2degrees founder Tex Edwards says why we need another supermarket chain

Tuesday, 5 October 2021

Commerce Commission chairwoman Anna Rawlings presents the commission's draft report into the grocery sector in July.

2degrees founder Tex Edwards has broken his silence on why he thinks the country needs another supermarket chain, saying it would result in more services for shoppers as well as lower prices.

Edwards is the driving force behind Northelia, a group that told the commission it could access $1 billion of capital to set up a third supermarket chain, with the right regulatory interventions.

He expected an increase in competition would result in innovations including the use of artificial intelligence and internet-connected fridges to help automate grocery shopping.

A third chain would also make it more likely that supermarkets would compete to provide more information to customers on minimising their carbon footprints, he said.

Customers should be able to scan their loyalty cards at different chains to get an estimate of how their carbon footprints would be different at each, he said.

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Tex Edwards says the process under which would-be supermarket industry entrants would be allowed to bid for existing stores would need to be competitive so it wasn’t just a “wealth transfer”.

New Zealand was a “niche, bespoke” food exporter and needed a vibrant domestic retail market to test its products, marketing and packaging, Edwards said.

The Commerce Commission is conducting a market study into the groceries industry and has canvassed the possibility of requiring Countdown and Foodstuffs to sell off some of their stores and perhaps separate their distribution business from their retail operations, to help make space for new rivals.

Northelia is understood to be courting a possible partnership with Māori interests, as 2degrees previously did to secure 3G radio spectrum that it used to support the launch of its network in 2009.

Edwards said he was not currently authorised to speak on behalf of Northelia, but could comment on behalf of Monopoly Watch NZ, a lobby group which also has submitted on the grocery market study and which has funded market research on the public's appetite for industry reforms.

A third supermarket operator might require the right to buy between 125 and 200 existing supermarkets from Countdown and Foodstuffs at “non-monopolistic” prices that disregarded the value of their local market power, he said.

That would not be a breach of Countdown and Foodstuffs’ property rights “because there's no property right to ‘monopoly rent’,” he said.

Edwards believed a new competitor would also need the commission to set up a “fair access regime” temporarily giving it the right to source products from Countdown and Foodstuffs’ distribution centres on the same terms as the two chains’ existing stores, while it built out its own infrastructure.

“Our recommendation is that for two to three years, the new operator is able to buy wholesale through the distribution centres,” he said.

The fact distribution centres were now very software-driven would make it easier for the commission to monitor compliance with such a regime, he said.

Countdown has warned of “unintended consequences” if the Commerce Commission recommends structural reforms of the supermarket industry.

It was important that new entrants were allowed to access data from the existing chains’ customer loyalty schemes, he said, likening that to “number portability” in the phone industry.

Edwards said that unless that happened, Countdown and Foodstuffs would be able to cherry-pick customers by tempting back the more lucrative customers who deserted its stores with special discounts that were not available to others.

Countdown and Foodstuffs have both advised against the structural separation of their businesses or forced sales of their stores in their submissions to the commission, querying the watchdog’s assessment they have been making excess profits.

Countdown said a forced split would have “unintended consequences” that would probably lead to higher prices and poorer outcomes for consumers.

“It is likely to be the Kiwi consumer and taxpayer who ultimately bear that cost, and therefore it’s our view that other actions should be considered first,” it said.

Northelia acknowledged in its submission to the commission that the types of intervention it was requesting would be globally unprecedented.

But Edwards said it had also been unprecedented for the Government to allow Countdown’s Australian owner Woolworths to buy New Zealand’s Foodtown chain in 2005.

“Nowhere else in the OECD has a ‘three to two’ merger been allowed,” he said.

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“We have to acknowledge that we've had really weak competition laws. That requires bold action to realign it.”

Edwards said the forced sale of existing supermarkets to a new entrant would “have to be a competitive process” to be fair, and could not simply be a “wealth transfer” to investors in a new venture.

He suggested some form of tender.

Northelia is the only group that has publicly expressed interest in entering the market on the back of the commission’s groceries study, so far.

But Edwards said there were “two or three other credible players” eyeing the opportunity, depending on whether the commission recommended structural separation.

Ernie Newman, a former chief executive of the Telecommunications Users Association has described Edwards as a “monopoly buster”.

But Edwards downplayed his personal interest in the supermarket-industry outcome.

He is not understood to be a position to be a major investor in a new chain, and appeared to indicate he would have been satisfied to have left the opportunity to others.

“The only reason I'm doing this is I want to respect the people who helped me on the telephone adventure and the customers who jumped up and down and helped us, and they deserve a break, so ‘monopoly watch, here we come’”.

Edwards helped coalesce the commercial interests that morphed into 2degrees and Edwards said he was undertaking a similar function in his involvement in grocery industry reforms.

“Different asset class, same movie.

“I've only got one skill, and that is that I can gather people better than me around me.”

It is understood Northelia envisages that some of the capital and expertise for a new supermarket chain might come from Foodstuffs store managers who hope to become owner-operators of New World and Pak ‘n Save stores but who have been unable to secure one because of the competition for franchises.

“Monopoly Watch has been swamped by people who are in the queue to buy a supermarket,” Edwards said. “Franchising is always an option.”

“There is competition in New Zealand to buy a supermarket because there is no competition when operating one. There's no shortage of capital for the business.”