Supermarket critics smell blood as Commerce Commission probes separation options

Monday, 1 November 2021

Countdown is open to acting as a wholesaler but appears to be on a different page to the Commerce Commission on what that would mean.

Countdown and Foodstuffs had to confront the possibility that the Commerce Commission could break up their businesses, on the bruising, penultimate day of the commission’s market study conference into the $22 billion groceries industry.

Commissioner John Small said no decisions had been taken, but indicated that making Countdown and Foodstuffs ‘operationally separate’ their wholesale and retail activities was the minimum step the commission would consider to improve wholesale competition in the industry.

The watchdog quizzed the chains on why it shouldn’t go further by structurally splitting the businesses while also requiring them to sell some of their stores to a new competitor, in the wake of its preliminary assessment in July they are making excess profits.

Critics of the two chains are understood to have been buoyed by the direction that the commission’s investigations took on Monday.

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2degrees founder Tex Edwards reiterated that a group he was involved in, Northelia, would like to take 150 stores off Countdown and Foodstuffs, and newly revealed that it was working with iwi around the country to ensure any business that resulted would be New Zealand-owned.

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

Representatives from Countdown and Foodstuffs baulked at the options drilled into by the commission.

Russell McVeagh lawyer Troy Pilkington, who was invited to give evidence by Countdown, said if the commission was to recommend forced divestments, it would need to consider “broader issues”, including investment incentives, “sovereign risk”, property rights, common law and consistency with international treaties.

Countdown strategy director Josh Gluckman questioned whether the commission should even be considering the idea of forcing it to sell some stores, given the implications that simply discussing the option could have for investors.

He declined to discuss how the commission could approach store sales, saying forced divestments would be “extreme and unwarranted”.

“There may be recipients who might benefit from expropriated assets, but New Zealand is a modern developed economy.

“There are risks in even entertaining some of these conversations,” Gluckman said.

But that didn’t stop the commission from pressing ahead with detailed questions about a forced sell-off, including how it might select supermarkets that would be sold and how they should be priced.

Edwards said stores would need to be sold at a price that did not reward owners for any local monopoly they enjoyed, instead suggesting a formula that was more based on their replacement cost.

Small opened the session by saying the commission currently saw the operational separation of retail and wholesale being “a minimal requirement for effective wholesale supply by grocery retailers”.

The commission hinted that it only envisaged imposing the requirement on grocery retailers above a certain revenue threshold, which might mean it was only Countdown and Foodstuffs that were affected.

A partner at law firm Russell McVeagh has suggested some options that may be considered by the commission could breach international law and put off overseas investors.

Operational separation would see New World and Pak ‘n Save owner Foodstuffs and Countdown establish a new business unit within each of their firms that would supply their own stores and other retailers on “non-discriminatory terms”, Small said.

The unit would need to have its own leadership team and have separate budgets and accounts, he said.

Structural separation would go a step further by requiring the wholesale divisions be split off into separate companies perhaps under different owners.

Small appeared to suggest the commission believed the supermarket groups had agreed to operational separation earlier in the discussions.

But Foodstuffs South Island retail manager Tim Donaldson told the commission that was not the case – rather the chains had only agreed that it might be possible for them to supply rival retailers on “commercial terms”, he said.

Gluckman appeared to confirm that, saying Countdown was “open to exploring voluntary wholesale access if considered necessary over time” but didn’t agree operational separation was a prerequisite.

The Commerce Commission plans to complete its market study in March.

Donaldson said both operational and structural separation would add costs that might need to be paid by consumers.

“In simple terms, we're able to get products where they need to go as efficiently as possible.

“It would be difficult if not impossible to maintain that agility, flexibility and efficiency with operational or structural separation,” he said.

Foodstuffs North Island chief executive Chris Quin also pulled down the shutter on structural reforms, saying Foodstuffs and Countdown were not a duopoly and food prices were not high in New Zealand compared to the international average.

Food and Grocery Council chief executive Katherine Rich, a former National MP, told the commission it was questionable whether the supermarket chains would be sincere about voluntary measures, given they would not acknowledge there were competition problems in the industry.

“We've heard discussions right throughout this conference that there are no ‘barriers to entry’, the market is fine, and a duopoly doesn’t exist,” Rich said.

“Divestment may be an option when you're dealing with players that don't sincerely and genuinely understand that there is a problem at all.”

Quin said that the “drastic measures” the commission was considering had only been carried out elsewhere with the consent of the businesses involved.

“Confiscation, even with recompense, of privately-owned businesses and family stores would be unprecedented.”

Competition lawyer Andy Matthews of Matthews Law, disputed that, telling the commission that business divestments had been required in the United States for “antitrust” and other reasons, and in New Zealand in the electricity sector.

Edwards said he had contacted credit ratings agencies Moody’s and Standard & Poor’s after viewing the commission’s conference agenda for Monday.

The feedback was that, rather than there being potentially negative consequences for the country’s credit ratings, “vigorous and vibrant competition policy” could result in a credit upgrade for New Zealand, he said.

The commission is due to publish its final recommendations for the sector on March 8 and repeatedly emphasised on Monday that it would still be open for talks after this week’s conference ended.