 -30% discount on supermarket prices.
A survey amongst members of NABMA (The National Association of British Markets Authorities) in 2005 estimated that 96,000 people are employed in the UK retail markets industry. Retail consolidation is not only putting their livelihoods at risk but also those of the producers, processors and distributors who rely upon them as customers. This effect is apparent in the wholesale groceries industry where traders are finding it increasingly difficult to source product. By our estimation some 1.5 livelihoods are directly dependent upon each market stall in the UK and they in turn support a further 1.5 livelihoods in the producer / supplier chain. The contrast with the vertical integration and shortened supply chain of a supermarket is stark.
The Association of Convenience Stores, The Rural Shops Alliance, New Economics Foundation, Joseph Rowntree Trust and Association of Sub-Postmasters (amongst others) have all undertaken excellent research into such social and economic effects. We suggest the Committee invites them to make submissions. 5. The absence of statistical evidence
Quarterbridge has undertaken detailed financial analyses and prepared Business Plans for many Market Authorities over the years which have all confirmed that Council-run markets are in a decline slowed only by a remarkably high level of shopper loyalty. Regrettably there are no meaningful national statistics to measure this trend. Admittedly there are some bright spots e.g. periodic Farmers Markets and Carboot sales but we see no possibility of so-called regular Open Markets and Market Halls reversing their decline unless they secure policy support from central government and adopt the same management strategies as their retail competitors.
In an increasingly affluent and mobile society markets are no longer the retail destination of necessity and most have been unable to convert themselves into the retail destination of choice. Those that are fortunate enough to be well-located e.g. Old Covent Garden and Borough Market are an exception to the rule but all others must struggle to reinvent themselves without access to the financial resources their competitors enjoy.
6. The need for improved Local Authority management
The under-performance of Council-run Markets is compounded by their failure to adopt commercial management skills. Councils tend to concentrate on their primary function of delivering efficient regulatory services rather than competing in the retail industry. Their management skills - or rather, the lack of them - reflects as much. Market Authorities are generally good at controlling operating costs but equally poor at exploiting business opportunities. Most still operate on the false assumption that a waiting list of traders exists for their stalls and they consistently fail to either to attract new "customers" i.e. traders or promote their offer to shoppers.
Historically, Council-run markets have generally been treated as a "cash cow" to deliver revenue support for other budgets without the application of any revenue ring-fencing for business development. This is an almost universal failure of local government and in many cases extends to starving markets of even the most essential repair and maintenance, let alone modernisation.
Councils' reluctance to reinvest has been compounded by a singular lack of business planning amongst Market Authorities and their failure to adopt profits-focussed management - an obvious failure in a fast-moving industry like retailing where there is little room for sentiment. Historic Market Hall buildings with their statutory listing and high maintenance costs are a particular problem for many Councils and effectively constitute a liability rather than an asset. Many suffer from a backlog of repairs and are unsuitable for alternative use so there is no exit strategy to dispose of the liabilities. It is not uncommon for a financially-viable Open Market operation to be dragged down by the cost of maintaining an inherently-unviable Market Hall. Small wonder then that most markets have failed to keep pace with their retail competitors.
Some market operations have passed the tipping-point beyond which they can recover. The decline in trading profits has reduced support for Councils' general funds to the point where in the current economic climate we expect 2009/10 to witness an unprecedented level of closures.
7. The need to support trader development
Decreasing viability is not a single-cause problem. Many market traders have still not adopted the most basic of modern retailing techniques, e.g. EFT (Electronic Funds Transfer - accepting credit and debit cards) - and are equally poor at promoting or reinvesting in their business. They mistakenly consider the market owners promotional efforts as sufficient to promote their individual businesses and unlike their mainstream competitors they generally lack formal training in business planning and product presentation.
Market traders are generally self-reliant, enterprising and opportunistic but too often are also under-capitalised sole proprietorships (sometimes not even VAT-registered) competing in arguably the most dynamic and competitive sector of the UK economy. Their inherent reluctant to admit they "have a problem" and to seek support means they are slow to take-up commendable initiatives such as the Local Enterprise Growth Initiative. For our part we believe LEGI to be an excellent method of attracting new traders into the industry and are keen to actively promote it as a fundamental component of market improvement plans.
8. The impact of market failures on the environment
The environmental impact of modern retailing patterns has been highlighted by other organisations such as Greenpeace and the Sustain Alliance. They are better qualified to comment than us so we suggest they are invited to make submissions.
But it is clear to even the least-informed that retail consolidation has been accompanied by an unprecedented rise in "food miles" due to centralised distribution systems and the air freighting of non-seasonal foods. This, combined with car-bone shopping trips to "free" carparking at edge of town retail parks is undermining attempts to reduce CO2 emissions. By contrast the town centre location of traditional markets and their predominantly local product sourcing is patently more environmentally-friendly. But it has to be said that the markets industry has been lamentably poor at promoting such "good news" stories such as the "How Green is your Market?" promotion recently launched by the National Market Traders Federation.
9. Suggestions for further consideration by the Committee:
• Retail diversity: Retail consolidation has created the "clone town" effect identified by the New Economics Foundation and others. This is at odds with planning policy guidance via PPS6 etc. and undermines the efforts of most town centre retail plans.
• Over-reliance on a narrow supply chain: The dangers of concentrating too much supply into the hands of too few retailers became apparent with the recent petrol tanker drivers dispute, as were the public health issues raised by the recent H5N1 bird 'flu scare and potential contamination of the food chain.
• Sustainable local economies: Markets retain the "shoppers pound" within the local economy and do not remit it to remote, institutional shareholders. They retain cash within the local economy and support the local producer / supplier base that creates sustainable local economies. This effect has been researched in detail by the NEF.
• Employment: Multiple retailers seek to drive down costs by adopting self-serve methods so it is self-evident that fewer persons are employed per square metre of supermarket floorspace than on a market. The common assertion that a new local superstore will "create an additional 250 jobs" is in fact a complete fallacy. It may do so in the short term but double that number of jobs are lost from the closure of local independent retailers in the medium term. The opening of a new superstore is followed by the failure of the local Market Hall within two years or so once the independents have exhausted their resources. They are not equipped to compete against loss-leader pricing and thinly-disguised predatory pricing techniques and the ripple-out effect of a market's decline amongst it's local suppliers and distributors is equally profound. It is no surprise that markets thrive best in areas where supermarkets do not (yet) dominate the local economy.
We hope you find these initial comments informative and helpful and would be pleased to expand upon them further. We look forward to hearing from you in due course.
January 2009 |