7/12/2022·4 mins to read
Commerce Commission releases final report from market study into residential building supplies
Yesterday, the Commerce Commission (Commission) released the final report from its year-long market study into the residential building supplies sector in New Zealand.
The Commission’s final report can be read here. In summary, the Commission has concluded that competition for the supply and acquisition of key building supplies is not working as well as it could. The Commission has proposed a range of recommendations to address the issues it identified in the report, which aim to enhance the regulatory system, support sound decision-making, and address strategic business conduct.
- Key issues identified by the Commission include that:
- the building regulatory system reinforces the market position of established building products and methods, and of existing suppliers of those products in highly concentrated markets.
- strategic conduct by established suppliers and merchants, such as quantity-enforcing rebates make it difficult for new or competing products to access distribution channels, increase sales and grow a market presence.
- The Commission proposed a suite of recommendations aimed at enhancing the regulatory system which it considers is too slow, costly and uncertain for new products to be accepted for general use. The recommendations seek to improve decision-making through greater information sharing between industry professionals and Building Consent Authorities (BCAs), and address strategic business conduct such as quantity-forcing rebates.
In November 2021, the Government asked the Commission to carry out a study into whether competition for residential building supplies in New Zealand is working well and, if not, what could be done to improve it. Key building supplies are used to build the major components of residential buildings, such as the foundation, flooring, roof, walls and insulation. The announcement of the study followed the Labour Party’s 2020 election promise that there would be a market study into the supply of building materials, which was a response to media coverage highlighting delays and increased costs in obtaining key supplies and materials.
The terms of reference for the study were published on 22 November 2021, with a hui with Māori partners and stakeholders taking place in May 2022, and a series of submissions and cross-submissions received on the draft that was released in August 2022.
The Commission’s findings
The Commission found that competition in the sector is not working as well as it could, and that it should be easier for new building products to be introduced and for competing suppliers to expand their businesses and market share.
The Commission undertook a review of the industry and found that most key building supplies are distributed through relatively few suppliers which have controlled a large share of supply in New Zealand. If competition in the sector was functioning more effectively, it would work alongside the building regulatory system (which it recommended should be enhanced) to help deliver safe, healthy, durable and affordable housing for New Zealanders. However, currently, it is difficult for new and competing products to be introduced, and for small-to-medium suppliers to expand their market share.
Two key issues identified by the Commission were:
The building regulatory system favours familiar building products: Although the regulatory system does not prevent new and innovative products being used per se, it is a slow, costly and uncertain process to get them accepted for general use. This is because of the way the building regulatory system and consenting system is applied to building products and, in turn, the decision-making by designers, builders and BCAs in applying the regulatory system.
Quantity-forcing rebate structures: quantity-forcing rebates paid by established suppliers to merchants appear, under certain conditions, to reinforce regulatory factors impacting entry and expansion. These rebate structures reward merchants for purchasing greater volumes through a single supplier by offering higher percentage rebates that apply across all of that merchant’s purchases with that supplier. This can deter merchants from stocking competing products, making it difficult for new or competing products to access merchants and distribution channels to become established in the market.
The Commission’s recommendations
The Commission has made a series of recommendations aimed at increasing competition by improving the conditions for entry and expansion for suppliers, without compromising the building regulatory system’s core objectives.
The recommendations fall within three broad themes.
Enhance the regulatory system
- Competition should be included as an object of the regulatory system, which is to be evaluated alongside safety, health and durability (without compromising those objectives).
- Better serve Māori through the building regulatory system.
- Create clear compliance pathways for a broader range of key building supplies such as updating more Acceptable Solutions and Verification Methods, including to better reflect international standards.
- Explore ways to remove impediments to product substitution and variations such as by reducing specification by brand.
Support sound decision-making by industry and Government agencies
- Establish a national system to share information about building products and consenting which should be accessible to designers and builders to share information about new and innovative products which have been granted consent.
- Establish an education and mentoring function for BCAs to coordinate and enhance their approach to consenting and product approval.
- Develop and implement an all-of-Government strategy to drive greater coordination between Government and industry which could focus on, for example, incentivising update of offsite manufacturing technologies and building methods.
Address strategic business conduct
- Promote compliance with the Commerce Act, including by discouraging the use of quantity-forcing supplier-to-merchant rebates that may harm competition.
- Consider the economy-wide use of land covenants and exclusive leases which have the potential to reduce merchants’ ability to access suitable sites which may hinder entry or expansion.
Where to now?
It is now up to the Government to decide which of the recommendations it will action. In keeping with the previous market studies on retail fuel and the grocery sector, we would expect to see many of the recommendations ultimately adopted by the Government. We also expect that there will be some changes made by key industry players in response to the Commission’s findings.
Get in touch
If you would like to know more about how the Commission’s findings and recommendations may impact your business or project, please get in touch with one of the contacts listed on this page.
Special thanks to Julia Marshall-Mead and Elsie Stone for their assistance in preparing this article.