Ahead of the Commerce Commission hearings, business disruptor Tex Edwards lays out his plan to challenge the grocery duopoly.
Opinion: On 29 July the Commerce Commission released the draft report: “Market study into the retail grocery sector” It’s a magnificent document. 517 pages of superbly thorough analysis. It should be required reading at every business, economics, law and journalism school.
Meticulously researched, impeccably analysed, closely argued and beautifully understated: “… our preliminary views on the features of the sector that are affecting competition and contributing to market outcomes that we consider inconsistent with what we would expect in a market with workable competition.”
That’s the kind of prose you’d expect from someone trying to tell you, kindly and delicately, that they’d just run over your cat: ‘We consider its appearance and behaviour inconsistent with what we would expect from a feline with a long life-expectancy.’
However, buried within that delicate prose is the nub: “competition is not working well”. For suppliers and consumers: you lose, and you lose. The draft report proves the requirement for direct intervention and divestment to achieve the requirements of like for like infrastructure competition.
And what has been the response to this masterpiece? Ninety nine submissions but almost no solutions. That’s concerning. Everyone can see that something’s wrong and is prepared to complain yet no-one has a solution.
My old economics teacher at Howick College in suburban Auckland used to say, don’t identify a problem without identifying the solution. If you’re going to complain about something you’d better have something better to offer.
I’m going to offer some solutions, so first let me talk about a couple of the problems. I became interested in market structure of industries at high school where I learned many things about supermarkets from pushing supermarket trolleys in Howick after school. I worked at the Big S, my mate was working at Foodtown Pakuranga and another mate at Shoprite Panmure.
We compared notes:
1 / You need trolley pushers because supermarkets have big parking lots filled with cars that people drive there because they’re going to buy a lot of stuff.
2 / Everybody goes to the supermarket every week and they spend a lot of money buying that stuff. Always more than they expect.
3 / You don’t get rich pushing trolleys. Or stacking shelves. Or checking out. Or packing bags or mopping floors. I learned later you don’t get rich supplying supermarkets either.
4 / Supermarkets are highly disciplined. They leave nothing to chance.
5 / When you put 1, 2, 3 and 4 together, someone is making a tonne of money.
I’ve learned more since then. Supermarkets are bottleneck infrastructure; when you have scale with little or no competition you control and dominate the value chain of food to consumers. In NZ that’s now $22 billion a year.
In the 40 years since I left high school, the butcher, the baker, the green grocer, the delicatessen, and the pet food shop have all closed down in Howick, and their revenues have morphed into the supermarket owner’s pocket.
When I left Howick, I finished uni and, after 20 years in banking, I joined the telecommunications industry. There, I learnt that if you had scale, and monopolised it, it didn’t matter what technology came along: you could just transfer dominance from one platform to another – this is important now. Why?
Because the internet, which changes everything else, can’t change a monopoly. Internet food providers don’t have sufficient dominance to make a sustainable consumer or supplier difference – they never will until scale is managed by the regulator.
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Of course internet shopping is coming, but unless the legacy scale of the supermarkets is disrupted, no new internet players will become sustainable challengers in New Zealand, as they have in other markets.
The final piece of the puzzle came 36 years later when I met another mate – a guy I had worked with in the freezers at General Foods in the evenings and holidays while at university, packing frozen foods into trucks for delivery to supermarkets. He’s now a top real estate broker, and one day in the pub he explained how decades of restrictive covenants had created an infrastructure monopoly.
There’s nothing super about supermarkets. They’re “suburban food distribution centres”, creating something which economists call “bottleneck infrastructure”. This is important, because in most OECD countries infrastructure utility bottlenecks are regulated – to ensure they work in the public interest.
Bottlenecks harm suppliers. They harm consumers. And they throttle innovation. Countdown and Foodstuffs talk about the innovation they bring to the sector. That’s arrogant nonsense. They talk only of in-store innovation: self-scanning and in-store labelling.
They fail to recognise that they should also be responsible for encouraging innovation at both the supplier and the consumer level. If you’re a bottleneck infrastructure provider you’re responsible for what happens upstream and downstream.
Here are two examples of what they don’t do.
Anyone who inspects Farro Fresh can see that it’s an innovation turbocharger for niche NZ food exporters. Only once they manage to deal at scale are the big players willing to take them on.
And in other markets the consumer use of internet-connected fridges and internet operators has yielded massive household productivity dividends. Not here. Incumbent scale and dominance prevent supermarket virtual operators from getting a scale to be sustainable in the value chain
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That’s enough moaning for one morning. So why no solutions?
1 / Fear of the incumbents. People have real fear not just for their jobs, but for their businesses and their ability to ever again earn a living in this country. If you think I’m exaggerating, consider: of the 99 submissions received 25 were from lobby groups, 12 from government agencies, 6 from supermarket operators, 24 from individuals with no defined interest and 32 – around one third — were anonymous. I fear too, I try to be normal, I enjoy Christmas drinks too, I want to be invited again this year!
2 / Leverage. There’s no point in having a monopoly if you’re not prepared to leverage it. (A few monopolists – very few – respect the glorious gift they’ve been given and work hard to ensure that no-one ever has a reason to take it away from them, but that’s another story).
OK, so technically we have a duopoly. But unless you’re an incumbent, it’s a closed club. For all practical senses a duopoly is just a monopoly with two personal profiles. Like the Kray twins. Can MonopolyWatch say that? You tell me. The turf wars between the duopoly over who opens where have all the hallmarks of gangsters divvying up “enterprises”.
Woolworths, the owner of Countdown, spent an estimated $4 million on legal fees in the 2000s to delay the opening of Pak’nSave Wairau Park by 12 years, thereby breaking up its hold on the lower North Shore. And this is a company that skites to its shareholders about its premium ESG rating (Environmental, Social, Governance programme) and says that it does the “right thing” — on the front page of its annual report.
3 / Because fixing it is bloody difficult. It will be a long and ugly fight (I know what those are like). And that’s before the lawyers get involved. They’ll invoke the Commerce Act, the Resource Management Act, the Health and Safety at Work Act, the Employment Relations Act, the Privacy Act, Te Tiriti o Waitangi, the Constitution Act, the Bill of Rights and the Statute of Westminster 1931. It will be a lawyers’ bonanza!
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Back to the fix. It takes only two things to solve this, and the second one’s a no-brainer.
The first is harder: political will.
Government must listen carefully to the Commerce Commission’s recommendations and proceed with meaningful changes to Section 36 and Section 27 of the Commerce Act to ban rebates, pocket pricing, unreasonable bundling, and abuse of market power.
If you don’t know what these behaviours are, all you need to know is that most rebates, pocket pricing, unreasonable bundling, and abuse of market power are illegal practices in Australia. Yes, the home of the owner of one of our two supermarket chains. Small wonder the OECD regards our competition law as weak.
Amazing that Woolworths, Countdown’s owner, perpetuates business practices in here in 2021, that were banned in 2008 by the ACCC, the Aussies’ competition regulator in 2008. Do the “right thing”. Yeah right.
It’s time there was a definition of market power in the legislation changes, as recently recommended, and it needs to be improved and upgraded to describe unacceptable behaviours. Do not leave that up to lawyers to test later, much later, in court.
This legislative fix currently being considered was promised back in Oct 2000 after the Fletcher Ministerial enquiry into Telecommunications in 1999. 181 submissions later, I am still waiting to see this fixed.
It’s time for Woolworths to apologise to NZ consumers for restricting competition, similar to the apology it published when it tried to open yet another liquor store in Darwin in a First Peoples’ community that had severe alcohol problems.
My view is this apology should not only be displayed in store, but also printed on all their own house brand packaging and it should accompany a fine similar in size to the damage they have caused Kiwi consumers by blocking competition. The Commerce Act enables a fine – will it be $5 billion? Monopoly Watch’s estimate of the damage caused to NZ consumers by this blocking of competition is $15 billion over the decade
Then there’s the big ballsy one: the Commerce Commission’s final report must recommend to the government – and the government must act on that recommendation — to break up the supermarkets and force each operator to divest 100 supermarkets and force the construction of two new distribution centres. Only a strong approach will remove market power from the hands of monopolists and give it to consumers.
Whoa! Steady on! Property rights, dude.
Wrong. There are no property rights in monopoly rents. Even the supermarkets’ auditors agree this when they discuss the “goodwill valuation” in the company’s accounts. It’s worth noting that Woolworths’ annual report and financing prospectus documents publish a risk warning to their investors that the regulatory environments may change. Likewise in the Foodstuffs business, the big money end of town are professional institutional investors – they know their party may end.
But isn’t divestment a radical solution? Hell no. I’ll tell you what’s radical.
Radical is Progressive Enterprises’ acquisition of Woolworths in 2006 (vigorously opposed by Foodstuffs) which brought the number of players down from three to two. That’s unheard of in the OECD.
Radical is the way Woolworths and Foodstuffs blocked the entrance of a third party supermarket challenger operator, the Warehouse, by purchasing a 20 percent stake in June 2006, to stop the Warehouse selling groceries . What were they thinking? What about “doing the right thing” and being “socially responsible“?
Radical is a decade-long battle between grocery giants over a supermarket that had been built for more than three years ago before it opened in the Wairau Road debacle
Radical is anti-competitive property covenants, banned in Australia in 2008 but still used by Woolworths and Foodstuffs in New Zealand a decade later, reinforcing the moat around their suburban monopolies.
Radical is the level of profitability the chains re able to extract from gouging consumers and crushing suppliers. Countdown’s profits go straight to Woolworths Australia and thence to Australian pension funds – let’s call it for what it is: the Woolworths tax. Divestment is a mild remedy, a gentle emetic, compared with two decades of systematic abuse of New Zealand consumers and suppliers.
Now to the second fix: show me the money.
This country abounds in people who have a powerful desire and access to the capital needed to buy supermarkets. And why is there such fierce competition to buy a supermarket? Simply because there is so little competition once you own one. We don’t need to change the Overseas Investment Office rules, just break up the monopoly and bring our competition laws into the 21st century.
Supermarkets are a mature business, there is no category growth — unlike video streaming, retirement care, digital transformations. Simply put a mature business model won’t attract competitive pressure unless the barriers – the walls, moat and drawbridge — that protect it are removed. Remove those barriers and the money will flow.
I can tell you, stage an intervention, establish the right market structure and people will line up to invest, it doesn’t have to be me or my friends at Northelia. Many other investors will step up. Just please make it possible for someone get on and do it.
You will see a new like-for-like supermarket chain, with an independent, competing open access wholesaler, a NZ controlled and owned facility with world class technology, leveraging franchise and owned stores. There’s plenty of scope for a greenfield institutional start-up to mobilise a capital base in excess of $1 billion. Then we’ll see what competition looks like.
The biggest risk we face is that we back down and don’t force a breakup, but instead opt for a best-endeavours and good intentions approach, swaddled in voluntary undertakings. It may look like competition but the same names will continue to as owners, and rich list nonsense will be perpetuated.
One final wisdom from my Howick College, teacher: the private sector creates monopolies; Governments break them up.
Please, Government officials, when you force divestment, as you surely must, don’t let the incumbents decide which stores to sell.