Cabinet agrees to keep supermarket break-up option in back pocket

Thursday, 13 July 2023

Cabinet papers appear to suggest consumers would be likely to benefit from a forced divestment, but that the risks would be high.

The Cabinet has agreed to keep a break-up of supermarket groups Countdown and Foodstuffs “in reserve” while it monitors the impact of its existing reforms of the grocery sector.

It could look more closely at the options and likely outcomes of forcing the supermarket chains to sell some of their stores to make way for new competitors “should it become clear that was needed to achieve a properly competitive grocery market”, Commerce Minister Duncan Webb advised fellow ministers.

A provisional cost-benefit analysis ordered by the Government last year found that forcing Countdown and Foodstuffs to sell some of their stores to make way for a third competitor had the potential to benefit consumers to the tune of $9.2 billion over 20 years, Cabinet papers released on Thursday stated.

But that study also estimated the negative impact on the supermarket chains could total between $4.5b and $7.4b over the same period, which could be passed on to consumers.

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

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Overall, there was a high degree of uncertainty over the possible impact of a break-up, Webb ultimately advised the Cabinet, with the possible outcome of the main break-up option officials looked at ranging from a $4.7b net gain to a $3.1b net loss.

The first option costed by the Government would have required Countdown and Foodstuffs to have split into three competing firms by selling supermarkets in regions where they had three or more supermarkets combined, to create a new rival with a national market share of at least 20%.

The second option was similar but would attempt to bring at least two new rivals into the market each with a national market share of at least 15%.

The cost-benefit analysis indicated that consumers were likely to benefit under the majority of the forced divestment scenarios that were modelled, Webb advised.

“These benefits would come via reduced prices and non-price benefits such as greater choice of stores/banners in a particular geographic area and increased range of products offered (so-called variety effects).

“However, in some scenarios consumers would be worse off, both in terms of reduced variety, and in one scenario, higher prices,” his Cabinet paper stated.

That risk of a break-up backfiring appears to have weighed heavily on Webb.

“A scenario in which divestment was implemented and resulted in consumers being worse off than prior to implementation would result in very high regret,” he told the Cabinet.

Food suppliers would have more negotiating power if they had more supermarkets to sell to, which could result in them increasing their profits margins, he advised.

The cost-benefit study assessed that consumers in rural areas were least likely to benefit from a break-up.

Webb said it would make sense to consider the need for more detailed policy work on forced divestment after the Commerce Commission produced its first report into the state of the grocery sector.

It is required to complete such reports following the passage of the Grocery Industry Competition Act earlier this month.

That further policy work could provide better information, but would be likely to cost $850,000, which would require reprioritisation of funding from other work to pay for consultants and contractors, Webb said.

Competition advocate Tex Edwards, who lobbied for a break-up of Countdown and Foodstuffs during the Commerce Commission’s market study into the industry in 2021 and last year, held out little hope that the other reforms referred to by Webb would improve the competitive landscape.

Those reforms include new rules designed to force Countdown and Foodstuffs to wholesale groceries to rivals on reasonable terms, under a regime overseen by newly-appointed grocery commissioner Peter van Heerden.

The Commerce Commission’s market study estimated that Countdown and Foodstuffs were making $430 million a year in “excess returns”.

Commission chairperson John Small made clear on the day of its release that he viewed that as excess profit.

Edwards said van Heerden could report on the state of competition, but the legislation through which he was appointed offered “no insights or pathway that might lead to creating scalable, like-for-like price competition in the monopolised supermarket industry”.

”Cabinet is so gun-shy about forced divestment that it will not permit the public to have a say in the matter.”

Instead, progress had been “sacrificed to fears of outlier scenarios and unintended consequences”, he said.

Clarification: This story has been updated to clarify aspects of the two divestment options that were costed by the Government. Amended: 9.46am, 17 July, 2023.