Tesco buyout gives CP undue power
The recent announcement by Charoen Pokphand (CP) group to buy Tesco’s operations in Thailand and Malaysia for US$10.6 billion (335 billion baht) marks the retreat of Western retailers’ presence in much of Southeast Asia. For Thailand in particular, CP’s Tesco buyout comes with added business significance and consumer risks because the giant agribusiness conglomerate will now have undue dominance directly over local supply chains and indirectly over consumer choice and benefit. In this case, it is imperative that Thailand’s regulator, the Office of Trade Competition Commission (OTCC), take a hard and close look to make sure CP’s good deal does not become a raw deal for local suppliers and Thais.
Not long ago, locals used to fear that Western multinational retailers were gobbling up “mom-and-pop” stores. These Western retail firms seized the opportunity to enter the Thai market in the aftermath of the 1997 economic crisis. But instead of thriving, they later folded. Tesco was the last holdout after Carrefour’s exit in 2010. What we are seeing now is not Western but gigantic Thai retailers who have taken over main streets and small alleys everywhere in a variety of formats, from convenience stores to hypermarkets. Domestic conglomerates are now a bigger worry for Thais than foreign multinationals.
As a result, Thailand’s modern trade is effectively concentrated in the hands of a very few. It is telling that the other two competing bids for Tesco were by retail-based Central Group and the property- and alcohol-focused TCC Group. CP, Central and TCC — the latter which is linked to the Singapore-listed ThaiBev group of another Thai billionaire — are now seen as Thailand’s top three conglomerates which take up the lion’s share of big-ticket business expansion and growth opportunities.
Critical to the next stage of broader Thai economic development will be how these big domestic conglomerates reshape the various playing fields and whether they will gang up and deploy their oligopolistic power and tendencies to their own ends and to the detriment of Thai society, thanks to a lack of competition from newcomers.
The retail industry, in particular, is heavily dependent on understanding local market conditions. When big foreign retailers called it quits, their shortcomings included poor timing, lack of understanding of local ways and means, not knowing consumer demands, and an underestimation of the local supply chain dynamics and competition. For example, Carrefour’s 2010 exit from Thailand and Southeast Asia was attributed to its lack of flexibility in adjusting its store format to urbanisation and the growth of cities. Tesco’s ambition in 2011 to become the most successful British retailer in the world, with operations in 13 countries, was dashed by its failures in many key markets including the US, Korea and Brazil, forcing the group to return to its European focus.
To be sure, local acquisitions of foreign multinational retailers have been pitched as home victories. For example, CP Group Chairman Dhanin Chearavanont has likened buying Tesco to regaining custody of a child he left with a caretaker. That child was Lotus, which CP gave birth to in 1994, only to have to sell it to Tesco in 1997 amidst the ravaging economic crisis at the time.
But this analogy is misleading. It is crucial not to look at an acquisition like Tesco as nationality contest between local and foreign players, but as a business transaction that should be monitored and scrutinised for its impacts and consequences on the industry structure and competition.
At issue currently is whether the Tesco acquisition will be approved by the newly empowered OTCC. Launched as an independent body under the 2017 Trade Competition Act, the OTCC is vested with the authority to rule whether certain mergers and acquisitions could lead to a monopoly or to undue market dominance against consumer interest and welfare. This threshold is defined as “any single business operator having a market share in the previous year of 50% or more and a sales turnover of at least 1 billion baht; or any top three business operators together having a market share in the previous year of 75% or more and a sales turnover of the same amount (of 1 billion baht)”. Adjudicating whether a business operator has dominant market power is tricky and subject to the interpretation of where market boundaries lie.
In CP’s acquisition of Tesco, market dominance should not be viewed simply from the business-to-consumer perspective but also from business-to-business transactions along the supply chain. Modern trade outlets come in different formats, from cash-and-carry wholesalers like Makro to Tesco-like discount hypermarkets and convenience stores like 7-Eleven. From the business-to-consumer view, operators of these stores may argue that they serve consumers in different market segments and therefore acquisitions across sectors, like that of Tesco by CP, does not increase the market power of 7-Eleven. But this logic is weakened when modern retailers operate their outlets in a variety of formats. Take Tesco Express, for example. This mini-hypermarket store format has become more popular in big and dense urban cities like Bangkok. In other words, Tesco Express competes directly with 7-Eleven and their mergers certainly limit consumer choices.
From the business-to-business perspective, when a single retailer controls a variety of distribution channels, its power over suppliers is enhanced. Modern retail outlets are no longer neutral merchants that convey consumer demands to suppliers. Rather, big hypermarkets can influence consumer demands and select suppliers who comply with their requirements. For example, Tesco can use access fees, their own private house brands, and product placements as conditions to select suppliers, indirectly influencing how products reach consumers in the process. When the same company controls a variety of retail formats, suppliers cannot be too unhappy lest they upset their main buyer.
In other words, CP may argue that it faces competition from other retailers, such as Big C (which belongs to TCC Group), but in reality, the new owner of Tesco has substantial leverage over its suppliers because of its vast control over the distribution channels of the retail supply chain. When Tesco was under different ownership, its suppliers had more negotiating space. Put another way, life was easier for suppliers when they had more than just one or two powerful buyers.
This is particularly significant in the food sector, in which smaller producers and suppliers may already suffer from price discounts and imitation of products by rivals and peers. When an agribusiness giant controls a variety of modern retail outlets, it is difficult to see how smaller and independent farmers and suppliers can prosper, let alone survive.
Overall, CP’s Tesco purchase calls for the need to understand market dominance, not only from business to consumer but also from business to business in relations between the agribusiness conglomerate and its suppliers. In addition, regulators should also bear the interests of small- and medium enterprises in mind. What we don’t want to see is big business crowding out SMEs that have the potential to flourish and compete. These SMEs are at least as important as the big conglomerates in boosting Thailand’s longer-term competitiveness. It is better to have more firms competing, whether local or multinational, for consumer choice and benefit rather than having a handful of local business oligarchs exploiting overwhelming market dominance.