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July 16, 2009

(Back) In the Spotlight – UK Competition Test

UK grocery retail is fiercely competitive and one topic of debate surrounds plans for a "competition test" in a bid to stop one retailer dominating a particular area. The debate was reignited today (16 July) with the UK regulator standing its plans for the test - and Tesco just as resolute in its opposition to the proposal. Dean Best reports.

By Dean Best

UK grocery retail is fiercely competitive and one topic of debate surrounds plans for a “competition test” in a bid to stop one retailer dominating a particular area. The debate was reignited today (16 July) with the UK regulator standing its plans for the test – and Tesco just as resolute in its opposition to the proposal. Dean Best reports.

Planning applications and competition tests may be esoteric issues to the average punter on the street but, according to the UK competition regulator, they could become vital to improving their shopping experience in the country.

The UK grocery sector is full of fierce debates and, today (16 July), the issue of the competition test waded back into view.

Three months after being forced to return to the drawing board after a successful appeal by Tesco, the Competition Commission presented new evidence to support its view that rules were needed to prevent parts of the UK becoming dominated by a particular supermarket.

The so-called “competition test” will seek to ensure no single company accounts for over 60% of grocery sales in a given area. The Commission argues that the measure will boost competition and benefit consumers to the tune of GBP1.9bn (US$3.12bn).

Tesco, which, as market leader, has most to lose should the rule be enacted, has fiercely criticised the proposal and today repeated its rebuke.

“We are concerned that the Competition Commission findings rely heavily on far-fetched assumptions which don’t reflect the reality of the planning system,” Tesco executive director Lucy Neville Rolfe said.

“The main effect of the proposed test will be to deter extensions which will prevent many older stores being updated to provide a better offer for customers up and down the country.”

The Commission, however, is firm in its belief that consumers will benefit. “We found that the test could bring significant benefits to consumers,” the regulator trumpeted.

Those benefits, the Commission argues, include “facilitating greater inter-store variety in any given highly-concentrated local area (though it might limit intra-store variety); by diverting investment by retailers from highly-concentrated areas where a retailer already had a strong presence towards those areas where it could lead to additional competition; and through a national effect on prices”.

Asda, Tesco’s nearest rival in terms of market share, agrees that the test would give consumers more choice.

“The Competition Test is a modest proposal, which will allow rival retailers to develop stores in areas that are currently heavily dominated by one player. Anyone opposing this measure is in effect opposing more competition,” the company told just-food.

Sainsbury’s, the UK’s third-largest retailer, is another high-profile supporter of the test. Last month, while discussing its latest quarterly results, Sainsbury’s chief executive Justin King said there was “only one postcode in the country” where it would fail the 60% threshold.

“We have been supportive of the Competition Test and we would be the least affected of the big four by it. You might see a connection between those two comments,” King told analysts.

The Big Four have all detailed expansion plans this year but perhaps Sainsbury’s, following its turnaround programme, is the most notable. The retailer plans to speed up expansion into areas where it had low market share, with an ambition to grow its floor space by 15% – or 2.5m sq ft – by March 2011.

Some industry watchers, however, believe the test is unnecessary, both in terms of an added layer of bureaucracy and the fact that the UK grocery sector is competitive enough.

Neil Saunders, a retail analyst at Verdict Research, questioned the Commission’s methodology, arguing the regulator was basing its evidence on the belief that consumers shopped where they lived.

“People just don’t shop like that; they have access to lots of supermarkets,” Saunders argued, pointing to consumers looking to shop closer to their place of work, for example.

Saunders cited Tesco’s battles with the “deep discounters” of Aldi and Lidl as evidence that one retailer does not wield excessive power in the UK.

“The grocery market is in of the most competitive states it has been in. Consumers have it much better than when the market was more fragmented,” Saunders said.

The Competition Commission spokesman acknowledged that the UK grocery sector was competitive – as the regulator reported when it concluded its two-year enquiry into the market last April – but insisted that did not mean the industry was “flawless”.

It promises to be a long fight. With Tesco in one corner and the likes of Asda and Sainsbury’s in the other, it also promises to be a lively debate.

Indeed, today’s assertion from Tesco that the competition test could cost jobs was slapped down by Asda.

“The suggestion that the test could cost jobs by deterring investment is simply wrong,” the Wal-Mart owned firm said. “Retailers like Asda are keen to invest in regenerating town centres across the UK, it’s simply that in many places we are prevented from doing so.”

The next stage in the debate is set for the autumn when the Commission is slated to publish its final verdict. In all likelihood, however, it is topic likely to fuel the fire in the bellies of all involved long into the winter and beyond.

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