A more competitive grocery market remains years away and more aggressive regulatory tools are needed to open up the sector and protect consumers in the meantime.
That was the conclusion of the Grocery Commissioner’s first annual report, which was published on Wednesday morning. It made for fairly bleak reading.
Pierre van Heerden, the Commissioner, told reporters he wouldn’t “sugarcoat it." The report showed no improvement in competition since the Commerce Commission's market study was published in 2022.
New Zealand’s $25 billion grocery sector was full of “red flags” which showed the three major supermarkets (Woolworths, Foodstuffs North Island and Foodstuffs South Island) were still reaping the profits of industry domination, he said.
A major concern was the analysis showing supermarkets had expanded sales margins and maintained or even increased profitability since 2019. Van Heerden backed the claim, despite supermarkets disputing it.
“Retail prices in the major supermarkets have been increasing faster than the prices they pay to their suppliers. This is despite major supermarkets claiming otherwise,” he told reporters.
This information was sourced directly from Foodstuffs and Woolworths NZ, and showed they had either maintained or increased their profitability between 2019 and 2023.
While the Grocery Commission's report highlights increased margins, Woolworths NZ disputes these claims, pointing to its own financial reports that show a decline in profitability.
Those earnings reports show both gross margins and earnings before interest and tax (EBIT) margins in NZ declined between 2019 and 2023, from 24.4% to 23.1% and 4.4% to 3.2%, respectively.
Spencer Sonn, the managing director of Woolworths NZ, said the 2024 financial year had been even worse. The company made a loss of 0.5 cents for every dollar spent in stores, and overall profit was cut in half.
“At Woolworths, like other businesses and New Zealanders, we have felt the impact of inflation in the last couple of years and our profits are at their lowest levels since [2016].”
To-ma-to, tom-a-to
Part of the disagreement between the Commission and Woolworths may be due to the different kinds of margins and profits being measured.
The Commission looked at price-cost margin, which is the difference between what a retailer receives from a consumer and what it pays to a supplier. It doesn’t factor in the wider operating costs included in EBIT margins, which is the gap between revenue and cost of goods sold as well as wages, property costs, advertising, and any other operating expense.
Price-cost margin is most comparable to gross margin, which Woolworths also reported as being down, but it is more granular and focused on the profit made from each individual unit.
Overall gross margins could include earnings from non-core grocery items, which may face competition in the wider economy and are of less interest to the Commerce Commission.
Foodstuffs’ North and South Island co-operatives, which have a 53% market share, issued a statement which claimed they had kept price increases below the rate of food price inflation.
This was an odd claim as many of Statistics NZ’s measures would be of prices taken directly from Foodstuffs’ shelves, so the co-operative was essentially comparing itself against itself.
Van Heerden was clear that within non-fresh grocery products, which is the category most dominated by supermarkets, all three had expanded their margins over the past three years.
Fresh food margins had also increased to a lesser degree, but these items face more competition from independent butchers, grocers, and bakeries. Non-fresh products also make up the majority of consumer purchases.
The audacity
Gemma Rasmussen, head of advocacy and research at Consumer NZ, said the expanded retail margins spoke to “the audacity of the duopoly.”
“Despite declining public trust and increased regulatory pressure, they continue to squeeze suppliers and increase their margins at the checkout,” she said.
“We agree with the Commissioner that the time for talk is over. His analysis of the two years since the market study clearly shows that the supermarkets won’t move unless they’re pushed.”
Van Heerden said the annual report gave the Commission the evidence it needed to unlock more regulatory powers to further open up the wholesale market.
Less than 1% of supermarket sales were being conducted through the wholesale market, as supermarkets are vertically integrated and have direct supply agreements with producers.
The Commissioner wants to grow the number of customers using this wholesale market to make it easier for smaller grocery retailers to challenge the supermarkets. It could also create an easier path for a full-scale competitor to enter the NZ market.
“We believe that three major national supermarket networks would be significantly more competitive than two, and that this is achievable in New Zealand,” Van Heerden said.
The Commission will introduce an enforceable code of conduct for wholesale providers, with penalties of at least $10 million, three times any commercial gain, or 10% of turnover.
It will also explore requiring major supermarkets to sell products to wholesale customers at the same prices as those offered to their own stores.
Commerce and Consumer Affairs Minister Andrew Bayly agreed with the Commissioner that stronger regulatory action was needed and signalled he would agree to unlock these additional powers.
However, some want the Government to go further. Both the Green Party and the Grocery Action Group (GAG) called for a breakup of the supermarket’s retail and wholesale businesses.
GAG chair Sue Chetwin said the authorities were “tinkering in a market that has structurally failed”. Van Heerden, however, asked for some patience.
“I want to assure you all that we are doing everything in our power and at pace to get change done in the industry. However, this does take time, as we've seen in the telecommunications industry, it's not something that gets fixed overnight,” he said.
Even with immediate improvements in competition, consumers should temper expectations, as the report implied that grocery bills might not fall as much as some might expect.
And finally, a word of warning to readers: even if perfect competition appeared overnight, grocery bills might not fall as much as you imagine.
The report estimated supermarkets would have made $372 million less profit each year in a more competitive market. This equates to $75 per person annually, or roughly one-third of the average household’s grocery bill per shopping trip.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.