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Competition Commission falls short of emasculating Tesco and providing safety net for smaller stores

by John Marshall

The final report of the Competition Commission into the UK supermarkets – the third in nine years – disappointed those who hoped that it would emasculate Tesco and provide a safety net for smaller stores and UK food processors. Pali International analyst Nick Bubb believes the commission ‘let Tesco off remarkably lightly’.

The commission has proposed that the planning system should be used to facilitate competition whenever a grocer tries to open a new store, but the test to be used is remarkably benign. Local authorities have been told to reject applications when an applicant already has more than 60% of the local market. Tesco has complained against this proposal, even though it is much less than the normal 25% market share test applied by the competition authorities for other industries, where anything above this level is regarded as a monopoly. Restrictive covenants on 30 sites in the UK which had allowed one player to retain dominance have also been lifted but this is a drop in the ocean in the overall UK market and will scarcely kick start an orgy of competitive activity.

The commission recommended that the Grocery Supply Code of Practice should be strengthened by the appointment of an ombudsman. It will be widened to apply to all retailers with grocery turnover of over £1 billion. While the code will outlaw retrospective changes to suppliers’ terms, many analysts are sceptical that the changes will actually ease the plight of suppliers. Stoddart says ‘it will be difficult to make the new ombudsman work’. How many suppliers will actually complain and bite the hand that feeds them? Certainly the ombudsman will not be able to make things better for suppliers like the UK pig farmers who are suffering from overseas competition.

Suppliers such as Uniq and Premier are confessing that they have suffered delays in recouping increased costs, and that situation is likely to persist as supermarkets react to the downturn in consumer confidence by seeking to offer even more competitive prices thus squeezing margins further.

The writer holds shares in Tesco and Morrison