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 V

Appendix 5.

COMPETITION COMMISSION CONSULTS ON ISSUES FOR THE PUBLIC INTEREST IN SUPERMARKETS INQUIRY

The Competition Commission has sent an Issues Letter to 24 companies as part of its monopoly inquiry into supermarkets.

Such a letter is sent to the main parties before the Commission has reached any conclusions. It is designed to highlight those matters which have been identified by the Inquiry Group for further consideration, and to ensure nothing has been missed. It is accompanied by an Issues Statement which is being made public to inform all interested parties should there be any further points they wish to raise with the Competition Commission.

The publication of the Issues Statement is part of the Commission’s initiative to be as transparent as possible in it’s work.

The Commission has reached the provisional view, subject to further discussion with the supermarkets themselves, that between them, they belong to either or both of two “complex” monopolies: one regarding the pricing of groceries; and the other their relations with suppliers.

This follows 35 hearings with third parties and over 200 submissions received. The Commission has also received information from nearly 400 supermarket suppliers and 50 local authorities.

There are a number of points the Commission wants particularly to talk to the supermarkets about, including price competition, competition in terms of services and sites for which the consumer may be paying, and how the supermarkets treat their suppliers.

The next step will be the hearings in March. The Commission wants to arrange sessions with Asda, Safeway, Sainsburys, Tesco and Morrisons.

At this stage, though, no conclusions have been reached. As the Issues Statement makes clear, there are a number of matters which the Commission needs to explore further with the supermarkets before it can decide what, if anything, needs to be done.

A copy of the Issues Statement is also available from our website at www.competition-commission.org.uk/04issues.htm

Notes for editors

1.This reference was made by the Director General of Fair Trading on 8 April 1999 (see OFT press notice 11/99) under sections 10(3) and (4), 47(1), 49(1) and 50(1) of the Fair Trading Act 1973.

2.“Groceries”: include food, drinks (alcoholic and non-alcoholic), cleaning products, toiletries and household goods; but exclude petrol, clothing, DIY products and financial services.

3. “Multiple stores” have been defined by the OFT as companies with 10 or more stores in the United Kingdom where more than 600 square metres of retail space is devoted to grocery sales of which more than 300 square metres is devoted to food and non-alcoholic drinks.

4. The Commission issued a press release inviting evidence on 21 April 1999 (see news release 4/99.)

ANNEX 2 TO ISSUES LETTER

SUPPLY OF GROCERIES FROM MULTIPLE STORES MONOPOLY INQUIRY

Issues Statement

The Competition Commission has written to 24 companies in connection with its inquiry into supermarkets, describing the progress made so far, identifying the issues which it has been examining and highlighting those which it wishes to raise with some of the companies concerned (see paragraph 12) at a series of hearings during March.

In accordance with recent practice the Commission is publishing this statement summarizing the main points raised with the companies, in order that those interested may give us their views. In view of the wide public interest in the inquiry and the uncertainty which it has generated, this statement indicates the Commission’s current priorities in the inquiry.

This is, however, an interim stage in the investigation and no conclusions have as yet been reached on any matter.

The Commission has received over 200 submissions, held 35 hearings with interested parties mainly in London but also in Belfast and Birmingham; and obtained questionnaire response data from consumers, all the main grocery retailers, nearly 400 suppliers of groceries to supermarkets and 50 local authorities. It has analysed a range of critical aspects including price levels, profitability and efficiency; price competition locally and nationally; international comparisons of prices and profitability; relationships with suppliers; transmission of price changes from suppliers through to consumers, acquisition of land for supermarkets and the impact of the planning regime in the UK. The Commission has also looked at a number of other social and environment issues relating to the retailing of groceries.

Jurisdiction

The Commission has provisionally found that all the companies to whom it has written belong to one or both of two complex monopoly groups for the purposes of the Fair Trading Act 1973, in relation to the supply of groceries in the UK by supermarkets (paragraph 12 identifies these companies). One complex monopoly derives from the pricing of groceries sold by supermarkets to consumers and the other from the relationship between supermarkets and their suppliers. These findings are provisional (the companies are being invited to comment on them) and carry no implications as to whether any of the companies is operating against the public interest.

Public interest considerations

Where the Commission concludes that a complex monopoly exists, it is required to decide whether any matter arising from its investigation operates against the public interest. Below are set out the matters the Commission will wish to raise with the companies before reaching its conclusions.

1.Market definition

The Commission is primarily interested in the so-called ‘one-stop shop’ pattern of grocery shopping in which consumers can buy most or all of their weekly grocery requirements in a single visit to a supermarket. In this context, its provisional view is that the market comprises a large number of local catchment areas within which consumers can reach a supermarket in a relatively short period of time. However, the Commission will also wish to explore the significance of regional or national market shares of the companies concerned; and whether Northern Ireland constitutes a separate market.

1.Company profitability

The Commission has examined a range of different measures of supermarkets’ overall profitability based on margins, returns on capital, and cash flow analysis, and trends in them. As appropriate, it has compared these to companies’ cost of capital and returns in supermarkets in other countries. Its initial view is that, while in some respects overall profitability performance has been quite strong, there is at most only limited evidence of excessive profitability, as measured, being achieved. The Commission will, however, seek further clarification at the hearings.

3.Prices

Evidence obtained by the Commission suggests that the trend of grocery prices in recent years, while upwards, has been significantly below that for prices generally in the UK, leading to a reduction in the price of groceries in real terms. Other evidence still under consideration suggests that the trend has also been lower than for grocery prices in some comparable European countries. A detailed survey of the prices of a wide range of grocery products in several thousand stores in the UK and certain other European countries is being conducted, the results of which will in due course be submitted to the companies for comment. The Commission is also looking at data indicating how individual supermarkets’ prices compare to each other.

4.Consumer satisfaction

The Commission has reviewed a number of surveys of consumers’ views of supermarkets. In addition, in order to obtain an independent view and to cover certain gaps in the evidence already available, the Commission has carried out its own detailed survey. This has been used to provide insights into a number of the issues described below, but the overall picture which these surveys provide appears generally to be one of high levels of consumer satisfaction with the performance of supermarkets in the UK.

Main points for the hearings

Within this context, the Commission has identified a number of points which it wishes to raise with supermarkets. These are:

5.Market power

The Commission wishes to raise with the companies whether individual supermarkets have some local market power in catchment areas where there are few or even no competing supermarket stores. Linked to this is the question referred to in paragraph 6(a) below, whether the extent of local market competition affects the prices which consumers pay.

6.Price competition

Surveys indicate that consumers have regard to range, quality, service and price when buying groceries. It is primarily matters relating to pricing which the Commission wishes to raise, including:

(a)whether price competition might be excessively concentrated on a relatively small number of frequently purchased items; and at stores which face the most local competition;

(b)whether price changes by suppliers have been rapidly and fully passed through to consumers; and

(c)whether the pattern of prices and margins across different types of product, including branded and own label products, is related to costs to the extent that would be expected in a fully competitive market. This would include products persistently sold at a loss, which may benefit consumers in the short term but which may distort competition and consumer choice, and may adversely affect the supply or availability of such products in the longer term.

7.Costs and efficiency

The Commission is also considering the cost structure and efficiency of supermarkets. Three issues which arise from this are:

(a)Whether some supermarkets have been able to maintain too high a level of costs, with consumers paying more than would otherwise be the case.

(b)The extent of economies of scale in the industry, at store level but more particularly at regional and national level, and what impact this has on prices and competition.

(c)Whether some forms of competition between supermarkets, primarily for sites and in provision of any facilities which do not cover their costs, has unduly raised prices to consumers.

8.Land and location issues

The Commission has been looking at prices paid for land acquired for supermarket development and at prices paid for land acquired for other types of retail development. It wishes to explore whether prices paid for land for supermarket development are higher and if so, whether such higher prices sustain, or are sustained by, higher prices for grocery products than would otherwise be the case. This could result in high prices even though profits were not excessive. A related issue is whether supermarkets seek to restrict competitors’ access to suitable sites for stores.

9.Relationships with suppliers

The Commission has received evidence from both supermarkets and suppliers on their commercial relationships. It will wish to discuss whether supermarkets have excessive buying power or not, and if so, whether this:

(a)lowers the price of products to consumers;

(b)prevents efficient suppliers from earning a reasonable return;

(c)leads to higher prices than otherwise of products sold by suppliers to other retailers;

(d)damages the longer-term competitiveness of the grocery supply base, or some parts of it, in the UK; and

(e)reduces consumer choice.

In particular, because the great majority of groceries are bought from supermarkets, fair and reasonable access to supermarket shelves may often be a precondition for an efficient supplier to survive and prosper. The Commission will therefore wish to focus specifically on the terms and conditions governing access to supermarket shelves and whether these are in any way unfairly discriminatory, either as between different suppliers or as between supermarkets’ own-label products and those of other suppliers.

Other issues

10.Social, environmental and planning matters

The Commission has sought views on the objectives, role and impact of the planning regime in the UK in relation to supermarkets. These, together with questions of access to grocery outlets by lower income and less mobile consumers, the impact of large grocery retail developments on local communities and related environmental issues, will also be raised.

11.Recent and prospective developments

The Commission will wish to discuss with the companies the most recent, and prospective, performance of the supermarkets, and the extent to which the nature and degree of competition may be changing. This will include the emergence of Internet and other forms of home shopping and the entry of Wal-Mart into the UK market, and any effects these may be expected to have on the competitive situation.

The companies

12.The Commission has considered the market positions of the 24 companies that between them make up the two complex monopolies, in particular their national, regional and local market shares, together with data on the number of their larger stores. In the light of this, the Commission’s provisional view is that, in relation to 19 of them, it would be unlikely to conclude that their behaviour operated against the public interest, and the Commission currently has no plans to arrange public interest hearings with any of them. These are Aldi Stores Ltd; Anglia Regional Co-operative Society Ltd; Budgens Stores Ltd; Colchester and East Essex Co-operative Society Ltd; CRS Ltd; CWS Ltd; E H Booth & Co Ltd; Iceland Frozen Foods plc; Lidl UK GmbH; Marks & Spencer plc; Midlands Co-operative Society Ltd; Netto Foodstores Ltd; Oxford, Swindon and Gloucester Co-operative Society Ltd; Plymouth and South Devon Co-operative Society Ltd; Scottish Midland Co-operative Society Ltd; Somerfield plc; United Norwest Co-operatives; Waitrose Ltd; and Yorkshire Co-operatives Ltd. This provisional view carries no implication that any of the activities of the other five companies, ASDA Group plc; Sainsbury Supermarkets Ltd; Wm Morrison Supermarkets plc; Safeway plc; and Tesco plc are or will be viewed as operating against the public interest. The Commission looks forward to discussing the issues with these five companies in March.

Views invited

Any person interested in these matters is invited to comment on any of the issues raised in this statement.

ENDS