Contraceptive sheaths: A report on the supply in the UK of contraceptive sheaths

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On 1 March 1993 the Director General of Fair Trading (DGFT) asked us to investigate the supply in the UK of contraceptive sheaths, also known as condoms (see Appendix 1.1).

The UK condom market is dominated by LRC Products Ltd (LRC) with a share of around three-quarters. There have been two previous MMC inquiries into condoms. Following the first in 1974 LRC was subject to a form of profit control. This was replaced by direct control of LRC's prices after the second report in 1982.

There are three distinct trade channels: supply to retailers and wholesalers for over-the-counter (OTC) sale in shops, which represents 60 per cent of the total; supply to the National Health Service (NHS) for free distribution (23 per cent); and supply via vending machines (16 per cent). While there are interactions between all three, we found that the NHS was a separate market, where supply prices are much lower than, and move independently of, those in the two commercial sectors.

The markets have changed since 1982, primarily as a result of concern about AIDS and the consequent recognition of the condom's unique ability to protect people against sexually-transmitted diseases (STDs), at the same time as preventing unwanted pregnancies. Advertising restrictions on suppliers were eased and the Government mounted extensive advertising campaigns of its own to promote condom use. There was a sharp increase in demand for condoms in 1987/88, and although growth then slowed it appears to have picked up again in the last two years. Mates condoms were launched in 1987 and quickly achieved nearly [*] per cent of total sales, although their share has since fallen back. Condoms have been stocked by an increasingly wide range of outlets, including supermarkets. In May 1993 Superdrug Stores PLC (Superdrug) initiated the first condom price war by cutting a third off the price of all its condom lines.

LRC told us that if the control were lifted it would seek to raise its trade prices in the commercial market to average European levels over a period of about five years. Whilst LRC's entrenched position and the strength of its Durex brand are significant barriers to the entry and growth of competitors, we believe that the changes in the market have made it much more likely that other suppliers would be prepared to challenge LRC if price control were removed and LRC tried to raise prices. Some, drawing on lower cost imports, have already established a presence, particularly in vending.

Since condom retailing is becoming a more competitive business, increases in trade prices would not necessarily be fully reflected in retail prices. Retailers would be receptive to new suppliers who could present a credible alternative to LRC. Competitors would be likely to come in with prices below those of Durex so that the general level of trade prices would not increase at the same rate as LRC's. LRC itself would no longer be able to justify price increases to its customers with the argument that the increases accorded with the price control system.

NHS buyers show a growing tendency to bargain keenly, to coordinate their efforts and to promote products offering the best value for money. The NHS is much more concerned with specification and price than with brand image and can look for quality suppliers on a worldwide basis. There is sufficient competition to protect its position if price control were removed. Moreover the expected introduction of a European Standard in 1994 should significantly increase the number of suppliers which can give the assurance of quality required by both NHS and OTC customers.

Throughout this inquiry we have paid close attention to its implications for the fight against AIDS. We believe that increased competition would generate much more commercial advertising and other promotional activity. The resulting stimulus to usage particularly among the young would, we consider, outweigh any contrary effect resulting from higher prices, with important benefits for public health and welfare. We believe the balance of argument now clearly favours the removal of price control.

We have examined a number of LRC's individual trading practices. We conclude that one of these, entering into exclusive agreements with customers whereby they agree to stock only LRC condoms, operates against the public interest. We recommend that LRC be required to desist from this practice.

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