Committee Reports > List of Committees > Joint > 2006 > Committee on Enterprise and Small Business > Report No. 08 - Examination of the UK retail sector

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Meán Fómhair 2006

Houses of the Oireachtas

Joint Committee on Enterprise and Small Business

Eighth Report

Examination of the U.K. retail sector, planning system, predatory pricing and the unfair treatment of suppliers

September 2006

Chairman’s Foreword

The Joint Committee on Enterprise and Small Business agreed on 10^th January 2006, as part of its Work Programme, to examine and report on developments in the retail sector in the United Kingdom.

The following Orders of Reference were agreed to by the Joint Committee ‘to examine the situation in the UK regarding the retail sector, manipulation of the planning system, predatory pricing and unfair treatment of suppliers to see what lessons can be learned and to report back to the Joint Committee’.

The Joint Committee appointed Senator Paul Coghlan, as rapporteur, to undertake the examination and to present a report for consideration. The report entitled ‘Examination of the U.K. retail sector, planning system, predatory pricing and the unfair treatment of suppliers’ was considered by the Joint Committee and adopted at its meeting on 20^th September 2006.

The Joint Committee wishes to thank Senator Coghlan for the excellent work he has carried out in the preparation of the report.

The Joint Committee recommends this report to the Houses of the Oireachtas.

_________________________

Donie Cassidy, T.D.,

Chairman.

20^th September, 2006.

This report was prepared by

Senator Paul Coghlan, Rapporteur

on behalf of the

Joint Committee On Enterprise and Small Business.

Terms of Reference

“To examine the situation in the U.K. regarding the retail sector, manipulation of the planning system, predatory pricing and unfair treatment of suppliers to see what lessons can be learned and to report back to the Joint Committee”.

I was appointed as a Rapporteur of the Joint Committee on Enterprise and Small Business to examine and report on developments in the retail sector in the United Kingdom following the publication of the High Street Britain 2015 Report by the House of Commons, Small Shops Group. My research on the subject was carried out during a visit to London in March 2006, when I met a wide range of interested groups and officials concerned with the matter.

This report should be read in conjunction with the following,

1Committee Report on “The Impact of Grocery Multiples on the Grocery and Retail Markets and its Effect on Consumers, Small Grocery Retailers and Small Grocery Suppliers”.

2High Street Britain 2015

3Report on the Impact of Superstores

4“First Voice” Supermarkets Unfair demands

5Office of Fair Trading, Grocery Market — proposed decision to make a market investigation reference

6Association of Convenience Stores — welcoming competition enquiry.

I would like to acknowledge the assistance of the Committee Secretariat and my Secretary in arranging my visit to London. I would also like to pay particular tribute to Ambassador Dáithí O’Ceallaigh and Mr. Shane McHugh, the Economic Counsellor of the Irish Embassy in London. Mr. McHugh’s assistance was invaluable and he arranged a most interesting and informative programme for me.

July 2006

Report by Senator Paul Coghlan on developments in the retail sector in the United Kingdom following the publication of the High Street Britain 2015 Report by the All Party Parliamentary Group on Small Shops, March 13-14, 2006

1. Introduction

The Joint Oireachtas Committee on Enterprise and Small Business (the Committee) has taken a keen interest in the retail grocery sector in Ireland since 1997. The Committee has carried out extensive hearings and published a major Report in 2005 on “the Impact of Grocery Multiples on the Grocery and Retail Markets and its Effect on Consumers, Small Grocery Retailers and Small Grocery Suppliers”.

The Committee has also followed recent developments in the retail grocery sector in Ireland and in particular the repeal earlier this year of the Restrictive Practices (Groceries) Order 1987. The Committee had previously expressed concerns at the impact of the repeal of the Order and had recommended its retention.

In its review of the grocery sector in Ireland, the Committee has also paid close attention to developments in Britain to see what lessons can be learned about the retail environment there, in the context of the increased market dominance of the major multiples. In January 2006 I was appointed a Rapporteur by the Committee to examine the situation in the UK regarding the retail sector, manipulation of the planning system, predatory pricing and unfair treatment of suppliers to see what lessons can be learned.

Earlier this year an All Party Parliamentary Group (the Group) in Westminster published a Report on the future of the retail food sector in Britain. This Report was followed by a decision of the Office of Fair Trade (OFT) to refer the retail grocery market to the Competition Commission in the UK. As a result of these developments, I was appointed as a Rapporteur to visit London and meet with members of the Group, and other parties interested in, or concerned with, the retail grocery sector in Britain. My visit occurred over three days in March 2006.

I would like to accord my grateful thanks to Ambassador O’Ceallaigh and Mr. Shane Mc Hugh of the Irish Embassy in London for their kind assistance in arranging meetings and providing support during my visit.

2. Context

My visit was sparked by the publication of the “High Street Britain 2015” Report by the All Party Parliamentary Group on Small Shops into the dominance of the retail multiples in the UK grocery market. The report outlined how the ‘big four’ retail chains - Tesco, Asda, Sainsbury’s and Morrison’s - now dominate the supermarket sector, and were increasingly present in the convenience store sector, through operating formats such as Tesco Metro. Tesco is the only UK multiple operating in the Irish market and is the market leader with a 26% market share. It also operates in Ireland in larger supermarkets and also the smaller metro format, but not to the same degree of proliferation as in the UK.

According to the Group’s report, the strength of the ‘big four’ gives them an unfair advantage over small shops in their dealings with customers, suppliers and local authorities. The Report suggested that 2000 small shops were driven out of business by the retail multiples every year and that the prospects for long-term survival of smaller non-multiple operators is very slim, unless remedial action is taken. In particular the Report noted that the reduction in smaller retailers was having a knock on effect on the wholesalers that supply the trade and that the elimination of the wholesalers represented the death knell for the independent sector. Without a vibrant wholesale sector, the non-multiple retailers had nowhere to source and secure the supply of their goods.

The Report’s chief recommendations included;

•The appointment of a retail regulator,

•An immediate ban on mergers and acquisitions in the grocery sector,

•A re-assessment of the “two markets” rule dividing the groceries sector into supermarkets and convenience stores markets, and

•A referral of the groceries market to the Competition Commission.

3. Reaction to the Report

The report had attracted significant media attention since its publication in late February, and the public appetite for the story remained strong. During my visit, the Evening Standard newspaper launched a high-profile “Save our Small Shops” campaign, based on the findings of the report. And while I was in London, the Office of Fair Trading (OFT) referred the “big four” to the Competition Commission - this was seen publicly as a response to the Group’s Report, even though the referral had been ordered on the basis of a request made by the Association of Convenience Stores eighteen months before. During my visit I took the opportunity to meet with the OFT to receive a briefing on the Competition Commission enquiry.

4. Meetings

In the course of my visit, I met with the following stakeholders, who represent all sides of the debate on this issue:

•Mr. Jim Dowd MP, Chair of the All Party Parliamentary Small Shops Group, who produced the report

•Mr. Andy Love MP, CVhair of the All Party Parliamentary Small Business Group

•Ms. Caroline Evans of Quintus Communications, who provided the secretariat for the report

•Mr. Gerry Sutcliffe MP, Parliamentary Under Secretary of State for Employment Relations and Consumer Affairs, Department of Trade and Industry

•Mr. Stephen Alanbritis, Chief Executive, Federation of Small Business

•Mr. Nick Goulding, Chief Executive, Forum of Private Business

•Dr. Kevin Hawkins, Director General, British Retail Consortium

•Mr. Chris Jenkins, Head of Supermarkets Team, Markets and Policies Initiatives Division, Office of Fair Trading

•Mr. Graham Winton, Director, Markets and Policy Division, Office of Fair Trading

•Mr. Bob MacDowall, Head, Remedies Monitoring and Enforcement Team, Office of Fair Trading

5. General feedback from the meetings

There were a number of common themes evident from the meetings which can be summarised as follows;

•Opinion was divided on the merits of the Small Shops Group report. Dr. Kevin Hawkins of the Retail Trade Federation was predictably dismissive, calling it the work of lobby groups with a grievance, and claiming the report had decided on its conclusions without doing the necessary research. Advocates like Mr. Andy Love MP and Mr. Steven Alanbritis of the Federation of Small Business admired its ambition, but felt it lacked focus. The OFT disagreed with its key claim that 2000 small shops went out of business each year; their most reliable statistics indicated that 2760 small shops had disappeared over a four year period - they also felt that at least some of these had not gone out of business, but rather joined up with a so-called ‘symbol’ group (e.g. Spar, Londis, Budgens). However, all contacts agreed that the Report was timely, generating significant publicity and a national debate on several of its findings.

•Supporters of the Report claimed the referral of the big four to the Competition Commission as an unequivocal victory; most contacts agreed that the report had at least some role in precipitating the referral. Mr. Jim Dowd MP, Chair of the Small Shops Group, hoped the referral could lead to planning reform which would give local authorities more leverage over retail planning in their area; the OFT thought it more likely that circumscribed action compelling retail multiples to “use or lose” land banks would result.

•I formed the distinct impression that the DTI was not minded to act on the report’s most radical recommendations for a retail regulator and a moratorium on mergers and acquisitions in the sector.

•In its 2006 budget the Treasury took action to close off a Jersey VAT loophole identified in the report which the multiples were taking advantage of to pay less VAT.

•Feedback also suggested a good chance of official action on supermarkets’ manipulation of transaction costs for competitive advantage.

•In addition to the specific measures highlighted in the report, the feedback indicated that there were broader strategic issues that needed to be addressed in the sector. Chief among these was the need to integrate competition policy with planning policy. Overall responsibility for planning law was concentrated in the Office of the Deputy Prime Minister, while competition law was the province of the Department for Trade and Industry. Several contacts noted that local authorities lacked the financial and legal support to fight a planning appeal by one of the retail multiples. The OFT noted that there was no system to take account of competition in local planning, while Mr. Jim Dowd MP called for a comprehensive retail planning strategy for local authorities.

•It was recognised that there is a need to address the practice of price-flexing, and the need to stamp out bad business behaviour from suppliers. The DTI noted in particular the lack of written contracts between suppliers and the retail multiples.

6. Feedback from individual meetings

Given the wide range of meetings that I attended over a short period and the diverse opinions expressed, I thought it might be appropriate to summarise the key observations made by individual stakeholders;

•Small Shops Group — Mr. Jim Dowd MP

I asked Mr. Jim Dowd MP, Chair of the All Party Small Shops group, about his assessment of the next steps following the publication of the report.

Mr. Dowd MP felt that the major win from the report had been the Competition Commission enquiry.

Among the other recommendations, he thought the issues common to all retailers would be dealt with quickest. The Jersey tax loophole was the easiest to fix; it was up to the Treasury to bring down the price level of exempt items to take cds/dvd’s etc out of the range

A second issue which could be resolved with relative ease was the problem of supermarkets manipulating financial transaction costs for price advantage - through the use of their own credit card services; retailers were able to get 2.5% of VAT disapplied.

Other issues highlighted in the report spanned responsibilities across a number of Westminster departments, including DTI, the Office of the Deputy Prime Minister and the Department of the Environment and Rural Affairs - any Government response would therefore be more difficult to co-ordinate. Mr. Dowd MP hoped to call for an Adjournment Debate in Westminster where MPs would address exactly these issues. In the long term, he hoped that the greatest gain to come out of the Report would be the creation of a comprehensive retail strategy for local authorities.

•Mr. Andrew Love MP - Chair of the All Party Small Business Group

Mr. Andrew Love MP, Chair of the All Party Parliamentary Group on Small Business, which numbers over 200 members, gave me background information on the Parliamentary Group concept and the origin of the High Street Britain Report. Mr. Love MP explained that Parliamentary groups can be formed with any combination of MPs from any political party to focus on any issue of the day. The Small Business Group was one of the more established and more active groups - it undertook a number of activities including running business breakfasts and helping to administer a small business trust fund. Representatives of small business were involved in supplying its secretariat, and a large proportion of its members were interested in the fate of small shops. The Small Shops Group was a recent offshoot, formed about a year ago to represent the interests of small stores, suppliers and ‘symbol’ groups. There had been plans for a joint meeting of both Groups to discuss the High Street Britain report later in the year, but these were in their infancy at present.

•Office of Fair Trading

I met with Mr. Chris Jenkins, head of the Supermarkets Team, OFT, and Mr. Bob MacDowall, Head, Remedies Monitoring and Enforcement Team at the OFT. At the time of the meeting, both were particularly excited by the success of the referral to the Competition Commission. This was the first report prepared under new legislation, and the first time the OFT had used its powers of disclosure to obtain documents from the retail multiples. Without using these powers, the OFT would not have had the solid evidence needed to make a referral to the competition commission.

The OFT detailed the background to the current investigation. The Competition Commission had last investigated the retail multiples in 2000. On that occasion, they had found evidence of below cost selling and price fixing that was against the public interest, but decided to take no action as “the cure would be worse [for the public interest] than the disease”.

Since 2000, there had been several changes to the sector. The most important were the move of several retail giants into the convenience store market, and several major acquisitions, including the takeover of Safeways by Morrison’s. The OFT had taken a permissive line on individual acquisitions; however, there was an argument that these had cumulatively changed the retail landscape so much that a fresh investigation was in order.

18 months previously, the Association of Convenience Stores, in conjunction with the Women’s Institute and Friends of the Earth, had asked for another referral to the Competition Commission. Their request was rejected in August 2005, on the basis of insufficient evidence. An appeal was launched in November 2005 - this time the OFT was operating under new legislation which enabled it to compel firms to disclose information. It considered that, on balance, the £9m cost of a referral to the Competition Commission could be justified. The sheer scale of the groceries market was the important factor here - if an attempt to rebalance the market resulted in a 0.1% improvement in competition, this would still mean a £90m benefit for consumers. As a result, it used its new powers, and the evidence it obtained of anti-competitive behaviour in the areas of planning, land banks and price flexing was deemed strong enough for a referral to the Competition Commission.

Planning

There were features of the planning regime that could act as a distortion to competition. As local authorities did not have the same legal resources or battle chest as the major retail multiples, there was reason to believe that applications may be granted because local authorities had no money to fight an appeal. There was also no system to take account of competition in local planning.

Land banks

Tesco has built up a large bank of 300 potential sites. It seemed that they only put in planning applications for these sites whenever a rival came into the local market. There was also evidence that Tesco had imposed restrictive covenants on 70 sites they had sold, which precluded selling groceries on the site.

Price-Flexing/Below Cost Selling

The OFT had no evidence that any element of overall pricing policy of supermarkets fell under the definition of “predatory pricing”. However, there was some evidence that in individual towns and regions, supermarkets may have manipulated prices to create difficulties for specific local competitors. There was also an inadvertent impact on small shops when the large multiples exerted buyer power over their suppliers. The suppliers needed to get their margins somewhere, and ended up squeezing smaller stores.

The OFT were reluctant to make predictions about possible outcomes of the Competition Commission enquiry. However, they noted that there were steps that could be taken to make the retail multiples deal with their land banks — retailers may be asked to “use or lose” all land they had accumulated, for example.

•Retail Trade Association - Dr. Kevin Hawkins

The Retail Trade Association is the representative body which caters for the large retail multiples as well as department stores. As the representative body for the targets of the Report it has been the most vocal critic of the All Party Parliamentary Small Shops Report.

Dr. Kevin Hawkins, Director General of the Retail Trade Association queried the statistics used by the Small Shops Group and claimed that according to the Institute of Grocery Distribution, only 2760 convenience stores had disappeared over the past four years. Many of these had joined up with symbol groups, who now accounted for 32% of the market. Of those convenience stores which had genuinely gone out of business, there were no statistics to show which had left through natural wastage (death, retirement of proprietor etc) and stores which were driven out of business by the retail multiples.

In general Dr. Hawkins thought that the report had made unsubstantiated conclusions without receiving the evidence, and had demonstrated a strong bias towards lobby groups with a grievance. Its main recommendations - for a retail regulator and for an immediate stop to mergers and acquisitions - had already been kicked into touch by the DTI. According to Dr. Hawkins, the net average margin of the major retailers had decreased over the past ten years to between 6% and 2% - which he claimed was not the badge of an uncompetitive market. He accepted that suppliers’ margins were being squeezed but claimed that the increased volume of trade carried out compensated for the lower margins.

On the OFT enquiry into the grocery sector, Dr. Hawkins noted that there were two core issues: the creation and retention of land banks and the possible erection of barriers to entry. The 2000 Competition Commission report had found it impossible to bridge planning and competition law — Dr. Hawkins expected a similar outcome here this time round.

Dr. Hawkins felt that the chief weakness of the Group’s report was its inability to draw upon objective research on the dynamics of competition at local level. To produce a more robust report, Dr. Hawkins suggested commissioning researchers to examine the dynamics of competition in three representative areas (suburban, rural and provincial). He also suggested that there should be a greater focus on what small retailers could do to help themselves - i.e. going into symbol groups or entering a niche not adequately serviced by the retail multiples. He also suggested that greater attention should be paid to what the shop owners themselves were saying about problems affecting their business. He, Dr. Hawkins claimed that when asked to set out their major problems, UK shop-owners had consistently identified the burden of regulation, and problems with local (usually high-street) parking.

•Forum of Private Business and Federation of Small Business - Mr. Nick Goulding and Mr. Stephen Alambritis

I met briefly with Mr. Nick Goulding, Chief Executive of the Forum of Private Business and Mr. Stephen Alambritis, Chief Executive of the Federation of Small Business. Mr. Goulding’s organisation represents larger SME’s - in the grocery industry, his membership base includes the co-operatives and ‘symbol groups’ such as Spar, while Mr. Alambritis is focused on the individual trader and the small shop market.

Mr. Nick Goulding saw the issue as one of Tesco’s dominance. There was an unwritten rule that if a retailer reached 30% of the market, a reference should be made to the Competition Commission. Tesco had now hit the 30% mark in large stores, but was also an increasingly strong presence in the convenience store market. The question was what to do in these circumstances - was this an opportunity to revisit the ‘two markets’ distinction between one-stop shopping and convenience shopping? One could argue that there was an advantage to the consumers in allowing Tesco to remain dominant - consumers were better served by lower prices. Balanced against that, there was the possibility that through growing so quickly Tesco’s would reach a “tipping point”, where there was nothing stopping it from becoming the Wal-Mart of the UK.

Neither Mr. Goulding nor Mr. Alambritis were overly optimistic about the conclusions of the Competition Commission report - both thought that it would result in minor adjustments but no overhaul of the competition system. Also, Mr. Goulding had concerns that the Competition Commission would take a broad brush approach that would unnecessarily cause difficulties for some of the Forum of Private Business’s members.

•Mr. Gerry Sutcliffe MP, Parliamentary Under Secretary of State for Employment Relations and Consumer Affairs, Department of Trade and Industry (DTI)

The DTI was responsible for two pieces of legislation - the Enterprise Act, which is policed by the OFT, and the Competition Act, which is policed by the Competition Commission. The Department also has limited powers to influence markets, but these were seldom used. While Minister Sutcliffe was concerned about various aspects of the supermarkets’ dominance, he felt ambivalent about the two main recommendations from the Small Shops Group report - the creation of the position of a retail regulator, and the proposed moratorium on retail mergers and acquisitions.

One area where Government could perhaps help was in the relationship between retail multiples and their suppliers by addressing bad business practices among suppliers. The DTI had noted the marked lack of written contracts between suppliers and supermarkets. It was satisfied that there was no coercion involved here - quite simply, business had traditionally been done in this sector through oral contracts. The DTI was committing resources towards the education of suppliers to ensure they were as prepared as possible. DTI believed the OFT’s assurances that the Supermarket code, which retailers needed to abide by in their dealings with suppliers, was working.

7. Conclusions

It was clear from my visit to London and the myriad of groups, organisations and individuals that I met, that the threat posed to local shopping in the UK is real and at a critical stage. The main multiples have amassed significant power across a range of markets and there is some suggestion that they are engaged in anticompetitive behaviour to the ultimate detriment of consumers.

Given developments in the retail trade in Ireland, it would be worthwhile to look at which of the Groups recommendations might have a resonance in Ireland. In many instances more research is required in Ireland to better inform policy and ensure transparency, to allow both consumers and policy makers to make informed choices.

It is also clear that there is a balance between ensuring that consumers’ needs are met for a wide range of goods at lowest possible prices in a way that ensures a competitive market for all stakeholders. In particular it is important that the growth in market power of the main multiples should be kept under review given their enormous capacity to exercise sway over suppliers, producers, smaller competitors and consumers.

In the light of the experience in Britain, there are a number of recommendations that might usefully be made in this jurisdiction.

8. Recommendations

1.The two markets rule should not be applied here — it is a false division and provides a competition law context in which the multiples can grow even bigger. There are already signs that Government agencies are tacitly accepting that there are two markets operating in the retail grocery sector in Ireland — the British experience suggests that this basis of analysis must be resisted.

2.The Competition Authority should carry out a study into competition in the retail grocery sector in Ireland focussing on the larger players. The Authority has extensive powers to procure information as part of its investigative and research powers, but has not used these powers to inform its pronouncements on the retail grocery sector here. It is notable that the OFT only decided to refer the grocery sector to the Competition Commission after using similar powers in Britain. In particular the Authority should examine the extent to which the multiples have acquired large land banks which are inhibiting new entrants from arriving in selected locations.

3.In retail planning terms, competition should be a relevant factor in granting permission for stores — where an existing retailer already has a presence in a town, then there should be an inhibition on a new store being opened or acquired in that town, unless it can be shown that local competition will not suffer. In particular a retailer departing from one site to another should not be permitted to enforce a restrictive covenant preventing another food store from opening at the old location — this is blatantly anti competitive.

4.An assessment should be carried out by a working group comprised of different local authorities and the Department of the Environment of the impact of the different parking regimes on retailers. At present town centre retailers must trade in areas that are subject to high parking charges and clamping, while many larger retailers are able to operate from outlets that have free surface or multi story car parking — this urgently needs to be addressed if people are to have the incentive to support local retailers.

5.The Central Statistics Office should carry out a census of local retail services, to determine the precise extent of retail provision in the State. The Census would provide a benchmark against which recent initiatives in the regulation of retail outlets can be assessed.

6.The Revenue should carry out an assessment to see if any of the multiples here are availing of the so-called Jersey loophole.

7.The Revenue should also carry out a review of the extent to which the multiples are manipulating transaction costs to reduce any VAT liability.

8.The Committee should monitor developments in Britain with the OFT referral and seek to engage with the Competition Authority to ensure that it is proactive in this area. I would welcome the opportunity to keep the Committee briefed on developments in this area.

9.Common issues between Britain and Ireland on the provision of retail facilities and the support of small shops should be part of the deliberations of the British - Irish Inter Parliamentary Body.

10.There should be far greater transparency in the retail grocery sector in Ireland, particularly on the disclosure of turnover and profitability figures by the large multiples. The Government should legislate in this area to compel disclosure if necessary.

Senator Paul Coghlan

July 2006