The issues statement is highly reassuring. But a sting in the tail could yet emerge from the Competition Commission. Analysis by Belinda Gannaway, Julian Hunt and Clive Beddall Low flying aircraft above Cheshunt on Tuesday no doubt picked up a dawn chorus of champagne corks as Tesco bosses toasted the Competition Commission's preliminary findings. They were cleared. Off the hook. They were, as they'd always claimed, honest traders offering the public a good deal. The same pleasurable relief was witnessed in head offices around the country. But perhaps for Tesco there was a heightened edge. The Competition Commission and the Office of Fair Trading before it were looking for excess profits. And there was always the suspicion that the UK's largest retailer would be hardest hit by their investigations. Wherever the corks were popping highest ­ fuelled more by relief than jubilation ­ the subsequent hangover failed to materialise on Wednesday. Endorsements and favourable shopping basket comparisons replaced Rip-off Britain's headlines in the nationals. And shares in most listed food retailers rose in early trading. But just what are the multiples crowing over? This is not the end of the road for the Competition Commission's inquiry. Its issues statement is a preliminary view not the final report. It may have focused far more on the up than on the down side, but these are not irrevocable conclusions. The good news for food retailers is that the Commission chose to highlight falling grocery prices in real terms, high levels of consumer satisfaction, and little evidence of excess profits. And that could mark the end of the media feeding frenzy. Inquiry head Dr Derek Morris says he doesn't identify with the Rip-off Britain line. "Rip-off Britain means nothing and tells you nothing useful," he says. His findings are significantly more upbeat than many feared ­ hence the detectable air of relief. However much retail execs ranted about how good they were at giving consumers what they wanted, and at the right price, there was always a nagging feeling somebody was out to get them. That suspicion has now all but evaporated with the champagne bubbles. Sainsbury Supermarkets md David Bremner said: "For food shopping, Rip-off Britain was always pure myth ­ the Commission's evidence on price merely confirms our customers' daily experience. We have always maintained that value is a complex mix of quality, choice, service and price. We applaud the Commission's recognition of this." But that is far from that. The Commission believes two complex monopolies are in operation regarding the pricing of groceries and relations with suppliers. That in itself is not a shock and is relatively meaningless. What matters, and what could start a snowball of regulation, is if that monopoly is found to operate against the public interest. The good news is that for 19 of the 24 swept into the investigation the Commission says it "would be unlikely to conclude their behaviour operated against the public interest". It has no plans to see them again unless new evidence comes to light. Something inquiry head Dr Derek Morris says is unlikely though he cannot rule it out. But that still leaves five ­ Tesco, Asda, Safeway, Sainsbury and Morrisons ­ with which the Commission has outstanding issues. And they are more than technicalities. One multiple insider said: "The list of issues is formidable. Virtually everything that's been discussed over the last two years is in there." Could the five be counting their regulatory blessings too soon? Morris is playing it fairly low key. The Commission is keen to point out "this provisional view carries no implication that any of the other five companies...are or will be viewed as operating against the public interest". Morris says: "What we have tried to do is say we have looked at a whole range of things and some of those seem to us unlikely for an adverse finding, but some others we do want to discuss. "There's no black or white answer. We have just tried to explain as far as we can what we have been doing to date." On the whole, City analysts do not doubt retailers will be encouraged by the measured and reasonable tone. But the Commission has already acknowledged evidence, if limited, of excessive profitability. Morris told The Grocer: "At most there's only limited evidence, so we will want to explore that a bit with companies. But on the evidence so far there's no sign they are making substantial excessive profits." The devil of these explorations will certainly be in the detail. Further points for discussion fall into five areas ­ local market power, price competition, costs and efficiency, the impact of land prices and relationships with suppliers. The Commission is looking at the situation in Northern Ireland as a separate issue to determine whether the arrival of the multiples has damaged the distribution of locally produced products. Investigations into the balance of power in local markets will seek any evidence of price competition being limited to areas of high retailer presence. In the area of price, the Commission seeks to rule on whether competition is excessively concentrated on a small number of frequently purchased items. And are price changes from suppliers being passed on to consumers? It is particularly interested in own label. Is the pattern of prices and margins across different types of product, including own label, related to costs to the extent that would be expected in a fully competitive market? Waitrose md David Felwick ­ not one of the five in the dock ­ is "puzzled they are still asking these questions" and is convinced they will find satisfactory answers to many of them. He says: "I think some of the questions they've been asking are very dubious. That because we compete in KVIs we don't compete in the rest of the assortment is clearly nonsense. One has to have competitive prices right across the assortment." The efficiency issue will address whether some supermarkets have been able to maintain too high a level of cost at consumers' expense. Have some forms of competition,primarily for sites and in the provision of services, unduly raised prices? In land and location the Commission has a number of issues, including whether supermarkets seek to restrict competitors access to sites, and the amount supermarkets pay for land compared to that acquired for other types of retail development. The real Achilles' heel of the industry is its relationships with suppliers ­ which will come under perhaps the heaviest scrutiny. Whatever the edicts from central office, buyers are under pressure in the field to get the best deal. If the Commission needs to be seen to do something, it could tackle this as the easiest area to make its mark with least effort. The Commission wants to get to the bottom of supplier relations and whether savings are passed on to consumers; whether retailer power prevents efficient suppliers from earning a reasonable return; and whether this leads to higher prices by suppliers to other retailers. Could retail power over the supply chain be damaging the long term competitiveness of the grocery supply base? Does it reduce consumer choice through discriminatory practices in allocation of shelf space? In particular, the Commission will focus on the terms and conditions governing that access. The NFU ­ which recently got embroiled in a major row with Safeway over supply terms ­ says it is encouraged by the continuing investigation into this issue. President Ben Gill asks: "Why should our farmers be working to some of the most demanding standards in the world, and yet still be commercial disadvantaged?" And Morton Middleditch, md of Spar UK, says this is the only issue that could now prove beneficial to independent retailers, because he says the power of the multiples is causing long-term structural damage to the supply chain. But is the fact big retailers screw suppliers over terms actually against the public interest? Middleditch, for one, thinks that would be hard to prove. The Commission may well insist that contractual relations between suppliers and retailers are formalised to equalise terms across the board. This could be done voluntarily and policed by the OFT, or monitored by some sort of industry watchdog. An Ofsuper' could also maintain a watch over regional and local monopolies and pricing therein. But such a development would raise permanent concerns about the public perception of the retail sector's standards and credibility. And leave a questionmark over sector development. But turning back to one of the main reasons for the inquiry, if the Commission can find no proof of excessive profits among the retailers, what then? Investec Henderson Crosthwaite analyst David Stoddart says: "What does the Commission recommend? Retailers must pay more and pass the extra costs on to customers? How is that in the public interest? Are the retailers to be forced into making inadequate profit? How would the government square that with its desire to be seen as business friendly? "If the Competition Commission concludes the top five are not making excess profits, and that home shopping and Wal-Mart's entry may further impact returns ­ presumably negatively ­ it will have a hard time justifying damaging remedies." It is now down to the five to prove their case. The 19 will be watching and throwing comments from the sidelines. Bill Shannon, corporate affairs director of the CWS, points out that while the critical eye may be focused on the big boys and their one stop shops, any remedies will have an impact across the whole sector. Safeway's communications director Kevin Hawkins says: "There is a whole raft of outstanding issues here and I don't see any real basis for the euphoric reaction coming through in the press. There is a steep hill to climb. We have to convince the Competition Commission that the complex monopoly which clearly exists works in the interest of both customers and suppliers." The five have four weeks to respond to the issues statement. Then the Commission will have one "substantial" private hearing with each of them. It will then decide whether that has proved sufficient to reach its conclusions. The deadline is April, though it could apply for an extension. The investigation is expected to end in mid summer with a final remedies letter. It is too early to ask whether the inquiry has been worthwhile. It has cost the industry an estimated £40m, and those smaller retailers who found themselves caught up in the investigations must find it very hard to see just what has been achieved. The inquiry has certainly put a break on development in the sector and has been vociferously slated by many company bosses. Felwick says: "If the government thinks it's been a valid exercise, it will be deemed to have been so. I suspect, as many of the supermarket chief executives have indeed commented, we don't feel it was an industry that needed this level of attention. "But in light of the public concern and the amount of attention given in the media, something was necessary to put it to bed. If it does that, then it will have been worthwhile." {{COVER FEATURE }}