The Competition Commission report on supermarket profitability is delivered to the DTI on Monday. Are draconian compulsory changes to British supermarkets on the way? Or will the whole inquiry go phut in a cloud of Blairite spin? Julian Hunt outlines the likely scenarios
Bet you can't wait for this summer's Labour Party conference. Not when it looks increasingly likely Stephen Byers is going to stand up and start laying into the supermarkets. He is due to get the Competition Commission's long awaited report into the industry on Monday, which gives him plenty of time to digest its findings before he stands before the Blairite faithful in Brighton in September to make his keynote address.
You can almost hear him: "We were right," he will declare. "Food retailers have been ripping off consumers and we are going to do something about it." Cue rapturous applause. Stand by for lurid stories in the Murdoch press.
Okay. That scenario is a bit over the top. But given Labour was the architect of the whole Rip-off Britain saga, it is extremely unlikely it is going let the retail industry off the hook.
And, after a series of embarrassing gaffes elsewhere, there's no doubt the Secretary of State for Trade and Industry is looking for something anything to help rescue his ministerial career.
Ask supermarket executives whether they believe they are being lined up as the next victims of headline grabbing spin, and they will wearily answer in the affirmative.
After almost two years of interminable questioning and fairly pointless form filling, the country's top food retailers should have been looking forward to July 31 the day the Competition Commission delivers its report to the DTI, officially marking the end of its inquiry.
But while retailers still embroiled in the inquiry Asda, Morrisons, Sainsbury, Safeway and Tesco are confident they will be given a fairly clean bill of health by the Commission, they are also wise to the realpolitik of the world in which they operate.
There's a strong suspicion that Rip-off Britain hype was one reason why the sector was referred by the Office of Fair Trading to the Competition Commission in April 1999. Commission chairman Derek Morris has publicly distanced himself from the politics surrounding his organisation's inquiry. "The whole concept [of Rip-Off Britain] is not one we can relate toIt means nothing and tells you nothing useful," he said earlier this year, bridling at suggestions the Commission's inquiry could in any way be hijacked.
Nevertheless, some supermarketers worry that even if the Commission does not recommend any remedies to tackle perceived competition issues, the government will still decide to enforce some of its own making.
"The Commission's report is one thing; Byers' reaction is quite another," says one frustrated supermarket executive. "The government needs some populist things to do in what could be its last legislative year before the next election. The only thing that's very clear is that everything they do is pretty short-term, so I would not necessarily rule anything out."
But surely, you ask, the government cannot publish a Competition Commission report while Parliament is in recess and then use a party political conference to outline new policies?
Er, sorry, but it can. Because the Competition Commission inquiry was initiated by the OFT, not the government, Byers need only place the report in Parliament's library for reference. He does not need to make a statement in the House. And that means he is free to say what he likes before, during and after the Brighton conference which could turn it into the worst kind of Spin City as far as retailers are concerned.
That point was not lost on the MPs who took part in a debate on supermarket competition and planning in the House last month. Beverley Hughes, the Under-Secretary of State for the Environment, Transport and the Regions, tried to reassure her parliamentary colleagues that there was nothing sinister in any of the timings.
"The Commission's report will be given to the Secretary of State for Trade and Industry for consideration on July 31. It will be published two months later a time much more conducive for the sort of Parliamentary debate for which members have called," she said.
Her reverse logic caused a few eyebrows to be raised and generated caustic comments from veteran Labour MP Gwyneth Dunwoody who wondered how there could be a debate when the House was in recess. Hughes claimed the publication date would be close to the start of the next Parliamentary session.
That internecine spat aside, the debate was interesting because Hughes stressed the government would in no circumstances relax planning guidelines as a way of encouraging more competition.
"The government regards the policy for the siting of supermarkets as a crucial lever for the wider policy of revitalisation of small market towns and city centres, and we are determined not to relax it. I place that on the record as the view of ministers in the Department of the Environment, Transport and the Regions. We will continue to hold that position."
Fair enough. So if the government has once again committed itself to retaining the PPG6 guidelines, what else could be in store for retailers? It's worth remembering that in the remedies letter sent to the country's top supermarket operators in February, the Commission made it clear that planning issues were top of the agenda, particularly where they helped protect local monopolies and created barriers to entry for other operators.
The Commission did not see a need for any major overhaul of PPG6, although it thought the guidelines may have to be made "more responsive" to the needs of competition in grocery retailing for instance, by allowing local authorities to prevent one supermarket chain building in an area where it was already well represented.
Simon Dunn of Dresdner Kleinwort Benson Research is one of those who thinks this will prove to be the biggest legacy of the Commission's investigation: "While the inquiry may not change history, it will undoubtedly change the way local planning decisions are made. There will be some onus on local planners when granting new permissions to consider whether they widen the degree of choice."
The Commission's letter also looked at how best to break up local monopolies where one or two chains have such a high market share it restricts choice or competition. It identified five possible remedies, ranging from the forced sale of stores and land to restricting the level of investment made in such areas by the so called duopolists.
For sure, the remedies outlined in the Commission's letter are all hypothetical, and will only be recommended should it consider that one or more of the grocery retailers are acting against the public interest.
But retailers are nervous. "If the government wants something radical that will catch the eye of voters then it will go for forced divesture even if the Commission has looked at that option and decided it is impractical or unnecessary," says one.
And a survey carried out by Dresdner Kleinwort Benson Research shows why retailers have every right to be worried. It reckons there are about 60 catchments in the UK where consumers have two or fewer supermarkets to choose from and where prices are, on average, up to 10% higher. DKB's report says: "Tesco is present in 80% of these locations, Sainsbury in 63% and Safeway in 36%. Asda and Morrisons appear rarely. The key driver of the UK food retail sector is increased competitive pressures. This represents a further significant risk to industry returns."
Clearly, a programme of enforced store sell-offs would quickly become a nightmare for retailers and regulators while being extremely lucrative for lawyers and property professionals. How would chains be compensated? Would other local traders notably independent retailers have any say in the sell-offs? Would stores sell only to the highest bidder? Who would draw up the criteria that would govern which stores had to be sold? Sorting out these technicalities would take years. But, if the pessimists are right, that's the idea: make the threat ("sort yourselves out or else..."), get the PR benefit, let the idea die quietly.
While the spectre of enforced store sell-offs is the main issue haunting retailers, that is not the only way in which the Commission's inquiry will change their day to day operations.
Take pricing. Based on what the Commission said in its remedies letter in February, there's no doubt that it will be looking at ways of making pricing in the sector more transparent for consumers.
Most pundits believe the Commission has dismissed the more impractical ideas, such as shelf labels that show the price paid to farmers alongside the retail price, and will instead want supermarkets to put all their prices on the internet.
That would clearly give management a headache in ensuring that the prices of 30,000 SKUs were kept up to date even leaving aside the fact many of them may change on a weekly basis due to promotional activity.
The Commission may also press ahead with its idea of introducing more openness about profit margins in company accounts.
But these are potential headaches, not nightmare scenarios. And there are those who are confident the Commission will not try to ban persistent selling at a loss drawing on the experience of Germany and the Republic of Ireland where enforcing such a rule has proved highly problematic.
The really big issues in this area will relate to the regional pricing policies adopted by some of the chains. It was clear way back in February that although the Commission was not against the idea of price variations within chains, it would come down hard on those that had price differences between stores that were not broadly related to costs.
One analyst says the scrutiny has already forced change: "What has clearly happened is that the extent of regional pricing has narrowed. There's no doubt there was significant variation in regional pricing before the Commission's inquiry."
Nevertheless, the Commission looks likely to take more action here. The only question is how?
Of course, there's one area where action is already under way: the code of practice governing supplier relationships being drawn up by the major supermarkets under the auspices of IGD. Although the code has been dismissed by one City commentator as "more spin than substance", it should meet all the concerns of the Commission in this area.
Given that the draft code has been enthusiastically backed by agriculture minister Nick Brown, and has the support of the National Farmers' Union, it would be unthinkable that the Commission would try to impose anything else on the industry. It may call on the OFT to review progress on the code's implementation, but otherwise the industry should get an easy ride on the supplier issue.
But is that really that? Apart from a bit of sabre rattling by the government, would we be right to expect very little to result from the Commission's report?
Ask supermarket bosses privately what they think and you can sense their unease. They hate the fact nobody really knows what to expect and some even seem to be preparing for the worse. And why not? Nobody thought the OFT would refer the sector to the Commission in the first place, did they?
Leaving aside what happens in two months' time, the uncertainty created by the OFT and Competition Commission inquiries have already made their mark on the industry. It has given the City and investors another reason to ignore food retailers, while simultaneously persuading overseas retailers not to follow Wal-Mart's lead and buy a British foothold.
When Byers stands up in Brighton he will no doubt argue that the past two years have been worthwhile. In particular, he will trumpet the fact that prices have come tumbling down as competition has increased and will probably take credit for that as well.
Ask retailers whether they think it's been worthwhile and you will, surprise, surprise, get a different answer.
"On balance, I don't think it has been worthwhile for lots of reasons," says one.
"First there's the sheer cost and the distraction of management time. Then there's the fact it has left a nasty taste in people's mouths, what with the things that have been said and the accusations that have been made without any real evidence.
"The Commission will probably come out and say most of the criticism was unjust and the industry is doing a reasonably good job.
"But the sceptics are still out there and there are lots of people who will say there's no smoke without fire'. And once all the fuss dies down there will be real sense of anticlimax and frustration among retailers."
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