Foodstuffs: We only make 4c profit in the dollar

Wednesday, 23 February 2022

Commerce Commission chairwoman Anna Rawlings presents the commission's draft report into the grocery sector in July.

Foodstuffs North Island says it is taking action to tackle problems the Commerce Commission has already identified in the supermarket sector, but consumer advocates say more is needed.

The Commerce Commission will deliver its final report in its market study into the grocery sector on March 8.

Its draft report identified a lack of competition resulting in shoppers paying higher prices for their groceries than they should have.

At the commission’s market study conference, commissioner John Small indicated that making Countdown and Foodstuffs operationally separate their wholesale and retail activities was the minimum step the commission would consider to improve competition.

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Supermarkets are not making unreasonable profits, Foodstuffs North Island says.

It had been suggested that the organisations could be forced to sell off their Fresh Choice and Four Square brands.

Foodstuffs North Island said it was already taking action in response to the draft report, including committing to remove barriers to market entry.

“We have not been including or accepting the inclusion of restrictive covenants or lease exclusivity provisions for new property transactions, and we are progressing with the removal of existing restrictive covenants – and we have already released covenants from approximately 30 titles,” chief executive Chris Quin said.

The commission identified that exclusivity covenants stopping competitors for setting up nearby could be a “significant factor” making growth difficult for rivals.

“On pricing and promotions, we are on track and working closely with our New World and Pak’n Save teams to manage the transition to a reduced number of pricing ticket types and more clarity on promotions,” Quin said.

“We have also outlined to the commission our proposed enhancements to our loyalty terms and conditions and expect to be able to quickly implement these, to the extent they remain appropriate after the final report and Government response.

“We support a mandatory grocery code of conduct and have engaged with the commission to emphasise the importance of industry participation in its development. We’ve also been looking across a sample of our stores with the principles of the Australian Code in mind to see how we currently compare.”

Consumer NZ chief executive Jon Duffy said the Foodstuffs North Island action plan seemed to have picked the “low-hanging fruit” of what was identified as an issue in the sector.

He said while the action being taken was important and necessary, it should have happened anyway.

Problems with consumers being confused about discounts were well documented, he said, and people needed more information about how the information they supplied to loyalty schemes was used. “All these things that Foodstuffs has identified are things that should have a firm conclusion drawn on them.”

The commission would also need to issue firm recommendations on how to increase competition, he said. It was becoming an increasingly pressing issue in an environment of high inflation when what shoppers could afford to buy was steadily declining.

Quin said his action plan addressed all the “proven issues”.

The supermarket sector has questioned the analysis that led the commission to conclude that it was more profitable than overseas counterparts.

“We have been clear from the outset that we welcome competition, but we don’t believe there is credible basis for recommendations beyond those we have indicated support for in our action plan.

“There has been no evidence produced to support the more extreme options being proposed, nor that they would deliver better outcomes. It’s important to recognise that options that involve forced divestment or forced structural separation of existing market participants would be unprecedented in our economic history.”

He said just 4 per cent of Foodstuffs’ supermarket revenue was profit. Of each dollar spent at one of its supermarkets, he said, 68c would go to suppliers, 13c to GST, 15c to wages and costs and 4c profit.

“The evidence is clear that the market is in better shape than claimed by some. Our profits are not consistently high when compared to the commission’s international sample of grocery retailers, we have good supplier relationships, and the industry innovates, invests and delivers for New Zealand consumers. This is not a simple duopoly; competition is growing right now and will continue to grow,” Quin said.

“At the end of the day, the key question the final report needs to credibly answer is how we can best get more value and more sustained competition for New Zealanders.

“This can be achieved through our action plan, but there is also work to be done on the Government side to reduce barriers to competition, including making appropriate changes to the RMA and the overseas investment regime to better encourage and facilitate new entry into New Zealand.

“We look forward to seeing the final report and engaging with the Government on its policy response.”