Government proposes telco-style grocery industry regulator and mandatory code of conduct

Commerce Minister David Clark has announced more detailed proposals for a single Grocery Commissioner to regulate the supermarkets duopoly of Foodstuffs and Countdown (Woolworths) from within the Commerce Commission, similar to the way the Telecommunications Commissioner enabled the breakup of the Telecom-Vodafone duopoly earlier in the 2000s and the arrival of 2 Degrees and many broadband competitors.

Clark highlighted the success of that anti-monopoly regulator in creating much greater competition and lower prices for consumers in broadband and mobile telecommunications. The period after the break up of Telecom into Spark and Chorus, along with the arrival of 2 Degrees, mobile number portability and termination rate regulation, has been described within the Reserve Bank as the '2 Degrees effect,' referring to the depressing effect on inflation of various regulatory and pro-competitive moves.

Clark has repeatedly referred to the $1 million in excess profits made each day by the duopoly, as measured by the Commerce Commission in its market study of the sector earlier this year. He acknowledged differences between groceries and telcos, but said the telecommunications role set a good benchmark and model.

Clark made the announcement from the headquarters of Consumer NZ, the independent consumer advocacy and watchdog organisation. Key details of the proposed Grocery Commissioner include:

• The Commissioner will be based inside the Commerce Commission and produce annual ‘state-of-competition’ reviews; and,
• The legislation governing the Commissioner’s role will be introduced to Parliament later this year; and,
• the person will be appointed after the Bill is passed.

“The Grocery Commissioner will be a referee of the sector, keeping the supermarket duopoly honest and blowing the whistle where it suspects there is a problem,” Clark said.

“They will maintain a close eye on how Government’s reforms for the sector are implemented and ensure Kiwis are getting a fair deal at the checkout,” he said.

“By placing this role in the Commerce Commission it will have access to a wealth of information when it comes to economic and competition regulation, fair trading, consumer protection and the grocery sector itself.”

Mandatory code of conduct

Clark also announced the launch of a five-week consultation process for a mandatory code of conduct between major grocery retailers and suppliers, which he said was to ensure suppliers got a ‘fair deal’.

“Historically, there has been an imbalance in the bargaining power major grocery retailers have over their suppliers,” Clark said.

“The Grocery Code of Conduct will address this by preventing the major retailers from using their power to push costs and risks onto those suppliers. It will ensure that this relationship is conducted fairly,” he said.

The discussion paper for the consultation said the code could either be principles based, as was seen in the UK where the code is mandatory, or be more prescriptive, as was the case in Australia where the code is voluntary. A third blended option could also be used.

The paper also refers to the use of either the ‘fair dealing’ or the ‘good faith’ approaches being considered. Suppliers are seen preferring the 'good faith' standard, so Clark's use of the phrase in his news release is notable.

Initial reaction

Consumer NZ CEO Jon Duffy said he was impressed at the speed with which the Government was moving.

“This sends a clear message to the supermarkets: they cannot keep making super profits at the expense of struggling consumers,” Duffy said.

“That said, the devil is in the detail – the Grocery Industry Competition Bill will set the powers of the regulator, and the mandatory code of conduct will set the rules for fair play between supermarket industry participants.”

The moves are the latest from Clark focused on supermarkets, including legislation passed last week to ban supermarkets from including clauses in shopping centre leases and covenants on land parcels that blocked competitors from using them, even after a member of the duopoly left the centre.

The push is also part of the Government’s attempts to deflect blame from the Opposition for inflation rising sharply this year, particularly for food, energy, transport and housing.

Clark reaffirmed the Government was on track to propose a mandatory wholesale access regime for groceries later this year and continued to work on back-stop options for a break-up of the sector.

ACT Deputy Leader Brooke van Velden said domestic inflation was fuelled by rampant Government spending and she referred to a measure from the Commerce Commission that excess profits were $86 per person per year, whereas food prices had risen $282 per person per year.

Van Velden said ACT would repeal the Resource Management Act to make it easier to build new supermarkets and exempt OECD members from the Overseas Investment Act to encourage foreign investment in the sector.