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Westpac NZ economists say stronger measures will be needed in the grocery sector to generate enough competition to deliver the outcomes the Government seeks

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Westpac NZ economists say stronger measures will be needed in the grocery sector to generate enough competition to deliver the outcomes the Government seeks

Proposed Government-led changes to the supermarket sector to give consumers a better deal won't generate enough competition to deliver significant benefits, Westpac NZ economists believe.

In a detailed Westpac Economic Bulletin looking at the grocery sector in NZ, Westpac NZ industry economist Paul Clark said the current cost of living crisis and growing concerns over food prices have brought last year’s Commerce Commission’s grocery sector recommendations back into focus.

Government, in conjunction with industry is well progressed on implementing these recommendations.

However, Clark says real change in the grocery sector will require a significant structural shift.

"We think that stronger measures will be required to generate enough competition to deliver the outcomes that Government seeks.

"Our view is that this can only be achieved by introducing more competition throughout the grocery value chain and hence breaking up the existing [supermarket] duopoly.

"We think that reforms should begin by reducing linkages between large grocery chains and suppliers/manufacturers (vertical de-integration) and then reducing horizontal integration by encouraging new players into grocery retailing."

Clark says this would involve some "tough policy trade-offs", including potentially higher prices in the short term as economies of scale were lost.

"Longer-term, however, we would expect the benefits of a more level competitive playing field to be reflected in better prices, a wider range of goods and an improved customer experience."

Clark says the real issue is the extent that the changes currently being introduced by the Government address the "power imbalances" that exist along the value chain.

"Foodstuffs and Woolworths NZ control north of 80% of the market, making the New Zealand’s grocery retail sector one of the most concentrated in the world.

"By comparison, the two top grocers in Australia, Canada, the US and UK control about half of their respective markets. To deliver the outcomes that it seeks, Government would have to make a big dent in that number."

Clark says therefore the Westpac economists "are not very optimistic" that the Government "will be able to rein in the big grocery retailers".

"While there may be some changes at the margin, we think that the two big vertically integrated grocery retailers will continue to dominate with limited upside for the consumer.

"What's really needed is the restructuring of the sector, and that includes measures that would dilute the power of the current duopoly."

But you do have to be careful what you wish for, Clark says.

"Forcing the big grocery retailers to vertically unbundle their wholesale operations might be tempting, but it’s not clear whether that by itself would result in greater competition given the dominance of the big downstream retailers and their ability to bulk buy to maintain market position. Indeed, if anything, breaking up the supply chain is likely to reduce efficiency levels in the short term, meaning higher costs would be passed onto downstream consumers in the form of raised prices.

"One possible way around this would be to also force the big grocery retailers to separate horizontally. But shedding retail stores is not necessarily a panacea for consumers. While vertical and horizontal disintegration may result in stronger competition and generate longer term benefits, in the short-term the costs associated with disinvestment and the potential for inefficiencies because of an even more fragmented supply chain and a loss of economies of scale would likely flow to consumers.

"Alternatively, the Government could have gone for the much-touted option of actively encouraging a large third grocery retailer to take on the existing duopoly. However, a new entrant might not generate significant benefits for consumers for a while given the need to recoup the investment required to establish a functioning supply network. It may be difficult to encourage a new entrant given no new major international players have entered the market despite the apparently high returns on offer," Clark says.

He says the Government "should set out a strategy road map" that identifies the key milestones that need to be achieved to level the competitive playing field.

"That road map would need to be backed up by appropriate legislation – the sector will not unbundle voluntarily."

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The HHI index requires 6 to 7 firms with equal market share 14% to 17% each for perfect competition.

We have 2 with 80%.

The duopoly must be broken up.

The government must also strengthen the law ComCom works under to make it give more weight to competition.

Next target the power gentailers and banks.


Unbundling a wholesale operation from a vertically integrated retailer who still owns the wholesaler is just nuts and already causing transfer pricing distortions for Suppliers to juggle with zero benefits for Consumers.

You need a strong 3rd player.


Agreed, wholesale disinvestment must proceed as well.


Agreed re: 3rd player. I'd like to see:

  • Current supermarket structure broken up into smaller groupings/ownership (e.g. max 5 supermarkets per "group" if that makes sense) to force some genuine independence; I'd go so far as to say that the different brands e.g. Pak N Save, Fresh Choice, New World should have to be separated off as well to force more competition.
  • Offer tax incentives and other carrots - big ones - to get a proper third player such as Aldi in the market, if not more. E.g. you've got a licence to operate for the next 10 years tax free in NZ, with another 10 years of reduced taxes thereafter (or whatever the "experts" determine to be the incentive that would actually work). I'd rather my taxes go to lowering the cost of food for all than having to have it selectively redistributed to those who can no longer afford to eat without government support.
  • Ensure zoning, covenants etc are not able to prevent competitors from setting up shop.

I'm usually a (fairly) free market kind of guy but food is too important to F around with. I've got no shame in admitting I'm no libertarian when it comes to trying to lower food costs. Maybe hyberbolic, but I think on the current trajectory food prices in NZ represent a real risk to social stability ... history has plenty of examples of how dire things get when enough people cannot afford to eat.

I recently worked on a project for an independent food business moving from selling D2C to going via supermarkets. My contact in the company attended the Foodstuffs conference, and said there were supermarket owners arriving in chauffeured Rolls Royces and Bentleys and landing helicopters on the front lawn. According to NBR, some of the richest people in NZ are supermarket owners - personally I don't think that should be the case, as using an established duopoly structure to flog people overpriced food (which they have to buy to survive) is hardly the height of innovative entrepreneurialism or risk-taking. 


Westpac " look over look at them, they need fixing"

Slinks off, job done, feeling smug 


Nothing much will change. The NZ market is too small and the costs of distribution are too high.  Forcing the break up of the likes of PaknSave and New World into 2 completely separate companies will make the problem worse as costs will increase.  And why would any of the large overseas companies like Aldi or Lidl want to come here when the Government will force them to wholesale to their competitors?

Meanwhile,I've noticed huge numbers of Kiwis seem happy to buy their  groceries from a petrol station rather than a supermarket across the road 


A windfall tax for their social license - and sweethart deals to incoming competition. 


Supermarkets where the only businesses allowed to operate by law during lockdown - they shouldnt be able to profit on everyone elses misery.


I just dont get why all this is so hard, polticians used to make hard decisions (unpopular ones) and do what they thought was the right thing, Now it is just john key/Jacinda populism.



ALDI should takeover The Warehouse Group. The share price has crashed. The company is floundering. Divest Torpedo 7,Noel Leeming, Warehouse Stationary stores and The Market online for whatever they can get. Throw out The Warehouse product range and rebuild and rebrand the stores as ALDI one by one. Push old Warehouse stock into remaining warehouse stores until the transformation is complete. Start in Auckland and move down the country. Take the best available Warehouse staff to work in ALDI format stores and keep the Red Sheds on life support and pull the plugs one by one. The warehouse has existing DC infrastructure that could be converted to service ALDI. Initially supply everything from one of the ALDI Australia DC's. Stephen Tindall would probably be glad to exit now. 


Let's of nice ideas out there but a little short on reality. Do we really want another foreign player in the market taking the supposed good profits overseas? Secondly, much as we may focus on the domestic market and how prices affect us, the big problem on the biggest scale is that good old NZ is spending much more on imported product,...that is, real money, not the paper stuff we printed out back in the garage,...than we get from exporting our own products. ie vastly predominantly, food products.

Our hope is that our growers are producing wonderful stuff that sells overseas for said real money. At present  we are on a hiding to nowhere.

From my own observation over many years, the reality for small producers (ie NZ) is that there very best product is sold (hopefully & probably offshore) for a lesser price than the somewhat lower grade product. Unfortunately your best and usually therefore your biggest customer can pick and choose. Product sold locally may well be slightly lower grade. The producer him or herself gets to eat the lowest grade, unsaleable stuff! It is often salutary to note when overseas, our prime produce on sale cheaper than back home. This is not a conspiracy, just the real world. I am picking it probably works like that in reverse especially if we are the "big guys" buying say, bananas from the islands?


New Zealand, the small island nation where life is good for the oligopolies.