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Antitrust Issues in the UK Grocery Industry Michael Rowe 21 May 2008 Introduction – A Good Number of Competition Cases Despite recognition that the grocery retail industry in the UK is broadly competitive, between 2000 and 2008 the sector has seen:

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introduction a good number of competition cases
CF081350285Introduction – A Good Number of Competition Cases
  • Despite recognition that the grocery retail industry in the UK is broadly competitive, between 2000 and 2008 the sector has seen:
    • Two substantial market reports by the Competition Commission (CC)
    • One merger review by the CC involving all of the major players (and other merger references to the CC)
    • One substantially complete cartel investigation (and at least one on-going)
  • "Because of its importance to the economy, because of its relationship with other sectors such as retail grocery, and because sectors facing strong competition have the greatest incentive to avoid competition, the dairy sector has seen a good number of competition cases" John Fingleton, CEO of the Office of Fair Trading (OFT), 19 September 2006
the first market investigation
CF081350285The First Market Investigation
  • Launched by the MMC in 1999 following concerns that:

> Groceries cost more in the UK than in comparable EC countries and the USA

> There was a discrepancy between farm-gate and retail prices

> Large out-of-town supermarkets were threatening the high street

  • Relevant Market

> Identified as that for one-stop grocery shopping in stores of at least 1,400 sq metres (15,000 sq feet)

> Shopping patterns found to be essentially local. Most consumers travelling no more than 10 minutes to the supermarket in urban areas and no more than 15 minutes in non-urban areas

the first market investigation cont
CF081350285The First Market Investigation (cont.)
  • The CC's Report (October 2000) focussed on three issues:

> Persistent selling below cost

> Price flexing

> Relationships between supermarket chains and their suppliers

  • Conclusions

> Supermarket industry broadly competitive

> No remedial action recommended in respect of predatory pricing or price flexing, due to concerns that any possible remedy would be "undesirable, disproportionate or present practical difficulties"

> A Code of Practice (COP) to be drawn up and parties with at least an 8% share of the market to be required to give undertakings to comply

> COP to include provisions relating to non-cost-related payments required of suppliers, access to shelf space, the imposition of charges and changes to contractual arrangements, particularly when imposed retrospectively

safeway merger analysis
CF081350285Safeway Merger Analysis
  • The References
    • Four references to the CC in March 2003 concerning the proposed acquisition of Safeway by each of Asda, Morrisons, Sainsbury's and Tesco
  • Market Definition
    • Market definition from 2000 Investigation used
    • Effect on convenience stores (below 280 sq metres) and stores providing for 'top-up' shopping (between 280 and 1,400 sq metres) also considered
    • Market essentially local but national dimension also addressed
safeway merger analysis cont
CF081350285Safeway Merger Analysis (cont.)
    • Local Market Analysis
  • Stage One
      • Based on identifying the number of competitive fascias within an isochrone around each Safeway store (10 minutes' drive time in urban areas and 15 minutes' drive time in rural areas)
      • Reduction in the number of fascias from each of 5 to 4, 4 to 3, 3 to 2 and 2 to 1 deemed a potential problem
  • Stage Two
      • Examination of problem areas identified under Stage One in conjunction with a discussion with concerned parties
      • Following analysis of results, five to four rule considered too demanding and abandoned
safeway merger analysis cont7
CF081350285Safeway Merger Analysis (cont.)
  • Recommendations
    • While a programme of divestment of stores might remedy local adverse effects, concerns at the national level would not be addressed
    • No reasonable divestment programme would adequately restore a fourth national competitor, and there would be scope for coordinated effects between the three largest players
    • Three largest players (Asda, Tesco and Sainsbury's) blocked from acquiring Safeway
    • Morrisons acquisition cleared conditional on divestment of stores in 48 problem areas
other mergers referred to cc
CF081350285Other Mergers Referred to CC
  • Readiness on the part of the OFT to refer mergers in the sector to the CC
  • Acquisition by Tesco in 2003 of Co-operative Group's store in Slough

> Referred to the CC in 2007 following Tesco's failure to fulfil undertakings in lieu given to OFT

> Tesco required to divest site or development

  • Acquisition by Somerfield in 2004 of 115 stores from Morrisons

> CC investigation launched after closing

> Somerfield required to divest 12 stores

> Somerfield applied to the Competition Appeals Tribunal (CAT) for judicial review of the CC's decision, but the application was dismissed

milk cartel
CF081350285Milk Cartel
  • Statement of Objections (SO) issued by the OFT in September 2007 provisionally finding evidence of collusion between certain large supermarkets and dairy processors on retail prices of milk, butter and UK cheese
  • The SO alleged that the supermarkets had indirectly disclosed to and/or exchanged with other retailers commercially sensitive information and that the dairy processors had facilitated such exchanges
  • The OFT announced that it had concluded "early resolution agreements" with, inter alios, Asda, Sainsbury's, and Safeway (7 December 2007)
  • Sainsbury's agreed to pay a settlement of £26 million and stated that:
    • "the price initiatives […], which were widely and publicly reported at the time, were designed to help British dairy farmers at a time of considerable economic pressure"
milk cartel indirect information exchange
CF081350285Milk Cartel – Indirect Information Exchange
  • In 2003 the OFT fined Argos and Littlewoods for fixing prices pursuant to an exchange of confidential information through a common supplier
  • The CAT upheld the OFT's decision, stating:
    • "If one retailer A privately discloses to a supplier B its future pricing intentions in circumstances where it is reasonably foreseeable that B might make use of that information to influence market conditions, and B then passes that pricing information on to a competing retailer C, then in our view A, B and C are all to be regarded […] as parties to a concerted practice having as its object or effect the prevention, restriction or distortion of competition"
  • The Court of Appeal narrowed this test, introducing a requirement for mental consensus between the parties, holding that it would be sufficient if retailer A intended that B should use the information provided to influence market conditions by passing that information on to C and B did in fact pass that information on to C in circumstances where C may be taken to have known the context in which the information was disclosed by A to B and C (Argos Ltd and another v OFT; JJB Sports plc v OFT [2006] All ER (D) 236)
  • The Court of Appeal found, however, that the evidence still supported the CAT's decision.
2008 market report background
CF0813502852008 Market Report – Background
  • The OFT reviewed the operation of the COP and other competition issues relating to the grocery market (2004-2005)
  • The OFT announced that there was no need to amend the COP or to refer the investigation to the CC (August 2005)
  • Following an application by the Association of Convenience Stores for review of the OFT's decision by the CAT, the OFT agreed to withdraw its decision and to conduct a further review
  • The OFT referred the supply of groceries by retailers in the UK to the CC for investigation (May 2006)
  • The CC's final report was published on 30 April 2008
2008 market report market analysis
CF0813502852008 Market Report – Market Analysis
  • Sector divided into three major product markets for the supply of groceries in the UK:
    • Large stores (more than 1000 to 2000 sq metres): competing only with other large grocery stores
    • Large and mid-sized stores (all stores larger than 280 sq metres): mid-sized stores competing with other mid-sized stores and large stores
    • All grocery stores: convenience stores competing with both mid-sized and large grocery stores (and being price constrained by both)
  • Precise delineation of the product market differs across local geographic markets
  • Geographic market fundamentally local
2008 market report key findings
CF0813502852008 Market Report – Key Findings
  • After conducting an "exhaustive" review of the industry, the CC concluded that:

> "In many important respects, competition in the UK groceries industry is effective and delivers good outcomes for consumers, but not all is well"

> There has been no broad-based decline in convenience store numbers or revenues, including the number or revenues of independent, non-affiliated convenience stores

  • Concerns in two principal areas:

> Certain retailers having strong positions in a number of local markets with barriers to entry (e.g. the planning regime and control of land)

> Various supply chain practices which transfer excessive risk and costs to suppliers

2008 market report local markets
CF0813502852008 Market Report – Local Markets
  • Highly concentrated local markets
    • Where a local market has three or fewer fascias and one fascia has a 60% or higher share of grocery sales within a 10- or 15-minute isochrone
    • 495 large grocery stores in the UK (27% of all large grocery stores) are in highly-concentrated local markets (using the 10-minute isochrone)
  • Planning regime and control of land
    • Planning regime constrains new entry into local markets by large grocery stores
    • The planning "need" test likely to provide incumbent retailers with an advantage over new entrants
    • Retailers not generally engaging in "landbanking" as a strategy to impede entry by rival retailers into local markets

> The control of land by retailers (e.g. by way of landbanks and restrictive covenants) in certain highly concentrated local markets gives rise an adverse effect on competition in the product markets for large grocery stores and for mid-sized and large grocery stores, but not in the product market for all grocery stores

2008 market report supply chain practices
CF0813502852008 Market Report – Supply Chain Practices
  • All large grocery retailers, wholesalers and buying groups have buyer power in relation to at least some of their suppliers
  • Overall the financial viability of food and drink manufacturers is not under threat as a result of the exercise of buyer power
  • No evidence of any "waterbed" effect in supplier pricing
  • Grocery retailers often transfer excessive risks or unexpected costs to their suppliers (e.g. through making retrospective adjustments to the terms of supply)
  • The COP is constraining the exercise of buyer power by the four largest grocery retailers to some extent
2008 market report remedies
CF0813502852008 Market Report – Remedies
  • The CC is to seek undertakings from large retailers requiring them to:
    • Release existing restrictive covenants in highly-concentrated areas and not impose new restrictive covenants that may restrict grocery retailing
    • Notify the OFT of all acquisitions of existing grocery stores of more than 1,000 sq metres
  • The CC recommends the OFT be appointed a statutory consultee to Local Planning Authorities on applications for planning permission for stores above 1,000 sq metres
  • The CC will require the establishment of a Groceries Supply Code of Practice (GSCOP), expanding the COP (e.g. by including an overarching "fair-dealing" provision, and by prohibiting retailers from making retrospective adjustments to terms and conditions of supply )
  • Establishment of a GSCOP Ombudsman to monitor and enforce compliance
2008 market review e mail case study
CF0813502852008 Market Review – E-mail case study
  • The CC conducted a review of e-mails between Asda and Tesco and their suppliers during the period 18 June to 22 July 2007
  • The CC noted that communications between buyers and suppliers evidence "a challenging relationship between trading partners with a shared objective to do business together while maximizing their own profitability"
  • Three areas giving rise to potential competition concerns:
    • Exchange of information on retailer pricing and promotion
    • Contribution by suppliers to costs of promotion
    • Wastage and product quality complaints
  • In particular the CC observed that private information that would not otherwise be available to a grocery retailer was being volunteered by a supplier, including information ona competitor’s retail prices for the coming week and on future promotions at a rival supermarket
recent events
CF081350285Recent Events
  • On 23 April 2008, the OFT announced that it had agreed to pay Morrisons £100,000 plus costs to settle a defamation case brought by the retailer over "serious errors" in an OFT press release issued in connection with the Milk Cartel SO
  • On 24 April 2008, the OFT conducted inspections at the premises of certain supermarkets, as well as certain suppliers, and contacted other suppliers to seek information about prices for groceries, health and beauty products and detergents
  • On 25 April 2008 the OFT issued an SO to two tobacco manufacturers (Imperial Tobacco and Gallaher) and 11 retailers (including Asda, Morrisons, Safeway, Sainsbury and Tesco) alleging (in respect of certain companies):
    • The indirect exchange of proposed future retail prices
    • Arrangements to link the retail price of a manufacturer's brand to the retail price of a competing brand of another manufacturer
the future
CF081350285The Future
  • "Businesses have expressed surprise over what they perceive to be the increasingly vigorous enforcement activity and the use of powers to obtain or request information […] There is also a perception that our fines have got much higher, and represent a tougher approach to enforcement"
  • Philip Collins, Chairman of the OFT, 15 May 2008