Competition Commission recommendations
October 2009
Richard Lemon, Associate, considers the implications of the Competition
Commission’s recommendations More than three years since the activities of the UK’s major supermarkets were referred to the Competition Commission for investigation, Richard Lemon considers the implications of the Commission’s recommendations for retail planning and the emerging PPS4.
In May 2006, the Office of Fair Trading referred the supply of groceries by retailers in the UK to the Competition Commission. Since then, the checkouts have continued to ring and new supermarket openings have continued apace. But now, more than three years later, the Commission’s work has drawn to a close, with a reaffirmation in early October 2009 of its recommendation that a ‘competition test’ is introduced.
In the meantime, CLG published draft PPS4. This new planning policy statement for England deals with the whole range of ‘economic development’ uses, including retail and leisure alongside office, industrial and distribution uses. CLG pushed forward with consultation on the new PPS before the Competition Commission’s final decision on the competition test.
It would be easy to draw the conclusion that the Commission has been resting on its laurels whilst CLG has sought to move the town centre retail planning agenda forward. In fact, it has moved admirably quickly given the amount of information it has dealt with. By October 2007, the Commission had considered over 550 submissions, held 65 hearings, undertaken three separate surveys, analysed existing data and research, collected a dataset of 14,000 grocery stores and published 26 working papers. All of this informed an interim report published that month; a final report followed in April 2008.
The findings of the interim report were damning, with the Commission concluding that a lack of competition in some local markets not only disadvantages consumers, but also allows the major grocery retailers to weaken their offer to consumers nationally. It went on to conclude that some practices, such as restrictive covenants, mean that competition is not as effective as it could be in a number of areas.
Planning did not escape the Commission’s criticism. The Commission expressed concern that on the one hand the planning system aims to promote public interest objectives, such as the development of existing town centres, but on the other hand retail planning policy acts as a barrier to entry or expansion by limiting construction of new stores on out-of-centre or edge-of-centre sites, and by imposing costs and risks on smaller retailers and potential entrants.
The Commission floated the idea of changes to the planning system that would provide greater opportunities for developments on the edge of town centres, while maintaining constraints on out-of-town developments. More controversially, it suggested the introduction of a competition test that would allow the existing local position of a grocery retailer to be taken into account in planning decisions.
In April 2008 the final report was published, and it once again concluded that planning acts as a barrier to the entry and expansion of grocery retailers in some local markets. This and other concerns led the Commission to conclude that consumers are often presented with a more limited choice of stores than would otherwise be the case, together with a poorer retail offer at mid-sized and larger grocery stores than they might otherwise receive.
That planning and planners intervene in the market is hardly earth-shattering news for those of us working in the profession. It is reassuring that the Commission recognises that the resulting barrier to entry is simply a by-product of fulfilling the broad objectives for which planning is intended. With that in mind, the Commission decided not to recommend any changes to the planning system that might allow for more out of centre development, fearing that interfering in an area of policy that has specific and well-defined social objectives would have ‘unintended consequences’.
The well-publicised exception is a proposed ‘competition test’, to which planning applications for the development of grocery stores with a net sales area in excess of 1000sq m (or applications for extensions which would result in a net sales area of 1000sq m) would be subject.
Under the proposed arrangements, applications would pass the test if, within the area bounded by a ten-minute drive-time of the development site:
- the grocery retailer was a new entrant to that area, or
- the total number of fascias in that area was four or more, or
- the total number of fascias in that area was three or fewer and the relevant grocery retailer would operate less than 60% of groceries sales area (including the new store).
Crucially, if a scheme failed the test it would still be open to an LPA to grant permission for a development in two circumstances:
- Where it would produce benefits for the local area that would clearly outweigh the disadvantages of an area becoming highly concentrated in terms of grocery retailing.
- Where a development would not take place without the involvement of a large grocery retailer that would be prevented by the test.
The proposed test was welcomed by some, including Marks & Spencer, Waitrose and the Association of Convenience Stores. Asda also expressed support, claiming that the test would widen the choice of supermarkets available to consumers and create thousands of much needed jobs.
Tesco, in contrast, argued that the proposed test is unlawful and would not remedy the adverse effect on competition, and appealed to the Competition Appeal Tribunal. The Tribunal upheld Tesco’s appeal, concluding that the Commission had failed to properly assess the economic costs of the test, or to address proportionality and effectiveness. But the Tribunal left the door open for the Commission to reconsider its proposals. Following a period of further analysis on the benefits and costs of the test, the Commission provisionally concluded in July 2009 that the test is likely to have a positive effect for consumers, albeit over a period of time, by ensuring that they benefit from greater competition and choice between retailers in their local areas.
Unsurprisingly Tesco expressed disappointment at the provisional decision. Lucy Neville Rolfe, Executive Director at Tesco, argued that the test will deter investment in the areas that need it most, going on to say that the Commission has assumed it is easy to find sites and there would be no delays in attracting replacement developments in cases where the test is failed.
Whilst Neville Rolfe was correct to suggest that identifying sites can be challenging, the Commission refuted her suggestion that there would be delays in attracting replacement developments in cases where the test is failed. It rightly argues in its final recommendation that there will be a period of time before the test comes into force which will give grocery retailers the opportunity to adapt their commercial strategies. First, they will have the opportunity to dispose of any existing sites in their ownership on which a proposed grocery store would fail the competition test, or to redouble their efforts to secure planning permission for a new store on the site. Of course, retailers may seek to land bank sites in an effort to restrict competitors’ ability to enter the market, though in its earlier investigation the Commission found little evidence of this practice. Second, retailers will be able to alter their search strategy for new sites. Retailers are unlikely to purchase sites prior to having applied the competition test themselves: they will only submit themselves to the formal test if they conclude they have a strong prospect of success.
Although Tesco’s concerns were rebutted, the Commission did take on board the concerns of Sainsbury’s and Morrisons. Sainsbury’s said that the Commission had overstated the sensitivity of retail stores’ revenues and profitability to rivals’ extensions; Morrisons said that small extensions would not impact on competitors’ development plans. With that in mind, the Commission concluded in its final recommendation that the proposed test should be modified to allow all retailers to make small extensions to stores of up to 300sq m of groceries sales area, provided that the store in question has not been extended in the previous five years.
The Commission has now formally recommended that CLG takes the necessary steps to implement the test. The same recommendation has been made to the Scottish Executive, the Welsh Assembly Government and the Northern Ireland Executive.
So what will all this mean for the retail sector? Perhaps most importantly, there may be a greater focus on smaller scale store formats by Sainsbury’s and Tesco. Lidl, Aldi, Marks & Spencer and the Co-operative Group may also be able to intensify their expansion programmes, given that they operate smaller format stores which are less likely to fail the competition test. In short, competition may intensify in the small- and medium-size foodstore market. Moreover, grocery retailers may become more innovative: Waitrose, for example, has already announced plans to sell its food in Boots stores.
There are three other possible responses from retailers:
- The larger operators are increasingly likely to drive sales through extensions to stores for the sale of non-grocery goods. This will be in circumstances where they would fail the test if increasing the groceries floorspace would lead to them holding 60% of groceries sales area in the local market. These stores are likely to increasingly become ‘one stop shops’, selling a wide range of goods, leading consumers to undertake much of their shopping under one roof, rather than at smaller stores and at complementary comparison goods stores, with a consequent impact on town centre vitality and viability. This remains one of the key unresolved issues in retail planning. The otherwise comprehensive Good Practice Guide on Need, Impact and the Sequential Approach, recently prepared on behalf of CLG, makes only brief reference to the need, or otherwise, for grocery retailers to consider the disaggregation of floorspace.
- There is likely to be a greater focus on additional, wider benefits, with retailers seeking to convince local planning authorities that, even if a proposed development fails the competition test, its wider benefits, such as the regeneration of an area through the development of a new store, will outweigh the possible negative impact of a concentration of retailers in a local market.
- Retailers may consider operating different fascias, in order to avoid being subject to the test. This seems an unlikely response, however, given the importance of building a brand and the cost implication of developing and delivering to stores an alternative own brand range.
It remains to be seen whether this will mean a third draft of the new PPS4 in England, or else its publication and then early replacement. In Scotland, the remaining part of a consolidated SPP, which will address retail and town centres, is expected within the next few months, but its publication could be delayed by the proposed test. Further change will be required in Wales, adding to or replacing the MIPPS and TAN already addressing retail uses in the Principality, and a replacement draft PPS5 is likely to be needed in Northern Ireland.
Grocery store operators, retail planners and town centre users alike can look ahead to continued uncertainty. The future of retail planning is far from settled.
Richard Lemon is an Associate at Roger Tym & Partners
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