The UK Office of Fair Trading's decision to put the supermarket sector under the microscope for the third time in seven-years has been warmly welcomed by small retailers and suppliers but, unsurprisingly, the reaction of the UK's 'big four' supermarkets has been less enthusiastic.
 
According to the latest TNS figures, the four biggest supermarkets in the UK - Tesco, Asda, Sainsbury's and Morrisons - control 74% of the grocery sector. Critics of the supermarkets have accused them of using their power to squeeze suppliers and push smaller retailers out of the market.
 
Responding to this growing sentiment, the OFT Monday (9 May) officially referred the UK's GBP95bn grocery market to the Competition Commission for investigation.
 
The CC's remit is broader than ever before. It will investigate the whole sector in order to determine whether the biggest retailers maintain market dominance by utilising anti-competition practices.
 
The Association of Convenience Stores, a trade organisation representing over 32,500 small retailers, has campaigned for an in-depth investigation into the dominance of supermarkets for a number of years, James Lowman of the ACS told just-food.
 
"We've felt that something needed to be done for several years," he said. "This particular investigation is the direct result of an original application for a full market enquiry we submitted in November 2004, with colleagues like Friends of the Earth and FARM. Last year, in August, the OFT rejected our call. We appealed the decision and won."
 
In the hope that it will shift the balance of power in favour of independent retailers, the ACS has argued that the enquiry should include an examination of the buying power and pricing policies of the large retailers.
 
"The buying power of the supermarkets is the route cause of inequality in the market and an issue that affects both small retailers and suppliers," Lowman said. "Pricing is also an important issue. We are calling for a ban on below cost selling and predatory pricing policies."
 
While such a move would clearly 'level the playing field', the benefits that a prohibition on special offers would have for consumers is certainly debateable.
 
The National Farmers' Union has also welcomed the enquiry, suggesting that the CC needs to consider the relationship between suppliers and retailers.
 
"I am pleased the OFT has acknowledged the potential impact the power of the retailers can have on suppliers," NFU president Peter Kendall said.
 
The market dominance of a few large retailers means that suppliers are forced to accept unfavourable agreements in order to maintain contracts, an NFU spokesperson told just-food. "The loss of one contract from one retailer can break small- to medium-sized suppliers and this allows supermarkets to make unreasonable demands."
 
The NFU has said it will submit detailed evidence to the Commission, adding that it is currently looking for examples of unequal supply chain relationships.
 
"This market investigation provides an excellent chance to create an environment which delivers a supply chain built on trust and transparency," Kendall said.
 
In contrast, the Forum of Private Business has said that it fears the OFT decision did not pay enough attention to the retailer-supplier relationship.

The FPB's chief executive Nick Goulding said: "The OFT has highlighted a number of concerns for our members… but it falls short of covering all the issues."

John Murphy, director general of the Federation of Wholesale Distributors, also expressed concerns that the investigation might not be broad enough. "The Competition Commission can't afford to focus too much on one aspect," Murphy said.
 
Generally, the supermarkets' response to the announcement has been lukewarm. 
 
Tesco, the UK's largest supermarket chain, said that the current situation promotes low prices, improved services and broad choice.
 
"The OFT itself has concluded that overall consumers have benefited from falling prices, an increase in product range and improved service. This is the most important measure of competition and we are confident the Competition Commission will endorse this view," the supermarket said in a statement released Monday.
 
Tesco chief executive, Sir Terry Leahy, suggested that consumers have demonstrated their support of the UK's supermarkets by choosing to shop in them.
 
"We know that up and down the country millions of ordinary consumers vote with their feet when they go shopping. They have a choice and it is one they exercise every day," he said. "The consumer in every walk of life benefits from the choice, value, quality, convenience, range and service that supermarkets like Tesco provide," he added.
 
However, Leahy did acknowledge the growing public concern surrounding the dominance of supermarkets in the grocery sector. "This inquiry," he said, "gives us an opportunity to listen to those [concerns] and address some of the myths surrounding our industry."
 
Following the OFT's announcement, Tesco seems to have gone on a charm offensive. In a move that the retail heavyweight claims is unrelated to the Competition Commission probe, Tesco has withdrawn from Deregulate, the industry body set up last year to promote total deregulation of Sunday trading. Leahy is also set to unveil Tesco's "community plan" to the Work Foundation, a think-tank headed by Will Hutton.
 
On the other hand, while Sainsbury's, Asda and Morrisons remain unconvinced that an investigation is necessary, they have all indorsed the OFT's focus on planning and land issues.
 
Some of the big supermarket chains, notably Tesco, critics say have banks of land that they are unwilling to sell or attach restrictive covenants to when selling. This, critics claim, represents a significant barrier to competition.
 
"Whilst we share some of the OFT's concerns about the competitive landscape, we have made it clear that we do not hold a land bank, nor do we flex prices through our store network. We are disappointed with another costly, full market reference but naturally we will fully support the investigation," Morrisons said.
 
"It was well flagged over a month ago and we said at the time that we didn't think it was necessary," Nick Agarwal, Asda spokesperson, told just-food. "But we are actually very pleased that the OFT has highlighted the issue of planning."
 
Although Asda is currently the second largest company in terms of sales volume, it is actually one of the smallest national retailers in terms of its number of outlets. Moreover, Asda does not have a land bank.
 
"Planning is an issue that hinders Asda's expansion," Agarwal said. "Choice doesn't play a role in planning. Over half the UK's towns have less than two retailers and there is nothing to stop a retailer building more than one store in an area."
 
While it is unlikely that the Commission will turn back the clock and reduce the dominance of supermarkets on the British retail scene, it is conceivable that the CC's findings could have far-reaching consequences. It is expected that particular attention will be given to convenience stores, pricing policy, buying power, planning practices and the large retailer's use of land banks.
 
With the 'big four' divided on the issue of planning as they vie to assert their own interests, it is possible that the Commission could force supermarkets to sell plots of land to rivals. If the suppliers get their way, the investigation will also examine the relationship between retailers and food producers. Additionally, smaller retailers are lobbying for the inclusion of issues surrounding buying power and pricing policy to feature in the Commission's report.
 
As Kevin Hawkins, director general of the British Retail Consortium observed, essentially the OFT handed the Competition Commission a "blank cheque" to investigate the entire sector.
 
"It may choose to focus more specifically on areas such as planning and the convenience market which, arguably, have a higher profile than was the case in the late 1990s," he said.