Monday, November 07, 2005

Foes home in on Tesco Criticism of the high street giant's expansionist behaviour is growing, writes Nick Mathiason Sunday November 6, 2005The Observer

They've crushed the competition. But now Tesco is facing its biggest-ever challenge. Everywhere it looks, Britain's biggest retailer has enemies. Not only are they growing by the day, but there's a fair chance they will succeed in cutting the giant down to size.

An alliance of government ministers, MPs across the political spectrum, campaign groups, suppliers, independent retailers and rival supermarkets are increasingly uneasy at the supermarket's overwhelming dominance of a British grocery sector worth £76 billion. Tesco controls 30.8 per cent of it and its stranglehold is tightening.

It sounds crazy to question the future of Britain's most powerful retailer when it accounts for more than one in every eight pounds spent by UK consumers, but the next six months could see significant efforts to clip its wings.

Next month, a report from an all-party group of MPs into the future of the high street is likely to recommend an end to below-cost pricing of key goods, and curbs to stop supermarkets in general, and Tesco in particular, buying more convenience stores. The recommendations will be closely watched by the Department of Trade and Industry, which appears sympathetic to the anti-Tesco bandwagon.

Last Thursday Gerry Sutcliffe, the DTI minister for competition and consumer affairs, outlined his concerns about the dominance of supermarkets to MPs taking evidence for the high street inquiry. 'I do have concerns that there is an imbalance at the moment and that we need to find ways to rebuild that balance, but I think it is a very difficult and complex area in terms of the structure of the markets .... There is definitely an issue there; the way the DTI has to deal with it is through the competition structure but we will be closely monitoring what takes place.'

Meanwhile, it is increasingly likely that the Office of Fair Trading will order a full-scale probe into the UK grocery sector in the New Year that could eventually see MPs' recommendations become reality. Last week, the fair trading watchdog was ordered by an appeals tribunal judge to 'urgently' reconsider its decision on whether to recommend a full inquiry into the groceries market. Sir Christopher Bellamy, president of the Competition Appeals Tribunal, told the OFT that its intention to take a further eight months to decide whether a full inquiry into the market was necessary was 'unreasonable'.

For the OFT, this represents a double humiliation. The previous week it was forced to cave in to demands by the Association of Convenience Stores to launch an inquiry after it admitted it had made mistakes in an 18-month investigation.

The result spells bad news for Tesco, whose market dominance will be the chief subject occupying the minds of investigators.

'I don't think people are going to let this one lie,' says Robin Webster, food campaigner at Friends of the Earth. 'There is a momentum building towards targeted action - action that will rein in the Tesco juggernaut and prevent further abuses of the system.'

One Whitehall insider says: 'There is top-level political concern about this issue. The all-party inquiry didn't happen overnight, or for no reason. This is now going through the process that everyone hoped for.'
Tesco is expert at giving consumers what they want: a wide choice at low prices, with free parking to boot, something town centre shops cannot offer. Lucy Neville-Rolfe, Tesco's company secretary and legal and public affairs director, cites evidence from Southampton University that the store has been instrumental in rejuvenating town centres and boosting employment.

But its huge land bank, below-cost pricing and aggressive tactics against planning authorities - which see the firm repeatedly issue planning appeals to wear down cash-strapped local authorities and get the stores it wants - have forced both its own suppliers and small shops out of business. Critics say that this ultimately reduces consumer choice.

Rivals despair that Tesco is now also the second biggest non-food retailer in the country. Small shops are aghast at how the competition authorities have allowed Tesco to buy up large chains of convenience stores, forcing them out of business. From scratch, Tesco has built up a chain of 600 convenience stores, with plans to at least double that figure in 10 years.

At the same time, 7,377 independent stores, more than 20 per cent of the total, closed between 2000 and 2004.

And MPs are also reacting to disquiet among small businesses in their constituencies when a Tesco opens on the local high street. Labour MP Jim Dowd branded the company 'disgraceful' for the predatory pricing tactics it adopted - dropping prices on some goods by as much as 40 per cent - to put an independent supermarket firm out of business in Yorkshire.

Tesco's Neville-Rolfe warns against public policy being made based on what she terms isolated incidents, but the problem for Tesco is that there is a growing list of complaints at Tesco's strong-arm tactics. Furthermore, Dowd is responsible for writing the MPs' report into the future of the high street that will appear next month. This could be the start of a process that will see the company, led by Sir Terry Leahy, face a number of sanctions.

The first is an end to below-cost pricing, as adopted by Tesco and the three other leading supermarkets; second, curbs on future acquisitions; and third - and most extreme - demands that Tesco sell off some of its outlets to encourage more diversity in the high street. This has echoes of the 'Beer Orders' of 1989 that forced brewers to sell off pubs - and, of course, like the beer orders, could have unintended consequences.
'There's certainly a case for divestment,' says Andrew Sims, policy director at the influential New Economics Foundation. 'It's the logical place to go. The muffled cries you can hear is the sound of the marketplace being strangled by the big four.'

Conservative MP Philip Hollobone, who is a leading member of the all-party inquiry into the future of the high street, says: 'The minister says the consumer is king, but you get to a point in free markets [where] driving down price limits choice for the consumer as well as reducing opportunities for suppliers to sustain a business in the long term.

'The big question is what percentage cap should be imposed, and if [they] are currently above that then divestment is a logical consequence. You have to think about the long-term interest of the consumer. It might be in the short-term interest to drop prices to the lowest possible level, but this is having serious long-term consequences on suppliers and I would hope that the OFT would want to see a sustainable retail market.'
Neville-Rolfe says that, as a dominant player in a high-profile industry, Tesco is used to public scrutiny and will vigorously fight any attempts to dismantle its empire.

But as concern grows across the political spectrum over the social and economic effects of Tesco's utter domination of the British retail landscape, it will need all its battling qualities to fend off the threat.

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