Kate MacNamara: Supermarket’s bid for consolidated market power should be blocked

Marriage of the two Foodstuffs' should be stopped at the altar, writes Kate MacNamara. Photo / NZME

OPINION

Contemporary New Zealand is the luckless inheritor of an uncompetitive duopoly of supermarket players. Foodstuffs North Island and Foodstuffs South Island, on one hand, and Woolworths NZ on the other, account for 80 to 90 per cent of the industry, which sells well in excess of $22 billion of groceries a year.

After housing, food and staples are households’ single largest expense, overwhelmingly those come from Woolworths’ Countdown (rebranding to Woolworths), Supervalue, and Fresh Choice stores and from Foodstuffs North Island and Foodstuffs South Island banners, including New World, Pak’nSave, and Four Square.

Unstitching the duopoly which blankets the country will be devilishly hard. Recent legislative changes – including a ban on anti-competitive land and lease covenants and the mandated opening of supermarkets’ wholesale networks to third parties – are intended to encourage new entrants to compete.

But it’s not yet clear that any of these provisions will make much difference to competition. It augurs ill that online grocer Supie, one of the few upstarts in the market, has gone into voluntary administration. And problems ranging from a cumbersome foreign investment regime to arcane consenting and building rules remain and constitute considerable barriers to newcomers.

There are few easy answers to the riddle of greater competition, although the industry does now have a dedicated regulator in the Commerce Commission, and its newly established grocery division, headed by its own commissioner, boasts a staff of 18, expected to rise to 25 by Christmas.

Great. That’ll coincide with what may well be the simplest answer this crew of grocery minions is ever asked to give: a flat no.

Foodstuffs NI and Foodstuffs SI – two co-ops, owned by their retailer members, which amicably split the country into two regions across which they do not compete – announced on Monday that they are preparing to merge into one national business.

This trip to the altar would require agreement by members within each business, and, critically, it would also need the nod of the Commission, under its merger clearance regime.

A key purpose of the Commission is to ensure that the level of competition in the grocery market is not substantially lessened by mergers or agreements between businesses.

So where’s the harm? Foodstuffs NI and SI already use SAP (Systems Applications and Products) software to centralise and digitally manage the back end of their respective businesses, spanning data, sales, reordering, finance and logistics.

It would certainly be efficient to merge these interoperable systems. Suppliers would require fewer sales managers in dealing with just one streamlined client, and the supermarket would have a cleaner, leaner operation with less duplication and just a single board and management where currently there are two.

Foodstuffs NI chairman Dean Waddell told the Herald earlier this week that: “being more efficient will mean savings at the checkout.”

There is little doubt that greater efficiency would mean savings for the two cooperatives. And it is possible that the gains would flow through to their inflation-weary customers, but it is not especially likely, given that each Foodstuffs faces only one other significant competitor.

What’s more, a merged Foodstuffs would have consolidated and increased market power.

Market power is usually associated with a small number of competitors in an industry, but it is also a product of high barriers to entry (after all, if a large market share can be threatened relatively easily it doesn’t equate to large market power).

Few competitors and high barriers to entry in the New Zealand grocery market are likely to endure, even if the political will to solve some of the unnecessary regulatory burden were found: we will still be a remote, thinly populated country of just a few million people, and an upstart would still need to compete with established duopoly firms which make relatively thin margins across a high volume of sales spread across large areas.

Especially post Supie, it appears that a meaningful competitor would need scale, and that would require large capital investment.

The Commission should see that a merged Foodstuffs’ beefier market power would be a drawback which would eclipse any possible benefit through efficiency gains.

A single Foodstuffs could coordinate pricing from the Houhora Four Square at the top of Northland to the Invercargill Pak’nSave at the bottom of Southland.

It would increase Foodstuffs’ strength in negotiating with suppliers even as a government-mandated Code of Conduct is being introduced to buffer many in that group from the asymmetrical power of their behemoth customers.

Decisions from product ranging to promotions could be made from a single head office. Whether the two Foodstuffs coops currently have this decision-making centralised is immaterial. A merger would allow this coordination and centralised control any time the company’s board and members decide to pursue it. How useful this would be in fending off any threat to market share, either present or future.

The Commission assesses mergers using a “substantial lessening of competition” test; that means it must compare the likely state of competition if the merger proceeds with the likely state of competition if it does not.

That decision may not be quick: once a merger clearance application is filed, the Commission is likely to take the path of publishing a Statement of Issues, on which parties – including interested parties such as suppliers and consumer groups – are invited to respond within 40 days. But it should be easy.