Competition in the grocery sector is "not working well for New Zealand consumers" with smaller retailers unable to compete effectively against the two main players, the Commerce Commission has found.
Among a range of proposals for the Government to consider, the commission has recommended changing planning laws to free up land for new grocery stores, introducing a code of conduct for relationships with suppliers, and establishing an industry regulator.
However, the commission has stopped short of suggesting splitting up the two dominant retailers and creating a third major retailer. It believes addressing land issues and improving access to wholesale supply will be effective in stimulating competition and allowing new firms from entering the sector.
"We have found that the intensity of competition between the major grocery retailers who dominate the market, Woolworths NZ and Foodstuffs, is muted and competitors wanting to enter or expand face significant challenges," commission chair Anna Rawlings said.
She told reporters on Tuesday that if "competition was working better than it is now, consumers would pay lower prices for a given range or quality of groceries that they buy today".
David Clark, the Commerce and Consumer Affairs Minister, responded to the report on Tuesday by saying the Government would "immediately progress work to address the Commission’s recommendations".
The Government asked the commission in November 2020 to examine the $22 billion sector and the factors affecting competition within it.
"The report is clear: competition in the retail grocery sector is not working. Consumers could get better prices, range and quality if action is taken," he said.
In the commission's final market study report, released on Tuesday morning, it made a number of recommendations that it believes will improve conditions for competition.
"The best way to improve competition in the retail grocery sector is through measures that will make it easier for independent grocery retailers to set up and expand," Rawlings said.
The commission recommends:
- "Making more land available for new grocery stores, by changing planning laws to free up sites, banning the use of restrictive land covenants and exclusivity clauses in leases that prevent retail grocery stores from being developed, and monitoring land banking by the major grocery retailers
- "Improving access to the wholesale supply of a wide range of groceries at competitive prices, by regulating to require the major grocery retailers to fairly consider any requests they receive to supply competitors, and requiring the criteria for obtaining supply and terms and conditions of supply to be transparent
- "Monitoring strategic conduct by the major grocery retailers, such as the use of ‘best price’ clauses and exclusive supply agreements."
Rawlings said there is an "increasingly diverse fringe of other competitors" in the sector but they are unable to "compete effectively" with Woolworths NZ and Foodstuffs on price, product range and store location "to offer the convenience of one-stop shopping for the many different kinds of shopping missions that consumers undertake".
The nature of retail pricing and promotional strategies as well as major retailers' relationship with suppliers "indicate that competition is not working as well as it could", the commission said.
"In addition, it has highlighted that New Zealand’s retail grocery prices appear comparatively high by international standards, the profitability of major retailers also appears high, and while consumers benefit from a range of innovations, there is scope for more."
Major grocery retailers should be required to ensure promotional and pricing practices and the terms and conditions of loyalty programmes are easy to understand, the commission said. It also believes unit pricing should also be displayed in a consistent format.
Rawlings says many grocery suppliers "fear having their products removed from store shelves if they do not agree to accept some costs, risks, and contractual uncertainty".
"This can reduce the ability and incentive for suppliers to invest and innovate, reducing choice for consumers."
The commission therefore wants a mandatory code of conduct for "grocery supply relationships to improve transparency and ban unfair conduct", the law prohibiting the use of unfair terms in standard form contracts to be strengthened, and for consideration to be given to collective bargaining by some suppliers.
The commission also proposed "a dispute resolution scheme and an industry regulator responsible for monitoring and oversight to help ensure those changes have the desired effect".
"The market study has brought an increased focus on the sector and the major grocery retailers have publicly committed to address some of the practices covered by our recommendations," said Rawlings.
"Nevertheless, the Commission has recommended formal regulatory requirements, monitoring and oversight by a grocery regulator, and a dispute resolution scheme to resolve wholesale and supplier disputes. These regulatory measures will help deliver the changes to competition that we have identified are needed.
"In addition, we have recommended a review of competition three years following the implementation of any changes to evaluate their effectiveness."
The Government will now consider the final report, but Clark, the minister in charge, has made it clear there will be swift action.
"This includes exploring how a Code of Conduct between major retailers and suppliers could be developed and looking at the role a dedicated regulator for the grocery sector could play," he said.
"The Commission’s findings indicate that restrictive covenants over land are a major barrier to supermarkets accessing new sites, so I want to ban these covenants being used to stop competition.
"The report sets out a clear justification for change in the grocery market. The status quo will not deliver fairer prices for consumers and a better deal for producers and wholesalers, and I hope the sector will constructively engage in the changes that need to be made."
But Clark also said he would not rule out "some of the other options that the Commerce Commission tabled while developing its report, if consumer benefit is not achieved from the changes recommended in the report".
"When New Zealand supermarkets are making more than double what the Commerce Commission considers to be a normal rate of return on capital for grocery retailing, it’s clear there is a problem with competition that needs to be fixed.
"New Zealanders are paying more at the checkout than most. Out of 38 OECD countries we’re the fifth highest in terms of grocery prices. This report makes a serious case for change when it comes to competition in the sector, so kiwis don’t have to pay so much for the basics."
Both major retailers said on Tuesday morning they needed time to review the report and the commission's findings before commenting.
The commission did provide a draft report last July when it said the current "duopoly" is "not working well for consumers" and that the "the core problem is the structure of the market". It toyed with the idea of creating another major grocery retailer by forcing the "duopoly" to sell some of their stores.
That idea has been dumped in Tuesday's report. Rawlings told reporters the benefits of divestment did not outweigh the costs and complexities associated.
After the preliminary findings, the commission held consultation on its report, receiving a large number of written submissions and hearing from a range of parties. It was originally to report back at the end of last year, but received an extension until Tuesday.
In the months after the first report, Foodstuffs said it would be freeing up some of the land it owned and fixing what it admitted was "complex and confusing" promotional schemes. However, it denied it was ripping Kiwis off and didn't believe its profits are excessive.