The supply of groceries in the UK market investigation 30 April 2008 © Competition Commission 2008 Website: www.competition-commission.org.uk Members of the Competition Commission who conducted this inquiry Peter Freeman (Chairman of the Group) Jayne Almond Barbara Donoghue Alan Gregory Alan Hamlin Bruce Lyons Chief Executive and Secretary of the Competition Commission Martin Stanley The Competition Commission has excluded from this published version of the report information which the inquiry group considers should be excluded having regard to the three considerations set out in section 244 of the Enterprise Act 2002 (specified information: considerations relevant to disclosure). The omissions are indicated by . iii Market investigation into the supply of groceries in the UK Contents Page Summary................................................................................................................................. 6 Findings ................................................................................................................................ 17 1. Introduction .................................................................................................................... 17 Conduct of the investigation........................................................................................... 17 Report overview............................................................................................................. 18 2. Context for the investigation .......................................................................................... 19 Events leading up to this investigation........................................................................... 19 Competition and other public policy issues concerning grocery retailing....................... 21 International competition-related developments in grocery retailing.............................. 24 3. Grocery retailing in the UK............................................................................................. 26 Structure of the UK grocery retail sector........................................................................ 27 Categories of grocery retailer.................................................................................... 27 Categories of grocery store....................................................................................... 29 Trends in the number and size of grocery retailers and grocery stores .................... 32 Grocery retailer profitability ....................................................................................... 34 Grocery retailing in Northern Ireland ......................................................................... 36 Grocery wholesalers and buying groups................................................................... 36 Suppliers to grocery retailers .................................................................................... 37 Trends in grocery prices and product range .................................................................. 41 Grocery prices........................................................................................................... 41 Product range............................................................................................................ 43 Consumers of groceries................................................................................................. 44 Shopping missions and shopping frequency............................................................. 44 Store choice .............................................................................................................. 45 Consumer satisfaction............................................................................................... 46 4. Market definition............................................................................................................. 47 Methodology for defining the relevant market................................................................ 48 Product market............................................................................................................... 49 Store size .................................................................................................................. 50 Variation in product range by store size ............................................................... 51 Variation in food counters and other amenity offerings by store size ................... 52 Distribution of store sizes for major UK grocery retailers ..................................... 54 Variations in store size by grocery retailer............................................................ 56 Consumer shopping patterns ............................................................................... 57 Econometric analysis of consumer demand......................................................... 59 Entry analysis ....................................................................................................... 61 Conclusions on the store size delineation of the product market ......................... 62 Store fascia ............................................................................................................... 64 Grocery retailers’ monitoring of their competitors................................................. 64 Entry analysis ....................................................................................................... 65 Econometric model of consumer demand............................................................ 66 Product range....................................................................................................... 66 Conclusion on the fascia-based delineation of the product market ...................... 68 Geographic market ........................................................................................................ 69 Retailer assessments of the geographic scope of competition ................................. 70 National and local competitive initiatives by grocery retailers ................................... 72 Consumer shopping patterns and store catchment areas......................................... 73 Econometric model of consumer demand................................................................. 74 Geographic variation in store-level margins.............................................................. 74 1 Revenue impact of new store entry........................................................................... 75 Simulation model of the SSNIP test .......................................................................... 77 The impact of Internet-based grocery shopping........................................................ 80 Conclusions on geographic market........................................................................... 81 Conclusions on the relevant markets for the supply of groceries by grocery retailers... 81 5. Competition between grocery retailers in the supply of groceries ................................. 83 Potential distortions in competition between large grocery retailers and other grocery retailers........................................................................................................... 83 Trends in convenience store numbers and revenues ............................................... 84 Impact of large grocery retailer store entry on convenience stores and specialist grocery stores ......................................................................................................... 86 Supplier pricing and the ‘waterbed effect’ ................................................................. 87 Viability of grocery wholesalers and the convenience store supply chain................. 93 Below-cost selling ..................................................................................................... 94 Below-cost selling by UK grocery retailers ........................................................... 94 Predation and below-cost selling.......................................................................... 95 Unintended effects of below-cost selling .............................................................. 97 Misleading effects of below-cost selling ............................................................... 97 Conclusion on below-cost selling ......................................................................... 98 Local vouchering ....................................................................................................... 98 Local vouchering practices of grocery retailers .................................................... 99 Review of individual vouchering campaigns......................................................... 99 Petrol pricing discount vouchers......................................................................... 101 Conclusion on local vouchering.......................................................................... 101 Expansion by Sainsbury’s and Tesco in convenience store retailing...................... 102 Findings on distortions in competition between grocery retailers ................................ 103 6. Concentration in local markets for grocery retailing..................................................... 105 Extent of local market concentration in grocery retailing ............................................. 105 Methodology for estimating the extent of local market concentration ..................... 105 Defining local markets to estimate concentration levels..................................... 105