Supermarkets

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 be 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.

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. Further information 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.

'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 will argue that new competitors have 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. The companies 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.

The Stock Exchange reaction was interesting, Sainsbury's share price rose significantly, suggesting that its shareholders foresaw greater profits arising from greater market power - though perhaps they instead - or as well - recognised the likely cost savings arising out of merging the two head offices. But Tesco's share price fell, suggesting that its shareholders were worried that the merger might indeed lead to stronger competition, rather than the lessening of competition that would worry the CMA.

Martin Stanley