Public could get say on break-up of Countdown and Foodstuffs early next year

Wednesday, 8 June 2022

A Cabinet paper says “property rights” and any reduced economies of scale would be among the issues that would need to be considered if the Government was to consider breaking up supermarket chains.

A cost-benefit analysis on forced store sales will be provided to the Cabinet in October
Commerce Minister David Clark says there would be a ‘high burden of proof’ for such a step
Supermarkets could be fined a percentage of their turnover for breaking new wholesaling rules

The public could be consulted on a break-up of supermarket groups Countdown and Foodstuffs early next year, if the Government chooses to go down that track, a newly-released Cabinet paper has revealed.

Commerce Minister David Clark announced the initial steps that the Government would take to improve competition in the $22 billion groceries industry last week, which include a new wholesale regime and a code of conduct for the industry.

But the Cabinet paper supporting those decisions provides more detail about the Government’s plans and conundrums, and the further step it could take of ordering Countdown and Foodstuffs to sell some of their stores to make way for a third supermarket chain.

Clark told fellow ministers that he would report back in October with the results of ‘a detailed cost-benefit analysis’ on the various options for “retail divestment” and to seek a decision on whether to proceed with further steps.

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“Based on this work, implementation options could then be developed for public consultation in early 2023,” the paper states.

The options could either be to force Countdown and Foodstuffs to sell some of their stores, or some of their banners, the paper said.

But details on the ways in which that could be done were redacted from the Cabinet paper.

The option touted by competition advocate Tex Edwards would see Countdown and Foodstuffs forced to sell more than 100 of their Countdown, New World and Pak’n Save stores.

But an alternative that has attracted the interest of the National Māori Authority is a forced sale of their Fresh Choice and Four Square chains.

Foodstuffs chief executive Chris Quin said it was “completely committed to playing its part and supporting New Zealand to meet the challenge of global food price inflation”.

Commerce Minister David Clark expects to go back to the Cabinet with the results of a ‘cost-benefit analysts’ of retail divestments in October, with consultations possible early next year.

“On divestment, we note the Commerce Commission was clear in its final report that such a step was not justified, would not be a proportionate response, and would not deliver better outcomes for New Zealanders,” he said.

“Our stores are independently owned, and in some cases are businesses that have been built up in communities over decades, so the option of forced divestment would have a significant impact and be unprecedented in our recent economic history.”

Countdown was also approached for comment.

It is widely assumed that the Government would risk a lawsuit from the supermarket groups if it did order either kind of break-up, which would appear unprecedented at least in New Zealand.

Telecom split into the business that is now Spark, and Chorus, in 2011 after a series of regulatory interventions, but ultimately did so voluntarily, rather than as a result of government legislation.

The Cabinet paper cautioned there would be a “high burden of proof to be met before decisions on retail divestment can be taken” in the supermarket industry, noting that the commission did not carry out its own cost-benefit analysis on the option when it conducted its market study into the industry.

Potential “risks and issues” would need to be considered and the potential impacts on the chains’ operations, economies of scale, property rights and supply model understood, it said.

The Cabinet paper said a wholesale backstop regime being developed to try to improve competition in the interim could include a “must supply” obligation on Countdown and Foodstuffs to sell groceries at the wholesale level on regulated terms and conditions.

But it showed major decisions had yet to be made about exactly how that would work, ahead of the introduction of a Grocery Industry Competition Bill in October.

Those included whether the regime would be based on a requirement for Countdown and Foodstuffs to supply rivals on terms equivalent to their own retail stores without discrimination, or on a “regulated cost of supply basis”.

The latter regime would appear likely to require the supermarket groups to supply groceries to rivals for the cost they bought them, plus an allowed mark-up.

The wholesale backstop would be triggered if the supermarket groups were deemed not to have abided by a “quasi-regulatory regime” to consider requests to supply rivals in good faith, and to supply them on standardised terms with a disputes resolution scheme in place.

But the Cabinet paper made clear that officials were still developing the criteria under which the wholesale backstop could be triggered.

It indicated that Countdown and Foodstuffs could face the possibility of big fines if they did not abide by whatever regime eventuated, or by a new mandatory code of conduct for the industry that will set out how they should treat suppliers and consumers.

The penalties for breaches could include fining them a proportion of their turnover as well as “injunctions, undertakings and damages”.

The authority that will enforce the code of conduct will have investigative powers and provide protections for “whistleblowers and complainants”, it said.