One of the largest market investigations in recent years was into the groceries market. The investigation resulted from considerable public concern about the supposed dominance and bad behaviour of Tesco, the largest UK supermarket chain. The Office of Fair Trading (OFT) never thought that there was a serious competition issue and, indeed, the Competition Commission (CC) found, in its 2008 report, that the big supermarket chains did compete fiercely at the national level. However, they also found that the market did contain some imperfections which the CC proposed should be remedied as set out below.

It was, however, interesting to note that Tesco was subsequently found to be not quite as clever as it (and others) thought it was, and it lost market share as well as becoming subject to an accounting investigation. Chicago School economists no doubt quietly muttered 'I told you so'.

Here is a brief summary of the CC's recommendations.

Planning/competition test: There are certain towns and areas where particular supermarket chains face only limited competition and so offer either slightly higher prices (mainly through less generous discounting) or lower product quality, reduced product range or less good service (reduced opening hours, longer check-out queues etc.) The CC accordingly recommended that the Government should introduce a competition test in planning decisions on larger grocery stores. The incoming (2010) government's coalition agreement included a commitment to change planning policy so as to enable councils to take competition issues into account when drawing up their local plans. But I have heard nothing since. Please email me if you are aware of any developments in this area.

Revised Code of Practice for the treatment of suppliers: There was considerable evidence that the supermarkets deployed excessive market power when dealing with their smaller suppliers, requiring back-dated discounts, paying late, forcing contributions to in-store promotions, and so on. The CC recommended that the existing code of practice should be strengthened and this was done in February 2010. 

(It was interesting that complaints emerged in 2019 concerning similar behaviour by Amazon which (it was said) 'punishes the businesses if their items are available for even a penny less elsewhere. It pushes them to use the company’s warehouses. And it compels them to buy ads on the site to make sure people see their products'.)

Ombudsman to rule on complaints of breaches of the code: The necessary legislation (the Groceries Code Adjudicator Act) became law in 2013. Christine Tacon, the first Adjudicator, launched her first investigation, almost inevitably into Tesco, in February 2015. But her powers were limited, not least because she could only investigate the relationship between the supermarkets and those who directly supply them. This leaves most farmers, for instance, unprotected as they generally supply the big food retailers via intermediary agents.

Further information - including about some interesting enforcement action - is on the Adjudicator's website.

The CC published the Controlled Land Order in August 2010. This tackled excessive and unfair land-banking and covenants, and required some land restrictions to be lifted within a set time of the order being published.  Tesco blamed administrative errors for 23 (fairly minor) breaches of the Order identified in 2020.

'Bargain' Offers

The consumer group Which? complained to the Competition and Markets Authority, in April 2015, about supermarkets 'dodgy multibuys, shrinking products and baffling sales offers' which were making it 'virtually impossible for people to know if they are getting a good deal'. The CMA responded in July saying that it had not identified systemic problems but would engage with retailers to address the poor practices which had been highlighted by Which?. The Government subsequently announced, in October 2015, that it would launch a consultation on how to make pricing simpler.

Sainsbury/Asda Merger

This proposed merger was announced in April 2018. It caused some surprise as the long-held view had been that the competition authorities would never allow one of the 'big four' to merge - the big four being (Walmart-owned) Asda, Morrisons, Sainsbury's and Tesco. The groceries market was so huge (£200 billion a year) that even a tiny price rise resulting from lower competition would take a huge amount of money out of consumers' pockets. (1% of £200bn is £2,000 million.)

Tom Sharpe QC summarised the case for prohibiting the merger in a letter to the FT:

The new group will account for more than 30 per cent of the market. Together with Tesco they will account for about 60 per cent of the market. The rest are small by comparison, typically with different regional and demographic characteristics and smaller in-store offer. This duopoly will continue to operate with (largely) national price files; together they will dictate or influence the prices of most if not all products sold in the market; which products will be on offer; which products should be introduced or discarded; who will supply them; and the prices paid to the suppliers.

There is simply no medium to long-term incentive for either party to engage in serious price competition over time as both would lose profits and the incentive to innovate with products, experiment with new suppliers and new systems will be diminished.

But Sainsbury's and Asda argued that new competitors had arrived in recent years, noticeably Aldi and Lidl, whilst Waitrose was also gaining market share. Amazon and Ocado, too, were selling increasing quantities of groceries over the internet, increasing competitive pressure on all the 'bricks and mortar' stores. It therefore seemed possible -though far from certain - that the CMA would decide that the merger would not in fact result in a 'substantial lessening of competition' at the national level. Asda's and Sainsbury's advisers clearly thought that there was a good chance that the merger would be permitted, albeit subject to conditions.

If so then the main conditions were likely to result from localised problems where the main competition in any one town, for instance, was between Asda and Sainsbury's. But this could be dealt with by the two companies offering to sell some of those stores to competitors.

There would be concern, too, that the merger might lead to suppliers being treated even more harshly than previously. Large suppliers - Unilever, Coca Cola and the rest - could look after themselves  But the merged entity would no doubt seek to consolidate their supplier base and this might particularly impact on smaller suppliers. It did not seem likely, however, that this concern would feature heavily when the CMA came to decide the yes/no question of whether the merger would substantially lessen competition.

In the event, perhaps unsurprisingly, the CMA (in April 2019) blocked the merger, not even allowing the companies the chance to sell some of the stores that were near neighbours.

Tesco Again

Tesco's relationship with its suppliers seemed to have deteriorated again by May 2021.  The company was paying its suppliers so slowly that it had arranged for them to be paid more quickly (if they wished) by Santander Bank in return for paying a finance fee.  They then offered to reduce that fee if the supplier could show that they had 'gone green', for instance by reducing their carbon emissions.    Simon Laffin suggested that Tesco's environmental agenda "might be better served simply by paying quicker rather than making you jump through a green reporting hoop in order to pay less for the privilege of waiting to be paid".


Martin Stanley

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