$430 million a year in excess profits but no supermarket split

Monday, 7 March 2022

The Commerce Commission insists supermarket reforms it is recommending will make a difference.

The competition watchdog won’t recommend Countdown and Foodstuffs be forced to sell parts of their businesses despite estimating they are making about $430 million a year in excess profits.

Commerce Commission chairwoman Anna Rawlings said measures to break up the businesses would be “high complex to develop and would be unprecedented in our view”.

It has instead recommended some smaller changes that it said would improve competition, which include encouraging but not forcing Countdown and Foodstuffs to wholesale groceries to rivals.

The commission estimated that Countdown and Foodstuffs’ combined profit would fall by $430m a year if they earned a 5.5 per cent return on their capital, instead of the 12.9 per cent annual return it said they enjoyed between 2015 and 2019.

Commissioner John Small described that figure as excess profit but would not put an estimate on how much the measures recommended by the commission might bring down the companies’ profits, or the weekly shopping bill.

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It had not received any indication from potential market entrants that the measures it was recommending would be sufficient to attract a third player into the market capable of providing “like for like” competition to Countdown and Foodstuffs, though he said he thought there was “a good chance” they would be.

The commission’s market study is not expected to end the argument over who or what is to blame for high grocery prices.

The measures announced by the Commerce Commission in its final report into the $22b groceries industry are expected to come as a disappointment to those who appealed for the commission to take quick steps to enable the entry of a third supermarket group.

It is recommending making more land available for new grocery stores by changing planning laws to free up sites, banning the use of restrictive land covenants and exclusivity clauses in leases that prevent retail grocery stores from being developed.

Chair of the Commerce Commission Anna Rawlings says splitting the major supermarkets businesses would be too complex.

It said it would also monitor “land banking” by the major grocery retailers.

It plans to “improve access to the wholesale supply of a wide range of groceries at competitive prices” by regulating to require the major grocery retailers “fairly consider” any requests they receive to supply competitors.

Countdown and Foodstuffs will need to draft terms and conditions that set out how the likes of dairies and speciality retailers can buy products from them at wholesale.

But those rules will not actually compel Countdown or Foodstuffs to wholesale groceries to rivals, or to sell them at any particular wholesale price if they do so, Rawlings said.

“What we're imposing on them is a quite a nuanced set of arrangements,” Small said.

The commission plans to monitor “strategic conduct by the major grocery retailers”, such as the use of ‘best price’ clauses and exclusive supply agreements, and there will be a mandatory code of conduct for the big chains to protect suppliers from their market power.

But the commission has not moved to split up Countdown and Foodstuffs’ chains or require them to sell off stores to a third supermarket entrant, as it had earlier been suggested they might.

Despite deciding to keep the big sticks in the cupboard, Rawlings said the commission had found that the intensity of competition between Countdown-owner Woolworths NZ and Foodstuffs was “muted”.

“While there is an increasingly diverse fringe of other competitors in the sector, they are unable to compete effectively with Woolworths NZ and Foodstuffs on price, product range, and store location,” she said.

But she said the commission did not know how much too much consumers were paying for groceries, saying that was not the purpose of the market study.

Defending the limited action by the commission, Rawlings said its recommendations were likely to improve competition and were also “feasible and proportionate” to address the issues it had identified.

“We would expect consumers to pay lower prices,” she said.

“I think public confidence in the ability of market studies to deliver real changes in competition for the public is something that they would need to be asked about,” she said.

“What we've done is conduct a study into the state of competition and reached a range of recommendations that we believe can improve competition.”

Commerce Commission chairwoman Anna Rawlings, pictured with commissioner John Small, described the regulator’s recommendations as “feasible and proportionate”.

The commission planned to again review the state of competition in the groceries industry in three years’ time, she said.

The mandatory code for the industry will be designed to make the relationship between supermarkets and suppliers more transparent and ban unfair conduct.

The commission said it would also consider whether to allow collective bargaining by some suppliers.

The supermarket chains would need to ensure promotional and pricing practices and the terms and conditions of loyalty programmes, were “easy for consumers to understand”.

They would be required to display unit pricing in a consistent format.

The commission has recommended establishing a grocery regulator and dispute resolution scheme.

Responding to the commission’s final market study report into the groceries industry Commerce Minister David Clark said the report was clear “competition in the retail grocery sector is not working”.

“Consumers could get better prices, range and quality if action is taken,” he said.

“The commission’s findings indicate that restrictive covenants over land are a major barrier to supermarkets accessing new sites, so I want to ban these covenants being used to stop competition.”

Rawlings acknowledged that the commission could potentially deal with the issue of restrictive land covenants using its existing powers under the Commerce Act.

But she said that if it did that, it would need to go through them “one at a time”.

Countdown and Foodstuffs said they were reviewing the final report.

“We’ve been actively engaged in the market study process over the past 16 months and have already committed to meaningful change to improve outcomes for our customers,” a Foodstuffs spokeswoman said.