Omicron won't get supermarkets off the hook with ComCom, advocates predict

Wednesday, 26 January 2022

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

Empty shelves caused by Omicron disruptions and panic buying might persuade the Government to delay the Commerce Commission’s final report into supermarket competition but are unlikely change its recommendations, competition advocates believe.

The competition watchdog is currently required to complete its market study into the $22 billion groceries industry on March 8, by which time the Omicron outbreak could be in full swing according to modelling by epidemiologists.

There continues to be speculation within the industry that the commission may suggest the Government requires Foodstuffs and Countdown divest their Four Square, Fresh Choice and SuperValue chains, as a compromise in lieu of a broader break-up of their businesses.

That could see those chains and their franchise operators empowered to source products from either Countdown or Foodstuffs’ warehouses on non-discriminatory terms that would be controlled by a new industry ombudsman, or through their own direct arrangements with suppliers.

However, that idea has drawn mixed responses from those advocating for more competition, with some insisting it would not go far enough.

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Requiring a divestment of Four Square and other smaller-store chains is an approach that seems to have divided competition advocates.

The commission’s final report is not expected to require an immediate formal response from the industry, as any actions it suggests are expected to be in the form of recommendations to the Government which would need to consider and consult on any legislative changes impacting the industry.

But it is understood there are some concerns within the industry that the report could nevertheless prove a distraction for food retailers and suppliers seeking to stay on top of Omicron-rated supply chain disruptions.

Countdown has been drawing up contingency plans for dealing with an expected high number of staff absences during Omicron, that include it potentially cutting back on non-essential activities and reducing store opening hours.

It argued in a submission released last month that its current structure had helped it respond to the challenges of Covid, for example by allowing it to move staff between stores to cover gaps while more than 1000 of its workers were self-isolating, and to “pull levers in an all-of-system way”.

Nick Hogendijk, a partner at consultant Hexis Quadrant who has supported a structural reform of the industry, said it might be prudent for the commission to delay its final report by a few weeks “in response to pressure from retailers” until a peak of Omicron infections had passed.

“Why on earth would you release the findings in the middle of everyone trying to make sure you have got products on shelves and stock cleared off the docks?”

A commission spokesman said Commerce Minister David Clark had specified the March 8 deadline for its final report and it was working towards that date.

Commerce Minister David Clark has received no formal request for what would be a second delay to the Commerce Commission’s final report on supermarket competition.

A spokesman for Clark said his office had received no formal request for a delay.

Omicron could conceivably be used as “an excuse” if the commission got cold feet about a mooted break-up of Countdown and Foodstuffs’ businesses, Hogendijk said.

But he saw no reason why it should influence the recommendations the regulator decided to make.

Competition lawyer Andrew Matthews of Matthews Law said he had no doubt the supermarket groups would continue to argue they needed a duopoly or duopsony (a duopoly buyer) to ensure the resilience of supply chains in the face of Covid and other disruptions.

But he said that argument was “incredibly weak and a tacit recognition of their market power and protected position”.

The Deputy PM said supermarkets remain open at the red traffic light setting.

Matthews, who has acted for the Food and Grocery Council, said it was hard to know where the commission’s recommendations would land.

But he said there was “a real logic” in requiring Foodstuffs and Countdown to divest their chains of smaller stores, including Four Square.

“It would be an opportunity for those parties to expand. For a Four Square owner, for example, it could give them the ability to step up and not wait for a New World or Pak n’ Save to become available.”

Matthew Tukaki, chairman of the National Māori Authority, Nga Ngaru Rautahi o Aotearoa, has also said that split is an option the commission should “absolutely” consider.

But consultant Ernie Newman, who has advocated for a deeper structural separation of Countdown and Foodstuffs that includes some of their Countdown, New World and Pak ‘n Save branded stores, said he would be “more than disappointed” if any forced divestment was limited to the chains’ other brands.

“I think it would be tinkering around the edges rather than dealing with the problem head on,” he said.

“It would do absolutely nothing for South Auckland or Porirua.”

While the smaller chains might move into larger format stores in urban areas over time, the timescale over which they could bring more competition to bigger cities would be very different than if a percentage of Countdown, New World and Pak ‘n Save stores were put under different ownership, he said.

Hogendijk said that splitting off Four Square, Fresh Choice and SuperValue would be “a token gesture”.

“You need scale and you need a supply chain that's sustainable,” he said.

“If you take out SuperValue, Fresh Choice and Four Square, you're taking out the smallest of the retail brands and you're not actually addressing the problem.”

Executives from Countdown and Foodstuffs declined an invitation from the Commerce Commission during a conference in November to give their views on how stores might be selected for any divestment, indicating that was not an outcome they were prepared to consider.

Newman said it had “crossed his mind” that supply chain issues caused by Omicron might cause the commission to water-down its recommendations, but believed politics made that unlikely.

Grocery prices were surging and a lot of families were finding it increasingly difficult to make ends meet, he said.

“They are not going to be too impressed with the idea all of this comes to a halt simply because of the traffic light levels or whatever.”

NZ SUPERMARKET STORE NUMBERS

Countdown (Woolworths NZ)

180 Countdown stores

38 SuperValue stores

33 Fresh Choice stores

Foodstuffs (North Island and South Island cooperatives)

140 New World stores

57 Pak ‘n Save stores

230 Four Square stores

Source: Companies’ websites