BRITISH COMMISSION RULES ON FOOD RETAILER PROFITS

JAMES FALLON

LONDON -- Britain's major food retailers breathed a collective sigh of relief after the government's antitrust authorities found limited evidence the companies were making excessive profits.

However, the government's Competition Commission didn't completely exonerate the industry -- it said the sector operates in two "complex monopolies" involving the pricing of groceries and the relationship between food retailers and their suppliers. The commission plans to discuss several more issues with retailers and manufacturers in the months ahead before deciding whether to take any action.

Despite the commission's warning, major food retailers claimed its statements eliminated any suspicions they were colluding to keep prices and margins high.

"This represents a recognition by the commission of the reality we experience everyday -- intense competition that benefits shoppers," said Terry Leahy, chief executive of the United Kingdom's largest food retailer, Tesco, Cheshunt, England.

David Bremner, managing director of Sainsbury's Supermarkets, here said the well-publicized -- and government-backed -- campaign against "Rip-Off Britain" was always misguided. "We have always maintained that value is a complex mix of quality, choice, service and price," he said in a statement. "We applaud the commission's recognition of this mix and note in particular 'high levels of consumer satisfaction' with all U.K. supermarkets."

The commission talked to all the main food retailers -- Tesco; J. Sainsbury's; Asda (now part of Wal-Mart), Leeds, England; Safeway, Cheshunt, England, and Wm. Morrison, Bradford, England -- as well as 400 suppliers and 50 local government authorities.

It cleared 19 retailers -- including such chains as Aldi, Marks & Spencer, Iceland Frozen Foods, Netto and Lidl -- of any behavior that might operate against the public interest, primarily because these companies have very small shares of the U.K. food retailer market.

The issues it still wants to discuss with the major chains include:

Retail prices, which have declined in real terms but at a rate "lower than for grocery prices in some comparable European countries." The commission has begun a survey of a range of grocery products at several thousand stores in the United Kingdom and certain other European countries and will submit the results to the companies for comment. It also is comparing how individual stores' prices compare with each other.

Market power, to determine whether any local monopolies exist where there are few or no competitors for a single superstore. It also will seek to determine whether this affects the prices charged.

Price competition, especially such issues as whether any decline in wholesale prices has been fully passed on to consumers, whether price competition is concentrated on a few frequently purchased items and at stores with the most local competition and whether prices relate to costs in both branded and private-label merchandise.

Costs and efficiency, including economies of scale and whether competition between food retailers for store sites and facilities has resulted in higher prices.

Land and location issues, such as whether land prices for food retail sites are higher than those for other retail developments and whether supermarkets seek to restrict competitors from buying suitable sites.

Supplier relationships, including whether food retailers have "excessive" buying power and whether this results in lower or higher prices, prevents efficient suppliers from earning adequate returns and damages the long-term competitiveness of food manufacturers.

Recent market developments, such as Wal-Mart's purchase of Asda last summer for $10.8 billion and the growth of Internet and home shopping. Some analysts have said they believe Wal-Mart's arrival in the United Kingdom will result in significant price competition and erosion of margins as the U.S. retailer uses its global buying power to slash Asda's prices and boost its market share.

The commission plans to speak with the companies concerned over the next two months and hopes to conclude its report by early April.

The commission began its investigation in April 1999 following claims by the British press, government officials and consumer groups that prices in the United Kingdom were significantly higher than those in continental Europe and the United States. The campaign focused on apparel, food, cars and computers, and the government began investigations into each of those areas. However, the only area so far where it has found significantly higher prices has been cars.

The United Kingdom's leading food retailers protested that the industry was intensely competitive and that prices and margins had actually declined over the last year.