Govt reveals its supermarket weapon, but will it make a difference?

Monday, 30 May 2022

Deputy Prime Minister and Finance Minister Grant Robertson sat down with Stuff to talk inflation, the budget and why Labour is sticking to its guns on long-term spending. (Video first published April 24, 2022)

The Government has released its response to the Commerce Commission’s supermarket report.
It is going further than the commission suggested on two points, including requiring supermarkets to open their wholesale functions to competitors.
But commentators say it could be a while before shoppers notice any change.

Supermarkets are on notice that they will have to open their wholesale operations up to smaller rivals in a major escalation of the Government's promises to force more competition on the duopoly.

But while Commerce Minister David Clark is talking tough in his long-awaited announcement of moves to tackle the lack of grocery competition, it's clear that shoppers have no hope of quick relief from a winter of misery at the checkout.

Announcing the Government’s response to the Commerce Commission’s supermarket report on Monday , Commerce and Consumer Affairs Minister David Clark said supermarkets would have to “change at pace” to increase competition, or be prepared to have regulation do it for them.

Of the commission’s 14 recommendations, 12 were accepted. For the final two, the Government said it wanted to go further.

* Supermarkets should get the message: the guillotine is primed

Clark said if supermarkets did not strike good faith deals with competitors, giving them access to their wholesale operations, the Government would create a regulatory system to ensure it happened.

“We are taking these actions because if competitors don’t have proper access to wholesale goods, there’s no real incentive to enter the market. You can’t run supermarkets with empty shelves. And the New Zealand market clearly needs more competition,” he said.

One of the key ways the supermarket duopoly has been able to maintain its stranglehold on the New Zealand sector is because the two chains control the wholesale and retail ends of the market. It is hard for new operators to get access to goods at wholesale prices at the scale required to be a serious competitor.

The Commerce Commission said requiring supermarkets to allow rivals to buy from their wholesale operations, rather than paying standard retail rates on to which they would then have to add their own margin, was critical.

Spencer Sonn, managing director of Woolworths NZ, which owns Countdown, said it did not yet have the capability to offer large scale wholesale supply, but it was in the process of planning how to achieve this.

Katherine Rich, chief executive of the Food and Grocery Council, which represents manufacturers and suppliers, said that change would make a difference in the interim but the long-term aim had to be an independent wholesale supplier.

“The wholesale market is broken. You can see that every time you go to the shop and see independent retailers lining up with other consumers. They can never compete as long as they are having to buy stock from supermarkets.

“That’s why initial access through some kind of wholesale agreement is important but long-term you need an independent wholesaler set up. That’s entirely possible.”

Getting access to goods at wholesale prices is vital to allow new operators to compete.

She said no one move would unravel the duopoly and it would require a suite of changes, but the Government had realised the cost of living had become a crisis that it could not ignore.

Consumer NZ chief executive Jon Duffy agreed that the changes would not provide a quick fix.

“But it will be noticeably quicker than what the Commerce Commission recommended, it forces the supermarkets’ hands – if they don’t comply with the wholesale access regime, if they put terms and conditions in there that are obstructive or don’t treat competitors fairly, this mandatory regime is coming down the pipeline.”

He said new players, or those expanding, would still be at the mercy of the duopoly in terms of what they stocked for wholesale. He agreed with Rich that it could be a stepping stone to an independent operation.

He said the most important thing could be one of the last items Clark mentioned – that the Ministry of Business, Innovation and Employment is also undertaking further work, including a cost-benefit analysis, around requiring major grocery retailers to divest some of their stores or retail banner. That could mean some operators are required to sell off their smaller shops to competitors.

He said that was a “shot across the bows” of the supermarkets.

2Degrees founder Tex Edwards, who developed a proposal for a third supermarket group, agreed that was the most “exciting” part of the announcement. “That showed the Government is still looking at structural separation,” he said.

“All other measures are closing the door after the horse has bolted, or are too small to have any real effect.”

Relief for shoppers?

Clark said the supermarkets were already responding with things like price rollbacks that had not happened before the Commerce Commission’s market study began.

But he said more competition would help ensure consumers paid a fair price in future.

Economist Gareth Kiernan, from Infometrics, said he was not convinced any of the Government’s changes would have any meaningful effect on food prices for “quite some time”.

“ There might be a bit of window-dressing in terms of pricing by the supermarket chains over the next 12 months to make it look like they’re responding to the criticisms, but I don’t expect any substantive change.”

He said short of setting up a Government run wholesaler or retailer, it was only able to facilitate competition, not create it.

“ It’s all very well that The Warehouse, for example, offers elusive $4 blocks of butter, but it’s not going to make meaningful change unless it provide security of supply for shoppers and has a wide enough range of products that people can essentially do their weekly shop there just like they would at a supermarket. Ultimately, I suspect that New Zealand’s size will remain a limiting factor around competition, and that increasing the number of serious competitors in the supermarket industry will be virtually impossible outside the five largest urban areas. We would have been better off in the Commerce Commission had adopted a less relaxed approach when the industry consolidated during the 1990s and early 2000s.”

The Government will also introduce an industry regulator, mandatory code of conduct, compulsory unit pricing on groceries and require more transparent loyalty schemes.