Supermarkets: Big four off the hook
The high street chains are no longer rattled, share prices climbed on the news, and the supermarkets are feeling quietly vindicated. Apparently, fears of unfair competitive practices were unfounded as the long-awaited Competition Commission's inquiry delivered it's preliminary findings. But not everyone is happy.
Published 01/11/2007 | 13:20
The Big Four supermarkets breathed a collective sigh of relief yesterday. The long-awaited provisional findings from the Competition Commission's inquiry into their dominance of the grocery sector appeared to let them off the hook.
The commission found no evidence of unfair competition between large grocery retailers and small stores. Local independents are not being killed off by an onslaught from the supermarkets, it appears. And the UK groceries market is generally "delivering a good deal for customers".
Furthermore, the commission explicitly said that the mighty Tesco, which currently enjoys a massive 31.4 per cent of market share, is not in such a dominant position that others cannot compete. "Expansion by other retailers continues, which suggests Tesco... is not acting as a barrier to expansion," the commission said. Consequently, shares in the supermarket giant hit an all-time high and closed the day 3 per cent ahead.
However, the commission does have concerns about a number of key areas which could have an impact on the supermarkets – the controversial issue of land banks sites, the planning system and the Supermarket Code of Practice.
The growing anti-supermarket lobby has been accusing the Big Four, but in particular Tesco, of buying up land near to stores and holding on to it to prevent competitors from building rival stores nearby. The watchdog outlined its intention to stamp out this practice and said it had found that in towns where a single company dominates, supermarket chains own land near about 10 per cent of large outlets, which probably prevents competitors, such as convenience stores, from building there.
Ultimately, supermarkets could be forced to sell off land where there is a low concentration of competing stores. Retailers could also be banned from using restrictive covenants or exclusivity arrangements, which prohibit certain types of retailer opening in some areas. In some cases, retailers have been found to own property which they sub-let for non-grocery use, or split the lease into more than one sub-lease, making it difficult to reassemble the site into space used for a grocery store.
The watchdog has identified 520 land bank sites owned by the four largest grocery retailers – Tesco, Asda, Sainsbury and Morrisons – and an additional 366 sites they in effect control through leases to third parties, restrictive covenants and exclusivity arrangements.
There are 110 land sites that have triggered fears over competitiveness, but just 20 of these are "most likely to frustrate entry by a competitor". It is these sites which are likely to be required to be sold off. Though the commission has not revealed the company holding these sites, the majority are thought to be owned by Tesco.
Many independent retailers have been hoping that an inquiry would eventually result in fewer supermarkets being given planning permission. However, a shake-up of the planning regulations which the commission proposes, could pave the way for more supermarkets to open. The commission found that the current planning system for retail development acts as a barrier to entry or expansion "by limiting construction of new stores on out-of-centre or edge-of-centre sites". The commission wants to ease planning restrictions and introduce a new "competition" test to the planning system to replace the current "needs" test. This would see local authorities encouraged to look favourably on retailers who do not have a presence in a local area.
Peter Freeman, the chairman of the commission, was keen to point out the commission was not "giving a green light to development in Greenfield areas" but said the current regime "... favours incumbent operators. We are concerned about the distortion that some aspects of the planning system creates in favour of certain retailers," he said.
Kevin Hawkins, the director general of the British Retail Consortium (BRC), who welcomed the commission findings, said a less restrictive planning regime "that enables more store competition would be good for consumers".
"So-called land banks are largely a function of the current planning regime where good retail sites are increasingly scarce," he said. "When a site comes up that a retailer wants to develop now or in the future they will grab it. That may exclude a competitor but that is simply a side-effect of the shortage of suitable sites."
The commission is also considering changes to the Supermarkets Code of Practice which regulates the relationship between supplier and retailer. "We do have concerns about aspects of the way retailers deal with their suppliers, which, if left unchecked, could harm consumers," Mr Freeman said.
All of the major four supermarkets welcomed the findings. Tesco's executive director for corporate and legal affairs, Lucy Neville-Rolfe said they "lay to rest the claims that Tesco's position in the market means that other retailers cannot compete or is acting as a barrier to expansion by other grocery retailers".
But not everyone was happy.
Duncan Swift, head of business adviser Grant Thornton's food and agribusiness recovery group, said the findings represented a "a cliff-hanger for UK food suppliers to supermarkets".
"They will need to keep trading on a wing and prayer that unreasonable market practices don't get so bad whilst continuing to be relatively unchecked as to threaten their individual livelihoods," he said.
Matthew Knowles, a spokesman for the Federation of Small Businesses, said the initial findings "miss the point entirely". "Competition between the big four supermarkets is not the same as free and fair competition across the whole grocery sector," he said. "Small retailers and suppliers are being squeezed out because of practices such as selling items below the cost of production, bullying suppliers and increased parking charges in the high street compared to free parking at supermarkets.
"The devastating impact of the current unfair grocery market can be seen on high streets across the country.
"Competition is about consumer choice as well as price and it does not matter how cheap mainstream items are at a supermarket if the only outlets for other goods have closed down."
Interested parties have until 30 November to submit their response to the commission's remedies.
Tesco executive director for corporate affairs, Lucy Neville-Rolfe said:
"... shopping for groceries is better for consumers than it has ever been. Prices are lower, quality is better, there is greater choice and it is more convenient. All the benefits to consumers have come about because retailing in this country is intensely competitive."
John Longworth, Executive Director, ASDA said:
"The Competition Commission has conducted a very detailed investigation into what is an important issue for UK consumers... We welcome their finding that the UK groceries market is delivering a good deal for consumers... A change in the planning system would allow more competition."
Wm Morrison Supermarkets welcomes the Competition Commission's provisional findings into the UK groceries market and the very thorough nature of the report, which confirms that the industry is broadly competitive. Morrisons always deals with suppliers fairly and we invariably face strong competition wherever we operate.
Sainsbury's is pleased that the provisional findings published by the Competition Commission bring the investigation nearer to its conclusion. In particular, Sainsbury's welcomes the Commission's findings that the UK groceries market is delivering a good deal for customers but that action is needed to improve competition still further.