One of the best things written about local economies last year looked at the price of curries in Wetherspoons. The Financial Times’ Alphaville blog investigated how the pub giant’s prices change across the country, and collected some great data showing that Wetherspoons varies its prices dramatically according to local conditions – and therefore local incomes and costs.
This process is called ‘price flexing’, and it’s what causes pubs to be more expensive in cities like Brighton than in cities like Barnsley. By contrast, grocery prices remain unchanged in the same stores in different cities. That’s because price flexing in supermarkets is frowned upon by UK competition regulators as being anti-competitive.
As a result, the same basket in Tesco Express costs the same in every city, regardless of the local economic conditions. This is known as ‘uniform pricing’.
It got us thinking – what are the implications of uniform pricing in supermarkets for local economies across the UK? And what would happen if British supermarkets were allowed to vary their prices in each store as Wetherspoons does?
Here are four reasons why all cities would benefit if supermarkets adopted Wetherspoon’s approach to price-flexing.
1. Uniform pricing makes low-income areas poorer
A recent paper on American chain stores by Stefano DellaVigna (University of California, Berkeley) and Matthew Gentzkow (Stanford) offers some insight into the impact of uniform pricing on local economies.
They fond that even though US regulators allow price flexing, most US supermarkets and drugstores practice uniform or near-uniform pricing across all of America. More importantly, their research suggests that both businesses and consumers lose out as a result.
For a start, the data shows that the average chain store in the US could increase its profits by 7 per cent if it introduced price flexing by neighbourhood.
Perhaps more surprisingly, they also find that people in low-income places lose out from uniform pricing. Stores in poorer neighbourhoods and cities should face lower costs, because their rent and their wages costs are usually lower. In theory this should result in lower prices for people in poorer neighbourhoods (who are more price-sensitive than richer households), the same way Wetherspoons pubs are cheaper in poorer areas.
But uniform pricing means that people in poor neighbourhoods have to pay the same prices as the people in rich areas, who enjoy much better amenities and services. In order for stores to keep prices uniform nationally, poor people have to pay a little more for groceries and rich people get to pay a little less.
2. Price flexing would make supermarkets prices fairer and more responsive to local conditions – just as devolution does for policy
Aside from regulatory concerns, supermarkets in the UK also say that one of the reasons they don’t engage in price flexing is that it would “damage their brand and reputation” and be “commercial suicide”. But this does not seem to square with the popularity of Wetherspoons. And it is hard to argue that charging poorer customers less and richer customers more would be unfair.
Moreover, DellaVigna and Gentzkow also argue that uniform pricing means cities cannot respond to local economic shocks. To apply this logic to Britain, when the Teesside steelworks in Redcar shut down in 2015, supermarkets such as Morrisons were not able to respond to the reduced local demand by lowering their prices. Local consumers in Redcar face the same high grocery bills as before, even though they now have less money to spend.
US chain stores maintain uniform pricing – even though they’re not required to by regulators – because setting individual local prices across hundreds of different goods in each store would take supermarket managers a lot of time, effort, and skill. By contrast, managers in businesses like Wetherspoons are in charge of setting their outlet’s prices. This is the logic of devolution – top-down, centralised policies penalise different places, while the results of devolved decision-making better fit local conditions.
3. Price flexing could also help ease the housing crisis in high-demand cities
But the impact of uniform pricing goes beyond the cost of your weekly food shop – it also has implications for housing markets in different cities. The supply of housing in the UK is very inelastic, which means that when consumers have more income or more money to spend on housing, the number of homes built locally does not really change – the price goes up instead.
So, for example, if an identical basket of groceries costs the same in Wakefield (where average weekly wages are £463) as it does in Bristol (where weekly wages are £525), people in Bristol are able to spend more of their money on other goods. As a result, uniform pricing in supermarkets means Bristolians have more change left over after their weekly shop, but it also increases house prices slightly in the city (as well as in other high-demand cities).
Price flexing by supermarkets would make groceries more expensive in high income neighbourhoods – but this would be eased by bringing down housing costs in growing cities.
4. Automation will force supermarkets to become more responsive to local economic conditions
As retail increasingly shifts online, shoppers are spending more and more on goods and services which have prices that are automatically changed by algorithms multiple times a day.
This could have two possible effects. The first is that well-designed algorithms could recognise how local economies shape local incomes and spending. As a result, online retail could provide cheaper baskets to people in poorer cities and neighbourhoods than uniform pricing does now.
The second is that the price flexing in online retail will increasingly force conventional retail to adapt. As competition from online retailers grows in part due to price flexing, supermarkets may conclude they need to adopt similar strategies to achieve those 7 per cent higher profits.
This would likely involve the loss of low-skilled jobs in retail. But would also demand increasingly skilled and trained management, capable of using new technology and data to respond to local economic conditions. (Amazon’s new grocery store – which doesn’t have checkouts, but relies on cameras and sensors to track what shoppers remove from the shelves – could be a sign of things to come.)
This process, where automation drives both the disappearance of some low-skilled jobs and the creation of new higher-skilled roles across the economy, will affect cities differently depending on their skills base and their productivity. (Our recent Cities Outlook 2018 report examined these trends in more depth).
As such, cities and firms will have to respond in order to both manage the costs of automation, and to benefit from the new jobs and lower prices it will create. Searching for ways to do this will underpin our research this year on the future of work. But the end result of this particular story may be that over the coming decades supermarkets will have to end up operating a lot more like Wetherspoons in order to survive.
Anthony Breach is an economic analyst at the Centre for Cities, on whose blog this post first appeared.