When Should Success be Punished?

The Competition Commission is shining a spotlight on the UK grocery market. It is focusing on the power of the supermarkets, prompted by concerns about the effect the big 4 supermarkets are having upon the UK grocery supply chain, the local high street, and competition generally, (they control almost 75% of the grocery market). However, there must be serious question marks over whether the Commission will require any significant changes to be made.

Is the success of the supermarkets a cause for concern for consumers, or is it simply the inevitable consequence of a supremely effective business operation, and of changing consumer preferences and shopping patterns? In the last 6 years the UK competition authorities have grappled with different aspects of this thorny issue, on several occasions. This week, the Competition Commission has taken an important step in its latest investigation of these matters, by publishing its preliminary analysis or “emerging thinking” paper, which seeks comments and further evidence from interested parties about the matters under investigation.

The Commission’s earlier investigations have dealt with specific competition issues. For example, in 2000 the issue was whether the supermarkets had a monopoly and, if so, whether they exploited this against the public interest. This inquiry led to a Code of Practice being agreed, dealing with the supermarkets’ treatment of suppliers. In 2003, the issue was whether the acquisition of Safeway’s stores by one of the big 4 would be against the public interest. This inquiry led to Morrison’s acquiring Safeway, and selling 115 stores to Somerfield.

The current inquiry is being carried out under new legal powers in the Enterprise Act 2002, and is more broadly focused. The aim is not to challenge the conduct or arrangements of particular companies, but to consider whether any feature of a market prevents, restricts or distorts competition. A “feature” can be the structure of the market; the conduct of those who supply/acquire goods in that market; or the conduct of the customers of those who supply/acquire goods in that market. That is to say, the Commission has to consider the whole chain from producer to wholesaler/food processor to retailer, and whether the grocery market is working well for consumers.

The investigation has identified three main areas: (i) the behaviour of grocery retailers towards their suppliers; (ii) the conduct of retailers and consumers in their local market; and (iii) land and planning issues. More specifically, the investigation has considered whether larger stores constrain the prices, product range and service of smaller stores; whether larger stores use below-cost selling to drive smaller stores out of the market; whether the supply chains involve unfair contract terms and treatment of suppliers; and whether companies are using “land banks” to create a barrier for competitors to open new stores.

Key findings of the Commission include the following, that since 2000:

  • the price of food in real terms has declined by 7%;
  • the number of grocery stores and convenience stores has declined overall, but the number of stores operated by the big 4 has doubled;
  • the number of local butchers and grocers has declined by 7%;
  • grocery sales have increased by 17% overall (in supermarkets by 26%, in convenience stores by 19%) but the rate of increase for local butchers and grocers was only 1%;
  • 67% of suppliers say gross margins have fallen over the past year;
  • 70% of suppliers make “marketing contributions” to supermarkets and
  • 43% said they paid “other rebates”;
  • most of the 15% increase in the milk price since 1999 has been retained by the retailers.

The key issue identified by the Commission is retailer competition, and specifically whether there remains sufficient competition between grocery retailers at local level, or “whether any supermarket, can get into such a strong position that no other retailer can compete effectively”. The Commission is concerned that there may be a lack of sufficient consumer choice of retailer. Accordingly, in the next phase of its investigation, the Commission intends to consider this issue on a local area by local area basis, rather than on a national or regional basis.

However, the dilemma facing the Commission is this – the purpose of competition law is to protect consumers, but what consumer detriment is being created by the power of the supermarkets, when all the evidence suggests that consumer prices are falling and choice of goods is increasing – as Peter Freeman the Chairman of the Inquiry Group puts it “We are not here to punish success”.

The publication of interim reports by investigators seems to be a new trend. Only last month Lord Stevens published his interim findings on illegal payments relating to football player transfers. It was greeted with thinly veiled disgust by the media, who felt cheated out of a juicy scandal having the potential to ensnare some of the biggest names in the game. Looking at the “emergency thinking” paper issued by the Competition Commission, there is a real risk that when Commission’s final report is issued, it will be greeted in the same way as Lord Stevens’.

Unless the Commission pulls a surprise out of the bag in November, then the answer for people who are concerned by the changing shape of the grocery market will lie not in Competition Law, but in meeting head on the commercial and competitive dynamics in the sector. That means finding innovative ways to aggregate disparate elements of the grocery sector, establishing new supply chain models which can deliver lower wholesale costs and unique products to grocery retailers outside the major supermarkets, and finding new ways to differentiate through quality and service.

The Commission intends to publish its provisional findings in June, and to publish its Final Report in November 2007