Fresh food start-up gets a taste of what Costco, The Warehouse and other new grocery stores can expect to face

When Ben Nathan launched his online grocery retailer, The Honest Grocer, he was chipper. “We see ourselves as a retail disruptor,” he announced boldly at Christmas.

“The supermarket duopoly needs a shake-up and I think there is a power imbalance, where both consumers and producers are losing out to the might of the big chains … I encourage all suppliers to stand strong in the face of any pressure or heavy-handed tactics from the supermarkets.”

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He didn’t know just how prescient his words were. Fewer than eight months later, at least 10 suppliers have pulled out. The suppliers expressed concern that The Honest Grocer’s lower retail prices upset the big supermarket chains they supplied. 

“As I’m sure you can understand this can potentially put trading agreements with our major customers at risk,” wrote one supplier, as she pulled the pin.

Now, as part of its year-long market study, the Commerce Commission is looking at how the big Foodstuffs-Countdown duopoly has treated The Honest Grocer. Its draft report says new technology has enabled the entry of new online-only grocery retailers like The Honest Grocer and Supie, with lower overheads.

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The Honest Grocer’s experience, as documented by the Commission, is a taster of what big challengers like Costco, The Warehouse and Coles will face in any attempts to break into the New Zealand grocery market.

There is evidence that New Zealand’s bigger grocery retailers are putting pressure on small suppliers, the Commission says, to dissuade them from doing business with new market entrants like The Honest Grocer – under fear of being “deleted” from supermarket shelves.

“We are aware of examples of some suppliers indicating that they are only willing to supply if a grocery retailer does not undercut the retail prices set by other grocery retailers,” the report says. “We have received information which appears to suggest that in some cases the refusal to supply occurred after concerns were raised by another grocery retailer the supplier trades with.”

“I got a call telling me my prices were too low. A big customer had called them to complain. The supplier said ‘pull our account’ so we did. This is bully tactics. I have been told by one supplier that I have to increase my price that I retail for … that I can’t sell at that price because ‘you’ll piss people off’.”
– Ben Nathan, The Honest Grocer

The Commission quotes Food & Grocery Council concerns that established grocery retailers are seeking to limit entry and expansion by other grocery retailers by pressuring suppliers so they withdraw their products, due to genuine fear they risk other parts of their business.

Ben Nathan has told the Food & Grocery Council that his company has faced examples of “price fixing and anti-competitive behaviour”.

He said “suppliers are scared” about the consequences of doing business with him. Five wine labels had withdrawn from supplying him, he said, after the intervention of another bigger retailer.

“After loading Italian dried pasta onto the site, all the pictures and prices which takes a long time for us to do, we were all set to go,” he said. “I got a call telling me my prices were too low. A big customer had called them to complain. The supplier said ‘pull our account’ so we did.

“This is bully tactics. I have been told by one supplier that I have to increase my price that I retail for … that I can’t sell at that price because ‘you’ll piss people off’.”

This week, Nathan tells Newsroom he is taking his time to consider the Commerce Commission report before deciding his next steps.

The Food & Grocery Council is backing him. It argues that new entrants to the grocery market can’t get access to product ranges at competitive rates. Suppliers will be “punished” if they enable a new entrant to offer competitive prices or ranges. An example is the launch of The Honest Grocer, it says, which lost numerous suppliers as a result of pressure applied by other retailers.

“Last time I checked a few months ago with The Honest Grocer, it had had around 10 suppliers withdraw from supply because of fears they were putting their supermarket sales at risk because The Honest Grocer was considerably cheaper than supermarkets.”
– Katherine Rich, Food & Grocery Council

“In relation to the ‘threat of entry’ and the role of strategic entry barriers, both the large New Zealand grocery retailers have applied pressure on suppliers to limit the access to products by the online provider, The Honest Grocer,” the Council has told the Commerce Commission. “This has taken a range of forms but commonly threats to delist products/product ranges are used.

“After agreeing to supply The Honest Grocer and supplying the new player, many suppliers have withdrawn products due to genuine fear that they risk other parts of their business. This is the result of The Honest Grocer going online with lower prices because as a retailer, it has lower margin expectations than the two major retailers.”

Food & Grocery Council chief executive Katherine Rich told Newsroom that a mandatory Code of Conduct – a proposal being embraced by the Commerce Commission – would stop one retailer applying pressure – either veiled or explicit – to not supply another retailer.

“Last time I checked a few months ago with The Honest Grocer it had had around 10 suppliers withdraw from supply because of fears they were putting their supermarket sales at risk because The Honest Grocer was considerably cheaper than supermarkets,” she said. “It has been the same with suppliers being under pressure for supplying The Warehouse over the years. Sometimes one supermarket works hard to get a supplier not to supply the other supermarket.  

“Really, who a supplier supplies is their business decision.”

“We are confident that we do not overstep ‘the line between robust negotiation and bullying’.”
– Woolworths NZ

Foodstuffs members own 145 New World supermarkets, 56 Pak’nSave supermarkets and 229 Four Square stores, through two separate-but-connected co-operatives in the North and South Islands.

“We do not prevent suppliers from doing business with other retailers,” said Antoinette Laird, head of corporate affairs at Foodstuffs NZ. “Many suppliers’ products can be found on the shelves of our competition, both large and small.”

Woolworths NZ owns 183 Countdown stores serving 2.5 million customers a week, as well as being the franchisor of 69 SuperValue and FreshChoice supermarkets.

“We are not aware of anyone at Countdown asking suppliers not to supply the Honest Grocer and we’d be surprised if those examples were from our business specifically,” said spokesperson Kate Porter.

“However if there were any discussions like this we would absolutely want to know so that we could follow it up with our team. Our buying team have extensive training around their legal responsibilities as well as our own Supplier Code of Conduct that we work to, and our focus should always on doing the best that we can as a business for our customers.

“At Countdown we are proud to partner with 1400 suppliers, including 120 produce growers and 900 small suppliers, and having good relationships is extremely important to us. We’ve done a lot of work over the past few years to make sure we are fair and good to do business with – in the latest independent survey undertaken by Advantage, Countdown was the top-ranked supermarket by suppliers for the second year running.”

In its submission to the Commerce Commission, Woolworths notes that online grocery sales are growing fast and will grow further.

“While we cannot comment on the relationship between suppliers and other grocery retailers, for our own part we are proud of the positive relationships we have developed with our suppliers, and the investments we make in training our staff to ensure a consistent and constructive culture in our buying teams,” it says. “We are confident that we do not overstep ‘the line between robust negotiation and bullying’.”

It says companies like The Honest Grocer are significant competitors because they have no “bricks and mortar” overheads.

“There is a significant and growing range of retailers and other suppliers of food and grocery products in New Zealand that compete directly and successfully with the ‘traditional supermarket’ grocery retailers,” it says. “The Honest Grocer is an online only supermarket that launched in December 2020 with the stated aim of being a ‘retail disruptor’ and is already delivering North Island-wide.”

“The Warehouse’s TheMarket has two million products from 3500 local and international brands, more than 1 million monthly sessions, and includes a significant number of food and grocery products – able to be delivered nationwide.”

The Warehouse Group, which has pulled back from plans to enter the groceries market, rejected the assertion that it and other online retailers are seriously cramping the style of the two big supermarket chains.

“While The Warehouse offers customers a range of ambient grocery products, the scale of this is insignificant when compared to that of the grocers, both in terms of range of products available and sales value,” its chief executive Nick Grayston told the Commerce Commission. “As a result, The Warehouse believes that the size of its grocery offering is insufficient to be a constraint on the grocers, similarly to many of the other retail brands cited by the Grocers as ‘competitors’.

“We believe that there are high barriers to entry and expansion, for both potential domestic and international operators.”

The grocers waiting in the wings

In the past year’s US lockdowns, Kiwi expat Evan Roberts would buy in bulk at one of the nine big Costco stores dotted across the twin cities of Minneapolis and St Paul, serving a population of 3 million people.

The stores offered a small range of household staples, often processed, and in bulk. “You could certainly feed your family there, if you had a fairly plain diet.”

Dr Roberts, a University of Minnesota historical sociologist who has written on the history of New Zealand and US retail, said Costco had a reputation for good customer service, and paying its staff better than other supermarkets. The model was that customers first had to pay about US$60 for an annual membership to get the discounted goods; that helped build loyalty so customers kept coming back.

There have been previous attempts by the likes of The Warehouse to break into the supermarket duopoly, and next year US company Costco is to open a three-storey big box grocery and home goods store at Westgate Shopping Centre in Auckland.

The Commerce Commission makes it clear that newcomers like Costco will face almost insurmountable challenges: accessing real estate, getting it consented, sourcing produce from captured wholesalers and gun-shy small suppliers – and that’s all before they even open their doors to the public.

Katherine Rich and analyst Nick Hogendijk point to Costco, The Warehouse and Australian chains Coles and Metcash – or just perhaps, Amazon Fresh – as contenders for expansion. "I recall visiting The Warehouse years ago and I was told that The Warehouse could not get suppliers to supply them Easter Eggs and chocolate because the supplier feared the wrath of the supermarkets," Rich said. "So The Warehouse had to go out and buy a chocolate factory."

She said the opening of Costco's bulk buy store in West Auckland would not have a major impact on its own. Nor would The Warehouse’s quiet re-entry into grocery lines – it would take more than that.

The frontrunner has always been seen as German discount grocer Aldi, which expanded throughout Australia 20 years ago, contributing to markedly lower grocery prices across the board.

The chain says it has no plans to expand on this side of the Tasman at present – but Hogendijk, the managing partner of Hexis Quadrant in Australia, believes it will be watching and waiting. It will be especially interested in whether the Commerce Commission manages to break open the covenants and planning laws used by the big supermarkets to execute a stranglehold on desirable real estate.

He said Costco’s business model was not to take over the New Zealand market but rather, to change the purchase behaviours of people and businesses who would purchase in bulk. "Ultimately they are not very likely to shift the dial massively in New Zealand," he said. "Still a good thing for consumers though."

Evan Roberts said that with the arrival of the first Costco in Auckland next year, the only question for Kiwi consumers was whether families here would have big enough cupboards and chest freezers. "The practical questions for a lot of consumers is, where do you put the packages of 20 toilet rolls, or 15 capsicums, or 3kg bags of broccoli florets!"

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

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