OFT orders competition inquiry into Somerfield stores deal

The supermarket sector was thrust under the regulatory spotlight once again yesterday after the Office of Fair Trading ordered an inquiry into Somerfield's purchase of 114 former Safeway stores from Wm Morrison.

The supermarket sector was thrust under the regulatory spotlight once again yesterday after the Office of Fair Trading ordered an inquiry into Somerfield's purchase of 114 former Safeway stores from Wm Morrison.

The Competition Commission, which conducted a mammoth investigation of the industry only 18 months ago sparked by rival bids for Safeway, has been given six months to complete its latest inquiry.

The 114 stores were sold off to Somerfield for £260m in October after completion of Morrisons' £3bn takeover of Safeway. The deal was not conditional upon regulatory clearance but the OFT said it decided to order a referral because it raised competition issues.

The OFT's concerns centre on 23 of the stores involved in the Somerfield transaction - 22 "mid-range" stores and a single one-stop store, defined as being larger than 1,400 square metres. In the case of these stores, the OFT said there was the potential for a lessening of competition and therefore consumer choice.

All of the stores bought from Morrisons by Somerfield were former Safeway outlets. A Somerfield spokesman said they had now been rebranded under the Somerfield name.

The chief executive of Somerfield, Steve Back, said that although he was "disappointed" by the OFT's decision, he remained confident of a satisfactory outcome. However, the referral is not thought to have been unexpected. Only those ex-Safeway stores where there was clearly no competition issue, such as its Leeds store, have been invested in heavily by Somerfield. Stores where competition concerns were likely to arise have been left largely untouched.

The OFT's decision to refer surprised the City, however, especially as the regulator has waived through a series of takeovers of smaller "convenience-sized" stores by the market leader Tesco. The OFT's failure to refer any of these deals to the commission has come in for criticism.

The commission ruled in September 2003 that Morrisons had to sell 53 Safeway stores in return for being allowed to buy the company. Of these, 48 were one-stop stores and five were smaller stores. The OFT said only one of the 114 stores involved in the Somerfield transaction was on the original list of 53.