The Commerce Commission is currently conducting a study of the state of competition in the grocery market. Photo / 123RF
New research submitted to the Commerce Commission has found broad dissatisfaction among supermarket suppliers with the terms on which they feel they must do business with their supermarket customers, and most suppliers believe that the country's supermarkets engage in anti-competitive behaviour.
The suppliers singled out Foodstuffs North Island as the grocery chain with which they have the most problematic relationship.
But in earlier submissions to the Commission, Foodstuffs North Island refuted the characterisation that the food and grocery market in New Zealand is a duopoly. The chain cited a host of businesses including "meal kit" providers like My Food Bag and the online food delivery platform Uber Eats as competitive threats that are eroding previously established customer patterns like "the weekly shop".
And Woolworths argued that supplier satisfaction ratings had improved over time.
However, in their own submission, the suppliers overwhelmingly called for a code of conduct to establish controls on commercial behaviour in New Zealand's food and grocery retail duopoly.
The Commerce Commission is currently conducting a study of the state of competition in the grocery market and is due to report its findings in November (a draft report is expected at the end of July).
In a paper published late last year, which set out the scope of the market study, the Commission said it would pay particular attention to the power dynamic and relative bargaining power between grocery retailers and suppliers.
The new supplier research was commissioned by their industry group, the New Zealand Food and Grocery Council (NZFGC), and conducted in January by Australia-based market research agency Blackmarket Research in conjunction with consultancy Hexis Quadrant, which works for a number of New Zealand supermarket suppliers.
Katherine Rich, chief executive of the NZFGC, said "the survey clearly showed that most food and grocery manufacturers know that supermarkets sometimes cross the line into anti-competitive activity. I trust this view because most of our members have received training to recognise it when they experience it. The challenge for manufacturers is that such activity is almost always verbal and rarely written. It becomes a he said/she said situation, denied as a misinterpretation, and the risks of raising issues further are prohibitive. You could lose your job or your product's place on the shelf."
One hundred and fifty nine members of the NZFGC completed the survey; 64 per cent agreed or strongly agreed that "anti-competitive behaviour (from customers [grocery retailers]) exists in the NZ food and grocery industry."
More than 90 per cent of surveyed suppliers said they had "challenges" in their commercial dealings with Foodstuffs NI and with the processes by which the chain is managing and reviewing the products it carries. Suppliers cited issues with Foodstuffs NI more frequently than with any other supermarket customer.
Foodstuffs NI includes North Island grocery banners: New World, Pak'nSave and Four Square.
Suppliers' concerns centre on the ongoing centralisation of pricing, purchasing and "category review" that determines the range of products carried through Foodstuffs NI. For over a year, the chain has been consolidating buying, ranging and pricing decisions at head office, a process that has entailed rewriting contractual terms, under threat, many suppliers say, of product "deletion" from store shelves.
Supplier comments also indicate that Foodstuffs South Island has undertaken a pilot project to determine whether it too will adopt a strategy of greater centralisation.
In a separate submission to the Commission, the NZFGC noted the "absence of material submissions" from suppliers. It cited fear of retaliation and the threat of product "delisting" by supermarkets for supplier reticence.
Rich said the newly published research was read by six different industry experts to remove identifying information.
In the direct quotes from suppliers listed in the research, the imbalance of negotiating power between supermarkets and their suppliers was frequently cited as a major concern.
"There is very limited competition in [the] NZ grocery market, and this is [evidenced] by FSNI behaviour in the last two years where they implemented unfair changes and threatened suppliers with delisting or reduction in facings [the number of spots a product occupies on a supermarket shelf] if they don't agree to the new terms or ways of working," one supplier noted.
The research also shows that suppliers have elevated concerns about dealings with other supermarkets.
For example, 66 per cent of suppliers had "category" challenges with Countdown and 58 per cent had such difficulties with Foodstuffs SI (the figure was 91 per cent for Foodstuffs NI).
More broadly, 82 per cent of suppliers said they have been "threatened with deletion" for not agreeing to a supermarket's terms or margins. And 93 per cent agree that a code of conduct is required to help rectify the power imbalance in the duopoly-dominated sector.
Just two big players account for roughly three quarters of New Zealand's grocery retail sales: Foodstuffs NI and Foodstuffs SI (which co-operate) and Woolworths New Zealand.
Foodstuffs grocery banners include New World, Pak'nSave and Four Square stores. The stores are individually owned but they are co-operatively joined together through a corporate head office, and North Island and South Island Foodstuffs divide the market and do not compete with one another.
Woolworths NZ owns banners including Countdown and is the franchise owner of Fresh Choice and SuperValue.
Woolworths' Steve Mills, the general manager of merchandise and replenishment, told the Herald the company has a strict supplier charter which sets out how it conducts business with suppliers.
"We value the good working relationships we have with our suppliers, and we work very hard to build and maintain them," Mills said.
"We are confident that we do not overstep the line, and if there were ever examples of this, we would want to know."
Mills added that the company keeps track of supplier satisfaction ratings and that these had improved over time.
In February, the Commission published submissions to its outline of issues likely to be tackled in the market study.
Since then, parties including Foodstuffs NI and the NZFGC have made supplementary contributions in response to other submitters.
Foodstuffs NI refuted the characterisation that the food and grocery market in New Zealand is a duopoly. It cited The Warehouse among its competitors, as did Woolworths NZ in a separate submission.
The Warehouse, however, refuted this claim in a submission published earlier this month. "While The Warehouse offers customers a range of ambient grocery products, the scale of this is insignificant when compared to that of the grocers [described as the two major grocery retailers] both in terms of range of products available and sales value. As a result, The Warehouse believes that the size of its grocery offering is insufficient to be a constraint on the grocers, similarly to many of the other retail brands cited by the grocers as 'competitors'," the submission said.
To corroborate this, The Warehouse submission contained an offer to share its "category level sales data" with the Commission on a confidential basis.
Foodstuffs NI submissions also outlined the series of channels currently available to suppliers with complaints and said the owner-co-operative endeavours to act in accordance with its own Supplier Relationship Charter. It cited a complaint process, agreed with the NZFGC, and fortnightly meetings with the body's Industry Relations Working Group to "cover any supplier issues".
Separately, Foodstuffs NI chief executive Chris Quin has described centralising changes currently underway at the co-op as a "customer-driven transformation" aimed at reducing range where products are considered highly interchangeable.
In its submission, Woolworths NZ characterised the food and grocery sector as "highly dynamic and intensely competitive." It said it deals with some 1400 suppliers and presented a cost breakdown that put the company's margin at just 2.4 per cent of store revenue.
The market study results could range from an acceptance of the status quo to legal prosecution under current law, or a recommendation to amend or write new legislation. It's widely expected that an industry code of conduct will result. The NZFGC is currently lobbying the Government to mandate such a code, with enforcement through the Commission.
Australia established a code of conduct for dealings between supermarkets and their suppliers in 2015. The code is legally enforceable by the Australian Competition & Consumer Commission.
Industrial projects dominate new supply, the study found, comprising 65% of new stock.