OFT refers the grocery market to the Competition Commission

The Office of Fair Trading has today referred the grocery market to the Competition Commission for a market investigation.

The investigation will primarily focus on the market for the supply of groceries by retailers in the UK (mainly the supply of food, alcoholic and non-alcoholic drinks, cleaning products, toiletries and household goods). The OFT has excluded from the formal terms of reference the supply of non-grocery items by retailers, as well as wider issues concerning the impact of supermarkets’ buyer power on the upstream supply chain such as the impact on farmers. However, consideration of these issues is likely to feature in the Competition Commission’s investigation since the OFT noted that “the OFT anticipates the CC will, in carrying out its investigation, also wish to consider supermarkets’ relationships with their suppliers and supermarkets’ conduct in relation to the selling of non-grocery products since those matters might reasonably be thought to be affecting competition in the retail market for groceries”.

The decision to make a reference to the Competition Commission follows a long review by the OFT of the grocery sector including an appeal by the Association of Convenience Stores against an earlier decision of the OFT in August 2005 not to refer the grocery market for a market investigation.

Today’s decision confirms the OFT’s earlier proposal to refer the grocery market on which it consulted during March 2006. It received some 1200 responses from businesses, consumers and other third parties, mostly supporting the OFT’s intention to make a reference.

Despite the evidence collected by the OFT suggesting that consumers have benefited from falling prices, an increase in product range and an apparent improvement in service, the OFT’s decision to make a reference is based on its concerns about the strength of local market competition in some areas, as well as the buyer power of the big supermarkets.

The OFT has identified a number of features of the market which the OFT suspects may be distorting competition, and, in the case of at least some of those features, the evidence suggests that consumers may be being harmed as a result:

• There is concern that the planning system may be restricting or distorting competition by raising the cost of, and limiting the scope for, new market entry.
• The land holdings of the large supermarket chains and the use of restrictive covenants on the sale of such sites may reinforce their existing market position in some local areas.
• There is evidence to suggest that the buyer power of the major supermarkets has increased since the last Competition Commission investigation in 2000 and the differential between supplier’s prices to large supermarkets compared with those to wholesalers and buying groups has risen.
• There is concern that below-cost selling and price flexing by the supermarkets could distort competition, although the OFT has not found evidence that consumers are being harmed as a result of these practices.

The Competition Commission now has up to two years in which to seek the views of all interested parties and produce its report.

The reference is therefore a key opportunity to make your views known and to contribute to the debate on the future direction of the grocery sector.