Something big may be about to happen with supermarket competition

Tuesday, 25 March 2025

ANALYSIS: Economic Growth Minister Nicola Willis expects to make an announcement in the next week to help attract a ‘third’ supermarket group to set up shop in New Zealand.

Chances are this will involve measures to combat so-called predatory or pocket pricing, which Woolworths NZ and Foodstuffs could use to drive a nascent rival out of business or at least contain their growth.

Willis confirmed to The Post this afternoon that predatory or pocket pricing was one of the issues the Government would need to look at as it sought to encourage more competition.

Earlier in the day, she said she had been talking to potential market entrants in the past few weeks and her tone suggests she is confident the moves she is planning are not a shot in the dark, but are instead likely to yield results.

After years of false dawns and hang-wringing over supermarket competition, something big may be about to happen.

‘Predatory pricing’ is often defined as the practice of an established company that has significant market power dropping its prices to below cost in order to drive a rival out of business.

Often that might involve a national chain slashing its prices near where a rival has set up shop, but keeping prices the same elsewhere.

Or it can involve a company cutting its prices more widely, but just for a short time, to have a similar effect.

‘Pocket pricing’ — while not a common term in New Zealand — is sometimes used overseas to describe a slightly less aggressive tactic, whereby a dominant firm will reduce its pricing near a rival business, but not necessary below cost, for example to match but not undercut its smaller competitor.

The goal may not be to drive a rival out of business as such, but to make their offering less attractive to customers and thereby strangle their growth.

Pocket pricing can also be used to send a signal to other potential market entrants that there won’t be big profits in taking on the established player.

“The key thing that we've seen internationally is that when a third player gets to around 10% of the market, that's when it can have a really significant impact on the prices that shoppers pay,” Willis said.

“The challenge that I see is how one of them gets to scale and I will have further announcements to make about that later this week.”

A clear signal that predatory or pocket pricing aimed at a third entrant in the supermarket industry would invite a strong response from the Commerce Commission is likely to be at least part of that helping hand.

That would help shield a new rival from the harsh winds of market power, while it built up its market share to that supposedly critical 10% level.

As ever, the devil would be in the detail.

Telecommunications company TelstraClear, now part of One NZ, warned in the early 2000s that it would need protection against pocket pricing in order to extend its cable broadband network to Auckland.

TelstraClear set up networks in Wellington and Christchurch, but struggled to gain as much traction as it could have expected in those cities after Telecom (now Spark) cut its pricing there to match, while leaving prices higher elsewhere.

The big petrol chains frequent face questions over the seemingly more competitive prices they charge in towns where independents have set up shop.

Willis told The Post in relation to petrol companies’ differentiated local pricing, “what I think it reveals is that under a normal context where there aren't other players, there is pricing going on that's not giving consumers the best deal possible”.

In both examples, it would seem reasonable to argue that the interests of consumers would have been better served by tougher responses from the regulator.

But one of the goals of attracting a third supermarket company would be to bring down the prices of the existing duopoly, and it can sometimes be hard to distinguish between legitimate reasons for differentiated local pricing and practices that should be subject to anti-competitive action.

Difficult, but not impossible.

Willis’ pending announcement has likely been shaped by what new entrants have told her they actually need to set up shop, as opposed to political red herrings the Government is often concerned with, such as ‘red tape’.

That means there’s good reason to assume she will be thinking along productive lines.

Her pre-announcement suggests someone might finally be close to pulling the trigger on a major investment.

To date, the only proposed like-for-like rival to Woolworths NZ and Foodstuffs that is known to have advanced to the stage of a detail business case was a collaboration between iwi — led by Waikato-Tainui — and former PwC partner Tina Kilmister-Blue, with the involvement of Britain’s Iceland supermarket chain.

Sources in Māoridom have confirmed Waikato-Tainui backed out of that venture, with one of their criticisms being that Iceland wanted only upside from the arrangement and wasn’t prepared to take on any of the commercial risks.

To be fair to Iceland, that starting point would appear entirely consistent with the concept that it would simply be a wholesale supplier to the proposed third national supermarket chain.

But it would raise the question — if the underlying initiative was in fact still alive — of where the capital would be coming from, if not from Iceland or iwi.

Willis mentioned talks with multiple parties, so there may of course be other games in town.