Jeremy Warner's Outlook: Another supermarkets investigation; is there any more purpose to it than last time round?

British Airways chops £450m costs; A day of bid action among the mid-caps
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The Independent Online

The purpose of competition policy, John Fingleton, the chief executive of the Office of Fair Trading, told MPs at a recent Commons committee hearing, is to protect competition, not competitors. Phew, thought Tesco and other Goliaths of the groceries trade; we're off the hook. And so it must have seemed after the OFT formally rejected calls from small shopkeepers for a full-scale investigation of the supermarkets sector.

Tenacious as ever, the Association of Convenience Stores, which has seen its members decimated by the advance of the big supermarket groups, refused to accept this finding, and used an appeals tribunal to force a rethink. This has resulted in what David Milliband, the Local Government minister, has in another context called a "vaulting, 180-degree, full-on U-turn". The supermarkets have found themselves again packed off to the Competition Commission.

I say "again", because this is the third time in little more than five years that they have found themselves up before the beak. The way things are going they'll end up more investigated than the banks and the beerage, which is a heroically high bar to even come close to. Is there any purpose to the inquiries, other than to keep the anti-big business lobby happy?

The last one, over the scramble for Safeway, came up with the blindingly obvious conclusion that only Wm Morrison should be allowed to bid. During the six months it took the commission to examine local drive times between supermarkets' isochromatic behaviour and other inventions of the competition lawyers, Safeway's business went to hell in a handcart, enabling Tesco further to strengthen its grip on the market.

This was very probably Tesco's intention all along, and was in any case powerfully illustrative of how Competition Commission investigations can have the perverse effect of actually harming competition rather than promoting it.

The first investigation, the outcome of which was published back in 2000, was scarcely any more worthwhile. Indeed the man responsible for referring the supermarkets on that occasion, the then director-general of the OFT, John Bridgeman, today admits that its only real purpose was that of exonerating the supermarkets after a long and largely misguided campaign by The Sunday Times on "Rip-off Britain". The commission duly concluded that the supermarkets were a rather good thing.

And so they are, bringing lower prices, more choice and better quality to most of what they do. It's hard to argue with the results, even in the convenience store sector, where the difference between a Tesco Metro and what went before can generally be measured in light years.

Even so, things have plainly moved on quite a bit in the five years since the first report was published. Even Mr Bridgeman now finds himself in the opposite camp. He's been one of the most active campaigners for this latest investigation.

In that time, the supermarkets have further consolidated their hold on the market, marching aggressively into both convenience shopping and non-foods. Local monopoly has been strengthened, and diversity on the high street has self-evidently been harmed. Suppliers have found themselves squeezed or excluded, while the growing practice of "price-flexing", where prices are chopped for promotional purposes then raised again, only serves to obfuscate real price competition between rivals.

Yet the biggest mischief is not really among the supermarket groups at all, which as aggressively run businesses will merely pursue the line of least resistance in their efforts to grow. Rather it lies in our planning laws, which actively restrict competition and perversely allow particular supermarket groups to become locally dominant. Milton Keynes has lots of supermarkets to choose from; unfortunately they all happen to be Tesco.

Many of those actively lobbying against the supermarkets would be equally appalled by the obvious solution, which would be to allow a planning free-for-all in which true competition could flourish. The halfway house might be to introduce a specific duty to promote competition into the planning process, so that for instance where there's scope for development of another supermarket, the existing incumbent wouldn't be allowed to apply. Instead, local monopoly is all too frequently strengthened through the promise of local amenities and other goodies.

In other respects, I imagine this latest exercise will be just like the last one, with no obvious consumer detriment established to justify anything in the way of hard-hitting remedies. As much prompted by political as genuine competition concerns, the investigation is all too likely to prove a waste of everyone's time and money.

British Airways chops £450m costs

If investors expected fireworks from Willie Walsh's first business plan for British Airways, then they would have been disappointed, but as an exercise in considered, deliverable targets, it seemed spot on.

The new chief executive aims to chop another £450m off costs over the next two years, though he's not saying precisely how, or at this stage what it means for the headcount. Given the challenges he faces in reforming working practices and pension benefits, this was probably wise. Best to let departmental heads give the bad news on a piecemeal basis.

Offsetting these savings is an anticipated further £400m rise in fuel costs over the next year. It seems that as fast as Mr Walsh cuts his fixed costs, his variable ones just keep rising. To bridge the gap, he promises a moderate degree of revenue growth.

Options on a further 10 Boeing 777s is meanwhile thought sufficient to satisfy all the company's medium term capacity requirements. The drive upmarket first set in train by Mr Walsh's predecessor, Rod Eddington, continues apace, with an ever greater proportion of capacity devoted to premium rate travellers.

Mr Walsh is confident enough of his plans to be able to convert his predecessor's aspiration of a 10 per cent operating margin into an outright target, to be achieved two years hence. That's still only half what Michael O'Leary achieves at Ryanair, but BA is not yet a low cost airline.

So far, so sensible, and probably achievable too, assuming Mr Walsh is not afflicted by headwinds similar to those of his predecessor - 9/11, war in Iraq, and Sars, to name but a few. Yet though Mr Walsh is understandably not keen to over promise, he may have to be more ambitious still if he's to meet the challenge of Emirates and other fast growing long haul operators with none of the legacy problems faced by Mr Walsh.

The new man at the joystick promises to come forward with proposals for dealing with the pensions liability by the end of the month. Assuming he survives that without a crash landing, then comes the move to Terminal 5, and the Wapping-like reform in working practices that must go with it. Mr Walsh has made a promising start, but the hard work has only just begun.

A day of bid action among the mid-caps

Lots of action in the mid-caps yesterday, with Permira tabling a conditional 210p a share for HMV, and in car dealerships, Pendragon launching a hostile, £259m bid for Lookers and then immediately declaring if final. This latter move, designed to frustrate the hedge funds which normally pile into these situations to force up the price, is something of a first, and will lead to a mercifully short bid battle.

If he's successful, Trevor Finn, Pendragon's chief executive, emerges as king of the motor showroom, with some 42 per cent of the market for new Jags and nearly as much for Land Rovers. What the manufacturers make of this concentration of dealership power is an interesting question.

For HMV, 210p a share will prove hard to resist, but the question is the same as always for private equity bids; is it for real, or once Permira has done the due diligence, will the price prove just an illusion?