Jon Duffy: Supermarkets will breathe a sigh of relief

There are some good wins for consumers, but for Kiwi shoppers struggling to put food on the table there is little to celebrate other than a clear indication we are being shafted. The only ones breathing a sigh of relief will be the two supermarket chains. There’s no relief in sight for consumers unless the government goes beyond the commission’s recommendations and takes real steps to sort this market out.

The commission should be congratulated for the robustness of its analysis, which endured sustained attack from the supermarket duopoly. At points following the preliminary findings released in 2021, it was economists on both sides, squaring off at 30 paces, debating dense economic concepts designed to work out whether profitability was reasonable or excessive.

The commission won. The commissioners stood their ground, adjusted their analysis where appropriate, and throughout the study kept focussed on how the highly concentrated nature of the market is producing poor outcomes for consumers.

The commission recognises the scale of the problem. It describes competition as “muted” and says supermarket profitability is twice as high as it should be. But, having set the scene, the commission then kicks for touch when it comes to the really difficult decisions.

The commission’s central thesis is that competition in the supermarket sector is not working well. To improve competition, the commission recognises we need more players in the market to compete against Foodstuffs and Woolworths. That could include a new company coming in or an existing small player expanding its operations.

To encourage this entry or expansion, the commission identifies two key elements that need to be in place: land available to build new supermarkets and access to wholesale groceries.

On the first point, the commission takes a strong line, recommending amendments to planning laws to ensure land is available, prohibiting restrictive covenants and making existing ones unenforceable. It also recommends the ongoing monitoring of land banking.

However, on the issue of access to wholesale groceries, the commission is much weaker. The existing wholesale market is controlled by the duopoly, so any company wanting to compete in New Zealand needs to either build its own wholesale supply chain or talk nicely to Woolworths or Foodstuffs to act as its supplier.

The commission’s recommendations here seem disconnected from the report’s own conclusions on the state of competition in the market and the hard-nosed behaviour of supermarkets industry participants have described. It is concerning that having heard at length that the supermarkets don’t play fair, the commission would make a central plank of its analysis—the need to improve access to groceries for resale— reliant on supermarkets doing just that: playing fair. This is a big leap of faith that asks the existing, entrenched duopoly to supply potential competitors with reasonably-priced wholesale groceries, out of the kindness of their hearts.

There will no doubt be hundreds of suppliers out there wondering where this kindness is going to be found. I have looked a couple of times, but the commission’s report doesn’t seem to have a section on kindness, or unicorns for that matter.

The supermarket giants will be breathing a sigh of relief. Along with potential divestments, opening up wholesale supply had the most potential to disrupt their existing models and profit taking. Yes, if the government takes on the commission’s recommendations, there will be greater oversight of the industry and that has to be a good thing, but for the most part, the supermarkets can carry on with business as usual. They have what they wanted, suggestions rather than enforcement, theory rather than action.

While the commission leaves open the possibility of structural change if the supermarkets fail to play ball within three years of the government implementing any regulatory changes, its preference is starting with a gentle approach to try and eliminate some of the barriers to entry and entice a new player in to compete. It’s recommendations certainly don’t rock the boat.

In doing so, it has charted a slow and steady course that attempts to create the preconditions for a competitive market to evolve. It’s a gamble and there’s lots that could get in the way to blow the plan off course.

The commission’s final report means no relief for shoppers any time soon and leaves the really hard decisions for another day, another government and most likely a different commission. This was a missed opportunity, and we should all care about what happens next. Let’s hope in the short term at least, the commission moves forward with referring any illegal behaviour it has uncovered to its enforcement arms for investigation.

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