24/11/2022·2 mins to read
New Bill aims to shake up grocery sector
The Grocery Industry Competition Bill (Bill) was introduced to Parliament on 21 September 2022, bringing with it a new suite of proposed changes which the Government says are aimed at addressing the supermarket duopoly’s excess profits.
Hon Dr David Clark, Minister for Consumer Affairs says: “The Bill will trigger an unprecedented shake-up of the grocery sector, deliver New Zealanders a fairer deal at the checkout and help tackle cost of living pressures.”
Commerce Commission Market Study
Earlier this year, the Commerce Commission released its market study on NZ’s retail grocery sector (read report here). The sector is particularly concentrated in New Zealand with Foodstuffs (New World, Pak ‘n’ Save, Four Square, Gilmours) and Woolworths (Countdown, Fresh Choice, SuperValue) holding a 90% market share for New Zealanders’ main food shop. The Commission’s conclusion was that this duopoly is not working well for consumers, and it was found that supermarkets earn excess profits of $1 million a day.
One of the key issues identified was lack of access to wholesale supply, which creates a barrier to entry into the market. The duopoly was also found to benefit from the efficiency of their vertically-integrated operations, and their purchasing power with grocery suppliers. The effect of this is that a new competitor is unlikely to be able to secure products directly from large suppliers at a comparable cost to the major grocery retailers.
Key issues targeted in the Bill
The Bill proposes a two-part wholesale supply regulatory regime:
The first part of the Bill requires major grocery retailers to facilitate the commercial supply of grocery products at the wholesale level to independent retailers. Steps to facilitate such arrangements may have already started to take place, given earlier this year Hon Dr Clark called on the duopoly to lock in good-faith wholesale arrangements on their own terms or risk facing regulatory intervention.
Under the second part of the proposed wholesale supply regulatory regime, provisions are there for regulatory intervention if the duopoly fails to reach commercial deals regarding their wholesale arrangements, or if deals are not what would be expected in a commercial market. The aim is to give a ‘leg up’ to smaller retailers and market entrants and ensure “other retailers can source and sell a wider range of groceries at better prices”.
Measures to address imbalance in bargaining power for suppliers
Another key target of the Bill is the imbalance in bargaining power between suppliers and grocery retailers, which was also identified as an issue in the Commerce Commission market study. Major grocery retailers have been using their advantage in negotiating power to push costs and risks that they are better placed to address onto suppliers, and to reduce the transparency and certainty over terms and conditions of supply. This has flow-on effects, such as reducing incentives to innovate. To address this the Bill, if enacted, would:
Enable suppliers to engage in collective bargaining.
Implement a grocery supply code to strengthen protections against unfavourable terms of supply.
Extend the existing unfair contract terms regime in the Fair Trading Act 1986 to a range of business-to-business grocery supply contracts.
The Bill also proposes to establish a Grocery Commissioner within the Commerce Commission, which will also become the main regulatory authority that administers and enforces it.
Where to from here?
The Bill is set for its first reading, and has been introduced under urgency. It will be open to feedback for four months through the Select Committee process, with a view for it coming into effect in mid-2023.
If you have any questions about the Bill or any other competition matters, please feel free to contact one of our competition specialists.
Special thanks to Rachael Machado and Elsie Stone for their assistance in preparing this article.