CLA submission to the Competition Commission Inquiry regarding the Grocery Market
Country Land and Business Association submission to the Competition Commission Inquiry regarding the Grocery Market
Dear Sir, 1.
The Country Land and Business Association (CLA) welcomes the Competition Commission (CC) inquiry into the grocery market, following the OFT’s referral to the CC on 9 May 2006.
2.
The CLA represents some 38,000 members in England and Wales, nearly all of whom have a direct and indirect interest in the food supply chain. Our members run small and medium sized enterprises who feel squeezed by the much more concentrated upstream input suppliers and downstream food processors and distributors. Therefore we have followed closely the way competition policy operates for this sector. We make explicit reference in this response to the buying power of the supermarkets and its detrimental impact on our members, and we comment on the issue of planning, particularly in relation to the ability of using land holdings to reinforce a retailer’s market position. We will also comment on the issue of pricing behaviour and the developments in the convenience store sector.
Background 3.
In 2000, the Competition Commission drew a number of conclusions on the negative effects of the concentration of the retailer sector and how the abuse of a dominant market position has harmed suppliers. It found a number of specific negative effects in terms of supplier relationships and certain pricing practices, these being: (a) requiring suppliers to make payments or concessions to gain access to supermarket shelf space; (b) imposing conditions relating to suppliers’ trade with other retailers; (c) applying different standards to different suppliers’ offers; (d) imposing an unfair imbalance of risk; (e) imposing retrospective changes to contractual terms with suppliers; and (f) restricting suppliers’ access to the market. (a) imposing charges and transferring costs to suppliers; and (b) requiring suppliers of groceries to use third party suppliers nominated by a main party. It recommended a code of practice as a means of resolving these difficulties.1 4. This led in turn to the introduction of a voluntary Code of Practice for supermarkets in their dealings with suppliers in March 2002. The OFT was unable to guarantee anonymity for suppliers who wished to complain about infringements, so the Code of Practice has been largely ineffective. The CLA worked with other SME supplier organisations to suggest ways of toughening the wording of the Code but these efforts bore little fruit. We have therefore put on
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Competition Commission: Supermarkets: A report on the supply of groceries from multiple stores in the United Kingdom: 2000 N:\AGRIC-EC\AG&RE\AGRICULT\SUPER\A0908003.doc
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CLA submission to the Competition Commission Inquiry regarding the Grocery Market
record a number of times our view that the Code of Practice, as presently constituted, does nothing to protect the interests of suppliers. Rather, it provides a veil of respectability behind which the major retailers continue to dominate the market and squeeze supplier margins further. In previous submissions to the OFT, the CLA has identified the failure of the mediation process within the Code to work. This led us to conclude that it might help to have another party involved to who aggrieved parties could turn. We therefore called for the Government to create an Independent Ombudsman for the grocery sector. We remain frustrated that these calls have gone unheeded when there is sufficient anecdotal evidence to suggest that the supermarkets continue to engage in practices that are against the interests of suppliers, and thereby, we contend, also against the interests of consumers in the long run. 5.
These views of the code were reinforced by the Competition Commission’s report into the proposed takeover of Safeway in 2003 when it stated: “The evidence both from submissions made to us and our two surveys suggests that the Code of Practice has not been working to protect suppliers. This suggests that, given that buyer power will increase as a result of the acquisition of Safeway, the situation would worsen for suppliers if the Code remained substantially in its present form.”2
6.
However, in the subsequent two reports on the Code by the OFT, no actions were recommended to remedy the failure of the Code. The OFT claimed that there was no concrete evidence from suppliers as to the alleged practices of the major retailers. However we note with interest that the OFT has now accepted the view that anecdotal evidence is sufficient (para. 5.27 on its proposal for a market inquiry) as a means of supporting the case for a referral to the Competition Commission.
Terms of reference 7.
With regard to the OFT’s terms of reference for a market referral to the Competition Commission, we welcome the Commission’s statement of issues (15 June 2006) that expands the original terms of reference. We believe that it remains important for the Competition Commission to be able to analyse the impact the practices of supermarkets have on suppliers and primary producers. It is essential that the inquiry fully takes into account the problems being experienced by suppliers to the food chain, including the failure of the Code of Practice in protecting suppliers’ interests.
Evidence from producers and suppliers to the inquiry 8.
One of the ongoing problems faced by the competition authorities examining the supermarket is the inability and reluctance of producers and suppliers to produce evidence of alleged abuses by the main retailers. The main reason for this is the “fear factor” with producers and suppliers aware that criticism of a customer
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Competition Commission: Para. 2.253: Safeway plc and Asda Group Limited (owned by WalMart Stores Inc); Wm Morrison Supermarkets PLC; J Sainsbury plc; and Tesco plc: A report on the mergers in contemplation), 2003 N:\AGRIC-EC\AG&RE\AGRICULT\SUPER\A0908003.doc
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CLA submission to the Competition Commission Inquiry regarding the Grocery Market
could lead swiftly to the termination of the supplier’s contract. We note and accept the difficulties the OFT has had in the past with seeking evidence. We also believe that the new CC inquiry provides a unique opportunity to resolve this problem. 9.
We welcome the Commission’s statement by the Inquiry Chairman that it is very well versed in dealing with confidential information and protecting the identity of parties giving evidence. However, we call on the Competition Commission to disseminate this statement as widely as possible and put in place stringent security procedures that will reassure producers and suppliers and encourage them to come forward.
Pricing behaviour 10.
We wish to strongly support the conclusions of the Competition Commission reports in 2000, 2003 and 2005 that price flexing is being carried out by the major retailers. This of course has a detrimental effect on suppliers in that if retailers are engaged in price flexing and below cost selling, this will inevitably be passed down to the supplier.
11.
As the OFT itself states in para. 5.16 of its report into a proposal for a market referral, irrespective of the fact that below-cost selling may not have increased since the Competition Commission 2000 report, the practice is still prevalent. If it is the case that below cost selling distorts the market within the supermarket format, it is surely the case that if the practice is extended to the convenience store sector, as is suggested by others, it must also lead to a distortion of competition in the market (para.5.18).
12.
The OFT report cites examples of local price flexing (para. 5.20). However, we believe that these prices are set centrally. If it is accepted that an example of price flexing is the ability of a retailer to offer local voucher promotions, we contend that this is not localised but carried on nationally. But if it is the case that local managers decide whether to engage in this practice, then it suggests that they are given a great deal of latitude in pricing decisions. We find this odd given the centralised nature of the decision-making processes of the multiple retailers.
13.
We believe that retailers do engage in below-cost selling and price flexing. However they are smart enough to ensure that they are not selling blow their own costs; they have sufficient power to ensure that the costs of their promotions, which can range from “buy one, get one free” (bogofs) to price reductions, can always be passed back to their suppliers so it is the supplier who is forced to sell at below cost. We are very keen for the CC to look into this thoroughly to see the distorting effects on the market.
Buying power 14.
There is mounting anecdotal evidence that retailers are using their buying power to weaken the position of suppliers, so much so that we believe many have gone out of business. In evidence submitted to the CLA, the UK mushroom industry has lost some 50% capacity since 2000. As we have stressed above, the Code
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CLA submission to the Competition Commission Inquiry regarding the Grocery Market
of Practice has abjectly failed to resolve the difficulties faced by suppliers of over consuming buying power. 15.
The very fact that suppliers are caught up in, what is termed, the “fear factor” illustrates the scale of the problem. We define the fear factor as the inability of a supplier to a retailer to fairly negotiate the terms of a contract for fear of being delisted in the future (see also paras 8 and 9 above). The effect of this fear is that, since the introduction of the Code of Practice and the mediation process, no single supplier has sought redress, simply due, we believe, to the very real fear of being delisted. In addition, the ongoing process of rationalisation in the supply chain has led to more and more producers and suppliers only supplying once retailer. We believe that this ‘exclusivity’ can only be to the advantage of the retailer.
16.
Given the sheer nervousness of producers and suppliers in giving evidence, we call on the Competition Commission to conduct a survey of interested suppliers, on the basis of strict anonymity, so it can gauge for itself the widespread nature of anti-competitive practices within the grocery sector.
17.
We refer to the concept of the “tipping point”. It is noted in many paragraphs within the OFT report the impact, positive or negative, on consumers. Indeed, a major aim of the OFT, as a body, is to ensure that consumers remain protected within the food chain. We contend that para. 6.21 clearly illustrates that consumers are being harmed by the practices of the Big Four. A major goal of Government policy is to promote social inclusion. We would suggest that, by forcing smaller or symbol retailers to endure higher costs, rural communities will undoubtedly be severely affected, if it is not already the case, which contradicts the Government’s own policies in promoting social inclusion.
18.
We firmly believe that the CC’s inquiry must be far reaching with particular emphasis being placed on the effects pricing behaviour and buyer power have on the grocery market.
The Independent Retail Sector 19.
We believe that the CC must establish a single market definition of the grocery market. We are of the view that the changes in the grocery market since the Competition Commission 2000 report means that the previous 2 market definition is now erroneous. We would suggest this for two reasons. Firstly, at present, the two market definition allows the largest of the multiple retailers to present a picture that there is no dominance in the sector. We believe this to be erroneous: putting Tesco’s share of the multiple and convenience sectors together would account for a market share of nearly 40%, which could be considered as a monopoly; secondly, the two-market definition fails to take into account the social and cultural aspect of independent retail outlets. In rural areas, it is vitally important that the social interactions that take place in the community remain vibrant. Once an outlet of one of the multiple retailers, such as Tesco Express or Sainsbury local, arrives in a village or small town this is the death knell of the local grocer, butcher, newsagent and chemist. This has profound social and economic effects on those communities.
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CLA submission to the Competition Commission Inquiry regarding the Grocery Market
20.
Furthermore, research from Lancaster University suggests that a review of the two market definition is overdue. The entry of the multiple retailers into the High Street has had a negative impact on smaller retailers who have suffered from considerable collateral damage.3 Unless the two-market definition is revised, consumer choice will be severely reduced as the multiples extend their domination of food retailing. Finally, the All Party Parliamentary Small Shops Group recommended in their recent report that the definition should be revised and recognised that the present situation is a significant cause of small shop closure. The report has also pointed out that unless its recommendations are followed, the independent retailing sector will have largely disappeared by 2015.4
Planning system and land banks 21.
Although we recognise that it can take some time before planning permission is granted on a new site, there remains evidence, as suggested by the OFT, that it is difficult for new stores to enter the market, thereby reducing the element of competition in the market place.
22.
It should also be noted that there are flaws in the system which constrain business, especially small and medium sized enterprises (SMEs) in rural areas especially.
23.
What is not recognised by the planning system is the burden it places on SMEs. This impact is clearly misunderstood at national level, as evidenced by Partial Regulatory Impact Assessments in draft Planning Policy Statements (PPS) which generally and clearly state that the draft “PPS is unlikely to have much effect on SMEs”. Very often the draft PPS has been drafted without having rural-proofed its contents and thus the impact of urban-oriented planning policy on rural areas, and rural businesses, is ignored.
24.
The interface between SMEs and the planning system is at a different, lower, level than, for example, the Big Four retailers. Thus the impact of the planning system on SMEs is proportionately much larger. The cost of planning fees and professional fees for the paraphernalia that now surrounds a planning application, is proportionately much higher for an SME than it is for one of the Big Four. If one takes into account that the largest number of business start-ups is currently taking place in rural areas, it is the case that a more simplified system and application process is required for SMEs, including the smaller retailer.
25.
Convenience stores are less able to contest the system, given the costs involved. Certainly in rural areas, owing to the artificial residential premiums now paid for all brownfield sites that have been designated for employment use, this prevents small businesses from breaking into the market.
26.
In practical terms, retail development, and also some types of logistics development associated with retail, now requires highly complex studies (such as sequential search for sites; demonstration of effects on existing retail) which not
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Retail competition and consumer choice: long-term change and household dynamics. Profs. Ian Clarke, Peter Jackson and Alan Hallsworth. Lancaster University. 2004.) 4 High Street Britain: 2015. All-Party Parliamentary Small Shops Group.2006 N:\AGRIC-EC\AG&RE\AGRICULT\SUPER\A0908003.doc
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CLA submission to the Competition Commission Inquiry regarding the Grocery Market
only are very costly and time-consuming, but demand a range of expert advisers and lawyers of which there is not an endless supply - and where the really good ones are already tied to big clients. The smaller retailer stands little chance. The multiple retailers play the game of backing more than one project, on the footing that if one out of several succeeds, the expense is justified. Small firms cannot play that game. 27.
We are also concerned with the issue of land banks. It may be the case that there is no deliberate intention by the Big Four to hold large land banks as an attempt to restrict entry into the market. However, whether deliberate or not, the practical effect is to reduce competition and as a consequence, lead to consumer harm. If it is the case, as surmised by the OFT, that “the threat of new entry in a local market is an essential driver of competition in the grocery retail market both nationally and locally “, then it is surely the case that the practices engaged by the major retailers in holding significant land banks and selling land with restrictive covenants are anti-competitive and should be rectified. We would also make the case that, in essence, the effect of multiple retailers locating in out of town bespoke geographic locations is wrecking the High Street.
Conclusion 28.
The CLA’s believes that the Competition Commission has been given a unique opportunity through its inquiry to redress the imbalances in the food supply chain so that it operates in a fairer way.. This requires the inquiry team to examine all facets of the supply chain, rather than focusing on particular aspects. In order to be able to do this effectively the CC must recognise the importance of obtaining credible evidence from those directly affected by the practices of retailers in the grocery market. This means that the CC must give guarantees of client confidentiality if a producer or supplier submits written evidence or is invited to give oral evidence. Only through this can the CC ensure that it is receiving all relevant information and as such, be able to make an objective assessment. Without such guarantees, we believe that those affected will simply wash their hands of the inquiry.
29.
We urge the CC inquiry team to ensure that all facets of the grocery supply chain are considered within a structure that allows for free disclosure. We would be more than happy to furnish the inquiry team with any additional information required and we would also welcome the opportunity of discussing the issues raised above directly with the Competition Commission through oral evidence.
Country Land and Business Association June 2006 A0908003
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