The UK's big five supermarket chains do not make excessive profits, the UK's Competition Commission has found after a two-year-long investigation into the sector.

But the chains under scrutiny - Tesco, Sainsbury's, Asda, Safeway and Somerfield - must agree to a new code of practice in their dealings with suppliers.

Large grocery chains had been accused of pressuring suppliers, particularly farmers, to accept low prices for their goods

However, the charge triggering the investigation, that UK supermarkets were ripping off consumers, was not confirmed by the Competition Commission.

Falling prices

One reason for that was the fact that the market had become more competitive since the inquiry was opened, Trade and Industry Secretary Stephen Byers said.

"Since the reference ... to the Competition Commission in April 1999, we have seen significant changes to the industry, the entry of Wal-Mart being a notable example, and a number of price cuts which it is estimated to have been worth over �1bn to the consumer," Mr Byers said.

The watchdog said supermarkets were "broadly competitive".

When this enquiry was started, the worry was that prices are too high, what we actually ended up being criticised for was that prices are too low.

Tim Mason, marketing director, Tesco

But it did find some fault with supermarket practices.

It highlighted three areas in which supermarkets were operating in a way that distorted competition.

The director general of the Office of Fair Trading now has three months to agree a code of practice with the five supermarket chains on their relationships with suppliers.

Supermarkets will have to give legally binding undertakings to comply with this code.

The Competition Commission has also expressed concern about supermarkets selling below cost and the concentration of chains in some areas.

But it has not, as some newspapers had predicted, recommended a change to the planning regime.

It does propose that the larger chains should have to get approval from the director general of fair trading before buying or developing new stores close to existing stores.

Supermarket joy

Some of the large supermarket chains have already welcomed the report's conclusions.

"We have always said that this was a competitive industry, the commisison has found that prices are falling, that profits are not excessive and that according to their own research, customers like supermarkets," Tim Mason, marketing director at Tesco said.

"When this enquiry was started, the worry was that prices are too high, what we actually ended up being criticised for was that prices are too low. It [below cost pricing] simply demonstrates what a competitive industry this is. Nobody likes it and nobody does it for long," Mr Mason added.

Asda said the report was a "thumbs up for the Wal-Mart effect", a reference to its takeover of the supermarket last year which has boosted competition in the retail sector.

But an Asda spokesman questioned whether a legally binding code of conduct was needed to govern relationships with suppliers.

Consumer groups welcomed the creation of a legally binding code.

Phil Evans, principal policy adviser at the Consumers' Association, said it would clean up one of the "murkiest areas of operation for the big four and it is good to see that it will be cleaned up".

Cutting prices

Much of the report had been leaked in advance of Tuesday's release.

The large chains have spent about �20m defending themselves since the inquiry was launched in 1998.

Some larger chains - including Tesco and Asda - have announced price cuts in recent weeks.

A week ago Tesco announced price cuts and on Monday, Asda launched a new line of budget products where some items will be sold below cost price.