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January 23, 2007

UK: Commission outlines future of grocery investigation – update

The Competition Commission has said that it will shift its focus to the local level as it continues its investigation into the UK’s GBP1.24bn (US$2.46bn) grocery sector.

The Competition Commission has said that it will shift its focus to the local level as it continues its investigation into the UK’s GBP1.24bn (US$2.46bn) grocery sector.
 
“Our key focus going forward will be the local retail system. This will include land and planning,” Competition Commission chairman Peter Freeman said at a press briefing today (23 January).
 
In its examination of land and planning issues Freeman said the CC would be posing the question: “do any particular retailers get an easier ride?” The investigation will examine the impact of planning rules and policies alongside the use of the planning system by retailers to gain a competitive advantage.
 
“If we were to feel changes need to be made to the planning system we would make a formal recommendation to that effect,” Freeman explained.
 
This morning’s release of the 60-page ‘emerging thinking’ document draws to a close the first stage of the 18-month inquiry into the market dominance of the UK’s big supermarkets, due to be completed in November. The four biggest supermarkets in the UK – Tesco, Wal-Mart’s Asda, Sainsbury’s and Morrisons – together control nearly 75% of the market.
 
Tesco alone accounts for 31.4% of food retail sales, and the CC has expressed concerns that such dominance could inhibit competition. “We are not here to punish success or individual retailers, but we are concerned with whether Tesco or any other supermarket can get into such a strong position, either nationally or locally, that no other retailer can compete effectively,” Freeman commented.
 
As the inquiry continues, the CC looks set to examine the effect of price-based competition, such as below-cost selling and price flexing, and non-price competition, such as product offering, staffing levels or store refurbishment, on the local level. “We will be looking closely at the extent to which price and non-price variables are influenced by the number and identity of grocery retailers in different local areas,” the Commission wrote.
 
Turning to the supplier-retailer relationship, the CC said that it has found little evidence to support the suggestion that retailers use their power to exploit food manufacturers.
 
“Our preliminary analysis does not indicate a systemic problem with economic viability of food and drink manufacturers and processors. We have not identified an ongoing decline in margins or return on capital for this group of firms. In our own survey of suppliers, less than 4% of suppliers indicated that it was either fairly unlikely or very unlikely that they would be in business in five years’ time,” the emerging thinking document said.
 
“Going forward, we will continue looking at supplier profitability both overall and in individual sectors, particularly in primary producing sectors where concerns are raised with us.”
 
This stance has been criticised by trade associations representing suppliers and smaller retailers. The Association of Convenience Stores’ chief executive, James Lowman said: “What is clear from the emerging thinking is that in some areas the Commission still needs to go out and find crucial information.  For example, their analysis of the relationship between retailers and their suppliers has not gone far enough. They must probe this issue much further in order to fully understand how buying power operates and how it ultimately damages competition and the consumer.”
 
The response of large supermarkets, on the other hand, has been more positive.
 
Tesco boss, Sir Terry Leahy, said: “We are at the early stages of this inquiry but the Commission appears to have made some progress on dispelling the myths surrounding our industry, particularly in their early work on suppliers where they have found no problems with the economic viability of manufacturers, processors or wholesalers.”
 
Meanwhile, Sainsbury’s has praised the CC’s concern that one supermarket could come to dominate the market and impede competition, commenting that it “shared the Competition Commission’s concern with ‘any one grocery retailer’s pre-eminent position, however acquired, becoming entrenched and incontestable by others’”.
 
It added: “Sainsbury’s main concern is to ensure that this investigation helps consumers have access to a real choice of one-stop shops and secures a competitive market in the future at both a national and local level,” the retailer said in a statement today.

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