Commerce Commission holds 3 meetings, sends 9 letters, 61 emails in 1112-hour probe

Friday, 17 March 2023

The Commerce Commission first identified restrictive covenants might be impeding supermarket competition an issue but it has yet to wrap up a Commerce Act investigation.

The country’s competition watchdog has spent 1112 hours of staff time investigating whether land and lease covenants entered into by Countdown and Foodstuffs breached the Commerce Act without so far announcing whether it will bring a prosecution.

Information supplied under the Official Information Act stated it had held just three external online meetings and indicated it had made no phone calls to external parties during the course of its investigation.

It had also sent only nine letters and 61 emails externally as part of its investigation, it reported.

The commission said it was not in possession of any other metrics that would provide information on the workload that the investigation had entailed to date.

Former Food & Grocery Council boss Katherine Rich voiced her concerns about supermarket covenants in June.

* Competition watchdog prioritises supermarket covenants for further investigation

* Art of the covenant: The tactic supermarkets have been using to 'unduly restrict' competition

But general manager of competition Antonia Horrocks said the number of calls undertaken by its investigation team was “not indicative of the volume of work undertaken”.

The “substantive work of the team” had been reviewing documents received from the major supermarkets and “analysing the competitive effect of each of the covenants” in each of the relevant geographic markets, she said.

National Party commerce spokesperson Andrew Bayly said the length of time the commission had been looking into the covenants was “extraordinary” and the low level of external investigatory activity raised the question of what the commission had been doing.

“Agencies like the Commerce Commission need to act much more promptly, because it also creates uncertainty in the market; ‘am I going to get prosecuted or not?’

“People move on, memories fade. If you've spent 1000 hours on it you must have come to a view you are prosecuting, or it seems a lot of hours to come to view that you might not be prosecuting,” he said.

The land and lease covenants the commission is investigating restricted competing businesses from setting up near the supermarkets’ own stores.

The commission said in its final market study report into the groceries industry in March last year that it had identified more than 190 such agreements which it said were “an aggravating factor” that had prevented rivals from setting up shop.

National Party commerce spokesperson Andrew Bayly says the low of level of external engagement the Commerce Commission has reported undertaking during its investigation raises questions over what it has been doing.

An example of a lease agreement presented to a select committee by the Food & Grocery Council last year enabled a supermarket to restrict activity from a wide range of potential competitors, from butchers and bakers to fast-food outlets and pet shops.

That agreement went as far as to also require the supermarket’s landlord oppose any developments within a one-kilometre radius or, at their own cost, any resource consent applications that affected the supermarket's competitive position.

Countdown and Foodstuffs would not comment directly on whether they accepted any wrongdoing in relation to their restrictive covenants, which have since been explicitly outlawed by a law change. Both said they were “cooperating fully with the commission’s enquiries”.

The commission said in response to the OIA that it first became aware that restrictive covenants and leases were an issue in December 2020 when it was conducting its market study into the industry.

It began issuing “targeted requests for information” from supermarkets in March of the following year, but it was not until May last year that the commission launched its Commerce Act investigation.

The commission appeared to partly blame the supermarkets themselves for dragging out its investigation since then.

“The major grocery retailers sought significant extensions to the time frames for responding to information requests sent in August,” it said.

Consultant Ernie Newman says trying to fix past mistakes in supermarket regulation is like trying to uncook a chicken.

Those requests were granted, but one major grocery retailer only responded on December 19, which was after the extension, it said.

The commission said there were other factors that had contributed to the length of its investigation.

It needs to show the covenants had either the purpose or likely effect of significantly reducing competition.

Despite their seemingly overt nature and widespread use, it has assessed it should attempt to work out what would have happened at each location without them, which it said involved seeking expert advice from real estate agents.

Commerce Minister Duncan Webb said he didn’t know whether he should be concerned by the amount of activity the commission could point to for the hours it had spent on its investigation.

“What is really important is that the commission makes its own decisions about its use of resources,” he said.

After the commission’s market study report, the Government passed a law banning supermarkets from creating new restrictive covenants and making existing agreements unenforceable, he noted.

“If you're a regulator and you've got limited resources, why would you be chasing something that isn't creating harm?,” he said.

But competition advocate Ernie Newman, a former executive director of the Grocery Manufacturers' Association, said attempting to the undo the damage caused by the covenants and past regulatory decisions was “like trying to uncook a chicken”.

“You don’t need a PhD to work out that the covenants have been anticompetitive and there have got to be questions asked about why it took so many years before somebody actually blew the whistle.”

Newman said that the Commerce Commission had until quite recently given the impression it had been “asleep at the wheel”.

“I suspect there is a certain segment of big business that sees the commission as an easy adversary,” he said.