Supermarket competition: Government looking at 'regulatory backstop'

Tuesday, 10 May 2022

David Clark says the Government is working at pace to address grocery prices.

The Government is considering forcing Countdown and Foodstuffs to supply rival retailers with groceries on terms underpinned by regulation to improve competition, Commerce Minister David Clark says.

Clark indicated no final decision had been made and said it was important to take the time to get the decision right.

Consumer NZ called for such a change on Tuesday, but competition advocate Tex Edwards predicted it would not be enough to bring about “like for like” competition from a new supermarket chain and would result only in “pyrrhic competition”.

The Commerce Commission considered imposing an obligation on the two supermarket groups to wholesale goods to rivals when it conducted its market study into the $22 billion groceries industry.

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Countdown and Foodstuffs would be required to supply rival retailers with groceries on terms underpinned by regulation, under a proposal being investigated by officials.

But it ultimately rejected that in favour of encouraging voluntary supply arrangements, saying “access regulation” had little support during submissions from those who wanted more “more significant interventions” and that many of the concerns of the two supermarket chains appeared well-founded.

It cautioned such regulation could reduce rather improve price competition and might make the industry less efficient by introducing “significant additional costs”.

Clark said the Government was on track to release its response the commission’s report by the end of the month.

“I'm not announcing today, the Government's response.

Commerce Minister David Clark says the Government is on track to announce its response to the Commerce Commission’s recommendations for the groceries industry by the end of this month.

“But I am signalling that I've asked my officials to look at a regulatory backstop as an option because I think it's something that has merit and could open up wholesale to a range of competitors,” he said.

Clark gave no indication that the Government had reason to expect a mandatory wholesale regime would be sufficient to draw a third supermarket chain that could provide like-for-like competition to Countdown and Foodstuffs into the market.

But the Government is believed to consider that it could put downward pressure on supermarket pricing even if it only made it easier for existing rival retailers, including dairies, to improve their blend of pricing and convenience.

“I think access to wholesale is a really key part of the Commerce Commission's response. They devote a great deal of the energy to describing how that might happen,” Clark said.

“I am considering whether we can go further so we are certain that happens.”

Clark would not comment on why the Government might reach a different conclusion to the commission, on the merits of a mandatory rather than a voluntary regime, saying he “didn’t want to get ahead of the process”.

Countdown spokesperson Kiri Hannifin said there were “a lot of complexities around wholesale supply that need to be considered and worked through, but we are well aware of both the commission’s recommendations and the Government’s expectations”.

Consumer NZ launched a petition on Tuesday calling for Clark to consider regulating access to wholesale supply or setting up a “state-owned wholesaler”, though Clark has ruled out the latter option.

When it comes to supermarket options, New Zealand has few and far between.

“By regulating access to wholesale supply, a third or fourth player would have the ability and confidence to enter, or expand, in the market, thereby increasing competition and reducing prices for consumers,” Consumer NZ chief executive Jon Duffy said.

“Fringe retailers such as convenience stores, dairies and petrol stations would also benefit from access to wholesale groceries on reasonable terms.”

Sarah Balle, founder of online supermarket Supie, said she supported the idea of a wholesale regime or a state-backed wholesaler, saying she believed that would be “a huge help to the broken sector”.

During the commission’s market study, she advocated harder for the second option, suggesting Supie could take on the role of being a government-back wholesaler, an offer she repeated on Tuesday.

Edwards had called during the commission’s market study for the Government to force Countdown and Foodstuffs to sell a large number of their stores to a new rival.

“Wholesale regulation is not going to resolve the retail dominance that exists. My experience is that both wholesale and retail market power need to be constrained, not just wholesale,” he said.

Competition advocate Ernie Newman, a former chief executive of what is now the Food and Grocery Council, said wholesale regulation would be only the “fourth best” option for improving competition in the sector.

The best option for consumers would be requiring Countdown and Foodstuffs to divest a proportion of their stores, and the second best would be requiring the structural separation of the supermarkets’ wholesale and retail businesses, he said.

The third-best option would be for the Government to provide some kind of support to get a new entrant into the market, he said.

There was a big gap after that “to a bit of regulatory tinkering” Newman said.

Newman headed the Telecommunications Users Association during the tumultuous period in that industry that saw the break-up of Telecom.

“Wholesale regulation worked in the telecommunications industry because you had essentially only half a dozen products,” he said.

“When you have a tiny number of prices it is very easy for a regulator to work out what they should be.”

But in the supermarket sector, where there were thousands of products including perishable goods that varied in cost and quality by the day, it would be “very hard” to police a wholesale regime, he said.

“My feeling is it would work, but only if it was extraordinarily specific in terms of how it was done. The concept is great but the execution is mind-boggling in that industry,” he said.