WhyisTesco’ssuccessaproblem?

Plentyofpeoplewouldsaythatit’snot。

Forstarters,Tesco’s1,900outletsmakeittheUK’sbiggestemployer(exceptforthestate),providingworkforsome250,000people。

NorisitaproblemforTescoshareholders,whohaveseenthesharepriceriseby18%overthepastfiveyears。

What’smore,free-marketeconomistswouldarguethatthehighlevelofconsolidationintheUKgrocerysector,combinedwithviciouscompetition,hasbeengoodforconsumers。

ThesupermarketsareoneofthemostsuccessfulsectorsoftheUKeconomyandshouldtakemuchofthecreditforfallingconsumerprices。

Arepricesreallylowerthantheywere?

Yes。

Governmentdatashowsthatsince1987therealpriceoffoodisdownbyafifthandthatofclothesbyonehalf。

Fromthisperspective,low-costsupermarketsprovideavitalsocialfunction。

First,theydisproportionatelyhelpthepoor,forwhomfoodbillseatuparelativelybigchunkofincome。

Second,theyareattheforefrontofforcingmanufacturerstoimprovelabellingandinpromotinghealthyeatinginresponsetochangingconsumertastes。

Andallthiswithoutmakingexcessiveprofits:£2。

2bnsoundsalot,butit’sjust3poneverypoundspentinTesco。

SowhatdoTesco’scriticssay?

Thatitsaggressivepricingruinsthecharacteroftowncentresbyforcinglong-establishedshopsoutofbusiness,thatitabusesitspowerbydemandingcripplingtermsfromsuppliers,andthatitusesunfairtactics–suchas‘landbanking’(buyinguppotentialstoresitestostopcompetitorsdevelopingthem)–tostiflecompetition。

OverthepastdecadetheOfficeofFairTrading(OFT)haskeptaneyeonthesector。

TwiceinthelastsevenyearsithasorderedtheCompetitionCommissiontoinvestigate。

InMay,theOFTagainaskedforafullinquiryonthegroundsthatmuchhaschangedsincetheearlieronein2000。

What’schanged?

Threemainthings,saystheOFT。

First,inthepastregulatorshavetreatedthesupermarketconvenience-storesectorsasseparatemarkets。

Butrecently,thebigfour(Tesco,Asda,SainsburyandWilliamMorrison)havemovedintotheconveniencesectorwithsuchavengeancethattheOFTthinksthetwo-marketapproachisoutofdate。

It’sespeciallyworriedaboutbelow-costsellingand“priceflexing”;thatis,havingdifferentpricesindifferentstoresdependingonwhatlocalmarketscanbear。

Second,increasedconsolidationsince2000meansthebigplayersareevenmorepowerfulthantheywere。

Third,theOFTsaysithasfoundnewevidenceofunfairpracticeswhenitcomestohowsupermarketsacquireanddevelopland。

Whatkindsof‘unfairpractices’?

Ingeneralterms,theOFTthinksthatthecurrentplanningsystemrestrictsordistortscompetitionbyactingasacostlybarriertonewentrants。

IftheCommission’sinquiryagreeswiththisview,itimpliesthatroot-and-branchreformofthesystemisneeded。

Morespecifically,theOFTisworriedthatthesupermarkets’so-calledlandbanksareharmfulandanti-competitive。

Theirreferraldocumentdetailssome319sitesownedbythebigfour–anamazing58%ofthembyTesco–thathavenotbeendeveloped,andalsocriticisestheuseof‘restrictivecovenants’underwhichsupermarketsselllandonconditionthatthebuyercannotthemselvesbuildorallowasupermarket。

Tescodeniesthatlandbankingexistsandsaysitmerelyneedstobuyuppotentialsitesalongtimeinadvanceforplanningpurposes。

However,iftheCommissionfindsthatitspracticesareanti-competitive,itcouldbeforcedtosellthosesites。

Tesco’scharmoffensive

WithevenDavidCameronjumpingontheanti-Tescobandwagoninaspeechearlierthisyear–heclaimedthatitsaggressivelocalpricingrisksbringingthewholesystemoffree-marketcapitalismintodisrepute–thegiantretailerisonamissiontowinfriendsandinfluencepeople。

InApril,chiefexecutiveSirTerryLeahyunveileda£100mfundtoresearchgreensourcesofenergyforits1,900stores。

InMay,helaunchedaten-point“goodneighbour”initiative–arangeofcommunity-mindedmeasures,includingbespokeTescoExpressstorefrontsthatmatchtheirenvironments,alogisticsoverhaultocutdeliveriesandnewbiodegradablebags。

ItremainstobeseenwhetherallthiswillimpresstheCompetitionCommission。

Recommendedfurtherreading:

IfyourethinkingofinvestinginTescooranyothersupermarket,readPaulHillsarticle:leaveexpensivesupermarketsontheshelf。