First fuel, now food: is our competition watchdog letting us down?

Wednesday, 9 March 2022

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

ANALYSIS: Retail consultant Nick Hogendijk believes most people wanted the Commerce Commission to give supermarket giants Countdown and Foodstuffs a walloping with a bit of ‘four-by-two’ on Tuesday.

But the steps the Commerce Commission has announced to bring down the price of fuel and groceries appear to have left more Kiwis wondering whether the competition watchdog is up to the job.

Rightly or wrongly, disgruntled shoppers were left unsatisfied by the final recommendations of its $3 million market study into the $22b groceries industry, Hogendijk says.

Those measures include moves to make more land available for new supermarkets and an appeal for Countdown and Foodstuffs to wholesale groceries to the likes of dairies and speciality shops.

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Commissioners Anna Rawlings and John Small made a rare media appearance fronting up on the supermarket study on Tuesday.

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

Commerce Commission chairwoman Anna Rawlings would not be drawn on how likely she thought it was those measures would be sufficient to entice a third supermarket group to set up shop in New Zealand.

Price premiums for higher octane fuels do not appear to have fallen in the wake of action by the Commerce Commission.

Fellow commissioner John Small made clear it hadn’t asked that question of potential entrants.

The public mood probably hasn’t been helped by the fact that the commission delivered its verdict on supermarket competition at a time when Omicron-related supply chain problems and increasingly rampant inflation mean that shoppers are often getting poor experiences when they do their weekly shop.

But this is not the first time competition advocates have had their expectations raised, only to be left deflated by a perceived lack of action from the commission.

The supermarket study comes on the heels of its $2.5m market study into the fuel industry that was also widely seen as a let-down.

The directly observable change that most motorists will have seen as a result of that earlier year-long study is that petrol stations now display the price of ‘’95’’ and ’’98’’ fuel on their roadside boards.

Less clear is whether that has had the effect that the commission and Automobile Association hoped it would have in actually reducing the high price margins for those premium fuels over ‘’91’’.

Economic and political commentator Bernard Hickey shared his thoughts with Breakfast.

Ironically, it has been smaller independent petrol stations battling to bring more competition to petrol retailing that have struggled the most to foot the bill for new signage.

Consumer NZ expressed disappointment with the small steps recommended by the commission on groceries on Tuesday, saying it should have gone further.

Results of a Stuff poll on the day suggest a thumping 83 per cent of readers think the commission is too timid, with only 9 per cent going into bat for the regulator.

The commission did not respond to a request for an interview to discuss that poll.

Perhaps more troubling for the commission is the fact there are signs the Government also feels let down.

The usual question when the commission makes recommendations to ministers about competition remedies is whether the government will have the gumption to implement them in full.

But this time Commerce Minister David Clark suggested that the Government might be prepared to go further in taking action on supermarket competition than its expert competition body has suggested.

Clark conspicuously left the door open to some of the other significant interventions that the commission had considered but ultimately shied away from in its final report, which included forcing Countdown and Foodstuffs to sell some stores to help make way for a third competitor.

The commission’s study lends credence to the argument a lack of competition is not the only, or even the biggest factor behind high prices.

That would not appear to be a vote of confidence in the regulator’s performance.

To be fair to the commission, there is an argument it might simply not be worth taking draconian action on supermarkets.

The watchdog estimated Countdown and Foodstuffs were making about $430 million in “excess profits” each year between 2015 and 2019, but dialled back its earlier assessments of their return on capital.

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

It also found they were making a combined net profit equal to about 3.5 per cent of their revenues, versus an average for supermarket companies overseas of about 2 per cent over that period.

Hogendijk says the results of a Deloitte study suggest Countdown and Foodstuffs’ net profit as a proportion of revenues may now be between 2 and 2.5 percentage points above the international norm.

But even excess profits of $430m a year would suggest households are ‘’only’’ paying about an extra $4.50 a week for groceries as a result of a lack of competition.

That may have been the point Rawlings was making when she described the competition measures the commission was recommending as “proportionate”.

Veteran industry consultant Tim Morris lists a host of other factors that he believes have an equal or bigger impact on New Zealand’s high food prices, which include the minimum wage, biosecurity regulations, higher costs for packaging, “island logistics” and low economies of scale.

The problem is that the commission helped talk up the competition problems in both fuel and groceries, for example when it said in a draft report in July that Countdown and Foodstuffs were making “persistently high profits”.

Had the commission’s message been that consumers were being slightly gouged, but that the cure would be worse than the disease, it might now be facing less of a backlash.

But on Tuesday it instead reiterated that competition in the groceries industry was not working well for consumers, stating that it was not just manifesting itself in higher prices, but also in a low level of innovation in the sector.

The groceries study came out at a time when many consumers were het-up about gaps on shelves and rising prices.

Lower innovation could mean less convenient ways to shop and a lack of new products to buy.

Having been told by the commission these problems exist, it would be hardly surprising if consumers expected the regulator to make a decent fist of its response.

But the detail and circumstances of the commission’s recommendations to improve competition don’t flatter the regulator.

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.

The commission made great play of the fact that it has recommended Countdown and Foodstuffs be required to “consider all requests for commercial wholesale supply in good faith”.

That means that if a dairy or speciality food stores wanted to buy groceries from one of the two companies’ warehouses, the supermarket chains would need to consider that request and, if they refused, explain why.

But it recommends that even if Countdown or Foodstuffs were found to have broken the rules by not considering such a supply request, they could still not be forced to supply the customer, only to “reconsider” the request, which it appears they could again refuse with impunity.

Nor would there be anything to prevent Countdown or Foodstuffs from agreeing to wholesale groceries to rivals but only at a price that was higher than the price in their retail stores, which would make a nonsense of wholesaling.

Regulatory lawyer Michael Wigley of Wigley Law says supermarkets will know that if they don’t play ball the commission could get tougher at a promised review in three years, “but I have no doubt the supermarkets will ‘game’ and delay until that happens”.

“I am surprised by the degree to which the Commerce Commission accepted the supermarkets’ submissions uncritically,” he says.

David Clark says he sees no reason why New Zealand can’t be the Silicon Valley of the southern hemisphere.

The commission’s recommendation that Countdown and Foodstuffs be banned from including land covenants that prevent competitors setting up shop on land they have owned also risks falling flat.

Competition advocate and 2degrees founder Tex Edwards argues the damage from such covenants has already been done.

Few new supermarkets are being built, and where such covenants have been imposed in the past, other business will already be occupying the places that might now be freed up for competition, making the change essentially too late.

If supermarkets have been using land covenants to block competition that also raises the question of why the commission has not already brought prosecutions under the Commerce Act.

One measure recommended by the Commerce Commission that could make a difference to competition is a mandatory code that will seek to ensure supermarkets treat suppliers fairly and don’t abuse their market power.

The new code might be expected to push up the price of some groceries by increasing suppliers’ bargaining power.

Despite years of publicity and action by the Commerce Commission, extended warranties are still being pushed by retailers.

But it could also increase competition by making it impossible for Countdown or Foodstuffs to lean on suppliers and demand they don’t supply competitors, or offer the two firms the “best price” for what they do produce.

It should be noted that the commission said it had not found evidence such bad behaviours had been happening “of a nature or scale that are sufficient to justify opening an investigation”.

Positive though the supplier code may be, it is not an initiative for which the Commerce Commission can take credit.

Clark made clear when he asked for the commission’s market study in 2020 that he envisaged it would result in a mandatory code for the industry.

Rather, the question may be why such a code for the groceries industry is only being developed now, long after already being enacted in Australia and the UK.

The answer may be that the Commerce Commission simply does not aspire to, or is not set up to, be a leader in competition policy.

Rawlings said on Tuesday that one reason that the commission had baulked at splitting up Countdown and Foodstuffs was because it believed such action would be “unprecedented” internationally.

That concern with precedent would seem to clearly position the watchdog as follower.

Regrettably, the commission may not have a deep reserve of goodwill to soak up the public’s recent disappointments.

If people have had direct dealings with the commission it is mostly likely to have been to fire off a complaint under the Fair Trading Act or Commerce Act into the ether.

Describing its accountability on its website, the commission states: “We answer to New Zealanders for the work we do and the money we spend”.

But unless anyone is counting the occasional short appearance in front of a select committee, does it really, and if so how?

Ultimately if the commission is viewed as an under-performer that has to bounce back to the government.

It is ministers who appoint commissioners to the watchdog and there is some evidence that they have not always been undertaking the due diligence that might be required.

The most vital attributes for commissioners are the ability to absorb and understand complex information, and sound judgment.

It perhaps doesn’t reflect well on ministers that the commission last year had to distance itself from one of those appointees after they posted an anti-vax message on LinkedIn that compared prominent public health experts to Nazi torturer Josef Mengele.

Rawlings, whom Hogendijk credits with doing a good job of leading the commission’s conference into the groceries’ industry in October, will depart in May.

It will then be up to a new chair to present the results of the commission’s third and probably toughest market study, into the complex area of building materials, from its offices high up on Wellington’s The Terrace, in the face of what will now be a sea of low expectations.