Supermarkets face real threat of a break-up if they back regulator into a corner

Thursday, 29 July 2021

Commerce Commission commissioner John Small said in July last year that the regulator was not playing a game with supermarkets.

ANALYSIS: Those tipping the Commerce Commission would take a hard line to bring down food prices and who suggested the supermarket chains had misread the “political mood” have been proved right.

Countdown and Foodstuffs face the threat of having to sell off stores or even some of their chains after the regulator went to town in its draft market study into the sector.

Commission chairwoman Anna Rawlings made clear that it would recommend requiring the chains to sell some of their stores to make way for a third competitor as a “last resort”.

That is if the watchdog is unable to negotiate or impose other fixes for what she described as weak competition and persistently high profits in the industry.

* High prices, high profits could mean supermarkets forced to sell stores

* Supermarket boss: 'So this is CEO asked to stop'

There is no bigger stick the commission could have reached for.

Rawlings did not rule out Foodstuffs being required to sell its entire Pak ’n Save franchise if push came to shove, saying the method of any enforced sales would be something it would need to consult on.

John Small says Foodstuffs North Island is currently ranked worse by suppliers.

But it seems more likely the commission would want to see a spread of sales from different chains in different locations, if it came to that.

“We would envisage we would be looking for a national spread of stores,” Rawlings said, commenting on the nature of any sell-offs.

“At this stage, we don’t contemplate it would necessarily target one particular retailer and one particular chain.”

The threat of forced sales of supermarkets is likely to overshadow the fact the commission has separately, as expected, recommended a mandatory code to protect suppliers against the supermarket chains' market power.

“We consider that it would be beneficial to introduce a mandatory code of conduct to help strengthen suppliers’ bargaining power with retailers,” the commission said, confirming that could be modelled on rules already in place in Australia and the UK.

That in itself would be a huge change for the industry.

The question now is whether the commission is really serious about actually breaking up the supermarket chains, and whether the Government would agree to that, or whether that threat is more of a negotiating tactic.

Commissioner John Small made it clear, I think, that the commission’s preferred option would be to achieve a voluntary agreement with Countdown and Foodstuffs to enable more competition.

That would see the two companies agree to supply rival retailers, including small and online stores and potentially a third supermarket chain, with groceries from their warehouses on “non-discriminatory terms”.

Small pointed out one benefit of that approach would be that it could bring about more competition faster than an enforced split of the supermarket chains, as it would benefit their existing rivals, such as they are.

“I’d emphasise too, the ‘dismantling options’ do improve the amount of competition but they don’t improve the physical make-up of the store network,” he said.

All that meant the alternative option of wholesale reform to free up the supply of groceries to more retailers might be more desirable, he said.

The commission has suggested it could perhaps force the kind of access it would like to see to the supermarkets’ distribution networks through regulation.

But it is hard to see such regulation being easy to craft.

How do you really regulate the nitty-gritty of ensuring bulk boxes of hash browns are delivered to a mini mart in Carterton from a Countdown warehouse on terms you can be confident are non-discriminatory?

The Commerce Commission is looking into how competitive New Zealand's grocery retailers are.

A voluntary deal under which the chains agreed to better supply rivals might be easier and faster, but would probably also raise a lot of questions.

Will the supermarket chains play ball, pretend to play ball while sabotaging the commission’s intent, or stonewall and call the commission’s bluff?

Or will they belatedly launch a charm offensive, cut their prices, broaden their product ranges and try to directly win over the public?

It may be a tough call for them to make.

Very earlier on in the commission’s market study into the petrol study, the watchdog signalled an expectation that might result in some sort of negotiated outcome.

This time, Rawlings sounded more hopeful than confident.

Countdown owner Woolworths and Foodstuffs would be seeing the draft results of its market study at the same time as everyone else, she pointed out.

“We are hopeful they will engage with our consultation process to explore which options might be most feasible,” she said.

Market observers have been baffled by the absence of any obvious charm offensive from the supermarket chains since the market study kicked off in November.

Small appeared to back up suggestions there might currently be a particular issue within Foodstuffs North Island, which has been singled out by the Food & Grocery Council over its attitude to suppliers in recent days.

Foodstuffs disappointed the First Union when it lobbied in February against a move to extend annual sick leave to a minimum of 10 days.

Asked whether there was a cultural problem at the co-operative, Small said Foodstuffs North Island currently appeared to be ranked worst by suppliers.

“There are some current issues in that regard. I think the broader issue is major grocery retailers do have market power when it comes to suppliers and that is why we think a code is desirable.”

If the supermarkets chains are in different headspaces right now, that would not appear to bode well for avoiding a showdown over the broader state of competition in the industry.

Consumers appear worked up about food prices, while suppliers have been quietly fuming.

Stuff has received some troubling correspondence from disgruntled supermarket workers complaining about poor employment practices and what they perceive to be greed in some supermarket fiefdoms.

Having told consumers that they are, in effect, paying too much for necessities, it is going to be nigh impossible for the commission or the Government to walk away from a fight empty-handed.

“We think if competition was working better, prices would be lower,” Small said.

The fact supermarket chains have been earning high profits for an extended period and no big rival has entered the market, shows this is a not a problem that is going to fix itself, he suggested.

“We don’t see ourselves as playing a game here,” he said.