The Commerce Commission’s draft report into competition in the retail grocery sector has found that competition is not working well for consumers.
“If competition was more effective, retailers would face stronger pressures to deliver the right prices, quality and range to satisfy a diverse range of consumer preferences,” said Commission Chair Anna Rawlings.
In November 2020, the Government asked the Commission to look at whether competition in the $22 billion a year grocery industry was working well and, if not, what could be done to improve it.
The Commission’s draft findings are preliminary and subject to consultation prior to its final report being published in late November.
“Our preliminary view is that the core problem is the structure of the market. In competitive terms, the major retailers, Woolworths NZ and Foodstuffs, are a duopoly, and while there is an increasingly diverse fringe of other grocery retailers, they have a limited impact on competition. This is because they are unable to compete with the major grocery retailers on price and product range in order to satisfy the widespread consumer demand for a main shop at a single store,” said Rawlings.
During its study the Commission observed features of the grocery sector which indicate the market is not working as well as it could be. These include persistently high profits being earned by the major retailers and high grocery prices when compared internationally. The level of innovation in the sector also appears modest by international standards.
“The major retailers appear to avoid competing strongly with each other, particularly on price. Meanwhile, competitors wanting to enter the market or expand face significant challenges, including a lack of competitively priced wholesale supply and a lack of suitable sites for large scale stores.
Other observations which indicate the market is not working as competitively as it could be also include:
- the complexity of the major retailers’ pricing strategies, promotions and loyalty programmes can confuse customers and make it difficult for consumers to make informed purchasing decisions
- many suppliers have few alternatives but to supply the major retailers. This allows them to exercise their buyer power to push excess risks, costs and uncertainty onto suppliers. Suppliers report agreeing to these terms because they fear that otherwise their products may not be stocked. This conduct can reduce suppliers’ ability and incentives to invest and innovate, ultimately leading to less choice, lower quality, and potentially higher priced goods for consumers.
“Without intervention, we currently see little prospect of a new or expanding rival being able to constrain the major retailers effectively, and improve competition in the sector,” said Ms Rawlings.
“We consider the best options for improving competition are those that enable an increase in the number of retailers directly competing against Foodstuffs and Woolworths NZ for a consumer’s main shop.”
These draft options for recommendations include:
- Making it easier for new competitors to enter or existing independent retailers to expand by increasing wholesale access to a wide range of groceries at competitive prices. A spectrum of potential options for achieving this is discussed in the draft report.
- Making land more available through changes to planning laws and restrictions on the use of covenants.
If these options were not feasible, had proved ineffective, or did not appear likely to improve retail competition within the desired timeframe, another potential option is to directly stimulate retail competition by creating a further major grocery retailer.
Options to strengthen suppliers’ bargaining power with retailers include introducing a mandatory industry Code of Conduct and allowing suppliers to bargain collectively.
Options to help consumers make more informed purchasing decisions and to enhance competition at the retail level include the introduction of mandatory unit pricing, as well as asking the major retailers to simplify their pricing and promotional practices, and ensuring that the terms and conditions relating to their loyalty programmes are clear.
“Our draft options encompass a range of possibilities and we look forward to now testing our draft findings and options for recommendations in coming weeks through public submissions and a consultation conference, before publishing our final report,” said Rawlings.
Comments on the draft report are due by Thursday 26 August. A consultation conference will be held in Wellington from 21-24 September, with public sessions open to media (subject to space). Post conference comments are due by Thursday 7 October.
An executive summary, the full draft report and infographics on the draft findings, recommendations and themes from the consumer survey conducted in March are available on the Commission’s website.
The full terms of reference for this study can be found here.
Grocery market study report shows big problems
The New Zealand Food & Grocery Council welcomes the Commerce Commission’s draft report on its market study into the grocery sector.
“This is a most thorough report that delves very deeply into all the market and competition issues concerning consumers, retailers and suppliers,” says Chief Executive Katherine Rich. “The Commission has left no stone unturned and has compiled a meticulous and accurate reflection of the grocery market. The report shows there are big problems in the market, and consumers would get better prices, wider ranges, and better quality if there was increased competition.
“It accurately reflects the reality faced by many suppliers of food and grocery products to the two supermarket chains around the imbalance of power in negotiations on issues such as price, promotions, and discounts. The Commission’s finding that competition in the wholesale purchasing of groceries is not working well for many suppliers, and that being reliant on just two major retailers has allowed the retailers to push excess costs, risks, and uncertainty onto suppliers, with fears of delisting if they do not agree to their terms, vindicates the Food & Grocery Council’s stance.
“It also identifies the lack of competition is having a negative effect on the range of products available, the innovation open to manufacturers, and investment in the industry.
“We are heartened by the Commission pointing to two options to strengthen supplier bargaining power: a mandatory industry Code of Conduct and allowing suppliers to bargain collectively. We were particularly pleased the Commission concluded it would be beneficial to introduce of a mandatory code of conduct to strengthen bargaining power and prevent current conduct which reduces the ability and incentive of suppliers to invest and innovate. This is exactly what is needed to give suppliers something closer to a level playing field when it comes to negotiations.
“The Food & Grocery Council has been advocating strongly for these for some years, and we currently have a petition before a Parliament Select Committee calling for a mandatory code of conduct. Everyone benefits from a flourishing food industry where suppliers have a genuine chance to negotiate and receive fair terms, and which ultimately benefits consumers in terms of innovation and range.
“The Food & Grocery Council looks forward to working constructively with the Commission’s process and making progress on the next phase of its study,” says Rich.
