Trade and Industry Secretary Stephen Byers today published The Competition Commission report on the supply of groceries from multiple stores. The report follows the decision by the Director General of Fair Trading (DGFT) in April 1999 to refer the industry. This followed the DGFT’s own preliminary enquiry which began in June 1998. The Secretary of State has accepted the Commission’s recommendations.

The Competition Commission concludes that taking all matters into consideration, they are satisfied that the industry is currently broadly competitive and that overall excessive prices are not being charged nor excessive profits earned. Whilst profitability among the main parties was not excessive from 1996 to 1999 it had been higher in previous years.

Commenting on the overall report, Stephen Byers said:

“Since the reference by the DGFT to the Competition Commission in April 1999, we have seen significant changes in the industry, the entry of Wal-Mart being a notable example, and a number of price cuts which it is estimated have been worth over £1 bn to the consumer.

A competitive market is the best way of securing the good deal for the customer. The enquiry has found that the industry is currently broadly competitive and as a result I have accepted the Competition Commission’s recommendations.”

However, the Commission has identified three situations where competition is distorted and operates against the public interest.

The first concerns the relationship between supermarket chains and their suppliers including farmers. The Commission recommends that a Code of Practice should be established which would put relations between supermarkets and their suppliers on a clearer and more predictable basis.

Announcing his response to this finding Stephen Byers said, “I agree that a Code of Practice should be introduced. Like the Commission I do not believe that a voluntary code would be adequate. The relevant supermarkets will have to give legally binding undertakings to comply with the remedies.

I am asking the DGFT to approach those supermarket chains with 8% or more of the market (currently ASDA, Safeway, Sainsbury, Somerfield and Tesco) to agree a Code of Practice which would meet the concerns identified by the Competition Commission. This would include provisions for independent dispute resolution. The representatives of suppliers will have an opportunity to comment on the draft.

I want this matter resolved quickly and have asked the DGFT to report back to me in three months time.” (Details of the Code are included in the Notes to Editors.)

The Competition Commission also finds two other situations where competition is distorted and certain practices operate against the public interest. These are persistent selling below cost and so-called “price flexing”. In each case, however, the Commission considered a number of remedies but in the end recommended that no action be taken because the options available would themselves have adverse effects and would be disproportionate to the problems themselves.

Finally, the Competition Commission, although not making an adverse finding, expressed concern about the limited choice of supermarkets in certain areas and considered that the situation should not be allowed to deteriorate.

They advise that, where there is scope for consumer choice to be increased through new store openings, it should be fostered. The Commission did not propose any changes to the planning regime, but noted that it is not designed to safeguard competition and consumer choice. The Commission have therefore proposed that the larger supermarket chains should have to seek the approval of the DGFT before being allowed to acquire or develop large new stores close to their existing stores.

The Competition Commission did not make an adverse finding on this issue. In law, the Secretary of State can only use the powers available to him under the Fair Trading Act if there is an adverse finding. As a result the Secretary of State has asked the DGFT to monitor the situation. Should there be signs of the situation deteriorating appropriate legislation would be considered.

NOTES TO EDITORS

Commission’s findings

  1. The Competition Commission identified 24 supermarkets which fell within its terms of reference. It looked at a number of key aspects of supermarkets’ sales and supply, including price trends in the industry, profitability, grocery prices in the UK compared with abroad, and whether recent falls in wholesale prices, especially in the livestock sector, were being fully reflected in prices charged to consumers. The inquiry also conducted its own consumer survey and considered the impact of supermarkets on inner city and rural areas, as well as the environment.
  2. Overall, the inquiry concluded that the multiple grocery industry was broadly competitive.
  3. The inquiry identified a complex monopoly situation for the purposes of the Fair Trading Act 1973 on two matters – the pricing practices of the supermarkets and their relations with suppliers. On pricing, it concluded that there were two practices which were operating against the public interest when carried out by the largest multiples – selling some frequently purchased products below cost which contributed to a situation where the majority of products were not fully exposed to competitive pressure (Asda, Morrisons, Safeway, Sainsbury and Tesco); and varying prices in different geographical areas in the light of local competition so that again the majority of products were not fully exposed to competitive pressure and competition in the supply of groceries was distorted (Safeway, Sainsbury and Tesco). Not all the supermarkets within the scope of the inquiry conducted these practices.
  4. A number of possible remedies to these pricing practices were considered, including a ban on below cost selling and requiring the supermarkets to put their prices on the Internet. However, both these remedies presented problems that would have outweighed their potential benefits. The Commission therefore concluded that any such remedies would be disproportionate to the adverse effects found and so made no recommendations.
  5. The second complex monopoly related to practices affecting suppliers. The Commission conducted a very thorough inquiry, and found that some of the larger supermarkets had sufficient buyer power that 30 of their practices adversely affected the competitiveness of some of their suppliers and distorted competition in the supply market. In particular, 27 of these practices were felt to be against the public interest because they gave the five major buying supermarkets (Asda, Safeway, Sainsbury, Somerfield and Tesco) substantial advantages over other, smaller, retailers whose competitiveness was likely to suffer as a result.
  6. The Commission felt that the most effective way of addressing these adverse effects in relation to suppliers would be a Code of Practice, which it recommended. The Code should address the concerns the inquiry had identified, and should be binding on the larger buying supermarkets and should be approved by the DGFT. In accord with the advice from the DGFT, the Code of Practice should cover the following:

    (a) Retailers should ensure that the standard terms on which they do business are in writing, and are made available to suppliers.

    (b) If retailers wish to vary those terms reasonable notice should be given to the supplier.

    (c) Retailers should pay suppliers within the time specified in the agreement, and in any event within a reasonable time after the date of the invoice.

    (d) Retailers should give suppliers reasonable notice (i.e. with regard to individual contractual arrangements, written or oral) of any intention to change a price previously agreed; and should not request retrospectively any form of discount or overrider.

    (e) Retailers should not request suppliers to contribute to retailers’ costs of buyer visits, or any supplier to contribution to the retailer’s costs of artwork and packaging design, consumer or market research, or to the costs of store refurbishment or opening; or to provide hospitality.

    (f) Retailers should not seek any form of compensation for profits being less than expected, whether on a promotion or otherwise, or for product wastage.

    (g) Where retailers change any volume ordered, or the specification of any goods, or introduce changes to any supply chain procedures they should give reasonable notice, (sufficient for the supplier to make arrangements for changes to production schedules), and should compensate suppliers for any costs or losses to them where reasonable notice is not given.

    (h) Retailers should compensate suppliers for costs caused through the retailers’ forecasting errors.

    (i) Retailers should give suppliers reasonable notice of any intention to hold a promotion in relation to the supplier’s products where there is likely to be a significant impact on suppliers’ costs; they should not over-order goods at a promotional price; and they should not require suppliers predominantly to fund promotions.

    (j) Retailers should not seek lump sum payments or better terms as a condition of stocking or listing existing products, or for better positioning of any products within a store, or for increasing shelf space.

    (k) Retailers should not charge suppliers in respect of consumer complaints unless the complaint has been verified as being justified, and as being caused by the supplier, and the supplier has been notified of the outcome; charges should not exceed the purchase cost of the goods to the retailer.

    (l) Retailers should not require suppliers to use particular third party suppliers of goods or services where the retailer receives a payment from that third party supplier in respect of that requirement.

    The Commission also suggest that the Code cover the following, although they did not make related adverse findings:

    (m) Retailers should not discriminate between suppliers in terms of access to information where category management is practised; also responsibility for allocation of shelf space to remain with the multiple.

    (n) Any penalties imposed on suppliers for alleged discrepancies or other failure to meet contractual obligations should be cost related; retailers should have written procedures covering the imposition of penalties.

    The Code should contain provision for dispute resolution.

  7. The Commission also had some concern about the limited choice of supermarket chains for some consumers in some areas. Any further local concentration among the supermarkets could weaken competition in these areas and lead to higher levels of profitability. Accordingly the Commission recommended that there should be a new system of approval for supermarket developments, and that in certain clearly defined circumstances the DGFT’s approval should be required for particular parties to be allowed to acquire or extend large new stores. But since this recommendation did not follow from adverse findings on either of the monopoly situations identified (regarding prices and suppliers), the Commission recognised that it would not be enforceable without legislation.
  8. Background

  9. Copies of the Competition Commission report “Supermarkets: A report on the supply of groceries from multiple stores in the United Kingdom”, CM 4842 (£80) are available from The Stationery Office. Press copies are available from the DTI Press Office.
  10. The Competition Commission report followed a reference by the DGFT under sections 10(3) and (4), 47(1), 49(1) and 50(1) of the Fair Trading Act 1973 on 8 April 1999. The Commission was asked to investigate the supply in the United Kingdom of groceries from stores:
  11. (a) in each of which:

    (i) the space devoted to the retail sale of groceries exceeds 600 square metres, and

    (ii) the space devoted to the retail sale of food and non-alcoholic drinks exceeds 300 square metres, and

    (b) which are controlled by a person who controls ten or more much stores as are described in sub-paragraph (a) above.

  12. The Commission was asked to consider whether any monopoly situations existed and whether any practices operated against or were expected to operate against the public interest.
  13. The original length of the reference was one year, but the Commission asked for an extension to complete the report. The report was delivered to the Secretary of State on 31 July 2000.
  14. A “scale” monopoly situation in relation to the supply of goods of any description in the UK is said to exist under Section 6(1) of the Fair Trading Act when at least one-quarter of the goods supplied are supplied by or to one and the same person or by or to a group of interconnected bodies corporate. A “complex” monopoly is said to exist under Section 6(2) when at least one-quarter of the goods supplied are supplied by or to members of the same group (not being interconnected bodies corporate) who, whether voluntarily or not, and whether by agreement or not, so conduct their respective affairs as in any way to prevent, restrict or distort competition, whether or not they themselves are affected by the competition and whether the competition is between persons interested as producers or suppliers or between persons interested as customers of producers and suppliers.