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Depending on who you listen to, the Office of Fair Trading’s (OFT)

investigation into profit margins and competition between the big four

supermarkets is either an over-simplistic farce egged on by a

self-righteous media or a timely opportunity to debate consumers’

anxieties.

Either way, last week’s leaked news that the OFT’s director-general is

’mindful to refer’ the matter to the Monopolies and Mergers Commission

means Sainsbury’s, Tesco, Asda and Safeway are going to have to endure

critical public scrutiny over far more than their prices and competitive

practice for many months to come.

The pricing policy of the big four has attracted consistent, negative

attention in recent months.

The Grocer magazine publishes a weekly guide for 33 similar grocery

items bought in different supermarkets to show the cost of the average

consumer shop. Its most recent table shows Sainsbury’s as the most

expensive, at pounds 44.06, followed by Waitrose (pounds 42.66), Safeway

(pounds 41.82), Somerfield (pounds 40.28), Tesco (pounds 39.70), Asda

(pounds 39.52) and Morrisons (pounds 38.88p).

Retailer disunity

Typically, in the cut-throat world of retail, the supermarkets’ united

front protesting that they are not too expensive has already

cracked.

Asda has attempted to distance itself from the others. It claimed that

in meetings with the OFT it had been assured that its ’prices and

margins are lower and profits are beyond criticism’ and that ’if

everyone’s profit numbers looked like yours there would be no

problem’.

For a marketing sector which in many areas has led the way in marketing

and communicating with consumers, the supermarkets appear to have

adopted an ostrich-like position to the price issue. While national

newspapers and television have been sticking it to them on price, they

have buried their heads deeper in the sand.

When the BBC’s Panorama devoted a whole programme to the question of

’Are supermarkets ripping us off?’, only Safeway was prepared to put up

a spokesman to counter the accusations. That PR strategy has changed

recently under Baroness Glenys Thornton, the consultant appointed last

November to be a spokeswoman for the supermarkets’ own trade body, the

British Retail Consortium.

She has sought to direct the supermarkets’ response to price concerns -

and explain some of the complex issues which they claim are being

overlooked in a simple but flawed comparison with other countries.

’I think that when dealing with the leaked OFT letter, the supermarkets

all gave out a similar message about competition and a positive message

about welcoming the inquiry because it would clear the air,’ she

says.

(Although this clearly was not true of Asda.) Lady Thornton also

suggests that the whole inquiry has been led less by public disquiet

about prices, and more by the media.

Ironically, she has some support from the Consumers’ Association, often

highly vocal on price rip-offs.

Phil Evans of the Consumers’ Association says: ’The British public

haven’t traditionally been bothered about pricing, particularly in

groceries.

Whereas a CD is comparable in price between here and the US, it’s an

identical product bought for the same purpose. But food is culturally

specific and most don’t know what individual items cost.’

There are other factors that support the supermarkets’ case. Some are to

do with the ’consumer championing’ government’s own policies.

Orange juice may be considered to be a basic food these days, yet there

is 17.5% VAT on the product, whereas in France there’s 5% on all food

stuffs.

At the same time, some international supermarket chains, such as

Wal-Mart have been put off opening outlets in the UK because of

restrictions on out-of-town shopping developments, which are designed to

protect existing businesses.

So why has the perception stuck that consumers are being ripped off and

how will supermarkets overcome the negative propaganda? If Asda’s PR

manager Nick Agarwal is anything to go by, repetition of key phrases

will ram the point home: ’Ask anybody what Asda is famous for and

they’ll say it’s our low prices. Our brand is value. We’re value

crusaders.’

Perhaps that is part of the problem. Supermarkets which have spent years

building their brands on price and value (with quality chucked in when

it suits them), struggle to have a public dialogue about why prices in

the UK may legitimately be higher than in other countries.

Difficulties with dialogue

Robert Clark, an independent retail market consultant, says: ’UK

supermarket chains face higher costs in terms of land and building

costs, and business rates are higher.’

They are also listed on the stock market and have a duty to their

shareholders along with their customers. It’s a hard act to sell

yourself to consumers on low prices, while presenting yourself to the

City as a high-profit organisation.

The supermarkets’ biggest mistake, according to Richard Perks, senior

retail analyst at Retail Intelligence, is their coyness in putting their

arguments to the media.

In response to last week’s OFT leak, Asda’s press release was nothing

but ’the usual complacent marketing chat’, he says. ’The supermarkets’

PR has been unbelievably ineffective when the newspapers have been

basing their high-price claims on the flimsiest of evidence.

’The supermarkets are left looking guilty and vulnerable because they

have failed to address numerous contradictory forces and the complexity

of the problems they face,’ Perks says.

Kevin Hawkins, Safeway’s communications director, and according to Perks

one of the few men from the industry to have raised his head above the

parapet, is convinced that the message is at last getting through.

’We have been attempting to educate journalists,’ he says. ’One can see

from the coverage in the last few days in the broadsheets that there’s

been greater recognition of cost structure issues than there was six

months ago.’

European agenda

As for the MMC referral, Hawkins believes that was inevitable as it

suits the government’s agenda - promoting itself as the consumers’

champion and supporting entry to the European Monetary Union (EMU).

’There was Helen Liddell (minister for education in the Scottish Office)

on Panorama a few weeks ago saying entry to EMU would help make price

comparisons easier and that will put added pressure on

retailers ... when you get something as blatant as that, well the media

bangs away,’ says Hawkins.

He also says that he judges the importance of the OFT issues by the size

of his postbag. ’I know this because all these customer letters

eventually land on my desk; in the past three weeks, letters on

genetically modified organisms have been running at 40 a week, while on

pricing I’ve had fewer than 20 in total over nine months. It’s not an

issue people find it easy to respond to.’

Then there is the question of what the government can actually do about

it if the MMC decides that prices are too high. Some commentators have

already suggested the absurdity of a regulator, checking to see that

bread rolls were not being overpriced.

If the government wants more competition in the market it is going to

have to consider less regulation, not more. And once again it ignores

the fact that for most supermarket shoppers price is not the deciding

factor governing which store they use.

There is a confidence among many of the supermarkets that they don’t

have too much to worry about. The biggest danger is that the inquiry

will damage the supermarkets’ brands and claims to value, even if

ultimately it finds no reason to take action.