Critics attack Tesco's new 'monopoly test'

What do Romford, Saffron Waldon, or Leigh-on-Sea have in common? They are all places that a shopper in central Chelmsford, Essex might go to visit their "local" Tesco. That's according to Tesco's definition of local, at any rate.

The supermarket giant yesterday was accused of "stretching the definition of local past breaking point" as it launched a last-ditch attempt to stop the Competition Commission from focusing on local markets in its study of the £124bn grocery sector.

The watchdog is deciding if the supermarkets excessively dominate local shopping. Tesco wants the commission to triple the size of what it regards as a local market. Previous inquiries have seen the commission use drive times of 10 minutes in urban areas and 15 minutes in more rural ones to assess local competition.

The bigger net Tesco proposed yesterday could see shoppers living in the London suburb of Balham travelling to their "local" shops in Cheam, Willesden or Bethnal Green; or the residents of Burnley, Lancashire, nipping to Oldham, Prestwich or Skipton.

This definition, Tesco believes, means the commission will capture the shopping habits of so-called "marginal consumers" - the "floating voters" of the high street, who it thinks hold sway when it comes to deciding who is top supermarket dog.

Tesco based its argument, which was published yesterday in response to the CC's emerging thinking, on a complex economic test that aims to measure how far retailers or producers could raise their prices in any market without being punished through losing customers.

The test goes by the acronym SSNIP, which stands for "small but significant non-transitory increase in price". It's probably easiest to think of it as a hypothetical monopoly test. Tesco likes it because it supports the crux of its argument that the grocery market is in fact national, and not local.

Tesco attacked the commission's approach to geographic market definition as "overly simplistic". It said that rather than concentrate on "most consumers", which the CC did in its 2000 inquiry, "markets should be defined ... by reference to marginal consumers, namely those who are most willing to switch between retailers".

The upshot of Tesco's analysis is that 90 per cent of its stores that are 1,400 square metres or more can be reached within a half-hour of consumers getting into their car. "Virtually the whole country is covered by one of these catchments," it said.

And just imagine how many of our rival chains shoppers will pass during those 30 minutes behind the wheel, it might have added. Tesco believes the SSNIP test shows how local markets overlap with each other to such an extent that there is a national market.

The CC has yet to clarify exactly how it intends to define the grocery market in this, its third inquiry into the sector since 2000, but will spell it out in a working paper due to be published shortly after Easter.

The watchdog has, however, given some fairly heavy hints. "The weight of evidence to date supports a finding that the relevant geographic market for the supply of groceries is local, rather than national," it said.

Tesco argues that companies set prices at a national level. It also called for the net of retailers considered as competitors to be widened to include Marks & Spencer as well as newer discount chains such as Aldi and Lidl.

The CC declined to share its views on Tesco's arguments. Alena Kozakova, principal economist at Which?, the consumer lobby group, said: "Tesco is keen to prove that the relevant market should include everyone from a local corner shop to anyone who sells a packet of crisps because [that will make Tesco's share] seem insignificant. That's their best defence but they will need very good proof."

On Tesco's newfound hero - the marginal shopper - Ms Kozakova added: "They are right in theory, that you have to look at marginal shoppers. It's a good approach but they are stretching the theory too far because they would like to define everyone who sometimes buys something outside a supermarket as a marginal shopper."

Bryan Robert, analyst at Planet Retail, said: "A supermarket has to be bloody awful for a consumer to drive right past it. The main determinant of where someone will shop is proximity."

And therein lies the rub - with the one proviso that giant superstores, from Tesco Extra or Asda and Sainsbury's biggest outlets are more of a draw than your local Aldi. Or even a Sainsbury's Local.

Nevertheless, Andrew Simms, of the New Economics Foundation think-tank and author of a new book critical of Tesco, said: "Tesco is stretching the definition of local past breaking point." He notes the irony that in claiming that shoppers actually drive 30 minutes to reach one of its stores, Tesco is implying that its "core business model depends on the use of energy intensive cars". And that from a supermarket that has tried to paint itself as the environment's champion of late, he added.

Richard Hyman, who heads the retail consultancy Verdict, thinks that regardless of how the commission defines the boundaries of its investigation it must not lose sight of its true purpose. "The key challenge is, can the CC improve the lot of the consumer by introducing a very, very small amount of greater regulation? It's absolutely true that Tesco is becoming more and more dominant. Not because it is operating unfairly, but because it is just better."

He warns: "Doing anything that penalises superiority needs to be done with great, great sensitivity because one does not want to kill the goose that lays the golden egg. Especially when the golden egg in this particular instance is low inflation and great deals for consumers."

Peter Freeman, the CC chairman who is heading the grocery inquiry, is acutely aware of that very fact. Which is why most observers are not expecting fireworks when the watchdog publishes its provisional findings this June, ahead of its final report in November. Roll on the day that Tesco, which is tipped to announce pre-tax profits of £2.5bn in a fortnight's time, breaks that £3bn barrier.