Supermarkets' Fine Should be $6 Billion

So Foodstuffs North Island have negotiated a settlement with the Commerce Commission over their long-term use of land covenants to stop entry of a major third operator.

This cynical use of covenants has been a stain on New Zealand commerce since it became common knowledge during the Commission’s 2022 grocery market study. Although today’s announcement cites only Foodstuffs North Island, its clear that such covenants have been commonplace. Arguably they are the single biggest cause of our having the developed world’s least competitive grocery market outside Latvia and Iceland. For decades, millions of Kiwis have paid the price every time we shop.

So the burning question is what “settlement” has been negotiated relative to the massive harm that has been done. We haven’t yet been told, but its worth speculating what a fair resolution, in kind or in cash, might look like.

In kind might involve undoing the harm that has been done – for example, by a voluntary separation of PaknSave from New World and Four Square, providing an instant increase to three competing players. Easily done – remember the successful split of Chorus and Spark from Telecom. And as the Commission has characterized covenants as an industry-wide phenomenon it has to be assumed all the Foodstuffs and Woolworths companies have some exposure – so maybe Woolworths could separate out Fresh Choice as well?

The other possibility is a cash settlement - again industry-wide. So how much might that be? There’s necessarily a lot of guesswork in my figures but they give a pointer to the scale.

The Commission has identified market failure as leading to excess profits of $400 million annually. I believe its considerably more (think about rebates from suppliers, payments to family members, transfer pricing, creative accounting within the cooperative structures and so on). But lets take that $400 million as a base.

$400 million annually over, say, ten years is $4 billion. That’s the amount taken directly out of the pockets of Kiwi consumers to the benefit of supermarket owners.

But to be fair, the covenants have not been the only issue. Our competition law – as unfit for purpose as the Prime Minister’s plane - allowed a three-to-two merger 22 years ago. So if we assume arbitrarily that only half the problem was a direct result of the covenants, that would reduce the excess profits to $2 billion across the whole supermarket industry.

But wait. The Commerce Act provides for a range of penalties, one of which is a fine of three times the commercial gain.

That would expose the supermarkets to collective fines of $6 billion. In round figures, a one-off reimbursement of $1000 to every woman, man and child in NZ. As well, or instead of, compulsory divestment to remove the issue for the future.

So when the specifics of the settlement are released, that’s the scale of remediation we should all be looking for.

That’s what consumers deserve. Then, and only then, the Commission can take a bow.

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FOOTNOTE: Since this post was written the ComCom has clarified that it is no longer investigation Foodstuffs South Island nor Woolworths in relation to the covenants