Supermarket chains brush off competition concerns in submissions to watchdog

Thursday, 4 March 2021

The Commerce Commission is carrying out an inquiry into prices and a lack of competition in NZ's supermarkets. (First published November 2020)

Countdown has told the country’s market watchdog that the price of groceries has fallen in real terms over the past 10 years and doesn’t appear high compared to overseas.

Commerce and Consumer Affairs Minister David Clark last year instructed the Commerce Commission to conduct a “market study” into the $21 billion groceries industry.

New Zealand had one of the most concentrated retail grocery markets in the world and there were indications that competition in the sector had weakened over time, Clark said.

But Countdown and rival Foodstuffs brushed off the concerns in filings released by the Commerce Commission on Thursday, essentially saying all was well within the sector.

* Supermarket suppliers offered anonymity in Commerce Commision competition study

Foodstuffs says a trend for people to do more regular, smaller “shopping missions” is working against the bg chains.

* Countdown posts $20m rise in net profit as watchdog advances its market review

* Why Countdown and Foodstuffs may be offering better deals next year

Supermarket promotions like New World's Smeg knives give-away are designed to change how we shop.

The submissions were lodged as the commission made an appeal to the public and supermarket suppliers to front up with their concerns, giving them the opportunity to complete an anonymous survey.

Documents released in January revealed that officials had wanted 16 months to complete the study, but were instructed by Clark to get it done in a year.

Countdown said in its submission that grocery food prices had “fallen in real terms” over the past 10 years, rising at an annual rate of 1.3 per cent a year, which was sightly below the average rate of inflation of 1.58 per cent.

Its own average annual price rises had been lower, at 0.7 per cent, it said.

Spending on food – ignoring restaurant meals and takeaways – had fallen from 9.5 per cent of people’s average household expenditure to 8.1 per cent in 2019, it said.

The company said making comparisons with overseas was hard, but a study it commissioned using Economist Intelligence Unit data concluded that in “purchasing power parity” terms, average grocery prices in Auckland were not high compared to other large OECD cities.

Countdown revealed in its submission that 12 per cent of its sales were now made online and broke down where each dollar spent at its supermarkets went.

Out of each dollar handed over at the till, 63 cents was paid to suppliers, 19c was consumed by costs including staff costs, 13c was paid in GST and 2c went on interest costs and other taxes, with only 2.4c going to the company in profit, it said.

Countdown says 63 cents in every dollar spent at its stores goes back to suppliers and about another 32c is consumed by costs and GST.

“The New Zealand grocery retail sector is highly dynamic and rapidly changing, and we consider it to be very important that the commission takes all those competitors and dynamics into account to obtain a complete view on the way in which competition works in this sector,” it said.

Major rival Foodstuffs was more circumspect lifting a lid on its operations in its submission, but also appeared to give no ground to competition concerns, listing everyone from MyFoodBag, The Warehouse, KMart, Uber Eats and Mighty Ape – and many businesses in between – as its competitors.

“A key trend in consumer shopping habits is that increasingly, not all consumers engage in a full shop, and instead tend to do more frequent, smaller shopping missions,” it said.

“Convenience is likely to be a more relevant factor for the smaller missions, with the ‘price, quality, range and service matrix’ at smaller retail outlets and specialist stores in many cases providing a competitive advantage over full supermarkets, and at the very least representing a strong competitive constraint.”

The supermarket study is widely expected to result in the commission mandating an industry code similar to Australia’s Food and Grocery Code of Conduct or the UK’s Groceries Supply Code of Practice, to protect suppliers from Countdown and Foodstuffs’ market power.

Countdown indicated in its submission that it was making progress in its relationship with suppliers, publishing a chart that appeared to show the proportion of suppliers that said they had a “qood or excellent” relationship with the company rising sharply from a bit over 50 per cent in 2018 to almost 80 per cent last year.

But the Food and Grocery Council, which represents major food manufacturers, said in a substantial submission there was “significant anecdotal evidence of exploitation of suppliers” in the industry.

Complaints included retailers making “arbitrary deductions” from bills and threatening to stop selling products or to move them to a lower shelf, as a negotiating tactic, it reported.

“Grocery supply in New Zealand is a duopoly with a limited competitive fringe,” it said.

The council urged the commission to look more deeply into the profitability of supermarket businesses, noting Foodstuffs was comprised of two cooperative groups, with stores that were independently owned.

“A true reflection of the profitability of grocery retail in New Zealand can only be gleaned by considering the cooperatives as a whole including each grocery retail member,” it said.

“That said, media reports of supermarkets being ‘worth tens of millions of dollars’ may provide a simple clue.”

Consumer NZ also encouraged the commission to press on, saying it had “major concerns about the high level of concentration in the sector and risks this has for consumers”.

It disputed Countdown’s assertion that the real price of groceries was trending down, saying food prices had been rising faster than the rate of general inflation over the past few years.

“Statistics NZ’s Food Price Index shows fruit and vegetable prices increased 8.9 per cent last year, while general inflation sat at 1.4 per cent,” it said.