Commerce Commission 'misguided' over supermarket competition problem

Wednesday, 25 January 2023

Former ministers Jacinda Ardern and David Clark discuss supermarket reforms in August.

Competition advocate Tex Edwards says the country’s competition watchdog is misguided after it appeared to tell MPs there were no inherent barriers to more supermarket competition.

A select committee is currently hearing evidence on the Government’s Grocery Industry Competition Bill, which would introduce a suite of interventions designed to improve competition in the supermarket industry.

They include a regulatory “backstop”, included against the commission’s past advice, that could force Countdown and Foodstuffs to wholesale groceries to rival retailers at prices set by regulation if they didn’t strike their own supply deals in good faith.

In a written submission, the Commerce Commission suggested whittling down a “purpose statement” in the bill to remove the goal of redressing limited competition in the industry to make it more like other markets.

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“Groceries markets are not natural monopolies and there are no inherent structural barriers to the development of competition in these markets in the same way as there are for some forms of infrastructure,” it told the committee.

“Given this, increases in competition in the grocery sector are both desirable and feasible” and the reference to making the industry more like other competitive markets was unnecessary, it said.

Edwards, who founded 2degrees and has since campaigned to open a range of industries to more competition, said the commission’s statement did not reflect reality.

The rising cost to supply produce to retail supermarkets is responsible for most price increases, up 24% in the last year.

He has previously characterised the industry as more closely resembling a series of local monopolies and argued that the Government needs to require Countdown and Foodstuffs to sell some of their stores to enable a third competitor to achieve the scale it would need to compete.

The commission’s assessment had been proved incorrect by the past behaviour of the two supermarket groups which had the ability to “foreclose” challengers, he said.

“Every time Countdown and Foodstuffs are submitting on something they talk about The Warehouse as being ‘the challenger’.”

That was because they wanted “a small healthy dwarf” as their competitor, he said.

Edwards appeared to get some support from credit ratings agency Moody’s on Wednesday.

Commenting on the country’s latest inflation figures which included the largest monthly increase in food prices since 1990, Moody’s said high grocery food costs had been attributed to the two chains’ “market power”, as well as to supply-chain snags.

Commerce Commission chief executive Adrienne Meikle clarified that it was not claiming there were no barriers to entry in the industry.

“Our grocery market study found that competition in the retail grocery sector is not working well for Kiwi consumers. There are areas where New Zealanders have limited options regarding their choice of grocery store and some consumers have to drive long distances to reach their nearest supermarket,” Miekle said.

“However, there are not the same inherent structural barriers to the development of competition in the grocery sector in New Zealand as there are for some network infrastructure such as electricity lines or gas pipelines. These are typically referred to as natural monopolies.”

In sectors that were not viewed as natural monopolies, a lack of competition could instead reflect barriers to entry such as the restrictive land covenants identified in the commission’s grocery market study, she said.

The commission “prioritised” its investigation of such covenants in June but has yet to announce any enforcement action.

The commission made a variety of other suggestions in its submission to MPs.

Some would give it more power to compel more information from the two chains and take swifter enforcement action against them.

But it also appeared to seek to weaken the law change in other areas, stating that the scope of some of the regulatory backstop instruments contained in the legislation “appeared to go beyond what we understand to be the policy intent”.

The Government is expected to decide early this year whether to consult the public on whether Countdown and Foodstuffs should be required to sell some of their stores or chains.

Countdown owner Woolworths noted in its submission to the select committee that the Commerce Commission had “expressly rejected” that proposal when it had considered it.

“Any forced divestment would inevitably result in significant costs to New Zealand and materially higher grocery prices to New Zealand consumers,” it told the committee.