Grocery Commissioner Pierre van Heerden has promised more price controlling regulation for the grocery sector. Photo / Mark Mitchell
ANALYSIS
The Commerce Commission has confirmed that it will push ahead with a mandatory code to regulate the wholesale market for groceries, even as it launches an inquiry into whether further, more aggressive regulation is needed.
New Zealand has no large, independent grocery wholesale businesses, though there are some more specialised players. The Grocery Industry Competition Act, which came into effect in the middle of last year, required the main supermarket operators – Woolworths New Zealand and Foodstuffs North and South Island (which co-operate and don’t compete at a retail level) – to fill the gap.
All three entities were designated “regulated grocery retailers” (RGRs), and were required to open the wholesale divisions of their businesses to customers other than their own retail stores.
Under this first step, they were required to meet the “light touch” requirements, such as considering all requests for wholesale supply in good faith. Blink and you’ll have missed that.
The Commerce Commission, which regulates the sector, and Grocery Commissioner Pierre van Heerden, have determined this “quasi-regulatory” provision is inadequate.
In its first annual report on the state of competition in the grocery industry, released earlier this month, the commission pronounced that prices in this new wholesale regime are more often than not higher than retail prices.
It also found that the wholesale range of products available often spans just a small fraction of supermarkets’ top sellers, and lacks staples including bread and milk.
Those failings mean that the commission is now determined to move to a mandatory regime; the grocery bill of 2022 contains plenty of scope for this through “regulatory back-stop” provisions.
The purpose of these mandatory measures is to improve competition by allowing other grocery retailers to benefit from the buying power of the supermarkets. In particular, the purpose of the wholesale measures is to encourage, either through new entry or growth, the establishment of a third large player in the duopoly-dominated sector, where competition is weak.
It is notable, however, that none of the regulatory changes provided for in the Grocery Industry Competition Bill were subject to cost-benefit analysis.
In addition, Ministry of Business, Innovation and Employment (MBIE) officials noted in a regulatory impact statement, that the mandatory wholesale market provisions are: “significant, unprecedented and exposed to considerable risks, including possible harm to consumers from disrupting vertical supply efficiencies”.
Another obvious risk is that driving wholesale supply through the main supermarket behemoths will further concentrate their market power (despite the regulator’s best efforts), and potentially arm them with an even deeper well of data – a valuable commodity.
The centrepiece of the Grocery Industry Competition Bill, which introduced a range of new rules and provisions, is wholesale regulation.
A “Wholesale Code” is one of two back-stop provisions contained in the bill, which the commission can implement itself, without ministerial decision-making.
The other such measure is a “Wholesale Framework” for setting range, price and access terms: a kind of rule book for how pricing and ranging decisions must be made.
There are a number of circumstances that can trigger a code – essentially measures of failure in the first iteration of a wholesale regime.
”The commission intends to implement a Wholesale Code, which can be done independently or alongside a Wholesale Framework. There is a process the commission needs to undertake to publish a draft and consult stakeholders and [it] won’t have further details on timing until that is complete,” a spokesperson said.
Act Party leader and Minister for Regulation David Seymour isn’t keen on the plan for a wholesale grocery code, but he doesn’t intend to block it. “We respect the ability for government agencies to exercise their powers within the law,” he said.
The supermarkets themselves have made only a muted response. Woolworths’ New Zealand managing director Spencer Sonn pointed to the “significant amount of major new regulations and initiatives” in the grocery sector, including the new rules for wholesale, and said he’s surprised the commission hasn’t given these “a chance to bed in” before looking at further change.
A spokesman for Foodstuffs said only that the company is reviewing the commission’s recently released preliminary issues paper (part of a more general inquiry into grocery wholesale), and will submit a response.
The Act provides the high level principles for what a code can do. It may stipulate the terms and conditions to be included in wholesale agreements (between RGRs and wholesale customers); it can specify terms and conditions that must not be included; and it can regulate or prohibit specific conduct connected to the supply of wholesale groceries.
It can also impose any other duty on an RGR or supplier to ensure their actions are consistent with, “the desirability that wholesale customers have reasonable access to any discounts, payments, or rebates” made available to the RGR, either directly or indirectly, by a supplier.
The Herald spoke to John Land, barrister with Bankside Chambers who practises competition law, and asked if that means that RGRs will be required to provide the same level of supplier discount or benefit to their customers as their own retail arms.
Land said the wording “reasonable access” is important: “I suspect that does mean that there’ll need to be pass-through, but does it mean full pass-through, or does it mean something less, for example adjusted for size? My sense is that this is open for argument, and the supermarkets will push back.”
Hayley Miller, a commercial lawyer and partner at Dentons, said it is too early to judge how the act’s high level principles – such as the desirability that wholesale prices reflect any scale-based or efficiency-based discounts, payments or rebates available to supermarkets from suppliers – are translated into code requirements.
She said it’s possible the regulator will, “provide examples of costs or discounts that retailers must or must not [as applicable] take into account when calculating fair wholesale prices”.
Miller also noted that the commission must also take into account the desirability of regulated retailers’ operational efficiencies when determining wholesale pricing.
”This might provide a basis for retailers [RGRs] to set variable pricing if retailers’ costs of supply genuinely vary according to order volume, although there is nothing in the legislation to mandate this.”
As of February this year, at least 155 suppliers had opted to take their products out of at least one regulated wholesale regime – including supermarkets as suppliers of private label products.
Land’s view is that this will change with the advent of a code: “I don’t see any ability for suppliers to opt out of the wholesale code. They [only] have the choice of whether or not to supply a regulated grocery retailer.”
The Act states that a code can regulate all supply agreements with RGRs, including terms and conditions, and impose any other duty on a supplier, if it serves the principle that wholesale customers should have reasonable access to the same benefits that flow from suppliers to RGRs, as a result of the latter’s scale and efficiency.
Suppliers are a varied group, some are (so far) quietly concerned about the regulator’s increased powers. And their main industry group, the New Zealand Food and Grocery Council (NZFGC), is cautious in what it’s saying publicly.
Asked if a code risks overriding suppliers’ freedom to contract, NZFGC chief executive Raewyn Bleakley said, “the NZFGC has long advocated for a well-functioning grocery market, which is competitive - including where there is the ability to negotiate wholesale offerings on commercial terms”.
The current regime allows for civil enforcement of financial penalties. However, Land said a code is likely to set out parties’ obligations in more exacting terms: “a code would make regulatory breaches clearer, as it would contain specific provisions and these are easier to enforce”.
Regulations to provide a code with teeth are yet to come; the legislation provides for financial penalties that range from $30,000 to $10m (and potentially more, in cases of very considerable financial gain related to the prohibited activity).
The commission has also launched an inquiry into grocery wholesale regime. An issues paper is published on its website, largely reiterating previously aired views on the shortcomings of the new regime. Submissions from interested parties are due by October 25, and a final report is expected by mid-2025.
An inquiry will pave the way for the Minister of Commerce and Consumer Affairs, Andrew Bayly, to consider using either of the more interventionist measures for grocery wholesaling that the Act provides for: “non-descriminatory terms” and “specified access terms” (also called price-quality regulation).
To introduce either of these, the minister must consider the commission’s advice, but he need not follow it.
Both non-descriminatory terms and specific access terms are considered forceful means to achieve price control, though in considering them, officials repeatedly noted that they would have highly uncertain consequences.
Both measures would mandate that particular mechanisms and calculations be used to determine wholesale grocery prices.
Under the act, non-descriminatory terms would require RGRs to supply customers on terms no less favourable than the terms on which they supply their own retail businesses. This could be implemented through the pricing of individual products, or through demonstrating the RGR’s return on supplying customers was consistent with the return from supplying their own stores.
To achieve this, RGRs could be required to separate their wholesale units to operate on a “stand-alone basis”, at arm’s length from retail stores.
Under specified access terms an RGR would be required to provide a range of products at wholesale which it stocks itself. Related rules would specify such things as: pricing methodology; performance standards; and payment terms.
Both provisions carried significant warnings from MBIE officials in their assessments of the Grocery Industry Competition Act.
”Both tools are novel in a market without any ‘essential facility’ or ‘natural monopoly’ characteristic and, if executed poorly, have the potential to disrupt efficiencies currently arising from vertical integration, which could ultimately result in higher prices for consumers,” a regulatory assessment said.
”Requiring supply on non-discriminatory terms may involve degrees of separation that erode the benefits of vertical integration. Price-quality regulation is likely to be particularly complex to develop without unintended consequences, such as gaming by wholesale customers, and without introducing significant additional costs.”
Westpac economist Paul Clark also sounded a cautionary note on their possible unintended consequences. In a report last year, he raised the practical issue of policing prices across “literally thousands of product lines”, and argued that the controls would likely to lead to distortions, “up and down the value chain”.
Bayly said he would not rule out using either provision. “It is too early to speculate on what the next steps may be and I am not ruling things in or out at this stage. In the first instance I would like to see the Commission complete its wholesale inquiry, and undertake its work to introduce a Wholesale Code. Any further government action will be evidence-based, taking into account the full costs, benefits and risks.”
Bayly also confirmed that the decision to implement either non-discriminatory terms or specified access terms would require Cabinet approval, at which point Act ministers would also need to be persuaded – a tall order considering the party’s commitment to less regulation.
Kate MacNamara is a South Island-based journalist with a focus on policy, public spending and investigations. She spent a decade at the Canadian Broadcasting Corporation before moving to New Zealand. She joined the Herald in 2020.
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