Supermarket competition won't change much in 20 years, Government warned

Monday, 17 July 2023

Shoppers should be prepared for variety to reduce and supermarkets’ gross profits to rise, according to a study ordered by the Government.

The Government’s much-touted reforms of the supermarket industry are unlikely to result in a material improvement in competition, according to its own advisers.

Instead, without additional action, consumers can expect little to change for the better over the next 20 years, with a risk that the variety of products stocked by the supermarkets will continue to reduce and that supermarkets’ gross profit margins will continue to rise, ministers have been told.

Former prime minister Jacinda Ardern said in August that a wholesaling regime overseen by a newly-appointed grocery commissioner would “unlock the stockroom doors” of Countdown and Foodstuffs.

But consultants Coriolis, Sense Partners and Cognitus advised Commerce Minister Duncan Webb in a report released by the Government last week that those reforms on their own were “unlikely to see a material change in workable competition”.

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

* Grocery commissioner says he's seen supermarkets play tough

* Commerce Minister says supermarket split 'difficult' but promises competition reforms won't stop

“Based on the last 20 years, and barring any significant change in regulatory settings or policy direction, we suggest the next 20 years in the New Zealand supermarket industry will look fairly similar to the last 20,” they said.

The three consultants were appointed by the Government to advise on the costs and benefits of the Government going a big step further than the wholesaling regime by forcing Countdown and Foodstuffs to sell some of their supermarkets in order to create one or two more competing supermarket firms.

Their study estimated that such forced divestments would be risky but potentially beneficial, with the costs and benefits of a forced split adding up to something between a net gain to consumers, supermarkets and their suppliers of $4.7 billion and a net loss of $3.1b, over 20 years.

The consultants’ advice appears to support claims by competition advocate Tex Edwards and Westpac researchers that without such a split, the Government’s existing reforms are likely to fall flat.

Edwards has argued that a new supermarket group is unlikely to enter the market without the forced sale of some Countdown and Foodstuffs supermarkets because the two groups have saturated the market in all towns and cities with their own stores.

Cabinet papers show that former commerce minister David Clark argued in December that the results of the consultants’ cost-benefit analysis were sufficiently encouraging for him to recommend exploring the options for forced divestment in more detail, before his successor Duncan Webb put that on hold.

Webb, who succeeded Clark in February, successfully recommended instead that Cabinet keep a break-up of Countdown and Foodstuffs “in reserve” while it monitored the impact of its existing reforms of the grocery sector.

The next 20 years

What the consultants advised could happen without a forced supermarket split:

- Barring the unexpected entry of a major overseas player, significant changes in the major groups’ market shares seem unlikely.

- Supermarket gross margins could continue to increase, accounting for a greater share of consumer spending than they do today.

- There could be further reduction in the number of store brands. For example, Supervalue could merge into Fresh Choice. Four Square could become New World Express.

- New entrants into “mainstream, mid-market, full-shop grocery retailing” could continue to fail.

- Range offered in “mature, low-growth product categories” could continue to reduce, often down to one retailer brand, or that and a single brand.

- Trans-Tasman consolidation of product lines could be expected to continue.