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That the detractors were disappointed is hardly surprising. In jumping on the bandwagon and seemingly vilifying every action of the big four grocery retailers, especially Tesco, but also Sainsbury’s, Asda and Morrisons, many detractors have lost sight of the CC’s underlying brief in undertaking its inquiry. The main focus is not on “saving our small shops”, combating “clone town Britain”, or softer issues such as delivery lorries blocking busy urban highways. Such issues are beyond the remit of the CC, which comprises hard-nosed economists, not management consultants.
So what exactly is the inquiry’s remit? In essence, there are four key areas of investigation:

• barriers to entry through the planning regime
• land holdings;
• restrictive covenants; and
• pricing behaviour.

The initial 60-page progress report did not draw any real conclusions about practices in the sector, but did state that the evidence gathered so far suggested there were not widespread problems in the relationship between grocery retailers and their suppliers, and that there had been little specific evidence about unfair treatment. In terms of the more central issue of the ways in which grocery retailers might seek to gain a competitive advantage through the planning system, the report says: “…grocery retailers’ use of these tactics does not indicate, at this point, that the use of these tactics is systematic or widespread.” A telling, although not definitive statement.

Having hinted at which way its current thoughts are heading, the CC also revealed where its microscope will fall next; competition at a local level. Whether Tesco could ultimately end up with a national market share of around 45%, as Sainsbury’s has protested, is largely immaterial. The key issue is much more the number of competing fascias consumers have access to within a realistic distance. To this end, initial findings have shown that “80% of the urban population has a choice of at least three different grocery outlets (>1400 sq m) within a 15 minute drive time” – hardly an uncompetitive trading landscape.

However, in rural areas, this proportion shrinks to just 24%. The obvious counter-argument to this is that access to just one or two different grocery outlets is infinitely more preferable to zero. However, we believe that the CC could recommend against the duplication of sites by existing retailers in rural locations, one of the few clampdowns that could emerge from the final inquiry. This may tie in with wider recommendations for improvements to the planning system. At present, the planning process is fairly generic. It focuses only on the need for a new supermarket/grocery floorspace, regardless of fascia. However, in its analysis, the CC is preoccupied with the level of competition and choice of fascia in each catchment. The CC could recommend that a similar approach be adopted as part of a revised planning regime. If this were to be enforced, it would have ramifications for new store openings of the dominant players, albeit in largely fringe locations.

Yet to be fully addressed, the thorniest issue of all remains the alleged land banking. Accusations are levelled predominantly at Tesco, which reportedly has a bank of around 185 sites. The implications of this are that the retailer has secured this position by foul rather than fair means, and that it is sitting on a number of sites purely as a preventative measure against other players entering the market.

We believe these implications are wide of the mark on both counts. The fact that Tesco has the largest landbank of the major players is testament to the strength of its underlying business model, rather than underhand means. It is worth emphasising that, on the back of successful trading, Tesco has consistently been on the expansion trail for 15 years. Its big three rivals, in contrast, have been in and out of the market. By the same token, Tesco has also had the most experience in tailoring its offer and store formats to meet the demands of the local catchment. In simple terms, Tesco has the flexibility to trade virtually anywhere with an armoury of adaptable trading formats (2,000–150,000 ft²), a competitive virtue that the other major players have yet to replicate.

Does the Tesco landbank to prevent other would-be market entrants? This is almost impossible to prove either way. The company would maintain that it only owns sites on which it intends to develop stores itself, and these may take several years to materialise on account of leases on adjacent sites and general inflexibilities in the planning process. This is hard to refute. After all, Tesco is a retailer, not a property company. To invest billions of pounds in non-trading sites, just to stifle competition, is a very cost-intensive strategy, totally at odds with all other aspects of Tesco’s business model.

As the most contentious issue in the inquiry, it is difficult to speculate as to the possible outcome. Certainly, decrees could be passed on individual sites and certain sites may be subject to enforced disposal. However, to expect wholesale break-up and disposal of landbanks is somewhat fanciful and, if it does materialise, the authorities should prepare for a violent and lengthy appeal process.

The other key question is whether there are any implications for the UK CC inquiry in international markets. There are two issues to consider; the first is whether authorities in any other countries will take on board the findings, negative or otherwise, of the UK CC and factor them into their own jurisdictions. The second is whether any adverse findings in the UK will curtail the international expansion aspirations of the UK grocers.

On the first issue, despite increasing economic harmony and accelerating internationalisation amongst retailers, the fact remains that retail markets differ drastically from one country to the next. In very simplistic terms, the UK is one of the most mature and sophisticated retail markets in Europe, if not the world. Testament to this is the high concentration in the grocery sector, where the big four collectively account for around 75% of the market. Contrary to the argument of detractors, this makes for a more, rather than less, competitive market. Equally, the UK retail market is subject to one of the tightest planning regimes in Europe, a function of the maturity of the retail market, a relatively small land mass and high population density. As a result, retail and wider town planning are rightly very high on the social agenda.

In this respect, many of the facets of the market under investigation by the CC are unique to the UK. On this basis alone, any rulings on the back of the CC inquiry will not necessarily resonate around the globe. The key difference is that few international retail markets are as consolidated as that of the UK grocery market. In countries where this is an issue, concerns over the market power of the major multiples tend to manifest themselves only in merger and acquisition instances. In these cases, the competition authorities tend to base intervention on market share levels at a national, or possibly regional level. To delve as far as local level, as the CC are doing, would represent an extreme that few authorities are prepared to go to.

In terms of the international aspirations of the UK retailers, the debate will inevitably turn again to Tesco. None of the other three major grocers are active overseas, although Asda does obviously have sister operations internationally through its parent company, and given that they are only just beginning to re-establish themselves in the UK market, we would not expect international expansion to be on either the short or medium-term agenda.

Such is the collective witch-hunt surrounding Tesco amongst its detractors that any setback or negative publicity overseas is widely reported in the UK and used as ammunition. Recent examples include the decision by the Slovak competition authorities to block Tesco’s proposed takeover of four Carrefour stores, as part of an asset swap. More bizarrely coverage of the fact that it sells live turtles in its new Chinese store, even though this is commonplace in China.

However draconian the outcome of the CC inquiry domestically, it is unlikely to destabilise Tesco’s international aspirations. These include many of the world’s largest retail markets, such as the US, China, India and reportedly Russia. Although the UK will remain its largest market and spiritual home for the foreseeable future, it seems only a matter of time before overseas sales surpass those domestically. It would be unrealistic to expect the company to succeed everywhere it goes – no retailer has this divine right – but with its track record of tailoring its proposition to meet the demands of local consumers, Tesco has a better chance than most. In short, Tesco tends to succeed because it gives consumers what they want, be they in Poland, Thailand, the Czech Republic or China.

Returning to the UK, perhaps the most telling statement in the Emerging Thinking document was its very starting point: “…in a competitive market, commercial success should not be penalised unless there is clear evidence of an abuse of market power and harm to consumers”. As the CC cannot fail to conclude, UK food retail is a highly competitive market. By its very nature, it is also a consumer-driven market. Tesco’s undoubted success is built around its ability to respond to consumer needs. In contrast, the current planning system is not a consumer-driven process, although most would argue that it should be. Is it too radical to suggest that, as a model of inefficiency, the planning system could, in fact, learn from Tesco et al, the epitome of efficiency, and that punitive measures serve few peoples’ interests?
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Stephen Springham, partner, retail research team, King Sturge,
tel: +44 (0) 20 7493 4933, e-mail:
stephen.springham@kingsturge.com

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