Supermarkets face fresh investigation

Competition inquiry prompted by expansion into convenience sector. Planning regime criticised
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Britain's four biggest supermarkets are bracing themselves for the third major inquiry into their industry in the past six years after the Office of Fair Trading found their growth was "distorting" competition and "harming" consumers.

In a surprise change of heart, the OFT said consumers were at risk from the march of the supermarket giants into the convenience store sector during the past five years, prompting its decision to refer the grocery market to the Competition Commission. It also condemned the amount of land that supermarkets have stockpiled for future development.

The City interpreted the move as an attempt to curtail Tesco's growing power and marked shares in the group, which has led the charge into the sector, 3p lower at 329p. Jonathan Pritchard, at Oriel Securities, said: "It is hard to escape the conclusion that this is disproportionately bad news for the market leader."

In a draft ruling after a three-month investigation, the OFT said competition between the big supermarkets had been good for consumers, but said the planning regime and supermarket land banks were acting as barriers to new players seeking to enter the market. After initially opting not to order a new investigation, the OFT changed its mind after the threat of a legal challenge from the Association of Convenience Stores, which has fronted a concerted campaign to force an inquiry on to the agenda.

The watchdog said it had gathered new evidence by using new powers granted to it under the Enterprise Act. Its investigation focused on the convenience market and the planning regime.

John Fingleton, the chief executive of the OFT, said the "restrictions in the planning system, and the possible incentives those restrictions create for retailers to distort competition, may harm consumers and mean that competition in the market is less than it might otherwise be".

Potential remedies open to the commission, which is unlikely to complete an inquiry until well into next year, include forcing supermarket chains to sell off their land banks and prompting a shake-up of Britain's planning laws.

The watchdog announced a four-week consultation period, which will give supermarkets the chance to make undertakings in an effort to reverse the decision, before it finally refers the £95bn grocery market to the commission.

Britain's biggest supermarket groups attacked the decision. Justin King, the chief executive of Sainsbury's, said: "The OFT states clearly that price, quality, range, choice and service are all working efficiently for consumers and have improved in recent years so we fail to see why further investigation of these aspects is required."

Tesco's corporate and legal affairs director, Lucy Neville-Rolfe, said: "The development of the UK grocery market has been good news for consumers, who have benefited from unprecedented value, innovation and convenience over the past decade, precisely because of high levels of competition."

Kevin Hawkins, the head of the British Retail Consortium, said: "Profit margins of the big supermarkets are declining - even Tesco is only holding its net margin - so where's the detriment to consumers? The OFT has said that the entry of supermarkets into the convenience store sector has improved the offer. If the market is growing, then what is the problem?"