Will the latest competition probe hurt supermarkets?

There are few things that reflect a nation's character better than their spending habits. For the British, this means a love of spending "cold hard cash" in supermarkets, says The Times. With groceries now making up almost half of all retail sales and about 13% of all household expenditure, it's a huge market. And after its rapid expansion over the last decade or so, it is Tesco that is way ahead of the pack.

The group now has more than 30% of the £120bn groceries market, with Asda, Morrisons and Sainsbury's controlling another 45% between them (Asda and Sainsbury's are neck-and-neck at 16.1% in the four weeks to 26 February, according to industry figures). But with all this spending concentrated in so few hands, it is "inevitable" that the supermarkets have been scrutinised in recent times.

For years small shopkeepers have been fighting a "losing battle", says Julia Finch in The Guardian. But it is pressure from a number of small retailer bodies that resulted in last week's decision by the Office of Fair Trading (OFT) to refer the industry to the Competition Commission for a full inquiry into the dominance of the big players.

After a five-month investigation, the OFT said that the power of the majors could "distort competition" by shutting out smaller competitors. If the Competition Commission agrees, it could result in the big grocers being forced to abandon some of their expansion plans, or sell off stores. 

It will be the third time in six years that the watchdogs have looked into the big supermarkets. And it is barely six months since the OFT decided not to refer them to the Competition Commission, says Lex in the FT. While issues such as Tesco's landbank are worth examining, other concerns, such as below-cost selling, can "benefit consumers" as much as harm them.

Even if evidence is found that consumers are suffering, the OFT itself says that it will find it difficult to remedy the situation. Changes in the planning regulations are the most likely outcome, but putting a brake on the dynamism of the UK supermarket sector "cannot possibly be good" for the shoppers themselves, who have enjoyed a 7.3% fall in food prices over the past five years.

For a sign of things to come, it's worth taking a look at the US. With Wal-Mart dominant, the way Americans shop for groceries has changed over the past ten years, says Jonathan Birchall in the FT. A "mix" of shopping destinations is now taking the place of the traditional single weekly trip to the local supermarket, in a process known as "localisation".

Basic products are bought at the cheapest prices at supermarkets, but shoppers prefer smaller, more locally based stores for their perishable goods. This trend is behind Tesco's plans to start up a chain of "convenience" stores on the US west coast next year. Once established in the US, the pattern could be repeated in the UK.

However, there is a trend towards "cheap and cheerful" shopping, says Liz Morrell in Retail Week. European food discounters such as Netto, Lidl and Aldi are growing fast in the UK and are increasingly competing with the supermarkets. Currently, the three discounters have an overall market share of 5%, with Aldi the leader at 2.3% and targeting 10%.Market trends in Germany and Denmark, where the discounters are dominant, might well show the way ahead.

How the analysts rate the retailers

Will regulators take action against the dominance of the big supermarket chains? James Collins and Ingrid Azoulay at broker Deutsche Bank doubt the industry has changed enough to justify it. They say the industry remains "highly competitive" and that the Competition Commission will conclude that it isn't working against customers' interests.

The Office of Fair Trading's concerns are all factors from which Tesco "probably benefits", given its high market share in some areas and large landbank of development sites, and so it probably has more to lose as a result of intervention. But Collins and Azoulay say there is "little risk" of the supermarket's expansion being slowed meaningfully.

So they keep their buy' recommendation on Tesco (TSCO, 332.8p) shares. They don't think there will be enough change to help Sainsbury (SBRY, 324.8p) or Morrison (MRW, 213.8p) "significantly" and so retain their sell' and hold' recommendations on them. (Asda is unrated as it is a unit of US firm Wal-Mart.)

Other City analysts think that the referral will harm Tesco more than its rivals, says Matthew Goodman in The Sunday Times. Jonathan Pritchard, retail analyst at Oriel Securities, says it will be "good" for Sainsbury and Morrison. He rates the two firms a buy', but recommends clients sell Tesco shares. The market has had a huge "love affair" with Tesco, but the momentum in the share price will suffer from bad news flow.