Competition Commission verdict on Safeway acquisition

United Kingdom

On 26 September 2003, the Secretary of State for Trade and Industry gave her verdict on possible acquisitions of Safeway by a number of other supermarket groups. Safeway is currently the fourth largest grocery retailer in the UK, with 481 stores concentrated mainly in Scotland and the south-east of England.

A number of offers were made for Safeway in January 2003, initially by Morrisons, closely followed by Sainsbury, Asda, Tesco and a company owned by Philip Green and his family. All of these transactions except that relating to Philip Green were referred to the Competition Commission in March 2003.

The CC reported to the Secretary of State who on 26th September gave the go-ahead to Morrisons to proceed with its offer subject to certain conditions, while prohibiting Sainsburys, Asda and Tesco from acquiring Safeway. Morrisons' clearance to proceed is subject to it divesting one stop grocery stores in 48 locations in order to deal with competition issues.

The CC's report provides an insight into the competition authorities' current views on competition in the supermarket retail sector, particularly the issues of buyer power and supplier squeezing which were investigated in its previous monopoly report into supermarkets in October 2000. It also sheds light on the effectiveness (or not) of the supermarkets Code of Practice introduced as a result of the earlier monopoly report. The OFT is currently reviewing the effectiveness of the Code.

In the Safeway report, the CC assessed the competitive position of Safeway in the market for one stop shopping which is defined as grocery stores of 1,400m2 and above. The basic conclusion was that although Safeway was performing relatively badly its removal as an independent competitor would have a significant effect on market dynamics for the following reasons:

  • The number of retailers active in the one stop shopping market would be reduced - and this mattered because,
  • there were only 4 players currently in the market (Safeway, Asda, Tesco and Sainsbury) and
  • there were high barriers to new entry (e.g. planning restrictions).

The CC found that an acquisition by Sainsbury, Asda or Tesco would have given the acquirer excessive market power while also making it likely that competition in the one stop shopping market would lessen as supermarket groups followed each other's pricing and other policies to the detriment of the consumer.

The CC concluded that an acquisition of Safeway by Morrisons would have the advantage of maintaining a market with 4 active players and a combined Safeway/Morrison would be a much more effective competitor to the other three than Safeway on its own. On a local level however there were 48 localities in which Morrison would not be able to own both its own store and a Safeway store and would have to divest one or other together with 5 smaller stores where adverse effects would result.

The CC heard from many suppliers and concluded that suppliers' negotiating strength against each of the bidders for Safeway had weakened over the last 4 years especially against Asda and Tesco. By contrast however in other respects the larger suppliers considered that their overall relations with the retailers had improved.

The suppliers were specifically asked about the impact of the OFT Code of Practice. Most responses were to the effect that the Code had not improved their position or even had a slightly negative effect and "it needed to be given teeth if it was to be made effective and that because of its ambiguities it was a factor in causing the behaviour it was intended to curb."

The CC concluded that if Sainsbury, Asda or Tesco were to acquire Safeway, suppliers would be likely to find themselves in an even more difficult position than at present, while a Morrison acquisition would not have such pronounced effects due to there still being 4 national grocery retailers.

The CC noted that the Code did not appear to be working to protect suppliers and that because buyer power would increase as a result of the acquisition of Safeway, the situation would worsen for suppliers if the Code remained substantially in its present form. The CC's finding is important as it suggests that the OFT will need to consider strengthening the working of the Code if suppliers are to be properly protected.

For further information please contact Richard Taylor via email on [email protected] or by phone on +44 (0)20 7367 2108.