In 2000 the Competition Commission was seen to give the UK grocery multiples an ‘easy ride’, a fact it may regret in the tussle for Safeway, says George Pitcher
No sooner did I pen last week’s column on the dangers of Tom Hunter’s plans for merging House of Fraser with Allders to create one big, bad department-store chain than the grocery magnates went bonkers in their desire to acquire Safeway.
I claim no connection between my musings and the sudden urge on the part of Sainsbury’s and Wal-Mart to compete with William Morrison for the assets of Safeway. Self-regarding as columnists are, I can’t quite picture Sainsbury’s chief executive, Sir Peter Davis, having my words thrust in front of him by an excited press officer and exclaiming: “That’s it! We’ll underperform on a bigger scale!”
But one is forced to speculate whether a successful bid by Sainsbury’s for Safeway would create anything other than a larger underperforming superstore business – a sort of cumbersome retail behemoth representing what Tesco isn’t.
And I’m afraid that I can’t quite escape the notion that a competitive takeover bid for Safeway from Sainsbury’s would serve to distract attention from Davis’s masterplan to revitalise Sainsbury’s through stripping costs – a strategy that has much in common with an old-style Soviet five-year plan and which ultimately might prove just as enterprising.
The Sainsbury’s bid will have to trump the agreed offer of £2.65bn in shares that Morrisons has on the table. And Sainsbury’s will, as a matter of course, have to be referred by the Office of Fair Trading to the Competition Commission, as any combined business would represent more than 25 per cent of the UK grocery industry.
That would tie up Sainsbury’s with the regulators for the duration of a retail recession (presuming there’s some uplift in the economy towards the end of the year), providing Davis with a distraction and an excuse if the organic plan isn’t delivering. The same prospect of referral to the competition authorities faces Wal-Mart, an offer from which could be called Asda 2, since it would be a straightforward extension of the US giant’s acquisition of Asda in 1999.
It is precisely in this area of referral to the Competition Commission that the most interesting implications lie for the fate of Safeway. It is one thing to say airily that any bid (other than Morrisons) is a dead cert for referral to the regulator, but quite another to consider how such a bid will be received by the commission.
I can suggest how it would be received. It would be about as welcome as a UN weapons inspector with no evidence in the White House. This is partly because the commission completed a protracted investigation into the grocery superstore industry in 2000 and must be thoroughly sick of the subject.
But the commission exists, in part, to be bored to tears by covering the same old territory again and again. The real reason it may dread having to re-examine this industry again so soon relates to its findings in its last report.
The commission was widely perceived then to have given the superstores an easy ride and reported only a couple of areas in which a complex monopoly may exist, but which could be addressed by a fairly relaxed code of conduct. Having to revisit its study so soon may serve to expose the weakness of its study, published less than two years ago.
At the time, I welcomed the commission’s report. There had been too much whingeing about the superstores, most of which was based either on a sentimental nostalgia for the friendly (and expensive) high-street “family” butcher/ baker/candlestick-maker or a misplaced attribution of the superstores’ growth to “globalisation”, which was a popular evil of the time.
But there can be no doubt that the commission’s conclusions were mild. Apart from some “pricing practices of the supermarkets and their relations with suppliers”, the commission concluded that “overall…the multiple grocery industry was broadly competitive.”
On the question of consumer choice, which must be a principle at the heart of any commission inquiry into the industry, its report concluded that “any further local concentration among the supermarkets could weaken competition in these areas and lead to higher levels of profitability”, but added that this “did not follow from adverse findings on either of the monopoly situations” regarding prices and suppliers.
Naturally, the commission could conclude that a business occupying over 25 per cent of the industry changes everything. But Sainsbury’s and Wal-Mart have indicated that some break-up of Safeway would be appropriate to remain within competition requirements.
It could be that the commission’s sweeping statement that the industry is “broadly competitive” could come back to haunt it. It could also find that it has lost some powerful friends in the retail industry and in politics if further concentration in the industry requires primary legislation.
The commission isn’t in the business of making friends in the industries that it investigates. But if it made new enemies among the retailers, they would doubtless make much of the previous findings. And some of them are good friends of the Government.
The Government itself would not thank the commission if it had to move primary legislation to restrict local concentration among the supermarkets. It would look like it had dragged its feet in addressing the issue.
I’m afraid the commission could reap a whirlwind this year, having sown its wind in 2000.
George Pitcher is a partner at communications management consultancy Luther Pendragon