Britain's top supermarkets could be forced to sell land to encourage competition but the biggest, Tesco, is not in such a strong position that it stifles rivals, the UK's Competition Commission said on Wednesday.
Shares in Tesco bounced nearly 3 percent higher in opening trade as fears of stronger punitive measures evaporated.
"There were no huge surprises and the remedies do not appear heavy handed," Seymour Pierce analyst Andrew Wade said.
Shares in Wm Morrison Supermarkets, Britain's fourth largest supermarket group, rose more than 2 percent, while the number three group, J. Sainsbury, traded nearly 1 percent higher, outperforming a 0.8 percent rise in the DJ Stoxx index of European retailers.
In provisional findings from its third inquiry in seven years into Britain's 125 billion pound ($258 billion) grocery market, the commission said in most areas shoppers had a good choice and benefit from strong competition between retailers.
"But action is needed to improve competition in a number of local markets and to address relationships between retailers and their suppliers," the watchdog said in a statement.
However it threw out suggestions made by supermarket rivals that Tesco, Britain's largest supermarket group with more than a 30 percent grocery market share, was hurting competition.
"Tesco is not in such a strong position that other retailers cannot compete. Expansion by other grocery retailers continues, which suggests Tesco ... is not acting as a barrier to expansion," the commission said.
It suggested possible remedies could be requiring grocery retailers to sell land holdings in areas where competition is weak and to ban the use of restrictive covenants or exclusive agreements that helped to shut out competitive rivals.
It also recommended changes to the planning system that would provide greater opportunities for developments on the edge of town centers, while maintaining constraints on out-of-town developments.
The watchdog said it supported introducing of a competition test that would allow the existing local position of a grocery retailer to be taken into account in planning decisions.
Kaupthing Singer & Friedlander Capital Markets said the statement was not aggressive in its preliminary form.
"This looks good news from a supplier/food manufacturer stand point and could even shake out some of the land bank advantages that Tesco has and possibly Sainsbury too," it added.
The 18-month inquiry has put the spotlight on the tense relations between Tesco and its nearest rivals Asda, part of world leader Wal-Mart Store , J. Sainsbury and Morrison.
The investigation into the market began in March 2006 after complaints about supermarket groups' rapid expansion, predatory pricing, relationships with suppliers, and their entry into the convenience sector.
Final conclusions from the Competition Commission, which has wide powers to act, short of issuing fines and changing the law, is expected by March 2008.