Why Britain loves to hate Tesco

How big is Tesco?

Huge. It has close to one third of the £95bn food and household goods retail market. That share is gradually increasing, despite already being about the same as its two nearest rivals put together: J Sainsbury and Asda each have close to 16%. Most people already know the much-quoted statistic that one pound in every eight spent in UK retailers is spent in Tesco. In fact, its position is even stronger than that. In the six months to August, boosted by warm weather and the football World Cup, Tesco took £17.4bn from Britain's shoppers. That's roughly £1 in every £7 spent or £1,117 every second.

Moreover, Tesco's growth (it opens an average of two new UK stores a week) is strongly driven by its expansion into everything from clothing to DVDs and even financial services. Overall, non-food sales now account for fully one-fifth of all sales, with clothing sales up 19% in the last six months and consumer electronics up 36%. Tesco is also extremely profitable. Earlier this month it announced half-year profits of more than £1bn, putting it on track to make record full-year profits of £2.5bn, up from £2.2bn last year.

Why is Tesco's success a problem?

Plenty of people would say that it's not. For starters, Tesco's 1,900 outlets make it the UK's biggest employer (except for the state), providing work for some 250,000 people. Nor is it a problem for Tesco shareholders, who have seen the share price rise by 18% over the past five years. What's more, free-market economists would argue that the high level of consolidation in the UK grocery sector, combined with vicious competition, has been good for consumers. The supermarkets are one of the most successful sectors of the UK economy and should take much of the credit for falling consumer prices.

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Are prices really lower than they were?

Yes. Government data shows that since 1987 the real price of food is down by a fifth and that of clothes by one half. From this perspective, low-cost supermarkets provide a vital social function. First, they disproportionately help the poor, for whom food bills eat up a relatively big chunk of income. Second, they are at the forefront of forcing manufacturers to improve labelling and in promoting healthy eating in response to changing consumer tastes. And all this without making excessive profits: £2.2bn sounds a lot, but it's just 3p on every pound spent in Tesco.

So what do Tesco's critics say?

That its aggressive pricing ruins the character of town centres by forcing long-established shops out of business, that it abuses its power by demanding crippling terms from suppliers, and that it uses unfair tactics such as land banking' (buying up potential store sites to stop competitors developing them) to stifle competition. Over the past decade the Office of Fair Trading (OFT) has kept an eye on the sector. Twice in the last seven years it has ordered the Competition Commission to investigate. In May, the OFT again asked for a full inquiry on the grounds that much has changed since the earlier one in 2000.

What's changed?

Three main things, says the OFT. First, in the past regulators have treated the supermarket convenience-store sectors as separate markets. But recently, the big four (Tesco, Asda, Sainsbury and William Morrison) have moved into the convenience sector with such a vengeance that the OFT thinks the two-market approach is out of date. It's especially worried about below-cost selling and "price flexing"; that is, having different prices in different stores depending on what local markets can bear. Second, increased consolidation since 2000 means the big players are even more powerful than they were. Third, the OFT says it has found new evidence of unfair practices when it comes to how supermarkets acquire and develop land.

What kinds of unfair practices'?

In general terms, the OFT thinks that the current planning system restricts or distorts competition by acting as a costly barrier to new entrants. If the Commission's inquiry agrees with this view, it implies that root-and-branch reform of the system is needed. More specifically, the OFT is worried that

the supermarkets' so-called land banks are harmful and anti-competitive. Their referral document details some 319 sites owned by the big four an amazing 58% of them by Tesco that have not been developed, and also criticises the use of restrictive covenants' under which supermarkets sell land on condition that the buyer cannot themselves build or allow a supermarket.

Tesco denies that land banking exists and says it merely needs to buy up potential sites a long time in advance for planning purposes. However, if the Commission finds that its practices are anti-competitive, it could be forced to sell those sites.

Tesco's charm offensive

With even David Cameron jumping on the anti-Tesco bandwagon in a speech earlier this year he claimed that its aggressive local pricing risks bringing the whole system of free-market capitalism into disrepute the giant retailer is on a mission to win friends and influence people. In April, chief executive Sir Terry Leahy unveiled a £100m fund to research green sources of energy for its 1,900 stores. In May, he launched a ten-point "good neighbour" initiative a range of community-minded measures, including bespoke TescoExpress store fronts that match their environments, a logistics overhaul to cut deliveries and new biodegradable bags. It remains to be seen whether all this will impress the Competition Commission.

Recommended further reading:

If you're thinking of investing in Tesco or any other supermarket, read Paul Hill's article: leave expensive supermarkets on the shelf. For more on the OFT's investigation, see: Will the latest competition probe hurt supermarkets.