Countdown and Foodstuffs about to find out what's in the regulator's trolley

Saturday, 24 July 2021

Countdown and Foodstuffs will find out next week whether they may have to sell off some of their stores or change their businesses to help make way for a new supermarket company.

Price controls on some “essential items” such as fruit and vegetables and cheese, might even be on the table, Consumer NZ chief executive Jon Duffy said.

The Commerce Commission is due to publish its draft market study into the $22 billion groceries industry on Thursday.

Duffy said it was a “no brainer” that the regulator would recommend new mandatory rules that will give more rights to food suppliers in their dealings with supermarkets.

**READ MORE:

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* NZ too small for another supermarket to break Foodstuff and Countdown duopoly

* Supermarket accused of bullying suppliers, terrorising sales reps

**

But less certain is what if any steps the commission might recommend to increase competition or bring down prices for consumers.

Consumer Affairs Minister David Clark said in November when he announced the review that 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.

One competition expert believed Countdown and Foodstuffs, which owns the New World, Pak’n Save and Four Square chains, might be in for a surprise.

Although not tipped as likely when the review was announced, the Commerce Commission could go as far as to recommend “vertically or horizontally separating” the supermarket chains, in its draft report, the expert said.

That could mean Countdown and Foodstuffs having to sell off some stores or allow a competitor to use their warehousing and other infrastructure – or both – to smooth the way for a third supermarket group to enter the market.

Countdown and Foodstuffs have argued throughout the review that they face more competition than critics might realise, including from speciality and online stores, people eating out, takeaways and the likes of Uber Eats, and that their competition is growing.

Countdown told the commission 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 just under 1.6 per cent.

But Duffy said there appeared to be a “distinct lack of competition” in the market.

The commission had been tight-lipped during the review to date, which was necessary as Countdown owner Woolworths is a listed company in Australia, he said.

But he believed the commission will have at least considered taking steps to help a new competitor into the market.

“I imagine that will have been on the table, but I’d need to see the workings before I said that was going to be a good use of resource,” he said.

It was also possible the commission might recommend price controls on some more essential goods, including fruit and vegetables and perhaps some dairy products, through the Commerce Act, he said, noting controversy over the price of cheese.

“It would be a really big call, but that may be something that is on the table.”

Consumer NZ’s central hope was that the draft report would “put to bed” the question of whether the profit margins of the supermarket chains were too high, and whether a lack of competition had resulted in “lazy behaviour” by them, he said.

“I think there are a number of signs pointing to that, but to date, because both supermarket groups are a closed shop, we haven’t been able to have someone independent go in and say ‘actually, yes this market is not working as it should be’.

The Commission Commerce only got the powers to undertake such market studies in 2018, and has so far conducted only one such study, into the petrol industry in 2019, with another pending into the building materials’ industry next year.

Despite speculation the supermarket chains would work harder put their best foot forward while the review was underway to try and head-off any radical outcomes, Duffy was unable to immediately identify any major signs they had pursued that strategy.

As soon as the groceries market study was announced in November it appeared clear it would at least result in a new mandatory 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.

New Zealand Food & Grocery Council chief executive Katherine Rich argued demands being made of suppliers by stores sometimes “overstep the line between robust negotiation and bullying”.

Clark appeared to talk-up the prospects of a mandatory code of conduct in November, but said it made sense to do the market study before making decisions.

“I think the code of conduct is a ‘no brainer’ and that is easy,” Duffy said.

“That could have happened without the need for this review.”

But the challenge for the Government may be that if a supplier code was the only major recommendation that came out of the market study, the initiative might be seen as more likely to raise rather than lower food prices for consumers.

Countdown spelt out the dilemma in a submission in February, saying it needed to negotiate “robustly” with large suppliers, “in order to obtain competitive prices for New Zealanders”.

Duffy said no-one could know how the Commerce Commission might manage any competing priorities until the draft report came out on Thursday.

“But I know the commission, in my dealings with them, have consumers’ interests at heart,” he said.

“While the supply issue is a key one, consumer outcomes are just as important.”