The same old rebuttals keep coming through. For instance, that market concentration delivers efficiencies that might be less in a more fragmented market. True - but rational commercial behaviour is to retain the benefits for the shareholders rather than pass them on to customers. In fact, if you believe that consumers benefit from monopolies you’d want to reduce every industry to a single player. Adios, capitalism!
National’s Nicola Willis argues that enforced divestment would be a step too far. She says the measures the Government is already implementing - an industry Code of Conduct, mandatory unit pricing, and enforced opening of the duopolists’ wholesale markets - should be allowed time to work.
But the Code of Conduct is largely for the benefit of suppliers rather than customers; mandatory unit pricing will have at best a very tiny effect, and compulsory external wholesaling will take years to prove whether or not it has a real impact.
Can we wait years for proper competition? Run that question past a few customers in the checkout line at Pak’nSave.
Inevitably, comparisons continue to be made with the breakup of Telecom in the 2000s - arguably New Zealand’s most successful and politically popular response ever to market failure. In those days we were bottom of the heap alongside Mexico in having the developed world’s most expensive telecommunications. Now we are up with the best in price and service quality, with around 100 service providers to choose from. All that in a sector that Telecom once argued was a natural monopoly with which we should just learn to live.
So what can our incoming minister learn from the Telecom experience?
The two problems are not identical, but they have certain similarities. Both had their roots in mis-steps by government years earlier. In telecommunications the Government privatised the sector without implementing regulations to ensure competition. In supermarkets, Woolworths was allowed to buy Foodtown, reducing the market from three players to two, due to a quirk in the law which at the time did not adequately protect competition.
The key split of Telecom into a wholesale company (Chorus) and a retail company (Spark) was the result of a stunning strategic move - the brainchild of Steven Joyce, then Communications Minister and in my opinion the most commercially astute Cabinet Minister of our times. Joyce put on the table a sum of around $1 billion as an incentive to build a new ultra-fast broadband network, opened it for proposals, but stipulated that Telecom would only be considered if it voluntarily split into two first.
It was an audacious plan. And it worked - Telecom meekly complied. Never a murmur from shareholders nor executives.
I’m not suggesting the Government devise an ultra-fast supermarket scheme, and right now I don’t have a specific idea. But the core problem is identical - how to correct a massive market failure that should never have happened in the first place, preferably short of enforced divestment. Surely, with lateral thinking, a similar win-win solution must be achievable.
So if I were Minister Webb I’d establish an eclectic group of individuals from diverse backgrounds, chosen for their ability to problem-solve and think laterally. Not lawyers or economists - their role comes later, and not people from the supermarket sector. I’d certainly include Steven Joyce, and earlier minister David Cunliffe, but mostly I’d hand-pick businesspeople from other sectors. I’d shut them in a room and tell them not to come out until they have a workable plan to introduce proper competition into our grocery market, with mandatory divestment only a last resort.
Back in the day a popular ad campaign urged us “better buy a bigger block of cheese”. Sadly those days are long gone. Smaller blocks are the best Kiwis will get for the foreseeable future - unless, that is, we go overseas to somewhere other than Latvia or Iceland for our shopping.
That’s a blight on our country. It must be fixed. We need to start now.
Ernie Newman is a Waikato-based consultant who has worked in many business organisations over more than 40 years including within the telecommunications and grocery sectors. He has advised a number of clients including the Food and Grocery Council, but the views in this article are his own.
