Commission’s report evades the vital issue

At 270 pages for the report of its provisional findings, plus several hundred additional pages of appendices, you could expect the Competition Commission had covered every possible angle, but there is one glaring omission.

In its investigation the Commission uncovered evidence of a massive price advantage for the big four grocers compared to wholesalers, but it has failed to come to any judgement as to whether this is a bad thing or not.

After analysing the cost of 141 SKUs worth about pound;1.8bn – a much smaller sample than was used in the last inquiry in 2000 – it found that Tesco pays 6.2% less than the overall average unit price, and its three nearest competitors, Asda, Sainsbury’s and Morrisons enjoy advantages of 4-6%.

In contrast, large wholesalers and symbol groups pay 3.4% more than the average price and smaller wholesalers and symbol groups pay 9% more. While buying by the trunker load provides undoubted cost efficiencies for the biggest retailers, can that really justify a price advantage of nearly 10% over large wholesalers who also often buy by the trunker load? And even taking into account the greater cost of distributing to smaller wholesalers, does that justify a cost advantage of more than 15%?

For anyone concerned about the wholesale trade, and for the retailers and caterers they serve, the answer to both questions is an emphatic no. There could be no clearer evidence that the big four enjoy an unjustifiable and unfair advantage – meaning the wholesalers and their customers are forced to sell at far higher prices than the big four. Having established these facts the Commission completely ducks the obvious conclusion by offering no comment whatsoever on these findings.

To rub salt in the wound it does make some comments about pricing, but only to refute all the points made about additional abuses by the big four. It says “Below-cost selling is not part of a predatory strategy aimed at convenience stores or specialist stores,” and claims “it is not having significant unintended effects on smaller stores.” Try telling that to off licences where the multiples are flogging cases of beer at below cost.

Astonishingly it also says there is insufficient evidence that local vouchering is being used by larger grocery retailers with any intention beyond that of normal competitive behaviour. But then perhaps it is difficult to prove “intention”. The waterbed effect, where the prices paid by the big four are effectively subsidised by their smaller competitors is also dismissed.

Another question where the Commission appears to be sitting on the fence is on whether the number of smaller stores is declining. It claims the situation since 2000 is complex and there is conflicting data as to whether the number of c-stores is declining. But even if the number is declining, it doesn’t matter. Considering the dubious validity of some of their other findings, wholesalers may not be reassured to be told by the Commission that the financial viability of the wholesale sector is not seriously under threat. It had been argued that as the number of independent stores declined, wholesalers would be forced to raise their prices, setting up a vicious circle until a tipping point was reached, but this too was dismissed by the Commission.

The only area where the Commission took on board any of the arguments against the big four was in their relations with suppliers. It acknowledged that suppliers needed to be given more protection against bullying and suggested a range of options including strengthening the existing Supermarket Code of Conduct or appointing a supermarkets ombudsman.

One Commission assertion that definitely is correct is that convenience stores with a strong retail offer will prosper, but just imagine how much better they would be doing if they were operating in a fair market? And just in case business wasn’t tough enough for c-stores already, the Commission wants to make it easier for members of the big four to build supermarkets in local areas where one of them is deemed not to have enough competition from the rest.

This is not the Commission’s final report and interested parties have one last chance to try and persuade it to see sense. Formal responses are required to be submitted by November 30, and its final report is due to be completed by May 8 next year.

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