29/07/2021·4 mins to read
NZCC draft supermarket study suggests possible major changes to current market structure
This morning the New Zealand Commerce Commission (NZCC) published the preliminary findings of its year-long study into New Zealand’s retail grocery sector, which features two dominant retailers, Woolworths NZ and Foodstuffs, as well as a diverse “fringe” of other retailers.
New Zealand is widely thought to have one of the most highly concentrated grocery sectors in the world.
The NZCC’s draft report can be read here. In summary, the NZCC has reached a preliminary conclusion that the retail grocery sector is not working well for consumers. It has proposed multiple recommendations to address the issues identified, including a number that are intended to enable an increase in the number of retailers directly competing against Foodstuffs and Woolworths NZ.
We discuss the draft report and what it might mean for New Zealand consumers below.
Process to date
The NZCC was asked to commence this market study in late 2020 by the Minister of Commerce and Consumer Affairs, Dr David Clark, following an election promise by the Labour Party that both the grocery retail sector and the building supplies sector would be subject to future competition studies.
The terms of reference for the study were published on 17 November 2020 and intensive information gathering by the NZCC began in early 2021.
The NZCC’s preliminary findings
The NZCC has found that, if effective competition was occurring, grocery retailers in New Zealand would face stronger pressure to deliver fair prices, better quality and range to satisfy a diverse range of consumer needs and preferences. Instead, the NZCC has observed that, under the status quo, Woolworths NZ and Foodstuffs are avoiding strongly competing with each other on price by targeting different consumer sectors.
In addition, the NZCC’s draft report states that the “fringe” of other grocery retailers can’t effectively compete with the two major retailers in terms of range of products or prices due to a variety of factors - most importantly, high barriers to entry and expansion. Some barriers identified include a lack of competitively priced wholesale supply and low availability of suitable sites for store development due to the practice of placing restrictive covenants on potential locations.
In terms of issues specifically affecting consumers, unsurprisingly the market study has found that New Zealand’s food prices are relatively high by international standards. The draft report further states that consumers are also prevented from comparing prices between Foodstuffs and Woolworths NZ by the frequency of promotions and the complexity of loyalty programmes, meaning they can’t make informed purchasing decisions.
The draft report also emphasizes how the current market structure impacts grocery suppliers, noting that the significant imbalance in buying power of the two major retailers compared to most suppliers allows Foodstuffs and Woolworths NZ to push high costs, risks and uncertainty onto suppliers. As the two main supermarkets are most suppliers’ key route to market, suppliers feel that they risk having their stock removed from shelves (“deleted”) if they do not agree to unfair supply terms.
In fact, suppliers’ fear of retribution from the two main grocery retailers was identified early as a key impediment to participation in the market study. In order to address these concerns, the NZCC created a supplier survey which was able to be completed anonymously.
The NZCC’s recommendations
In its draft report, the NZCC sets out a variety of proposed recommendations, a number of which are intended to enable an increase in the number of grocery retailers which could effectively compete with Foodstuffs and Woolworths NZ.
The recommendations fit roughly into the following categories:
There are recommendations which are intended to improve the conditions for entry and expansion by potential competitors. Most importantly, the draft report proposes to recommend that access to wholesale supply be increased. Some options for doing so include by requiring Foodstuffs and Woolworths NZ to undertake to supply other retailers at a wholesale level on fair and non-discriminatory terms, or putting in place a regulated access regime. Notably, the NZCC identified a “possible last resort” as requiring the two main grocery retailers to structurally separate their wholesale and retail businesses.
There are also recommendations which facilitate or create entry by major retailers, including by government sponsorship of new entry or by requiring Foodstuffs and Woolworths NZ to sell some of their stores to create a third viable major grocery retailer.
Some recommendations are intended to tackle the power imbalance between supermarkets and suppliers, including the introduction of an industry “code of conduct” for dealings between supermarkets and suppliers similar to those which have been put in place in Australia and the UK.
- Lastly, there are recommendations aimed at empowering consumers to make more informed purchasing decisions.
While these recommendations will certainly be the subject of submissions by Foodstuffs and Woolworths NZ (and other parties) in the coming months (which the NZCC must take into account), it is reasonable to assume that at least some of the recommendations set out in the draft report will appear in the NZCC’s final report, due on 23 November 2021. For example, it has long been expected that the NZCC would recommend the introduction of an industry code of conduct to bring New Zealand into line with the practices in other overseas jurisdictions.
Once the NZCC’s final report is published, it will then be up to the government to decide which, if any, of the recommendations to action. Some of the recommendations, if actioned, would represent a major change from the status quo, such as those which require wholesale supply to third parties and/or the two main supermarket chains to separate structurally their wholesale and retail businesses. However, they are not without precedent in New Zealand. Following the recent retail fuel market study, the government introduced legislation establishing a terminal gate pricing regime to provide wholesale access for the supply of fuel. Going back further into the past, power companies were required by legislation to structurally separate their energy and lines businesses.
Where to now?
As noted above, the NZCC’s draft findings and recommendations are preliminary and subject to consultation prior to the final report being published in late November.
The NZCC has invited submissions on the draft report, which are due by 26 August 2021. A consultation conference will be held in Wellington between 21 - 24 September 2021, after which there will be a further round of submissions. The NZCC’s final report is then due on 23 November 2021.