Competition regulator to examine supermarkets' pricing power

By Ahmed ElAmin

- Last updated on GMT

Related tags Oft Asda Tesco Supermarket

In a major move that might help reduce the pricing power of the
UK's major supermarkets, the Office of Fair Trading (OFT) yesterday
said it would refer the issue to the Competition Commission (CC)
for more detailed examination.

The OFT has come under heavy attacks from consumer groups and the government's National Audit Office for not taking a proactive approach to the effect the big four supermarkets are having on the grocer sector.

Pricing power has also helped squeeze manufacturers' margins when they negotiate prices with the group.

In particular the OFT plans to refer the pricing power of the supermarkets to the CC.

"There is also some evidence to suggest that the big supermarkets' buyer power has increased, and that there are aspects of the big supermarkets' pricing behaviour - below-cost selling and price flexing - which could distort competition,"​ the OFT stated in a report. " Although consumers have benefited from lower prices, the data does not allow the OFT to reach a firm conclusion on whether choice and variety for consumers in local markets - whether choice of fascia or on-shelf product variety - have increased. Because pricing practices and buyer power interact with local concentration to affect product variety and choice of fascia, the OFT proposes also to refer to these features in making the reference."

Tesco, Asda, Sainsbury's and Safeway/Morrison hold about an 80 per cent share of the UK's grocery market.

The OFT report noted that grocery prices continue to fall and suggests that choice and quality are rising, creating benefits for consumers.

"However, there are features of the market which, when considered in the context of increased consolidation and the move by supermarkets into the convenience sector, could reasonably be suspected to distort competition and harm consumers,"​ the OFT stated.

The UK's planning system, in particular, the "needs test" for new stores, acts as a barrier to entry, making it difficult to secure new openings or for new operators to compete with those already in the market, the OFT stated.

Big supermarkets also appear to have significant land banks which could, coupled with the planning system, aggravate barriers to entry or otherwise harm consumers. In some instances, supermarkets have attached restrictive covenants when selling sites.

The consultation will last for four weeks and end on the 6 April.

The British Retail Consortium stated that much of the content of the OFT report is favourable to supermarkets and acknowledges that competition has delivered major benefits to consumers.

"This is particularly obvious in the convenience sector where, as the report notes, the 10 per cent market share held by multiple retailers has greatly improved the quality of the offer to consumers,"​ the BRC stated. "We also note the report's concern about the planning system as a barrier to entry by smaller competitors into the sector. All retailers, however, are obliged to work within the system as it is, with all its imperfections, and the Competition Commission has on previous occasions declined to pursue this issue."

TNS Worldpanel supermarket share figures for the 12 weeks ending 26 February show that Asda has 16.6 per cent share of the market, Sainsbury 16.2 per cent. Tesco's growth rate has slowed to eight per cent. Morrisons share is 11.2 per cent of the market.

An OFT investigation six months ago resulted in the regulator deciding that no further action was necessary. The OFT gave said supermarket suppliers had failed to provide evidence of malpractice or any other breaches of the Supermarkets Code of Conduct.

Since the code came into effect on 1 November 2001 there has been no official complaints under the dispute process set out by the code, OFT spokesperson Kate Wilcox told last June.

In March last year the OFT published a review of the supermarkets' code, stating that the UK's four big chains were in general compliance. The regulator then extended the consultation process to give those supplying food to the supermarkets a chance to make additional submissions about any malpractice. The voluntary code covers Tesco, Asda, Sainsbury's and Safeway/Morrison.

An investigation by the Competition Commission in 2000 found more than 30 exploitative practices directed by supermarkets at their suppliers. Afterwards the code, amended by the supermarkets who signed undertakings to follow the rules, was put in place.

The OFT last year quizzed suppliers, trade associations and the four supermarkets about how well the code was working. About 80 per cent of respondents said that it had failed to bring about any change in supermarket behaviour.

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