TITHE AN OIREACHTAIS
HOUSES OF THE OIREACHTAS
Joint Committee on Enterprise & Small Business
An Comhchoiste um Fhiontraíocht agus Mionghnóthaí
The Supermarkets – Giving Consumers a Fair Deal? A Review of the Competition Commission Study on the supply of groceries from multiple stores in the United Kingdom
Na hOllmhargaí - Cothrom na Féinne á Thabhairt do Chustaiméirí? Athbhreithniú ar an Staidéar ón gCoimisiún Iomaíochta ar Sholáthar earraí grósaeireachta ó ilstóir sa Ríocht Aontaithe
The Joint Committee on Enterprise and Small Business was established in November 1997 by orders in Dáil Éireann and Seanad Éireann. A list of members of the Joint Committee is attached at Appendix 1. Since its establishment, the Joint Committee has taken a major interest in the food retail trade in Ireland.
This report, reviewing the Competition Commission Study on the supply of groceries from multiple stores in the United Kingdom, was prepared on behalf of the Joint Committee by Senator Paul Coghlan and adopted by the Joint Committee on 20th February 2001.
Ivor Callely T.D.
20th February 2001
In April 1999 the UK Competition Commission launched an investigation into the supply of groceries from multiple stores in the UK. As the Oireachtas Joint Committee on Enterprise and Small Business (“the Committee”) had carried out its own extensive examination of the retail and wholesale grocery trade in Ireland,1 it was decided by the Committee to review the UK investigation and assess the implications for the Irish retail grocery market. As some of the multiples operating in the United Kingdom also trade in Ireland, it was felt that there were clear lessons that might be learned from the report.
Accordingly I was appointed as Rapporteur for the Committee to review the Commission investigation, address the response to the Commission Report and prepare a report outlining any issues that have a bearing on the food supply sector in Ireland. In this regard I would like to acknowledge the grateful assistance of Ambassador Ted Barrington, and his staff at of the Irish Embassy in London. I would also like to acknowledge the assistance of Mary O'Connor from my office in Dublin, the Clerk to the Committee, Lena Quinn and the staff of the Committee Secretariat.
The Commission Report raises certain competition and planning issues. During the course of my visit to the UK, I was also appraised of a recent UK Government Report on rural development, which addressed may of the issues raised in my earlier report on Superstores. In the light of the Committee's earlier interest in this matter and the close linkage between the Commission Investigation and issues concerning the retailing function and planning in rural communities, I have also addressed these issues and the latest UK Government Report for the Committee.
In June 1998, the Director General of Fair Trading in the UK conducted an enquiry into concerns that the supply of groceries from multiple stores in the UK raised concerns about the level of competition in the market place. Concerns had been expressed by a number of newspapers and commentators that the retail grocery market in the UK was uncompetitive and controlled by a limited number of very powerful retailers. Following this preliminary investigation, the Director decided to refer the industry to the Commission for a full investigation.
The Commission investigated 24 multiple grocery retailers, who fell within the terms of reference of the investigation2 and received over 200 submissions in the early stages of the enquiry. The Commission looked at a number of key aspects of supermarkets sales and supply, including price trends in the industry, profitability, grocery prices in the UK compared with abroad, and whether recent falls in wholesale prices were being fully reflected in the prices being charged to consumers. The Commission also conducted its own customer survey and considered the impact of supermarkets on inner city and rural areas as well as the environment.
The Commission Report3 was published in October 2000 and made a number of findings and recommendations;
The multiple grocery industry in the UK is broadly competitive.
On prices, there was evidence that there were two practices that were operating against the public interest when practised by the largest multiples;
The selling of goods below cost (which contributed to a situation where the full range of goods was not fully exposed to competitive pressures).
Varying prices in different geographical areas in the light of local competition, so that the majority of products were not fully exposed to competitive pressure and competition in the supply of goods was distorted.
A number of possible remedies to these pricing practices were considered, including a ban on below cost selling and requiring retailers to put their prices on the Internet. However, both remedies were seen as problematical in an UK context.
On relations with suppliers, there was evidence that some of the larger supermarket groups had sufficient buying power that 30 of their practices adversely affected the competitiveness of some of their suppliers and distorted competition in the supply market. In particular, 27 of these practices were seen to be against the public interest because they gave the five major UK multiples4, substantial advantages over other smaller retailers whose competitiveness was likely to suffer.
To remedy these anti-competitive consequences, the Commission felt that a code of practice should be prepared which addressed the concerns that the inquiry had identified and should be binding on the larger supermarkets. It was felt by the Commission that the Code should cover the following;
-Retailers should ensure that the standard terms on which they do business are in writing and made available to suppliers.
-If retailers wish to vary the terms, then reasonable notice should be given to the supplier
-Retailers should pay suppliers within a specified time
-Retailers should give suppliers reasonable notice of any intention to change a price previously agreed and should request retrospectively any form of discount or overrider.
-Retailers should not request suppliers to contribute to retailers costs of buyer visits, consumer or market research, costs of store refurbishment or opening, or providing hospitality
-Retailers should not seek any form of compensation for profits being less than expected, whether on promotion or otherwise, or for product wastage.
-Where retailers change any volume ordered, or otherwise change the supply chain procedures, they should give reasonable notice and should compensate the supplier for any costs or losses where reasonable notice is not given.
-Retailers should compensate suppliers for costs caused through the retailers forecasting errors.
-Retailers should give reasonable notice of any intention to hold a promotion for a suppliers product where there is likely to be a significant impact on the suppliers costs and should not require suppliers predominately to fund promotions.
-Retailers should not seek limp sum payments or better terms as a condition of stocking or listing existing products, or for better positioning of any products within a store or for increasing shelf space.
-Retailers should not charge suppliers for consumer complaints unless the complaint is verified as justified and as being caused by the supplier.
-Retailers should not require suppliers to use particular third party suppliers of goods or services where the retailer receives a payment from that third party supplier in respect of that requirement.
-Retailers should not discriminate between suppliers in terms of access to information where category management is practised.
The Commission also had some concerns about the limited choice of supermarket chains for some consumers in some areas – it was felt that any further local concentration could further weaken competition in these areas and lead to higher levels of profitability. The Commission recommended that there should be a new system of approval for supermarket developments and that in certain circumstances the approval of the Director General of Fair Trade should be required for specified retailers to extend or acquire new large stores.
Reactions to the Competition Commission Report
In early November 2000 and following the publication of the Report, I visited London and met a number of interested parties and organisations in the UK to assess the general response to the Report. I aimed to get a wide range of input from representatives of the multiples, small business, political figures and government sources. The various people and organisations and the views that they expressed are set out as follows;
Colin Breed, MP.
Mr. Breed is a Liberal Democrat MP who as spokesman on Consumer Affairs has spent considerable time and resources addressing the power of the multiples in the UK. His 1998 Report “Checking out the Supermarkets – Competition in Retailing” generated considerable attention on the power of the main multiples in the UK.
Mr. Breed was disappointed with the Competition Commission Report and its findings, which he said failed to recognise the impact of supermarkets on small businesses in general, and the importance of the social fabric in rural areas. He also felt that the suggestion of a binding voluntary code was unworkable and will fail to protect small suppliers from the practices, which have been exposed by the Commission. Mr. Breed also felt that the Report would do little to reduce the dominance of the multiples across all sections of the retail trade and feared that they would continue to “steam roll out all competition.”
Janet Nunn – Director, Regulatory and Consumer Affairs, British Retail Consortium.
The British Retail Consortium (BRC) is described as “the Voice of British Retailing” and represents the main multiples in the UK. Ms. Nunn's believed that the Report was both exhaustive and fair – representing a very thorough job completed despite some considerable media pressure. The BRC had some serious reservations about a code of practice for retailers' relations with suppliers.
Martin O'Neill, MP, Chairman of the House of Commons Trade and Industry Committee
Mr. O'Neill had a genuine concern for the future of rural areas and the vibrancy of the countryside. He was awaiting a detailed assessment of the Report and seemed mindful of the need to examine the multiples' power critically. He would be playing a full role in the implementation by the Government of any measures resulting from the Commission's Report.
Peter Waller, Deputy Head, Small Business Section, DTI
Mr. Waller is a senior official responsible for the formulation and implementation of Government policy for small businesses. He did not express any personal views and endorsed the views expressed by the Secretary of State at the DTI, Mr. Stephen Byers on the publication of the Commission's Report5. Mr. Byers had welcomed the report and noted that since the Report had been commissioned, the retail grocery sector in the UK had witnessed the entry of Wal-Mart with consequent price cuts worth over £1bn to the consumer. He also noted that the sector was broadly competitive, but did admit that there were specific issues that needed to be addressed in the context of the Commission's findings, most particularly the relationship between the retailers and suppliers.
There did seem to be some surprise in the DTI that despite the Commission's careful analysis of malpractices, the report failed to make any clear findings on this issue.
Stephen Alambritis, Federation of Small Business
Mr. Alambritis was very critical of the Commission's Report and believed that the outcome of the Report and the absence of forceful recommendations, clearly pointed to the ability of the big multiples to devote considerable resources to spin their view and engage the Commission. The Federation of Small Business represents over 155,000 members in the UK and claimed that the results of the enquiry were “extremely disappointing” and that the report let the Supermarkets “off the hook”. In particular the FSB had condemned the failure to make strong measures on below cost selling, local dominance and relations with local small suppliers.
Mr. Alambritis also mentioned that a significant report on rural England was due to be published by the Deputy Prime Minister, John Prescott MP, and that this report would dovetail with some of the issues considered by the Commission.
The Prescott Report
In November 2000, the Deputy Prime Minister, John Prescott MP and the Agriculture Minister, Nick Brown MP published a Report on rural communities in England. The Report while concerned with far more than just trade issues did raise some useful issues that are relevant for Ireland.
The Prescott Report 6noted that between 1991 and 1997 over 4,000 food shops had closed in rural areas in England and that over a third of villages now have no shops, with a continuing loss of banks, garages, post offices and pubs in rural areas. This forces local people to travel considerable distances for basic services and limits their choice of service provider. In 1997 only 58% of parishes in England had a permanent shop, while only 75% of villages had a post office7. To sustain the survival of village shops, the Prescott Report recommended that the village shop rate relief scheme should be extended. At present the scheme offers mandatory rates relief to sole shops and post offices in settlements of less than 3,000 people with a rateable valuation of less than £6,000. The Prescott Report also recommended a wide number of measures to maintain rural post offices, including making post offices centres for the provision of many government services in the community, ranging from the payment of fines, to voter registration, acceptance of Tax and VAT returns and other such services. The Report also placed a formal requirement on the Post Office to maintain the rural post office network and to prevent any avoidable closures of rural post offices.
In general terms there seems to be some disappointment that the recommendations of the Competition Commission in the United Kingdom did not match some of the findings that the Commission made on the behaviour or impact of the multiples in the UK. Nonetheless, the findings of the Commission do have some significance for the retail grocery sector and consumers served by this sector in Ireland.
First, the findings underpin the decision of the Tánaiste to retain the Groceries Order to ensure fair play in a competitive sector. The Groceries Order, effectively addresses many of the issues that the Code proposed by the Commission will endeavour to achieve. It also outlaws many of the nefarious practices that suppliers in the UK were subjected to by the multiples and protects consumers from misleading pricing practices. There may be some benefit in examining the Groceries Order, and the mechanism for enforcing the Order, to see if its provisions can be strengthened in the light of some of the observations made by the Competition Commission on the multiples supplier and pricing practices. There may also be some benefit in examining the extent and nature of promotional offers, loyalty cards and “bargains” offered by multiple retailers to examine where the true costs of such schemes are borne – is it by the retailer, the supplier or the consumer, or by all three?
Secondly the Commission Report also raises interesting issues about local market power and local dominance by retailers. It is clear that some of the multiples in the UK exercise regional pricing policies for consumers, with pricing policies depending on the level of competition they face in the catchment area. At present there is no legal impediment on a multiple retailer in Ireland from charging selective, or discriminatory prices across the same companies stores in different areas. There is also no requirement on local planning authorities to assess the negative impact on competition arising from a proposed development by a multiple retailer within a given catchment area. In a number of locations and districts in Ireland, different multiple retailers exercise market dominance or considerable market power in specific sectors. This limits the choice of outlet for customers. While Internet shopping may introduce competitive alternatives for consumers within a given catchment area, there is no guarantee that the existing dominant force within that locality might not enter the Internet shopping arena.
Thirdly, the Prescott Report also raised issues concerning competitive choice for consumers. Given the clear decimation inflicted on local retailing facilities in town and village centres, there was clearly a need to offer an incentive to retailers to stay in business providing services to consumers. The rate relief scheme seems to provide some viable assistance to local retailers and enable them to continue to serve their consumers and the strong line taken with the Post Office is certainly meritorious. While the Retail Planning Guidelines may have addressed some of the issues dealing with the provision of retail planning over the next 10 years, there may need to some assessment of the equilibrium of treatment between existing town centres and large – scale out of town retail centres, in terms of parking facilities. Is it right that consumers wishing to do their comparison shopping in a town centre are likely to face hefty on street or off street car parking charges, but could park for free in a large surface car park at an out of town centre. The Minister for the Environment and Local Government is to be complemented for introducing the Retail Planning Guidelines earlier this year Why provide for retail planning guidelines for the future, while ignoring existing unsustainable retail policies at present, particularly concerning parking provision. It is a clear lesson from the experiences in the UK that locational disadvantage of smaller retailers was a key factor facilitating the growth of the multiples to a stage where they acquired market dominance.
Arising from my investigations in the UK, my research into the Competition Commission Study and Report, the Prescott Report, the previous reports and deliberations of the Joint Committee on Enterprise and Small Business and the people that I met in the UK, I can make a number of clear recommendations:
In the light of the recent Government decision to retain the Groceries Order, the Department of Enterprise, Trade and Employment should be asked by the Committee to engage with the Director of Consumer Affairs, the Competition Authority and representatives of suppliers, retailers and consumers in Ireland to see how the Groceries Order could be strengthened in the light of the findings of the Competition Commission in the UK. In particular, the Department should assess the need to incorporate any additional aspects of the code of practice recommended by the Commission in Irish legislation. The Department should be asked to report back to the Committee on this issue within 3 months.
The Director of Consumer Affairs should be asked to appear before the Committee to outline what resources she has, or requires to proactively enforce the Groceries Order.
The Director of Consumer Affairs should carry out a detailed survey to assess if any multiple retailers in Ireland are practising regional pricing. In the event of a positive finding, the Director should identify what legislative measures may be required to prevent such a practice from recurring. The Director should also be required to investigate the true cost of various promotional and loyalty schemes operated by some multiple retailers, to see if these represent hidden costs for consumers or suppliers.
Legislation should be introduced to prevent the creation of local monopolies by multiple retailers. Local monopolies can inhibit competition, restrict innovation and damage consumer interests. Local Authorities should be required to gather the appropriate data on operators market shares within their catchment areas and assess the impact on competition from increasing existing market dominance or reducing current consumers' choices. The Competition Authority might usefully be consulted on this issue.
To recognise and encourage the services provided by local food shops serving communities in rural areas, a system of rates relief should be introduced for shops in communities of less than 3,000.
An Post should be compelled to maintain and develop the existing network of post offices through out the State. Post Offices provide an essential public and community service and if developed could play a critical role in the roll out of e-government and e-services to the public.
Measures should be introduced to restore some balance between town and village centres and out of town centres for the provision of parking spaces. It is ludicrous to talk about protecting the vitality and viability of town and village centres, if consumers are going to be subjected to higher costs and charges for supporting town centre retailers. A scheme for charging the operators of large out of town retail centres for parking provision should be introduced immediately. This approach would also be beneficial as it would discourage consumers using out of town centres from over reliance on the car for short hop trips and would consequently impact on traffic flow on important national routes.
1See Report on the Impact of Superstores, October 1998 (PN 6421) and Report on Superstores (September 1999).
2The investigation included supermarkets with 600 sq. metres or more grocery sales area, where the area devoted to the retail sale of food and non-alcoholic drink exceeds 300 sq, metres and which are controlled by a person who controls 10 or more such stores.
3Supermarkets – a report on the supply of groceries from multiple stores in the United Kingdom – Volume 1: Summary and Conclusions – CM 4842.
4Asda, Safeway, Tesco, Sainsbury and Somerfield
5“Byers publishes Competition Commission Report on Supermarkets” – DTI, 10 October 2000, P/2000/674
6Our countryside: our future – A fair deal for rural England – Cm 4909, November 2000