Wednesday, June 4, 2008

It’s official: inflation Lebanon reaches 35%

The Lebanese Central Administration of Statistics has published the inflation figures for the first quarter of 2008, see L’Orient of last weekend (link already gone). They confirm what all Lebanese already knew, namely that the inflation is seriously out of control. The costs of food and non-alcoholic drinks, e.g., have increased with over 35% on annual basis.

One can only hope that our beloved leaders will take actions to bring the inflation back under control. A very good first step would be to allow supermarkets to compete with one another in Lebanon. Ever noticed that most prices are pretty much the same every supermarket you go to? Experts have told me that no one is competing with one another.

There’s this unwritten agreement to keep the prices as high as possible. This results in profit margins between 15 to 40% for most items whereas in, say, The Netherlands, margins are typically less than 2%. Dutch supermarkets compete heavily with each other and often sell various items at a loss. These items, the so-called loss leaders are used to get customers inside the store who then would also buy other, profitable items.

Not so in Lebanon. The best offer you can get are those bundled offers whereby they literally bundle a free item to another item with adhesive tape. This is the result of strict agreements with the distributors who set the prices and bundling is a way to circumvent it. In comparison, the Dutch supermarkets are free to sell items at any price they want which results in significantly lower prices.

A first step would be easy to do for the next government: curtail the power of the distributors by allowing supermarkets to compete on prices. If, say, Spinneys wants to sell Coca Cola at a (near) loss, then by all means it should be allowed to do just that. Given the average profit margin of 25% for Lebanese supermarkets, imagine how many customers a new player could attract by accepting only a 5% profit margin.

Until the Powers That Be read this blog (and they just might!), we’ll simply have to keep forking over up to 40% profit to the supermarket owners.


Hedley said...

My microeconomics is slightly rusty but that sounds like a Cournot oligopoly.
Ah the joys of pricing above the point where your marginal cost intersects your marginal revenue...