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The acquisition of Safeway

Chairman of the British Brands Group, Andrew Redpath examines the ongoing acquisition of Safeway, and the impact this is likely to have on Brands, with reference to the Competition Commission's investigations.

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The forthcoming acquisition of Safeway has been hailed as the last great merger in the UK grocery sector, where the top five companies already control some 75% of sales through large supermarkets (>1,400m2). Were Safeway (or its stores) to be acquired by an existing national supermarket chain, the further domination of UK grocery by a few large supermarkets would result.

This may be ‘the last great merger’ in terms of major domestic supermarket mergers but is unlikely to affect the ongoing trend of international consolidation. Furthermore, there is every sign that concentration in the UK will increase further, albeit in smaller steps, as supermarkets expand into other retail formats, demonstrated recently by Tesco’s acquisition of T&S Stores in the convenience sector.

Such trends have great significance for many brand manufacturers and other suppliers dependent on supermarkets as their primary route to the consumer.

What many will be watching closely is the scope adopted by the Competition Commission in determining the public interest issues arising from such acquisitions.

Historically, the focus has been almost exclusively on the potential impact of a merger on consumer prices and the extent of local competition, forces that originally made Asda-WalMart the bookies’ favourite in the battle for Safeway.

The question for many suppliers however is whether the focus of the competition inquiry will broaden in light of the Competition Commission’s inquiry into the grocery supermarket sector just three years ago. That inquiry identified 52 practices carried out by retailers that distorted competition between suppliers or retailers or adversely affected the public interest (and in most cases, all three). Such practices included seeking compensation from suppliers when profits were lower than expected and requiring or requesting suppliers to pay for retailers’ marketing costs.

If the recent acquisition by Tesco of T&S Stores is a foretaste, there seems little prospect of greater emphasis being given to distortions in the supply market. The OFT devoted only a couple of lines of its advice to the supply market, stating that there was no significant overlap in suppliers between the two parties and, where there was overlap, share of sales was low, a finding that raised eyebrows amongst suppliers.

There may be a belief that, because the impact on suppliers occurs upstream, the impact on consumers is negligible. This is not the case. The artificial transfer of revenues from suppliers to retailers (ie where there is no corresponding benefit) and the artificial transfer of commercial risk from retailers to suppliers reduces the ability of suppliers to invest. Their ability to bring new products to market and to compete effectively is weakened, damaging consumer choice, value and welfare through improved performance. Supermarkets provide the essential route to market for many suppliers and dependence is therefore high.

In reality there is a time lag before the manifestations of reduced choice of products and retail competition (ie choice of outlet) reach consumers. By the time it does, it may well be too late to address root causes. A full analysis of upstream as well as downstream effects of any further concentration in the grocery sector is therefore vital.

It is to be hoped that the Competition Commission’s broader remit, and the longer period of time for their inquiry, will encourage it to analyse the upstream effects of the mergers in much greater depth than did the OFT in the Tesco/T&S case.

Of course analysis of issues affecting suppliers should not be, and is not, confined to merger investigations alone. The first year’s working of the Code of Practice to put relationships between supermarkets and their suppliers on a more reasonable footing - the major substantive recommendation from the Competition Commission’s inquiry into supermarkets - is now being reviewed by the Office of Fair Trading.

The Code, written off by many as toothless in comparison with the Competition Commission’s recommendations, is nevertheless the most far-reaching initiative of any competition authority in Europe or the US to address practices that distort competition in the supply market. Specific practices and measures are spelt out in 32 provisions and the four largest supermarkets have been required to give legally binding undertakings to comply.

The fact that any individual supplier would have to be brave indeed to raise a potential breach of the Code with one of its largest customers, let alone to pursue its case through mediation, may explain why there have been no cases of mediation to date.

However the value of the Code should not be assessed in this light alone. The monitoring exercise currently being undertaken by the Office of Fair Trading demonstrates that the Code provides a specific framework for dialogue between suppliers and regulators that has never existed before. Recognising the climate of apprehension that exists between suppliers and their retail customers, the OFT has created a role for suppliers’ trade associations such as the British Brands Group to speak collectively on their members’ behalf, protecting the identity of individual companies.

It is important that suppliers use the Code to inform the OFT of their experiences as the Code, like any regulation, acts as a useful deterrent as well as a means of redress. If suppliers remain silent, there should be no surprise were the OFT – and indeed the supermarkets themselves – to pronounce that the Code has been complied with and is effective.

An informed OFT on the other hand offers the best prospect for a regulatory framework that improves relationships between retailers and suppliers. The OFT has already demonstrated its willingness to be flexible. Its current monitoring goes further than that envisaged only a year ago and, with Don Curry’s report into the Future of Farming and Food, interest in the smooth running of the supply chain is becoming more intense and widespread. This is in the interests of suppliers, competition and, most of all, the consuming public.

This article originally appeared in British Brands, the publication of the British Brands Group, issue 17. Contact info@britishbrandsgroup.com or Tel: 07020 934250.

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