Building supplies report not an 'all clear' for Fletchers, says watchdog

Thursday, 4 August 2022

• Commerce Commission says it needs to be easier to bring new building products into the market.

• But it is not recommending breaking up any existing suppliers.

• It is concerned by the use of “rebates” by dominant businesses and will prepare more information on what practices it wants to stop.

• The prices shown on invoices for building materials should be the price paid, it says.

• Hei tā te Kōmihana Tauhokohoko, me ngāwari ake te mau mai i ngā rawa waihanga ki te mākete.

• Engari kāore e marohitia nei te motunga i ngā kaiwhakarato o nāianei.

• Kua āwangawanga i te whakamahinga o ngā “whakahokinga pūtea” a ngā pakihi matua, ā, ka whakarite mōhiohio anō mō ngā mahi e hiahiatia nei kia aukati.

• I tōna tikanga, ko ngā utunga ki ngā nama rawa waihanga te utu ka utua, hei tā rātou.

The country’s competition watchdog is not recommending breaking up any businesses in the building supplies industry, despite finding in a draft report that competition in the sector was not working as well as it could.

The Commerce Commission has instead recommended focusing on industry and regulatory reforms that it hopes could lower the price of new housing by helping new building materials suppliers into the market.

Commerce Minister David Clark said the commission had done precisely what it had been asked.

“I expected the commission to look at how the regulatory and standards systems operate in practice, and they have come back with some findings.”

**READ MORE:

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**

Commission chairperson Anna Rawlings said its draft market study released on Thursday did not amount to an “all clear” for businesses including Fletcher Building, whose subsidiary Winstone Wallboards dominates the supply of plasterboard.

“We discussed the vertical integration of a couple of the suppliers and merchant chains and we do identify that can give rise to difficulties at times, so it’s not an ‘all clear’.

“But we haven't found at this stage that vertical integration is substantially affecting competition across the supply or the merchant level,” she said.

The Commerce Commission found competition would be improved if it was easier for building products to be introduced into the market and for competing suppliers to expand their businesses.

Rawlings said its investigations had shown “tried and tested” products had become embedded in home-building practices in New Zealand, and the building regulatory system should include competition as a “deliberate objective”.

“Despite flexibility to use new products being available in the system, it is too slow, costly and uncertain to get them accepted for general use,” she said.

“What we've identified is a real circle of conduct that reinforces the regulatory system and its impediments for new and competing products.”

Gib-branded plasterboard was one of the products commonly specified in building plans, and that had made it difficult for builders to substitute it for competing products, she said.

The commission found some rebates paid by building supplies firms to merchants were adding to competition problems.

The rebates that were of most concern rewarded merchants for purchasing greater volumes through a single supplier and could deter them from stocking competing products in their stores, she said.

The commission did not recommend new laws to restrict the use of rebates, but Rawlings said in some cases they could breach the Commerce Act, and that they were more likely to do so once an already legislated change to that act came into effect next year.

That change will mean businesses with significant market power can be prevented from engaging in conduct that is likely to have the effect of substantially lessening competition, whether or not that was in fact their intent.

Rawlings indicated the commission would provide more information to the industry about what types of rebates it would deem unacceptable before that law change took effect.

National MP Andrew Bayly, the party’s construction spokesperson, said the commission had done a good job of working out what the problems were in the sector. However, most people knew about those issues anyway, he said.

“I am a bit surprised that they concluded that vertical integration does not appear to be a factor affecting competition over the long term, particularly when they raise the issue of quantity-based rebates and potential land covenant restrictions.”

Vertical integration refers to the ability of product manufacturers to also control the distribution of those products.

Bayly said there didn’t seem to be much supporting data to the commission’s view that vertical integration was not a problem.

It was a “missed opportunity” that the commission hadn’t looked significantly at whether suppliers were able to extract excess profits, he said.

But he said National was not calling for the breakup of any businesses in the sector, saying that working out whether that was required was the role of the commission.

Housing Minister Megan Woods said building products could cost up to four times more than they did in other markets.

She said it would not be appropriate for the Government to say what action it intended to take until the draft study and its recommendations were finalised in December, but it “signalled some really useful areas for further inquiry”.

A spokesperson for Fletcher Building described the report as comprehensive and said the company would take its time to consider the points the commission had made.

Jarden analyst Grant Swanepoel predicted that the report would have little impact on Fletcher Building, whose share price was up 0.6% at $21.62 a share on the NZX at noon on Thursday.

Aside from recommending that competition should be specified as an objective in building regulations, the commission recommended developing systems to centralise information-sharing about building supplies.

Rawlings said businesses that misrepresented the true cost of building supplies in their invoices to customers to disguise the impact of discounts they had received could be breaching the Fair Trading Act.

“We would expect if customers were being told the price paid for a product, that should be the price,” she said.

Builders that overstated the actual price they had paid for materials in their invoices should take that as a warning, she confirmed.