But not the Competition Commission. It believes that grocery competition is local, not national. What really matters is how Tesco Lewisham competes with its nearby Sainsbury’s. It’s like saying in football that the Premiership is all very well, but what really matters are the local derbies.
The provisional findings published last week have almost nothing on national competition nor market share. They acknowledged that the big four get lower prices from suppliers and that Tesco gets the lowest of them all. They acknowledged some economies of scale in distribution costs, but that’s it – national competition doesn’t matter.
So why does the Commission think that local competition is all important? Because it thinks that in some catchments, supermarkets are exploiting the lack of competition. Tesco submitted self-analysis showing that indicators such as price, range, product availability and check-out queues do not vary with local competition.
But the Commission dismissed these as insufficient and preferred its own multiple regression that shows that the fewer the competitors, the higher the store profit margins. The Commission is very precise on this. One fewer competitor is worth£20,000 to£25,000 a month per store in extra profit.
The Commission glibly asserted that its regression equation shows that having fewer competitors causes higher store profit. It does nothing of the sort. All a regression can show is that both move together. Why don’t they use their intriguing finding to ask why this happens? Is it because prices are higher in less competitive areas?
We know this can’t be true, because the big four have national price structures. But, as all retailers know, the strongest driver of store profitability is sales per sq ft. So is it that stores in less competitive areas simply have a higher sales intensity? Or is it more sinister – that retailers cut back on labour in those areas? The Commission must have this data, but remains silent on it.
Most of the recommendations hinge on the assertion that fewer local competitors reduce the quality of the local offer and so generate monopoly profits. If not, where would the justification be for changing the planning laws, regulatory supervision of development plans and even forced store divestments?
Remember this is the same Commission that thought three years ago it would increase competition by forcing the number four player Morrisons to sell stores to Tesco, which is nearly three times its size.
The biggest effect they identified is where a store is the only one in a catchment. How do you solve that? Perhaps the OFT will command another operator to build a store and order the planning authority to permit it.
Crowds of no doubt grateful inhabitants will come out to thank the competition authorities for turning the town’s only cinema or green space into another supermarket.
Simon Laffin is private equity adviser and former chief finance officer of Safeway
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