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
Credit:ivythesis.typepad.com
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