The Competition Commission says the UK's supermarket sector is lacking competition and warned action needed to be taken in a number of local markets.
The watchdog outlined its intention to overhaul the planning system and to stamp out the practice of "land banking" as part of an 18-month inquiry into the grocery market.
The Commission also raised concerns over the relationship between supermarkets and suppliers in provisional findings of the probe and said changes were needed to help offer greater protection to suppliers.
The Commission said it found that Tesco - which has often come under fire over its dominance of the sector - was "not in such a strong position that other retailers cannot compete".
But the 269-page report details proposals under consideration to improve competition throughout the sector.
Recommendations include reviewing the planning system to allow greater scope for developments on the edge of town centres, while maintaining constraints on out-of-town supermarkets.
The watchdog is also proposing that grocery retailers are prevented from holding on to land to stifle competition and is looking at barring the use of "restrictive covenants" on sale of land, under which land cannot be used by a rival supermarket.
A new "competition" test could also be introduced to the planning system to replace the current "needs" test, according to the Commission.
A competition test would see local authorities encouraged to look favourably on retailers who do not have a presence in a local area, rather than the current system which requires supermarkets to demonstrate that a town requires a new store.
The Commission's proposed changes to the voluntary code of practice governing the relationship between suppliers and grocers may see the rules extended to cover not just the big four supermarket chains. It also recommends a change in how the code of practice is monitored.
