By Duminda Pathirana, B.Com,MBA,
Frontpage Journal | Business Insights
For decades, Sri Lanka’s economy has been presented as a free-market arena where competition thrives and consumers benefit from variety, innovation, and fair prices. But beneath this narrative, a quieter, and more troubling, shift is taking place. Large conglomerates are not just competing; they are redesigning the playing field itself. Through aggressive vertical integration, they are building self-contained business ecosystems where they own the supply chain, the production, the retail distribution, and even the marketing channels. The result? Independent suppliers, service providers, and small business owners are being squeezed out of the market they helped to build.
The supermarket chain example is particularly instructive. Once a channel for hundreds of small producers to reach urban consumers, many of Sri Lanka’s leading supermarkets have now turned inward. They manufacture their own private-label goods, stock them prominently, and price them below competing brands. They prepare ready-made takeaway meals in in-house kitchens, undercutting nearby restaurants and cafés. On paper, this looks like efficiency and convenience. In reality, it’s a controlled funnel, one where customer choice shrinks, entrepreneurial diversity withers, and economic power consolidates in the hands of a few corporate boards.
This raises a fundamental question for Sri Lanka’s economic future: is vertical integration a legitimate competitive strategy that benefits consumers, or is it an anti-competitive chokehold that erodes the very fabric of a healthy market?
The Allure – and the Trap of Vertical Integration
Vertical integration is not new. Globally, it has been the hallmark of corporate empires from John D. Rockefeller’s Standard Oil to Amazon’s e-commerce logistics network. By owning multiple stages of production and distribution, a company can reduce costs, control quality, and respond faster to market demand. In theory, these efficiencies should translate into better prices and service for the consumer.
In Sri Lanka, conglomerates have seized on this model with gusto. The supermarket chain is not just a retailer; it is now a manufacturer of packaged food, household cleaning products, and personal care items. It has its own bakeries, dairy processing plants, and meat suppliers. The same chain owns the logistics company that trucks goods across the island and the advertising agency that promotes them.
On the surface, consumers benefit from lower prices on these “house brands.” A supermarket’s in-house loaf of bread might cost 20% less than a competing bakery’s, and its ready-made rice and curry packs might seem like a more affordable lunch option than the café down the street. But what happens when these private labels and in-house services dominate the shelves and crowd out competitors entirely?
That’s where the trap lies. Once independent suppliers and small business owners lose access to the market, either because they can’t compete on price or because shelf space is dominated by the supermarket’s own products, the competitive pressure disappears. Without competition, the company can quietly adjust prices upward, reduce quality, or limit variety, all while controlling the entire consumer experience. The initial bargain for the customer often turns into a long-term loss for the economy.
The Long-Term Cost, A Market Without Entrepreneurs
The short-term gains from vertical integration are seductive, but the long-term consequences are damaging, especially in an economy like Sri Lanka’s that depends heavily on small and medium-sized enterprises (SMEs) for employment, innovation, and regional economic activity.
Consider the ripple effects. A small-scale biscuit manufacturer that once sold 5,000 packets a week through a supermarket chain suddenly sees orders drop as the store promotes its own biscuits more aggressively. The manufacturer cuts staff, reduces output, and eventually shuts down. That’s one less local employer, one less source of tax revenue, and one less product that differentiates Sri Lankan shelves from global generics.
The same applies to food outlets. When supermarkets begin selling ready-made hot meals at prices independent restaurants cannot match, the smaller players lose their lunchtime crowds. Their survival becomes precarious. Once enough close, the supermarket becomes the de facto sole provider, a monopoly in all but name, for certain food segments in a community.
This is not simply an economic concern; it is a cultural one. Local food outlets, bakeries, and corner shops are not just businesses. They are part of the social fabric, places where people gather, share stories, and maintain community bonds. Their disappearance under corporate pressure erodes this intangible but vital part of Sri Lankan life.
Where Do We Draw the Line?
The ethical and legal boundaries of vertical integration are complex. In some countries, competition laws (antitrust regulations) place strict limits on how much market share a company can control, especially if its practices disadvantage smaller competitors. The European Union, for example, has imposed billions in fines on companies like Google for using their dominance in one market to suppress competition in another. In the United States, the Federal Trade Commission regularly challenges mergers and acquisitions that might lead to excessive concentration of market power.
Sri Lanka has competition laws on paper, but enforcement is weak. Large conglomerates often operate with minimal regulatory challenge, partly because their reach extends into political influence, advertising power, and even philanthropic initiatives that buy goodwill. Without strong oversight, the lines between competitive efficiency and predatory dominance blur quickly.
The question then becomes: should the government intervene to protect smaller players, or should the market be left to “self-correct”? The free-market purist argues that consumers, not regulators, decide winners and losers. If people prefer supermarket bread over bakery bread, so be it. But this ignores the structural imbalance in resources, shelf access, and promotional budgets between a corporate giant and a family-owned bakery.
Balancing Scale and Fairness
The solution is not to dismantle big business or ban vertical integration outright. Large corporations have a role to play in modernizing Sri Lanka’s supply chains, improving efficiency, and raising product standards. But these benefits should not come at the cost of erasing the competitive diversity that sustains a dynamic economy.
Several measures could help restore balance,
Strengthen Sri Lanka’s Competition Commission with real investigative power and the ability to impose penalties for anti-competitive behavior, including unfair shelf-space allocation and predatory pricing. Require supermarkets to reserve a percentage of shelf space for independent suppliers, ensuring smaller brands have visibility and access to customers.
Further, Mandate disclosure when in-house products are priced below cost, a tactic often used to drive out competition before raising prices again.
Offer tax incentives, grants, and training programs that help small businesses modernize operations, improve branding, and negotiate better terms with large retailers.
Educate consumers about the broader economic impact of their purchases, encouraging a balance between price sensitivity and support for local entrepreneurs.
Final Word
The supermarket scenario is not an isolated case, it is a microcosm of a wider shift in Sri Lanka’s corporate landscape. Left unchecked, vertical integration can morph from a competitive strategy into an economic stranglehold. The country risks replacing a vibrant, entrepreneurial marketplace with a narrow, controlled economy dominated by a handful of corporate giants.
The ultimate question is not whether vertical integration is “right” or “wrong” in the abstract. It is whether Sri Lanka’s current implementation serves the public good, or whether it is quietly dismantling the economic ladder that future entrepreneurs will need to climb.
If we do nothing, the cost will not be measured merely in lost shops and shuttered factories. It will be counted in the narrowing of our economic imagination, the loss of local innovation, and the slow erosion of the freedom to compete.
