A summary of the findings and possible remedies of the Competition Commission's provisional report of the groceries market inquiry:
Findings
Market definition
Precise market definition will differ across local geographic markets but there are three major product markets: larger grocery stores (ie stores larger than 1,000-2,000 sq metres) which compete with stores of the same size; mid-sized stores, (ie all stores larger than 280 sq metres) which compete with both mid-sized and larger stores; and convenience stores, which compete with grocery stores of all sizes. To analyse collectively a large number of local markets, we have used the lower size thresholds of 280 sq metres for mid-sized stores and 1,400 sq metres for larger stores.
The geographic market for the supply of groceries by grocery retailers is local-larger stores compete with other larger stores within a 10- to 15-minute drive-time, with the distance between competing stores in the same local market progressively reducing for smaller stores.
Concentration
A significant number of local markets have high levels of concentration, which have persisted over a number of years. Weak competition in local markets lets grocery retailers weaken their retail offer in all of the markets in which they operate, as well as in those individual markets where competition is weak.
Barriers to entry
The four largest grocery retailers own a significant number of landbank sites, as well as controlling further sites through leases to third parties, restrictive covenants and exclusivity arrangements.
In many cases, these landbank sites represent a pipeline of future development activity that does not raise competition concerns. However, approximately 10 per cent of all larger grocery stores in highly-concentrated local markets have a nearby landsite which is controlled by the retailer and is likely to be constraining entry by competitors. In addition, there are instances of local markets where controlled land holdings, particularly the use of restrictive covenants, may be constraining entry by convenience stores.
The planning regime aims to promote a series of public interest objectives such as orderly growth and development of existing town centres and the provision of a wide range of services in a pleasant and widely accessible environment. Nevertheless, the planning system for retail development and the manner in which it is applied by local planning authorities also acts as a barrier to entry or expansion, by limiting construction of new stores on out-of-centre or edge-of-centre sites, and by imposing costs and risks on smaller retailers and potential entrants.
The economies of scale resulting from the distribution systems of the national grocery retailers, as well as the significant purchasing cost advantages held by larger retailers, are likely to act as a barrier to entry or expansion by smaller retailers and new entrants. However, the presence of the grocery wholesaling sector mitigates the detrimental effects of this barrier on smaller retailers and new entrants.
Tesco is not in such a strong position that other retailers cannot compete. Expansion by other grocery retailers continues, which suggests that Tesco's purchasing cost advantage, share of national grocery sales or expansion into convenience store retailing is not acting as a barrier to expansion by other grocery retailers.
Effects on convenience stores and smaller retailers
Below-cost selling by national retailers is not part of a predatory strategy aimed at convenience stores or specialist stores and is not having significant unintended effects on smaller stores.
There is insufficient evidence to conclude that local vouchering is being used by larger grocery retailers with any intention beyond that of normal competitive behaviour.
The characteristics of UK grocery retailing that we observe do not support the argument that a 'waterbed' effect is distorting competition between large and small retailers. Large retailers do not always get the best price from suppliers. In addition, convenience and specialist store numbers are not in such a state of decline to suggest that a waterbed effect exists.
There is no evidence to suggest that the financial viability of the wholesaler sector is seriously under threat. In addition, consolidation at the wholesale level is unlikely to damage the competitiveness of the convenience store sector.
Coordination between grocery retailers
We have not seen direct evidence of tacit coordination between grocery retailers. However, given the structure of the grocery retailing market, such conduct might arise in the future. In particular, practices such as category management are capable of facilitating exchanges of information between retailers.
Our review of emails between Asda and Tesco and their suppliers shows that suppliers facilitate the exchange of information on retail prices charged by rival retailers. Further consolidation among suppliers may be a cause for concern if it is likely to facilitate coordination, but there is no direct evidence of tacit coordination at present.
Supply chain
There are no systemic problems with the financial viability of UK food and drink manufacturers, nor are there significant barriers to entry or expansion for small grocery suppliers.
Trends in supplier investment or product innovation in the UK are positive, but we have concerns about the effect of practices carried out by grocery retailers that transfer risks and increase costs to suppliers on future levels of investment and innovation.
Each of the national grocery retailers, and some symbol groups, are likely to have buyer power with respect to at least some of their suppliers. The SCOP appears, at least to some extent, to be constraining the exercise of buyer power by the retailers to which it applies.
There is no evidence to suggest that the sale of own-label products by grocery retailers is giving rise to material competition concerns.
Possible remedies
Require grocery retailers to divest land holdings in areas where concentration is weak.
Prohibit grocery retailers from using restrictive covenants or exclusivity arrangements that reduce the likelihood of land being used for a competing supermarket.
Recommend changes to the planning system that would provide greater opportunities for developments on the edge of town centres, while maintaining constraints on out-of-town developments.
Introduce a competition test that would allow the existing local position of a grocery retailer to be taken into account in planning decisions.
Include more retailers in the scope of the SCOP, tightening of various provisions within the SCOP and changing arrangements for its monitoring.
The full report can be found on the Competition Commission's website:
http://www.competition-commission.org.uk/inquiries/ref2006/grocery/groceries_inquiry_news.htm
Findings
Market definition
Precise market definition will differ across local geographic markets but there are three major product markets: larger grocery stores (ie stores larger than 1,000-2,000 sq metres) which compete with stores of the same size; mid-sized stores, (ie all stores larger than 280 sq metres) which compete with both mid-sized and larger stores; and convenience stores, which compete with grocery stores of all sizes. To analyse collectively a large number of local markets, we have used the lower size thresholds of 280 sq metres for mid-sized stores and 1,400 sq metres for larger stores.
The geographic market for the supply of groceries by grocery retailers is local-larger stores compete with other larger stores within a 10- to 15-minute drive-time, with the distance between competing stores in the same local market progressively reducing for smaller stores.
Concentration
A significant number of local markets have high levels of concentration, which have persisted over a number of years. Weak competition in local markets lets grocery retailers weaken their retail offer in all of the markets in which they operate, as well as in those individual markets where competition is weak.
Barriers to entry
The four largest grocery retailers own a significant number of landbank sites, as well as controlling further sites through leases to third parties, restrictive covenants and exclusivity arrangements.
In many cases, these landbank sites represent a pipeline of future development activity that does not raise competition concerns. However, approximately 10 per cent of all larger grocery stores in highly-concentrated local markets have a nearby landsite which is controlled by the retailer and is likely to be constraining entry by competitors. In addition, there are instances of local markets where controlled land holdings, particularly the use of restrictive covenants, may be constraining entry by convenience stores.
The planning regime aims to promote a series of public interest objectives such as orderly growth and development of existing town centres and the provision of a wide range of services in a pleasant and widely accessible environment. Nevertheless, the planning system for retail development and the manner in which it is applied by local planning authorities also acts as a barrier to entry or expansion, by limiting construction of new stores on out-of-centre or edge-of-centre sites, and by imposing costs and risks on smaller retailers and potential entrants.
The economies of scale resulting from the distribution systems of the national grocery retailers, as well as the significant purchasing cost advantages held by larger retailers, are likely to act as a barrier to entry or expansion by smaller retailers and new entrants. However, the presence of the grocery wholesaling sector mitigates the detrimental effects of this barrier on smaller retailers and new entrants.
Tesco is not in such a strong position that other retailers cannot compete. Expansion by other grocery retailers continues, which suggests that Tesco's purchasing cost advantage, share of national grocery sales or expansion into convenience store retailing is not acting as a barrier to expansion by other grocery retailers.
Effects on convenience stores and smaller retailers
Below-cost selling by national retailers is not part of a predatory strategy aimed at convenience stores or specialist stores and is not having significant unintended effects on smaller stores.
There is insufficient evidence to conclude that local vouchering is being used by larger grocery retailers with any intention beyond that of normal competitive behaviour.
The characteristics of UK grocery retailing that we observe do not support the argument that a 'waterbed' effect is distorting competition between large and small retailers. Large retailers do not always get the best price from suppliers. In addition, convenience and specialist store numbers are not in such a state of decline to suggest that a waterbed effect exists.
There is no evidence to suggest that the financial viability of the wholesaler sector is seriously under threat. In addition, consolidation at the wholesale level is unlikely to damage the competitiveness of the convenience store sector.
Coordination between grocery retailers
We have not seen direct evidence of tacit coordination between grocery retailers. However, given the structure of the grocery retailing market, such conduct might arise in the future. In particular, practices such as category management are capable of facilitating exchanges of information between retailers.
Our review of emails between Asda and Tesco and their suppliers shows that suppliers facilitate the exchange of information on retail prices charged by rival retailers. Further consolidation among suppliers may be a cause for concern if it is likely to facilitate coordination, but there is no direct evidence of tacit coordination at present.
Supply chain
There are no systemic problems with the financial viability of UK food and drink manufacturers, nor are there significant barriers to entry or expansion for small grocery suppliers.
Trends in supplier investment or product innovation in the UK are positive, but we have concerns about the effect of practices carried out by grocery retailers that transfer risks and increase costs to suppliers on future levels of investment and innovation.
Each of the national grocery retailers, and some symbol groups, are likely to have buyer power with respect to at least some of their suppliers. The SCOP appears, at least to some extent, to be constraining the exercise of buyer power by the retailers to which it applies.
There is no evidence to suggest that the sale of own-label products by grocery retailers is giving rise to material competition concerns.
Possible remedies
Require grocery retailers to divest land holdings in areas where concentration is weak.
Prohibit grocery retailers from using restrictive covenants or exclusivity arrangements that reduce the likelihood of land being used for a competing supermarket.
Recommend changes to the planning system that would provide greater opportunities for developments on the edge of town centres, while maintaining constraints on out-of-town developments.
Introduce a competition test that would allow the existing local position of a grocery retailer to be taken into account in planning decisions.
Include more retailers in the scope of the SCOP, tightening of various provisions within the SCOP and changing arrangements for its monitoring.
The full report can be found on the Competition Commission's website:
http://www.competition-commission.org.uk/inquiries/ref2006/grocery/groceries_inquiry_news.htm
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