Two players dominate our supermarket trade. Are we getting the sharpest prices or paying more than we should?
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.
You don’t have to look far for evidence of supermarkets’ dominant role in determining what ends up in our kitchen cupboards.
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.”
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.
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.”
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.
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.
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.
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.
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%
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.