The recent news that Supervalu, parent of Cub Foods, is suing Walmart to force it to reduce the number of food items in its Midway store says a lot about the ever-evolving structure of retailing in the United States and illustrates some important economic principles.
My first reaction to the headline was “Aha! Rent-seeking in action.” That is the term economists use for abuse of the legal system or political process to gain more money or even a simple business advantage.
But getting into the details, it was clear that this was not the case. Supervalu had a legitimate legal complaint over breach of contract. It and Walmart both have stores in the same St. Paul development south of University Avenue and east of Snelling. Supervalu signed a lease on the property with a contractual guarantee that no other business renting space from the same developer would be allowed to sell groceries.
This is perfectly legal and is of value to Supervalu since it reduces direct competition at least marginally. (There already is a large Rainbow Foods supermarket on another property just a few blocks away and a SuperTarget in the other direction.) Economic theory suggests that Supervalu would have to pay at least somewhat higher rent for a lease with this provision than for one that did not provide a similar guarantee, and that other lessors, including Walmart, would pay less because their activities were restricted.
Now the Walmart store in the development has started selling thousands more grocery items, many in categories specifically barred by the lease. This seems a pretty flagrant breach of contract, and the property owner is participating in Supervalu’s suit.
But it may not be so cut and dried. All the details are not clear, but Walmart reportedly got access to the property by assuming the lease of a Kmart after that company’s bankruptcy. Walmart now claims that it is not subject to the restrictions that formerly applied to Kmart.
This is the sort of legal issue that can be settled only by the courts, so I would not venture an opinion as to who is right. But the incident provides valuable insights into the business of retailing.
First, at the national corporate level, retailing is an oligopoly: A handful of companies, either general retailers like Walmart and Target or big-box specialty companies like Best Buy, have dominant market shares, with a host of little firms gleaning the leavings.
But at the community retail level, the industry is one of “monopolistic competition.” Retail does not quite meet the ideal of “perfect competition” found in markets for commodities like corn, with many buyers, many sellers and a uniform product, but it is still extremely competitive.
Most households make most of their day-to-day purchases from sellers that are in monopolistic competition. These sellers may compete on price, but more often they concentrate on offering better service or more convenience. Advertising expenditures often are high in monopolistic competition.
Yet another feature of monopolistic competition is apparent overcapacity. You see gas stations with 16 pumps, even if no more than three or four of them are in use only a few hours of the day. You see a bank with 20 checkout lines, even if the full number are used only a few days of the year. You see suburban fast-food strips with nearly every franchised burger, pizza, taco or sandwich house represented, even though there is a similar strip only a few miles away.
And you see companies like Walmart deciding to sell groceries in an area that is already very competitive with Cub, Rainbow, Target and Aldi.
There is plenty of capacity to meet the needs of the community and enough competition to keep prices low. But Walmart must think that its superior management will allow it to take sales from existing businesses.
The impulse in situations of monopolistic competition to continue to increase capacity was a motivating factor of the commercial property boom of the last decade. Irrational exuberance about the general economy, combined with self-judgments of superior managerial ability, led retailers of all sizes to overexpand. Now big boxes and strip mall storefronts alike stand empty. If you want to start an evangelical church or open a paint-ball range, it’s a renter’s world right now.
St. Paulites probably will not be much affected by how the Supervalu-Walmart suit turns out. Historically, inner-city neighborhoods with large minority populations are underserved by retailers and pay higher prices. The Midway area, however, has developed a broad-based, highly competitive retail sector. Don’t expect prices to go up or down very much, no matter who wins.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.