Supermarkets fight: Round 1 to the little guy

Independent sector toasts OFT's 'landmark' ruling. Inquiry is industry's third in six years

It has been pitched as a battle between David and Goliath. And yesterday round one in the fight between the dwindling neighbourhood store sector and the four bully-boys of food retailing was won decisively by the little guy, after the Office of Fair Trading bowed to pressure and signalled its intention to order a fresh investigation into Britain's £95bn grocery market.

For the first time, the OFT said the convenience store sector should be at the heart of an inquiry into the supermarket sector. Its decision, which followed a two-year campaign of attrition by the Association of Convenience Stores (ACS), Friends of the Earth and the Women's Institute that culminated in a legal assault, reversed years of intransigence from the competition watchdog on the subject of so-called "top-up" shopping.

Ever since Tesco stamped its authority on the small-shops sector by swallowing 1,200 corner stores from T&S in October 2002, the OFT has refused to heed calls for it to view the supermarket sector as a whole. Earning itself the nickname of "Office for Tesco", the competition watchdog has waved through deal after deal on the grounds that the major supermarkets controlled only a small share of the "top-up" shopping market.

But in a U-turn yesterday, it admitted the move by the supermarkets into the convenience store sector could "reasonably be suspected to distort competition and harm consumers". Its change of heart came weeks after an all-party group of MPs warned that corner stores and newsagents could disappear in 10 years without government action.

David Rae, the head of the ACS, said: "This is a landmark ruling for independent retailers and consumers. Buying power, below-cost selling, price-flexing, and the decline in choice caused by the closure of many independent shops are all identified in the OFT's decision, and these are the issues the Competition Commission needs to address."

There is a four-week window for public consultation before the OFT makes its final decision, but the likelihood of it changing its mind is close to zero. The inquiry will be the industry's third in six years, including the nine-month inquiry into the sector during the fight for Safeway.

Not before time, according to John Bridgeman, the former OFT boss, who ordered the last major inquiry into the sector. "The market is long overdue for a very, very serious re-examination," he said yesterday. "It is a matter of regret that the two major acquisitions of convenience stores [including Tesco's of T&S] were not referred. To see the ["top-up" and one-stop shopping] markets as separate will go down in history as a heroic assumption that has long since been disproved."

Since John Fingleton, the chief executive of the OFT, took the helm in October, he has not appeared to favour the lot of the independent shopkeeper. Giving evidence to MPs in the autumn, he said his job was to protect "competition, not competitors". As head of the Irish Competition Authority, he repealed the Groceries Order, which fixed prices on certain foods, opening the door to supermarkets to sell "below cost" - a huge bugbear of corner shop owners. He insisted yesterday the watchdog's change of heart had been based purely on market evidence. "It's not a popularity contest. Vocality is not an issue."

In setting out its reasoning for recommending the referral, the OFT said the "Big Four" - Tesco, J Sainsbury, Asda and Wm Morrison - own 1,306 convenience stores compared with 54 in 2000. Their expansion, or more pertinently that of Tesco and Sainsbury's, has been at the expense of specialist shops such as greengrocers and fishmongers, which have ceded 6 per cent share of the market. The total number of convenience stores has dwindled by 5 per cent during that time.

The political groundswell that propelled the supermarket sector back on to the agenda is reminiscent of the reasoning for the original inquiry ordered in 1998, shortly after Labour came to power. Then, the issue was "rip-off Britain"; now it appears to be the mighty Tesco's increasing dominance. A backlash against Britain's biggest supermarket has gathered pace recently, as its share of the grocery sector has crept ever higher.

So far, disquiet over Tesco's increasing dominance has yet to make its mark on the group's bottom line, but that could change. Research released yesterday by IGD, the industry think-tank, showed consumers are shopping around more than ever before, with the 6 per cent growth in visits to markets and butchers outstripping the 4 per cent increase in trips to supermarkets.

The other main area of concern highlighted by the OFT was the planning regime, which it fingered for distorting competition. Again, this was a first for the watchdog, which has hitherto declined to meddle in the planning process.

"We are aware of growing concern about the perceived local dominance of large supermarkets in some locations," it said, pointing to Inverness, Bicester, Milton Keynes, Twickenham, Southall and Hemel Hempstead as particular culprits. To open a new store in, for example Inverness, which is dominated by Tesco, all the chain has to do is show there is a need for a new grocery outlet. The fact that it already controls the market does not come into it. Mr Bridgeman said: "This needs to be investigated. There is a very short step from enjoying local dominance to abusing local dominance."

The OFT also raised concerns about the land banks that supermarkets have built up, the inflated prices they have often paid for those sites, and the restrictive covenants they have placed on sites when selling them to a rival. Mr Fingleton said: "The restrictions in the planning system, and the possible incentives those restrictions create for retailers to distort competition, may harm consumers and mean competition in the market is less than it might otherwise be."

The "Big Four" were found to be sitting on 319 sites that have not yet been developed. These are on top of the 149 sites they are waiting to buy once planning permission is granted. The OFT queried whether the likes of Tesco and Asda were simply sitting on land to stop it falling into the hands of rivals, pointing out that the average age of undeveloped sites is more than eight years - double the average length of time needed to develop a site.

Analysts were ambivalent as to what all this means in terms of the future of the sector. Philip Dorgan, at Panmure Gordon, said: "What are they actually going to find? It's quite a visible industry and politically it's easier for the OFT to get the commission to have a look at it than not."

After all, five years ago the grand finale of the 18-month investigation, which cost £20m and produced a 1,100-page report, was merely to propose drawing up a voluntary code of conduct aimed at protecting suppliers. As one source said yesterday: "I've yet to find anyone outside the supermarket industry who thinks that works."

But even that isn't to detract from the celebrations in corner stores up and down the country last night.

Waitrose is no longer the preserve of the Home Counties housewife

The upmarket food retailer Waitrose claimed yesterday it was no longer simply the choice of the Home Counties housewife, revealing it generates more than half its sales from outside its core south-east of England market.

Although the chain has long been associated with wealthy shoppers from the South-east, the supermarket's managing director Steve Esom said the group's rapid and successful expansion across the UK over the past few years had proved "the love of food is not determined by postcode".

The news came as the group revealed it was breaking into the Scottish market for the first time, buying two Edinburgh stores from Somerfield, which it hopes to have converted by June. The group also said it had bought two sites from Somerfield in London and one in Derbyshire, taking its total number of branches to 179.

The John Lewis Partnership, Waitrose's parent, published full-year results, unveiling an 8 per cent rise in group sales and operating profits in the 12 months to 28 January. Like-for-like sales at Waitrose were up 4 per cent over the year, while profits across the division rose 19 per cent. Sales at John Lewis rose 2 per cent, but profits fell 6 per cent.

The group said it would pay staff a 15 per cent bonus, equivalent to eight weeks' pay, on the back of the strong results - the highest payout for six years.

The results represented a remarkable turnaround for John Lewis after a poor first half, during which it saw a 21 per cent slump in profits. The group said tight cost control, increased levels of productivity and better product selection in stores had helped turn around fortunes in the crucial last quarter.

Charlie Mayfield, the managing director of John Lewis, said the first nine months of 2005 were "some of the most difficult trading conditions in the non-food market that have been seen in the UK for probably 15 years". Group sales in the first five weeks of the company's new financial year rose 8 per cent. However, it said it expects trading conditions to continue to remain tough in 2006.

James Daley