Giants of £125bn grocery sector under fire

Faced with mounting concerns over the relentless rise of the supermarket and fears that local shops were being squeezed out of the marketplace, the Office of Fair Trading was forced to refer the £125bn grocery retail sector to the Competition Commission.

The biggest four retailers, Tesco, Asda, J Sainsbury and William Morrison, account for 75 per cent of the market, and convenience store owners say they aim to put them out of business. There are also fears town centres will lose all character as butchers and grocers are forced to shut up shop, unable to compete with the supermarkets' low prices. According to the Association of Convenience Stores (ACS), 2,000 independent convenience stores closed during the 12 months to June last year as supermarkets moved in, offering a wider range of products under one roof. Most of the criticism has been fired at Tesco, the market leader with a 31.5 per cent share, more than double that of its nearest competitor, Asda. Currently, £1 in every £8 of UK consumer spending is taken by Tesco.

Yesterday, the commission released its report Emerging Thinking, the result of an 18-month investigation, in which it highlighted the key areas of concern. Provisional findings will be released in June and the final report is expected in November.

Land

Land banks have been one of the most contentious issues in recent years. Critics claim Tesco and other retailers have been strategically acquiring and holding land to prevent other competitors from building nearby. The Forum of Private Business (FPB) claims there are more than 300 land banks in the UK preventing other companies from effectively competing in local markets.

"Retail giants are using their financial muscle to prevent rivals gaining access to markets," the FPB's campaign manager, Victoria Carson, said. "At the same time, businesses around the land banks are suffering as a result of a lack of investment and maintenance of those areas because the supermarkets often wait significant periods of time before developing them."

The commission said it needs to examine this issue in further detail and plans to carry out analysis at a local level. It acknowledges there is a concern about "ways in which land holdings might be used to impede entry by competitors into the local market".

The Association of Convenience Stores, Friends of the Earth and Sainsbury's have all argued that the size of Tesco's land holdings will result in significant growth in its national share of grocery sales. Sainsbury's say it will rise to 43 per cent by 2010 while Friends of the Earth puts it at 45 per cent.

However, although the commission has acknowledged Tesco's dominant position, it has rejected these claims. Other retailers are now actively increasing their holdings, it said.

Supply chain

The Big Four have also come under fire for abusing their relationships with suppliers and using "bullying tactics". However, the commission said it has found little evidence of bullying or of widespread problems in the supply chain.

The FPB argues this is because there has been no clear message guaranteeing anonymity for suppliers, who fear a reaction from the supermarkets, their main customers. The commission is now calling on more farmers to come forward to give evidence and has warned a "climate of fear" was hampering its investigation.

The commission has been focusing its investigations primarily on dairy and pig farming as the number of farmers has declined in recent years, indicating widespread difficulties in these sectors. The commission said it needs to examine this in more detail.

The Association of Convenience Stores claims there is a "waterbed effect" which can lead to overall higher prices for the consumer. This happens when supermarkets drive down the prices of their suppliers through their buying power, which forces suppliers to raise prices for other smaller retailers.

The commission said it will be looking at the waterbed effect in more detail.

On a positive note for the supermarkets, it said: "Buyer power can lead to lower prices or better quality for consumers, it may increase innovation in the supply chain."

Retailer competition

One of the biggest complaints of the small retailers is that the Big Four are able to sell certain items below cost deliberately to put them out of business. "Below-cost selling" and "price flexing" are rife, they say. Specialist food retailers closed at the rate of 50 a week from 1997 to 2002, according to the New Economics Foundation. Tesco has expanded into the convenience-store sector and increased its number of outlets from 100 to about 1,000. Sainsbury's has 90 local convenience stores.

Yesterday, the commission said claims of predatory pricing are "feasible" but, again, this is also a matter for further investigation.

The commission said its principal concern will now be "to focus on competition between retailers at the local level, where it most matters to consumers".

Peter Freeman, the chair of the commission and of the inquiry, said: "It would be a cause for concern if supermarkets, either individually or collectively, were in a position to increase prices or lower their offer in any particular locality or region because of lack of effective competition."

However, he made it clear that the commission does not intend to "punish success". Its main concern is whether Tesco, or any other supermarket, "can get into such a strong position, either nationally or locally, that no other retailer can compete effectively".

Other factors

The commission is also looking at peripheral factors, not directly related to competition. The Friends of the Earth is worried about the impact the growth of supermarkets is having on the environment due to "food miles", traffic congestion, and the huge amount of waste products they produce. Its supermarket campaigner, Sandra Bell, said: "This report confirms what farmers and small shops already know: supermarket dominance is a threat to their livelihoods... Tough action is urgently needed to control the power of the supermarkets. Failure to do so will lead to an increase in food miles and force farmers to either intensify or leave the land."

Other groups are concerned at the living standards of workers overseas. Dr Claire Melamed, head of ActionAid UK's Trade & Corporates campaign said: "It is vital when they [the commission] produce their final report, they act to rein in supermarkets' dizzying market power and make sure poor people get a fair deal."