Competition Commission chairman Peter Freeman issued his long-awaited grocery market remedies report last week, a day after Valentine’s Day.
Before February 15, a tidal wave of hype had been building that Freeman would administer tough love to the big four, put the brakes on their growth plans and clamp down on their relationships with suppliers. The reality was that the report was more akin to a gentle cuddle. Effectively, Freeman put his arms around the chief executives of the big grocers and told them that, while he was not entirely pleased with all aspects of their businesses, he was not going to do the dirty on them in his final report, due before May 8.
In particular, Tesco chief executive Sir Terry Leahy will have lost little sleep last Friday night. Publicly, the UK’s biggest grocer slammed the introduction of a competition test to prevent food groups owning more than 60 per cent of the grocery floor space in a particular area, alleging the changes would add£150 million a year through bureaucracy, costs and delays, slow down the planning process and hit investment.
But it could have been far worse for Tesco. Above all, it will not have to dispose of a single store, nor any of its so-called landbank sites on which it is not trading. Even the recommendation to outlaw exclusivity on big brownfield development schemes was softened by the fact that the rule will only apply after five years on both new and existing sites.
In fact, Tesco chiefs were pleased about the Commission’s decision to recommend introducing a new version of the Supermarkets Code of Practice (SCOP) – arguably the most wide-ranging change of the entire report – binding all UK grocery retailers with an annual turnover of more than£1 billion to it.
The extension of the Code beyond the big four will ensnare grocers including Iceland, Marks & Spencer, Aldi, Budgens, Co-operative Group and Lidl.
So what do retailers, industry observers and affected organisations think would be the impact of the remedies report – if it were to be implemented in full – and what will be the legacy of Freeman’s inquiry?
Perhaps predictably, Tesco responded strongly. Tesco corporate and legal affairs director Lucy Neville-Rolfe said the remedies were “a bit more costly and bureaucratic than we expected. I don’t think they realise how much more work it will involve”.
She added: “It’s ironic that the Commission says that the planning system is a barrier because it causes complexity and delays, yet the proposed remedy makes it more complex and more likely to cause delay.”
Neville-Rolfe said that Tesco’s forecast of£150 million in extra regulatory costs are based on the 65 applications for big stores that were submitted last year. She claimed that these will be hidden costs to customers. “Regulation is not free of cost,” she said. In terms of exclusivity, Neville-Rolfe said Tesco would have preferred the period to be 15 years – not five.
Bernstein senior analyst Chris Hogbin says that, if implemented, the remedies report may lead Tesco and Sainsbury’s to increase the number of smaller convenience stores they open, to circumvent the new competition test, which refers specifically to stores larger than 10,765 sq ft and aims to block a retailer gaining more than 60 per cent or more of large-store grocery space in the area concerned.
Bad news for independents
The prospect of more Tesco Express or Sainsbury’s Locals moving onto the turf of smaller independent retailers is hardly what the Association of Convenience Stores (ACS) wanted to see from the inquiry.
That said, Asda – which does not yet have a convenience business – said the competition test could work in its favour. Asda corporate affairs director Paul Kelly said: “What you have now got is a genuine look at competition that encourages new entrants into the market.”
If the competition test was adopted, Kelly said it could help Asda open between eight and 12 stores a year, although that was a “finger in the air” estimate.
Kelly also welcomed the report’s recommendations on exclusivity and restrictive covenants (see box). He said: “If you look into the restrictive covenants and exclusivity, it is used across the industry and not just by the big four, so there is potential for clarity.”
He denied that Asda was disappointed by the fact that the remedies report delivered no additional recommendations on the needs test – used to gauge the necessity for another supermarket in a particular catchment – which it wants abolished.
Kelly emphasised that the Government, in its planning white paper last year, had flagged the “unintended consequences of the needs test being a barrier to entry and having an adverse effect on competition”.
Other big grocers have also given the competition test, recommendations on restrictive covenants and exclusivity a tentative thumbs up. Waitrose managing director Mark Price said: “We are pleased by the fact that they are going to introduce a planning test for organic growth. The bit about restrictive covenants and exclusivity is a good thing for consumers and good for competition.”
According to Price, if the remedies were implemented they would not change much in the short term, but could make a difference in the long run. “I think you have to take a look into the future, in 10 to 15 years. Will this provide more choice for consumers? You have to say it will,” he said.
Similarly, Waitrose, along with M&S, approves – at least publicly – of the recommendation that they are included in the new Groceries Supply Code of Practice, which is to replace the existing Supermarkets Code of Practice to which only the big four are bound.
Price said: “It is no problem for us, because we already go beyond what the code requires for the big four. In that sense, it is not going to be an issue for us.”
Asda is bound by the existing Supermarkets Code of Practice and Kelly stresses that, if an ombudsman is appointed, it “must have customer interests at the top of the agenda. It would be perverse if a market that is highly competitive ends up with customers paying higher prices”. The ideal scenario, he argues, is that the ombudsman is the “last resort” to resolve disputes between grocers and suppliers. A Commission spokesman said an ombudsman would have close links to, and report in to, the Office of Fair Trading.
Gavin Matthews, partner at specialist retail law firm Bond Pearce, says: “It is likely that this would not require new primary legislation, but could be implemented in a similar way to the current SCOP.”
The ACS is arguably the most disappointed group involved with the inquiry. ACS chief executive James Lowman put on a brave face and said that after the perceived whitewash of the provisional findings in October, the remedies report provided a few crumbs of comfort.
The organisation was buoyed by the fact that the Commission seemed to backtrack from one interpretation of its autumn report that it was set to ease planning regulations to smooth the building of more out-of-town supermarkets, which could have a damaging impact on smaller independent retailers in town centres. “They have rowed back from the decision in October to intervene in planning decisions to help build [more] out-of-town supermarkets,” says Lowman. However, he admits that the remedies report is not what the ACS wanted when the inquiry – which it was instrumental in bringing about – began in May 2006.
Overall, however, most industry observers still believe the remedies report will not have a large impact on the big grocers. Hogbin says: “Over the next five years, I do not think it will affect the number of store openings for the big four to any large extent.” Asked why, he says: “They do not tend to open stores in areas where they have a strong position.”
For the ACS, the final report before the statutory deadline of May 8 is likely to make for grim reading. Asked what will be the legacy of this inquiry, Lowman says: “It is a massive missed opportunity. They have failed to identify the impact of the major multiples for buying locally. In a few years, we will still see a market dominated by four players and we will not have new entrants entering the market and competing at their level.”
For the big four, with a collective market share of more than 75 per cent, Freeman’s post-Valentine’s day delivery put paid to their worst fears. In public, Tesco may be talking tough, but in reality, the UK’s biggest retailer has little to fear.
In a nutshell: key proposed remedies
A competition test should be introduced when local planning authorities are assessing planning applications for large grocery stores. The OFT would act as a statutory consultee to the local planning authority to carry out the test
A requirement for grocery retailers to release existing restrictive land covenants, which have the effect of preventing that land being used for competing stores, in areas of high concentration
A requirement on grocery retailers to lift existing exclusivity arrangements that have been in place for more than five years
A requirement on grocery retailers not to enter into or enforce any exclusivity arrangements of this kind in the future for longer than five years
The creation of a Groceries Supply Code of Practice (GSCOP) to replace the existing Supermarkets Code of Practice (SCOP), which will be extended to include all grocery retailers with a UK turnover greater than£1 billion
The new code, while including much of the existing SCOP, will prohibit retrospective changes to agreed terms of supply and also require retailers to make further improvements to their dealings with suppliers through the appointment of an in-house code compliance officer
The establishment of an ombudsman to arbitrate on disputes under the GSCOP
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