Supermarket power: are stores playing fair on price?

Two players dominate our supermarket trade. Are we getting the sharpest prices or paying more than we should?

20aug supermarket concentration hero

It’s been a stellar year for supermarkets. In the first three months, Countdown’s sales jumped 13.7% to $1.9 billion. That boost was largely thanks to the Covid-19 lockdown, which left supermarkets as one of the few places we could shop.

We weren’t just spending more at the stores. For some items, we were also paying more.

Average prices at Countdown rose 5%, according to figures published by Aussie owner Woolworths. The grocery giant blamed most of the hike on rising prices for household staples, including dairy, flour, meat, and fruit and vege.

Both Countdown and rival Foodstuffs, owner of the New World and Pak’nSave brands, notched up complaints as unhappy shoppers saw their grocery bills climb. However, even without the lockdown, there were grounds to question whether what we pay for groceries is fair.

It’s no secret our supermarket trade is one of the most concentrated in the world with two big chains dominating the market. That increases the odds consumers will pay more than they otherwise would because the usual competitive pressures don’t apply.

Market dominance

You don’t have to look far for evidence of supermarkets’ dominant role in determining what ends up in our kitchen cupboards.

Fresh produce on supermarket shelf.
Growers’ margins have been static for the past decade, according to Horticulture New Zealand.

Mike Chapman, Horticulture New Zealand chief executive, estimates Countdown and Foodstuffs command 70% to 80% of domestic fresh fruit and vege sales. The stores’ exacting specifications mean most of what they sell is top grade – the stuff without blemishes or “cosmetic” defects – and generally earns a higher price, he said.

While the stores also sell cheaper grades, figures on what percentage of sales this comprises aren’t available.

Horticulture New Zealand, which represents about 6000 growers, has previously criticised supermarkets for mark-ups on fresh produce. But the organisation’s biggest gripe is with the margins growers earn.

“Margins have been static over the past decade,” Mr Chapman said.

It’s among the reasons the growers’ group has advocated for a supermarket code of conduct – similar to the one in place in Australia – to help “level the playing field” between producers and the big chains (see “Code of conduct?”).

“It’s really difficult to prove there has been bad conduct but if you’ve got a [code] that’s designed to be fair … that hopefully will mean everyone gets a fair price for what they’re producing. To stay in business, growers need to get a good price.”

Weakening competition

While fruit and vege growers may have seen margins flatline, it appears to be a different story for supermarkets.

A 2019 report prepared for the Productivity Commission set out to assess competition levels in a range of industries. For the supermarket trade, the authors found data suggested a sector with relatively high margins and weakening competition.

Countdown supermarket.
A 2019 report prepared for the Productivity Commission found data pointed to a sector with relatively high margins and weakening margins.

The report linked increasing margins to the merger in 2002 of Woolworths and supermarkets then in the Progressive Enterprises camp (Foodtown, Countdown and 3 Guys). That merger resulted in the number of players shrinking to the two giants we have today.

Since the industry’s consolidation nearly 20 years ago, “margins have continued to gradually increase,” it concluded.

Co-author and economist Aaron Schiff said the competition measures used in the study were “high-level indicators” to help identify sectors deserving further analysis.

“High margins can mean that consumers are paying unnecessarily high prices.”

Weakening competition can also result in other undesirable outcomes for consumers such as a reduced range of products, he said.

He believes more work needs to be done to determine what’s happening in the sector and whether companies are making excessive profits.

There can be legitimate reasons why margins in a particular sector are higher, such as covering the cost of service attributes that consumers value, he said. Longer opening hours or store location may be among them.

“Margins might need to be higher to pay for some of those things … We would need to do more analysis to see if outcomes for consumers are worse than they would be if competition was stronger. Doing that requires a detailed understanding of how competition works in the sector and what consumers care about.”

Investigation needed

Gauging if what we’re paying for groceries is fair would be easier if there was regular monitoring of prices in the industry. However, despite the high degree of market concentration, the supermarket trade hasn’t attracted much scrutiny.

“To get a sense of what’s going on, you need good price data,” economist Richard Meade explains. “You need very detailed price data to do this analysis but there’s not a lot of it available from official sources.”

He points out supermarkets could be required to front up with price information if the Commerce Commission used its market study powers to investigate the industry.

ALDI supermarket.
Aldi is credited with shaking up the Australian market and forcing the major supermarket chains to cut prices.

Law changes introduced in 2018 widened the commission’s powers and gave it the ability to investigate competition in specific markets. These market study powers mean it could require companies to disclose price data.

So far, just one study has been done, looking at competition in the retail fuel industry. The supermarket trade is an obvious candidate for the commission’s next study.

Dr Meade agrees the grocery market is among the sectors “you’d want to take a look at, given the concentration and importance of the sector”. He’s not alone in that view. Prime Minister Jacinda Ardern previously commented she “would not be surprised” if the supermarket sector was on the commission’s radar. For its part, the commission has yet to announce where it will focus the spotlight next.

Anyone holding out hope another big player will enter the market and shake things up – as Australia witnessed with the arrival of discounter Aldi – could be waiting a long time. Aldi’s arrival in Australia was credited with forcing the two big supermarket chains there (Coles and Woolworths) to cut prices.

In the current economic climate, there’s no hint Aldi will be setting up shop this side of the Tasman any time soon. The only glimmer of a challenge to the supermarkets’ growth may not come from the big guns but from smaller grocery retailers that have started to offer online shopping.

Store brands

Signs of supermarkets’ margin gains can be seen in the rise of private label brands – supermarkets’ own brands – which offer healthier returns.

Private labels used to be marketed as “no frills” options. But as stores have expanded their ranges, private labels have climbed up the shelf and can now be found alongside mainstream offerings.

Foodstuffs North Island 2019 annual report boasts its private labels (think Pams) have seen “record” growth, up eight percent for the year. Its target is to reach $1.3 billion in sales.

Not to be outdone, Woolworths Group annual report highlights the 640 new products launched in 2019 with “double-digit growth” across its “Macro” and “Free from” private-labels.

The growth of private labels can mean more money in shoppers’ pockets if these products are cheaper. But there’s also a major downside. Private labels may ultimately lead to less choice and less competition if other brands start disappearing from shop shelves.

Code of conduct?

In Australia, a grocery code of conduct has been introduced to help ensure fair dealings between supermarkets and their suppliers.

A code has been floated here but it’s failed to gain traction. Horticulture New Zealand chief Mike Chapman thinks suppliers will get some benefit from proposed changes to the Fair Trading Act, which will ban unconscionable conduct and protect small businesses from unfair contract terms.

Unfair terms are already banned in consumer contracts. Amendments to the act will extend these protections to business contracts worth less than $250,000 a year. The law changes are currently before parliament but aren’t expected to be passed before the general election in September.

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By the numbers

Foodstuffs

Foodstuffs NZ logo.

Brands: New World, Pak’nSave, Four Square, Henry’s Beer, Wine & Spirits, Liquorland, On the Spot, Raeward Fresh
2019 revenue: $9.90b
Year-on-year increase: $190m
Percentage change: Up 2%

Woolworths New Zealand

Woolworths NZ logo.

Brands: Countdown, FreshChoice, SuperValue
2019 revenue: $6.71b
Year-on-year increase: $279m
Percentage change: Up 2.4%

Our data are from companies’ annual reports. Woolworths’ 2019 revenue data is for 53 weeks.

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Member comments

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Peter R.
21 Nov 2020
Supermarket pricing

I'm sure there is room for keener price competition between our supermarkets but another neglected area is the pricing they pass on from the big multinationals like Unilever, Mondelez, et al. Prices in UK supermarkets for products like deodorants, denture cleaner, shampoos and so on are a fraction of what we pay here, not because of our supermarkets but because the multinationals choose to compete via slick marketing rather than price.

Linda Y.
09 Aug 2020
Abuse of suppliers by Countdown during Covid?

Countdown lost my custom when it comes to meat and vegetables as I discovered the had used Covid as an excuse to give a very low price to growers and suppliers. I heard stories of people being told”We are your own buyers. Take our price as you won’t be able to sell. Would lover Consumer to check this. I now shop in Farmers markets and local butchers.

Barbara E.
08 Aug 2020
Meat prices

Yes why is our meat so damned pricey? Was telling my son that we had meat meals every day of the week when I was a kid - we were not rich, Dad was a mechanic, and Mum stayed home and looked after us 4 kids. Why could we afford lamb, beef, steak meals most nights of the week, when we are earning so much more now and having to cut down on meat meals? Something is really wrong here in NZ.

Christopher C.
08 Aug 2020
Pricing is based on think of a number and add 30%!

Arrived here from U.K. four years ago and was stunned at the cost of groceries and more so when you realise that most of it is produced here in N.Z. The quality is very good, particularly fish and meat (although poorly butchered) but still very expensive. For instance, NZ lamb leg costs at least 30% more here than in the U.K. Why? No competition is why. Something that definitely needs looking into by government but no doubt vested interests will get in the way.

Dawn N.
08 Aug 2020
UK Comparison

We worked in UK for 18 years and suffered price shock on return to NZ too. Tesco is the major player in Supermarkets over there but we also had Waitrose, Sainsbury's Aldi, Lidl and Iceland plus small grocers. The choice of goods were baffling at times, with too much choice (43 brands of honey one day!) but the thing I noticed in particular was the choice of sizes. A lot of people these days live alone or as a couple and don't need as much as a family. We found individual servings, half loaves of bread, and one I particularly noticed was 6 slices of cheesecake in one pack with each slice a different flavour. I get frustrated at finding 3 or 5 serving packs in the meat dept here and when pointing out that we only needed two I was told to buy 2 packs and freeze the extra 4! I don't want to have to freeze things because I like fresh, and see no logical reason why a 2-pack can't be available.
Reference the price of NZ meat in UK, I bought 3 legs of NZ lamb, frozen, from Sainsburys for Christmas one year, much to the horror of our sheep farming relations back home when we told them the tiny price we had paid. The equivalent of approx NZ$10 each! Still haven't worked out how they could be imported and sold so cheaply.
Now retired and not having to count every penny I spend, although cautious, I gave up checking prices between the supermarkets and now shop solely at New World, for several reasons. Not sure why, but the number of harassed mothers and screaming children is lower there, (A child's scream plays havoc with my husbands hearing aids), the staff seem happier and the customers generally more relaxed. I also believe that although I might find something cheaper elsewhere, the prices balance out and New World's quality is generally better. This, of course, might only apply to my local shops, but they are the ones that concern me anyway.

Bill
08 Aug 2020
NZ lamb

Why is lamb dearer here? Because we are subsidising the exported lamb, that's why. Not only do we get the "rejects" that are not perfect enough for overseas customers, eg fruit, etc but we also pay a premium for anything that is exported from this country. During the lockdown lamb chops in my supermarket were $15.00 per kg, now it is back to $26.99 per kg "on special", reduced by $6.00 per kg. I can only assume that the low price was due to having a backlog of product that could not be exported at that time.

N R.
01 Nov 2020
And yet sheep and beef farmers have had it tough for so long

New Zealand consumers are paying more and more, and farmers are struggling because the prices they receive are so low. NZ farmers are having it so tough, with government regulation changes, constant farmer-bashing by politicians and the media, and climate conditions changing. It is no wonder whole farms are going into pine trees. Prices at the farm gate for sheep and beef are so poor and income from planting trees is better.

It is only going to get worse as production decreases due to changes in land use. Less land in food production equals lower production and even higher prices.

Alan B.
08 Aug 2020
Pricey Pineapple

I'm very frustrated with the price of Pineapple at my local Countdown.
They are usually $4.99 ea but this can vary to as low as $5.00 for 2.
I would like to see prices of goods at a steady reasonable price rather fluctuating wildly.

Peter C.
08 Aug 2020
Pricey Pineapples

Alan B - you need to compare the quality at each price.
It's possible that at $5 for 2 the pineapples were old stock that the supermarket wanted to clear quickly.

Bill
08 Aug 2020
Pineapples

Strange, I have been buying pineapples for $3.00 each for a couple of months now from Countdown in Christchurch.