Competition Commission risks failing statutory duty in supermarket inquiry, says nef

The Competition Commission risks failing to examine the grocery market in line with its statutory duties, says nef, in its' response to the Commission’s Emerging Thinking.

Obliged by law to defend the interests of both present and future consumers from the adverse effects of market failure, nef fears that the Commission’s approach is based on inadequate evidence and a failure to protect the interests of all consumer groups for access to a full range of shopping experiences, including independent local stores and street markets.  The current loss of both undermines choice and innovation, which are measures of consumer detriment as defined by the Enterprise Act 2002.

Following consultation with a range of leading experts in the fields of competition law and economics, nef, in its response to the Commission’s ‘Emerging Thinking’, titled Detrimental Effect submitted today, Thursday 12 April 2007, sets out the grounds for its belief that the Commission will fail in its remit if it ignores crucial evidence of market distortion, as well as the needs of a wide range of consumers.

Analysis by nef informed by expert consultation indicates that the Competition Commission in its Emerging Thinking has failed to adequately define consumer interest, and is failing to make full use of the powers it possesses.  As evidenced by its Emerging Thinking, the Commission has:

• Taken an over-simplistic view of consumer interest in terms of price, when the Enterprise Act lays down quality, choice and innovation as considerations to be protected – both today and into the future. 
• Failed, so far, to interview sufficient suppliers or consumers, something which casts doubt on the methodology for the inquiry. Under Section 109 of the Enterprise Act they possess statutory powers to get evidence which nef believes should be used.

The Commission previously recognised a threat to product innovation resulting from the supply chain practises of the major supermarkets. Ongoing consolidation in the grocery market since the Commission’s 2000 report, has, we believe, reduced choice under the terms of the act by reducing the range and accessibility of different types of shopping experience, such as independent locally owned retail and street markets, available to the consumer.

“The regulators are not counting the extra value that genuine local shops provide in terms of economic benefit and the social glue that holds communities together. This creates an in-built bias in favour of the large supermarkets who distort markets. Ultimately the collective dominance of the big four supermarkets, undermines the choice of consumers to enjoy a full range of goods and services provided by a healthy range of formats, including a diversity of independent local retailers and street markets. Innovation is hampered too. Both choice and innovation are measures of consumer detriment that the Commission is obliged by law to prevent,” says Andrew Simms, nef’s policy director.

nef believes that unless the Commission takes effective action, the self-reinforcing economic dynamic that is strengthening the collective dominance of the Big Four supermarkets will continue to have this detrimental effect, resulting in harm to future consumers, whose choice will be reduced still more.

In particular, the notion that adequate consumer choice is represented by a selection of three grocery outlets larger than 1,400 m2 within a 10-minute drive, seems an impoverished view of choice and diversity in a local market, and rather arbitrary.

Tesco, in its response to the Commission’s Emerging Thinking document goes further in the wrong direction, suggesting instead a drive time of 30 minutes. The unusual logic of Tesco’s position is to suggest to someone living in central Chelmsford in Essex, that a store in Romford, Saffron Walden or Leigh on Sea counts as local; or, alternately, that someone in Burnley might just go next door to Oldham, Prestwich or Skipton to shop; or that someone living in Balham, South London, would consider outlets as far apart as Cheam, Willesden or Bethnal Green to be local.

We believe that the absence of significant new entrants into the grocery sector, and the large scale departure of independents is prima facie evidence of an uncompetitive market. In other words, we consider that all that was feared and highlighted as a potential danger in the Commission’s 2000 report on the grocery sector has actually come to pass.

“The Commission has yet to prove that it is capable of managing a vastly changed modern retail landscape, in which the leading players are becoming ever more powerful. Unless it makes full use of its powers for the next phase of its inquiry, the big, centralised logistical operations of the supermarkets will continue to drive the homogenisation of business, shopping, eating, farming, food, the landscape, the environment and our daily lives. The endgame could be Britain turning, in effect, into a one supermarket state. If the Commission can’t do its job and put in place the checks and balances that could ensure genuinely open markets, people will be justified in questioning exactly what the Commission is for,” says Andrew Simms, nef’s policy director.

The conclusion that we draw from the evidence to date is that the Competition Commission is in danger of:

• Ignoring clear evidence of the anti-competitive nature of the UK grocery market, and where it does identify anti-competitive practices, it is in danger of failing to act on them.
• Failing to take account of the real needs and desires of consumers – both current and future – partly through inadequate determination of consumer interest and detriment, and partly due to a partial interpretation of its obligations under the Enterprise Act 2002.
• Employing a simplistic view of the role of a competition watchdog in the inquiry in the UK. In the event of the Commission failing to act on the interests and demands of major groups of consumers, the Government will need to rethink the UK’s market regulatory architecture, including the design, function and fitness for purpose of the current Competition Commission.

The next phase of the Commission’s Inquiry needs to paint a clear picture of the impact of the collective dominance of the big four major multiple retailers on the grocery market in the UK. To be able to inform effective action, and to prove that the regulator is ‘fit for purpose’ then the Competition Commission must now:

• Define local competition: The Commission needs a clear idea of what local competition needs to achieve. Our view is that any local competition policy that fails to meet the basic needs of major groups of consumers for different kinds of outlet would be either ineffective or illegal under the Enterprise Act. For example, if elderly people or people without access to cars – a sizeable minority of the population – are unable to find outlets that are easy to use.

• Define consumer interest and detriment: We believe that the Commission is in need of more detailed profiling of actual consumer preferences. In other words, to protect consumer interests, the Commission needs a much fuller picture of what customer preferences actually are, in terms of: the retail landscape, choice of formats, the ability to compare prices, especially in the case of own brand products, and the ability to choose retail options that take account of ‘external costs and factors’ as well as choice within stores.

• Identify the level of market share beyond which the divestment of stores by dominant operators would become necessary to maintain an open market nationally and locally. We see no reason why any single supermarket chain should control more than 25 per cent of the national market, and note from the Commission’s 2000 enquiry that only 8 per cent market share is necessary to exercise potentially abusive power along the supply chain. At the local level, depending on the definition of a local market, we see no competitive benefit in allowing any single operator to control more than a one-third share.

It is also clear from the new round of evidence, incomplete and inadequate though it is, that abuses continue. The Commission must therefore set out some more effective mechanism to address them. We propose:

• An independent regulator who can make things happen through monitoring the relationship between supermarkets and suppliers and adjudicating in an on-going manner. The Commission needs to make an order under the Act putting in place a retail monitor who would have the task of ensuring fair dealings between suppliers and retailers. This would act as a control mechanism on behalf of present and – as importantly – future consumers. It would reduce, rather than increase burdensome regulation, because, as a continuingly functioning mechanism it would avert the need for repeated, weighty investigations – the consequence of the ineffective current arrangements. It is more a question of adding oil to the engine, rather than buying a new vehicle.

That is our major proposal for the Commission, or for Parliament, if the Commission fails to take it up. 

The next phase of the Commissions investigation will be a clear test of their fitness for purpose, and their ability to manage a modern economy in which the leading players are growing ever more powerful.

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	detrimental effects: defending consumers from distorted markets