Q&A: Supermarket competition concerns

Critics say supermarkets have too much power in the retail world

The Office of Fair Trading has been under increasing pressure to investigate the supermarket sector amid competition concerns in the sector.

Despite its ruling late last year that there was "insufficient evidence" to prompt such an inquiry, the OFT was forced to reconsider its position after the matter was referred to the Competition Appeals Tribunal.

The tribunal quashed its ruling and ordered the OFT to reach a new decision as soon as possible.

The OFT weighed up a number of questions before it decided to refer the matter to the Competition Commission.

Why are supermarkets causing concern?

Significant worries have been raised about the relentless rise of supermarkets and their hold over consumers and suppliers alike.

According to market research group TNS Worldpanel, the UK's big four - Tesco, Asda, Sainsbury's and Morrisons - now hold almost three-quarters (74.4%) of the grocery market.

Tesco, the UK's number one supermarket has the biggest share and now takes £1 of every £8 spent by consumers in the UK.

When you consider that UK retail sales totalled £246bn in 2004 - more than the combined economies of Switzerland and Ireland - that's a significant amount.

According to the All Party Parliamentary Small Shops Group, half the UK's 278,630 shops are owned and managed by a sole trader.

However, these local shops are now losing out to supermarkets, which are moving into the convenience store format.

According to the Association of Convenience Stores, in the 12 months to June last year, 2,000 independent convenience stores closed down as supermarkets moved in.

What areas did the OFT examine?

The OFT looked at two main issues - competition worries surrounding the local convenience stores market and whether supermarkets are abusing their relationships with suppliers.

Last year, the OFT ruled that the grocery market was not restrictive, prompting widespread derision from local shops and action groups.

The OFT also ruled that there was no need to reform the way the supermarkets deal with suppliers, despite claims that the "big four" had engaged in "bullying tactics".

However, in its latest statement, the OFT now says there is "some evidence to suggest that the big supermarkets' buyer power has increased".

Why are people worried about the convenience stores sector?

Local, or corner, shops are becoming a huge growth area for supermarkets.

As the big four - Tesco, Asda, Sainsbury and Morrison's - face greater planning restrictions, one of the key ways they can expand their business is by targeting the convenience store format.

Tesco plans to change many petrol stations to its Express format

Such a tactic also allows the supermarkets to target "cash-rich, time poor" consumers who can pick up a few groceries on the way home.

However, the strategy has drawn fire from MPs and small shops groups.

The recent all-party report by MPs warned that the invasion of supermarkets into the convenience store sector could destroy the local community.

Friends of the Earth and the Women's Institute also highlighted social and economic concerns raised by the increasing dominance of supermarkets.

The Association of Convenience Stores warned that predatory or below-cost pricing by supermarkets was driving small shops out of business, as they were unable to compete with their bigger rivals.

It also argued that the OFT's decision to divide the retail market into "convenience" and "one-stop" categories had allowed supermarkets to expand into the convenience store sector unhindered.

Consumers have voiced concern about having less choice on the High Street, and in-store, as consolidation and expansion in the market continues.

Why the beef over supermarket suppliers?

Campaign groups like Breaking the Armlock Alliance are up in arms over the OFT's original ruling that supermarkets are sticking to the Supermarkets' Code of Practice and treating suppliers fairly.

They allege that suppliers have been too scared to complain of any code breaches, for fear of losing key contracts.

Critics want an independent watchdog to oversee complaints made in confidence.

Under the current system, complaints from suppliers have to go through retailers.

The National Farmers Union (NFU) also wants the OFT to acknowledge that there is a problem, saying "many farmers live in fear of losing contracts if they speak out - they're not the greatest deals but they are all they've got".

Suppliers and campaigners want clear, transparent information on buying prices.

Other groups complain that the code also fails to protect workers overseas and ensure they get a fair, living wage.

What do the supermarkets say to all this criticism?

Supermarkets have long argued they are simply giving UK consumers what they want and treat suppliers fairly.

Tesco has denied that smaller shops are at risk, arguing that consumers use both supermarkets and corner shops at different times.

The British Retail Consortium (BRC), which represents supermarkets, says consumers are the best regulator of the sector.

It argues that supermarkets have grown as they have met the changing demand of shoppers, and in turn, competition has benefited consumers by offering lower prices, greater choice and high quality produce.

Have any big names raised concerns about supermarkets?

Any criticism mainly seems to come down to gripes about market leader Tesco, which currently has a 30.2% share of the market - way ahead of Asda (16.6%) and Sainsbury (16.2%).

Even Asda is feeling the squeeze from Tesco

But rivals have spoken out about its expansion, as the group plans a rapid rollout of its Express format stores across the country.

Asda's owner Wal-Mart has called on the government to investigate Tesco's continuing domination, because it was so difficult for rivals to try to catch up.

Remarkably, smaller rival Waitrose - owned by department store John Lewis - has also added its voice to concerns about declining competition in the convenience store sector.

While insisting it was not anti-Tesco, the retailer recently revealed it had been prevented from opening stores in many towns as it had been outbid by Tesco.

Local authorities fail to consider competition, service and social issues, instead concentrating purely on who pays the highest price, Waitrose added.

How long before an inquiry goes ahead?

Now that the OFT has decided to refer the supermarket sector to competition watchdogs, a four-week open consultation will take place, ending on 6 April.

It will then make a final decision on the matter next month.

If it does decide to go ahead with a full investigation, the process could take months and cost big-name supermarkets millions of pounds.