Chairwoman Anna Rawlings reveals the findings and recommendations from the Commerce Commission's market study into supermarkets. Video / Commerce Commission
OPINION:
Supermarket owners across New Zealand are likely to be breathing a little easier today after their corporate bosses convinced the Commerce Commission that the sector is not delivering the kind of super-profits the regulator initially thought.
The Commerce Commission's final report of its supermarket sector market studyhas delivered meaningful recommendations that could boost the ability of small supermarkets to expand, as well as create a framework for allowing rivals to purchase wholesale products from the supermarket giants.
But it is a far cry from the sweeping measures mooted last year, which argued that there was a structural issue.
Today's report revealed the commission now assessed that average returns on capital across the sector, dominated by Foodstuffs (New World and Pak'nSave) and Woolworths (Countdown and Super Value), were about 13 per cent.
In an industry as stable and consistent as supermarkets, that is strong and well above what the commission believes other New Zealand retailers are able to generate.
It is, however, dramatically lower than the more than 20 per cent the commission believed in July last year at the time of its interim report.
Back then, the commission found that the supermarkets were enjoying profits that were "consistently and materially above what we would expect in a workably competitive market", above international comparisons and at a level where regulators would expect a new entrant to swoop in to share the spoils.
Today's final report continued to point to competition problems and suggest prices were high by international standards, but conceded that "profit to sales margins for New Zealand's major grocery retailers are broadly consistent with the sample of overseas grocery retailers".
Commissioner Dr John Small said that the earlier assessment was based on the profitability of individual supermarkets.
Foodstuffs, a cooperative owned by hundreds of store owners, "took strong exception to that", Small said, pointing out that it was a large vertically integrated business, meaning the calculation ignored considerable property assets.
Woolworths, meanwhile, said accounting rules meant that although it did not own its sites, it had to account for future lease commitments as capital on its balance sheet.
At the time, almost nothing was off the table in terms of possible interventions.
Commerce Commission chair Anna Rawlings. Photo / Mark Mitchell
Commerce Commission chair Anna Rawlings floated the idea of forcing the sales of some stores, or even some kind of break up of the major companies, either across brand lines or between wholesale and retail. The commission even floated the idea of the Government establishing its own business.
But today's recommendations contain no direct action. The final report "shows no appetite to take direct authoritative action to intervene in the supermarket sector and either install a competitor or directly determine levels of competition at a regional level," Infometrics principal economist Brad Olsen said.
The main recommendations - changes to planning rules to prevent the supermarket companies from blocking competitors and a structured approach to allowing new entrants to buy wholesale products - could lead to meaningful improvements.
"The clear two challenges here relate to finding a good location for a supermarket, and having the goods to stock it," Olsen said.
"Both are being addressed by ComCom's recommendations."
The New Zealand Initiative applauded the ComCom saying the market study took issue with meaningful regulatory hurdles, beyond those imposed by the behaviour of supermarkets, including ensuring the Overseas Investment Act and the Sale and Supply of Alcohol Act do not unduly impede entry and expansion.
"For too long it has been effectively impossible for a new grocery chain to enter," Dr Eric Crampton, the New Zealand Initiative's chief economist, said.
"No sane grocery business would consider entering a small market at the far end of the world under the restrictions New Zealand has had in place. And the Commission recommends striking to the root of the problem."
But the measures recommended will, in all likelihood, take years to change the competition landscape, meaning for the established companies, this report will be quite a relief.
