Commerce Commission finds rebates paid to merchants to sell building supplies like GIB are hampering competition

The Commerce Commission has launched an investigation into the rebates paid by Fletcher Building’s plasterboard arm, Winstone Wallboards, to building supplies retailers.

The rebates paid by building firms like Fletchers to retailers for selling their products is one of two main factors the Commerce Commission says is hampering competition in the building suppliers sector and makes it difficult to introduce new competing products.

But Fletcher's GIB maker has already gotten ahead of the Commission's news, announcing just after the Commission started its press conference that Winstone Wallboards "has already informed its merchant customers that it will discontinue use of that type of rebate and will move to a tailored, flat pricing model based on volume".

The competition watchdog Commerce Commission released its final market study into the residential building supplies market on Tuesday morning, and found, like the supermarket industry, competition was not working as well as it could.

Government pledges action

Commerce Minister David Clark and Building Minister Megan Woods say the Government will take action to increase competition in the residential building supplies sector.

"We welcome these findings and will consider the recommendations, to understand what changes are necessary to help increase competition, and ultimately bring down costs for consumers, which is hugely important in these challenging global cost of living times."

The Commission released nine recommendations to improve competition for building supplies including introducing competition as an objective to be promoted in the building regulatory system, to create more clear compliance pathways for a broader range of key building supplies, to explore ways to remove impediments to product substitution and variations, and to establish a national system to share information about building products and consenting.

It says it needs to address “strategic business conduct” including the “quantity” forcing rebates paid by suppliers to merchants, which appear to be making it difficult for new or competitive products to access distribution channels and increase sales.

“Quantity-forcing rebates reward merchants for purchasing greater volumes through a single supplier, by offering higher percentage rebates that apply across all of a merchant’s purchases with that supplier. Under certain conditions they can deter merchants from stocking competing products in their stores, making it more difficult for new or smaller suppliers to get established,” the report says.

But the Commission didn’t recommend legislative change to prohibit rebates, saying rebates can provide benefits, and whether rebates are affecting competition depends on specific circumstances.

It also took aim at the building regulatory system, which it says incentivises designers, builders and consenting authorities to favour familiar building products.

Building consenting authorities are the councils which handle consent applications, and many submitters to the Commission’s market study said there were too many consenting authorities to deal with, who had differing ways of dealing with consents and in particular product substitution.

The councils have been left the last man standing over the years for leaky building cases and this is considered to have significantly contributed to a conservative approach to substituting or changing what is used in a build from branded products like Winstone Wallboard’s GIB plasterboard product.

There is a current review underway of the consenting system.

Woods says the Ministry of Business, Innovation and Employment (MBIE) had released updated guidance on Tuesday on the building consent process, and a new standardised checklist for residential building consent applications.

"This will help lift the quality and consistency of building consent applications."

Woods also introduced a plasterboard taskforce to look at how the supply of plasterboard could be improved, and allowed the use of four plasterboard products to satisfy Building Code requirements for structural bracing. MBIE has also published guidance on which products can be used as a substitute to make it easier to work out what can be used instead of GIB.

The Commission report says plasterboard is commonly specified by brand in building plans, and this has made it difficult for builders to substitute competing products to Winstone Wallboards’ GIB-branded plasterboard. 

“BCAs [building consent authorities] throughout New Zealand can take different approaches to consenting decisions, adding to the difficulties in substituting alternative plasterboard (and other) products. Quantity-forcing rebates for plasterboard may also be contributing to difficulties for competing suppliers.”

Winstone has been investigated by the Commission before, without any action being taken. It holds an estimated 90% of the plasterboard market in New Zealand and this over-reliance was exposed when there was a GIB shortage which saw  work on building sites grind to a halt.

Winstone Wallboards 'surprised'

Winstone says it was surprised by the Commission’s conclusion that it needs a third investigation to collect information about Winstone Wallboards and its rebates.

"We note the Commission has made no adverse comment about Winstone Wallboards - just that it needs more time to collect more information."

It says rebates are a volume incentive, where a customer receives a better rebate, measured over all their purchases if they buy pre-agreed volumes of a product over a period of time and they are very common, not just across the building supplies industry but other parts of the economy as well.

The Commission also found familiar ground again with the supermarket market study and the fuel market study, saying that land covenants and exclusive use clauses - controlling how a piece of land can be used - is also at play for the building supplies industry.

It says widespread use of land covenants, exclusive leases and contractual arrangements with similar effect could adversely affect competition.

Anyone holding out hope that vertical integration, those businesses that both make and supply, would see changes would be disappointed.

The Commission says vertical integration can provide a competitive advantage and potentially creates opportunities for certain conduct that can reduce competition. 

“However, it does not appear that this industry structure normally has a material adverse effect on competition for key building supplies at either the supplier level or the merchant level.”