Consumers are not being served well by the New Zealand grocery duopoly, according to the Commerce Commission – but it stopped short of any major recommendations in the final report into the grocery market tabled this week.
The commission asked the government to undertake an independent review of the $22 billion annual grocery market in November 2020. In a preliminary report released last July, it flagged a raft of options for improving competition including making it easier for new competitors to enter the market, and adjusting planning laws to reduce restrictions on the use of sites using development covenants.
Several submissions advocated splitting the wholesale and retail arms of the two players, Woolworths NZ and Foodstffs, thus reducing their ability to influence prices through convenience stores and independent retailers.
In a key finding in the final report, the commission stopped short of recommending the two players be forced to lose their overall control of the wholesale supply of groceries, something the National Business Review observed: “has been a major bugbear for suppliers and would-be competitors for many years”.
However, Katherine Rich, CEO of the supplier lobby the New Zealand Food & Grocery Council, described the report as “a victory for suppliers in terms of fairness, competition, and common sense”. But she appeared to be focusing on the findings rather than the recommendations, which after more than two years of investigations, seemed relatively mild.
“The findings and recommendations confirm what we have been saying for years – competition in the market is not working well, stifling innovation, consumer choice, and genuine competition, and creating an environment where suppliers are treated unfairly,” said Rich in a statement.
“There is still a duopoly, and ideally there needs to be two or three more sizeable players in the market for there to be genuine competition. It remains to be seen if recommendations to improve wholesale distribution and land availability will be enough to encourage new entrants.”
Commission Chair Anna Rawlings said, “the best way to improve competition in the retail grocery sector is through measures that will make it easier for independent grocery retailers to set up and expand”.
“We found that the biggest challenges facing competitors are a lack of suitable sites for store development and difficulties in obtaining a competitively priced wholesale supply of a wide range of groceries.”
The report said covenants preventing landlords from leasing space to competitors were impacting the ability of new players to open stores. Another major issue is the inability of new retailers to be able to access competitively-priced stock from wholesalers, controlled by the duopoly. (For years, this has led to convenience store operators buying stock at a Countdown or Pak’N Save store where common items can be bought in volume considerably cheaper than from wholesalers).
Another issue highlighted in the report is that many grocery suppliers fear having their products removed from store shelves if they do not agree to accept some costs, risks, and contractual uncertainty. “This can reduce the ability and incentive for suppliers to invest and innovate, reducing choice for consumers,” said Rawlings.
Suite of recommendations
The Commerce Commission presented “a suite of changes and new regulatory measures” to help improve the conditions for competition in the sector. These include:
- Introduce a dispute resolution scheme and an industry regulator responsible for monitoring and oversight to help ensure those changes have the desired effect.
- Make more land available for new grocery stores, by changing planning laws to free up sites, banning the use of restrictive land covenants and exclusivity clauses in leases.
- Improve access to the wholesale supply of a wide range of groceries at competitive prices, by regulating to require the major grocery retailers to fairly consider any requests they receive to supply competitors, and requiring the criteria for obtaining supply and terms and conditions of supply to be transparent.
- Monitoring strategic conduct by the major grocery retailers, such as the use of ‘best price’ clauses and exclusive supply agreements.
- Introducing a mandatory code of conduct for grocery supply relationships to improve transparency and ban unfair conduct.
- Strengthening the existing law prohibiting the use of unfair terms in standard form contracts.
- Considering whether to allow collective bargaining by some suppliers.
The commission also recommended measures to help consumers make more informed purchasing decisions, and stimulate competition between retailers. These include:
- Requiring major grocery retailers to ensure promotional and pricing practices, and the terms and conditions of loyalty programmes, are easy for consumers to understand.
- Requiring grocery retailers to display unit pricing in a consistent format.
HortNZ CEO Nadine Tunley said greater transparency would enable consumers to understand better the price they pay for New Zealand-grown fruit and vegetables.
Pointing out that grower returns have not increased for at least 10 years, she said retail prices and costs – labour, freight and compliance – have steadily increased.
“In addition, Covid has brought about further, more recent, steep cost increases.
Meanwhile, NZFGC’s Rich said the changes recommended in the final report will not solve everything “but will significantly move the dial.
“That was always our ambition. The commission’s report is a ringing endorsement of the Food & Grocery Council’s stance.”
Code of Conduct now ‘vital’
Establishing a Code of Conduct had been a goal of the council for 12 years and it now considers the move “vital”.
“Everyone benefits from a flourishing food industry where suppliers have a genuine chance to negotiate and receive fair terms, and which ultimately benefits consumers in terms of innovation and range,” Rich said.
“The big question now is the government’s response to the report. We hope there will be cross-party support in the Parliament to put this report into action.”
Commerce and Consumer Affairs Minister David Clark confirmed the government will explore the concept of a Code of Conduct and said he wanted to ban restrictive covenants over land that were a barrier to supermarkets securing new sites.
Independent online grocery retail startup Supie was less than impressed by the report on the New Zealand grocery duopoly. “The commission’s final report is unfortunately not a positive outcome for Kiwi consumers and suppliers,” the company said in a statement. “Sadly, the recommendations will not result in any tangible change for consumers at the checkout.
“This process was the opportunity to make a meaningful change to set up a fair food future and a better outcome for every New Zealander. Fairer access to food will not improve, the cost of food will continue to rise and we as a country will continue to be treated unfairly by the status quo, being the supermarket duopoly.”
Supie concluded: “The commission makes it clear the market is not working. There is muted competition between the two main companies, which are taking much-higher-than-normal profits.”
Supie’s predicament was perhaps best summed up by Rawlings: “While there is an increasingly diverse fringe of other competitors in the sector, they are unable to compete effectively with Woolworths NZ and Foodstuffs on price, product range, and store location to offer the convenience of one-stop shopping for the many different kinds of shopping missions that consumers undertake.”