United Kingdom
Food type
Primary production
Processors
Red meat
80,000 cattle holdings
87,000 sheep holdingsa
300 abattoir companies
Largest 22 accounting for 59 % of cattle slaughtering
Largest 19 accounting for 45 % of sheep slaughteringb
Pig meat
10,000 holdingsc
Six integrated pig processorsd
Milk
20,000 holdingse
Over 200 processors
Largest three accounting for more than 90 % of milk sold to grocery retailersf
Fruit
500 holdingsg
Four marketing agents accounting for 80 % of UK-produced fruit sold to large grocery retailersh
As for the retail level, although there were 93,000 grocery stores in the United Kingdom in 2009, 85 % of grocery sales are accounted for by the eight large grocery retailers, and two-thirds of sales are accounted for by the four largest grocery retailers (Asda, Morrisons, Sainsbury’s and Tesco).2
Finally, it should be noted that the levels of concentration described above do not necessarily provide a completely accurate reflection of the bargaining power and economic strength of the various levels of the supply chain. Although the primary production markets generally feature very low levels of concentration, it is common for producers to market their produce jointly through large cooperatives. In particular, the EU’s common agricultural policy provides for “producer organisations” for certain types of produce (including fruit and vegetables, as well as milk and milk products) whose objectives are to plan production, increase the concentration of supple, optimise production costs and stabilise producer prices.3 Furthermore, farmers have proven able to exert industrial and political pressure on processors and retailers through other forms of collective action. By way of example, as discussed below, the Office of Fair Trading found that in 2002, pressure from dairy farmers for an increase in the “farm gate” price of milk was so intense (including blockades of depots)4 that grocery retailers and dairy processors implemented an across-the-board retail and processor price increases for the purpose of passing back an increase in the farm gate price of milk.5 Far from being an isolated incident, similar incidents have occurred regularly, and again as recently as this year.6 Finally, it is fair to say that at least some consumers in the United Kingdom have a preference for purchasing food that supports farmers, and this in turn is reflected in grocery retailers’ efforts to demonstrate that they are farmer friendly in their practices.
19.1.2 Legal Background
19.1.2.1 Overview of UK Competition Law
There are four principal elements of competition law in the United Kingdom, all of which apply to grocery retailing:
Each of those elements is discussed in turn below. It should be noted, however, that the United Kingdom’s competition law regime is in the process of undergoing substantial institutional reform. Whereas there were until recently two general competition law authorities – the Office of Fair Trading (the “OFT”) and the Competition Commission – these two institutions merged into a single Competition and Markets Authority, which commenced work on 1 April 2014.7 Various changes will be made to competition law procedures, and some changes to aspects of the substantive regimes, but little that is material to the issues discussed in this report will change.8 In what follows, this report therefore discusses the current regime and the ways that it has been applied to this sector in recent years.
The first of those elements, the market investigation regime, is, to the reporter’s knowledge, unique in global competition law. It combines the wide-ranging powers of investigation and reporting that are common in market study/sector inquiry regimes in other jurisdictions with the extensive remedial powers that more commonly arise in the context of merger control or antitrust enforcement. The regime operates as follows:
1.
The OFT9 has the power to refer a market to the Competition Commission for investigation where it has “reasonable grounds for suspecting that any feature, or combination of features, prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the United Kingdom or a part of the United Kingdom”.10 The term “feature” is defined very widely to include market structure or the conduct of suppliers or customers.11
2.
3.
Where the Competition Commission identifies features of the market that restrict competition, it must also consider what measures it should take, or what measures it should recommend that others take, to remedy those features and any detrimental effect on consumers resulting from them.14
4.
The Competition Commission has extremely wide-ranging remedial powers, including the power to prohibit agreements, mandate various forms of conduct, order divestitures or prohibit acquisitions.15
5.
It should also be noted that Competition Commission market investigation references are very resource intensive, not just for the Competition Commission but also for the private parties involved. Given the expense involved and the risk of adverse outcomes (from the parties’ perspective), the mere threat of a reference can have an impact on parties’ behaviour and market outcomes.
The market investigation regime applies to grocery retailing markets in the same way as it does to other markets. Indeed, as discussed in Sect. 19.2 below, the Competition Commission published a market investigation decision on the grocery sector in 2008, which followed an earlier investigation under the predecessor regime in 2000.
The second element, merger control, is also somewhat distinctive. The Enterprise Act provides for “relevant merger situations” (broadly, acquisition of control or “material influence” over another undertaking) that satisfy either a turnover test (GBP 70 m for the target) or a market share test (25 % combined share of supply) to be reviewed by the OFT and Competition Commission. Because the market share test can be applied in relation to local, regional or national markets, even very small mergers (such as the acquisition of a single grocery retailer store) can be reviewed.16
Unlike many other jurisdictions, the United Kingdom’s merger control regime features voluntary notification, combined with a 4-month deadline (measured from when the fact that the merger has completed has been “made public”) for the OFT to decide whether to refer the merger for in-depth investigation by the Competition Commission. As a result, it is possible for some small or inconspicuous acquisitions to escape scrutiny altogether if they do not come to the OFT’s attention.17
The substantive test for review is whether the merger gives rise to a “substantial lessening of competition”. In addition, the relevant minister can intervene in a case and take the final decision on wider public interest grounds if the merger engages one of the defined public interests set out in the legislation. Although there are not currently any public interests specified in relation to the grocery sector, in principle the government of the day could change that position in the course of a merger investigation if it saw it fit to do so.18
The remaining two elements of competition law in the United Kingdom follow broadly the same pattern as other EU jurisdictions: a prohibition on anticompetitive agreements (the Ch I Prohibition/Article 101 Treaty on the Functioning of the European Union) and a prohibition on abuses of a dominant position (the Ch II Prohibition/Article 102 Treaty on the Functioning of the European Union). Both are enforced by the OFT, in conjunction with the national courts. Breaches of either provision can result in substantial financial penalties.
In principle, both prohibitions can be applied in the grocery sector, although to date only the Ch I prohibition has been (as will be discussed below). Both prohibitions require proof of an effect on trade within the United Kingdom (Ch I and II Prohibitions) or between Member States of the EU (Articles 101 and 102 TFEU).
19.1.2.2 Retail and Grocery-Specific Competition Law Rules and Exemptions
The United Kingdom’s competition law regime described above is (for the most part) generally applicable across all sectors. There are no sector-specific exemptions or special provisions in respect of their application to grocery retailing.
However, one of the remedies imposed by the Competition Commission in the 2008 Groceries Investigation Report was the establishment of the Groceries Supply Code of Practice (the “GSCOP”), which regulates the relationship between large grocery retailers and their suppliers. In particular, it imposes a general obligation of fair dealing, in addition to a number of specific requirements in relation to various aspects of the supplier–retailer relationship. At the time of the 2008 Groceries Investigation Report, the Competition Commission required the retailers to seek to agree to the appointment of an Ombudsman to enforce the GSCOP. However, they failed to reach an agreement, and so Parliament decided to legislate for a new role of Groceries Code Adjudicator to act as an enforcer for GSCOP.19 Because it resulted from a market investigation rather than as a sui generis piece of competition legislation, the GSCOP is discussed in more detail in Sect. 19.2 below.
19.2 Market Investigations and Advocacy
19.2.1 Overview
As discussed in Sect. 19.1.2.1 above, one of the unique features of the competition law regime in the United Kingdom is its market investigation regime, which empowers the Competition Commission to impose wide-ranging remedies to address any features of markets that it considers to be undesirable from a competition perspective. One such recent investigation concerned the grocery sector, which is discussed in Sects. 19.2.2–19.2.4 below.
19.2.2 Background to the 2008 Groceries Investigation
As explained in Sect. 19.1.2.1 above, the Competition Commission can only conduct a market investigation where the OFT (or other relevant body) refers a market to it for investigation. The reference that gave rise to the 2008 Groceries Investigation was made by the OFT in 2007 but was the product of many years of competition concerns in relation to the sector.
In 1999–2000, the predecessor to the Competition Commission, known as the Monopolies and Mergers Commission (the “MMC”), had conducted an inquiry into the grocery sector under the competition legislation that was in force at that time (the Fair Trading Act 1973) (the “MMC Investigation”). That legislation provided for a market investigation regime that is similar to that which is found in many other jurisdictions, in that the MMC had powers of investigation but could only make recommendations as to what the Government or others should do to remedy any concerns that it identified.
The MMC Investigation arose out of concerns in the 1990s about high prices and profits in the grocery sector in the United Kingdom. Those concerns reflected a broader concern that consumer prices were higher in the United Kingdom than in continental Europe and the US, which the popular press dubbed “Rip off Britain”.20 The MMC Final Report identified a number of competition concerns, falling into two broad categories: (1) concerns about grocery retailers’ pricing strategies (in particular, below-cost pricing and “price flexing”, whereby higher prices were charged in some stores than others)21 and (2) concerns about grocery retailers’ conduct towards their suppliers.22 It decided not to recommend any action in relation to the pricing concerns, however, because it considered that the potential remedies (such as a prohibition on below-cost selling or on price variations across stores) would either have too many unintended consequences (such as prohibiting desirable price cutting or differential pricing that reflects regional cost differences) or be too difficult to implement.23 In relation to the concerns about supplier practices, the MMC recommended the adoption of a Supermarkets Code of Practice for all grocery retailers with a national market share in excess of 8 %. Such a code (the “SCOP”) was drawn up and adopted by the four largest grocery retailers at the time.
In the years that followed, complaints continued to be made to the OFT about grocery retailers’ treatment of suppliers, in particular, and also about competition in the sector, more broadly. The OFT conducted a general review of SCOP in 2004 and commissioned and published a detailed audit of compliance with SCOP in 2005. At the same time, the OFT sought submissions on the effectiveness of competition in the grocery retail markets but concluded on August 2005 that a further reference to the Competition Commission for a market investigation was not warranted because the SCOP and competition generally were both working well.24 On October 2005, however, that decision was challenged by the Association of Convenience Stores (the “ACS”), which considered that competition was not working well at all. The OFT conceded that its decision had not been properly reasoned, consented to the quashing of that decision by the Competition Appeal Tribunal and undertook to investigate and consider the issues again.25 On 9 May 2006, the OFT referred the market to the Competition Commission for investigation, citing concerns about (1) the operation of the planning system, (2) barriers to entry raised by large grocery retailers’ landholdings, (3) grocery retailers’ imposition of restrictive covenants when selling land and (4) the same retail pricing and supplier relationship practices that the MMC had found problematic in the earlier MMC Inquiry.26
19.2.3 The 2008 Groceries Investigation Report
The 2008 Groceries Investigation ran for nearly 2 years (9 May 2006–30 April 2008) and covered a comprehensive range of competition issues:
1.
competition between large grocery retailers and smaller convenience and specialist stores,
2.
concentration in local markets for grocery retailing,
3.
barriers to entry or expansion,
4.
possible collusion or coordination between grocery retailers, and
5.
competition issues in the grocery supply chain.
Its findings in relation to each topic are summarised below.
19.2.3.1 Competition Between Large Grocery Retailers and Smaller Convenience and Specialist Stores
As explained above, the 2008 Groceries Investigation only came about because of pressure from the convenience store sector based on their concerns that large grocery retailers were squeezing them out of the market. But for their intervention, the 2008 Groceries Investigation would not have happened. The ACS actively participated in the Investigation as well, submitting 16 documents over the course of the Investigation. As explained below, however, although the Competition Commission investigated a number of the concerns raised by the ACS, in each case the Competition Commission concluded that there was no restriction of competition.
First, the Competition Commission investigated the so-called waterbed effect, whereby large grocery retailers exercise their buyer power to obtain low-cost prices for themselves, with the result that suppliers need to charge higher cost prices to smaller grocery retailers in order to recover their costs. As a consequence, large grocery retailers are able to offer more competitive retail prices, which in turn allows them to increase their market shares at the expense of smaller retailers and thereby reinforces their buyer power. Ultimately (according to the theory), consumers are harmed by the reduction in competitive constraint posed by small retailers.
Although the Competition Commission’s investigation confirmed the accuracy of ACS’ complaint that large grocery retailers pay less for their supplies than their smaller competitors, and although the Competition Commission accepted that the “waterbed effect” theory was logically coherent, the Competition Commission found that there was no such effect in the United Kingdom grocery markets. In that regard, the Competition Commission placed weight on (amongst other factors) (1) evidence suggesting that there is a limit to the extent to which growth in the size of a retailer translates into lower supply prices27 and (2) the fact that because competition between large grocery retailers is intense, any reductions in supply prices that they achieve are likely to be passed on to consumers.28
Second, the Competition Commission considered the argument that the closure of some convenience stores was leading to a “tipping point” in the viability of the wholesalers that supply them as those wholesalers become unable to recover their fixed costs from a more limited customer base. The Competition Commission rejected that argument, however, on the basis that both the convenience store sector and the wholesaler sector were growing rather than declining, and in any event any decline in customer base would be more likely to lead to consolidation amongst wholesalers rather than resulting in a “tipping point” for the viability of the whole sector.29
Third, the Competition Commission investigated whether below-cost pricing by large grocery retailers might foreclose competition from specialist and convenience grocery stores. Although the Competition Commission found that large grocery retailers do sell products below cost, unlike the MMC in the MMC Investigation, the Competition Commission did not consider this to be problematic from a competition perspective. In particular, the Competition Commission rejected the suggestion that the below-cost pricing might be an attempt to “predate” smaller stores, not least because the Competition Commission found that such smaller stores do not in general place a competitive constraint on larger stores.30 Similarly, the Competition Commission rejected the suggestion that the foreclosure of convenience and specialist stores might be an “unintended consequence” of below-cost selling because the evidence showed that the local entry of a large grocery retailer (which tends to engage in below-cost pricing) had no impact on the rate of entry or exit of convenience stores or off-licence alcohol retailers.31 Finally, the Competition Commission also rejected the argument that below-cost selling by large retailers might “mislead” consumers into believing that such retailers were better value than small retailers across the board. The Competition Commission considered that the evidence showed that consumers take into account a broad range of factors, rather than just the price of a select few items, in determining where to shop.32
Fourth, the Competition Commission considered the argument that local discount voucher campaigns by large grocery retailers (and in particular Tesco) might be part of a predatory strategy to exclude smaller retailers from the market. The Competition Commission rejected that argument on the basis that the evidence did not show any impact of those strategies on the entry or exit of convenience stores and because local voucher campaigns were not used extensively in any event.33
Finally, the Competition Commission considered the entry by Tesco and Sainsbury’s (two of the largest grocery retailers) into the convenience store sector. However, the Competition Commission concluded that their efforts to compete in this sector were pro-competitive and did not provide any evidence of predation.34 It should be noted, however, that the Competition Commission’s findings that there had not been predation and that competition from large grocery retailers was pro-competitive do not provide a complete answer to concerns that the expansion of large grocery retailers might be socially undesirable for other reasons (i.e., reasons that do not relate to competition). For example, the Competition Commission could not consider in its investigation the question of whether diversity in high streets across the country is desirable in its own right irrespective of the impact on competition. As the Competition Commission explained, that and a wide range of other public policy issues were outside of its remit under the United Kingdom’s market investigation regime.35
19.2.3.2 Concentration in Local Markets for Grocery Retailing
The Competition Commission conducted an in-depth investigation of the extent to which competition between grocery retailers in highly concentrated local markets might be restricted. In contrast to the situation at the time of the MMC Investigation, by 2006–2008, most large grocery retailers had stopped engaging in “price-flexing” and had rather adopted uniform national pricing policies pursuant to which prices only varied between stores according to their overall size.36 Moreover, most large grocery retailers took a similar approach to other aspects of their retail offering, including product range and the use of promotional discounts.37
Nevertheless, the Competition Commission was concerned that a lack of competition at the local level could manifest itself in one or both of two ways: (1) a deterioration in the quality of those parts of the retail offering that were determined at a local, store level (i.e., opening hours, stock levels, cleanliness, quality of service) and (2) influencing the overall pricing and quality decisions applied by the retailers across the board. As explained below, the Competition Commission found evidence of both forms of anticompetitive harm.
First, the Competition Commission analysed the extent to which retailers might soften their competitive efforts in local markets in which they faced reduced competition. Although the Competition Commission conceded that it could not measure this directly, it could analyse store level profit margins, and the evidence showed that profit margins were higher in highly concentrated local markets. The Competition Commission concluded that those higher profit margins reflected the deterioration of the retailer’s local competitive efforts.38
Second, the Competition Commission concluded that, when setting national price levels, retailers would take into account the extent to which they faced competition in the various local markets in which they compete. Because the Competition Commission found that a significant proportion of grocery stores were located in highly concentrated local markets (11–27 % for large stores and 10–22 % for mid-large stores), it stood to reason that retailers would take that into account and set higher national prices than they would have if more of their stores were located in highly competitive local markets.39
19.2.3.3 Barriers to Entry or Expansion
The Competition Commission investigated a number of potential barriers to entry or expansion in grocery retailing, both in general and in local markets that are currently highly concentrated. In particular, the Competition Commission considered three potential barriers: (1) cost advantages held by large grocery retailers, and Tesco in particular; (2) the planning system; and (3) large grocery retailers’ land banks.
In relation to cost advantages, the Competition Commission found that large retailers (and in particular Tesco) had such advantages but that they did not give rise to material barriers to entry. The evidence showed that other retailers successfully acquired and developed new sites notwithstanding their cost disadvantages.40
In relation to the planning system, the Competition Commission noted that it necessarily has the effect of restricting entry and expansion, both because it constrains retailers’ freedom to choose where to build new stores or enlarge existing ones and because the planning approval process itself is costly and time consuming.41 Further, the Competition Commission noted that the system favours incumbents, both because it is easier to obtain approval for expansions of existing stores than for building new stores and because the existing large grocery retailers have more expertise and resources for dealing with the process than new entrants would have.42 However, the Competition Commission considered that the planning system only gave rise to a material barrier to entry in respect of large stores because medium and smaller stores could more easily be established in areas that are not subject to planning restrictions.43
The Competition Commission also identified material barriers to entry arising from large grocery retailers’ holdings of land and the restrictive covenants and exclusivity arrangements that attach to those holdings. Although the Competition Commission accepted that none of the retailers pursued a strategy of using those holdings to exclude competition, it found that the presence of such holdings in highly concentrated local markets had the effect of restricting competition in those local markets.44
19.2.3.4 Coordination Between Grocery Retailers
The Competition Commission also investigated the possibility that large grocery retailers might collude or coordinate with each other. It noted that the OFT was in the process of conducting a number of cartel investigations involving the sector, which are discussed in Sect. 19.3 below. It also noted that the conditions that make collusion or tacit coordination possible were evident in the sector, although it found no evidence of such behaviour taking place.45
19.2.3.5 Supply Chain Issues
Finally, the Competition Commission considered whether large grocery retailers have significant buyer power and whether they use that power in a way that distorts competition.
The Competition Commission concluded that large grocery retailers do have buyer power46 but that this is not in itself problematic from a competition perspective because the lower supply prices that their buyer power makes possible are passed on to consumers.47 In particular, the Competition Commission rejected the suggestion that retailers exercised their buyer power by withholding demand, which (if it had been established) would have had adverse effects on consumers.48 However, the Competition Commission drew a distinction between the normal exercise of buyer power to obtain better trading terms and the use of buyer power to “transfer excessive risks or unexpected costs to their suppliers through practices involving retrospective adjustments to supply agreements or giving rise to moral hazard on the part of the grocery retailer”.49 According to the Competition Commission, such conduct “is likely to lessen suppliers’ incentives to invest in new capacity, products and production processes … [and] will be detrimental to the interests of consumers”.50 Particular examples of retrospective conduct that the Competition Commission identified included imposing price changes on suppliers after goods had been ordered or delivered or requiring them to contribute to the costs of promotions that had not been agreed upon in advance.51 Examples of excessive risk transfer giving rise to moral hazard included the practice of making suppliers liable for losses arising from goods being lost or stolen in store.52
In addition to its investigation of buyer power and supply chain practices, the Competition Commission also investigated whether the sale by retailers of “own label” products alongside branded products gave rise to distortions of competition by reason of the retailers acting as both customers and competitors of suppliers of branded products. The Competition Commission rejected the suggestion that their privileged position gave retailers a substantial competitive advantage, however, because the evidence did not show that own-label products had been consistently growing at the expense of branded products.53
19.2.3.6 Remedies
As explained above, the Competition Commission identified four features of the relevant markets that distort competition: (1) high levels of concentration in some local markets, (2) the planning system, (3) retailers’ landholdings and (4) supply chain practices. In each case, the Competition Commission found that the features gave rise to detrimental effects on consumers, and accordingly the Competition Commission had a statutory duty to impose remedies.54