Commerce Commission prepares to make a final decision on the proposed Foodstuffs merger. Video | NZHerald
The grocery sector has had no meaningful improvement in competition, the Commerce Commission says.
And the watchdog said the entrance of new competitors was being stifled, and major grocery retailers’ explanation for rising costs contradicted sustained levels of high productivity.
Based on data from 2019 to 2023, the first annual report released by the commission built on findings in its 2022 Market Study into competition within the sector.
The report found retail margins of major supermarket brands, including New World and Woolworths, have increased.
The Commerce Commission has released its latest annual report into the state of New Zealand's grocery sector. Photo / NZME
All non-fresh product margins were up 3.1% and were up by a smaller 0.4% on fresh products, including bakery goods, fresh meat, poultry, produce, and seafood.
The report called that a “red flag for the state of competition in the grocery industry in New Zealand”.
While Woolworths reported a decline in profit of 57% and Foodstuffs North and South Island reported losses, the commission was confident all three major retailers kept making profits after removing intangible costs.
The report also said the current wholesale regime was not gaining sufficient uptake to help improve competition, with the commission hearing continued reports of “bullying” of suppliers by the major retailers.
The commission did identify increased competition in specific parts of the industry at the regional level, but despite Costco and The Warehouse’s grocery offerings, no other significant challenger had entered the market at the national level.
The report said structural change was needed to make profitable entry possible.
The commission believed three national supermarket networks would be far more competitive than two, and that was achievable in New Zealand but would take time.
“Even if a significant challenger were to emerge tomorrow, it would take some time for them to establish themselves and grow market share,” the report said.
Restrictive land covenants were hampering new entry. The commission has already prosecuted Foodstuffs North Island for historical abuses.
While the number of covenants had decreased, the commission expressed concern at the more than 100 properties currently owned by major retailers not being used for retail stores, or land-banked.
To clarify, the commissioner said some of these properties could be for car parks or storage, but they certainly included potential expansion sites when properties held for more than 20 years were considered.
The commission said it would engage with potential new entrants to clarify what issues they had and what barriers could be removed to support their entry into the market.
Most competition was concentrated in Auckland, with grocery market share falling from 74% in 2022, to 70% in 2023.
The commission also said consumers were still encountering misleading pricing and incorrect charges at the checkout.
Woolworths: Scrutinise big multinational suppliers
After the report’s release, Woolworths New Zealand managing director Spencer Sonn said the company had been working hard to improve competition and had done everything the commission had asked of it.
“The amount suppliers charge us has a much bigger impact on the prices shoppers pay than anything else.
“For all the analysis that’s been done, the role of large, multinational suppliers has never been properly taken into account - we think that to get a full picture, this needs to be looked at.”
Sonn pointed to the business’ recent loss in profit, saying he was surprised the commission hadn’t allowed more time for recent regulatory changes to be in effect for longer.
Spencer Sonn, managing director of Woolworths New Zealand. Photo / Supplied
Foodstuffs responds
Foodstuffs North and South Island issued a joint statement in response, with chief executive of Foodstuffs North Island Chris Quin expressing support for the report.
“We fully support the commission’s vision of a grocery sector that delivers value to New Zealanders at the checkout, keeps food pricing under control, and makes sure this small market is working as well as it can for New Zealanders,” Quin said.
He expressed support for the report’s plan to explore changes to planning rules and remove barriers for investors to increase competition.
“We see encouraging new investment in New Zealand’s grocery sector as the most effective path to substantially increasing competition.”
Chief executive of Foodstuffs North Island, Chris Quin.
Government reaction
Minister of Commerce and Consumer Affairs Andrew Bayly said the report painted a concerning picture.
“I welcome the commission’s decision that, based on these findings, it will unlock new regulatory powers to improve uptake of the wholesale regime, redress the balance of power between suppliers and supermarkets, and bring greater transparency to pricing.”
He plans to seek advice on the sites currently being land-banked, alongside broader regulatory reviews that could lead to potential change, including the Overseas Investment Act and the Fair Trading Act.
