Commerce Minister wants to see supermarkets' 'super profits' come down

Saturday, 22 July 2023

Commerce Minister Duncan Webb says supermarket split risky but not off the table (video first published in July).

The Government could resume research into the pros and cons of breaking up Countdown and Foodstuffs if it didn’t see their profit margins come down and groceries become more affordable, Commerce Minister Duncan Webb has made clear.

Cabinet papers released last week showed ministers had accepted a recommendation from Webb they keep the option of a forced split of the two supermarket groups “in reserve”.

Webb said it was important to note that requiring Countdown and Foodstuffs to sell some of their stores to make way for new competition was not off the table.

“We want to see progress in terms of the ‘super profits’ of supermarkets coming down and the affordability of groceries being much more effective,” he said.

But he stressed the risks and uncertainties of a forced break-up.

Commerce Commission chairperson John Small said on Wednesday he remained comfortable with a previous assessment that Countdown and Foodstuffs were together making about $430 million a year in excess profits.

A study conducted for the Government by consultants Coriolis, Sense Partners and Cognitus estimated that, under their central scenario, consumers would be $3.2b better-off over 20 years from lower prices and more variety if Countdown and Foodstuffs were broken up, with an overall benefit to the economy of about $500m.

That calculation was based on Countdown and Foodstuffs being forced to sell enough stores to help make way for a new rival with at least a 20% nationwide share of supermarket sales.

ActionStation protests against supermarket prices outside Countdown’s store on Lambton Quay in Wellington.

But Webb said that was very much a “preliminary analysis”, noting that the consultants had also advised there was a risk such a break-up could leave consumers, suppliers and the supermarkets themselves collectively worse off.

Webb’s predecessor in the commerce portfolio, David Clark, had recommended commissioning further research to try to better nail down the likely outcomes of a forced break-up, describing the results of the consultants’ cost-benefit study as “sufficiently encouraging”.

But Webb advised the Cabinet against that, saying the further research would cost $850,000.

The Government could better apply its limited resources on other initiatives, such as encouraging “open banking” and supporting a new consumer data right, he has now suggested.

Duncan Webb says he wants to see supermarkets’ “super profits” come down.

“Changing ministers does mean a change in approach.”

The consultants said existing reforms enacted by the Government, which include forcing Countdown and Foodstuffs to wholesale groceries to rival retailers, a new grocery commissioner and a ban on anticompetitive supermarket land covenants, were only likely to have a marginal impact on competition.

Without regulatory or policy changes, the next 20 years were likely to play out for consumers similarly to the last 20 years, they forecast.

But Webb said he was more optimistic.

“I see a lot of room for futures which are quite different from the ones they predicted.

Commerce Commission chairperson John Small rejects the accusation the watchdog lacks ambition (video first published July 20, 2023).

“The way we shop is changing. Brick and mortar supermarkets might be quite a static model – that is not the whole of the grocery sector.”

2degrees founder Tex Edwards, an ardent advocate for a break-up of the supermarkets, said the $850,000 the Government had estimated it might need to spend on further research was negligible when compared to people’s food bills.

New Zealand consumers were groomed to expect less by incumbents and their lobbyists when it came to competition, but the vast majority wanted supermarket “unbundling”, he said.

National Party commerce spokesperson Andrew Bayly said it had ruled out a forced break-up of Countdown and Foodstuffs, but “like Labour” would be watching and monitoring the industry very closely.

It supported most of the grocery industry reforms that had been implemented by the Government, but was opposed to its mandatory wholesaling regime forcing Countdown and Foodstuffs to sell groceries to rival retailers on terms that could later be set by regulation, he said.

That regime could backfire on competition by entrenching the market power of the two supermarket giants, he said.

“Supermarkets have been legitimised to go back and operate as wholesalers in the market.

“If that experiment fails, we will probably end up in a worse place than where we are now. They have already got a significant reach and they automatically become enshrined.”