Local investors, iwi Māori and major global supermarket brands share the view that establishing a third supermarket chain is not commercially viable, says entrepreneur Tex Edwards. The Govt’s supermarket divestment review is the last hope.
Opinion: We know grocery has a competition problem, and not just because the Commerce Commission says so. We experience it viscerally every time we shop.
Whether it’s the weekly, the top-up or the mission shop, each one registers as a shop-shock. We aren’t visiting super “markets” we are visiting super “monopolists”.
Attractive as it is to blame government and its agencies – whether the Overseas Investment Office, or the Natural and Built Environment Act or the Grocery Industry Competition Bill – the problem is entrenched and won’t be addressed by single-solution regulatory tweaks.
The stage was set when an earlier incarnation of the Commerce Commission approved a three-to-two merger in July 2006. Since then, the duopoly has single-mindedly pursued the goal of stifling potential competition at birth. That’s not surprising: any entrenched incumbent has the goal of eliminating meaningful competition programmed into its organisational DNA.
But before I go any further, disclosure. I founded Monopoly Watch because I believe competition matters, and market structure matters too.
We, like so many other long-suffering consumers, are interested seeing new market entrants into the supermarket sector. I also have an interest in Northelia, which has expressed its intention to establish a third supermarket chain, should the market structure change so as to make such a move commercially viable.
As things stand, it’s not.
That’s a view shared by our consortium, by Māori and by major global supermarket brands, all of whom have expressed an interest in setting up a competitor chain.
What’s stopping us is not any regulatory impediment.
One of the key findings of the Commerce Commission’s recent market study is that there has been an overbuild of supermarkets in New Zealand and that there is no business case to build more.
It’s relevant because the overbuild, in real terms, prevents the financing of a new entrants with scale to deliver price benefits to consumers, regardless of what the Overseas Investment Office says or does, regardless of what appears in Natural and Built Environment Bill, regardless of the changes, yet to be implemented, promised in the Grocery Industry Competition Bill.
In fact, nothing the Overseas Investment Office can do will remedy the problem. We push back on the NZ Initiative’s Eric Crampton’s view that the only barrier to entry is the Overseas Investment Office and Resource Management Act, a view shared by incumbent lobbyists.
When competition fails to arrive in a profitable market it’s not because potential competitors can’t see the substantial – even excessive — profits being made. It’s invariably because insurmountable barriers have been put in their way.
It’s market power and scale that prevents scalable, price-based competition coming to save Kiwis from monopolist driven inflation.
“There is no business case.” A market participant protecting an entrenched position against a new entrant can imagine no sweeter phrase.
It means they can continue to take advantage of a dominant position and argue that no one has turned up to compete, whereas, in reality, they have used monopoly profits to erect anti-competitive bricks and mortar barriers to entry on the foundation of the three-to-two merger.
The single most salient piece of evidence about the effects of competition to emerge since the Commerce Commission’s final report followed the opening of Costco in Westgate. Within a week, the nearest Pak’nSave implemented a retail tactic called “geographic pocket pricing.”
That occurs when a national chain reduces prices in one store only in order to make life difficult for a local competitor in a specific geographic area. The tactic, legal in New Zealand but generally not elsewhere, coupled with our weak competition law which allows it, has cost the New Zealand taxpayer billions.
If that seems to over-state the case, consider this: in the mid-1990s, a private company called Saturn, without using taxpayers’ money, started to roll out competitive telecommunications facilities in cable to Wellington and Christchurch suburbs. Scarcely had it set its plans in motion when it was “geographically pocket-priced” out of business by Telecom, which ended its deployment.
Fast forward to this millennium and Kiwi taxpayers shelled out $4 billion to help finance Chorus’s fibre rollout.
Monopoly profits have been invested in erecting physical and legal barriers to entry, a moat around the duopoly’s castles in the form of an overbuild footprint that can stymie any competitor. No business case can be made to undertake construction of a nationwide portfolio of new supermarkets.
Failure of government and the Commerce Commission to act on geographic pocket pricing is the reason Telecom became so profitable and no new entrants turned up until then. For 20 years consumers got ripped off in their telephone bills until 2Degrees arrived and started to fight for fair.
In most jurisdictions its absolutely fine for an organisation which has market power to compete with a challenger, but it must price its entire network at the new price, not just the pocket where embryonic competition has formed.
It’s a lesson in how competition actually works. When competition fails to arrive in a profitable market it’s not because potential competitors can’t see the substantial – even excessive — profits being made. It’s invariably because insurmountable barriers have been put in their way.
The combination of restrictive covenants, weak competition law and an overbuild have done their job for the incumbents. Monopoly profits have been invested in erecting physical and legal barriers to entry, a moat around the duopoly’s castles in the form of an overbuild footprint that can stymie any competitor.
No business case can be made to undertake construction of a nationwide portfolio of new supermarkets.
New Zealand’s telecommunications regime is ‘widely recognised as a disaster’ … the opportunity has come and gone. However, grocery is still in play,
The implications of this entrenchment are obvious to financial analysts. On the same day the Government announced that food inflation had reached a 13-year high, Goldman Sachs Sydney released a report showing margins in New Zealand supermarkets were forecast to expand in the near term.
ASX-listed Woolworths, which owns 100 percent of Countdown, has a “New Zealand” break-out section in its financial analysis, which showed the already world-leading margins in this market expanding from 4.2 percent to 4.8 percent. (For reference, Sainsbury enjoys margins of 1.74 percent).
In 2001 Oxford University Press published what is now a standard competition law text, Telecommunications Law and Regulation, edited by Ian Walden and John Angel. New Zealand’s telecommunications regime is “widely recognised as a disaster”, it said.
Many Kiwi consumers would agree with that description. In telecommunications, the opportunity has come and gone.
However, grocery is still in play, and a potential turning point is on the horizon for Kiwi consumers in the form of the supermarket divestment review.
This is a not just a review of supermarkets. We’ve just had that, and the Commerce Commission, after a bold start, ducked and ran for cover.
This is, instead, a review of whether MBIE and its analysts can continue on a long journey that started with a review of the Commerce Act (in particular the monopolisation test section 36) and start a new era of competition.
The report is due out before the end of the year, and exploited and embattled Kiwi consumers will be hoping for some relief.
Not very many sleeps to go now. If it doesn’t appear before the end of the year, don’t be concerned. It simply means that MBIE is taking the matter very seriously and is looking to deliver a late Christmas present for Kiwi consumers.