Cost of living: Will Government's actions make any difference to what Kiwis pay for groceries?

By Sarah Robson for The Detail for RNZ

New Zealand's supermarket duopoly is in for a shake-up - but how did we end up with a sector with just two big players? And will the government's changes mean lower prices at the checkout?

In Feilding, in the late 1990s, there were three supermarkets in town: a New World, a Write Price and a Price Chopper.

Now, like much of the country, there are just two brands left standing: New World and Countdown.

For two decades now, New Zealand's supermarket sector has been a duopoly, dominated by Foodstuffs and Woolworths.

But in 2020, amid a growing outcry about the price we pay at the checkout, the Commerce Commission was tasked by the government to carry out a market study into whether competition in the grocery sector was working - and if not, what could be done about it.

When its final report was released in March, the Commerce Commission's conclusions were stark: competition isn't working well for consumers, and if competition was more effective, retailers would face stronger pressure to deliver the right prices, quality and range.

The government's already taking action - but will it make any difference to what we're paying for groceries?

The beginning of the end

Consumer NZ's Jon Duffy says a series of mergers and acquisitions in the 1980s and 90s ultimately led to the status quo.

People might remember supermarket brands like Foodtown, Big Fresh, Write Price and Price Chopper.

"Over the years, what is now the duopoly chipped away at that and acquired and merged and eventually in the early 2000s, the last brand standing was Foodtown.

"The company that is now Woolworths - called Progressive Enterprises at the time - applied to the Commerce Commission to purchase Foodtown," Duffy says.

After a lengthy legal process, the merger eventually went ahead.

"That was the beginning of the end, that was the beginning of the status quo, which is New Zealand's grocery sector being served by a duopoly."

Since then, those businesses have continued to consolidate - and vertically integrate. That means they've bought into the wholesale chain and, in some instances, are even supplying themselves, owning fishing fleets and the like.

"Right from the moment a fish is caught through to the moment it is scanned at the checkout, that's fully owned, in one case, by one entity," Duffy says.

"When you own the entire supply chain it makes it a lot easier to control the prices that are charged through that supply chain, and that's what we end up wearing at the supermarket checkout."

But a duopoly is competition, isn't it?

Duffy says the Commerce Commission's market study has highlighted various activities that have made it difficult for real competition to take root. Competition between the two big players could be described as "muted". 

"They may have competed more vigorously early on, but what we see now is through the supply chains, through the requirements that are placed on suppliers, it's very rare to see a special at one supermarket chain and then not see it repeated in very short order at the other supermarket chain.

"To say that the offerings are really differentiated and that they're competing on different services - it's hard to reach that bar in New Zealand."

The Commerce Commission steps in

Duffy explains that the Commerce Commission was asked to look at the state of competition in the market.

"The rationale behind that is when competition is working effectively, we see businesses competing as the name would suggest, but we see competition on price, we see competition on service, we see good things like innovation in the market and so on.

"When competition is muted or not working well, there is often an absence or a low level of those good positive factors."

Duffy says up until the commission delivered its final report, advocates like Consumer NZ had believed "something's funky with this market" - but they didn't know quite what it was, although they suspected it was something to do with the structure of the market and the behaviour of the duopolists.

"But we needed the resource thrown at it to actually identify what the issues are and the Commerce Commission's analysis pinpointed exactly where the issues are.

"The headline was, competition wasn't working well for consumers, and then they were able to drill down into the profitability of the supermarkets and drew up the conclusion that the supermarkets are earning $1 million in excess profits every day."

What happens next?

The government has acted swiftly on the Commerce Commission's recommendations. 

Legislation's been introduced to ban restrictive land covenants, which have allowed supermarkets to buy up land or dictate terms of leases to block their competitors from setting up shop in the area. 

A grocery commissioner is being appointed to regulate the sector - Commerce and Consumer Affairs Minister David Clark says the commissioner will "maintain a watchful eye over the supermarkets... they will be a referee for the sector, keeping the duopoly honest and proactively blowing the whistle where a problem is suspected".

Duffy says importantly, the commissioner will do a yearly stocktake of how competition is working in the sector.

"Rather than drifting for 20 years, as we have for the last 20 years not really knowing what the problem was or being able to exactly put our finger on what the problem was - but having a vague feeling that there was a problem - we'll know every year how the supermarket sector is operating and whether competition is doing what it should do in producing those good results for consumers and suppliers, or whether further regulation might be needed."

The government is also bringing in a code of conduct, around how supermarkets interact with suppliers, to prevent the major retailers from using their power to push costs and risks on to suppliers. 

Will it be easier for overseas companies to set up shop here?

Duffy says that'll depend on the two supermarket giants opening up their wholesale supply to competitors. The government has indicated it will regulate to do this, if the companies don't act themselves. 

"If you're a competing supermarket retailer, not only do you have to set up a retail chain, but you've got to bring all your wholesale and all your distribution with you, you're not going to enter and that's why we haven't seen any entry over the last 20 years.

"But if you know you've got a guaranteed source of wholesale groceries that you can then sell to customers and you can get them at a fair price that is regulated by a code of conduct that is overseen by an independent regulator, it's a much more attractive prospect for you to come in and set up retail."

A more transparent, regulated system could also give domestic brands looking to expand more confidence to take that risk.

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Cost of living: Will Government's actions make any difference to what Kiwis pay for groceries?