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 VI

Appendix 6.

COMPETITION COMMISSION CONSULTS ON POSSIBLE REMEDIES IN SUPERMARKETS INQUIRY

The Competition Commission is today making available a statement of possible remedies relating to its inquiry into supermarkets. It invites comments on possible remedies for any issues that might be found to operate against the public interest. This follows up its earlier statement of 31 January in which it indicated the issues that it wished to raise with the supermarkets.

It is only in the event that the Commission makes any findings against the public interest that remedies would need to be considered. It has not yet formed any view on this and will not do so until after hearings with supermarkets scheduled for March.

The purpose of setting out these hypothetical remedies now is to ensure that all interested parties have sufficient time to comment on the likely effectiveness, costs and practicalities of them while minimising the time necessary to complete the inquiry.

The remedies listed in the statement (annexed to this press release) all relate to issues identified in the statement dated 31 January 2000 (also attached).

Possible remedies for issues have been grouped under three main headings:

1. Competition issues (especially local market concentration and barriers to entry)

2. Pricing

3. Relations with suppliers

The publication of the remedies statement is part of the Commission’s initiative to be as transparent as possible in its work.

Notes to Editors

1. A statement of possible remedies is normally released before the Commission has reached any public interest conclusions in an inquiry. It is based on hypothetical remedies for matters which the investigating group may find to operate against the public interest. Comments are invited from interested parties on the possible remedies to help the Commission assess the wider implications of any recommendations it might wish to propose.

2. The inquiry into the supply of groceries from multiple stores is being carried out under the monopoly provisions of the Fair Trading Act 1973 as a result of a reference made by the Director General of Fair Trading in April 1999 (see OFT News Release No 11/99, dated 8 April 1999, and CC News Release 04/99, dated 21 April 1999).

3. Competition Commission News Release 04/00 of 31 January set out the issues which the Commission wished to consider in the inquiry. The Commission will hold further hearings with the supermarkets before completing its report.

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

5. “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.

6. Further information about the inquiry, including copies of the remedies and issues statements, can be obtained from our website at www.competition-commission.org.uk/ref.htm

7. Enquiries should be directed to:

Ends

REMEDIES STATEMENT

Introduction

1. On 31 January, the Competition Commission wrote to 24 companies involved in its inquiry into supermarkets, indicating the issues which it wished to raise with five of them. The issues were summarised in a publicly released statement, a copy of which for convenience is attached. This indicated some areas which the Commission viewed as unlikely to lead to any adverse public interest findings, and others which it wished to raise with the five companies at hearings in March. Yesterday the Commission followed this up with a further letter to the five companies, copied to the other 19, inviting them to comment on possible remedies that could be recommended if, at the completion of the Commission’s investigation, it considered that one or more companies were operating against the public interest.

2. This statement summarises the points on which views are sought. In particular comments are invited on the likely effectiveness, costs and practicality of the remedies listed. It must be stressed, however, that the points listed below are being raised on an entirely hypothetical basis. The Commission has not yet formed any public interest conclusions, not will it do so until after the hearings in March. It is at that stage, and only in the event of any findings against the public interest, that remedies would need to be considered by the Commission. The purpose in publishing this statement now is to ensure that all interested parties have sufficient time to comment on possible remedies that the Commission may consider, while minimising the time necessary to complete the whole inquiry.

Hypothetical remedies on which views are sought

3. The Commission invites views on possible remedies in three broad areas.

Competition issues

4. The first question raised in the Commission’s earlier issues letters was whether there are a significant number of localities in which one or two supermarket chains have a high market share, such that consumers might face insufficient choice, or the supermarkets concerned face insufficient competition. Examination of this necessarily involves consideration of the dimensions of local markets, primarily in terms of the time consumers spend in travelling to stores; how market shares should be measured, for example in terms of the number of stores in a particular area, or the square footage of retail space or grocery sales provided by each supermarket; and above what market share local market concentration might be regarded as excessive.

5. If problems were found to exist, possible remedies include restrictions on new investment, either in new stores or extensions, by supermarkets in locations where the market share criterion was exceeded; divestment of any land holdings in such locations, in order to facilitate entry or expansion by other supermarkets; divestment of stores where the criterion was breached, to reduce or to eliminate any excessive concentration identified; prohibition of any restrictive covenants or other mechanisms which could restrict the availability of sites to competitors; or a requirement to ensure that a supermarket’s price level in any areas found to have excessive concentration was no higher than in its stores of similar size in fully competitive areas in the same region of the country.

6. The Commission has also carried out an investigation into the impact of the planning regime in the UK on grocery retailing. In the light of this the Commission provisionally does not believe there is a case for any major change in the regime or the land use principles incorporated in the current guidance; but seeks views on some possible changes which, consistent with these principles, might, if necessary, enable the system to be more responsive to the needs of competition in grocery retailing. These include measures to facilitate assembly of suitable sites, including more positive guidance on the use of existing compulsory purchase powers by local authorities; and any mechanisms through which the extent of local competition or consumer choice could have some influence on which companies were permitted to acquire or develop a site, for example, by restricting use of some sites available for grocery retailing to certain named supermarkets. Ancillary questions concern the extent to which assessment of the likely impact of a new store should be carried out independently of those with an interest in the site (this may have particular application in Northern Ireland), and whether store turnover figures should be available to local authorities and other interested parties involved in planning applications.

Pricing

7. The issues letters sent to companies referred to a number of aspects of pricing behaviour which the Commission wished to raise, including whether price competition is excessively concentrated on a relatively small number of frequently purchased items, and at stores which face the most local competition; whether suppliers’ price changes are passed through to consumers rapidly enough; and whether prices sufficiently reflect the costs of different products.

8. If problems were found to exist in relation to pricing behaviour, possible solutions are of three types, the first being measures to increase transparency of pricing. This might include: improvement in the presentation of price information on supermarket shelves, in particular for products where the price is less well known to customers or which are rarely if ever the subject of promotions; and increasing the ability of consumers (or other interested parties on behalf of consumers) to make easy comparisons between the prices of different supermarkets through a requirement that the companies publish all current retail prices on the Internet.

9. The second type of solution relates to pricing policy more generally. The Commission does not currently envisage any remedies which would interfere with companies’ decisions on whether to adopt national pricing strategies or not, but invites views on whether, first, price differences between stores should be broadly related to costs, eg on a regional basis in the light of regional difference in costs, or to reflect the costs of different store size. This would have the effect of prohibiting any possible discrimination against consumers who shop in areas where there is less competition. Second, if persistent selling at a loss threatens to damage the supply base of the products involved, or results in higher prices to consumers for other products (to finance the losses incurred), this practice might be prohibited.

10. The third area relates to profitability. In the light of its work to date, the Commission does not currently envisage any remedies directly relating to overall profitability. However, as part of any set of remedies designed to address pricing issues, it might consider measures to increase transparency of profit margins at company accounts level including, in particular, the separation of profits due to grocery retailing from that of other activities, including petrol retailing; or a requirement that supermarkets regularly send gross margin data on a product line basis to the Director General of Fair Trading. In addressing any adverse findings which might arise in relation to pricing, the Commission invites views on whether some matters might better be dealt with through monitoring by the DGFT in the context of his powers under the 1998 Competition Act.

Relations with suppliers

11. In the event of any adverse findings in this area, the purpose of remedies would be to ensure no unreasonable use of excessive buying power, which might distort competition and which might in turn restrict consumer choice. This could occur through unreasonable terms, charges or costs being imposed on suppliers such that, for some at least, their competitiveness was adversely affected.

12. One possible solution to any such problems would be the drawing up of a code of practice governing such relationships to ensure that any supermarket found to have exploited excessive buyer power should no longer do so. Options include a voluntary code being issued by the supermarkets; as agreed code being established, using the good offices of one or more respected industry bodies; or the supermarkets being required to comply with a code drawn up by the competition authorities. The means of enforcement of a code would be a significant element in any such remedy. Here again the Commission invites views on whether the DGFT might monitor adherence to the code in the context of his powers under the 1998 Competition Act.

13. In general terms such a code would be designed to ensure that suppliers should have a reasonable degree of certainty as to the price they will receive (or the factors which can subsequently alter the price) when they accept orders; should not be required to vary the terms on which they are trading with supermarkets without reasonable notice, though the latter is likely to depend heavily on the nature of the products concerned; and should not face unreasonable or discriminatory trading terms or conditions.

14. In a properly functioning market, competition should ensure that these conditions are normally met. If the Commission were to conclude that excessive buyer power was inhibiting this and that a code of practice was required then its content might need to be quite specific. To assist those wishing to comment, the Commission has compiled a list of possible terms for inclusion in such a code; but reiterates that the list does not imply that any activities of any UK supermarkets have been found to be against the public interest:

i)requiring reasonable notice a) of any variation in the terms and conditions of supply (this to cover both standard terms and conditions of business and the terms of individual contracts, whether written or oral) and b) of any requirement or invitation to contribute to the cost of promotions;

ii)requiring reimbursement of costs imposed on suppliers as a result of variations of the terms and conditions of supply by supermarkets for which reasonable notice is not given;

iii)prohibiting discrimination against suppliers because they are not prepared to participate in or contribute to certain promotions;

iv)prohibition on supermarkets requesting or insisting that suppliers give them discounts from previously agreed prices other than where the basis for this has been identified and agreed in advance;

v)prohibition on any penalty charges, fines or additional discounts for failure by suppliers to meet quality specifications, delivery quantity or times etc where the method of determining the payment is not agreed in writing in advance;

vi)prohibition of any discrimination in the quality standards required as between one supplier and another for the same product;

vii)no financial contributions to any third parties to be required or invited;

viii)exclusive supply arrangements to contain identifiable benefits for suppliers to compensate for the restriction on their trading, and reasonable termination notice given to reflect this restriction;

ix)agreeing with suppliers at the outset of a contractual relationship whether the cost of supplier audits by supermarkets are to be paid by the supplier, and means for ensuring that such costs are not excessive;

x)no supplier to be given control of access to, or management of, supermarket shelf space;

xi)listing fees, shelf access fees or other non-performance-related fees, or more generally fees payable as a condition for stocking, ordering or displaying products to be prohibited. Alternatively any such fees to be chargeable only where the supermarket subsequently guarantees to take a reasonable minimum supply of products. In the case of listing fees these might be required not to exceed the identifiable cost of assessing a supplier’s suitability;

xii)no interference with suppliers’ other business activities, including prices charged by suppliers to other retailers;

xiii)all arrangements with third parties involved in the supply of complementary goods or services, eg packaging or transport, to be transparent and agreed with the product supplier at the outset, in particular including any charges made by supermarkets to third parties which the latter might seek to reclaim from the supplier;

xiv)prohibition of credit terms beyond a specific limit, eg 30 days or, alternatively, prohibition of credit terms which unreasonably discriminate between suppliers, or both.

15. Comments on the hypothetical remedies and related points raised in this statement are invited and it would be helpful if those responding could arrange for replies to be sent to Mr James Jolly, Reference Secretary, Competition Commission, New Court, 48 Carey Street, London WC2A 2JT.