Supermarket competition: what the Commerce Commission could do on Tuesday

Friday, 4 March 2022

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

Shoppers will find out on Tuesday what the Commerce Commission thinks should be done to improve supermarket competition.

It would be an understatement to say the industry is on edge about what the final report from its market study into the $22 billion groceries sector will recommend.

The competition watchdog is expected to partially walk back some of the conclusions it drew in a draft report in July about the “persistently high profits” of supermarkets.

But no-one expects it to just rip up its preliminary finding that “competition is not working well for consumers”.

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Countdown is owned by Woolworths, one of two giant chains which have a practical duopoly over the grocery market. Woolworths also owns the Fresh Choice and Super Value brands.

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Unusually for a significant Commerce Commission report, no-one purports to know exactly what the commission might recommend.

But many of the options do seem clear.

The most drastic option

That would be for the commission to recommend Countdown and Foodstuffs are forced to sell a large number of their stores to help make way for a third supermarket chain.

The commission said in its draft report that such forced divestments were an option.

If the commission does reach for the chain saw, there are at least three broad options for how it could be wielded, with plenty of scope also for some sort of ‘mix and match’.

Extreme impact: The commission could follow the advice of 2degrees founder Tex Edwards and undertake a scientific process to hand-pick at least 125 Countdown, New World and Pak ‘n Save stores for forced disposal.

The objective would be to allow a third supermarket entrant to quickly set up a like-for-like business in large cities.

To entice a third operator, stores might need to be sold at a price that reflected what they would cost to build and kit out, rather than their market value which would probably be higher.

Monopoly Watch spokesperson Tex Edwards is disappointed that no other non-profits that could have represented the interests of consumers are giving evidence at a conference hosted by the Commerce Commission.

Many New Zealanders in big cities could expect to get the chance to shop nearby at a new chain.

Very high impact: The commission could decide that Progressive Enterprises should not have been allowed to buy Woolworths NZ in 2002 and recommend the acquisition be unwound.

The acquisition, which was approved against the commission’s initial advice after a court case, reduced the number of supermarket groups from three to two, now known as Foodstuffs and Countdown.

If that came about, Foodstuffs might emerge unscathed while Countdown’s business would be for the chopping board.

Iwi are believed to have Four Square in their sights.

Edwards argues too much water has flowed under the bridge since 2002 for this to be the optimal option.

Also very high impact: The Commerce Commission could attempt a simpler, cleaner split by requiring Foodstuffs and Countdown sell their chains of smaller Four Square, Fresh Choice and SuperValue supermarkets to a new operator or operators.

That could set them up for partial ownership by iwi.

The assumption might be that the small store networks could then grow to become a bigger competitor to Countdown and Foodstuffs’ New World and Pak ‘n Save chains over time.

Matthew Tukaki, the chairman of the National Māori Authority, Nga Ngaru Rautahi o Aotearoa, has said this has “got to be an option among many things that need to happen”.

Shoppers in rural and regional New Zealand could expect to see a new dynamic in their communities, but competition advocate Ernie Newman has suggested this option would be a cop-out by the commission that would do “nothing for South Auckland or Porirua”.

Kiwishop, anyone?

Low to high impact: The commission has floated the idea that the Government itself could directly support the entry of a new supermarket competitor.

The impact would depend on the form that investment took and the scale of the Government’s ambitions.

An idea proposed by Sarah Balle, the chief executive of online supermarket Supie, is that the Government could fund iwi or instruct the NZ Super fund to invest in an online-only competitor, such as Supie.

The goal would be to help them quickly grow to a size where they could provide nationwide deliveries from a broad range of suppliers while competing strongly on price with traditional supermarkets.

A Stuff poll suggests shoppers may be split pretty much down the middle on whether they think a new online-only supermarket chain could be a solution to the sector’s supposed competition woes.

The huge logistics centres that sit behind the supermarket store networks, such as this giant Foodstuffs distribution centre in South Auckland, may be a big piece of the puzzle.

Wholesale change

Minimal to medium impact: Whether or not the commission recommends breaking up Countdown and Foodstuffs’ store networks or funding a new online competitor, it could recommend intervening in their wholesale operations.

It could merely suggest some voluntary guidelines under which Countdown and Foodstuffs would agree to supply owners of other shops with products.

Or it could go the whole hog and recommend they be required to split their stores into one business, and their procurement, warehousing and distribution arms into another.

There is a sliding scale of options in between, including some form of operational separation that would require they supply other shops on equal terms and treat their own store networks at arms’ length.

Strong wholesaling rules might be needed temporarily at least to help nurture a third market player, should the commission also recommend the Government break off chunks of Countdown or Foodstuffs’ retail networks or invest in a new entrant.

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Less clear, is the impact intervention in the wholesale market could have if it wasn’t married with other such actions.

A mandatory industry code

Mixed impacts: The commission is certain to recommend a new mandatory code and some form of commissioner for the supermarket industry that together will seek to prevent big chains from using their market power over smaller suppliers.

Countdown and Foodstuffs have agreed to back a code based on one in Australia, under which big retailers and wholesalers “volunteer” to abide by a scheme overseen by a government-appointer reviewer who sets rules and provides for the mandatory arbitration of disputes.

Consumer NZ is preparing a complaint for the Commerce Commission about supermarket specials.

But the Food and Grocery Council has suggested the commission implement a tougher regime that borrows at least some elements from an alternative scheme operating in Britain.

Balle is keen for the new regulator to also have a hand in ensuring fair competition between large and small retailers.

The impacts that an industry code could have for consumers appear mixed. It could mean higher prices for food on the shelf if it prevents supermarkets from negotiating aggressively with suppliers on price.

But the code could also tackle the cosy relationships that are rumoured to have developed between the chains and some of their larger suppliers, which could mean a wider choice of products in store.

Rats and mice

Lower impact: The commission identified a number of potentially illegal practices by supermarkets and their suppliers in the early stages of its market study.

Its concerns included the use by supermarkets of land covenants to prevent rival activities near their stores, which the watchdog said had the potential to breach the Commerce Act.

The watchdog said it also knew of some suppliers indicating they were only willing to supply grocery retailers if they did not undercut prices charged by other retailers, and examples of suppliers allegedly refusing to supply retailers when they were concerned their retail prices were too low.

Both practices could open up suppliers to legal action by the commission.

The commission also said it was considering taking action against supermarkets in relation to pricing practices under the Fair Trading Act, citing concerns about non-genuine “specials”.

The new industry code has the potential to limit the future scope for activities that would already fall on the wrong side of the law, but Edwards notes that in the case of restrictive land covenants, much of the damage might already have been done.

If the commission is going to expect the public to have faith in the broader recommendations it makes on Tuesday, it may not be able to leave any skeletons it has discovered in the cupboard.

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