(Adds Tesco comment)
By Kathy Sandler
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- The U.K. Competition Commission has formally recommended introducing a 'competition test' which would consider and could block supermarket developments by retailers already powerful in a local area, arguing the benefits, especially to consumers, outweigh the costs.
In its final report, the CC retained its recommendation made in a provisional ruling in July that both new stores and extensions would be subject to the test, but conceded that small extensions to existing stores could still go ahead under certain conditions.
The CC will consult further with local governments on the details and implementation of the test, including the exception for small groceries extensions.
"We expect that the competition test will have the effect we intend by helping to bring in competition where it is lacking and to stop individual retailers consolidating strong positions in local areas to the detriment of consumers," the CC said.
The perceived detrimental impact on consumers is calculated at about GBP105 million to GBP125 million in additional profits per year for the supermarkets from their large grocery stores.
The CC also said the scale of impact on national price levels which came about from weak local competition was potentially very substantial, although difficult to measure.
The CC envisages that the new test will work in tandem with the Controlled Land Order, which is regulation that aims to stop companies putting restrictions on the use of land which could block their competitors opening stores in the same area.
The Controlled Land Order is the next phase of the groceries market investigation, and a spokesman for the CC said the order should be issued within the next few months.
U.K. supermarket giant Tesco PLC (TSCO.LN) has been a vocal opponent of the test and forced the CC to reconsider its position earlier this year after challenging the premise of its original findings in a Competition Appeal Tribunal case in March.
The company said Friday that it continues to believe the U.K. Competition Commission has made the wrong recommendation, and said the test would block investment in both new stores and extensions, "and create delay and unpredictability in the planning system, depriving customers of the benefits of new and updated stores."
In a statement Friday, Tesco's corporate and legal affairs director Lucy Neville-Rolfe argued that the CC had relied for its data on a theoretical model and unrealistic assumptions, and added the Commission "is unable to provide evidence of any real benefits."
The introduction of the test would result in Tesco's expansion plans coming under greater scrutiny from regulators. Under the test, permission for a new store would be subject to a retailer's existing market share in the area. Tesco is the U.K.'s biggest retailer by sales.
Separately, Citigroup Friday initiated the U.K. supermarket sector at a sell, citing food price deflation as the key reason for the bearish note and pointing to the below-expectation performance of the U.S. supermarkets as a case in point.
At 0856 GMT Tesco was down 2.13% or 13 pence at 619p, J Sainsbury PLC (SBRY.LN) was down 1.01% or 5p at 514 pence while William Morrisons PLC (MRW.LN) was down 1.35% or 6p at 440 pence. The FTSE-100 was down 0.6%.
Company Web site: www.competition-commission.org.uk
-By Kathy Sandler, Dow Jones Newswires; 44-207-842-9293; kathy.sandler@dowjones.com