‘No meaningful improvement’ in supermarket competition — minister ‘disappointed’

Wednesday, 4 September 2024

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Commerce Minister Andrew Bayly says he is disappointed the Commerce Commission found “no meaningful improvement in competition” in its first annual review of the supermarket industry released on Wednesday.

“The report painted a concerning picture of the $25 billion grocery sector and reinforces the need for stronger regulatory action, coupled with an ambitious, economy-wide programme to promote competition,” Bayly said.

The commission’s report found the changes heralded by the previous government had “failed to deliver”, with checkout prices rising more than wholesale costs and supermarket margins increasing, he said.

The Commerce Commission reported the supermarket industry was still characterised by “increasing retail margins, continued high levels of profitability and ongoing dominance of the industry by the major supermarkets”.

These are the two Foodstuffs co-ops and Woolworths NZ.

It said that “in contrast to the supermarkets’ claims”, the commission’s analysis showed the retail prices of the major grocery brands had been increasing faster than the prices the major supermarkets paid to their suppliers.

Grocery commissioner Pierre van Heerden said the report painted “a concerning picture” with a number of red flags and showed more action to improve competition was needed.

He also accused the major chains of “ripping off” consumers to the tune of millions of dollars a year through incorrect prices on their shelves.

Van Heerden signalled reforms to beef-up a wholesale regime implemented by the former government, that former Prime Minister Jacinda Ardern had said would “unlock the stockroom doors” of Countdown and Foodstuffs.

He also indicated the commission could consider whether Foodstuffs franchise owners, such as Four Square owners, should be free to source groceries from suppliers and rival wholesalers and set their own pricing without risking breaching their co-op agreements.

Foodstuffs and Countdown advised The Post on Tuesday that between them, they had supplied just under $10m of groceries to rival businesses under the wholesale regime to date.

Van Heerden said that volume was “insignificant” and not good enough.

The commission was considering if it needed to deploy additional tools to ensure that the supermarket chains treated wholesale customers “the same way they treat their own stores with pricing and terms”, he said.

Bayly made clear to The Post there would no objection from the Government to that step.

“However, many of the issues identified by the report point to broader, structural problems with our trading, planning and regulatory systems,” he said.

Reforms of the Resource Management Act that could make it easier to get planning permission for new shops could help in that regard, he said.

Van Heerden said it was really important to make it easier for a “third entrant” to enter the market to compete with the Foodstuffs North and South Island co-ops and Woolworths NZ.

The supermarkets had been “land banking” more than 100 properties — some for more than 20 years — some of which could be used for the expansion of supermarkets and the commission would be taking a closer look at the use of those properties, he said.

Bayly said he was looking forward to receiving the commission’s “more detailed analysis” on that issue and its advice about whether the arrangements complied with competition law and what levers were available.

Van Heerden said he had observed price labels that were incorrect.

“We need to get change here and we need to get it quickly, because consumers are being ripped off by ‘large millions of dollars’ every single year.”

The issues that would be involved in enabling Foodstuffs’ franchises, such as Four Square stores, to operate with more independence from their parent co-ops were complex, he said.

“It is something, though, that I believe we need to look at to see if that can change.

“There's also the further issue in that some of them may want to leave the co-op and go with someone else, and we want to make sure that ‘restraints of trade’ doesn't hamper competition, so it is an important part of the puzzle.”

Foodstuffs pushed back against the idea such reforms when Night ‘n Day general manager Matthew Lane called for them on Tuesday.

Four Square was part of a co-operative model that was “built on the principles of shared resources, collective buying power and mutual support within each co-operative” and that was “fundamental to its success”, Foodstuffs spokesperson Stefan Herrick said.

Woolworths NZ said in a statement that there had been “a number of positive changes” at its business in the past couple of years.

“We have felt the impact of inflation in the last couple of years and our profits are at their lowest levels since the 2016 financial year,” it said.

“While the cost of living continues to make it a tough time for Kiwi families and businesses, our absolute focus is on giving our customers more value, convenience and a fantastic shopping experience — and we’re committed to getting on with that.”

Foodstuffs North Island chief executive Chris Quin said it was also “making good progress”.

“The Foodstuffs co-ops have kept grocery prices below Stats NZ’s official rate of food price inflation for 24 of the last 27 months, based on a basket of goods comparable with Stats NZ’s basket.

“This is despite the grocery supply chain facing its highest cost pressures in 30 years,” he said.

Responding to Woolworths NZ’s comments about falling profits, van Heerden said the the figures the commission used in its report were “directly sourced from the supermarkets”.

“We are using their own information and we're looking at the margins and taking out things like ‘write-offs’ and extraordinary items.

“Even though it appears that there wasn't as much profit … all three major supermarkets have increased margins and either maintained or increased their profitability,” he said.

Sue Chetwin, chairperson of the Grocery Action Group lobby group and a former chief executive of Consumer NZ, described the commission’s report as “scathing”.

“The industry has had two years since the Commerce Commission’s market study, and new rules to put matters right,” she said.

“Instead we have increased prices for consumers, exploitation of suppliers, high profitability and total market dominance by the duopoly of Foodstuffs and Woolworths.”

She backed the commission’s intention to activate stronger powers to strengthen the wholesaling regime but said that amounted to “tinkering in a market that has structurally failed”.

“What will promote competition is more players acting competitively,” Chetwin said.

The Grocery Action Group (GAG) would keep pushing for “more powers for the commission to force the duopoly to sell some of its stores to rival operators”, she said.

“GAG would wholeheartedly welcome any moves by The Warehouse, Māori interests and/or others to set up shop, but the regulatory environment has to improve before that can realistically happen.”

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