Committee Reports > List of Committees > Joint > 2000 > Committee on Enterprise and Small Business > Report - Development in Relation to UK Supermarket Trading Practices & Retail Planning

APPENDIX II

Appendix 2

BRIDGEMAN REFERS SUPERMARKETS

John Bridgeman, Director General of Fair Trading, today referred the £60bn a year grocery retailing sector to the Competition Commission (formerly MMC) for investigation.

The Commission has 12 months to report to the Secretary of State for Trade and Industry on:

•whether a monopoly exists in the sector - which includes all companies in Great Britain with 10 or more stores where more than 600 square metres of retail sales space is devoted to grocery sales and more than 300 square metres is devoted to food and non alcoholic drinks - and, if so, in whose favour

•whether the situation is being exploited

•whether the monopoly operates, or may be expected to operate, against the public interest.

The reference follows an eight-month OFT competition inquiry. The OFT looked at the profit levels of the four largest supermarket chains - Tesco, Sainsbury, Safeway and Asda - over five years (1993-98) and competition issues such as barriers to entry and pricing policies. The study was based on data from 1630 stores in Great Britain and also included an independent assets evaluation of land and buildings.

John Bridgeman said:

‘After analysing the profits of the four largest supermarket chains using a range of conventional and specialist economic measures I have to conclude that there is a level of profitability here which requires further investigation by the Competition Commission. The Commission will be able to carry out a wide-ranging and transparent study of this important industry.’

The OFT inquiry had raised several competition issues, he said. The most important of which were:

•the nature, extent and existence of barriers to entering the market on a competitive scale

•the extent to which land is increasingly impacting on the cost structure of competing firms

•the intensity of price competition at local, regional and national levels

•the nature of the relationship between the multiples and their suppliers, including agricultural producers and the ways in which buyer power is exerted

Mr Bridgeman said:

‘My interest has been in trying to find out whether excessive profits are being earned and I have considered the results in the context of wider concerns such as whether there are barriers to entering this industry or other factors affecting competition.

‘I believe that there are now significant barriers to new competitors in high-volume grocery retailing in Britain. For example, sites for new stores are dwindling and this gives the existing stores an advantage. Planning delays, site development costs and the ability of the largest stores to outbid smaller rivals add to the problem. This should not be seen as criticism of planning policy - it is simply to state the fact that there are significant barriers to entry and they limit the impact new competitors could be expected to have on the behaviour of the current main players.

‘In this situation it becomes imperative that the competition authorities are satisfied that competition between existing grocery retailers is effective. I am not. I am concerned, for instance, that grocery prices are often set to match competitors rather than to undercut them particularly in catchment areas where consumers have a limited choice of supermarkets.

‘Supermarkets have become an important and vital part of the national economy and they have brought the benefits of greater convenience and choice to the consumer. Their size has brought them tremendous buyer power which can be used to deliver better quality and lower prices to customers. I have had concerns for some time, though, that this power may become exploitative and the many responses from suppliers during our inquiry suggests that it is something which needs to be looked at by the Competition Commission.

‘The supermarkets have been co-operative and helpful at every stage of the OFT’s inquiry and I have considered their representations carefully. I note, in particular, what has been said about the measures we have used to assess profitability. Considerable effort was made to explain our methods and assumptions to all the parties and I am satisfied that we have been as fair as possible in our analysis. It is not possible to determine whether excessive profits are being made by simply comparing profits and margins across different UK businesses. Sophisticated economic modelling is required to take into account the firms’ levels of investment and risk. We have used a number of measures and have not exclusively relied upon any one indicator of profitability.’

Anyone wishing to make representations to the Commission should write to: The Secretary, Competition Commission, New Court, Carey Street, London WC2A 2JT.

NOTES

1. Grocery retailing includes food, drink (alcoholic and non alcoholic), cleaning products, toiletries and household goods. Petrol, clothing, DIY products and financial services are not included.

2. Terms of reference are attached.

3. Under section 2 of the Fair Trading Act 1973, the Director General of Fair Trading has a general duty to keep under review commercial activities in the UK so that he can find and evaluate monopoly situations or uncompetitive practices.

Inquiries into scale monopoly situations allow the OFT to examine all aspects of competition in markets served predominantly by one or more leading companies which each supply or acquire 25% or more of goods or services of any particular type in all or part of the UK.

Inquiries into complex monopoly situations examine markets that may be served by several companies which are not interconnected and which together account for 25% or more of the supply or acquisition of any particular description of goods or services in all or part of the UK - and which engage in conduct (whether or not by agreement) which has or is likely to have the effect of restricting, distorting or preventing competition.

The Director General has the primary responsibility for conducting initial enquiries into possible monopoly situations and anti-competitive practices. When these enquiries have been concluded companies may offer the Director General legally enforceable undertakings to remedy any detriments to competition or the Director General may make a reference to the Competition Commission for a more detailed investigation and potential remedies. Before making a reference he issues a Minded to Refer letter to the parties which asks them for their views on the terms of reference of the Commission’s inquiry.

The Secretary of State for Trade and Industry also has powers under the Act to refer monopoly situations to the Commission (section 51). He may also make general references (section 78) of business practices such as refusal to supply, parallel pricing, discounts to retailers. The latter reference is not into any company or group of companies and it does not produce a report with recommendations, it is simply a report on types of business practices.

The Commission has been given 12 months to complete this inquiry but it can ask for further time if necessary. Following a Commission investigation a report goes to the Secretary of State. If the Commission has made an adverse public interest finding he must decide what action to take. He may ask the Director General to seek undertakings from the parties or impose remedies using his order-making powers.

Terms of Reference:

The Director General of Fair Trading in exercise of his powers under sections 10(3) and (4), 47(1), 49(1) and 50(1) of the Fair Trading Act 1973 hereby refers to the Competition Commission the matter of the existence or possible existence of a monopoly situation in relation to the supply in Great Britain of groceries from stores:

(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 such stores as are described in sub-paragraph (a) above.

The Commission shall investigate and report on the questions whether a monopoly situation exists and, if so:

(a) by virtue of which of the provisions of sections 6 to 8 of the said Act that monopoly situation is to be taken to exist;

(b) in favour of what person or persons that monopoly situation exists;

(c) whether any steps (by way of uncompetitive practices or otherwise) are being taken by that person or persons for the purpose of exploiting or maintaining the monopoly situation and, if so, by what uncompetitive practices or in what other way;

(d) whether any action or omission on the part of that person or persons is attributable to the existence of that monopoly situation and, if so, what action or omission and in what way it is so attributable; and

(e) whether any facts found by the Commission in pursuance of their investigations under the preceding provisions of this paragraph operate or may be expected to operate against the public interest.

For the purposes of this reference:

“control” shall be construed in accordance with section 65(3) of the Fair Trading Act 1973;

“food” excludes food sold for consumption in the store; and

“groceries”:

(a) includes food, drinks (alcoholic and non-alcoholic), cleaning products, toiletries and household goods; but

(b) excludes petrol, clothing, DIY products and financial services.

The Commission shall report upon this reference within a period of one year from the date hereof.