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.

Danny Alexander, MP for Inverness

It is interesting to look at the situation in Inverness before Tesco entered the market there. In the early 1990s there were two Safeway stores, two William Low stores, a Marks and Spencer food store and two Co-Op stores. At this time Safeway had a similar, if not greater, share of local trade than Tesco does today.

We built our first store on a retail park on the outskirts of Inverness – at the time considered a brave move because it was a long way from any housing developments.

Our second store was opened following our acquisition of William Low. In the years that followed, Safeway opened a new town centre store and closed one of their older smaller stores on the outskirts. They maintained their leading position as our retail park store at Seafield was making steady progress. During this time, Asda and Sainsbury took no interest in Inverness.

In the late 1990s we started to develop larger stores, extending our Seafield store and providing shoppers with a much better range. Around this time the Co-Op decided to close its large stores. We believe that this was part of a nationwide strategy to close larger stores, rather than the Co-Op no longer being able to compete with us. We successfully bid for the Co-Op retail park site at Inshes.

Asda announced their interest in Inverness two or three years ago. At this time they identified a site and they launched a major press and lobbying campaign. However, the Director of Planning consistently informed his members that the Asda site was unsuitable and that his professional team did not support the Asda approach. Asda never lodged an application for this site.

There then followed a local plan inquiry where major land owners, developers and retailers debated the future of retailing in Inverness at a public inquiry. The outcome of this inquiry was to support a ring of district centres around the city. Although Tesco is located at three of the identified centres, they have all been in the hands of other retailers or developers in the past. The inquiry identified two further sites at Slackbuie and Culloden. We believe Asda have recently submitted an application for the Slackbuie site. This still leaves the Culloden site free for a potential retail development.

The last significant change in Inverness was when Morrisons acquired the Safeway business. Whilst Safeway had been happy to trade two stores side by side in the city centre, Morrison made the decision to close the store on Rose Street. This means that there is an existing purpose built food retail store in the centre of the city that is capable of being used by a competitor now, should Morrisons allow this.

Whilst food retailing has changed, the city of Inverness itself has also undergone a lot of change in recent years. In just three years between 2001 and 2004 the population increased by 1.7% compared to 0.3% for the whole of Scotland. This population growth makes Inverness one of the fastest growing cities in Europe. The city is thriving and many people are attracted by the economic opportunities and access to services.

In summary, whilst we may have two large stores and a smaller Metro store in the city centre, this is not materially different to the situation Safeway were in during the early 1990s. There is also plenty of opportunity for other retailers in Inverness, with the sites at Slackbuie, Culloden and the vacant superstore at Rose Street. In addition, there is a Morrisons, two Co-Ops, an M&S a Lidl and a Somerfield.

This brief history of retailing in Inverness demonstrates that we have been the only large scale food retailer consistently to have invested in the highland area for some time. We have been serving the local people and creating jobs in the retail sector.

Generally the quality and range available in supermarkets has greatly improved. At present many customers choose Tesco because we offer low prices, a bigger range of products and great service, but we are well aware that if we stop offering any of these things customers will vote with their feet and shop elsewhere. In fact, there is plenty of competition in Inverness.

We conducted a telephone survey of residents in Inverness and this survey showed that 95% of shoppers are satisfied with their shopping experience in Inverness. 85% of shoppers also believe that their shopping experience has improved over the last few years.

Mr Alexander raised concerns about apparent dominance in Inverness. He quoted local market share figures from a market research report produced by CACI.

As described in the previous paragraphs, there is plenty of competition in Inverness. The CACI research is based on grocery sales within 121 relatively large postcode areas in the UK. Analysis based on such areas is plainly irrelevant to any proper assessment of market power under Part IV of the Enterprise Act, as none of the areas constitute an economic market. Indeed, CACI’s large postal areas led to some absurd conclusions, such as that Tesco “dominates” Southall, when Tesco does not have a store in Southall (our nearest store is in Hayes).

A newspaper article, reporting the CACI research, stated that the research showed that certain supermarkets were ‘dominant’ in the postcode areas. Quite apart from the geographic market point, this way of presenting the research is plainly misleading. At most the research shows which supermarket has the leading share in each area, not they that are dominant in the sense understood by competition law. The fact that one supermarket has the highest share of trade in a local area does not give it market power. This is for many reasons, but in particular because it is constrained by the fact that customers could switch to other fascia present in that local area. The vast majority of customers in the UK have a choice of several supermarket fascias, switching costs are low, and overall switching levels are high and increasing. The major supermarket operators have national policies, and do not materially vary their offering as between different local areas.

We also have other concerns about the CACI research, including the fact that it excluded smaller stores and independent operators, was based on data not crosschecked against alternative data sources, and used a generic estimation model that is open to large error and uncertainty.

Mr Alexander also mentions our plans to build a store in the Holm area of Inverness.

As mentioned above, Inverness is currently experiencing a period of rapid growth. As the population has grown, the city has expanded, meaning that many areas on the outskirts of the city are poorly served by supermarkets. One such area is Holm, where at present residents have to drive across the city to visit a large food store. In line with the local plan inquiry outcome, we have plans to develop a site in this area (one of the five district centres identified in the local plan inquiry) to provide residents with better access to a supermarket.

In addition Mr Alexander has concerns about differential pricing, especially concerning petrol.

We operate a national pricelist for groceries in our stores. All the grocery prices in our stores in Inverness are part of this national pricelist. Petrol is rather different. The nature of petrol business is such that we only have discretion over a tiny part of our retail price because of tax, world price movements and low margins. Consequently the degree of variation is relatively small. Following recent significant increases in the price of oil, petrol pricing has been under review. At present we aim to reflect changes in the cost price of petrol in our retail prices on a daily basis. We also check prices in competing local petrol stations and take account of this in our pricing decisions. All petrol prices are determined centrally and then communicated to stores for implementation.

One of Mr Alexander’s constituents had brought to his attention that a product (Twinklers flashing toothbrushes) that was previously available in a local shop is now only available at Tesco.

When Twinklers toothbrushes were first brought to the UK at the end of 2002, the product was quite a crude unit and this was reflected in the initial price on offer to the trade. The first retail customer of any magnitude was Poundland, and it is true that customers in Inverness were able to buy an early version Twinklers for £1 from January 2003. Problems with the first version meant that a redesign of the operating mechanism was undertaken to produce a far superior unit that was inherently more reliable. This new unit was more expensive in terms of components and manufacturing but was a much better product for the customer (the recommended retail price is £1.97). We are not aware of Poundland purchasing the product since the end of 2003. The current design of Twinklers is on sale in Tesco, Asda and Sainsburys at a similar price. Therefore, there is no truth in the suggestion that we have in any way prevented Twinklers toothbrushes being sold through smaller retailers.