Select Committee on Welsh Affairs Minutes of Evidence



Examination of Witnesses (Questions 199-219)

MR DON THOMAS, MS LYNDA JAMES, MR REES ROBERTS AND MR BOB BANSBACK

DR DEREK MORRIS, MS MARGARET SMITH, DR CLIVE RIX AND DR DOUGLAS COOPER

TUESDAY 11 DECEMBER 2001

Chairman

  199. Good afternoon. Welcome to the Committee. Before I start proceedings, for the benefit of my colleagues and for the record, we understand that you are prohibited by law from disclosing some of the information that you obtained in the course of your inquiries, and that this is omitted from the report before it is laid before Parliament. We do not wish to put you in a difficult position, and we fully appreciate the constraints that you have about that information; so if you are unable to respond to any of our questions just indicate that that is the reason, and we will make sure that you are not imprisoned in the Tower.
  (Dr Morris) Thank you for that, Chairman, though, within that constraint, I hope we can be helpful to the Committee.

  200. Thank you. Would you begin by introducing yourself and your colleagues, please, Dr Morris?
  (Dr Morris) Yes. On my left, Margaret Smith, who is the Senior Case Manager involved in the Supermarkets inquiry. On my right is Douglas Cooper, who is an economist involved in the Supermarkets inquiry; and, on his right, Clive Rix is the Head of the Commission's Business Advisers. I am Derek Morris, Chairman of the Commission, and I also chaired the inquiry into Supermarkets.

  201. Thank you very much. Perhaps you could explain briefly, I know it was a very large report, but if you could say, broadly, how you conducted the inquiry, how you worked, where you got your sources of information, and what independent research you commissioned?
  (Dr Morris) Yes. We were looking at really two major but very different aspects of supermarkets' activity; one was their activities vis-a"-vis consumers, and the other vis-a"-vis suppliers. On the consumer side, we took a lot of evidence on prices, costs, margins and competitive activity generally from the supermarkets themselves; we looked at various consumer surveys, such as the Consumer Association's work in this area, but we also conducted a fairly extensive survey of our own. We were also open to submissions from the public in general, and I can say more about that, if that is required. With regard to suppliers, there was something of a difficulty; a number of suppliers were concerned about their relationships with supermarkets, but they were very anxious indeed about saying anything critical of supermarkets, if there was any danger that that would get back to supermarkets. But, obviously, allegations that supermarkets were behaving in unacceptable ways were difficult to deal with, if we could not then go back and discuss them with supermarkets. So, in the end, our methodology to resolve that problem was to collect from several hundred suppliers allegations of activities by supermarkets that they thought were uncompetitive, or unfair, and then we went back to the supermarkets with a list of 52 such practices, and asked them, "Have you at any point in the last three years engaged in any of these activities?" without giving them chapter and verse as to who had made that allegation. And, under the Act, they are required to answer those questions fully and accurately, and most of those 52 were ones where supermarkets did admit that they were carrying out those activities; and, of those, 27, at the end of the day, we regarded as being, to use the terminology of the Act, against the public interest, that is to say, really, unfair or anti-competitive.

  202. Thank you, Dr Morris. How much did your inquiry cost, and how long did it last?
  (Dr Morris) It lasted 16 months, and it cost 3,748,000.

  Chairman: Thank you.

Chris Ruane

  203. According to your figures, in paragraph 2.10, that is page 13, and Table 2.2, page 24, in 1998-99, five stores, in fact, there were six stores (Asda, Morrison, Safeway, Sainsbury, Somerfield and Tesco) accounted for 84 per cent of the reference market, now that is a great deal of purchasing power. Is it in the interests of the consumer or the food producer to have that concentration of purchasing power in so few hands?
  (Dr Morris) Concentration is not something that, per se, I think, is good or bad; there are situations, and, indeed, broadly, we think supermarkets is one of them, where one can have four or five main suppliers covering most of the market and they engage in intense competition. There are other situations where a market is concentrated in this way and it can be a fertile situation for cartel activity, or for, perhaps rather less than formal cartels, a sort of conscious parallelism of behaviour, a lack of competition, inefficiency can grow. And that is why Commission inquiries, when they look at concentrated markets, never stop at that point, they will always go on to look at price behaviour, various types of non-price competition, profitability, how consumers, how purchasers respond; all of that is necessary before one can decide whether a concentrated market is operating in the public interest or not.

Mr Williams

  204. In paragraph 1.13, you describe the industry as "broadly competitive"; what do you mean by that?
  (Dr Morris) A number of aspects led us to that conclusion. First, the great majority of consumers purchasing from medium/large-scale retail outlets for groceries had substantial choice, about 90 per cent clearly had three or more supermarkets which they could get to in a reasonable travelling time, and a significant number exercise that choice; many people have a main supermarket, the one they usually go to, and we found that 15 per cent in one year had changed that main supermarket. So a lot of choice. We found that profitability was not excessive, and I can say more about that in a moment; we found, as a result of various consumer surveys, that consumers were really very, very satisfied with the service they got. We also found there had been entry, some of the new discount stores had come in, and there were new retail formats appearing, particularly in some more congested urban areas. And I suppose also important in our thinking was just the fact that the market shares of these large supermarkets, which have been referred to, were changing quite substantially; Sainsbury had at one stage been pre-eminent and was rapidly losing market share at the time, Safeway was in some difficulty, Asda, five, seven years earlier, had been in difficulty, there had then been a resurgence and it had come back and taken market share from other supermarkets. So all of those signs indicated to us that this was a "broadly competitive market."

  205. To put the question really in another way, but is it possible, where 84 per cent of the market is in the hands of six companies, to be really competitive?
  (Dr Morris) Yes, it is, I believe. I believe that is the situation here, and one must remember there are many markets I hazard, but it is a guess, that the great majority of industrial markets have that number of major suppliers, or indeed fewer, responsible for the great bulk of the market; and we have found cases where that leads to lack of competition, but we felt not in this case.

  206. Is this what we call an asymmetric market, where some of the players have more of the knowledge than their suppliers would have, in terms of quantity and quality of the product that is available, and are therefore in a much more powerful position to make the market, so to speak?
  (Dr Morris) Yes, I think that is right. Once we had looked at the position of supermarkets vis-a"-vis suppliers, we came to the conclusion that there was a clear imbalance of negotiating power, the supermarkets had very substantial buyer power, the concentration this time really was having anti-competitive effects. But, again, we did not just presume that from the market statistics, we went, in the way I described earlier, to look at the actual practices and activities, and we were concerned with a number of them and we did find against the supermarkets on those.

  207. Would you say that the industry is broadly competitive throughout Britain, or are there areas where you would say it probably is not broadly competitive?
  (Dr Morris) We found that there were about 10 per cent of cases where consumers were faced with perhaps only two, or in some cases even only one medium or large-size retail outlet for groceries; there would tend to be other, smaller shops, but they were not necessarily competitive, in that they could not supply the whole week's shopping. Interestingly, the usual example of that was in areas where the population was very sparse, a number of them were in Scotland, for example, in rather rural areas, where, because of the sparseness of the population, the demand was just not great enough to maintain two 30,000/40,000 square feet supermarkets, so that was a problem, and we had some views and recommendations on that; but it is very much at the margin, the last 10 per cent, or so.

Adam Price

  208. Running a little ahead, to the Code of Practice, am I right that you have set a threshold level of UK market share, in terms of coming under the terms of that?
  (Dr Morris) In relation to the Code?

  209. Yes?
  (Dr Morris) That is right; we recommended that the Code should be mandatory, and, I must emphasise, it is a legally enforceable Code, perhaps I could come back to that, it should be mandatory for any supermarkets with more than 8 per cent of the market. And the reason for that is that companies in negotiations are always trying to get the better deal, they are always trying to negotiate that, and, in general, cannot enforce unfair contracts, or unfair deals. Where it was occurring, in our view, in this case, was where there was substantial buyer power; that was what was allowing supermarkets to impose a number of quite, we thought, unacceptable restrictions; but in the absence of buyer power, we did not believe supermarkets could do that, and that was why the Code was restricted to the five main ones with buyer power. Now, subsequently, that became four, because one of them slipped below the 8 per cent threshold.

  210. And that one is Somerfield?
  (Dr Morris) That is right, yes.

  211. That is of particular relevance to us, of course, because, as you know, Somerfield has a very large market share in Wales, I believe I am right in saying that, I think, according to your figures from 1998-99, it is double its share of the UK market, about 17 per cent, so it is a major issue for us, actually, that one of the significant players in Wales is not mandated, of course, to join, and I believe they have said that they are not currently minded to join the Code voluntarily?
  (Dr Morris) I understand that. We certainly said that in our view it would be right for all the supermarkets to sign up to the Code, but we were not in a legal position to recommend that through our report and the Secretary of State was not in a legal position to require that on the basis of our report, because there was not a formal adverse finding in relation to the smaller supermarkets.

  212. Do you think the fact that Somerfield will not be party to the Code will sort of weaken the position of suppliers in Wales?
  (Dr Morris) Clearly, it might. I think there are two points there. One is that, if the Code is effective, a matter we might refer to in a moment, if it is effective, and if, therefore, the Code establishes norms of behaviour, when suppliers and supermarkets negotiate, then, I think, increasingly, smaller supermarkets will find that they have to meet that norm, they have to come in line with it. But, clearly, one cannot guarantee that, and an important part of the Code, and this came up in your earlier hearing, is that it is going to be monitored and it will be reviewed, and if problems of the sort that you have described emerge then there will be an opportunity to address that.

Mr Wiggin

  213. In the course of your inquiry, did you find any evidence of the supermarkets positively assisting the farming industry; and, if you did, could you give us some examples perhaps?
  (Dr Morris) Yes, I think we did come across some examples. I suppose the one that immediately leaps to mind is, when the BSE crisis hit, and, I think, if I remember rightly, anyway, one of the burger chains promptly announced that all of its beef was going to be imported, which was obviously very damaging to the UK industry, a number of the supermarkets went out actively to promote English beef in their supermarkets. So I think that was quite an important attempt by the supermarkets to support UK farming.

  214. Of course, the price might have dropped at that time, might it not?
  (Dr Morris) Indeed; but it would have been quite easy for supermarkets to have followed the line of the burger chains, and they did not.

Chairman

  215. Dr Morris, it was also after our Committee announced it was going to look at the subject?
  (Dr Morris) I see. I was not aware of that, Chairman. They have done quite a lot of work, I think, on labelling, that is more in relation to pork, where there were major issues about pork being labelled as "British Pork", but the animals were not actually born in Britain; they did some, I think, helpful work there. And they have also, I understand, improved credit terms to some of the smaller suppliers. But we did not systematically look at this, this is just particular examples that I can recollect from the inquiry.

Mr Wiggin

  216. And the same sort of thing for processors; did you come across anything like that, helping the farmers?
  (Dr Morris) I think all I could say there is that, for supermarkets, it is a competitive market and they are always looking for an edge, and sometimes that is price, but sometimes it is marketing a slightly different product, and, to do that, they have to work closely with processors, and, indeed, increasingly, all the way down the chain. You have heard some of that this morning, and obviously it is a way of them improving their own profits and position, but it is a co-operative approach to processors and other suppliers.

  217. With all that in mind, and the particular size of the market share, do you think we are justified in continuing to build new supermarkets, or should we stop building supermarkets now?
  (Dr Morris) There is no doubt that there is a very substantial love affair between consumers and large supermarkets, I think that became very clear. We were concerned, a lot of evidence was put to us, that large supermarkets, typically on the ring-road of a town, were having very damaging effects on life, and indeed other stores in the centres of towns, and that clearly has happened. We would have been minded to intervene on that. However, two years before the inquiry, in 1996, there had been changes in the planning regime that were designed to try to deal with that, and it was clear, because there are long lags, long lead times, in planning, that the potentially beneficial effects of that could not yet have come through. But, essentially, what they were going to do was very much encourage town centre, or anyway not ring-road, developments on a smaller scale, but bringing some of the cost efficiencies of supermarkets to smaller towns and town centres; and in that way, I think, supermarkets may well develop without some of the damaging effects they have had to date on town centres, and indeed on transport problems as well.

Mr Caton

  218. Carrying on with the hypothesis that we are having a love affair with the large supermarkets, your consumer survey indicated a high degree of consumer satisfaction, as you have already mentioned, Dr Morris; but when the only comparison most consumers have is between one supermarket and another here in the United Kingdom, should we give very great weight to that sort of response?
  (Dr Morris) Some weight; but, certainly, my comments were not based only on that. Part of the survey addressed the issue of local shops, corner shops, and so on, and what consumers thought of those, and actually consumers were extraordinarily self-knowing in this, because many of them said that they regretted the decline of small, local shops, which, of course, to a considerable extent, had been brought about through the rise of supermarkets. But, equally, many of them recognise that the reason for it was because they very rarely went there; they typically did the week's shopping, the main shop, at weekends, quite often at the supermarket, and, yes, it was nice to be able to pop round the corner for a loaf of bread or a pint of milk when you have run out, but they knew they were not going to spend enough there actually to ensure the survival of many of them. So I think that they do see, certainly the survey confirmed this, supermarkets as providing them with immense choice and quality and service, and good value for money.

  219. I take the point, I think, that a lot of people would indicate that they find it very convenient to go to supermarkets, as compared with having to go to two or three different local shops, but I am wondering how much we know about how the consumer can make a judgement as to how much better supermarkets might be in providing them with things. In evidence last week, for instance, we were told that a dairy farmer receives slightly less than 20 pence for a litre of milk, and then we see it on the shelf at something like about 50 pence; now, perhaps you did this, did you put that sort of point to the people you surveyed, as consumers, to say, "Did you realise that the farm-gate price of this product," milk, or whatever it may be, "is this, and you are paying this much; are you concerned about that, or do you think you are getting a good deal?"?
  (Dr Morris) The answer is, we did not put that question, and I cannot be authoritative on this, but I would hazard a guess that the overwhelming majority of consumers do not have any idea of what, in effect, the price spread between retail prices and farm-gate prices is, nor do I think very many consumers would have the first notion of the length and complexity of the supply chain that is involved; after all, farming, I think, is less than 2 per cent of the workforce now, and by its nature it tends to be rural and dispersed. I think one or two papers have occasionally focused on this, but only in a rather desultory way. So I do not think they do have any idea of that.

 


 
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