Outlook: Supermarkets

THE BIG GUYS of the supermarket sector get it their own way most of the time, but they are certainly being punched around a bit at the moment. Less than a month after the Office of Fair Trading launched a full-scale investigation into the sector, along comes another OFT report, this time into buying power.

Its central thesis is this: that while huge buying muscle can be in consumers' interests if those gains are passed on to consumers in a competitive environment, the likelihood of such benevolence reduces sharply when competitors achieve a stranglehold on their market.

The killer punch is the final paragraph, which suggests that profits are bounding ahead too fast to sustain the argument that the buying power of the big chains operates in the consumer's interest, as the Monopolies and Mergers Commission and OFT have maintained up until now.

The implication is clear - that "something must be done". The more difficult issue is what. The supermarket sector is not a regulated monopoly and any attempt at legislating for it would almost certainly be counter-productive. America has the Robinson-Patman Act, which seeks to prohibit suppliers from offering preferential terms to selected buyers, thus limiting the effect of enhanced buying power. Unfortunately, forcing larger supermarkets to pay the same as the local corner shop is likely to lead to higher food prices, not lower ones.

Any attempt to force the supermarkets to lower their prices would be wrong in theory and impossible in practice. So perhaps all the Government can do is hope market developments come to its rescue. On this front, the advent of the euro should work miracles. The effect should be both to increase the pool of competitors and to flatten out prices across the single European market. Consumers would not tolerate food prices that were blatantly higher in the UK than elsewhere.

The gradual increase in home shopping may also help increase competition by drawing in rivals from other countries not saddled with the high cost base of a store portfolio. In the meantime, perhaps the best way to keep prices down is for politicians and competition authorities to keep banging on about it. The threat of retaliatory action is often more effective than the action itself.