Jeremy Warner: Grocery findings manage to displease all

Downturn seems to be on a long fuse;Rock reaches final denouement
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The Independent Online

The Competition Commission has come up with a set of provisional findings on the UK groceries market which has managed the not-inconsiderable achievement of pleasing absolutely no one – neither small shop owners, the green lobby, Tesco bashers nor the supermarkets themselves. Everyone is unhappy with these proposals in their own particular way.

Food prices the world over are on the rise because of rapid industrialisation in the developing nations, yet the Commission fails to propose remedies that would underpin the required level of retail competition to keep this price inflation to a minimum.

To the contrary, by refusing to sweep away the "needs test", the findings further discourage the development of edge-of-town competition, while the so-called "competition test" limiting each supermarket group to one outlet per area is a growth cap in all but name on successful retailers which will only entrench an oligopoly of the established big four.

The trouble with this report is that it is neither fish nor fowl. By seeking to limit the power of the big supermarket groups, and more particularly the dominance of Tesco, it also undermines competition between them and is therefore quite unlikely to be in the best interests of the consumer. The resulting muddle of half-baked regulatory interventions is likely to be quite costly to the industry for very little public benefit.

Downturn seems to be on a long fuse

Lights, camera ... no downturn. It's hard to find an upbeat voice in the City these days, with some bankers warning of looming recession or worse. Yet outside the narrow confines of the financial and property markets, there is very little evidence of a downturn at all, let alone a serious one.

If there is a recession hurtling down the road at us, it seems to be shrouded in a cloak of invisibility. Certain areas of the retail market, particularly clothing, are certainly feeling the squeeze, but consumption as a whole remains robust and most business leaders outside the financial services industry insist that things are still basically fine.

One of those is Thomas Middelhoff, chairman of Thomas Cook Group, Europe's second-largest tour operator. His start of season sales are up 9 per cent on the same month a year ago in Germany and 14 per cent in Scandinavia. Britain is looking good too.

Travel may not be the best of lead indicators. It is often said that whatever else people cut back on when forced to tighten their belts, the annual holiday is always the last thing to get chopped. Indeed, in a recession, people might even take more holidays, with redundancy cheques to spend and sorrows to drown.

Yet his message is repeated by others who would normally be hit badly in the early stages of a downturn. Sir Martin Sorrell, chief executive of the advertising giant WPP, remains famously upbeat about prospects for this year, though he is much less certain about what happens after the US presidential elections in November. Manufacturers the world over have never been busier and across great swathes of the service industries, boom conditions persist.

The dilemma facing many companies, then, is whether they should continue to invest as if nothing has happened, or whether they should start hunkering down for an economic contraction which, though there is no evidence of it yet, may just be taking longer to arrive than those in the thick of the crisis in financial markets would have expected.

There are a number of analogies that may be helpful here. One is of the cartoon character who carries on running long after he's gone over the edge of the cliff, only eventually to look beneath him, realise he's running on nothing but air, and then plunge into the abyss. Another is of the automobile whose engine is suddenly cut while tearing down the motorway. It takes a long time for the car to grind to a halt.

Regrettably, these are the most likely explanations for what's going on in the UK and large parts of the rest of the world economy right now. There's so much momentum built up after the long boom that it may not be for some months and possibly not until the tail end of the year that the economic pain really begins to bite. The downturn may only be on a long fuse.

We'll see. In the meantime, keep booking those holidays. By the time you jet off to the sun, you may need those warmer climes just to cheer yourself up.



Rock reaches final denouement

As the Northern Rock debacle moves towards its final denouement, only one thing seems beyond doubt, which is the terrible hash the Government and its regulators have made of it all. A bad ending now looks increasingly likely, with the Rock's two biggest shareholders promising to block any deal the Government proposes with Virgin and one of them vowing to sue the Government if it pursues the alternative route of nationalisation.

Is there no satisfying these hedge funds? Both of them, Jon Wood's SRM Global and Philip Richards' RAB Capital, have taken big, largely unhedged bets on Northern Rock and believe they have little to lose in calling the Government's bluff.

If the Government nationalises, it would have to pay some compensation, though it seems unlikely any court would back the hedge funds' insistence that nothing less than book value of £4 a share would suffice.

To them, the Virgin proposal looks like pure theft, leaving existing shareholders heavily diluted and forcing the company to pay £250m for a brand, Virgin Money, which they regard as essentially worthless. What's more, Northern Rock would have to fork out an ongoing fee of £10m a year to Sir Richard Branson personally for use of the Virgin brand.

Yet nothing is certain in this increasingly dismal saga. Virgin insists it needs only 50 per cent support to get its proposals through shareholders, which would mean the hedge funds cannot by themselves block the deal. The hedge funds reckon that legally Virgin would need 75 per cent support, which would in effect give them a veto.

The Government meanwhile has its own separate issues with the Virgin approach – notably the size of the Government's share in any upside from the intended turnaround, and the charge to be levied for guaranteeing future funding. If shareholders are going to vote against Virgin, even in the event of the Treasury and Virgin managing to bridge these differences, then ministers might reasonably wonder whether there is any continued point in trying to find a private sector solution.

Shareholders believe the Government should just quietly persist with the situation as it is, allowing an eventual workout of the funding problems in which the taxpayer gets all his money back but shareholders keep the business. Yet even if the status quo was a politically acceptable outcome, the Government reckons its hands are tied by EU rules on state aid. If this is the case, then the Government again only has itself to blame.

It's hard to see how the lender of last resort funding originally provided to Northern Rock by the Bank of England is any different to the liquidity similarly provided by the European Central Bank to large numbers of continental banks. If the Rock funding is now classed as potentially illegal state aid, it only became so after the Treasury agreed to underwrite Northern Rock creditors, including the Bank of England. With the benefit of hindsight, this was yet another blunder in a very long list of them.

Nobody is going to have any sympathy for the position of avaricious hedge funds, but one thing they have got right is in arguing that nationalisation would be a costly disaster, with ministers incapable of taking the tough decisions necessary on jobs and streamlining. At the same time, complaints of unfair competition from rivals will severely limit what can be done with the company in a manner that will effectively remove one of Britain's largest mortgage providers from the market. Meanwhile, the Rock's entire workforce would become civil servants, kept at the taxpayer's expense to do nothing. Quite an outcome.



j.warner@independent.co.uk

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