NOffLA Speaks – Below-cost selling

NOffLA highlights the inherent dangers involved in the multiples' using alcohol as a loss-leader to entice shoppers into their stores

Below-cost selling continues to be a major source of difficulty for Irish independent retailers. However, this problem becomes a source of difficulty for the broader Irish society when it is alcohol that is sold at below cost.

As a recent Irish Times article reveals, long-held suspicions that Tesco Ireland generates far greater profits than its UK counterpart would appear to be correct. Such excessive profit-taking by Tesco and other multiples is achieved by below-cost selling of alcohol, used to drive customer footfall in its stores.

Minimum price per unit

Another Irish Times feature article, last year by journalist and writer, Brian O’Connell, proposed a direct response to the continued availability of low-cost alcohol by calling for a minimum price to be established for each unit of alcohol.

The concept is not unique. It formed part of alcohol legislation proposed by the Scottish Nationalist Party last year. Had it been
passed, it would have set a minimum price for alcohol per unit of alcohol, definitively bringing to an end the practice of below-cost selling by any retailer. Such a mechanism would overcome the difficulty previously encountered when retailers were not allowed to sell products below their invoice price, allowing multiples to be invoiced particularly low by their parent company.

Cheaper than coke

The National Off-Licence Association has long campaigned on this issue, not just from an unfair trading perspective, but because NOffLA members consider themselves as specialist retailers who practice their philosophy of Responsible Trading in the Community as an inherent part of what they do. Former NOffLA chairman, Jim McCabe, often questioned the logic of such a dichotomy in pricing: “How can any circumstance be justified that makes a can of beer cheaper to buy than a can of coke?”

Jim McCabe’s comments were prompted by his frustration in witnessing the undermining of years of work in developing a Responsible Trading in the Community environment as a result of these price wars: “The promotion of alcohol in this manner can only be regarded as irresponsible and will inevitably lead to over-indulgence by consumers, which is to be deplored.” NOffLA members want to sell alcohol, but, as professional retailers, they have no interest in doing so at a cost to society. Cheap alcohol based on volume purchases appeals to the most vulnerable of customers and professional retailers neither need, nor want, that type of business.

Government policy disjointed

A recent statement from the director of Alcohol Action Ireland, Fiona Ryan, reiterated the view held by NOffLA for some time: “The current government’s alcohol policies remain disjointed. On the one hand, the government states that alcohol-related harm is a serious public health issue, but on the other, almost every move it has made around pricing and regulation has been to maintain the widespread availability of alcohol at relatively cheap prices.”

The AAI director was also clear as to how this matter should be addressed: “Cheap alcohol, widely available and easily accessible, is fuelling a health and wellbeing crisis of which children and young people are the first casualties. There are steps we can take: introduce a minimum price for alcohol – a floor price below which alcohol cannot be sold; curb availability and accessibility and restrict the promotion of alcohol.  Alcohol is a controlled substance and we act as if it’s a grocery”.

Scandalous practices

The extent of the problem cannot be overstated. In the same Irish Times article, Brian O’Connell was in no doubt as to the importance of finding a solution to the cheap availability of alcohol. “The legislation is needed at this point because supermarket chains and other off-trade retailers are engaged in scandalous practices of selling low or below-cost alcohol.” The writer had only to look at his local supermarkets and non-specialist alcohol retailers for several examples of the practice. He describes an offer by one petrol forecourt chain as having a summer offer of twenty bottles of a branded beer for €17.99, which he describes as working out “at about 90 cent per bottle or roughly the same as a small bottle of water.”

Discount advertising

The extent of below-cost selling of alcohol in Ireland is significant. The practice is an inherent part of the trading policy of the multiples. Some €100,000 was spent in one weekend alone last year by multiples on discount advertising for unprecedented low alcohol prices – including incentives for multiple purchases. There has also been very clear evidence of below-cost selling. This is a direct example of predatory pricing, with alcohol being used as a loss leader and is exactly what NOffLA warned would be the result of the removal of the ban on below-cost selling.

Government responsibility

Despite Tesco apparently making unusually high profits from the Irish market, their prices remain disproportionately higher than those charged by their UK operation. This demonstrates that the absence of price controls, i.e. no below-cost selling does not necessarily benefit the consumer in offering lower prices.

Tesco is the fourth-largest retailer in the world measured by revenues and the second-largest measured by profits (after Wal-Mart). It has outlets in fourteen countries across Asia, Europe and North America and is the grocery market leader in the UK (where it has a market share of around 30%), the Republic of Ireland, Malaysia and Thailand.

Tesco’s pricing policy for the Irish market isn’t providing the Irish consumer with equivalent retail prices with their British neighbour. Much more importantly, a pricing policy that allows for the sale of alcohol at below-cost isn’t providing Irish society with anything close to responsible trading. That responsibility now falls to the Irish government.

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