The View

‘Marmageddon’ would never happen in Hong Kong, given the monopolistic domination of our two main food store operators

ParkNShop and Wellcome not only maintain high prices but appear to be acting in concert to keep them that way

PUBLISHED : Wednesday, 19 October, 2016, 11:15am
UPDATED : Wednesday, 19 October, 2016, 10:57pm

Alarmist talk of “Marmageddon” in Britain has eased following a settlement between the world’s second largest supermarket chain, Tesco, and Unilever, the world’s number two food supplier.

British consumers responded with alarm over fears that Tesco would be withdrawing Marmite from its shelves following a massive price rise by Marmite-maker Unilever citing the plunge in the value of the pound as the rationale for the increase.

Many non-British readers have been spared the horrors of this dark coloured yeast extract and are strongly advised to keep well away. Yet Marmite occupies a pivotal position on literally millions of British breakfast tables, Australians are afflicted by a similar blight but they call it Vegemite, goodness only knows why.

Although hours of harmless fun can be had dwelling on the vileness of this product, this temptation must be avoided because here in the business section we need to focus on the commercial aspects of this affair.

British consumers appear to see Marmite as a quintessentially British product, manufactured on home ground and therefore were angered over the idea that its price should somehow be impacted by the fortunes of the pound because, from their point of view, this brown goo was being made and sold under the same currency regime.

British consumers appear to see Marmite as a quintessentially British product, manufactured on home ground and therefore were angered over the idea that its price should somehow be impacted by the fortunes of the pound

If only the modern world of commerce were so simple. The reasons why simplicity is an illusion are usefully illustrated by this Marmageddon furor. For a start, like most successful British companies Unilever has expanded well beyond its home base and has ceased to depend on Britain for either the bulk of its profits or its inputs. It is, in other words, a thoroughly international company, with a number of substantial overseas shareholders.

For these and other reasons it denominates its accounts in euros. Moreover even when, as in the case of Marmite, it makes the product in Britain, it is still importing significant inputs from overseas, which exposes the company to currency fluctuations.

So, when the pound sinks to levels not seen for over a century not only do these imports cost more but also when the goods are sold in sterling and the profits are translated into Euros, as they are on the Unilever balance sheet, shareholders face a declining level of profitability.

This is why the wholesale price of Marmite rose and why Tesco, no stranger to international business, balked at the price rise.

Tesco prides itself on following the famous dictum of its founder Jack Cohen who said he was in the business of ‘pile ‘em and sell ‘em cheap’. In other words: going for volume and doing so by being the most competitive supermarket on the block. The spat with Unilever over Marmite was in fact part of a wider dispute over other Unilever price raises, demonstrating Tesco’s determination to keep its costs down.

No one will quibble with this approach; it is indeed followed by the supermarket chains here in Hong Kong. The difference being that our local market leaders, ParkNShop, from the Hutchison stable and Wellcome from the Dairy Farm stable, occupy a more dominant share of their local market than Tesco, even though it has a bigger global presence.

The other difference is that while Tesco is frequently cheaper than its local competitors, the duopoly of Hong Kong’s supermarket business tends not only to maintain high prices but appears to be acting in concert to keep them that way.

Between them, they are estimated to have a 75-80 per cent share of the food store market. By most global definitions this can be classified as monopolistic market domination.

Moreover, as anyone who follows the Consumer Council’s price tracking indices will know, the two giants sell goods in greatest demand either at precisely the same or similar prices.

This long standing practice, suggesting a level of collusion, was the subject of a Consumer Council report in 2013, that found troubling evidence of anti-competitive practices in this sector.

It was hoped that the enactment of the Competition Ordinance last year would lead to a more vigorous supermarket investigation, but with the added value of being a statutory investigation producing action.

If this has happened, I have missed it and so have shoppers who continue to patronise the dominant supermarket chains with no hope of cheap prices but out of a desire for convenience and due to lack of alternatives.

I merely point all this out because were a Marmageddon type event to occur in Hong Kong no one would notice because we have been inured to high prices and indeed arbitrary price hikes at supermarkets and expect little response from a supine government that talks big about competition but quakes in its boots at the thought of having to go head to head with a couple of the biggest local conglomerates.