E-Commerce Giant Effects on Local Businesses

For the sake of this blog the e-commerce giant in question will be known simply as The Firm. To begin with it must be noted that powerful Wall Street investors have a long-term growth strategy regarding The Firm. Therefore, as the company gains stock and the share price increases, it is free to pursue a policy of expansion regarding market share using aggressive price-cutting tactics to gain a stranglehold and eliminate competition. A lack of effective ‘antitrust’ regulation, as well as lax tax laws and state subsidies will only exacerbate the problems and challenges faced by smaller retailers and manufacturers.

Further analysis reveals that since advanced capitalist economies such as the US and UK adopted neoliberal policies under the Regan and Thatcher administrations, there has been a fundamental shift in emphasis regarding antitrust regulation. Previously, concentrated market power was considered deleterious and antitrust, state regulation was structured to prevent monopolisation of industries and markets. However, the new ‘laissez faire’ era of neo liberal economics has led to a strategy of ‘maximising economic efficiency’. This should be questioned on the basis that there is a risk of an open market being supplanted by a privately controlled one. It is clear that The Firm which is the subject of this blog is under no pressure from its powerful investors to make any real profits. Indeed, the core strategy is to incrementally expand market share, so why is this?

One theory is that the long-term goals of investors is to eliminate competition and then exploit their monopoly-like power and exercise pricing and margin pressure on both consumers and suppliers. It is feasible that rival manufacturers and retailers could be reduced to third-party sellers on an online platform. Indeed, The Firm of today could be compared to a 19th Century railroad baron controlling which businesses get to market and what they have to pay to get there. Short-term consumer gains in the form of driven down prices can be more than off-set as competition is eliminated leading to widespread job losses and business closures that will do immeasurable harm to local communities.

As traditional retail jobs are replaced by warehouse workers in huge distribution centres, strategically placed around the country, it is important to expose the way long-standing employment contract norms are being undermined. Many of the vacancies are filled using subcontracted temporary workers, with minimal employment rights. They are described as ‘seasonal’ though in reality they are year-round ‘permatemps’. Further down the supply chain a delivery network has been established using sub-contracted drivers who are paid by the delivery, rather than by the hour. They must cover their own fuel, insurance and maintenance costs. This circumvents minimum wage laws and allows the firm to absolve itself of any responsibility regarding employment protection and all the benefits associated with it.

If The Firm can obtain a 50% or more market-share of every £1 spend online in the UK it is important that the possible negative effects are explored and exposed for the general public wellbeing. Firstly, the longstanding economic model of ‘perfect competition’ is undermined.

Two key conditions of this model are:-

  • All buyers and sellers are small relative to the market.
  • There is free entry into and exit from the market.

It is obvious that if the firm in question has market power to the extent it commands at least 50% of all online sales, then it is no longer ‘small’. The vast network of warehouses, uber-like delivery network, global investors of vast wealth expecting no profits in the short to medium-term, as well as government subsidies and tax breaks then this can no longer be described as ‘perfect competition’. Any competition is unlikely to be able to match the speed of delivery and free delivery for long, if at all.

Furthermore, manufacturers have little choice but to use the firm in order to sell its products on a level playing field regarding access to the market. Rival retailers, both online and in the form of traditional stores face unrelenting pressure from The Firm to lower prices in order to compete. The result is, widespread closures of local and independent businesses up and down the country.

By and large local independent manufacturers and retailers have to survive and compete with little help from the state. They also pay their fair share in taxation which helps local and national society. However, it can be revealed that The Firm generated £4.2 billion in sales in 2012. Astonishingly, in the same year it paid only £2.4 million in corporation tax by using a subsidiary in Luxembourg. The Firm is not a UK based company and in exchange for investing in its UK operations, managed to obtain £2.5 million in government handouts. This legalistic hocus-pocus is surely unethical, although not illegal and prevents revenue from being recycled into the local UK economy.

Combined with its powerful investors who are willing to forgo short and medium-term returns, The Firm is in a position to implement a predatory pricing policy in order to eliminate competition and extend its monopoly power. Once this has been achieved it can ruthlessly prey on suppliers rather like a cheetah would hunt a sickly gazelle. Suppliers need access to the market place in order to survive, if The Firm is the only feasible way to get there, this otherwise felicitous and symbiotic relationship quickly becomes a one-sided power relationship. The firm can keep demanding discounts knowing that, unlike them, suppliers cannot operate at a loss for very long. Therefore, local businesses have to shed jobs and lower wages. Ultimately causing even more misery for local communities and the UK economy as a whole.

Blog by Simon Jones  

Look out for my next blog in the coming weeks which will focus on how the UK printing industry is suffering from the ruthless tactics in relation to online batch printed product orders.