Supermarkets - ComCom Conference

In a lockdown almost any pastime beats hanging around taking bets on the 1pm announcement. So last week’s start of the Commerce Commission’s online conference about our grocery market has been a fascinating spectacle. Competition law, market structures and economics are not everyone’s cuppa, but the enormous stakes in this battle to escape from our supermarket duopoly have made the opening salvos compelling viewing.


There’s a small but highly influential range of actors. Supermarket industry bosses earnestly assuring the Commission that its got its sums horribly wrong and there’s nothing to see here. Consumer representatives backing the Commission’s stand by underlining the extreme dominance of the big two players. Advocates for the poor. Grocery suppliers and their representatives – only a handful of these because of the risks of speaking out – as one conceded very frankly on Friday “Its very dangerous for me to even be here talking about this.”


And there was the irony of learning afterwards that even while Foodstuffs CEO Chris Quin and colleagues were defending their position as though their overpriced butter wouldn’t melt in their mouths, colleagues in the next room were informing supplier Sealord and others that many of their products were to be “delisted”, allegedly to make more shelf space available for Foodstuffs own “Pams” house brand with resulting regional job losses. In a market with half a dozen outlets it wouldn’t matter so much as Sealord could compete through other retailers, but with just two outlets its devastating.


Wholesale pricing of groceries will always involve tough negotiation, and shelf space is not elastic. That’s life in the FMCG industry. It becomes an issue only with the extreme concentration of power in New Zealand’s wholesale and retail grocery markets in Woolworths and Foodstuffs. Suppliers at one end of the chain, and consumers at the other, are being held to a king’s ransom by the middlemen.


The Commission’s end game, subject to the Minister’s approval, is the probable enforced divestment of some stores, possibly with other forms of structural separation. Rightly so. Foodstuffs is arguably New Zealand’s second largest business after Fonterra. It is just not right that in a trading nation there should be so much market power in the hands of a vast and opaque entity that has inherited a position of extreme dominance in a market where it faces no international competition as a discipline. That’s exactly the argument that was made successfully against Telecom in earlier times.

Given the opportunity flowing from divestment, competition will undoubtedly emerge. An active player in the process is Tex Edwards, founder of 2degrees. Edwards is extremely well connected in investment circles and is clearly acting as a front for potential entrants.


How much is at stake for Kiwi consumer? Opinions vary on the precise numbers. The Commission’s study found that we are somewhere between the 4th and 6th biggest spenders on groceries in the world and that the supermarket industry is earning persistently excessive returns. Foodstuffs countered that it is earning “less than half” what the Commission calculated. The NZ Institute of Economic Research tabled substantially higher figures again.


A spokesman for Night and Day stated that because the two duopolies have total control of the wholesale market his company pays a premium of 43% for dry groceries over its competitors. That’s huge!


Aside from structural separation there are sideshows. Promotional practices are one – the endemic use of “confusion marketing” with a bewildering mix of everyday low prices, loyalty club discounts, specials so frequent that they seem permanent, and free gifts. Consumer NZ pointed to its research showing that 63% of consumers struggle to navigate the various offers and don’t believe the constant specialling is of benefit to consumers. The Kore Hiakai Zero Hunger Collective pointed out that people in poverty on super-tight budgets often lack numeracy and literacy skills and cannot navigate the constant changes in price.


Countdown retorted that its customers react to its specials with “surprise, delight and excitement.” Are we all talking past each other, or what?


Other sideshows include removal of covenants and land banking as a way to snuff out the threat of a new entrant building new stores, and a code of conduct for dealing with suppliers. The supermarkets seem to be accepting of all these.


But as Consumer’s Jon Duffy observed, all the supermarkets are really conceding is a promise to act fairly and ethically. Their promises don’t start to address the big-ticket issue – lack of competition as a constraint on consumer prices.


And that’s the issue. New Zealand has this one, belated chance to get it right through separation. We should not have got into this expensive pickle in the first place. That Foodtown and Woolworths were allowed to merge in 2002, and that The Warehouse failed against blocking tactics from the big two a few years later, were blights on our economic history. No one party was to blame – the Commission, Parliament, the Privy Council, overly-permissive legal frameworks, and sheer bad luck all played a part.


The challenge now is to fix it – to re-wind to where we might have been with 4 or more separate chains competing with vigour. Its daunting. But it can be done. That’s what we have a competition authority, and a parliament, for.

The remaining few days of the conference, the post conference submissions, the final Report next March, and the government’s response will be telling. We’ve been here before with telecommunications and, with cross-party support, New Zealand Inc won. Watch this space.


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