Commerce Commission supermarket probe suggests creation of third retailer to 'directly stimulate retail competition'

The Commerce Commission has released its first findings into the New Zealand grocery market, threatening to force Woolworths and Countdown to sell some of their stores to create a third retailer.

The commission's inquiry began in November, and is expected to take a year to complete. On Thursday morning it released its draft report, saying the present "duopoly… 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.

Over 90 percent of New Zealand's grocery market is controlled by just two companies - Woolworths NZ (Countdown, Fresh Choice, SuperValue) and Foodstuffs (Pak'nSave, Four Square, New World).

Food prices rose 2.8 percent in the year ended June, according to Statistics NZ - the fastest in six months - while prices of fruits and vegetables are up 10 percent on a year ago.

"Our preliminary view is that the core problem is the structure of the market," said Rawlings.

"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."

The commission said Woolworths NZ and Foodstuffs have "persistently high profits" compared to supermarket operators overseas, and show only "modest" levels of innovation.

"The major retailers appear to avoid competing strongly with each other, particularly on price," said Rawlings. "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."

The duopoly maintain the status quo through complex "pricing strategies, promotions and loyalty programmes", which make it hard for consumers to make informed decisions, the commission said.

Suppliers have few alternatives to the major retailers, allowing Woolworths NZ and Foodstuffs to "exercise their buyer power to push excess risks, costs and uncertainty onto suppliers", the report found. 

Earlier this week Katherine Rich, head of the the Food and Grocery Council - which represents suppliers - accused Foodstuffs North Island of threatening members with "extreme demands" and a strategy to "break people".

"A member of one of the Foodstuffs North Island store committees has cheerily explained that their approach is to employ ‘the Walmart strategy…. push people until they break and then come back from there… and it’s working really well for us," she wrote on LinkedIn. 

And earlier this year a study found a majority of New Zealand grocery suppliers face challenges when dealing with supermarkets and believe they engage in anti-competitive behaviour - Foodstuffs North Island rating the worst.

"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 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."

To do that, the commission recommends: 

  • 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."

This would be achieved by forcing the duopoly to sell some of their stores.

Another option is a mandatory industry code of conduct or allowing suppliers to bargain collectively.

"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. 

Consultation will be held on the draft report in the coming months.

In response, Woolworths said it hadn't seen the draft report before publication.

"We appreciate that many Kiwis will have strong thoughts and feelings about the report and would ask that they keep it kind when shopping in our stores and treat our teams with respect," said managing director Spencer Sonn.

"We hadn’t seen the draft report ourselves ahead of its release today, so we will  now take the time to read it so we can provide our feedback within the required timeframe. We note this is only a draft report but on face value some of the recommendations would have significant implications and we’ll need time to work this through and understand the impact."