Investigating the UK retail grocery market

Introduction: This paper is an informal business report on the major trends,

opportunities, and threats faced by retail grocery market participants in the UK. It

discusses the structure of the market and the competing firms, competition law and the

roles of the Office of Fair Trading (OFT) and the Competition Commission in the

industry. It examines whether the OFT’s non referral of the Asda acquisition of Netto

to the Competition Commission was beneficial to the economy and all stakeholders.

Consumer spending in the UK is continuously impacted by household budgets,

unemployment , the banking crisis and credit availability, but the UK food and grocery

market remains robust, compared to other sectors. The market was worth 141.7 billion

pounds in 2008, which is an increase of 5.1% over 2007. Groceries represent the third

largest household expenditure in the UK, following housing and transport. UK grocery

stores are comprised of four sectors. Supermarket chains are stores selling a broad

range of grocery items and with a sales area of 3,000-25,000 square feet, while

superstores are those exceeding this sales area and also sell non-food items.

Convenience stores are those having a sales area of less than 3,000 square feet,

selling at least 8 different categories of grocery items and operating for long hours.

Traditional retail stores are those having a sales area of less than 3,000 feet and

cover news stands, green grocers, liquor stores and gas stations. The alternative

channels group covers a broad range of outlets like the internet or catalogue home

shopping, farmers’ and other such markets, and vending machines. The UK retail

grocery market is projected to expand at an average of 2.9% yearly over the next

five years.[1]

The oligopoly market form in which the market is dominated by a small number of

sellers is the prevailing pattern in the UK, as is usually the case in modern economies.

The few members in this group are interdependent of each other’s actions, with the

responses on strategic planning by other members always taken into consideration to

avoid internal conflict. New firms are hindered from easy entry into the industry by in-

placed barriers within this market form.[2] This is supported by the finding that sites for

new stores are becoming less, which in turn favors existing grocery stores. Four

supermarket chains have 75% market share of the retail grocery sector in the UK, with

the remainder comprised of hundreds of outlets. The market leader Tesco has a

sizeable margin of 30.9% market share, followed by Asda/Walmart with 17.2%,

Sainsbury’s with 15.7% and Morrison’s with 11.5%. Other supermarket chains include

Cooperative-Somerfield, Waitrose, Island and Aldi.[3]

The new trend in the UK grocery sector is discount retailing as practiced and led by the

German-owned chains Aldi and Lidl which entered the market in the 1990s. Discount

supermarket shopping is characterized by low priced items sold in smaller and relatively

uniform-sized stores that carry limited product ranges and predominantly private label

products. This group is growing fast and now accounts for 5.4% share in grocery

spending. Tesco entered discount retailing in 2008 and is now offering 700

discounter-style branded products. Each retailer generally concentrates on specific

market segments. Tesco offers economy and up-scale products to the middle market,

while Sainsbury’s is positioned slightly up-market of Tesco, and slightly down-market of

the latter are Asda/Walmart and Morrison’s. The most up-market of the leading chains

is Waitrose, while the price-focused outlets include Iceland, Aldi, Budgens, Netto and

Lidl. Town planning regulations in the UK have resulted in limited sites suitable for

supermarket chains and there is a move toward smaller stores sitting alongside

convenience store formats like gas stations. The UK’s major chains dominate the

private label market, which give them the opportunity for product diversification and

new revenue development.[4]

Tesco, Sainsbury’s, Asda and Waitrose allied with Ocado dominate the internet and

online grocery market in the UK, while a wide range of specialized retailers offer items

not always available in the major stores. Online food shopping is most popular with the

younger generation, families and more affluent consumers and has considerable

growth potential. The number of convenience stores affiliated with a symbol group is

on the rise in order to check the advance of major chains in the convenience sector.

Such players as Spar UK, Premier/Booker and Musgrove offer small retailers strong

marketing and branding, a broader range of products and more sophisticated supply

chain systems. The growth of the UK consumer’s taste for healthy, convenient and

ethnic foods and the UK government’s increasing promotion of healthy eating habits

and lifestyles have created a demand for quick meal solutions like ready meals or

ingredients and single snack portions, which retail grocery markets can readily fill.[5]

The Office of Fair Trading (OFT) of the UK is a non-ministerial government department

that acts as the UK’s economic regulator by enforcing both consumer protection and

competition law. Majority of the body’s work includes market analysis, consumer and

competition law enforcement, merger control, licensing and supervisory work and

advocacy.[6] The UK competition law which is impacted by both British and European

elements has the task of prohibiting practices restrictive of free trading and competition

between business entities, banning abuses by a dominating firm in a market or anti-

competitive practices such as predatory pricing, tying and price gouging, and

overseeing large corporation mergers and acquisitions, with the possible prohibition of

competition-threatening transactions.[7] The UK Competition Commission is also a non-

departmental body tasked with investigating mergers, markets and enquiries linked to

regulated industries under competition law in the UK to ensure healthy competition for

the benefit of companies, customers and the economy.[8] According to a 2007-08

report, the OFT has estimated that its work had saved 98 million pounds for consumers

during the period, but the body has also been criticized for its ineffective investigations

of supermarkets and oil companies among others.[9]

The OFT has given supermarket giant Asda the go signal for its 778 million-pound

takeover of budget retailer Netto in March 2011, and not referred the acquisition to the

Competition Commission. Asda will convert 147 Netto stores between May and the end

of the year, retain all Netto store colleagues and create an additional 1,500 jobs

including 430 jobs in Yorkshire and Humber to upgrade the stores’ service levels. The

chain would also retain the same prices of its bigger stores and expand the Netto

product range from 1,800 to 10,000 that will allow customers a full weekly shop. The

OFT required that Asda sell 47 of the original 194-strong Netto portfolio to provide

competition benefits to local shoppers.[10]

The OFT action of not referring the Asda acquisition to the Competition Commission

and of requiring Asda to sell 47 of the 194 Netto stores it acquired to rival supermarkets

was a one-size-fits-all approach, because while it was able to generally ensure free

competition in areas where Asda will be present, check possible abuses by a

dominating firm, and protect and upgrade the consumers’ interests in shopping, the

body failed to solve the possible problems at the local level. Based on two tests on the

Asda acquisition, OFT’s closure of higher-priced stores that are nearer and more

convenient to the people on the ground in favor of lower-priced stores a few miles away

from them affected older consumers, those without transport and those who are less

able to travel. Competition could also be greatly reduced in about one in four of the local

areas where stores overlap.[11]

While the economy and consumers are benefited by open competition, government

bodies at all levels have the responsibility of consulting local communities and people

on the ground on how national and local policies will impact them. It was the legal duty

of the OFT to refer the Asda acquisition to the Competition Commission for a 6-month

investigation because areas where consumers’ interests would be compromised had

not been solved.[12]

[1] Julie Vasquez-Nicholson, “United Kingdom – Retail Food Sector”, Global Agricultural Information Network, pdf, 2009, <http://gain.fas.usda.gov/Recent%20GAIN%20Publications/RETAIL%20FOOD%20SECTOR_London_United%20Kingdom_11-13-2009.pdf> [accessed 16 June 2011]

[2] “UK Retail Grocery Market”, Ivythesis.com, 2011, <http://www.ivythesis.com/samples/uk%20retail%20grocery%20market.htm> [accessed 16 May 2011]

[3] Julie Vasquez-Nicholson

[4] ibid

[5] ibid

[6] “Office of Fair Trading”, Wikipedia, 13 June 2011, <http://en.wikipedia.org/wiki/Office_of_Fair_Trading>

[accessed 16 June 2011]

[7] “United Kingdom Competition Law”, Wikipedia, 13 May 2011, <http://en.wikipedia.org/wiki/Office_of_Fair_Trading> [accessed 16 June 2011]

[8] “Competition Commission (United Kingdom)”, Wikipedia, 4 June 2011, <http://en.wikipedia.org/wiki/Non-departmental_public_body> [accessed 16 June 2011]

[9] “Office of Fair Trading”

[10] “Asda Gets Go-Ahead for 778 Million-Pound Takeover of Netto”, Yorkshire Post, 10 March 2011,

<http://www.yorkshirepost.co.uk/business/business-news/asda_gets_go_ahead_for_778m_takeover_of_netto_1_3162743> [accessed 17 June 2011]

[11] Dave Anderson, “Supermarket Acquisitions (Tyne and Wear)”, 7 February 2011,

<http://www.daveanderson.org.uk/110207supermarkets.htm> [accessed 17 June 2011]

[12] ibid

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