While the Commerce Commission’s report into the supermarket sector acknowledges an undesirable situation, its proposed solutions are not promising and the horizon continues to look dull for consumers, argues associate professor Sergio Biggemann
The findings of the final report of the Commerce Commission Market Study into the Retail Grocery Sector are no surprise to anyone in this country.
The majority of the proposed initiatives to change the very conformable situation of the two major players in the sector are not new.
Foodstuffs and Woolworths NZ have been for years enjoying a duopolistic situation that economic theory has well proven encourages collusion instead of competition, maximising profits for the sellers.
To protect their position, these dominant players have developed a habit of purchasing land and lodging restrictive covenants where potentially a supermarket could be opened, building much higher entry barriers for potential competitors.
To completely close the gates to new entrants they are also the dominant wholesalers; the horizon looks pretty dull for consumers.
Making the problem more difficult is the size of New Zealand market. Although we spend an average $234 a week per household, which at competitive prices should be more like $170, we are only five million people with great concentration in one city. For low-density areas, this means expensive and rather inefficient logistics and overall a not very attractive market to another big player. Unless something fundamental changes.
The report arrives at the same conclusion and offers a number of options summarised in four points: 1) free more land for new retailers to open, 2) encourage Foodstuffs and Woolworths NZ to wholesale to competitors, 3) create a mandatory code of conduct, so suppliers have a fairer go, and 4) improve customers’ ability to understand supermarkets’ offers.
Regrettably, they are likely to have little or no effect, at least individually. No matter how clear it is for consumers that prices are too high, if there is no other option, not much can be done.
As a new big player appears to not be the option, making more land available for retail may result in more small players that later don’t find a suitable supplier, which won’t help either.
Expecting the current wholesalers to voluntarily collaborate and supply the competition at fairer prices seems to be a little naïve, and finally pretending to enforce a code of conduct may prove difficult in practice.
So, should New Zealand consumers accept what is clearly an undesirable situation? Of course not. However, they should not expect significant changes in the near future. To me, the best chance we have to improve the current situation is to help the ends of the chain connect one another. That is, facilitate direct connections between suppliers and end consumers, or at least between suppliers and retailers, aiming to avoid the participation of wholesalers.
The Government would like to revisit regulation that might be hindering these connections. The easier it is for parties to collaborate, the more difficult it becomes for big players to collude. Besides, one less link in the chain makes automatic savings, some of which might be passed onto consumers.
In parallel, better conditions for the emergence of a third wholesaler could be created to help break the current duopolistic situation; not necessarily someone that also offers a retailing space. These two actions, easier interaction, and one additional wholesaler, might level the field for independent retailers and create the conditions for a more competitive market.
Lastly, emerging technologies such as artificial intelligence, autonomous vehicles, and drones, are starting to change the retail landscape (e.g. Amazon Go). The task for the Government here is to make sure legislation keeps up with the progress of technology.
This is a complex and undesirable situation with little options at hand. However, disruption happens when existing parties become complacent, inviting innovators to take advantage of the opportunity. What those innovations are going to be is hard to say, but we hope they will come soon.