Tesco wins key appeal over ruling to curb store growth

Tesco's expansion plans in the UK received a major boost yesterday when it won its appeal against a competition test designed to slow its growth, but its victory may be short-lived after the Competition Commission hinted it was determined to see a revised proposal come to fruition.

After the final report into the grocery inquiry in April 2008, the world's third-largest retailer challenged with the Competition Appeals Tribunal the proposed introduction of a competition test that would prevent a retailer from gaining a dominant position in a local market.

Yesterday, CAT upheld Tesco's appeal, largely on the grounds that it did not "fully and properly assess and take account of the risk that the application of the test might have adverse effects for consumers." More specifically, CAT identified that if one retailer was blocked from developing a store in a local area, then a replacement development by a different retailer may not occur.

Lucy Neville-Rolfe, executive director of corporate and legal affairs at Tesco, said: "I think it's great news for consumers because it means we can continue to invest in parts of the country including deprived areas and bring modern retailing to them."

She added: "It would be particularly perverse to introduce a test that would block investment in the current economic climate."

Tesco, which has a 30.3 per cent share of the grocery market, according to TNS Worldpanel, had most to lose from the competition test, which aimed to prevent a retailer opening a new store, or extending an existing one, over 1,000 sq m, that would mean it surpassed a 60 per cent limit of grocery retail space in a specific location.

Tesco cited the commission's finding that the test would prevent 24 per cent of existing larger grocery stores in the UK from extending those outlets. It pointed to the commission's own finding that new store construction can also create extra capacity, which can in turn deliver benefits for consumers.

However, a commission spokesman said that the judgment "did not challenge the rationale for a competition test to tackle local supermarkets monopolies or its design". He added: "The judgment itself leaves the possibility of introducing the test in the future subject to addressing some of the issues raised." The Competition Commission could state its intention to press ahead with a revised version of the test, as early as 16 March. An appeal by the brewer Interbrew in 2001 was the last time a company had successfully appealed against a commission ruling.

Nick Bubb, an analyst at Pali International, warned that Tesco was not yet in the clear regarding the competition test. "If I was Tesco I would not be going around crowing about defeating the Competition Commission. It could backfire on Tesco if the commission decided to be more forceful in its approach," he said.

Asda said it was "obviously disappointed" with the verdict. Previously, it had said the competition test would enable it to double the number of stores it opens each year to about 20. "It would be a great undone that having established adverse effects on competition, it was not followed through," Paul Kelly, the corporate affairs director at Asda, said.

Chris Hogbin, the Bernstein analyst, said that while the decision by CAT was a "mild victory" for Tesco, the importance of the competition test should not be "overstated". He added: "In general, food retailers open space where they do not already have stores," he said.

The commission has also proposed a new code of practice to oversee relationships between supermarkets and their suppliers and an ombudsman to adjudicate in disputes.