HC Deb 09 December 1998 vol 322 cc289-95

1 pm

Mr. Eric Martlew (Carlisle)

I am delighted to have been given a slot on a Wednesday morning, although I am a little concerned that the original title of the debate—competitiveness in the retail sector—was vague. I have had journalists and lobbyists ringing me up and asking me what the debate was about, and I think that the Minister was a little confused initially about what my concern was.

Apparently the confusion was caused by a problem of the House. I put in for a debate on the growing power of the supermarkets and the threat that that poses to the consumer. Unfortunately, the Table Office said that the rules of the House would not allow that. Perhaps the Modernisation Committee could look into that at some time in the future.

Overcharging by British supermarkets is nothing new. As far back as 1991, when I was a member of the Agriculture Select Committee, I was part of a high-profile campaign to reduce the price of food in British supermarkets. The campaign was led by The Sunday Times, and both sides of the Chamber were involved in the debate. We had some success: soon after our campaign began, a price war broke out. But then, as these things happen, peace was soon declared.

Seven years ago, we had the highest prices for food in western Europe. Today, we have the highest prices for food in western Europe. So nothing has changed. In reality, things have got worse. The supermarkets try to bamboozle people by introducing gimmicks such as loyalty cards. They charge customers inflated prices, then give them back a pittance in tokens that have to be spent in the supermarket. As a spin-off from loyalty cards, the supermarkets obtain great knowledge of the buying pattern of customers, and people get junk mail through their doors as a result.

I was pleased that, on 30 July this year, the Office of Fair Trading announced that it would look into food prices. I am sure that they will endorse my claim that supermarket companies are not playing fair with the consumer or the supplier. I was led to believe that the report would be out by the end of this year, but I understand that, as a result of public pressure about a detailed report, it is not likely to be available then. Perhaps the Minister can clarify when we are likely to receive the report.

May we now examine the situation in which we find ourselves, especially here in England? There are 3,200 supermarkets. One in three are called superstores, which are premises of more than 25,000 sq ft of selling space. Four companies dominate the market. They have 60 per cent. of the market and 83 per cent. of the superstores. The companies are Tesco, Sainsbury, Asda and Safeway. The development of supermarkets in the 1960s and 1970s killed off the smaller shops, and in the 1980s and 1990s the supermarkets are giving way to the superstores, many of them in out-of-town locations.

The concentration of power in a small number of retailers has given rise to exploitation in various ways. They have a dominance in the market which enables the retailers to negotiate large discounts from the food manufacturers and suppliers. No food company in Britain can afford not to do business with the big chains. As the British farmers know to their cost, the discounts are often not passed on to the customer.

The supermarkets use special offers, whereby they sell products at a very cheap price. By the time the customers have been round the supermarket, they have paid for the cheap price two and three times over. Superstores tend to be on their own site. There is no competition on that site, so people buy the product in that superstore or not at all.

Supermarkets have now developed their own-label brands, which many people think is fair enough. However, they are not all a plus factor. They mean that the retailers have a conflict of interest. They are agents for a manufacturer, yet they are competitors to the manufacturer as well. That has led in many areas to fairly well-known secondary brands not finding a place on the supermarket shelves and disappearing altogether, thereby reducing customer choice. To quote a publication from the British Brands Group: the strength of private label has altered the trading relationship between the manufacturer and the retailer—the trading relationship is no longer equal—the retailers possessing a significant competitive edge". The British Brands Group is made up of many very successful, very large companies, including Unilever, Procter and Gamble, Mars, Nestle and Kellogg. If they are saying that the retailers have an edge over them, the customer has a real problem.

There is also the problem of look-alikes. This is where own-label products masquerade as a product very similar to a well-known brand. The customer may take it by mistake or believe that it is produced by the same manufacturer and therefore that it is good but a few pence cheaper. In reality, few look-alikes are produced by the manufacturer of the branded goods. Again, customers are being misled. In the long term, customer choice will be reduced. Companies will not invest in new products if they believe that their ideas will be copied and they will not receive the payback.

There is limited competition between the supermarkets. There is undisputed evidence that, while the big four have seen off the smaller competitor, they will not engage in true price competition among themselves. In a recent survey by The Grocer magazine of 33 articles, half were identically priced in all the shops. The rest differed by only a few pence.

Dan Norris (Wansdyke)

Will my hon. Friend explain why he believes that there is no competition between the big four companies? Is it profiteering? It is greed? What is the motive?

Mr. Martlew

My hon. Friend will have to listen to the rest of my speech for the answer.

The price of a popular brand, Heinz tomato ketchup, was identical in Asda, Tesco, Sainsbury's and Safeway. There is no competition whatever.

Not only is there little competition among the British supermarkets, but the consumer is paying over the odds in comparison with Europe. A recent survey by The Sunday Times compared Tesco prices to those in Europe. The figures do not make happy reading. There were 22 items in the shopping basket. In the United Kingdom, the cost was £81.59. In Holland it was £49.55, in Belgium it was £50.67, and in Italy it was £60.20. The survey showed that the prices of many popular foodstuffs were at least 40 per cent. higher in the United Kingdom than in America or on the continent. Even when Tesco did its own survey, the prices were still higher than in the majority of European countries.

It is interesting to note that, while prices to farmers and food manufacturers have fallen in the past 12 months, the price of food in British shops has risen by 1.6 per cent. So food costs are higher in the United Kingdom, and supermarket profits are higher. Supermarket profits are about 6 per cent. in the United Kingdom, about 2.6 per cent. in France, and about 2 per cent. in America. So profits in the United States are a third of those in the United Kingdom. Charging higher prices to consumers and paying lower prices to the supplier means that there is only one winner. The statistics prove that both consumer and supplier are being systematically exploited.

The crisis in British farming is well documented, but I want to draw the House's attention to one or two points. Andrew Dare of Milk Marque told me yesterday that, four years ago, 68 per cent. of the price of a pinta went to the farmer; now, that percentage is down to 56 per cent. The problems are similar in respect of pig meat: prices paid to farmers have plummeted, yet supermarket prices have hardly decreased. The prices paid to sheep farmers are at their lowest for 20 years, but supermarket shoppers would hardly notice the difference.

The supermarkets are not passing on cost reductions to the consumer, and the price differential between consumer and supplier is huge. I accept that there are middle-man costs—for example, transport, abattoir and butchering costs—which must be paid, but the chief suspects for capitalising on and exploiting the situation must be the supermarkets. I was pleased when the Office of Fair Trading decided to investigate the excessive profits of the big four, but already a report commissioned by the OFT has highlighted the fact that the big four are using their dominance to extract discounts from suppliers that are used to swell their coffers, instead of being passed on to the consumer in the form of savings.

The case I have made today means that the Government must take action. The supermarkets' immense economic power is a growing threat to the consumer, not a benefit. People talk about the price of petrol, but the proportion of the family budget spent in supermarkets is probably second only to housing costs.

The fear is that supermarkets will increase their stranglehold by expanding in other sectors, such as pharmaceuticals, banking and insurance—I understand that Tesco might even start to sell new cars. What is to be done? We cannot expect the supermarkets to curb their own appetites, because that is not in the nature of the beasts: they are profit-making organisations, and they will exploit their position as best they can. Therefore, the Government must act.

There must be no more mergers or takeovers by the big four. I understand that a merger between Safeway and Asda is being considered. The Government should tell them that that is not on—we do not want any increase in the dominant market share of the big four.

Next, we must consider the problem as it affects regions or cities. If a particular supermarket chain has several stores in an area, to the extent that it dominates the area, we should follow the example set by the Monopolies and Mergers Commission when it investigated the brewers.

When it was decided that one chain had too many pubs in an area, it was told to sell off some to a competitor. That is what needs to be done with some supermarket outlets.

Certain supermarket practices described in the recent "Panorama" programme should be outlawed. I shall give only one example, so that the Minister has time to reply. A supermarket company tells a manufacturer that it must buy its packaging material from company X, or the supermarket will not take the product. The manufacturer could probably buy cheaper packaging from company Y, but company X gives a kickback to the supermarket. That cannot be right, and must be stopped.

The main challenge facing the Government is to ensure that the supermarket companies compete on price, even though, in an ideal world, we would not start with four big companies whose growth we were trying to restrict. The companies set up a price watch system to check prices in other supermarkets, but not so that prices can be kept low; instead, they price their goods similarly to other supermarkets in the area, so that there is no competition or price war. That cannot be right.

We must find a way of monitoring prices, so that we can tell when something is wrong and step in to ensure free competition. The supermarket bosses are too clever to go into a big room and hammer out a cartel agreement; instead, they use the price watch procedure to achieve the same results. We have to represent the customer. The Department of Trade and Industry has to tell supermarkets that there must be true and fair competition, so that the housewives of the United Kingdom can benefit from cheaper prices.

Mr. Colin Breed (South-East Cornwall)

Does the hon. Gentleman agree that the four supermarket companies to which he refers are complex monopolies? Each company consists of a huge number of single-store local monopolies, and therein lies the problem: each supermarket is, in itself, a local monopoly—a fact that is not recognised under current OFT rules.

Mr. Martlew

I covered that point when I spoke about superstores. They are the sole occupants of a site, to which the consumer has driven three or four miles. There is no competition nearby—probably the nearest competitor store is on the other side of the city—so the consumer buys from the superstore. The DTI must now give some guidance to the companies, and tell them, "The game is up. We know what you are doing, and it is going to stop."

1.17 pm
The Minister for Competition and Consumer Affairs (Dr. Kim Howells)

I congratulate my hon. Friend the Member for Carlisle (Mr. Martlew) on having raised an important subject. It currently occupies a great deal of space in our newspapers, and rightly so, because it has an impact on every family in the country.

I find it amazing that, until the hon. Member for South Holland and The Deepings (Mr. Hayes) arrived a few minutes ago, there was not a single Conservative Member, Plaid Cymru Member, or Scottish National party Member in the Chamber, despite the fact that they all paint themselves as the farmers' friends. I do not know about theirs, but my front room in Pontypridd has been full of farmers complaining about the buying power of supermarkets. If Opposition Members were that concerned about the issue, they would have turned up for a debate on a subject that we rarely have the opportunity to discuss.

Mr. John Hayes (South Holland and The Deepings)

That is why I am here.

Dr. Howells

I am glad that one Conservative Member is here—that is more than usually show up for debates such as these.

In no uncertain terms, my hon. Friend has emphasised the image of supermarket chains as market tyrants. I shall try to deal with the subject from the point of view of the Department of Trade and Industry. He has described how the big four—Tesco, Sainsbury, Asda and Safeway—have been able to dominate the buying market, especially the market for farm and primary products, and how they have moved into other areas.

My hon. Friend knows as well as I do that others would paint the supermarkets, especially the big four, as market heroes, citing as evidence their ventures into selling designer goods at low prices. Recently, the chief executive of one chain asked me, "Where is the sense in my being able to go to New York and buy a pair of top-range Levi Strauss jeans for $30 or $40, when they are sold in the high-street specialist outlets in this country for £55 a pair? There is something wrong with that." His chain is now selling those designer jeans at £30 a pair, and I am glad about that.

I glad that the supermarkets are pushing the edges of the envelope by exploiting the possibilities offered by so-called parallel or grey imports—terrible phrases, but unavoidable. They are introducing real competition into the markets for such goods. The high streets are no nirvana for shoppers. I am sure that an enormous amount of careful price calculation goes on—I was going to refer to price fixing, but as a Minister I can no longer use such terms.

Retailers are looking carefully at what the market can bear. Companies trading in well-known branded images and products can make a good profit in countries such as Bulgaria. However, those of us who are very naive and have simple views about these matters wonder why UK companies can buy those products in Bulgaria and sell them in this country—whether in the supermarkets or on the high street—at prices lower than those in retail outlets, and still make a profit. One wonders about the profit margin of those retailers that pitch the original price in this country. We must ask some serious questions, and my hon. Friend can rest assured that, as the new Minister for Competition and Consumer Affairs, I shall ask those questions every day. I want to uncover the real situation.

My hon. Friend asked about comparisons between United Kingdom prices and those across Europe and the United States. The DTI does not have a section that deals with pricing issues. I was amazed—I suppose I should not say that as a Minister who speaks on behalf of the DTI. I was told that such matters were too complex to examine, but I think it is about time that we had that information. I open newspapers every day and see price comparisons, some of which my hon. Friend mentioned. Where is my database that will allow me, as a Minister, to say what is and is not true?

The excellent officials in my Department are beginning to construct a prices database so that we will know where we are. Price information is very important for families in this country. I have seen articles and editorials in the Sunday Times that refer to "rip-off Britain". I am very glad that those reports have been published. Someone should try to compare the prices of goods in the United States, France or Canada with those in this country. That is an excellent policy for newspapers to adopt, and I shall respond as best I can.

My hon. Friend and the hon. Member for South-East Cornwall (Mr. Breed) have raised some interesting and important points in this debate. The definition of the boundary or extent of a market is vital. My hon. Friend's constituency of Carlisle is very much like many constituencies in Wales: it is a mix of urban and rural areas. It is easy for supermarkets to dominate a particular region or locality without having a dominant share of the UK market. We must examine that situation carefully, because dominance can easily distort markets, in terms of prices or selling power and so on.

I am extraordinarily glad that the right hon. Member for Kensington and Chelsea (Mr. Clark), and the hon. Members for Salisbury (Mr. Key) and for Mid-Norfolk (Mr. Simpson)—three very distinguished members of the Conservative party—have just entered the Chamber. It is excellent to see the hon. Member for Salisbury, for whom I have great regard, on the Front Bench. That is welcome news, because this is an important debate.

We are determined to ensure that there is transparency of pricing for all, whether it is the farmer trying to sell his farm produce to supermarket chains or the shopper trying to secure the best bargain. I think that that is what my hon. Friend is seeking. There are many variables involved in the selling equation. There is no question that supermarkets have revolutionised retailing. I will admit from the Dispatch Box that I quite enjoy shopping at my local Tesco. I like the fact that I can drive there and do my shopping for the week or the fortnight. There is wide choice inside the supermarket, and it is convenient. Unfortunately, the appalling car parking situation in my home town makes it difficult to shop in the town centre.

Mr. Breed

Does the Minister accept that, although dominance in the marketplace is not illegal as such, the abuse of that dominance is a concern? Companies may dominate the market, so long as they trade fairly.

Dr. Howells

The hon. Gentleman has put his finger on the problem. We must discover whether this country's great supermarket chains are abusing their dominant positions.

My hon. Friend mentioned that the Director General of Fair Trading, Mr. John Bridgeman, is currently examining this matter. His team at the Office of Fair Trading is investigating the profitability of the major supermarkets in the grocery sector, focusing on whether competition between the majors has been distorted to the detriment of consumers. Mr. Bridgeman is due to report early in the new year, and I am sure that all hon. Members are looking forward to those findings.

In the meantime, what evidence do we have of abuses of market power? It depends where we look. The farmers who were in my front room complaining about the situation will tell us that, yes, the market is being distorted and abused. We approached Tesco and pointed out that, although the current market price of a steer is £490, the shelf prices of the products derived from that steer total £1,124. We asked where that extra cost had come from.

The supermarket told me that it costs £634 to process the steer into saleable meat. It gave us a breakdown of that sum. It said that 63 per cent. of the steer is waste and must be thrown away, and that the remaining 37 per cent. of the steer must sell for an average of £5.13 per kilogram—or £2.33 per pound for those of us who still use the imperial system—in order to cover costs. Tesco also told us that £4.83 per kilogram is its average selling price, so it is making a 30p per kilogram loss on beef sales. [Interruption.] Hon. Members are groaning—and I can understand why. Those figures should be examined in light of the declared profits of some supermarket chains, and the OFT, under John Bridgeman, will do just that.

I do not think that it is easy to compare the profitability of United Kingdom supermarket companies. A report published this week by Verdict Research claims that there is no easy way of making that comparison. The report states:

Verdict does not believe that Britain's grocers are overcharging … the market is too highly competitive for that to happen and competition is intensifying. The average operating profit margin of the four leading grocers has fallen by nearly one fifth, from 7.2 per cent. in 1992/93 to 6 per cent. in 1997/98. British grocers are not more profitable than their Continental counterparts once factors like longer European supplier payment terms, and the preponderance of leasehold property, are taken into account. UK retailers are all quoted and have traditionally sought to maximise their profitability to attract investors. Most Continental retailers are privately owned and minimise their reported profits in order to pay as little tax as possible. This helps give the impression that they are giving customers a much better deal than British companies. My hon. Friend raised many issues in his short and very pertinent speech. Although we recognise the extra choice, convenience and lower prices that supermarkets have provided for consumers in the past 20 years, and although we welcome the entry of supermarkets into the retailing of non-food goods such as clothing and electrical products—which will strengthen competition in those sectors—I stress that, as Minister for Competition and Consumer Affairs, I shall continue to champion the rights of consumers. I welcome the OFT inquiry into the profitability of major supermarkets in the grocery sector. We will ensure that, at long last, the DTI becomes the consumers' champion.