Arm wrestle for share of $22b groceries market intensifies

Thursday, 28 October 2021

Supie founder Sarah Balle has suggested it could play a similar role to ‘Kiwibank’ in the groceries market, given $150 million.

Countdown and Foodstuffs should be required to sell about 150 of their supermarkets to encourage a third player into the market, 2degrees founder Tex Edwards has told the Commerce Commission.

Edwards, revealed more about what a bid by Northelia to set up a third chain might look like on the fifth day of the commission’s market study conference into the supermarket industry on Thursday.

That saw some testy exchanges as the watchdog begin tackling the more meaty issues of possible structural reforms and heard some of the strongest complaints made against the existing chains so far.

A sensible goal for a third player would be to capture a $3.5 billion or 15 per cent share of the $22b groceries market, with a footprint of stores in Auckland, Wellington, Christchurch, Dunedin, Tauranga and Hamilton “to start off”, before it expanded into provincial New Zealand, Edwards said.

Tex Edwards said the damage caused by restrictive supermarket land covenants had already been done.

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“We see the scale issues as absolutely essential, because although it's a highly profitable industry in New Zealand, it is still a low margin industry.”

Edwards said margins would also fall if a new supermarket chain came in, forecasting a “vigorous, almost violent” reaction from the existing chains and a three or four year “hell zone” for the new entrant.

But Sarah Balle, founder of Auckland online groceries supplier Supie, appeared to suggest public funds could be invested into Supie to allow it to become a competitive check on the two main chains.

“We believe one of the opportunities that is present is a ‘Kiwibank’-style ownership model to enable Supie to become an effective competitor in New Zealand, operating in the best interests of New Zealand which is what Kiwibank prides itself on,” she told the commission.

Balle said that to scale nationwide and offer “like for like” competition to Countdown and Foodstuffs, but without bricks and mortar stores, Supie would need access to more than $150m.

“As much as we want Supie’s ownership to remain in New Zealand, this is simply not possible with the current conditions,” she said, adding the ‘Kiwibank’ concept could be a solution.

Edwards said he was able to raise $250m to establish 2degrees within “72 hours” of the Commerce Commission publishing a 42-page review of the mobile market at 4pm on October 4, 2007, that paved the way for significant regulatory reforms in that industry.

But he said encouraging a new supermarket entrant would involve asking “capital providers to put capital in harm’s way” and there was “significant scar tissue” in New Zealand in that regard.

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Matthew Lane, general manager of Night 'n Day, which operates 51 convenience stores, endorsed Edwards’ comments about the likelihood of a strong reaction from Countdown and Foodstuffs to new competition.

Lane said that within six months of the Dunedin-based company expanding to the North Island in 2011 by acquiring 21 former Woolworths Quickstop stores, Foodstuffs South Island terminated an agreement giving it access to dry goods on equal terms to its franchises.

As a result, Night ‘n Day was unable to obtain dry goods from any supplier in that market on competitive terms and had to focus on the likes of coffee and “food to go”, he said.

Foodstuffs South Island retail manager Tim Donaldson responded that Night n’ Day had complained to the commission, and that the watchdog had found in Foodstuffs SI’s favour.

Edwards aired another historic grievance, recalling that Countdown owner Woolworths and Foodstuffs each bought a 10 per cent stake in The Warehouse in 2006 at the time when The Warehouse was considering a broad move into food retailing.

He described that as a “blocking move”.

The regulatory interventions Monopoly Watch NZ and Northelia were seeking were not extreme in comparison, he suggested.

“The behaviours of the incumbents have been off the [chart] extreme – it is a sort of second-page Financial Times narrative,” he said.

“The New Zealand investors who would put capital into this industry are basically just wanting market power constrained.”

An offer by Countdown and Foodstuffs to terminate restrictive land covenants limiting the types of business activities allowed near stores didn’t fix the competitive damage those restrictions had already done, he also suggested.

“The horse has bolted. We've had entrenched behaviours for 15 years.”

Foodstuffs North Island general counsel Mike Brooker responded that if the purpose or effect of the covenants was anticompetitive “they would be illegal today”.

“We've heard a bit about blocking. I think the commissioners will be extremely well aware of the unlawful provisions in the Commerce Act about unlawful blocking – so those are there,” he told the commission.

Brooker also rejected any suggestion there might be anything “untoward” about Foodstuffs’ future response to a new entrant.

Instead, its reaction would be “responsibly competitive”, he said.

Independently of whether the commission agrees the bombshell step of requiring Countdown and Foodstuffs to sell some of their stores to a third supermarket player, it is considering ways to allow a potentially wider variety of rivals to buy goods on competitive wholesale terms from the chains.

Edwards has forecast Northelia’s potential venture would need that right for a few years, while it became established.

He said “a regulatory backstop” would be needed, but if Countdown and Foodstuffs were required to sell some of their stores it would help that they would then have an incentive to compete to supply a new entrant.

Commissioner John Small said options to ensure better wholesale access to groceries included voluntary commercial arrangements, enforceable access undertakings, or a “regulatory access regime”, but he acknowledged the issues involved were “difficult”.

Donaldson said Foodstuffs SI was not currently set up to enable wholesale supply as it was a “fully integrated business.”

“Vertical integration is the most efficient way for retailers to operate,” he said.