Supermarket competition report unlikely to reveal much change at the till

Sunday, 21 April 2024

The clock is ticking down towards the competition watchdog’s first annual report on supermarket competition, and pressure is building for a rethink.

Towards the end of July, the Commerce Commission will publish its first annual report into the state of competition in the groceries market.

As it stands it won’t have much to shout about in terms of tangible gains for consumers.

On the bright side, the Commerce Commission would be able to report a big drop in grocery food price inflation as well as smaller profits in the industry.

Grocery prices have risen by 3.5% in the year to the March quarter, down from their 12.3% leap the prior year.

Woolworths NZ’s net profit fell to $71 million in the six months to the end of December, versus $122m in the same period last year, even if its gross margins remain remarkably unchanged through the years.

But evidence of more dynamic competition is weak to non-existent.

Online supermarket venture Supie collapsed in October. There is no indication a major overseas player such as Aldi is any closer to entering the market, and it’s still unclear if iwi led by Waikato-Tainui will press the trigger on a major mooted Māori supermarket initiative.

Matthew Lane, general manager of Dunedin-based convenience store chain Night' n Day, frets that it is instead existing supermarket groups Foodstuffs and Woolworths that appear to be expanding their footprints.

“Our biggest concern is we've seen nothing happen at all in terms of competition in relieving some of that market dominance,” he says.

“When I look at the news, there’s a new Fresh Choice opening on Cuba Street, there are new Four Squares opening in Onehunga and Britomart, there’s a new Pak’nSave opening in Tapanui.

Supie’s collapse in October appeared a significant set-back for anyone hoping more competition was on the cards.

“There’s this massive absorption of the market continuing and which makes it harder to break down.”

According to information quoted by the Commerce Commission, Foodstuffs North Island appears to have added six New World stores, one Pak’nSave and five Four Squares to its 313 store network in the 2½ years to June last year.

Competition advocate Tex Edwards argued during the commission’s market study into the supermarket industry that level of saturation made it impossible for a new entrant to set up like-for-like competition without a forced sell-off of some of the big chains’ existing stores.

But what will be concerning the commission even more is that the central mechanism that the former Labour government was hoping would bring about more competition has not got off to a flying start.

That is the regulated wholesale regime that came into effect last year and that requires Woolworth NZ and Foodstuffs to supply rival retailers on terms that mirror those that the commission would expect in a competitive market.

The purpose of the wholesale regime was partly to help existing, niche rivals to the major chains become a stronger force by ensuring they could more easily access supplies on more competitive terms.

There is some evidence that is happening on a small scale.

But the main hope was that it could be used by any large-scale new entrant to get a temporary leg up while they established their own warehouses and distribution networks.

Former prime minister Jacinda Ardern talked up the reform while still managing to keep the benefits vague when she announced in 2022 that it would “unlock the stockroom doors” of Countdown and Foodstuffs.

The view in the capital is that Woolworths NZ, at least, has seen wholesaling as a genuine business opportunity and been willing to play the game.

Woolworths NZ general manager of wholesale Steve Sexton says its wholesale arm has supplied rival retailers with 160,000 cases of groceries worth $5m since July last year and made a positive difference for customers.

But that is a drop in the ocean in the $26b industry, and Foodstuffs appears more hostile to the regime.

Former prime minister Jacinda Ardern said the wholesale regime would “unlock the stockroom doors” of Foodstuffs and Woolworths, but so far what has come out is a trickle.

“No other country has attempted to regulate its wholesale grocery market. At the appropriate time there should be a proper cost benefit analysis of the wholesale regulations to assess if they can deliver the promised benefits to consumers,” its spokesperson says.

As of February 21, only about $680,000 of groceries had flowed through Foodstuffs’ wholesale arm, since it opened in March last year.

The Grocery Industry Competition Act requires Foodstuffs and Woolworths to deliver a wholesale service that is “consistent with what would be expected in a competitive market” and make a material contribution to improving competition in the sector.

But to be fair to the supermarket groups, the latter goal, at least, is not entirely within their power.

One of the reasons that the supermarkets’ wholesaling operations haven’t grown to a more appreciable size is that a number of large groceries suppliers including the likes of Fonterra have so far chosen not to make their products available through them.

Industry sources say there are variety of reasons for that.

Not least is that some large suppliers have concluded they won’t sell more products overall by diverting some of their supplies through the supermarkets’ wholesale businesses and doing so would only erode their margins, so there’s simply no incentive.

A related concern is that building up the supermarkets’ wholesale chains might on balance increase their market power rather than trim it.

An open letter from grocery commissioner Pierre van Heerden on Tuesday encouraged both retailers and suppliers to participate in the wholesale regime “in the spirit of the Act”.

But he appears to have no leverage over suppliers in that regard.

In the final days of the Labour government, former commerce minister Duncan Webb said Labour would back 'credible companies' wanting to enter the market (video first published October 12, 2023).

Fonterra Brands domestic sales director Guy Blaikie says it doesn’t currently use the supermarkets’ wholesale distribution networks as it has its own franchisee network that distributes products directly to 22,500 customers, such as dairies and cafes.

That franchisee network consists of 44 family and privately-owned small businesses, employing more than 300 people, that any customer can order from and that “brings competition to wholesale distribution in New Zealand”, he says.

“Our franchisee model of delivering short shelf-life, chilled products direct to store, ensures the fastest route to shelf for our consumers and ensures there is no compromise on food safety and quality.”

It is not just some large suppliers that are standing back.

The Warehouse Group is currently retailing a limited range of groceries in larger volumes direct from suppliers.

Chief product officer Tanya Benyon says it hasn't found the wholesale regime useful to date as it wouldn’t allow it to source those products any cheaper.

“It doesn't necessarily increase the range available to us either, because not all suppliers have been comfortable opting in. It's a tricky one, because you feel like you'd be buying from your competitor.”

Benyon believes the wholesale regime might be of more value, at least to smaller retailers, if the supermarket groups had to pass on the benefit of any volume-based rebates they got from suppliers to their wholesale customers.

A backstop power in the Grocery Industry Competition Act could see the commission step in and set the terms and prices at which Foodstuffs and Woolworths wholesaled groceries to rivals if it didn’t think the regime was working well.

But as it stands, under its current settings, Benyon says it wouldn’t be a big loss for The Warehouse if the wholesale regime was scrapped.

Lane says that even Night' n Day sources 95% of its groceries direct from suppliers despite being broadly satisfied with a supply arrangement it has with Woolworths NZ.

With no major new supermarket entrant appearing ready to leap onto the former government’s “ladder of investment”, questions are starting to be asked in the corridors of power over whether the wholesale horse is one still worth flogging.

The Commerce Commission came out against a mandated wholesale regime when it published its market study into the industry two years’ ago.

It concluded it could reduce rather than improve price competition, make the industry less efficient by introducing “significant additional costs” and potentially entrench Countdown and Foodstuffs’ market shares.

Commerce Minister Andrew Bayly voiced the exact same concerns when in Opposition.

He told The Post in July that “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.”

But Bayly needs to at least attempt to deliver on a coalition agreement with NZ First to improve competitiveness in the industry and “address the lack of a third entrant to remove the market power of a duopoly”.

He appeared to accept failure as an option in March, telling The Post the Government couldn’t “dream up a competitor”.

“The best we can do is make the conditions more attractive for a potential competitor.”

The question though remains “how” — assuming the Commerce Commission report in July fails to report much progress, or even a realistic pathway towards much change at the till.