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  1. Analysis
February 22, 2008

Liberal UK stands out in European retail scene

The UK's big four retailers must have felt pretty content over the outcome of the investigation into the country’s grocery sector. The probe will lead to more competition between the likes of Tesco and Asda but, ultimately, the country's remains a retail-friendly environment. But how does the regulatory framework in the rest of Europe compare? Ben Cooper investigates.

The UK’s big four retailers must have felt pretty content over the outcome of the investigation into the country’s grocery sector. The probe will lead to more competition between the likes of Tesco and Asda but, ultimately, the country’s remains a retail-friendly environment. But how does the regulatory framework in the rest of Europe compare? Ben Cooper investigates.

The UK’s Competition Commission (CC) finally published its recommendations following its long-running investigation into the supermarket sector in the UK last week, and the outcome arguably served to confirm what suppliers to the major UK grocery chains have known for years – that  the UK is a pretty good place to be a supermarket operator.

The prospect – and it was a fairly remote one – that the Competition Commission would introduce extensive reform to limit the growing power of the major supermarket chains both in planning and supply chain management theoretically threatened the UK’s status as one of the most permissive environments for supermarket expansion in the EU.

While the CC has recommended some reforms in both areas, the review was condemned for not going nearly far enough by campaigners.

The proposals include the creation of a “competition test” in planning decisions on large grocery stores and measures to prevent exclusivity arrangements and restrictive covenants being used by retailers to restrict entry by competitors; the creation of a new strengthened and extended Groceries Supply Code of Practice (GSCOP), and a recommendation to establish an independent ombudsman to oversee and enforce the Code.

The think tank, New Economics Foundation, described the proposals as “straight out of Alice in Wonderland”, adding that “instead of doing the job they were given, which was to break the stranglehold of the big four supermarkets over British shoppers and producers, they propose measures, such as weakening current checks and balances on planning, they will tighten their grip.”

A sceptical reaction from campaigners to proposals which even when objectively viewed could hardly be described as radical, is to be expected. But there was a prevailing feeling of bemusement in the response from the media and observers. This was the third CC investigation into supermarkets and previous reviews had produced little in the way of tangible change. Even the fact that the CC chose to unveil its proposals at 4.30 on a Friday afternoon was seen as somewhat perverse.

Among the informed observers who was disappointed with the scope of the proposals was Nick Bubb, retail analyst at Pali International. Speaking to just-food, Bubb described the CC’s investigation as a “bizarre review” and “remarkably benign”. However, Bubb was not surprised at the tenor of the recommendations given what had been outlined in the CC’s provisional findings.

In Bubb’s view, which is shared by many, the review has done little to trim back the overwhelming dominance Tesco has over its large rivals or the dominance the big four exert over the market in general. Notwithstanding the possible strengthening of the Code and the presence of an ombudsman, the CC’s proposals do not intervene extensively in the supplier-buyer relationship.

So from a regulatory standpoint, the UK remains a retailer-friendly environment. But the publicity surrounding the review naturally led to comparisons being made between the UK and its EU counterparts.

Both France and Germany have tougher regulation on retail expansion than the UK. Daniel Lucht, senior retail analyst at Verdict Research, describes the French retail sector as still “highly regulated”. The Netherlands used to have quite stringent legislation with regard to out-of-town retailing, Lucht points out, but this has been liberalised recently. Ireland’s Grocery Order Act has also recently been reformed, giving greater freedom to retailers.

Even France’s strict regulations both on retail expansion and below-cost selling could be subject to reform if recommendations stemming from Jacques Attali’s extensive economic review are acted upon by the Sarkozy administration. Italy remains a highly fragmented retail market in comparison with its European peers, and retailers are subject to considerable local regulation and bureaucratic obstacles, Lucht states.

Lucht believes that differing regulatory environments have an impact on how the major supermarket operators can expand and control the market, in particular with regard to out-of-town development.

However, regulation is only one factor. The comparisons show that tight regulation in itself is no bar to the major players establishing a leading position. Certainly, the liberal environment has helped UK chains to grow. According to Verdict Research, the top five food retailers accounted for between 64% and 65% of the grocery market in 2006. But interestingly in France, where regulations are stricter, the top five still account for in excess of 60%, according to Verdict. Moreover, in Germany the share of the biggest five companies is closer to 85%. The comparable figures in the Netherlands, Spain and Italy are 64%, 50% and 32% respectively.

Independent retail analyst Teresa Wickham, formerly corporate affairs director at Safeway, believes that to attribute the success of supermarket chains in the UK to a lack of regulation does not give the companies sufficient credit for innovation, particularly in the area of own label. “One way the retailers have been able to increase their profits is by growing their own brand and we are now starting to see that on the continent,” Wickham says.

This view is supported by Bubb. “We have some pretty good retailers who stand up well on the world stage,” he says.

Wickham also maintains that UK retailers are no more aggressive in price negotiation than their counterparts in other EU countries. “It’s always going to be challenging dealing with retailers but the main message that’s getting through to suppliers is that price is important but it not the only issue. They must have a very clear understanding of their retail customer and how they can gain increase sales working with that customer. (Buyers) are going to look for a value price, not necessarily the lowest price.”

Nevertheless, the relationship between large supermarkets and their suppliers remains an area of considerable debate, not just in the UK. The publication of the CC review coincided with an announcement from the European Parliament calling for EU-wide scrutiny of the issue. Some 439 MEPs signed a declaration asking the European Union Commission to investigate the impact the growth of large food retailers has had on smaller businesses and suppliers.

“Retailing is increasingly dominated by a small number of supermarket chains and these retailers are fast-becoming ‘gatekeepers’, controlling farmers’ and other suppliers’ only real access to EU consumers,” the MEPs stated. “Such squeezes on suppliers have negative knock-on effects on both quality of employment and environmental protection and consumers potentially face a loss in diversity of products, the cultural heritage and retail outlets.”

Analysts concur that the prospect of EU-wide regulation is unlikely at this time, despite signs of liberalisation in the Netherlands and Ireland and the prospect that even the French market may be liberalised.

On the other hand, as the European Parliament petition suggests, environmental factors will weigh heavily in the coming years which could maintain pressure on out-of-town development. “In general, planning permission rules and regulation are stacked against out-of-town in the EU,” Lucht says. “They are trying to protect the mixed-use city centres in Europe, trying to prevent sprall like that which has been seen in the US.”

So whether the moves in the Netherlands and Ireland – and the likely preservation of the permissive status quo in the UK following the CC review – is indicative a convergence towards a more liberal environment in the EU remains to be seen.

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