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."