The graph illustrates the levels of retail concentration (the share of market held by the four largest players in each category) in four major channels – the ones where people buy the essentials: food, medicine, clothing, and similar items. (Other channels – such as books, sporting goods, electronics, hardware – all show similar patterns). The data is from the Census Bureau's Economic Census, conducted every five years (another such census was done in 2007 but, this being the government we’re discussing, the results won’t be known until 2009-10).
As you can see, the degree of concentration increased significantly in most channels. Although department store concentration dropped slighly in 2002, since then #3 Marshall Field was bought by #2 May Company, which was then absorbed into #1 Federated/Macy’s. I have no doubt the 2007 results will show far greater concentration in all categories, and the recent wave of bankruptcies, liquidations, and store closings ensures that those results, when they finally arrive, will greatly understate reality.
The drug channel has seen the recent takeovers of Eckerd and Osco; discount obviously has reached a point of absolute concentration, at least by this measure.
The big increase in the relatively unconcentrated (on the national level) grocery business between 1997 and 2002 reflects the entry of Wal-Mart into that channel and their immediate rise to dominance – the 2007 figures will be interesting. Despite the national numbers, the grocery industry is extremely concentrated at the local level: Concentration in Chicago in 2003, for example was 68.5%, Los Angeles was 61.8%, Phoenix was 84.7%, Boston was 70.8%, and so on. No major city except New York was below 60%.
Take another look at the chart and then reflect that the rule of thumb in antitrust is that 60% concentration is the point at which free competition begins to suffer, and 80% is the crisis point. When everything shakes out, how concentrated do you think the consumer electronics channel, as one example, will be?
We most often hear references to the dangers presented by too few sellers (oligopoly), who control a market and thereby set prices unfairly. There can, however, also be a problem with too few buyers (oligopsony), who can also control a market and dictate prices.
This problem already exists in some categories, as I hear endlessly from various vendors (though they are, to be sure, not unbiased sources). But I’m fairly sure that we will come out of the current economic turmoil with more channels impacted and with some channels in severe situations.
I have often advocated that manufacturers undertake efforts (through their trade promo programs, or perhaps by other means) to nurture their smaller customers. While such efforts might not pay the immediate dividends that can be gained by running promotions in the big boxes, the long-term interests of the manufacturer are advanced by having a thriving channel and lots of smaller customers to serve as a counterweight to the few big ones. Unfortunately, in some channels, it may already be too late.
It will be interesting to see if the new administration will pay any attention to this problem.