Commissioners are asking robust questions about whether Foodstuffs and Woolworths should be required to divest some of their businesses to break their stranglehold on the grocery market
Analysis: This is not the first time Dunedin-based Night ‘n Day has gone toe-to-toe with the big guys.
First, in 2011, it bought 21 North Island Quickstop stores previously part of the Woolworths group. Foodstuffs South Island responded sharply, terminated a supply agreement giving the convenience store chains access to dry goods on equal terms to its co-op members.
As a result, says general manager Matthew Lane, Night ‘n Day was unable to obtain competitively-priced dry goods and had to shift its focus to coffee and takeaway foods. Night n’ Day complained unsuccessfully to the Commerce Commission.
“It gives us the opportunity to grow without two overbearing operators pressing down on us. We will look at the opportunities for us to expand in retail.”
– Matthew Lane, Night ‘n Day
Then a law change in 2012 restricted alcohol sales to a narrow definition of a grocery store that had sold a full range of food products – a definition sought by the supermarkets, that stopped Night ‘n Day and almost all dairies from selling beer and wine. Opposition MPs told Parliament the minister had folded under pressure from the supermarkets.
Then again, at the start of this year’s Delta outbreak when all of New Zealand went to Level 4 lockdown, Countdown wholesale cut back its supplies in the North Island, saying it needed all its supplies to serves its own stores. Night ‘n Day protested and, perhaps anticipating an adverse public response ahead of this Commerce Commission competition hearings, Countdown reinstated supplies.
Today, Matthew Lane will appear again before the Commerce Commission to argue that the control the two big chains exert over groceries retail is stopping any other players entering or expanding in the market – and he will argue from experience.
This time is different, though. Night ‘n Day is lining up alongside several other small players who see the first opportunity in decades for new players to break into the supermarket business. That’s because, on Friday afternoon, the Commerce Commission supplied an agenda to participants in its hearings into competition in the supermarket competition.
According to that agenda, it will begin this week by addressing a long and robust list of questions about whether it can recommend the Government force Woolworths and Foodstuffs to divest parts of their retail or wholesale business, to allow a third entrant into the market.
“Every concern we raised with the Commerce Commission back in 2011, that is what is before the Commerce Commission today and has led to the prevention of increased competition,” Lane says this morning. “And that’s what I’ll be talking to them about today.”
The agenda has prompted excitement. Night ‘n Day sees a potential opportunity. Sarah Balle, the founder of online grocer Supie has already told the Commerce Commission she wants the opportunity to expand. Entrepreneur Tex Edwards, who previously broke open the Telecom/Vodafone telco duopoly with the creation of 2 Degrees, says he is fronting a consortium called Northelia that can raise the capital to build a new chain of supermarkets.
“Northelia’s board is meeting Wednesday,” Edwards told Newsroom this morning. “But we’re aware three other parties, including several Māori groups, are looking at how a different industry structure would work better for Kiwis.”
He declined to comment on the commission process, “other than to say the commission has an important referee’s job to protect the people, and small business”.
Northelia was working on evidence to support “a sensible solution to a bizarre market structure” that he said had failed consumers and suppliers.
Extraordinarily, by count of its 51 stores, Night ‘n Day is now the third-biggest standalone groceries retailer in New Zealand, after Foodstuffs and Woolworths. Those two big players own or license everything else: Countdown, New World, Pak’nSave, Four Square, Supervalue, Freshchoice, wholesalers Gilmours and Trents, and alcohol retailers Liquorland and Henry’s.
A critical problem for challengers like Night ‘n Day, and online grocers Supie and the Honest Grocer, is that the supermarkets own the big nationwide wholesalers and their distribution networks, which they say means it’s almost impossible to set up a grocery chain in opposition to the duopoly.
There’s nowhere else with a comprehensive range, in most parts of New Zealand. That’s why the owners of independent corner dairies are forced to stock up at their local supermarket, at retail prices – so once they’ve added even the smallest mark-up of their own, it’s impossible for them to be competitive on price.
That’s why the Commerce Commission’s work-plan to wrap up its hearings this week is provoking enormous interest. Commission chair Anna Rawlings intends to look at three options.
First, operational or structural separation – which might look similar to that imposed on Telecom in 2007. Back then, the Government required Telecom to create a stand-alone fixed network business (which later became Chorus), one or more arms-length wholesale units, and one or more arms-length business units that provided other functions like retail (later to become Spark).
For the supermarkets, that might mean splitting the retail businesses from the wholesale businesses, forcing the wholesalers to treat all retailers the same – whether they be affiliated supermarkets like New World and Countdown, or independents like Night ‘n Day, Supie and your corner dairy.
The commission wants to know whether operational separation would be technically possible, and what it would cost, and whether a separated business could be run on an arms-length basis, perhaps with the same shareholders but separate boards, and management incentives aligned with the narrow interests of the separated entities.
It distinguishes between operational separation where a separate unit might operate in the same company, or structural separation where the parent group would set up separate companies with separate boards.
The commission worries that might not be enough, asking: “Would an independent wholesaler or wholesalers have market power that might require further regulatory intervention?”
The second option is divesting some of their retail business. The commission acknowledges there might be negative consequences in such a government intervention of this type, and is anxious to minimise any adverse impact on investment incentives or New Zealand’s reputation.
It will ask the retailers and challengers like Northelia what the minimum efficient scale would be to create a viable and effective competitor to the major grocery retailers. Already, in an opinion piece for Newsroom, Tex Edwards has argued that the two big companies would need to divest 100 stores each.
The commission asks what the process should be for deciding which stores would be divested, and what other assets would need to be divested or other arrangements put in place (possibly on a transitional basis) to ensure the new business owner would be viable and would operate as an effective competitive constraint on the major grocery retailers.
The third option would be divesting some or all of the supermarket chains’ wholesale business, in order to establish a stand-alone wholesaler.
And the final option would be a hybrid model: the divestment of an integrated wholesale and retail business, or the assets necessary to establish such a business. That might be more effective than simply divesting stores, which might be left with the same problem of accessing wholesale supplies that has plagued Night ‘n Day and the country’s small corner stores.
The commission asks whether this might be more likely to successfully establish a viable and effective competitor. But, it asks, what are the potential risks or unintended consequences associated with such a divestment?
Not only will it consider today what retail, wholesale or other assets the supermarkets might be required to relinquish – but the commission will also look at what sort of new entrant might step into the breach.
Finally, hinting at its previous proposal for a ‘KiwiMart’ government-owned supermarket chain, it asks: “Are there barriers to entry or expansion that the Government is better able to overcome than private enterprise?”
At Night ‘n Day, Lane says the first option of structural separation would not be sufficient to bring competition to the market – but he believes some form of divestment would make a difference. That might be a combination of all the commission’s alternatives, he suggests.
“The chicken farmer that is subject to the whims of the massive chicken processor is going to face analogous contract terms to the author that is subject to a major bookseller. The worker at the whims of his boss, and who is bound by a noncompete agreement so he can’t quit and go next door; or the small-business franchisee that’s at the whims of the big franchiser; or even the consumer that wants to switch internet providers, but there’s no other service in their neighbourhood”
– Lina Khan, Federal Trade Commission
The culmination of the Commerce Commission hearings this week will be watched with interest not just in New Zealand, but internationally.
It comes as other governments, including the Biden Administration in the US, consider the forced breakup of very large vertically-integrated businesses like the tech giants.
Biden has appointed competition law expert Lina Khan, a groundbreaking critic of the dominance of such businesses, to chair the Federal Trade Commission. That was on the strength of her argument that these firms function as gatekeepers for billions of dollars in economic activity, operating a platform and marketing their own goods and services on it.
She has signalled her willingness to take on Amazon, Facebook and Google, arguing that small suppliers are “subject to the whims” of big processors, franchisers and other corporates
It’s that same argument that suppliers and retail competitors – such as they are in this market – are mounting in the Commerce Commission hearings.
Matthew Lane, for one, believes the two big companies wield too much power right across the supply chain – and that’s why he’s excited at addressing the Commerce Commission this week, and the opportunities its report to Government may bring to small New Zealand businesses like his to enter or grow in the groceries market.
“It’s certainly of interest to us – even for more competition to be brought to the market would be beneficial to us,” he says this morning.
“It gives us the opportunity to grow without two overbearing operators pressing down on us. We will look at the opportunities for us to expand in retail.
“From a personal point of view I’m keen to see what the Commerce Commission comes up with – I’m happy to trust the process.”