As he surveys Bath from the grandeur of his Georgian townhouse this weekend,
Peter Freeman, chairman of the Competition Commission, may choose to reflect
on one thing: if only the rest of Britain were this simple.
Freeman and his wife Elizabeth have plenty of choice when deciding which
supermarket to use to stock their kitchen. A Waitrose? There’s one less than
three-quarters of a mile away. Go a little further and there’s a
decent-sized Sainsbury’s. A big Morrisons is also within easy reach.
The essential picture is clear. Bath is elegant, dignified and beautiful, yes.
But it also provides the perfect example of the supermarket world that
Freeman would like to see – a city where the consumer looking for somewhere
to do a weekly shop can make no complaints about shortage of choice. No
operator dominates. Options abound.
But Freeman and his five Competition Commission colleagues, who have spent 21
months investigating the UK groceries market, now want to see an overhaul of
the rules under which supermarkets have expanded in the past three decades.
Is there a problem on the high street with competition between small shops –
both independent and owned by a big supermarket group? Not at all, according
to the commission. Should the watchdog intervene to prevent the opening of
large edge-of-town superstores when their overbearing presence threatens the
health of town cen-tres? None of our business, it says.
But Freeman and his colleagues are suggesting one measure that, on the face of
it, could have a fundamental effect on the pattern of expansion by the
supermarket giants. They want the planning system to be used to prevent an
operator that is already dominant in a local area from becoming more
dominant still.
The proposal was outlined in October when the commission delivered its initial
findings. On Friday night, retailers saw the detail.
CLOSE examination of the Competition Commission’s findings show that Tesco –
the undisputed big daddy of the British grocery business – can count itself
lucky. The commission’s proposed measures may rein in Tesco’s expansionary
ambitions. But it won’t be by much.
The commission is proposing a “competition test” for new stores of 1,000
square metres or more – “one-stop” stores, broadly speaking, where it is
possible to do a full family shop. The test would try to avoid any operator
becoming overwhelmingly powerful in a given area.
Not all developments would be caught by the system. A retailer wanting to
build its first store in a local market – defined as an area that is within
a short drive – would not be challenged under the new regime. It would be a
newcomer, so competition could only increase.
Similarly, a proposal would face no challenge where there were already four or
more different competitors – or where the new store brought the total to
four.
But, crucially, a proposed new store would be blocked only where it would give
the retailer 60% or more of large-store floor space in the area concerned.
This 60% rule means the vast majority of proposed developments – by Tesco or
any other group – would not be stopped.
Nick Gladding, retail analyst at Verdict Research, said: “It is quite lenient.
Some of the restrictions that are suggested – such as using a 60%
market-share threshold for the competition test – are quite easy meat for
most retailers.”
Certainly, there are areas where a single retailer does dominate. In places
such as Dumfries and Galloway, Tesco has more than 50% of the one-stop
supermarket space. J Sainsbury has more than 60% in southwest London.
Simply because Tesco is already Britain’s biggest food retailer, it had most
to lose from the introduction of the competition test.
In the one-stop shopping market, Tesco takes about £1 in every £3 that goes
into the tills. In more than two-thirds of Britain’s postcode areas, the
company is the largest operator.
But because the local market-share hurdle has been set so high, the new rule
will have little effect.
In a second big area of the Competition Commission’s recommendations, the
actual impact is likely to be far less than it first appears.
The commission wants to combat the widespread practice of retailers holding on
to land, or placing restrictive covenants on land to stop a competitor
moving in. Retailers are now being told that they will have to lift existing
restrictive covenants. All future covenants will be banned.
Furthermore, supermarkets will be forced to give up “exclusivity” arrangements
that have been in place for more than five years. In other words, a retailer
might be granted exclusive rights by a landlord to open a new store on a
site; but then it must press on and actually do the building; the
arrangement must not be used simply to keep rivals out.
That sounds strong enough. But look what happens in practice. Very often these
restrictive covenants are on land already being used for something else. And
the companies using the land have long-term leases. Covenant or not, the
land would not be switched to food-retail use for years to come. Ian
Anderson, planning expert at the property adviser CB Richard Ellis, said:
“Long term, perhaps it will bite the retailers, but in the short term I
can’t see that lifting restrictive covenants will have much effect on store
development.”
The commission has also tried to address concerns about supermarkets’
relationships with their suppliers: in essence, are retailers able to bully
the people who provide the food the shops sell?
Here again, the commission’s suggestions are modest. A code of practice for
dealings with suppliers is to be tightened up – and incorporated into
contracts for buying-in merchandise. It was a change that Tesco resisted.
There will be a new grocery supply code ombudsman, appointed by the Office
of Fair Trading.
And the code will be extended to cover Marks & Spencer and Waitrose, which
have so far fallen outside the net. This has been quietly welcomed by
Sainsbury.
QUITE as important as the things the Competition Commission has done are the
things that it hasn’t. It could, in theory, have told Tesco – and indeed any
other operator with a tight grip in a particular area – that it would be
forced to sell stores to even things up with its rivals.
But Freeman and his colleagues stopped short of that. In essence, what an
operator already has, it can keep.
The commission could have come up with a formula to try to protect local high
streets from being wounded by the opening of big, edge-of-town stores. It
didn’t.
The commission could have ordered supermarkets to sell off their land banks
where the full development of sites would increase an operator’s
stranglehold. It didn’t.
So add it all together, and the commission appears to have side-stepped some
of the issues that critics of the supermarket industry wanted it to tackle.
And on two key points – the introduction of a local competition test and the
scrapping of restrictive covenants – the practical effects are likely to be
limited.
Nevertheless, Tesco felt obliged this weekend to suggest the commission had
been unreasonable.
Understandably, the company doesn’t like the introduction of a local
competition test into the planning process – it has more to lose than any
other operator. Every other big retailer – Asda, Sainsbury, Wm Morrison,
Waitrose, Somerfield, the Coop and Marks & Spencer – was in favour of
the test.
Tesco also said the competition test system would cost the industry about
£450m a year – three times the company’s original estimate. The commission
estimates there may be three or four developments each week that have to be
scrutinised.
And Tesco insists that exclusivity arrangements have been crucial in cementing
its involvement in regeneration projects. It cited Beckton in east London as
an example. “We invested millions of pounds and, as the anchor tenant, were
key to redeveloping the old gasworks into a modern retail park that has
transformed the area,” said Tesco’s head of corporate affairs Lucy
Neville-Rolfe. “Getting rid of exclusivity could jeopardise future
developments like this.”
Despite its protests, Britain’s biggest retailer won’t be hit too hard. So
Freeman may yet get a big Tesco on his doorstep – or as near as the company
can manage without taking over a Georgian terrace.
Additional research: Rose Gamble
FIVE INQUIRIES IN SEVEN YEARS
OUR £101 billion supermarket industry is used to being pawed over by
competition regulators, with five separate inquiries in the past seven
years.
The raft of inquiries has caused angst at Tesco, the sector’s biggest player.
Sir Terry Leahy told The Sunday Times in a recent interview that he felt the
company was being singled out. “If you look at the papers they have
published, it is a long list of people with clear vested interests making
unsubstantiated claims about Tesco on almost every imaginable front,” he
said.
The latest inquiry, conducted by the Competition Commission, focuses on
whether the grocery market is working effectively for shoppers in regard to
competition between shops in local areas.
