Our failed grocery market – where are we going?

Grocery Commissioner Pierre van Heerden has released this statement revealing two commercial behaviours he believes are “reinforcing” the market dominance of the grocery duopoly.

One is “suppliers covering retail costs” such as shelf stocking, setting up displays, and dealing with outdated stock. Nothing conceptually new here – suppliers were complaining about this my day (the 1980s!) The bit that’s changed is that in those days there were half a dozen supermarket chains, so a supplier who fell foul of one could still trade viably with the others – very different to today’s duopoly where all the power is in the retailers’ hands.

The second is the scale of promotional payments, discounts and rebates. Again these have always existed. But the revelation is that the Commission has calculated these at $5 billion annually.

$5 billion! That’s an astonishing sum! Spread across the community its around $4000 a year for a Kiwi family of four.

Some of those payments are legitimate contributions to temporary price reductions or specials.  But clearly much of that figure is a straight out cash grab by avaricious retailers, simply because they have tied up the market in a way that gives them practically unlimited commercial power.

I went on air on NewstalkZB with this brief overview.

So here are a few considered conclusions:

First, much as I support the establishment and actions of the Commissioner and his Commerce Commission team, I wonder whether there is much purpose in continuing down the same track. So far, after three years its hard to see any positive change for consumers. In my view that’s because all the Commissioner’s actions have been designed to change behaviour, whereas the problem is with market structure.

Its well agreed in global antitrust circles that you can’t resolve structural problems with behavioural remedies. When a market is broken, like ours, the proper remedy is to fix it by splitting it up – for instance, requiring the existing players to divest large numbers of stores, or to split their wholesaling from their retailing functions. This principle was reinforced recently by a major European Union Study on Antitrust Remedies over the past 20 years, which concluded that structural remedies should in future be used more frequently and behavioural ones, less so.

The truth of that concept was illustrated too by New Zealand’s most successful repair job on a broken market – that of Telecom in the 2000s – where the dominant business was effectively bribed to split its wholesale from its retail business. Like installing a stent in a blocked artery, structural reform can deliver dramatic effects almost instantaneously.

Second, I wonder whether the Commission is wasting its time given our current political climate. Strong action will require political will, which our three-headed-monster government seems unlikely to agree on. ACT, which appears to be in charge, would clearly oppose structural reform. New Zealand First appear more pragmatic and just might support decisive action.

As for National, Minister Nicola Willis has emphatically stated her intention to deal with this. But whether she can get support from within her party is moot – its hard these days to see what principles National stands for, if any. I fear without overt political support Minister Willis, like the Commissioner and his hard-working team, may be tramping down a road to nowhere.

So while I support the Commissioner in his valiant efforts, my best hope is for action from Nicola Willis. She has stated clearly that all options are on the table and Kiwi shoppers are being poorly served by a market effectively dominated by just two major players. The spotlight is now shining strongly in her direction. But she needs overt support from her party.