The Commerce Commission has recommended a series of changes to the supermarket industry in New Zealand following its final report and market study into the grocery sector.
The Commerce Commission’s final report from its study into the retail grocery sector has recommended a suite of changes to increase competition and help improve the price, quality and range of groceries and services available to New Zealanders.
In November 2020, the Government asked the Commission to take an independent look at the factors affecting competition in the $22 billion a year industry.
Commission Chair Anna Rawlings says the final report has concluded that competition in the grocery sector is not working well for New Zealand consumers.
“We have found that the intensity of competition between the major grocery retailers who dominate the market, Woolworths NZ and Foodstuffs, is muted and competitors wanting to enter or expand face significant challenges,” says Rawlings.
The Commission has also identified that the nature of retail pricing and promotional strategies, and the major grocery retailers’ relationships with suppliers, indicate that competition is not working as well as it could. In addition, it has highlighted that New Zealand’s retail grocery prices appear comparatively high by international standards, the profitability of major retailers also appears high, and while consumers benefit from a range of innovations, there is scope for more.
The commission is recommending that both a grocery sector regulator and a dispute resolution scheme be established.
“A sector-specific regulator could have responsibility for general oversight of the retail grocery sector. This could include monitoring and reporting on its performance, both publicly and to government,” the commission says.
The commission is proposing another review after three years: “If competition is still not working as well as it could after three years, the review could consider whether other initiatives are required.”
Commenting on the report, Government says that Kiwis will soon benefit from a much more competitive grocery sector as a result of the market study.
“The report is clear: competition in the retail grocery sector is not working. Consumers could get better prices, range and quality if action is taken,” says Commerce and Consumer Affairs Minister, David Clark.
“We made a manifesto commitment in 2020 to address the rising cost of groceries and to make sure shoppers are paying a fair price at the checkout. It’s especially important as the economy recovers from the impact of Covid-19.
“This is the second of three market studies commissioned, to help Government continue to deliver on our promise to ensure hard-working kiwis are getting a fair deal for the things they buy and consume.
“I know there is a desire to see us act swiftly on this too, and I want New Zealanders to know this will be the case. From today, we will immediately progress work to address the Commission’s recommendations.
However, Consumer NZ says it’s disappointed the recommendations don’t go further.
We have been calling for 10 fixes to the grocery sector, including a mandatory code of conduct, a supermarket commissioner, a ban on restrictive land covenants and mandatory unit pricing – all of which the Commerce Commission has recommended in its final report.
The report confirms consumers aren’t getting a fair deal and recommends changes to bring about more competition in the sector. But the report hasn’t recommended regulation of supermarket price displays, promotions and loyalty schemes and there is nothing that will require supermarkets to supply other retailers with groceries at competitive wholesale prices. Instead, the recommendations rely on supermarkets voluntarily changing their pricing and loyalty scheme practices and to only consider requests for wholesale supply from other retailers in good faith.
“We are concerned the recommendations rely on the supermarkets doing the right thing. While we’re happy to see the spotlight put on the supermarket sector, we are concerned that if the spotlight is removed, supermarkets will revert to the practices that brought about the need for this market study in the first place. Change is likely to be slow and consumers are not going to see lower prices at the checkout any time soon,” says Jon Duffy, Consumer NZ chief executive.
Presently, Woolworths and Foodstuffs have a combined market share of about 80 percent in New Zealand.
On improving the prospect of competition through new players in the market, the commission says: “We consider that the best way to improve competition in the retail grocery sector is through measures that are likely to improve the conditions for entry and expansion. Improving the conditions for entry and expansion is likely to be particularly beneficial for consumers where this enables a greater range of grocery retailers to offer a convenient one-stop shopping option.
“We consider that the New Zealand market could sustainably accommodate at least one more large‑scale rival, and that reducing current constraints on entry and expansion would help to facilitate this.”
The New Zealand Food & Grocery Council has welcomed the Commerce Commission’s report saying it’s a victory for suppliers in terms of fairness, competition, and common sense.
Chief Executive Katherine Rich says: “The Commission’s report delivers on all we brought to their attention, and more. The findings and recommendations confirm what we have been saying for years – competition in the market is not working well, stifling innovation, consumer choice, and genuine competition, and creating an environment where suppliers are treated unfairly.
“But there is still a duopoly, and ideally there needs to be two or three more sizeable players in the market for there to be genuine competition. It remains to be seen if recommendations to improve wholesale distribution and land availability will be enough to encourage new entrants.
“The Commission makes it clear the market is not working. There is muted competition between the two main companies, which are taking much-higher-than-normal profits.
“It also accurately reflects the reality faced by suppliers from the imbalance of power in negotiations on issues such as price, promotions, and discounts. The sunlight from additional regular scrutiny will make a difference. Already the supermarkets have made concessions not on the table prior to the market study.
“The Commission has affirmed its position that competition is not working well for many suppliers, and that the duopoly over the past two decades has pushed excess costs, risks, and uncertainty onto suppliers, with fears of delisting if they do not agree to their terms.
“Changes recommended today will not solve everything but will significantly move the dial. That was always our ambition.”