The Monopolies and Mergers Commission is set to launch a sweeping investigation into allegations that food retailers are reaping excess profits.
Sainsbury's, the country's number two food chain, was the second-largest faller in the FTSE 100, shedding nearly 5 per cent to 377.75p. Tesco, the market leader, fell by 2.3 per cent to 169p, Asda lost 1.75p to 153p and Safeway was 9.25p down at 238p.
The MMC inquiry follows a nine-month probe by the Office of Fair Trading into prices and margins at Tesco, Sainsbury, Asda and Safeway, the UK's "big four" chains. The OFT is understood to have asked the monopoly regulator to widen the inquiry to the entire pounds 87bn-a-year food market, including smaller retailers such as William Morrison and Iceland; the latter's shares fell 9.5p to 275.5p
The competition authorities worry that British consumes are getting a worse deal than European counterparts because of the pricing and margins structure of the UK industry.
The big four, which control half the food market, welcomed the probe and praised the MMC's intention to look at the entire food retail sector.
Tesco said the MMC inquiry, likely to last up to a year, was unlikely to find evidence of overcharging. "The MMC will find what our customers already know; that food retailing is a highly competitive industry."
Safeway said the industry would have the chance to air its case and clear suspicions. "Our case is there to be made... and Safeway has nothing to hide."
Allan Leighton, chief executive of Asda, said: "Asda has nothing to fear from an MMC inquiry. We intend to carry on being fierce competitors and value crusaders."
However, the company has become embroiled in a row with the OFT by claiming that its previous enquiry had given its profits a clean bill of health. "We have not said to Asda at any meeting that we have no problems with their profits," an OFT spokesman said.
Analysts warned that the uncertainty created would depress the supermarkets' share prices. "It is not going to help. It creates uncertainty for up to a year and will take a lot of management's time," one said.
Steve Woolf, retail analyst at Paribas, said the inquiry would stifle takeovers among retailers. There is speculation that the US group Wal- Mart could bid for Asda and Dutch chain Ahold link up with Sainsbury's.
Mr Woolf said foreign predators would steer clear of the UK until the end of the MMC's work. "It is a bold predator that enters the UK market at this time."
Industry experts said the probe was unlikely to find conclusive evidence of excess profits. Richard Hyman of retail consultants Verdict Research said that UK consumers were happy and its retailers highly successful. "They are now being torn apart by a Government and media keen to score easy points."Reuse content