The Commerce Commission says competition in the supermarket sector is "not working well for consumers" and it's difficult to see the situation improving without "some form of intervention".
It also suggests a code of conduct to address a current imbalance of power between the supermarket giants and their suppliers.
And it suggests the possibility of requiring the existing market participants to "structurally separate" their wholesale businesses from their retail grocery businesses. This would likely require legislative intervention.
The commission also says it would also be possible for Government to take "more direct action" to facilitate entry into the NZ market by further major grocery retailers. This could include forcing divestiture of retail brands by existing players - although this is seen as a last resort if other measures don't work.
The commission released its draft report on the retail grocery sector on Thursday. The inquiry was ordered by the Government last year. This is the draft, which will be followed by a final report in November.
New Zealand has two major supermarket operators, Foodstuffs and Woolworths New Zealand. Both companies have their own wholesale as well as retail operations.
In its report the commission has suggested various things that might improve competition - including getting another competitor into the market.
The commission says our supermarket companies make "persistently high profits" and appear to avoid competing strongly with each other, "particularly on price".
Meanwhile, competitors wanting to enter the market or expand face significant challenges, including a lack of competitively priced wholesale supply and a lack of suitable sites for large scale stores.
The commission thinks competition in retail grocery markets would be more effective "if the major grocery retailers faced additional competitive constraints".
"The options for securing the most significant and durable improvements in competition (and consequent benefits for consumers) are likely to be those that enable an increase in the number of firms competing effectively in retail grocery markets," the commission says.
"In the long term, meaningful entry or expansion (or the real threat of it) is likely to be the most significant driver of greater competition in grocery markets.
This could involve entry by firms not currently involved in groceries, expansion by existing firms, or entry by firms already operating in adjacent retail markets such as general merchandise.
"It could also include, but is not limited to, one or more additional major grocery retailers, stronger competition from independent grocery retailers, or further online grocery offerings."
The commission says it is difficult to see improvements to competition occurring without some form of intervention.
"While we cannot be certain, in the foreseeable future we do not consider we can rely, under current competitive conditions, on market entry or expansion being sufficient to materially enhance competition with the major grocery retailers."
The commission sees two primary ways that intervention could occur:
- measures to improve the conditions for entry by new grocery retailers, and expansion by existing firms; and
- measures to facilitate or support entry or expansion by wholesalers or further major grocery retailers.
"Second, we consider that the imbalance of power between the major grocery retailers and their suppliers could be addressed through a number of measures, including a code of conduct."
"This might improve long-term outcomes for consumers, including by promoting investment and innovation by grocery suppliers."
This is the media release from the commission:
The Commerce Commission’s draft report into competition in the retail grocery sector has found that competition is not working well for consumers.
“If competition was more effective, retailers would face stronger pressures to deliver the right prices, quality and range to satisfy a diverse range of consumer preferences,” said Commission Chair Anna Rawlings.
In November 2020, the Government asked the Commission to look at whether competition in the $22 billion a year grocery industry was working well and, if not, what could be done to improve it.
The Commission’s draft findings are preliminary and subject to consultation prior to its final report being published in late November.
“Our preliminary view is that the core problem is the structure of the market. In competitive terms, the major retailers, Woolworths NZ and Foodstuffs, are a duopoly, and while there is an increasingly diverse fringe of other grocery retailers, they have a limited impact on competition. This is because they are unable to compete with the major grocery retailers on price and product range in order to satisfy the widespread consumer demand for a main shop at a single store,” said Ms Rawlings.
During its study the Commission observed features of the grocery sector which indicate the market is not working as well as it could be. These include persistently high profits being earned by the major retailers and high grocery prices when compared internationally. The level of innovation in the sector also appears modest by international standards.
“The major retailers appear to avoid competing strongly with each other, particularly on price. Meanwhile, competitors wanting to enter the market or expand face significant challenges, including a lack of competitively priced wholesale supply and a lack of suitable sites for large scale stores.
Other observations which indicate the market is not working as competitively as it could be also include:
- the complexity of the major retailers’ pricing strategies, promotions and loyalty programmes can confuse customers and make it difficult for consumers to make informed purchasing decisions
- many suppliers have few alternatives but to supply the major retailers. This allows them to exercise their buyer power to push excess risks, costs and uncertainty onto suppliers. Suppliers report agreeing to these terms because they fear that otherwise their products may not be stocked. This conduct can reduce suppliers’ ability and incentives to invest and innovate, ultimately leading to less choice, lower quality, and potentially higher priced goods for consumers.
“Without intervention, we currently see little prospect of a new or expanding rival being able to constrain the major retailers effectively, and improve competition in the sector,” said Ms Rawlings.
“We consider the best options for improving competition are those that enable an increase in the number of retailers directly competing against Foodstuffs and Woolworths NZ for a consumer’s main shop.”
These draft options for recommendations include:
- making it easier for new competitors to enter or existing independent retailers to expand by increasing wholesale access to a wide range of groceries at competitive prices. A spectrum of potential options for achieving this is discussed in the draft report.
- making land more available through changes to planning laws and restrictions on the use of covenants.
If these options were not feasible, had proved ineffective, or did not appear likely to improve retail competition within the desired timeframe, another potential option is to directly stimulate retail competition by creating a further major grocery retailer.
Options to strengthen suppliers’ bargaining power with retailers include introducing a mandatory industry Code of Conduct and allowing suppliers to bargain collectively.
Options to help consumers make more informed purchasing decisions and to enhance competition at the retail level include the introduction of mandatory unit pricing, as well as asking the major retailers to simplify their pricing and promotional practices, and ensuring that the terms and conditions relating to their loyalty programmes are clear.
“Our draft options encompass a range of possibilities and we look forward to now testing our draft findings and options for recommendations in coming weeks through public submissions and a consultation conference, before publishing our final report,” said Ms Rawlings.
Comments on the draft report are due by Thursday 26 August. A consultation conference will be held in Wellington from 21-24 September, with public sessions open to media (subject to space). Post conference comments are due by Thursday 7 October.