What Byers may have in store for Britain's top supermarkets

After 18 months the Competition Commission is ready to have its say on the grocery trade
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The Independent Online

For Britain's beleaguered supermarket sector the end of a long, drawn-out regulatory investigation is finally drawing near. The Competition Commission's 18-month inquiry into the profitability of the UK's top four grocery chains will be submitted to Stephen Byers, the Secretary of State for Trade and Industry, by Monday. Depending on the commission's recommendation, Mr Byers is then expected to take 10 weeks considering the potential remedies before announcing his ruling in September or October.

For Britain's beleaguered supermarket sector the end of a long, drawn-out regulatory investigation is finally drawing near. The Competition Commission's 18-month inquiry into the profitability of the UK's top four grocery chains will be submitted to Stephen Byers, the Secretary of State for Trade and Industry, by Monday. Depending on the commission's recommendation, Mr Byers is then expected to take 10 weeks considering the potential remedies before announcing his ruling in September or October.

For a sector plagued by issues such as the "Rip-Off Britain" campaign, the invasion of Wal-Mart and the accusation that it is ruining British farming, the report cannot come soon enough. But even after a year and a half under the microscope, the industry is still uncertain what to expect. While most industry experts think the case for excess profitability is unproven, many believe the political pressure for some kind of action will prove irresistible, particularly after the Government's high-profile championing of consumer issues. "I believe there will be a lot of political face-saving," says Richard Hyman of Verdict, the retail consultants. "But the case for excess profits is completely unproven."

A top supermarket analyst in the City adds: "The commission is not mad keen to intervene and in the past six months the market has gone from expecting forced store disposals to thinking the commission might actually allow sector consolidation. That's how far we've come."

What might the commission recommend? The remedies letter issued in February detailed the range of potential actions. These included the "nuclear option" of forcing the most powerful supermarkets to dispose of stores to the more anodyne proposal that they publish their prices on the internet and agree a code of conduct to protect the interests of suppliers.

Taking the options one by one, the least likely outcome is forced disposal. The attraction here is that it casts the Government firmly in the role of consumers' champion and sends a powerful warning to other sectors that over-pricing will be cracked down upon. The obvious target would be the market leader Tesco, which controls 24.5 per cent of the UK grocery market according to the latest figures from Taylor Nelson Sofres. The downside is that there are no precedents for forced asset disposals in this country, outside of takeover situations. Also, this remedy would almost certainly meet a legal challenge. As one analyst put it: "Tesco's lawyers are primed and ready for action."

The second possible remedy is the forced disposal of supermarket land banks, the land grocers buy up ready for development, pending planning permission. Again the key target will be Tesco, which has the most aggressive store opening programme. This kind of redress would be good news for rivals such as Asda, which is keener than ever to build market share following its takeover by Wal-Mart last year. Analysts and supermarket executives admit that such a remedy is "possible" though again the enforced "sequestration" of assets could face a legal challenge.

The other weakness of this remedy is that it fails to tackle the current dominance of the major players. It only prevents that dominance from increasing.

Changes to the planning environment are also possible, though again considered a long shot. The commission could recommend the tilting of the planning regime away from the dominant players in certain regions. That could mean excluding Tesco and Sainsbury's from being able to open any more stores in and around London. It would also cause problems for Asda and William Morrison in Yorkshire and Safeway in parts of Scotland.

The commission could recommend a total relaxation of planning restrictions, hoping that mass supermarket development would increase competition and bring down prices.

These two suggestions are seen as having a likelihood close to zero. First an all out development frenzy would fall foul of the environmental lobby. Secondly it is not within the DTI's remit to make recommendations on planning policy whatever the commission might suggest. There has already been open warfare on this issue between the DTI and the Department of the Environment, Transport and the Regions and changes like these would only pour fuel on the flames.

Even local changes to the planning environment would be difficult to monitor. The Competition Commission already seems to have accepted that the grocery market functions as a series of smaller, local markets rather than a national or regional one. It is doubtful, therefore, whether there would be either the resources or the inclination to continually check, for example, Tesco's market share in Guildford, to determine whether the group could open another store nearby.

Most of the other remedies concern prices. It is likely that the commission will recommend that supermarkets post price lists on the internet. This would give the Government the opportunity to appear both aggressive and modish at the same time. "It's a gimmick," one supermarket executive says. "But it would be very New Labour."

While some supermarkets complain about the volume of extra work to comply with such a request, Tesco and Sainsbury's already post full price lists for their internet home delivery services. The introduction of pricing controls monitored by a regulatory body like an "OffGrocer", is another option.

This looked like a plausible possibility when the commission first started its investigations last year. But with increased competition reducing margins over the past few years, as the chart shows, this action would now be considered "extreme".

The option that is seen as a racing certainty is the introduction of a code of practice to ensure the major supermarket groups do not use their huge buying power to exploit suppliers. This is already being discussed and is likely to be introduced on a voluntary basis. However, voluntary codes hardly set the pulse racing and on their own would make the Government look far too soft.

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