Grocery Monitor Overview Presentation to Food and Drink Industry Ireland William Prasifka, Chairperson, The Competition Authority 23 rd May 2008

Overview The request by the Minister: “to review and monitor the structure and operation of the grocery trade for the foreseeable future to see how it responds to the new legislative environment”. Initial set of three reports: 1.Report No. 1: Structure and Operation of the Market 2.Report No. 2: Price Trends 3.Report No. 3: The Retail Planning System (Later in 2008)

1.GO introduced a ban on selling below the “net invoice price”:  Retailers were forbidden from passing on to consumers off- invoice discounts received from suppliers  Not only sales below costs but also sales above costs were banned by GO 2.The Competition (Amendment) Act of March 2006:  Abolished the Groceries Order 1987 (GO)  Introduced new provisions for the Irish grocery trade sector (Part 2A) Background

The Competition (Amendment) Act 2006 (1) 1. The following practices are now prohibited IF their object or effect is to restrict competition:  Fixed and minimum resale price maintenance  Dissimilar conditions to similar transactions  Make any payment or grant any allowance for the advertisement or display of grocery goods (“Hello Money”)  Make a payment or grant an allowance to retailer for providing space for grocery goods within the first 60 days of the opening of a new retail outlet (incl. newly expanded and new ownership) 2. It concerns suppliers, intermediaries, distributors of grocery goods to retailers or directly to the public, retailers 3. Dominance is not required

The Competition (Amendment) Act 2006 (2) 1.Sanctions available for the prohibited conducts are the same for violations of sections 4 and 5 of the Competition Act 2002  Fines on undertakings guilty of an offence (up to 10% of turnover)  Criminal sanctions on individuals (directors, managers etc) 2. Complaints about retailers:  Parallel pricing of milk and baby milk,  Predatory pricing on alcohol  Allegation of “hello money”

Since the abolition of the GO the world has changed February 2007:  Denis Manning was convicted of aiding and abetting a cartel  Denis Manning (the enforcer), took certain action to protect Ford motor dealer margins  The High Court left no doubt of the seriousness of such an offence. “This type of crime is a crime against a consumer and is not simply against one or more individuals. To that extent it is different from other types of crimes and while society has an interest in preventing, detecting, and prosecuting all crimes, those which involve a breach of the Competition Act are particularly pernicious…In my view, there are good reasons as to why court should consider the imposition of a custodial sentence in such cases”. Mr. Justice McKechnie, DPP v. Denis Manning, Central Criminal Court, unreported judgement, 9 February 2007.

Cartel Immunity Programme 1. Immunity may be granted to undertakings/individuals who confess and cooperate  Contact the designated Authority’s officer between 10am and 4pm Monday to Friday, except public or bank holidays at  Check CARTEL IMMUNITY PROGRAMME on the website of the Competition Authority ( ) Tel.:

Methodology of Grocery Monitor 1.Gathered information from the 13 largest wholesalers and retailers 2.Supplemented this information with:  Survey of 75 small retailers (230 were invited)  Price information gathered by the National Consumer Agency  Retail market information on consumers and retailers from AC Nielsen 3.Mapped the retail and wholesale landscapes using geo-demographic tool:  Enables mapping  Demographic analysis  Competitive analysis 4.CSO Data:  CPI and grocery price indices  Product subcategories price indices

Grocery Monitor: Report No. 2: Price Trends in the Irish Retail Grocery Sector: A Description of the Evolution of Retail Grocery Prices between 2001 and 2007

Prior to the removal of the GO (Dec 01- Apr 06)

After the removal of the GO (Apr 06 – Apr 08)

Conclusion on Price Trends 1.From the abolition of the Order, a structural change occurs in the price trends for Groceries Order items and Non Groceries Order items: they are divergent 2.This reflect a period of price adjustment by retailers who were free to use price enticements to compete 3.In more recent times, the influence of world food markets has tended to push up the price of items that were previously covered by the Groceries Order

Breads & Cereals (Dec 01 – Apr 08)

Grocery Monitor: Report No. 1: A Description of the Structure and Operation of Grocery Retailing and Wholesaling in Ireland: 2001 to 2006

Findings: Retail 1 (Size) Size of the sector 1.Turnover of €14.6 billion in €11.6 billion is attributable to grocery goods defined as food and drink for human consumption and household necessaries Vertically- integrated retailer (46%) Affiliated retailer (40%) Independent retailer (14%)

Findings: Retail 2 (Shares) Vertically-integrated 1.Tesco Ireland (15-20%) 2.Dunnes Stores (10-15%) 3.Superquinn (5-10%) 4.Lidl (0-5%) 5.ALDI (0-5%) 6.Marks & Spencer (0-5%) Affiliated retailers 1.SuperValu (Musgrave) (10-15%) 2.SPAR (BWG Foods) (5-10%) 3.Centra (Musgrave) (5-10%) 4.Londis (ADM Londis) (0-5%) 5.Gala (Gala Retail Services) (0-5%) 6.MACE (BWG Foods) (0-5%) Turnover shares relatively stable between 2001 and 2006 Exception: ALDI and Lidl Main players losing some ground

Findings: Retail 3 (Capacity) 1.Vertically-integrated retailers  Number of outlets almost doubled since 2001  Amount of floor space also nearly doubled 2.Affiliated retailer groupings have seen similar growth over the period 3.The number of independent retailers (non-affiliated) retailers has fallen – part of a long-term trend in retailing in the grocery sector as well as other sectors 4.Overall:  Grocery retailing capacity (as measured by floor space) has grown substantially since 2001  Tendency toward consolidation of floor space

Trend in Number of Grocery Outlets

Trend in Estimated Aggregate Net Retail Sales Area for Grocery Goods

Findings: Retail 4 (Competition) 1.Pricing behaviour:  All of the vertically-integrated retailers pursue national pricing policies  Wholesalers recommend prices to affiliated retailers but cannot enforce recommendations  The exception is Musgrave who, through the SuperValu group of affiliated retailers, pursue a national pricing policy. 2.Product offerings:  Vertically-integrated retailers - much broader range (Lidl, ALDI and M&S more specialised) with significant growth in own-label and exclusive label products  Affiliated retailers tend to have narrower product ranges – SuperValu retailers are the exception – similar to the vertically-integrated retailers 3.Geographic distribution:  Vertically-integrated retailers in more urban areas (driven by population density)  Vertically-integrated – Dunnes Stores and Tesco are truly national, Lidl and ALDI are growing  Affiliated retailers – Musgrave and BWG Foods have an even spread across the State – other groups of affiliated retailers more regional

Findings: Retail 5 (Competition) 1.Vertically-integrated retailers and SuperValu:  Tend to serve the one-stop shopper  There is a strong local dimension to competition  SuperValu outlets tend to follow a different location distribution than the vertically-integrated retailers 2.Other affiliated retailers:  Tend to serve convenience and top-up requirements  Vertically-integrated retailers making moves into this market

Tesco Retail Outlets Dunnes Retail Outlets

Musgrave Affiliated Retail Outlets BWG Affiliated Retail Outlets

Example: The Retail Grocery Landscape in Waterford 10 min Drive Catchment Area for Aldi (Dashed Red Border) 10 min Drive Catchment Area for Lidl (Dashed Purple Border) Other Stores 10 min Drive Catchment Area for Tesco (Dashed Blue Border)

Findings: Wholesale 1 The major players 1.ADM Londis 2.Barry Group 3.BWG Foods 4.Mangan Wholesale 5.Musgrave 6.Gala (and Stonehouse Buying Group) Size of the sector: 1.Turnover of €4.6 billion in Growth of 53% on €3.5 billion is attributable to grocery goods 4.Direct supply is the other channel to market - does not include turnover from direct supply The wholesale level is concentrated: Musgrave & BWG Foods have almost 80%

Findings: Wholesale 2 4. Mangan Wholesale  Xpress Stop, Vivo and Mace 5. Musgrave Brands  SuperValu, Centra, Daybreak and DayToday 6Gala wholesalers  Gala, Gala Superstore, Gala Xpress and Checkout 1.ADM Londis  Londis and Londis TopShop 2.Barry Group  Costcutter and Quikpick 3.BWG Foods  MACE, SPAR /EUROSPAR /SPAR Express, XL Stop & Shop Wholesaler groupings license retail brands to affiliated retailers

Findings: Wholesale 3 1.The trend at wholesale level is toward greater integration with retailers – has advantages for both sides:  Stability of demand for wholesalers  Access to group purchasing strength for retailers 2.Implication for competition:  Within a group the offerings of the affiliated retailers are becoming more uniform  Competition is between affiliated retailers of different groups  Partly explains the stability of market positions of wholesalers Affiliated Retailers 78% Sales to Affiliated Retailers 78% Sales to other Customers 10% Sales to Non- Affiliated Retailers 12%

Conclusion on Structure 1.The Grocery Monitor has facilitated a comprehensive mapping of the retail and wholesale levels of the grocery supply chain. 2.The exercise has revealed a number of bottlenecks in the grocery sector:  Wholesale level of the grocery supply chain is concentrated  Local retail markets may also be concentrated/entry difficult 3.This piece of work places the Competition Authority in a strong position to pursue any necessary enforcement activity in the sector. 4.Furthermore, it is hoped that by putting the information contained in these reports in the public domain, the often controversial debate concerning this important sector will in future be better informed.