(Bloomberg) -- Britain’s antitrust watchdog will investigate a two-tier pricing system that’s developing in supermarkets as a result of loyalty programs it says can confuse shoppers.

Major retailers now use the programs principally for promotional activity, the Competition and Markets Authority said Wednesday, and the practice is expected to grow further. 

The regulator will also investigate the price of infant formula after it found that consumers are choosing more expensive branded options, and will update on its findings in mid-2024. It said about 85% of the baby formula market is dominated by two companies. 

A spokesperson for Danone UK & Ireland, the biggest maker of infant formula in the UK, said it has launched bigger and better-value formats and will continue to engage with the CMA. A spokesperson for Nestle, which has a lower share, said it welcomed the review and that it has been cutting costs wherever possible, only increasing prices as a last resort. 

The watchdog has been closely monitoring Britain’s grocery sector this year after food prices soared and supermarkets faced accusations of profiteering. While it cleared grocers of that claim in July it also found that supermarkets weren’t doing enough to allow customers to compare prices.

Read More: Grocers Cleared of Profiteering From High UK Food Prices

Most British supermarkets have some form of loyalty card program, part of a bid to compete with discounters Aldi and Lidl during the ongoing cost of living crisis. Tesco Plc ramped up promotions through its Clubcard this year while J Sainsbury Plc launched Nectar Prices in April, passing on discounts to customers with its Nectar loyalty card. 

On an earnings call earlier this month, Sainsbury Chief Executive Officer Simon Roberts called Nectar Prices “an absolute game changer,” as the supermarket raised its guidance. 

Shares in Tesco and Sainsbury were little changed at midday in London on Wednesday.

The British Retail Consortium, which represents most UK retailers, said grocers know they must demonstrate clear value to customers, whether that’s through loyalty discounts or everyday lower prices. 

Representatives for Sainsbury and Tesco declined to comment.

‘Two-Tier Prices’

The CMA report said loyalty programs are likely to lead to a growing prevalence of two-tier prices in stores and could result in a more complicated environment for consumers to compare and choose the best deals.

“Price promotions are only available to people who sign up for loyalty cards,” said Sarah Cardell, chief executive of the CMA, which could raise questions about whether the pricing is fair and competitive for all shoppers. 

Representatives of Britain’s four largest supermarkets were called in front of UK lawmakers earlier this year to defend their pricing strategies. However, the CMA later said that retailers’ costs have been rising faster than their revenue.

The regulator found that although branded suppliers have more pricing power than own-label manufacturers, competition is still strong as consumers are willing to switch to cheaper brands. Retailers are also incentivized to get the best prices from suppliers in a grocery market considered one of the most competitive in the world.

“Taken together, this means that consumers can have confidence that, for most of the product categories we have considered, they are getting competitive prices where they are able to access and choose own-label alternatives,” the regulator said.

Infant formula, baked beans, pet food and mayonnaise have the highest margins, the CMA said of the categories it investigated, while poultry and milk have the lowest. When it comes to infant formula, the CMA found that Aldi is the only retailer to sell an own-label option. 

Baby Formula

According to data provider Circana, the price of infant formula has gone up almost 14% in the year to October. There are large variations, too. The cost of feeding a 10-week-old baby can range from £44 ($56) to £89 per month, NGO First Steps Nutrition Trust said in an August report.

“All infant formulas are nutritionally adequate and meet the same minimal UK compositional requirements, and there is no reason for such a wide range in prices,” UNICEF said in August, highlighting the need for the government to tighten regulation on marketing.

Consumer goods groups like Danone have been largely growing sales through higher prices this year. Danone’s specialized nutrition unit, which includes infant formula and medical nutrition, increased pricing 6.2% in the first three quarters of the year. Sector companies say they have absorbed some of the increased costs rather than passing them on to consumers. 

--With assistance from Katharine Gemmell.

(Updates with Danone and Nestle statements in paragraph 4, price data.)

©2023 Bloomberg L.P.