Business and Trade Committee
Oral evidence: Food and fuel prices: follow-up session with the CMA and Asda, HC 1595
Wednesday 19 July 2023
Ordered by the House of Commons to be published on 19 July 2023.
Members present: Darren Jones (Chair); Alan Brown; Jonathan Gullis; Jane Hunt; Ian Lavery; Anthony Mangnall; Andy McDonald; Charlotte Nichols; Mark Pawsey.
Questions 107-144
Witnesses
I: Sarah Cardell, Chief Executive, Competition and Markets Authority, and Dan Turnbull, Director of Markets, Competition and Markets Authority.
Examination of witnesses
Witnesses: Sarah Cardell and Dan Turnbull.
Q107 Chair: Welcome to this afternoon’s session of the Business and Trade Committee for an additional hearing, further to our previous hearing on food and fuel price inflation. Today, we will be hearing from the Competition and Markets Authority and then, in the second panel, we will be asking some further questions of Asda.
For the first panel, I am delighted to welcome back to the Committee Sarah Cardell, chief executive of the Competition and Markets Authority—good afternoon—and Dan Turnbull, director for markets at the Competition and Markets Authority.
To kick us off, since our session with the supermarkets that have fuel forecourts, you have published your report into fuel pricing. You said that there had been a weakening of competition in the market. Will you summarise for the Committee what that means in practice, please?
Sarah Cardell: Yes. I will be happy to take more detailed questions, but essentially, as we all know, the major drivers of increasing road fuel prices over the last few years have been external factors, including the impact of the war in Ukraine. Over the last three or four years, however, we have seen a significant increase in operating margins among retailers, particularly the supermarkets but across retailers as a whole. We have seen increases of around 6p per litre between 2019 and 2022, and a particular increase in 2023 in relation to operating margins for diesel specifically.
The reason that we have identified this as reflective of a weakening of competition is that it is driven by what we see as underpinning those margin increases. I will just unpack that. We identified that if you look at the extent of competition in the market, typically the supermarkets have been the cheapest-priced operators in the market. In particular, Asda and to some extent Morrisons have been the price leaders in the market. What we identified through our study was that Asda and to some extent Morrisons had taken an internal decision to increase their internal margin targets. They did that over a period—particularly 2022 and 2023—and we saw an absence of a competitive response to that from the other retailers, including the other major supermarkets.
Ordinarily, when competition is working well, you would expect other competitors to respond to that kind of change by looking for opportunities to win market share and to price more competitively themselves. Historically, the other retailers have pursued a passive pricing strategy and that did not change, so as Asda and Morrisons increased their margins, the others effectively drifted up.
The further element that we identified specifically was a slowing of the responsiveness of retail prices as wholesale prices came down. We saw that particularly in diesel over the first part of this year.
Q108 Chair: Essentially, that means that customers were paying more for their fuel and the companies were making more profit than they did in the past.
Sarah Cardell: Our view is that it indicates that customers were paying more than they would have been had those operating margins remained at historical levels, yes.
Q109 Chair: Those companies might say that it is entirely their decision what they charge their customers. What is your response to that?
Sarah Cardell: It is, but we would expect to see a dynamic of competition in the market where there is some competitive response. If one or two companies decide to increase their margins, in a competitive market you would expect others to see that as a commercial opportunity to win share and business. It is the combination of the change in relation to margin targets for certain of the retailers with the absence of a competitive response from others that causes us concern.
Q110 Chair: The concern, therefore, is that collectively, as a group—presumably they are not collaborating formally, because that would be illegal, but they do so informally—they see each other’s prices and feel like there is no need to try to reduce the price to be more competitive.
Sarah Cardell: You are right that there is no evidence—we have certainly seen no evidence—of formal collaboration, cartel behaviour or anything like that, but we see this absence of competition or a competitive reaction. In a market where there are a limited number of players and a limited degree of competitive pressure, that causes us concern.
Q111 Andy McDonald: I am interested in that “absence of competition” comment. In your study, you recommended two particular measures to increase incentives for retailers to compete with each other. One was an open data fuel finder scheme, and the other was an ongoing fuel monitor function. Can you tell us a little more about those two proposals?
Sarah Cardell: Yes, of course. On the first—the open data fuel finder scheme—there are two objectives. The first is to make sure motorists have the best information available to them when they make choices about where to fill up. One of the other findings that we identified is that in a number of cases—not all cases—motorists can get better deals in other relatively close filling stations, but that information isn’t readily available. For the most part, you have to drive around to find that information. There are some social media sites and some apps that produce some information, but it is not on the basis of fully available, real-time information.
Our recommendation is to have an open data scheme based on real-time data that is mandated—it is critical that it has statutory backing—and that requires every single retailer to provide that data in an open-source format in a way that can be incorporated easily into price comparison apps and navigation apps to make it as easy as possible for people to shop around and get the best deal. That is the first element. That should increase the competitive pressure in the market. If you give motorists a better ability to shop around, almost by definition that should improve the competitive pressure.
We recognise that that is not the complete answer, which is why we recommended the second element, which is the ongoing monitoring function. Part of the reason for that is to keep under review how effective the fuel finder scheme is. Through the course of our market study over the last year, we have seen that having a public light focused on the sector has resulted in some decreases in prices. Given the importance of the market and the absence of a sector regulator in this space, we think it is right to keep some degree of ongoing monitoring and focus.
The last reason is that the market is going to be in decline. There is going to be a transition away from vehicles reliant on petrol and diesel. That will affect some consumers more than others. There will be some people who, whether because their income level means that they have less of an ability to switch to an electric vehicle, or because they live in an area where the infrastructure does not support electric vehicles in the same way, are likely to be dependent on petrol and diesel for longer. We want to make sure there is ongoing monitoring of the market to make sure those motorists—those consumers—are looked after and, if necessary, further recommendations are made in due course about how to tackle any issues that we identify.
Q112 Andy McDonald: You say with an eye on 2030, but that is seven years away. It is the making of diesel and petrol cars that is going to come to an end; they are still going to be around for a long time thereafter.
Sarah Cardell: Indeed.
Q113 Andy McDonald: So there is a question mark over whether the decline will be that marked.
I am interested in the mandating issue. You said earlier that there is no evidence of a cartel, but through silence and observation, people can sit on their hands and observe what they should do. How will mandating that they report the prices they will charge benefit consumers if they just stay where they are? You are anticipating that the pressure will be effective, but what if it just stays where it is?
Sarah Cardell: The evidence we have seen from other countries where this kind of scheme is in place—for example, Australia and Germany—suggests that it has made a difference in making it easier for motorists to shop around, and it creates greater competitive pressure. I won’t overstate the impact of that, but it has made a material difference, and given the importance of this market, it is worth doing. That mandated element is absolutely critical.
Dan Turnbull: If I could build on that, there are two elements of the remedies package that we are proposing. This is where the monitoring function comes in. We think one important role of that monitoring function will be to see the impact that the open data scheme is having on pricing behaviour in the market, to measure that over time and, if it does not have the type of positive effect that we are anticipating, to consider whether there is a case for more interventionist approaches in this market to get the right outcomes.
Q114 Andy McDonald: Of course, while we await mandating and the statutory provisions to facilitate that, these retailers have the ability to voluntarily sign up to data sharing. Have they done that? Who are the people who have said, “Yes, we’re going to do that, and we’ll do it by a certain date”?
Sarah Cardell: I will give a very brief overview of where we are on that. There are two elements that we think are worth considering in relation to a voluntary scheme. The first is what we have undertaken to do very rapidly, which is a quick, simple scheme in which effectively all the major retailers are asked—we cannot mandate this—to make their prices available in a machine-readable, easily comparable form on a daily basis. That can be utilised by consumers directly but importantly also by app providers.
The second, which is also worth emphasising, is that the full open data fuel finder scheme, which we think needs to be introduced through legislation, could be introduced on a voluntary basis in advance of that. We are working with officials at the Department to explore whether it is possible to accelerate that.
To answer your question in terms of engagement, I attended a roundtable that was chaired by the Secretary of State on Monday. That was used to encourage all the major retailers to participate in this scheme. We do not yet have firm commitment from any of them on that. We will have a meeting next week where we will be setting out our expectations about what is required. I would emphasise that getting this up and running for August requires prompt and full co-operation.
Q115 Andy McDonald: It is disappointing that you did not get that commitment—people voluntarily agreeing to sign up to it—there and then on Monday.
Sarah Cardell: There were a range of expressions of willingness to do that, but not yet the full sign-up.
Q116 Alan Brown: On 27 June, Asda’s chief commercial officer, Kris Comerford, told the Committee that Asda’s “fuel pricing strategy policy has not changed over many years.” Is that an accurate statement?
Dan Turnbull: In exactly the same way, over the course of the market study Asda told us repeatedly that it had not changed its fuel pricing strategy. It said that that was because it had consistently, throughout that period, maintained the strategy of trying to be the lowest-cost provider in any particular area.
On that particular point, we did not find any evidence that that had changed, but we did find two very significant changes to Asda’s pricing approach. The first of those was around its internal margin targets. We found that between 2021 and 2023, it significantly increased its internal fuel margin targets on a pence-per-litre basis, and indeed by 2023 those pence-per-litre targets were three times what they had been in 2019.
The second of these areas was a decision that Asda took during 2022 to deliberately feather prices on fuel as they came down from the peak. Asda told us that it saw an opportunity, as the wholesale price fell, to pass through reductions in the retail price more slowly than it previously would have done. Asda said that it applied that in over 100 petrol stations where it faced no direct competition from another supermarket within the local area. It also said that there was a greater opportunity to do that on diesel in 2023 because of the volatility in the market.
Q117 Alan Brown: So you contend that a threefold increase in return per litre on petrol, or fuel, and the feathering would constitute a significant change in policy.
Dan Turnbull: We certainly saw that as a significant change in its pricing approach.
Q118 Alan Brown: Your report also noted that Mohsin and Zuber Issa and TDR Capital, a private equity company, took over Asda in August 2021. I believe that that was when we started seeing changes in the pricing strategy. Would that be right—that following the ownership changes, there seems to be a change in direction?
Dan Turnbull: That’s right. The significant changes that we saw in its internal margin targets came between ’21 and ’22, and then again in ’22 and ’23. That decision to start increasing them significantly was taken at some point in 2021 by Asda.
Q119 Alan Brown: Would it be fair to suggest that Asda used the high volatility in fuel prices associated with the Ukraine war as a way to hide the transparency of them increasing their margins?
Dan Turnbull: Based on the evidence we have seen and what Asda told us, my answer would be yes, and that is to do with the feathering of prices. If your intention is to reduce pump prices more slowly as wholesale prices fall, you can obviously only do that while wholesale prices are falling. Because we saw this very high peak in wholesale prices in 2022 and then this long, gradual fall in wholesale prices, particularly in diesel, that provided an extended opportunity to engage in feathering prices in diesel.
Q120 Alan Brown: So using the Ukraine war as an excuse to gouge more money out of their own customers.
Dan Turnbull: That wasn’t how we would have put it in our findings, but certainly we found—or Asda told us that that volatility in the wholesale price provided an opportunity to feather prices in diesel.
Alan Brown: So not gouging, but an opportunity.
Q121 Jane Hunt: You fined Asda a total of £60,000 for failing to comply with two notices under section 174A of the Enterprise Act 2002. Can you tell me why you did that?
Dan Turnbull: Yes, certainly. As you say, these fines referred to two instances where Asda failed to comply with a compulsory request for information from us without giving a reasonable excuse. The first of these was in relation to a written request for information that we made to Asda. We gave Asda three weeks to respond to this written request for information. Thirty minutes before the deadline for that request for information, they requested an extension, which we granted them, of four days, so they had three weeks and four days in total to respond.
For two of the questions that we posed, which were asking for important information in delivering our study, they provided no answer at all, nor did they explain why they provided no answer. When we queried this point, they were able to provide pertinent information on one of those questions within three days. It seemed to us that Asda had not complied, with no reasonable excuse, with that request for information.
The second fine related to a compulsory interview that we required Asda to attend at our premises in Canary Wharf. In advance of the interview, we sent Asda a letter setting out the areas that we would like to ask them about. We also sent them a list of documents from among the document pack that they had submitted to us that we particularly wanted to ask them about. The person Asda sent to that interview was not able to answer questions on two of the areas that we had set out in advance, nor was this person able to explain some of the terms that we saw in one of the documents that we had flagged to them. We had, in advance of this interview, explained to Asda that they were welcome to send more than one person to answer our questions if that was necessary to cover the waterfront of the areas that we wanted to ask about, but Asda declined to do that.
We therefore issued the preliminary notice that we intended to find against them and to fine them, and we said that they could rectify this situation by sending more senior personnel who were able to answer on those areas. In the event, Mr Comerford and Mr Issa attended and gave us the information that we requested.
Q122 Jane Hunt: Thank you. I have two points of clarification. The first is on the gathering of the information. What data were you asking for? Was there anything that they had a statutory responsibility to collate that they were not able to offer? Were the other supermarkets able to offer it straightaway?
Dan Turnbull: The information that we were asking for in the written piece was around—Asda had told us that they had taken some steps to increase their margin on fuel in order to cross-subsidise prices in their grocery business, to avoid passing on inflation at as great a rate as they otherwise would have done. We asked Asda to provide some quantification of this: “Well, look, how much have you added to fuel and where has that gone on the grocery side?” This was a question that they did not answer, but they were able to provide useful information.
In terms of the other supermarkets and, indeed, all the other parties to this investigation, I think all I can say is that we have not issued any fines in relation to anybody else.
Q123 Jane Hunt: Okay, thank you. On the interview point—for the rest of the Committee, this is page 19 of our notes—we had a letter from Mr Issa from Asda dated 5 July, in which he said: “We wrote to the inquiry team to explain that we believed there was a mismatch between their expectations of how our fuel business is organised and the types of information available to it, and sought an opportunity to explain this in person.” Did they? My understanding is they didn’t. Is that right? Did you say they had not, and therefore—
Dan Turnbull: By this point, if I remember rightly, they are referring to after we had issued our preliminary notice to fine them in respect of this and required that they attend a formal statutory interview with us. So at this point we were in a statutory process, therefore we did not think that it was necessary to hold a further informal meeting with them. We did offer Mr Comerford and Mr Issa an opportunity to make any more general points after the formal interview that we held with them, and that was taken up.
Q124 Jane Hunt: Okay. Have they paid their fine?
Dan Turnbull: Yes, I understand that that fine has now been paid in full.
Q125 Jane Hunt: And just as a one-liner, do you think £30,000 is enough?
Dan Turnbull: No.
Q126 Chair: As I understand it, Asda does not have a CEO and I think has only an interim CFO. Was this part of the problem, in that they have not managed to appoint senior leaders to respond to your questions?
Dan Turnbull: We did not experience that as a problem directly, although it was confusing for us when we were trying to understand who would be the right person to issue notices to attend to.
Q127 Chair: It was Mr Issa, presumably, who managed to get you the answers to your questions that you needed.
Dan Turnbull: Mr Comerford and Mr Issa in combination.
Q128 Mark Pawsey: I want to ask you about the position of Asda as a share of the entire fuel market. Asda and EG Group are part of the same organisation. They have a very substantial number of forecourts, but you don’t seem to see a problem with that.
Sarah Cardell: I will give a little bit of history on that, and Dan should jump in as well. When those two businesses were brought together, effectively, when the Issa brothers took control of Asda back in 2021, we reviewed that as a merger at the time. What we were looking at when we were looking at it through the lens of merger control was the coming together of those two businesses, the Euro Garages business and the Asda business, from a fuel perspective, and whether that in and of itself created a competition issue. Our principal focus there was on competition at local level. We required divestment of various individual petrol/fuel stations. I think there has been—
Q129 Mark Pawsey: So you did require some—
Sarah Cardell: We did require—
Q130 Mark Pawsey: Approximately how many did you require—
Sarah Cardell: From memory, it was somewhere between 30 and 40, I think; I can double-check that.
Q131 Mark Pawsey: That is a relatively small number in terms of the total estate.
Sarah Cardell: It reflected our analysis. The way we tend to do that analysis is to look at local-level overlaps, because you are looking at whether there is a lessening of competition in local areas as a result—
Q132 Mark Pawsey: But you don’t look at the proportion of the market they have as a whole?
Sarah Cardell: We also looked at the dynamic of national competition, but the increment from adding the two businesses together did not create a change, in and of itself, in terms of a lessening of competition at national level.
Q133 Mark Pawsey: And you are happy with that judgment?
Sarah Cardell: That judgment at the time, I think, was an entirely accurate assessment of the market. There have been some questions to us since about whether we could look again at that transaction, in the light of the latest restructuring.
Q134 Mark Pawsey: You just said “at the time”, so what might have changed since you took that decision?
Sarah Cardell: I think there is a difference between our assessment of competition in the market as a whole, which is the work that we have been doing through the market study, where we have identified a weakness of competition, and whether there is a weakening of competition as a result of the merger. We don’t see, and didn’t see, a weakening of competition beyond the issues that we identified—
Q135 Mark Pawsey: In hindsight, do you think that any element of the weakening of competition that you started off telling us about has arisen because of this acquisition?
Sarah Cardell: It is not clear to us that it has arisen because of the acquisition, because, again—
Q136 Mark Pawsey: But it coincides with that acquisition.
Sarah Cardell: I think it is worth distinguishing two elements. It is worth distinguishing the impact of bringing those two businesses together, and whether there has been a change of strategy because those two businesses have been brought together. That is what we look at with merger control. There is a separate question about whether it flows from that change of ownership, which is not really a question for merger control, but I think that is a pertinent question.
Q137 Mark Pawsey: I was going to come on to that. This is a business that has grown at a phenomenal rate by taking on what we might consider to be eye-wateringly high levels of debt. I think its debt will be something like £7.6 billion. Does the financial viability of such a large player in our grocery and fuel market provide any element of concern to you?
Sarah Cardell: Let me unpack that slightly—hopefully that will be helpful for the Committee. If you are thinking about the merger control assessment, we won’t look, in and of itself, at whether a change of owner is a problem unless there is a competition issue too. You could imagine a situation where you had a new owner coming in to buy Asda that had no pre-existing interest in petrol stations at all, and they might still have decided to pursue a different commercial strategy, approach—whatever word we want to use. So the merger control focus is one.
When it comes to financial viability in the market as whole, I think there is an interaction, or there can be an interaction, between competition and financial resilience. Concerns around resilience can go beyond competition concerns too, but there certainly can be an interaction between the two.
Q138 Mark Pawsey: Do you look at resilience? There is a real concern if this money is borrowed, we are in an era of fluctuating interest rates, and what looked a good deal two or three years ago, in the light of today’s interest rates may not look so good and may present a risk to the viability of the business. Is that a matter of concern for you as the CMA?
Sarah Cardell: Again, I am trying to answer the question specifically in relation to merger control, because our mandate when we look at issues in relation to merger control is whether there is a lessening of competition. That does not automatically read across to a question of financial resilience. There is a separate question about how viable and resilient you see a market as being.
Q139 Mark Pawsey: Do you think there is any element of Asda’s change in pricing policy on fuel being linked to this great debt burden that they have to finance? Might they say that by doing this feathering that you told us about, “we can get a bit of margin there, and have some funds available if interest rates go the wrong way”?
Dan Turnbull: We did not find any direct evidence from Asda internal documents or anything that they said to us in the formal interviews that linked that.
Q140 Mark Pawsey: But it would be a pretty sensible thing for them to do, wouldn’t it?
Dan Turnbull: I can’t comment on that, but I can say that Asda told us that part of their strategy and how they decide how to set these margin targets involves looking at growth and paying down debt in a very sustainable way. That reference to debt was in there, linked by them to how they set their margin targets.
Mark Pawsey: Thank you.
Dan Turnbull: Chair, if I may just clarify Sarah’s answer earlier, it was 27 sites that we required the parties to divest when Asda and EG merged.
Q141 Chair: Let me ask a very basic question. The concern that some policymakers have is that if a company like Asda goes bust, I think it employs 8,000 people, who will then have to apply for universal credit. There might be a pension deficit that the taxpayer has to pick up. Who in Government or among regulators has an oversight of that risk on behalf of taxpayers? If it is not the Competition and Markets Authority, who is it?
Sarah Cardell: I am not sure I am in a position to answer that question. It is a very real risk, and I absolutely understand the concern. I don’t think it falls to us when we are looking at competition issues. We highlight those issues through our market analysis, but remedying them through merger control is not the current mandate of the CMA.
Q142 Ian Lavery: Just briefly, the CMA has clearly identified a link between private equity buy-outs of retailers and an increase in fuel prices. That obviously impacts competition. I just wonder whether there anything more that the CMA can do to have a look at buy-outs by private equity firms.
Sarah Cardell: It is important not to generalise too much from these particular issues. We have identified issues in relation to this market and these businesses. The question of private equity buy-outs is something that we have seen in some other areas and markets. To give an example that we have talked about previously, we have had a number of merger investigations where we have seen an aggregation by private equity in relation to vet or dental practices. Those are other areas where we have seen that. But again, the question there is whether there is a lack of competition by bringing those businesses together.
When we undertake these kinds of market studies, our job is to look at the range of different factors that might be driving greater or less competition, one of which in this case could have been the change of ownership or the change of approach driven by a different financial situation. It was also undoubtedly influenced by other external factors, including, as Dan said, the ability to take advantage of the market volatility.
Q143 Ian Lavery: But are you actually looking at that—at the fact that there is a huge impact on the prices and on competition because of these private equity buy-outs? Is it of any concern to you?
Sarah Cardell: I absolutely understand the concern. Where we can find ways to link that to a competition concern, yes, we are, as I mentioned in relation to merger control on vets and on dentists. We also put out a report earlier this year looking at financial resilience and competition, identifying where we can take action, but also giving recommendations to Government about how to look at those issues more broadly, because they are broader issues than simple competition ones.
Q144 Ian Lavery: Finally, the Asda and EG Group merger has had what I think has been described as a chilling effect on fuel prices. Is there any opportunity, or any thought that you might reopen the opportunity, to use your statutory powers to investigate the potential merger of Asda and EG Group?
Sarah Cardell: It is not open to us to reopen that merger investigation. Through the market study, we have undertaken a really thorough investigation of what is happening in the market now and have given the recommendations we have made to Government. The deeper understanding that we have of competition in the market now would certainly inform any further merger investigations in this space.
Chair: Thank you very much, Sarah Cardell and Dan Turnbull, for your evidence this afternoon. We will now move to panel two, where we will welcome Mr Issa, the co-owner of Asda, and Hayley Tatum, the senior vice-president and chief people and corporate affairs officer at Asda.