Applications for Safeway Grocery Store - PowerPoint by dzm10561

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Antitrust Issues in the UK Grocery

Michael Rowe
21 May 2008

Introduction – A Good Number of
Competition Cases
   Despite recognition that the grocery retail industry in the UK is broadly
    competitive, between 2000 and 2008 the sector has seen:
    >   Two substantial market reports by the Competition Commission (CC)
    >   One merger review by the CC involving all of the major players (and
        other merger references to the CC)
    >   One substantially complete cartel investigation (and at least one on-
   "Because of its importance to the economy, because of its relationship with
    other sectors such as retail grocery, and because sectors facing strong
    competition have the greatest incentive to avoid competition, the dairy
    sector has seen a good number of competition cases"
    John Fingleton, CEO of the Office of Fair Trading (OFT), 19 September

The First Market Investigation

   Launched by the MMC in 1999 following concerns that:
    > Groceries cost more in the UK than in comparable EC countries
      and the USA
    > There was a discrepancy between farm-gate and retail prices
    > Large out-of-town supermarkets were threatening the high street
   Relevant Market
    > Identified as that for one-stop grocery shopping in stores of at
      least 1,400 sq metres (15,000 sq feet)
    > Shopping patterns found to be essentially local. Most consumers
      travelling no more than 10 minutes to the supermarket in urban
      areas and no more than 15 minutes in non-urban areas

The First Market Investigation (cont.)

   The CC's Report (October 2000) focussed on three issues:
    >   Persistent selling below cost
    >   Price flexing
    >   Relationships between supermarket chains and their suppliers
   Conclusions
    >   Supermarket industry broadly competitive
    >   No remedial action recommended in respect of predatory pricing or price
        flexing, due to concerns that any possible remedy would be "undesirable,
        disproportionate or present practical difficulties"
    >   A Code of Practice (COP) to be drawn up and parties with at least an 8%
        share of the market to be required to give undertakings to comply
    >   COP to include provisions relating to non-cost-related payments required
        of suppliers, access to shelf space, the imposition of charges and changes
        to contractual arrangements, particularly when imposed retrospectively

Safeway Merger Analysis

   The References
    > Four references to the CC in March 2003 concerning the proposed
      acquisition of Safeway by each of Asda, Morrisons, Sainsbury's
      and Tesco
   Market Definition
    > Market definition from 2000 Investigation used
    > Effect on convenience stores (below 280 sq metres) and stores
      providing for 'top-up' shopping (between 280 and 1,400 sq metres)
      also considered
    > Market essentially local but national dimension also addressed

Safeway Merger Analysis (cont.)

   Local Market Analysis
Stage One
    > Based on identifying the number of competitive fascias within an
      isochrone around each Safeway store (10 minutes' drive time in
      urban areas and 15 minutes' drive time in rural areas)
    > Reduction in the number of fascias from each of 5 to 4, 4 to 3, 3 to
      2 and 2 to 1 deemed a potential problem
Stage Two
    > Examination of problem areas identified under Stage One in
      conjunction with a discussion with concerned parties
    > Following analysis of results, five to four rule considered too
      demanding and abandoned

Safeway Merger Analysis (cont.)

   Recommendations
    > While a programme of divestment of stores might remedy local
      adverse effects, concerns at the national level would not be
    > No reasonable divestment programme would adequately restore a
      fourth national competitor, and there would be scope for
      coordinated effects between the three largest players
    > Three largest players (Asda, Tesco and Sainsbury's) blocked from
      acquiring Safeway
    > Morrisons acquisition cleared conditional on divestment of stores
      in 48 problem areas

Other Mergers Referred to CC

   Readiness on the part of the OFT to refer mergers in the sector to the
   Acquisition by Tesco in 2003 of Co-operative Group's store in Slough
    > Referred to the CC in 2007 following Tesco's failure to fulfil
      undertakings in lieu given to OFT
    > Tesco required to divest site or development
   Acquisition by Somerfield in 2004 of 115 stores from Morrisons
    > CC investigation launched after closing
    > Somerfield required to divest 12 stores
    > Somerfield applied to the Competition Appeals Tribunal (CAT) for
      judicial review of the CC's decision, but the application was

Milk Cartel

   Statement of Objections (SO) issued by the OFT in September 2007
    provisionally finding evidence of collusion between certain large
    supermarkets and dairy processors on retail prices of milk, butter and
    UK cheese
   The SO alleged that the supermarkets had indirectly disclosed to
    and/or exchanged with other retailers commercially sensitive
    information and that the dairy processors had facilitated such
   The OFT announced that it had concluded "early resolution
    agreements" with, inter alios, Asda, Sainsbury's, and Safeway (7
    December 2007)
   Sainsbury's agreed to pay a settlement of £26 million and stated that:
    > "the price initiatives […], which were widely and publicly reported
        at the time, were designed to help British dairy farmers at a time of
        considerable economic pressure"

Milk Cartel – Indirect Information Exchange

   In 2003 the OFT fined Argos and Littlewoods for fixing prices pursuant to an exchange
    of confidential information through a common supplier
   The CAT upheld the OFT's decision, stating:
    >   "If one retailer A privately discloses to a supplier B its future pricing intentions in
        circumstances where it is reasonably foreseeable that B might make use of that
        information to influence market conditions, and B then passes that pricing
        information on to a competing retailer C, then in our view A, B and C are all to be
        regarded […] as parties to a concerted practice having as its object or effect the
        prevention, restriction or distortion of competition"
   The Court of Appeal narrowed this test, introducing a requirement for mental consensus
    between the parties, holding that it would be sufficient if retailer A intended that B
    should use the information provided to influence market conditions by passing that
    information on to C and B did in fact pass that information on to C in circumstances
    where C may be taken to have known the context in which the information was
    disclosed by A to B and C
    (Argos Ltd and another v OFT; JJB Sports plc v OFT [2006] All ER (D) 236)
   The Court of Appeal found, however, that the evidence still supported the CAT's

2008 Market Report – Background

   The OFT reviewed the operation of the COP and other competition
    issues relating to the grocery market (2004-2005)
   The OFT announced that there was no need to amend the COP or to
    refer the investigation to the CC (August 2005)
   Following an application by the Association of Convenience Stores for
    review of the OFT's decision by the CAT, the OFT agreed to withdraw
    its decision and to conduct a further review
   The OFT referred the supply of groceries by retailers in the UK to the
    CC for investigation (May 2006)
   The CC's final report was published on 30 April 2008

2008 Market Report – Market Analysis

   Sector divided into three major product markets for the supply of
    groceries in the UK:
    > Large stores (more than 1000 to 2000 sq metres): competing only
      with other large grocery stores
    > Large and mid-sized stores (all stores larger than 280 sq metres):
      mid-sized stores competing with other mid-sized stores and large
    > All grocery stores: convenience stores competing with both mid-
      sized and large grocery stores (and being price constrained by
   Precise delineation of the product market differs across local
    geographic markets
   Geographic market fundamentally local

2008 Market Report – Key Findings

   After conducting an "exhaustive" review of the industry, the CC concluded
    >   "In many important respects, competition in the UK groceries
        industry is effective and delivers good outcomes for consumers, but
        not all is well"
    >   There has been no broad-based decline in convenience store numbers or
        revenues, including the number or revenues of independent, non-affiliated
        convenience stores
   Concerns in two principal areas:
    >   Certain retailers having strong positions in a number of local
        markets with barriers to entry (e.g. the planning regime and control of
    >   Various supply chain practices which transfer excessive risk and costs
        to suppliers

2008 Market Report – Local Markets

   Highly concentrated local markets
    >   Where a local market has three or fewer fascias and one fascia has a 60% or
        higher share of grocery sales within a 10- or 15-minute isochrone
    >   495 large grocery stores in the UK (27% of all large grocery stores) are in highly-
        concentrated local markets (using the 10-minute isochrone)
   Planning regime and control of land
    >   Planning regime constrains new entry into local markets by large grocery stores
    >   The planning "need" test likely to provide incumbent retailers with an advantage
        over new entrants
    >   Retailers not generally engaging in "landbanking" as a strategy to impede entry by
        rival retailers into local markets
    >   The control of land by retailers (e.g. by way of landbanks and restrictive covenants)
        in certain highly concentrated local markets gives rise an adverse effect on
        competition in the product markets for large grocery stores and for mid-sized and
        large grocery stores, but not in the product market for all grocery stores

2008 Market Report – Supply Chain
   All large grocery retailers, wholesalers and buying groups have buyer
    power in relation to at least some of their suppliers
   Overall the financial viability of food and drink manufacturers is not
    under threat as a result of the exercise of buyer power
   No evidence of any "waterbed" effect in supplier pricing
   Grocery retailers often transfer excessive risks or unexpected costs to
    their suppliers (e.g. through making retrospective adjustments to the
    terms of supply)
   The COP is constraining the exercise of buyer power by the four
    largest grocery retailers to some extent

2008 Market Report – Remedies

   The CC is to seek undertakings from large retailers requiring them to:
    >   Release existing restrictive covenants in highly-concentrated areas and
        not impose new restrictive covenants that may restrict grocery retailing
    >   Notify the OFT of all acquisitions of existing grocery stores of more than
        1,000 sq metres
   The CC recommends the OFT be appointed a statutory consultee to Local
    Planning Authorities on applications for planning permission for stores above
    1,000 sq metres
   The CC will require the establishment of a Groceries Supply Code of Practice
    (GSCOP), expanding the COP (e.g. by including an overarching "fair-dealing"
    provision, and by prohibiting retailers from making retrospective adjustments
    to terms and conditions of supply )
   Establishment of a GSCOP Ombudsman to monitor and enforce compliance

2008 Market Review – E-mail case study

   The CC conducted a review of e-mails between Asda and Tesco and
    their suppliers during the period 18 June to 22 July 2007
   The CC noted that communications between buyers and suppliers
    evidence "a challenging relationship between trading partners with a
    shared objective to do business together while maximizing their own
   Three areas giving rise to potential competition concerns:
    > Exchange of information on retailer pricing and promotion
    > Contribution by suppliers to costs of promotion
    > Wastage and product quality complaints
   In particular the CC observed that private information that would not
    otherwise be available to a grocery retailer was being volunteered by
    a supplier, including information on a competitor’s retail prices for the
    coming week and on future promotions at a rival supermarket

Recent Events

   On 23 April 2008, the OFT announced that it had agreed to pay
    Morrisons £100,000 plus costs to settle a defamation case brought by
    the retailer over "serious errors" in an OFT press release issued in
    connection with the Milk Cartel SO
   On 24 April 2008, the OFT conducted inspections at the premises of
    certain supermarkets, as well as certain suppliers, and contacted
    other suppliers to seek information about prices for groceries, health
    and beauty products and detergents
   On 25 April 2008 the OFT issued an SO to two tobacco manufacturers
    (Imperial Tobacco and Gallaher) and 11 retailers (including Asda,
    Morrisons, Safeway, Sainsbury and Tesco) alleging (in respect of
    certain companies):
    > The indirect exchange of proposed future retail prices
    > Arrangements to link the retail price of a manufacturer's brand to
       the retail price of a competing brand of another manufacturer

The Future

"Businesses have expressed surprise over what they
perceive to be the increasingly vigorous enforcement activity
and the use of powers to obtain or request information […]
There is also a perception that our fines have got much
higher, and represent a tougher approach to enforcement"
Philip Collins, Chairman of the OFT, 15 May 2008

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