Competition

Supermarket expansion in U.K. faces competition curbs

The British government may make it more difficult for supermarkets including Tesco Plc and J Sainsbury Plc to expand by creating a competition ombudsman to oversee the industry, business minister Gareth Thomas said.

Thomas, a minister in the Department of Business, Enterprise and Regulatory Reform, said the government will embrace recommendations from the Competition Commission. The independent panel last week called for a new ombudsman post to enforce a new supermarket code of practice aimed at restraining the industry's pricing power.

“My instinct is that there will be an ombudsman, and that the code of practice will be extended and will have more teeth,” Thomas said in an interview. “The industry recognizes that it needs to continue to offer, in a sense, confidence to their suppliers that they are going to be taken fairly.”

The comments add to pressure on the Britain's biggest supermarkets to keep a lid on prices after the inflation rate rose by its most in six years in April. The Competition Commission finished a two-year investigation of the industry last week and called for grocery chains to be subject to an antitrust test when they apply to build new stores.

Tesco, Asda, Sainsbury and William Morrison Supermarkets Plc together control about three quarters of the 120 billion-pound ($233 billion) grocery market in the U.K. Another antitrust agency, the Office of Fair Trading, is conducting three probes into the industry.

Regulator's Concern

There are a “significant” number of British towns where one or other of the biggest chains face little competition, at shoppers' expense, the regulator said April 30.

The commission identified 30 sites held under so-called restrictive covenants in areas dominated by one company and will require the owners to surrender those sites within six months. Another 60 sites are under scrutiny. Thomas said his department will make specific recommendations in July.

The commission's report recommend an antitrust “test” that supermarkets chains would have to pass to be allowed to build stores. They would either have to be new to a local area, or be entering a vicinity where there were already four or more different grocery chains. An applicant might also gain planning permission if it would control less than 60 percent of sales in the area. An area is defined as land within a 10-minute drive.

The ombudsman would make a judgment on complaints but could also “go out and be a bit more proactive and look at companies' records,” Thomas said.

Tesco's Dominance

Tesco's 31.1 percent market share has made the Cheshunt, England-based company a target for rivals and anti-supermarket campaigners. Sainsbury and environmental advocacy groups including Friends of the Earth say Tesco's land bank may enable it to command 45 percent of the market eventually.

The number of specialist retail outlets such as butchers and liquor stores operating in areas where supermarkets opened declined, a report by the Competition Commission in July 2007 showed. Specialist food retailers closed at a rate of 50 a week from 1997 to 2002, the New Economics Foundation has said.

Tesco said today it will spend 1.95 trillion won ($1.86 billion) to buy a chain of South Korean discount stores, reflecting the growth constraints it faces at home. Sainsbury said today that its annual profit rose 1.5 percent to 329 million pounds. Thomas also praised the supermarket industry.

“Supermarkets in general are one of the great British retail successes and we should be proud of the difference they make,” he said. “Having said that, there are concerns about how, on occasion, they operate and we need to address those concerns.”

(Published by Bloomberg 14, 2008)