MARKET INVESTIGATION INTO THE SUPPLY OF GROCERIES IN THE UK Provisional findings report Published: 31 October 2007 The Competition Commission has excluded from this published version of the provisional findings 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 . Market investigation into the supply of groceries in the UK Contents Page Summary................................................................................................................................. 4 Provisional findings ............................................................................................................... 21 1. Introduction .................................................................................................................... 21 Events leading up to this investigation........................................................................... 22 Conduct of the investigation........................................................................................... 26 Publication of evidence and other materials .................................................................. 29 Report overview............................................................................................................. 30 2. Key themes and issues in the investigation ................................................................... 32 3. Grocery retailing in the UK............................................................................................. 35 Developments in UK grocery retailing............................................................................ 36 Long-term developments: 1950 to 2000 ................................................................... 36 Recent developments: 2000 to 2006 ........................................................................ 39 Northern Ireland ........................................................................................................ 45 Convenience store retailing....................................................................................... 46 National-level consumer outcomes from grocery retailing ............................................. 50 Trends in the retail offer from grocery retailers ......................................................... 51 Store choice .............................................................................................................. 53 Consumer satisfaction............................................................................................... 55 Grocery store customers................................................................................................ 57 4. Market definition............................................................................................................. 66 Methodology for defining the relevant market................................................................ 67 Product market............................................................................................................... 70 Store size .................................................................................................................. 71 Store fascia ............................................................................................................... 91 Geographic market ........................................................................................................ 98 Retailer assessments of the geographic scope of competition ............................... 100 National and local competitive initiatives by grocery retailers ................................. 103 Consumer shopping patterns and store catchment areas....................................... 104 Econometric model of consumer demand............................................................... 105 Chains of substitution between local geographic markets ...................................... 105 Geographic variation in store-level margins............................................................ 109 Revenue impact of new store entry......................................................................... 112 Simulation model of the SSNIP test ........................................................................ 113 The impact of Internet-based grocery shopping...................................................... 118 Provisional findings on geographic market ............................................................. 120 Provisional findings on the relevant markets for the supply of groceries by grocery retailers...................................................................................................................... 120 5. Competition between grocery retailers in the supply of groceries ............................... 124 Competition in the larger grocery stores product market ............................................. 125 National and store-level variations in the retail offer ............................................... 127 Areas of high concentration .................................................................................... 134 Variations in the store-specific retail offer in response to local competition............ 138 Conclusion .............................................................................................................. 142 Competition in the mid-sized and larger grocery stores product market...................... 142 Areas of high concentration .................................................................................... 144 Local vouchering ..................................................................................................... 146 Conclusion .............................................................................................................. 148 Competition in the convenience, mid-sized and larger grocery stores product market 149 Local competition and areas of high concentration................................................. 151 1 Expansion by Sainsbury’s and Tesco in convenience store retailing...................... 152 Distortions in competition between large grocery retailers and convenience store operators............................................................................................................... 153 Provisional findings on competition between grocery retailers .................................... 165 6. Barriers to entry or expansion in grocery retailing ....................................................... 168 Recent experience of entry and expansion in UK grocery retailing ............................. 170 Cost advantages for existing national grocery retailers ............................................... 173 Distribution costs..................................................................................................... 175 Purchasing terms .................................................................................................... 178 Planning regime for grocery retailing ........................................................................... 181 Conduct by grocery retailers to impede competitor entry ............................................ 187 Retailer interaction with the planning system.......................................................... 188 Controlling access to land necessary for competitor entry...................................... 190 Provisional findings on barriers to entry and expansion .............................................. 207 7. Coordination between grocery retailers ....................................................................... 211 Possible coordination strategies .................................................................................. 212 Conditions necessary for tacit coordination ................................................................. 213 Concentration and monitoring deviations................................................................ 214 Punishment mechanism.......................................................................................... 218 Outside constraints ................................................................................................. 220 Evidence of coordination......................................................................................... 220 OFT inquiry .................................................................................................................. 222 Concentration in the supply chain................................................................................ 223 Category management ................................................................................................ 224 Provisional findings on coordination ............................................................................ 227 8. Competition issues in the grocery supply chain........................................................... 229 Grocery retailers’ buyer power..................................................................................... 230 The size of grocery retailers relative to suppliers.................................................... 231 Prices and margins suppliers receive from grocery retailers................................... 232 Provisional conclusions on buyer power ................................................................. 236 Supplier profitability and ongoing financial viability.....................................................