Talking Tesco: UK Competition Commission

Why are we publishing these comments?

Tesco has been reading with interest the third party comments on the Groceries Market Investigation that the Competition Commission has been publishing on its website. Our formal submissions have addressed many of the issues raised by these comments, particularly those of some of the professional lobbying organisations. However, a number of submissions on the Competition Commission’s website contain more specific comments about Tesco which we have not covered in our formal submissions.

Some of these specific comments are inaccurate and misleading, and we are providing a series of short notes in order to put the record straight. In the interests of transparency we are today publishing the first such series of notes.

Lady Caroline Cranbrook

Lady Cranbrook makes several general points about the grocery retailing market, the role of supermarkets and the role of independents. She claims, in particular, that food producers, processors, wholesalers and independent retailers are interdependent, and that the arrival of a supermarket will force independents to close and disrupt this “complex web”.

Contrary to Lady Cranbrook’s assertions, supermarkets such as Tesco bring many benefits to communities. We source locally-produced products, which our customers have told us they want to be able to purchase in our stores. We work with small suppliers and encourage and support them as they expand. Working in partnership with our suppliers, we deliver new and innovative products. We cater for customers who are unable to drive to a store. We are reinvigorating the convenience sector; and we are working with local councils to promote the vitality and vibrancy of the town centre.

She suggests that independent retailers are the seedbed for new products, and implies that supermarkets are unable to deliver innovation or customer choice, especially local, fresh seasonal foods “with a provenance”.

Innovation

Supermarkets are a significant source of new products. Last year we added 8,000 new lines with the help of 300 new suppliers. This tells a very different story to Lady Cranbrook’s assertion that the multiples are consolidating their supply chains and reducing the number of suppliers. We are constantly seeking new suppliers that can offer new innovative products to meet the needs of our customers. It is therefore a myth that only large suppliers are able to sell their products through supermarkets. We are very keen to work with small suppliers and can help them establish and grow their business by sharing with them our skills and expertise as well as providing a market for their products.

As the managing director of The Welsh Whisky Company explains:

“Tesco has been instrumental in helping us to establish the Penderyn brand. They showed faith in us from the start. Last year, we supplied 11,000 bottles of whisky to Tesco, including a Grand Slam edition to mark the rugby success.”

Already the fledgling company has doubled its staff, to 20, and is currently exporting to a new country each month.

Tilly Confectionary tells a similar story. Eight years ago Peter and Elisabeth Patterson were making tablet (crumbly butter fudge) on their kitchen table. Now they supply our Scottish stores with up to 4,000 bars of tablet, fudge and macaroon each week. Their Clackmannanshire-based firm, Tilly Confectionery, has taken on extra staff since last year earning the contract to work with us, and now employs 14 people.

Local produce – our new regional buying offices

We understand that it has not always been easy for small suppliers to approach supermarkets so we are going to great lengths to improve the situation. We also agree with Lady Cranbrook’s assertion that consumers are increasingly interested in buying local and regional food. Our customers have told us this and so we will be opening five new regional buying offices to support our commitment to locally produced products. One of these will be located in the East of England. We have launched a new website (www.tesco.com/regionalsourcing) that enables suppliers to contact us as well as allowing customers to recommend a supplier. We are hosting a series of regional road shows so producers and suppliers can come and meet our buying teams.

One such company, which attended our recent road show event in Cornwall is The Incredible Fruitcake Company. They started making fruit cakes for family and friends and before long they were supplying a much wider demand. They now use a local bakery to bake the cakes. The company’s founders pride themselves on picking only the very best ingredients for their cakes.

They thought the regional sourcing event was a fantastic idea not only for them, but that it also presented numerous advantages for local people. During the day, their small company secured an order to supply our stores in the region with cakes for Christmas. This is exactly the sort of local, fresh, seasonal food “with a provenance” that Lady Cranbrook claims supermarkets are unable to deliver.

Our new initiatives such as the regional buying offices will result in hundreds of new local lines being stocked in Tesco stores and more business for small suppliers.

Lady Cranbrook seems to think that the livestock industry is also under threat. We are Britain’s biggest livestock customer. 97% of the fresh beef we sell is British as is 95% of our fresh chicken, 92% of our fresh pork and 88% of our fresh lamb. We are committed to supporting the British livestock markets We have been strong supporters of UK meat producers over many years, standing shoulder-to-shoulder with the industry throughout the BSE crisis and during the more recent crisis over foot-and-mouth disease.

Small suppliers

Lady Cranbrook goes further in stating that supermarkets are not interested in small suppliers with small output and inconsistency of supply. We would strongly dispute this. As explained above, we are interested in working with small suppliers and understand that there are sometimes teething problems when establishing a new business. Trevor Giles who grows organic English Victoria plums for us in the Vale of Evesham is a testament to this.

His first year of working with us, Trevor admitted he expected us to dismiss him out of hand when frost struck and wiped out two thirds of his crop. But he says:

“Tesco said they wanted a partnership whereby we look after each other in good times and bad, so they still took my fruit, even though I could only offer three tonnes. This year the crop looks much healthier and I’m hoping to supply between 10 and 20 tonnes of plums.”

The security which the Tesco deal provides is enabling Trevor to re-invest in his orchard, which he started from scratch four years ago.

Less mobile customers

Lady Cranbrook also mentions the old and infirm. We recognise the importance of affordable accessible food for this group of people. We have opened more Express stores in local neighbourhoods and in some cases these stores are, for the first time, providing a source of affordable, fresh food for people without access to cars. Our dot.com service is also incredibly popular, with busy urban families and people in rural communities. It has also allowed many house-bound people to shop properly for the first time.

Wholesalers and independents

Lady Cranbrook raises concerns about the wholesale market. She suggests that the closure of independent shops means we could soon reach a point where the wholesale market is no longer viable – the so called ‘tipping point’. We have not seen any evidence to support this. Indeed, the OFT reported that total grocery wholesaling sales had grown and were expected to continue growing in the future. The IGD says the same, noting that the grocery wholesale market has grown steadily since 2000. Furthermore, a recent survey published in The Grocer reports that 86% of wholesalers expect their turnover and profit to be higher next year. We also know that the convenience sector, which one would expect to be the hardest hit by any tipping point phenomenon, is the fastest growing sector in the market.

Lady Cranbrook supports the view that there is only one market and the two-market definition needs to be examined. We agree that smaller stores should be seen as operating in the same market as larger stores: customers today use a wide range of stores, and do larger shops at smaller stores and smaller shops at larger stores.

Lady Cranbrook raises concerns about Tesco (and Sainsbury’s) move into the High Street and the convenience sector. The entry of supermarkets into the convenience sector has reinvigorated competition. The Institute of Grocery Distribution (IGD) has found that the average price premium in convenience stores compared to supermarkets is steadily coming down. The IGD also estimates that sales in convenience stores will grow by around a quarter over the next five years.

To the extent that independent stores are in decline, this is part of a long-term trend dating back to at least the 1940s. For example, changes in consumer preferences, the development of the road infrastructure of the United Kingdom, and the burden of property taxes and regulation – with the repeal of the Resale Prices Act in 1964 of particular significance – have all had an effect on the sector. They led convenience retailers to adapt their business models in order to remain competitive.

Importantly, large numbers of independent retailers have not been “lost” at all, but have joined buying (or “symbol”) groups. These groups accounted for less than 7,000 stores in 2000, but now account for over 12,000, and are trading strongly. Further, according to the DTI, the rate of decline of the independent sector was slower in the period 2000-2005 than over the period 1995-2000.

Stalham

Lady Cranbrook cites Stalham as an example of a town that is alleged to have suffered since we opened a store.

Before we opened a store in Stalham, North Norfolk District Council had identified the need for a supermarket in the town. The town had been facing many challenges with the decline of Stalham markets in the 1970s and 1980s. Many shoppers were also being attracted away from Stalham by supermarkets in other towns. The nearest supermarket was a Sainsbury’s store six miles away, which has more recently been extended (many Stalham residents still travel to this store and further a field to access the broader ranges offered by larger stores). With fewer visitors the High Street suffered and the Council recognised the need to reverse this trend. The town needed investment and a reason for shoppers to visit the High Street. The Tesco store has proved popular and gone some way to reverse the trend. We offer free parking and there is a pedestrian walkway linking the car park to the High Street.

There has been much speculation about the closure of shops in Stalham. Lady Cranbrook has drawn the conclusion that the shops closed as a result of Tesco. However, one local resident notes that:

“The Baker: The couple who ran the bakery decided even before Tescos opened that they would close as they wanted to retire anyway.
The Butcher: Closed because the owner became ill (The Fruit & Veg Shop: Closed because the guy who ran it moved away from the area.
The Fishmonger? The fish monger's shop in the middle of the street closed at least 5 (maybe even 10) years before Tescos even submitted planning permission!”

Lady Cranbrook mentions that the Co-Op and the Somerfield have closed in recent years. This is true, but the mix of retailing in a town may alter over time as local economies develop, change and mature and neither of these units has been left empty: the Co-Op store has since re-opened as a funeral parlour and the Somerfield store is now a factory shop.

On a recent visit to Stalham we visited the High Street to assess the situation for ourselves. We were pleased to see that the local butcher is trading very well. At a recent Customer Question Time session in our Stalham store, many of our customers commented on the quality of the local butcher. He has diversified and is now selling hot baguettes, which are very popular.

The local convenience store, The Stalham Shopper, has also diversified. The owner Nigel Dowdney took part in a Rural Shops Alliance Project which offered him advice as to how he might improve his offer and make his store more competitive. Having moved to a more of a convenience, off-licence focused offer and after receiving advice on how to merchandise his products better, Mr Dowdney reported:

“Without taking into account the sales of the seasonal products, average weekly sales before and after the changes showed growth of 16% – with the seasonal sales added this became 41%. All categories except gum showed sales increases, with chocolate up 20%.” (Confectionary sales).

“We’ve seen a real uplift in sales of multipacks – 8s, 10s and 12s.” The sales data showed multi-packs rose 15% over the period, helping the category to a total 8% rise.” (Alcohol sales)

“Sales have gone up 34%” (Video and DVD rental).

The Rural Shops Alliance also comments on The Stalham Shopper:

“Video and DVD rental is becoming a vital part of the shop’s mix as it looks to provide something different from Tesco.”

This is a good example of how Tesco has increased competition in a town and encouraged local retailers to improve their offer to the benefit of consumers. At our Customer Question Time sessions (which include residents who do not shop at Tesco) the general feeling was that Tesco has been a welcome addition to the town, having a positive impact on the local high street. Residents commented that, since Tesco opened in the town, there were increased visitor numbers to the area and the high street and that some retailers on the high street have experienced an increase in revenue. They recognised the extra employment opportunities and were pleased that there was a reduced need for local travel further a field.

Saxmundham

Lady Cranbrook says a superstore in Saxmundham would hinder, not help, local shops.

Lady Cranbrook claims that the absence of a large superstore in the Saxmundham area is the most significant factor underlying the prosperity and vitality of the local food sector. This claim is incorrect: the shops in Saxmundham are not flourishing because of the absence of a supermarket, since the vast majority of residents are using supermarkets anyway – albeit supermarkets which are many miles away. These shops could be even more successful were it not for the significant leakage of trade to areas where there are supermarkets.

The evidence that Lady Cranbrook presents is based on a small (local) survey of retailers and producers. Crucially she does not provide any evidence about customers. Her survey asked retailers to comment on what they thought the impact of a supermarket would be. It understandable for retailers to be apprehensive about the arrival of a competitor, however our research shows that not only can other retailers compete, but many benefit from the presence of supermarkets.

We tried to build a store in Saxmundham but our application was rejected on the basis of the “sequential test” because the site was located outside of the town centre. We then looked at another town centre site, but were unable to pursue this development because a parcel of land on part of this site was unavailable.

At the time many Saxmundham residents were in support of our application and believed it would attract people to the town as well as provide some effective competition to the local Somerfield. The area is currently poorly served, in terms of supermarkets, with many residents having to travel over 16 miles to the nearest store. Lady Cranbrook seems to suggest that residents are perfectly happy with the current provision. Our research provides evidence to the contrary.

We know that 60% of households in Saxmundham are regular Clubcard holders who visit Tesco regularly. The vast majority of these residents shop at Tesco Martlesham (91%) to the north east of Ipswich – some 16 miles away. With an average of 2.5 trips per month to Martlesham, Saxmundham residents are travelling a minimum of 1.8 million miles a year to shop at Tesco, at a cost to each family of about £100 per year in petrol. There are other costs associated with shopping outside of Saxmundham such as the time taken. Given the cost involved, we think that Saxmundham residents would not make their current travel choices if local provision was strong enough for the needs of the majority.

This information is supported by a telephone survey conducted on our behalf by Marketing Sciences in August 2006. A survey of 350 residents in the Saxmundham and East Suffolk area showed that:

  • only 7% spend most of their grocery budget in local shops;

  • around a quarter shop most with each of Tesco, Somerfield and the Co-Op;

  • people visit Tesco because of price and range;

  • and go to local shops because they offer food quality and a way to support local business;

  • but location is the only big reason for visiting the Co-Op (88%) and Somerfield (76%).

Earlier this year, the situation of Saxmundham was brought to our attention by one resident who comments:

“If one walks down the High Street at any one time on any day, the number of people around would suggest that the majority of local people shop elsewhere. The only shop that can be said to be busy is Somerfields, they do a good job, and without them the town might be different to what it is today.”*

We visited Saxmundham recently and were able to confirm this. The town was very quiet apart from the Somerfield store. Within the town there were two empty units and the local haberdashery was for sale. There were a couple of shops that appear to be doing well – a small greengrocers/farm shop selling local organic produce and a butcher who likewise was selling local meats. One might conclude that these shops are thriving because they stand out. They have something special to offer that attracts customers and sets them apart from supermarkets.

Lady Cranbrook draws the conclusion that local shops are flourishing because of the absence of a supermarket. Arguably some are flourishing because of another of her observations – that consumers are increasingly concerned about the provenance of their food, something which supermarkets such as Tesco increasingly cater for. We believe local shops would do even better were it not for the leakage of trade to other areas where there are supermarkets.

Supermarkets provide convenience, which customers want

Considering that these shops may be thriving due to a changing consumer trend, they may be able to increase their trade further by identifying other consumer trends. It has been well documented that consumers are leading increasingly busy lives – people are increasingly “cash rich and time poor”. Customers are much more interested in the convenience element of shopping, something Tesco has worked hard to deliver. Lady Cranbrook suggests that local shops have improved their opening hours. Whilst this may true for some, it is certainly not true for all. As one Saxmundham resident notes:

“Most of the shops still close on Thursday afternoon, Sundays and Bank holidays.”

We were able to confirm this on our visit to the area. Another case to note is that of Alder Carr Farm Shop near Stowmarket. Lady Cranbrook claims that their takings halved overnight when Tesco opened in 1997. Alder Carr Farm Shop is still trading despite further competition in the form of a new Asda, but as its website states:

Opening Times
Tues – Sat 9.00 – 4.30
Sun 10.00 – 4.00
Bank Holidays
Mon 10.00 – 4.00
Please Note:
Opening times vary throughout the year, please ring to confirm opening times before making a journey.

Since most people work during these hours, these opening times are likely to be inconvenient for the majority of consumers. These shops might trade better if they opened at times more suited to consumer needs.

On revisiting the Saxmundham study area in 2004/05 Lady Cranbrook notes that:

“Out of the 81 shops, 14 had shut but 14 had opened. In addition, several additional farm shops and delicatessens have opened since the study period.”

There is nothing remarkable about these figures. We have looked at several towns in the area and how they have changed since 2000. Lowestoft, Woodbridge and Stowmarket are all served by supermarkets and have seen similar changes in the mix of grocery retailers. Using the assumptions of Lady Cranbrook one would expect the number of grocery retailers to decrease in these towns. In fact, Lowestoft has seen the arrival of eight new grocery retailers and the closure of three. Woodbridge has seen two new grocery retailers, one closure and two grocery retailers change hands. Stowmarket has seen three new grocery retailers and the closure of four.

Over the last decade, farm shops, box delivery schemes, farmers’ markets and health food shops have all increased the variety of organic produce on offer. This has been another emerging trend and the number of these outlets has grown nationally. The Yellow Pages report growth of 623% in farm shops in less than 10 years. The growth of the deli market has also been well documented. The emergence of these retailers in these Suffolk towns, all of which have supermarkets, cannot be attributed to the absence of a supermarket.

*Quotes taken from a letter addressed to Sir Terry Leahy from a Saxmundham resident.