When supermarkets are superpowers

By Alex Brummer, May 21, 2009

As a sector, Britain’s grocers are having a good recession. While other firms, including the food suppliers, have been shedding jobs, the supermarket chains Tesco, J Sainsbury, Wm Morrison, Asda and Waitrose have been adding them. And although Marks & Spencer has had to reshape “Simply Food”, jettisoning some of the stores it bought from Somerfield as a job lot, its executive chairman Sir Stuart Rose believes that its food offering has turned the corner, and that same-store sales — the critical measure for retailers — will soon be expanding again.

The current strength of grocery shopping was highlighted in results from J Sainsbury, where former M&S food supremo Justin King has been responsible for an impressive turnaround. Overall sales climbed by 5.7 per cent to £20.4bn and profits climbed by 11.3 per cent to £543bn, largely on the back of sales of its “basics” range. The same trend towards cheaper eating during hard times has been seen from all the food chains.

But there is another side to food austerity and eating at home. It used to be the food suppliers who held the whip hand in dealings with the retailers. Grocery suppliers such as Unilever, Heinz, Cadbury and Premier Foods — with their global reach — could dictate terms to the retailers. But these days the global food chains such as Tesco and Wal-Mart, the owners of Asda, can be as powerful as their suppliers.

This is especially true in an age when consumers have placed a premium on organic and local produce and the supermarkets are the dominant partner in the relationship. When times are tough and price becomes increasingly important, the grocers use their buying power to battle the suppliers into submission.

Suppliers have been seeking protection against bullying grocers for some time and finally received support from the Competition Commission (CC) in its most recent report on the grocery market. It found flagrant breaches of good practice by the supermarkets. Its solution is the creation of an ombudsman service to ensure that the supermarkets use their buying power fairly.

The Commission, headed by Peter Freeman, is also seeking to prevent the supermarkets using devices such as exclusivity arrangements and restrictive covenants to keep the competition out of local areas.

The latter moves are principally designed to disarm Tesco, which has built up an enormous land-bank, allegedly as much about keeping other players out of the edge-of-town markets as expanding its own presence.

Despite Mr Freeman’s determination to press ahead with his ombudsman recommendation, the CC does not have the direct power to enforce the order.

The new role initially can only be created with the consent of the retailers. If agreement cannot be obtained then the CC can ask Lord Mandelson, at the Department of Business, Enterprise and Regulatory Reform (BERR), to enforce the order.

The CC regards the grocery orders as an important test case of its powers. When Labour passed the Competition Act in 1998, it conferred far stronger powers on the CC, including American-style criminal penalties for busting cartels. Gordon Brown argued that it would be as independent as the Bank of England’s Monetary Policy Committee, which sets interest rates.

The CC’s authority and independence was damaged last year when the Prime Minister and Lord Mandelson waived competition rules to allow Lloyds TSB chairman Sir Victor Blank to make a rescue bid for Halifax Bank of Scotland. As we know, the decision to overrule competition rule proved catastrophic for Lloyds and Sir Victor, who has resigned prematurely as a result of shareholder pressure.

The perceived vulnerability of the CC to political override by the government gives hope to the supermarket groups, led by Tesco, who are seeking to defeat the new regulator. It and the other larger supermarket groups say that the creation of the ombudsman would be bureaucratic and add to consumers’ grocery bills.

Tesco, which in April reported £3.1bn of profits, argues that an ombudsman system could be used by the big multinational suppliers and would hurt the smaller supermarket groups. The company supports strengthening of the supplier code but not an ombudsman.

So far, through a series of appeals, Tesco and its allies have been able to keep the Commission and the ombudsman at bay, much to the anger of critics such as the Lib Dem agriculture spokesman Tim Farron. He argues that “a powerful supermarket monopoly has damaged farmers and has weakened communities”. He notes that the estimated £6m cost to setting up an independent watchdog is just 0.2 per cent of the group’s turnover.

Tesco, which once prided itself on founder Sir John Cohen’s motto: “pile it high and sell it cheap”, believes that despite its control of 30 per cent of Britain’s grocery market, it is still trusted by the consumer.

The Competition Commission and second line suppliers believe it is too powerful.

Alex Brummer is City Editor of the Daily Mail

Last updated: 12:13pm, May 21 2009