Antitrust Issues in the UK Grocery Industry

1
Antitrust Issues in the UK GroceryIndustry

• Michael Rowe
• 21 May 2008

2
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
• 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

3
The First Market Investigation

• Launched by the MMC in 1999 following concerns
  that
• gt Groceries cost more in the UK than in
  comparable EC countries and the USA
• gt There was a discrepancy between farm-gate and
  retail prices
• gt Large out-of-town supermarkets were
  threatening the high street
• Relevant Market
• gt Identified as that for one-stop grocery
  shopping in stores of at least 1,400 sq metres
  (15,000 sq feet)
• gt 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

4
The First Market Investigation (cont.)

• The CC's Report (October 2000) focussed on three
  issues
• gt Persistent selling below cost
• gt Price flexing
• gt Relationships between supermarket chains and
  their suppliers
• Conclusions
• gt Supermarket industry broadly competitive
• gt 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"
• gt 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
• gt 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

5
Safeway 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

6
Safeway 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

7
Safeway 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

8
Other 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
• gt Referred to the CC in 2007 following Tesco's
  failure to fulfil undertakings in lieu given to
  OFT
• gt Tesco required to divest site or development
• Acquisition by Somerfield in 2004 of 115 stores
  from Morrisons
• gt CC investigation launched after closing
• gt Somerfield required to divest 12 stores
• gt Somerfield applied to the Competition Appeals
  Tribunal (CAT) for judicial review of the CC's
  decision, but the application was dismissed

9
Milk 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"

10
Milk 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.

11
2008 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

12
2008 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

13
2008 Market Report Key Findings

• After conducting an "exhaustive" review of the
  industry, the CC concluded that
• gt "In many important respects, competition in
  the UK groceries industry is effective and
  delivers good outcomes for consumers, but not
  all is well"
• gt 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
• gt Certain retailers having strong positions in a
  number of local markets with barriers to entry
  (e.g. the planning regime and control of land)
• gt Various supply chain practices which transfer
  excessive risk and costs to suppliers

14
2008 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
• gt 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

15
2008 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

16
2008 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

17
2008 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
  on a competitors retail prices for the coming
  week and on future promotions at a rival
  supermarket

18
Recent 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

19
The 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