Consumers paying too much for groceries, report confirms
Commerce Commission report finds evidence of high prices and high profits.
Kiwi consumers are paying high prices for groceries and the major supermarkets are making “persistently high profits”, the Commerce Commission’s draft report on the industry states.
The report confirms what our research has found: New Zealand’s highly concentrated supermarket sector means consumers aren’t getting a fair deal and are paying more for groceries than they should.
The dominant position of the two major retailers – Woolworths (owner of Countdown) and Foodstuffs (owner of the New World and Pak’nSave brands) – means there are significant barriers to any new player setting up shop and competing on price.
Releasing the report, commission chair Anna Rawlings said “if competition was more effective, retailers would face stronger pressures to deliver the right prices, quality and range to satisfy a diverse range of consumer preferences”.
But with little threat to their market share, supermarkets are in a cosy position.
“The major retailers appear to avoid competing strongly with each other, particularly on price. Meanwhile, competitors wanting to enter the market or expand face significant challenges, including a lack of competitively priced wholesale supply and a lack of suitable sites for large scale stores,” Rawlings said.
Fixing the market
The commission’s report outlines several options to increase competition and try to fix the market.
They include getting the big chains to supply other retailers with groceries at competitive wholesale prices.
Supermarkets could do this off their own bat or be required to do so via a “regulated access regime” that would force them to do so. Given the stores’ reluctance to move so far, we think regulation will be required.
The report also puts forward the option of backing a new independent wholesaler into the market through a competitive tender process.
A “possible last resort” option is to break up the supermarkets by requiring them to separate their wholesale arms from their retail businesses.
Preventing the stores from imposing restrictive convenants on the use of land (to stop competitors gaining a foothold) is also on the table.
The report outlines two other options to directly intervene in the market by:
establishing a new grocery retailer, or
requiring the major chains to sell off some of their stores to create a viable third-party competitor.
But the commission appears less enthusiastic about going down this route and flags the “significant” costs associated with the options.
“These measures are only likely to be appropriate if the costs, risks and expected benefits had been considered, and other options, particularly in relation to the wholesale market, were not feasible, had proved ineffective, or did not appear likely to improve competition within the desired time frame,” it states.
A mandatory code of conduct for the sector looks more certain.
The commission is recommending a mandatory code to govern dealings between suppliers and supermarkets, and redress the imbalance in power between suppliers and the big chains.
Similar codes are already in place in Australia and the UK.
To be effective, a code here would need to have legal backing and include penalties for bad behaviour.
Supermarkets’ constant specials and confusing pricing practices have also deservedly come under fire.
Specials have become so common that seven out of 10 consumers question whether the savings are genuine.
The draft report includes long-overdue proposals to introduce mandatory unit pricing.
Unit pricing shows the price per 100g or 100ml so it’s easier to compare value. Research shows that when consumers are able to use unit prices, they save money. One study found shoppers could slash as much as 13 percent off their grocery bill.
Supermarkets have also been told to simplify their pricing and promotional practices.
The stores have indicated they intend to decrease promotional pricing and increase their use of “everyday low pricing”, the commission said.
Prosecutions for some pricing practices may be in the pipeline. Complaints received during the commission’s investigation are being assessed for potential Fair Trading Act breaches.
The report also takes a swipe at supermarkets’ loyalty programmes, telling the stores to come clean about how they work.
The commission found understanding of loyalty programmes was low, including understanding of how they collect and use consumer data.
These schemes can also have a distortionary effect on competition by making consumers less likely to shop around.
Moreover, personalised or targeted promotional offers to consumers who belong to the programmes can facilitate price discrimination “which may raise competition concerns as it becomes more sophisticated,” the commission said.
What’s happening next
The commission is calling for submissions on its draft report by Thursday, 26 August. We’ll be putting forward our views on the recommendations.
The commission’s final report is due on 23 November 2021.