What's really needed to achieve genuine supermarket reform

Friday, 3 June 2022

Former Food & Grocery Council boss Katherine Rich voiced her concerns about supermarket covenants in June.

Ernie Newman is a Waikato-based consultant who worked as an advocate in both the telecommunications industry in the 2000s, and the grocery industry in the 1980s. He has advised many clients, including the Food and Grocery Council, but the views in this article are his own.

OPINION: If there was anyone still doubting that something has been terribly wrong in our grocery distribution industry, the extraordinary revelations in Parliament this week by the Food and Grocery Council’s Katherine Rich must have persuaded them otherwise.

We’ve been hearing about the supermarkets’ widespread use of “covenants” to block competition in shopping centres.

Most of us probably assumed that meant that if a mall signed up Countdown as a tenant, it was prevented from also giving space to a New World, or vice versa.

But we now know these covenants go vastly wider. Any business that could compete with a supermarket, whether directly or very marginally, has been precluded.

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Ever wondered why you don’t see an independent greengrocer or butcher in your local mall? Or an artisan food outlet? Now we know. The supermarket dictates who else is allowed to have a business near its patch.

That’s outrageous!

No wonder when the Commerce Commission study attracted public interest, some of the supermarkets couldn’t wait to announce that they were in the process of voluntarily cancelling these covenants. They’d been caught red-handed on a scale we’ve seldom seen in New Zealand business. So much for the virtues of free markets and open competition – that’s for the little guys.

Sign of the times? An error in a “savings” ticket in a Countdown supermarket offering a special price higher than the normal retail price.

So where are we going from here?

The Government has been making the right noises, but there are politics at play here.

Food price inflation has rightly become a very hot issue, but its caused mostly by the Ukraine war and Covid.

The German supermarket chain Aldi has often been talked about a potential duopoly-buster, but maintains it has no plans to come to New Zealand.

It may suit the government’s PR machine to link supermarket reform to inflation, as a means to deflect attention from the issue of the moment. But it's misleading.

The reality is that action over supermarkets will take time – it will be a medium-term fix for a problem that has been growing for decades.

Veteran consultant Ernie Newman sees some clear lessons from the telecommunications sector to drive genuine competition into supermarkets.

If the Government was really serious about the cost of living in the short term, it would go back to its socialist roots and address the gap between rich and poor, the minimum wage, reduced income tax and GST, increased benefits and the like.

Implicitly selling supermarket reform as a response to the cost of living is disingenuous. Both must be addressed but they are separate issues.

So how well is the supermarket issue being progressed?

Ministers have been making welcome noises. They’ve been talking up the potential arrival of Aldi – although this seemed to come as a surprise to Aldi itself.

Nonetheless, Aldi is but one of many potential players in the wings – the Warehouse, a possible Māori enterprise, and others who could well come from left field.

In telecommunications, where New Zealand had similar competition issues 15 years ago, as soon as government removed the anticompetitive bottlenecks, new entrants flew out of the woodwork. In the grocery sector too, have faith that if we get it right, they will come.

So here are some suggestions for the ministers.

First, avoid the offers of the incumbent wholesalers to help you establish a new wholesale enterprise. That’s what effectively happened in telecommunications when Telecom assisted in “operational separation” – establishing a wholesale arm within its own structure, supposedly at arms length.

That failed. It had to be replaced several years later with a full structural split.

Second, think of food distribution as an essential part of our infrastructure. It may not meet the academic definition, but in its impact on the wellbeing of our society it is every bit as important as electricity, roads and communications.

As you take a deep breath before deciding on the bold initiatives needed to repair our food distribution system, remember that there are kids going without adequate food while you get them right.

Third, close your ears to the false excuses.

Yes, we are a small country – but many other countries our size have half a dozen or more grocery chains in healthy competition.

Yes, we are a long, skinny country that is challenging in terms of distribution logistics – but that doesn’t justify a block of cheese made in Taranaki selling in Sydney far cheaper than the identical product on Lambton Quay.

Fourth, keep the debate out in the open. Listen to a range of experts. Avoid the lobbyists. Ignore the increasing chain of PR releases about supermarkets doing wonderful acts of community good.

Listen to practical people who can give you good advice. Local dairy owners would be a good start.