• The two big supermarket chains are pocketing high profits by charging Kiwis the sixth-highest prices in the OECD, the Commerce Commission has found.
  • Tough action is needed to allow a big new nationwide player to compete in NZ’s towns and cities.
  • Separately, the Commission is to investigate apparent misconduct, with strong-arm tactics putting small suppliers out of business

ANALYSIS: Foodstuffs and Woolworths have cornered 90 percent of the grocery market through owning all of NZ’s biggest supermarket brands – New World, Pak’nSave, Countdown, Four Square, Supervalue and more. And little short of Government intervention is going to break that hold, the Commerce Commission says.

In some respects, the two businesses have cornered the market quite literally: they have bought and banked land in an attempt to block other companies like discount chains Aldi and Costco from getting a toehold in New Zealand.

So in November 2020, the Government asked the Commission to look at whether competition in the $22 billion a year grocery industry was working well and, if not, what could be done to improve it.

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In a draft report, the Commission presents options to unlock a “duopoly” that it says is driving up food prices for vulnerable communities, and putting some struggling suppliers out of business. It is seeking a response from the supermarket chains, as well as suppliers and shoppers affected by the supermarkets’ anti-competitive behaviour.

First, Commission chair Anna Rawlings say NZ needs more wholesale access to a full range of groceries, potentially through a new regulatory regime. If the two supermarket chains aren’t willing to move of their own accord, then that could mean forcibly separating retailers like New World and Pak’nSave from wholesalers like their sister companies Gilmours and Trents.

That would be similar to the forced separation of Telecom, once NZ’s largest listed company, into retail telco Spark and fixed line operator Chorus.

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Secondly, retailers might be required to sell some stores to make space for a third big player in the retail market. At the same time, the Government could change planning laws and restrictions on the use of covenants, to make it easier for a third supermarket chain to break into the market.

Without such robust action, other grocery retailers simply aren’t big enough or strong enough to challenge the big supermarkets. “This is because they are unable to compete with the major grocery retailers on price and product range in order to satisfy the widespread consumer demand for a main shop at a single store,” Rawlings says.

The Commission has embraced calls from the Food and Grocery Council, which represents suppliers, for a mandatory industry Code of Conduct and allowing suppliers to bargain collectively. “Many suppliers have few alternatives but to supply the major retailers,” Rawlings says. “This allows them to exercise their buyer power to push excess risks, costs and uncertainty onto suppliers. Suppliers report agreeing to these terms because they fear that otherwise their products may not be stocked.”

Previously in 2014, the competition watchdog conducted a nine-month inquiry but was unable to find evidence that Countdown and its Australian-owned parent Progressive Enterprises used intimidation against suppliers.

Australia has already introduced a Code of Conduct. Food and Grocery Council chief executive Katherine Rich says that has helped; some of the improvements to behaviour there have started to filter through to NZ.

For consumers, the report suggests more transparent, mandatory unit pricing to help shoppers compare how much different products cost, at different stores, and ensuring honest and clear loyalty programme terms. “If competition was more effective, retailers would face stronger pressures to deliver the right prices, quality and range to satisfy a diverse range of consumer preferences,” Rawlings says.

Consumer NZ chief executive Jon Duffy said the report confirmed consumers weren’t getting a fair deal and stores were making excess profits. 

“We campaigned for an inquiry into the industry because our research showed there were major problems in this market that meant shoppers were paying too much,” he said. “With the supermarket trade carved up between them, the two big chains are in a cosy position and there are significant barriers to potential rivals establishing a presence. That won’t change without regulatory intervention.” 

Duffy noted that supermarkets’ loyalty programmes had also come under scrutiny from the commission. Consumer NZ’s research found seven out of 10 consumers felt supermarket “specials” had become so common they questioned whether the savings were genuine. 

The Commerce Commission’s draft findings are preliminary and subject to consultation prior to its final report being published in late November.

Newsroom Pro managing editor Jonathan Milne covers business, politics and the economy.

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