9 March 2022

Jon Duffy: Supermarkets will breathe a sigh of relief

The Commerce Commission’s final report means no relief for shoppers any time soon and leaves the really hard decisions for another day.

To say the recommendations in the Commerce Commission’s 18-month-long study into the supermarket sector are a fizzer is an understatement.

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.

The fight for a fair deal at the checkout is not over yet, you can help by signing up to support Consumer NZ’s campaign.

Member comments

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Linda M.
27 Mar 2022
Costco a true competitor?

I used to live in western Canada and visited Costco many times with a relative who is a member. (I could not have entered as a non member alone). It costs $? 60 every year as a member, so you have to factor that into any savings on products.
The warehouse is huge, and products displayed very well to attract customers.
Interesting range of frozen and perishable items and other foods, and I was able to buy some in small quantities, but many were in bulk packs, which we found hard to eat before the product deteriorated. So in many cases it is NOT actually cheaper.
Or you'd end up eating more than you should because you had a whole carton of biscuits on hand. So not so good for those with no willpower.
But some products were real bargains, especially items like coffee, snack foods, fresh fruit and vegetables.
Also sold lots of hardware items, clothing, bedding and electronics at excellent prices. I think those items give you the most savings overall.
The warehouse was always super busy with enormous tall pallets of stock, which helped the idea of bulk products with big savings.
Main thing with Costco is to be disciplined, check their special discounts on line first and shop with a list. Do not join if you are an impulse buyer!

Christopher B.
14 Mar 2022
Competition is coming

Competition is coming in the form of Costco, a major US retailer, who will open their first NZ store in Auckland later this year. This might change the duopoly.

Y M.
14 Mar 2022
Cosco model unlikely to pose any real threat

Not sure if you've been to a Cosco - but they aren't a 'supermarket' in the traditional NZ version of it. They are bulk retailer. Think of the supermarket section of The Warehouse but with even cheaper goods and you can only buy 100 at a time. They are famous for stocking products with questionable chemical content, evasive labelling and ends of lines. What would really change the picture would be the likes of one of the Aldi brothers eyeing up NZ - but we're just to small, too remote and too costly to do business in.

Ben H.
14 Mar 2022
Costco

My experience of Costco is that they offer great quality branded products at very good prices (their pork ribs are amazing). They do this by maintaining a low margin and selling in bulk or jumbo packs. As a result you end up buying more than you normally need for an average sized family so unless the product stores well you don't really save as much as you thought you would.

I agree with Y.M. one Costco supermarket though is not going to change things. A retailer like Aldi or Lidl would shake things up but as Y.M. says we are probably too small, remote and costly to be an attractive market for them to launch into.

David C.
12 Mar 2022
How do you tell if profits are excessive?

I don't know the methodology of the Commerce Commission's assessment of supermarket profitability, but it's hard to imagine it was completely open book. Did it transparently include all their practices for things like: depreciation, the valuation of goodwill, capital purchases that temporarily depress profitability and all the rest?

Elizabeth B.
12 Mar 2022
Growers too

It is despicable that growers are not permitted by supermarkets to sell any produce that is surplus to supermarkets requirement/order. What a waste

Lesley H.
12 Mar 2022
Unfavourable fruit

Plums, peachers, nectarines, mandarins, $6 to $7 kg these fruits look desirable in the supermarket, The way I was taught to buy firm fruit, they last long and will ripen up, these stay hard which is unpleasant to bite into but they should be a bit softer now and more pleasant to bite into, their not when you do try to eat into them they are going off near the pip, they still look good but not good to eat, mandarin are starting to dried up inside, I buy tin fruit now and waiting for my fruit frees to grow

Lesley H.
12 Mar 2022
Unfavourable fruit

Plums, peachers, nectarines, mandarins, $6 to $7 kg these fruits look desirable in the supermarket, The way I was taught to buy firm fruit, they last long and will ripen up, these stay hard which is unpleasant to bite into but they should be a bit softer now and more pleasant to bite into, their not when you do try to eat into them they are going off near the pip, they still look good but not good to eat, mandarin are starting to dried up inside, I buy tin fruit now and waiting for my fruit frees to grow

Heather L.
12 Mar 2022
Vote with our feet - buy elsewhere

I have been using My Food Bag (for 4 days a week)for two years now and I find that it hugely reduces my overall spending on food by keeping the need to call in to the supermarkets to a minimum. My supermarket shopping happens less often, and is more focused on cleaning and basic stock items. This helps hugely to reduce my levels of 'accidental' spending, where I'm tempted buy things I don't really need!
I also use bakeries, specialist fruit and veg sellers and farmers markets.

John P.
12 Mar 2022
Commerce Commission’s 18-month-long study

I look forward to the Commerce Commission’s next study which again will do nothing. Why do we so desperately keep hoping that anything will change? It never does and it never will. Keeps bureaucrats employed, if that's a good thing.

Dionne N.
09 Mar 2022
Not surprised that nothing will ready change

Can't say I'm surprised that after the time and money taken to write the report nothing virtually nothing will change. Same as with the report on pentrol companies and the profits they make even taking away the taxes that go to government.