The Groceries Market Investigation 2008

1. The Groceries Market Investigation 2008 Carole Begent Deputy Chief Legal Adviser Competition Commission IDRC, Kyoto 13 April 2008

2. Background to the Reference OFT referred Grocery Market to CC on 9 May 2006 The OFT said the following was suspected of distorting competition: • Planning system—by raising costs and limiting scope of local market entry, particularly for new large format stores • Land holdings of big supermarkets reinforcing existing market position • Pricing behaviour of big supermarkets through below cost selling and price flexing • Buyer power of big supermarkets undermining the viability of alternative business models (e.g. wholesale distribution and convenience store sector) and harming consumer choice

3. Key steps of Investigation Issues statement June 2006 Emerging thinking January 2007 Provisional findings October 2007 Provisional decision on Remedies February 2008 Final report to be published by 8 May 2008

4. Market Investigations — The Test “whether a feature or features of the market prevents restricts or distorts competition” “Features”: structure or conduct (of grocery retailer or customers) Investigation was focused on possible harm to the consumer

5. The Groceries Market Sales by big supermarkets – 80% of annual sales (2006) Largest 4 Grocery retailers – 70% of annual sales Since 1990s – development of out of town stores Sainsburys and Tesco move into convenience stores Decline in independent convenience stores and specialist stores Overall the number of convenience stores has not declined in recent years Some entry – ‘LADS’

6. Groceries Market Investigation — other issues Damage to environment – transport of goods and by customers, excessive packaging and shopping bags Social impact – emptying the high street and threat to communities Health – cheap alcohol encourages binge drinking and alcoholism Strategic – security of UK food suppliers

7. The Groceries Investigation — the CC Six Commissioners – the decision takers Staff – up to 30 staff with expertise in competition, economics, business strategy, statistics, law Evidence received through hearings, submissions, staff meetings, surveys

8. Product Market Definition — per Provisional Findings • The CC found asymmetric competitive constraints between stores of different sizes • Larger stores compete with other larger stores (all stores > 1000 to 2000 square metres) • Mid-size stores compete with other mid-size stores and larger stores (all stores > 280 square metres • Convenience stores (less than 280 square metres) compete all other stores

9. Geographic Market Definition – per Provisional Findings Geographic market is essentially local • Use isochrone (drive-time) around each store to delineate the relevant geographic market => bright line • 10 to 15 minutes drive-time for larger stores • 5 to 10 minutes drive-time for mid-sized stores • ½ mile (0.8km) convenience stores • Detail local assessment may alter these thresholds

10. Provisional findings (1) UK Grocery Retailers generally deliver a good deal for consumers – Food prices had declined by 7% since 2000 Did not find any significant distortions of competition through: – targeted price or product promotions, vouchering below cost selling – ‘waterbed effect’ – favourable supplier prices to large retailers having adverse impact on supplier prices to convenience stores and wholesalers Weak competition in some local markets influences the retail offer

11. Provisional findings (2) Horizontal issues Significant numbers of areas of persistent high concentration for all stores (though proportionately less for convenience stores) The planning regime acts as a barrier to entry: – by limiting construction of new large grocery stores – by imposing costs and risks on smaller retailers and entrants The control of land by incumbent retailer acts as a barrier to entry

12. The Planning Regime • Growing concerns about the impact of out-of-town retail developments on town centres • Applicants wishing to develop retail sites outside town centres must pass two specific tests: • The “town centre first” or “sequential approach” • The “need” test

13. Control of Land • Landbanks: • A few land holdings frustrate entry • A few cases of ransom strips • Restrictive covenants: explicitly or effectively prohibit use of land for grocery retailing (sometimes by naming specific grocery retailers) • Exclusivity arrangement: • Favour the tenant grocery retailer • Exclusivity arrangement without end date bar entry forever of competing retailers • Leases: granted to third parties

14. Provisional findings (3) Vertical issues Exercise of buyer power distorts competition through practices that transfer risk and unexpected costs to suppliers thus harming consumers

15. Remedies (1) — per ProvisionalDecision To address highly concentrated local markets:- • “competition test”: applies to new stores of 1000sq metres or more failed if 3 or fewer grocery retailers and market share of incumbent is 60% or greater • Removal of existing restrictive covenants in hc markets • Prohibition on future restrictive covenants • Restriction of periods of exclusivity to 5 years

16. Remedies (2) — per ProvisionalDecision To address supply chain issues:- • Revised code of practice: prohibition on outright retrospective changes to agreed terms • More grocery retailers covered by the code of practice • Retailers to appoint in house compliance officer, improve records • Recommend the establishment of Ombudsman

17. Next steps Report publication 8 May 2008 (latest) Implementation of Remedies Order Recommendation Working with OFT, Government – Planning, Ombudsman Government must respond within 90 days to CC recommendations