High prices, high profits could mean supermarkets forced to sell stores

Thursday, 29 July 2021

The Commerce Commission is looking into how competitive New Zealand's grocery retailers are.

Supermarket shoppers are forced to pay too much for not enough selection because of a lack of competition, a draft Commerce Commission report into the market has found.

It found “persistently high profits” and high grocery prices compared to other countries.

The report suggests lowering the hurdles for new competitors, or, if that failed, creating another major grocery retailer to break open the supermarket duopoly and potentially requiring existing retailers to sell some of their shops to make it happen.

“If competition was more effective, retailers would face stronger pressures to deliver the right prices, quality and range to satisfy a diverse range of consumer preferences,” said commission chairwoman Anna Rawlings.

* Supermarket suppliers offered anonymity in Commerce Commision competition study

* Countdown posts $20m rise in net profit as watchdog advances its market review

In November 2020, the Government asked the commission to look at whether competition in the $22 billion a year grocery industry was working well and, if not, what could be done to improve it.

Produce prices are continuing to rise – with many shoppers looking for alternatives.

The commission’s draft findings are subject to consultation prior to its final report being published in late November.

“Our preliminary view is that the core problem is the structure of the market. In competitive terms, the major retailers, Woolworths NZ and Foodstuffs, are a duopoly, and while there is an increasingly diverse fringe of other grocery retailers, they have a limited impact on competition.

“This is because they are unable to compete with the major grocery retailers on price and product range in order to satisfy the widespread consumer demand for a main shop at a single store,” Rawlings said.

The commission found that the level of innovation in the sector looked modest by international standards.

“The major retailers appear to avoid competing strongly with each other, particularly on price. Meanwhile, competitors wanting to enter the market or expand face significant challenges, including a lack of competitively priced wholesale supply and a lack of suitable sites for large scale stores.”

She said New Zealand was the sixth-most expensive groceries market in the OECD in 2017. “The level of profit being earned is persistently high.”

The commission said the complexity of the major retailers’ pricing strategies, promotions and loyalty programmes could confuse customers and make it difficult for consumers to make informed purchasing decisions.

Many suppliers had few alternatives but to supply the major retailers. That allowed them to exercise their buyer power to push excess risks, costs and uncertainty on to suppliers.

Suppliers reported agreeing to these terms because they feared that otherwise their products may not be stocked. This conduct could reduce suppliers’ ability and incentives to invest and innovate, ultimately leading to less choice, lower quality, and potentially higher priced goods for consumers, the commission said.

INCREASING COMPETITION

“Without intervention, we currently see little prospect of a new or expanding rival being able to constrain the major retailers effectively, and improve competition in the sector,” Rawlings said.

Anna Rawlings: “The level of profit being earned is persistently high.”

“We consider the best options for improving competition are those that enable an increase in the number of retailers directly competing against Foodstuffs and Woolworths NZ for a consumer’s main shop.”

The commission is recommending, at this draft stage, that it be made easier for new competitors to enter or existing independents to expand by increasing wholesale access to a wide range of groceries at competitive prices.

There could be voluntary undertakings or a “regulated access regime” under which the chains would undertake to supply other retailers with groceries on “fair and non-discriminatory terms”.

It also suggested making land more available through changes to planning laws and restrictions on the use of covenants.

If these options were not feasible, had proved ineffective, or did not appear likely to improve retail competition within the desired timeframe, another potential option was to directly stimulate retail competition by creating a further major grocery retailer, and requiring major retailers to sell some of their shops.

Rawlings said that if the Commerce Commission did go as far as requiring the supermarket chains sell some of their stores it would need to consider whether that would have to involve then selling some of brands, for example requiring Foodstuffs to sell either its Pak'n Save or New World chains, or whether it might require the sale of individual stores.

But she made clear that if the commission did recommend forced sales, its would be seeking to achieve a national spread.

The costs and risk of that option would be significant and are only likely to be appropriate if the costs, risks and expected benefits had been considered, Rawlings said.

Commissioner John Small stressed that a lesser option of achieving better competition through the opening up of the supermarket chains' wholesale operations would help retail competitors that were already in the market and could therefore achieve faster results.

Rawlings said the commission had found some conduct by the supermarket chains which might breach competition law and would separately examine where enforcement action might be appropriate

Options to strengthen suppliers’ bargaining power with retailers include introducing a mandatory industry code of conduct and allowing suppliers to bargain collectively.

Options to help consumers make more informed purchasing decisions and to enhance competition at the retail level include the introduction of mandatory unit pricing, as well as asking the major retailers to simplify their pricing and promotional practices, and ensuring that the terms and conditions relating to their loyalty programmes are clear.

SUPERMARKETS RESPOND

Spencer Sonn, managing director of Woolworths New Zealand, which operates Countdown, said he had not seen the report ahead of time. He said the chain recognised its role in providing food and other groceries.

”We will now take the time to read it so we can provide our feedback within the required timeframe. We note this is only a draft report but on face value some of the recommendations would have significant implications and we’ll need time to work this through and understand the impact.

“We’re proud to partner with 1400 suppliers, including 120 produce growers and 900 small suppliers, and having good relationships is incredibly important to us.

“We appreciate that many Kiwis will have strong thoughts and feelings about the report and would ask that they keep it kind when shopping in our stores and treat our teams with respect.”

Commerce and Consumer Affairs Minister David Clark welcomed the report.

“I asked the Commerce Commission to look at whether this sector is as competitive as it could be and today it has released its draft report for consultation,” he said.

“The draft findings indicate that there are problems in the market and that New Zealanders would get better prices, ranges and quality if there was increased competition in the grocery sector.

“Consumers deserve to know if they are getting a fair deal at the supermarket checkout, and the draft findings indicate they may not.

“The average Kiwi household spends a large amount of its weekly expenses on food, and this has been increasing year-on-year.

“I encourage everyone to read the draft and make a submission as this will help the commission form the final report. I look forward to a public discussion of the issues in the draft report and seeing the commission’s final recommendations.”