UK: Food wars - competition in the supermarket sector. (1 of 5)

UK: Food wars - competition in the supermarket sector. (1 of 5) - The bitterest fight among big supermarkets is over sites not prices. But soon the sites will run out. Shirley Skeel reports.

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Last Updated: 31 Aug 2010

The bitterest fight among big supermarkets is over sites not prices. But soon the sites will run out. Shirley Skeel reports.

Sainsbury's joint managing director Tom Vyner is such a likeable chap that it seems distasteful to suggest to him that not everyone thinks his big friendly stores are so wonderful. The fact that two Government bodies have already shown their members' own poor upbringing by doing just that makes it a little easier. That is until Vyner's two corporate minders, hunched over the table, hastily point out that no less than four inquiries had cleared the big food retailers of any wrongdoing.

Indeed they did. A 1981 Monopolies and Mergers Commission inquiry and a 1985 Office of Fair Trading inquiry both concluded that competition in food retailing was still strong. The OFT inquiry, however, outlined one limitation of its research as its two-week "snapshot" view of 20 product prices, which "may not be as accurate as a longer period of observation involving averaging of prices". In 1988 complaints of supermarket collusion on the price of baked beans sparked off an informal OFT inquiry. It found no evidence of price fixing to justify a full inquiry. And in February this year the OFT was unable to find any firm evidence that supermarkets had put pressure on manufacturers to stop supplying the new German discounter Aldi.

All the same, concern over both the muscle of the big supermarket chains and the amount of real price competition taking place continues. Conservative MP and Food and Drink Committee chairman David Ashby has commented publicly that "the fact that they are such a powerful oligopoly has to be kept under review", while Labour Party consumer affairs spokesman Nigel Griffiths is calling for a parliamentary investigation. Sir Gordon Borrie, director general of the OFT, has himself called for tougher investigative powers, although not pointing to any one business.

The charm of events at present is that we are heading towards a crunch that may throw up some new answers. For years now Britain's large supermarket chains, led by J Sainsbury, Tesco, Argyll (Safeway, Lo-Cost, Presto) and Asda have modestly told the world that their unrivalled profits in a £39 billion food market are only partly due to their own skills. The rest of the credit goes to their customers - discriminating women and men who have made it clear that price is only a part of what they want. Quality, range and convenience are, if anything, more important.

As a result, since the late 1970s price war retailers have poured resources into quality-conscious superstores. These were paid for by widening their own margins - adding value at the retail price end with new fresh and packaged foods and higher margin "own brands" and by pounding efficiency into the cost end. Bar-coded scanning came in, and retailers' warehouses were savagely reduced in number to expedite deliveries, with the effect, according to NFC Consulting Group head John Doran, that distribution costs have been slashed in half. The result: in 10 years retail net profit margins have risen from a range of 2.5-4% to 5-7.7%, double that in the United States and Europe, and easily the highest in the world. And - not to be forgotten - a lot of happy customers.

This rosy state of affairs is only blighted when one opens a trade journal to find retailers promised a 35% mark-up on a common pot scourer, or when figures appear showing an average price difference of only 4% between a UK store's "own label" tomato ketchup and a leading brand. In France it is 48%.

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