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The thoughts of an American expat in Hong Kong living on an "underlying island"

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Carrefour: A Tangential Discussion

Apparently the digital Red Guards/Boxer Rebellion is up in arms about the French and clamouring to boycott Carrefour. Wait until the modern day Red Guards/Boxers hear about the Mayor of Paris wanting to make the Dalai Lama an honourary citizen of Paris.

But really I had been thinking of Carrefour a couple of weeks ago, while reading this piece of dreck in the Wall Street Dreck by Dan Ryan of the ever entertaining Lion Rock Institute. (How I ended up with the dissent link from their online advert Wikipedia page is beyond me.) Specifically, I thought of Carrefour, when I read this piece of kaka.

Those in favor of a competition law regulator often point to the dominance in Hong Kong of two large supermarket chains – PARKnSHOP and Wellcome – as if this alone demonstrates there is a "cartel" in the retail sector. Yet strangely this has proved no barrier to new competitors establishing themselves in the territory.

The reason I mention Carrefour is because they tried to establish themselves in Hong Kong and were driven out by the two chains and their tycoon owners. In fact Carrefour serves as one of the great case studies of why HK needs a universal competition law. Is Mr Ryan familiar with this case study or just feigning ignorance?

Some time ago I browsed in to the Antitrust and Competition Policy Blog which posts links to lots of academic studies of various issues regarding, logically enough, antitrust and competition policy. Last December they featured a post on an article written by Mark Williams of the School of Accounting and Finance of The Hong Kong Polytechnic University. From the abstract:

Unfortunately, this characterization is not an accurate representation of competition conditions in the domestic, non-traded sector of the economy. The government monopoly of the supply of land has facilitated the development of dominant, family-owned conglomerates that extract monopoly rents in many business sectors. Private monopolies in gas and electricity supply, a duopoly in the supermarket sector, tight oligopolies in port services and oil supply, and numerous well-known cartels are prominent features of the local economy.

And if you click through and get the full PDF:

pp11-12 of the pdf, pp142-143 of the magazine
Turning to the retail sector, two incumbents, Park’nShop and Wellcome, dominate approximately 80 percent of the supermarket sector in Hong Kong. The Hutchinson-Whampoa real estate conglomerate is the parent of the Watson’s retail group. This entity controls Hong Kong’s leading electrical retailer, Fortress, the leading personal care chain, Watson’s, and the largest supermarket chain, Park’nShop. Wellcome is owned by Dairy Farm, the retail subsidiary of the local Jardine Matheson conglomerate. Supermarkets in Hong Kong are small by international standards and the local market has significant idiosyncrasies. Most shoppers buy only what they can carry home from the stores since 90 percent of Hong Kong residents do not own automobiles. Grocery shopping is done on a daily basis, especially for fruit, meat, and fish, because of limited storage capacity in cramped Hong Kong kitchens and a cultural preference for fresh produce. Most supermarkets are within the vicinity of large condominium developments, where the vast majority of the population live (houses are the preserve of the very rich or of traditional village dwellers). Supermarkets in Hong Kong are not located on standalone sites with extensive parking lots. These peculiarities of the local market, along with site scarcity, determine market structure.

Both organic growth and the acquisition of sites enabled the two incumbents to attain their dominant positions. International grocery retailers have attempted to enter the local market, but have failed to gain sufficient sites to make operations viable. Allegations have surfaced that landlords affiliated with the two main players were reluctant to lease premises and that all available sites were already occupied. Hong Kong’s urban area is extremely densely packed and large retail sites are very rare. Carrefour, the French grocery giant, opened and then withdrew from the local market in the 1990’s citing these constraints. Later it alleged that the incumbents were unhappy that Carrefour might sell at discounted prices. Allegedly, suppliers, either voluntarily or at the behest of the incumbents, applied commercial pressure by threatening to deny supplies of merchandise unless retail price maintenance was adopted to ensure that price competition was suppressed.

Another example of alleged abuse of dominance occurred when a new market entrant, Ad Mart, sought to adopt a no-store Internet and telephone ordering service with free home delivery. This new entrant was allegedly forced out of business by the actions of the two incumbents. Selective price-cutting and pres- sure on suppliers not to deal with Ad Mart forced the closure of the newcomer within nine months. Such practices are lawful, however, and no investigation of the allegations was undertaken.

There are about 20 pages in the article and it covers many other domestic sectors of HK's economy that are horribly non-competitive. For the extended version, see Alice Poon's excellent 150 page Land and the Ruling Class in Hong Kong.

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