The forced sale of some supermarket assets is still an option, as the Government tries to boost competition and combat rising prices, despite the big grocery chains’ warnings that it could have the opposite effect.
David Clark, current Minister of Commerce and Consumer Affairs, said he had received the “initial cut of the cost-benefit analysis for retail divestment” and discussions with his Cabinet colleagues are ongoing.
A report on grocery retailing, commissioned by the Government, has found that the sector is exceptionally concentrated and just two supermarket chains make New Zealand a “distant outlier” compared with other countries with broadly similar population density and per capita GDP.
The work also suggests that a government-forced sale of New Zealand supermarket assets could attract potential buyers ranging from global supermarket groups and private equity firms to wealthy New Zealand-based individuals, retail groups, iwi and others.
However, it warns that even if the Government forced a third significant player into the country’s duopoly-dominated grocery sector, it could not assume the newcomer would succeed.
The work was commissioned by the Ministry of Business, Innovation and Employment and supplied by Australia-based consultancy Coriolis as supporting material for a detailed cost-benefit analysis of two options for a government-mandated “divestment” of supermarket assets -- an idea mooted to introduce more competition and ultimately to lower prices.
The document was released to the Herald under the Official Information Act, with supporting documents and heavily redacted government papers. The cost-benefit analysis, also requested, was withheld in full on the basis that the work constitutes confidential advice to the Government.
While Clark has been considering the issue, the job of steering the discussion on whether to pursue forced asset sales is likely to fall to a new minister after next week, when freshly minted Prime Minister Chris Hipkins is expected to shuffle Clark out of the Cabinet. Clark has said he won’t seek re-election this year.
The Government is also pushing ahead with other reforms through the Grocery Industry Competition Bill, now past its first reading.
This is “designed to trigger an unprecedented shake-up of the grocery sector and deliver New Zealanders a fairer deal at the checkout,” Clark said.
The forced sale or break-up of private businesses would be a radical move for New Zealand, and many economists consider it an unlikely remedy for high and rising grocery prices.
But with inflation running strong, and an election looming, food prices are a hot political issue.
The Consumers Price Index rose by 7.2 per cent in the year to December 2022, its strongest annual increase in over three decades. In the same period, food prices surged a whopping 11 per cent.
Hipkins has said that under his leadership the Government will focus on “bread and butter” issues, among which is the spiralling cost of living.
It remains to be seen whether he will be tempted to push beyond the current range of remedies to weak competition in the grocery sector that Labour is already pursuing. A spokesperson said Hipkins had nothing to add to Clark’s comments on the prospect of forced divestment.
Nicola Willis, National Party finance spokesperson, said forced divestment of private assets would be “a drastic step” and a “very high bar” would need to be reached, requiring “clear evidence” before a National Government would consider such action.
“National supports steps to increase competition in the supermarket sector,” said Willis. “The Government has proposed a series of new measures that the National Party supports, including the creation of a supermarket code of conduct and the establishment of a new regulatory watchdog and needs time to assess whether these will improve competition.”
In its grocery market study last year, the Commerce Commission recommended a review of competition in the sector after three years, to evaluate the effectiveness of any changes.
Last year the Commerce Commission reported that grocery competition is anaemic and that prices appear comparatively high by international standards. The dominant players are Foodstuffs (New World, Four Square, Pak’nSave) and Woolworths NZ (Countdown, Fresh Choice).
The Commission also estimated that the two major retailers’ “excess returns” (broadly speaking, profits greater than can be expected in a healthy market) total roughly $430 million a year. The calculation was based on the businesses’ return on average capital employed (ROACE) and the weighted average cost of capital (WACC).
It made a range of recommendations, many of which the Government is now pursuing. They include mandatory unit pricing for many goods, mandatory wholesaling to competitors by the dominant players, and an enforceable code of conduct to govern supermarkets’ dealings with suppliers. Last year the Government implemented another of the commission’s recommendations and banned restrictive site covenants designed to keep competitors at bay.
But the commission stopped short of recommending a break-up of existing players because of the risks and expense involved, and the uncertain benefits.
The Government, however, didn’t abandon the idea. Clark subsequently asked MBIE to pursue further work in the area.
“Note that you directed officials to continue examining retail divestment with a view to reporting back to DEV [Cabinet Economic Development Committee] in October 2022 with a detailed cost-benefit analysis on retail divestment to inform decisions on progressing further work on retail divestment options,” said a heavily redacted December 1, 2022 briefing.
The two mandated sale options considered, “focus on ensuring competition is improved in as many local markets as is practical while providing the industry with scope to develop specific, lower-cost divestment proposals in response to explicit Government-mandated criteria”, the briefing noted.
The Coriolis work released identifies more than a dozen peer countries - mostly European - with similarities to New Zealand in population density and per capita GDP.
The work found no countries, apart from Iceland (population roughly 370,000), with greater concentration of “chain supermarket market share” than New Zealand, which it describes as a “distant outlier in terms of market structure relative to its peer group countries”.
Coriolis’ work categorises only Foodstuffs and Woolworths as chain supermarkets of meaningful size in New Zealand.
After New Zealand, the next most concentrated supermarket retail landscapes were: Latvia, with two dominant players commanding some 70 per cent share, and three other operators with roughly 10 per cent each; Finland, with two dominant players that represent some 72 per cent share and a further four competitors; and Switzerland, with two dominant players (both consumer co-ops) and a “strong group of secondary operators”.
By contrast, other small populations including Ireland, Croatia and Norway have six, five and three large supermarket retailers respectively.
The Coriolis work gave a very rough “back of the envelope” $10b estimate for the value of the New Zealand supermarket industry shared between Woolworths and Foodstuffs.
On that basis, it reckoned a buyer would pay some $2.5b (plus acquisition premium) for a 25 per cent chunk of the business, and some $3.3b (plus acquisition premium) for a 33 per cent share.
These rudimentary figures were produced to provide some basis for discussing potential buyers for any “newco”.
Coriolis listed a wide range of possible New Zealand buyers for a new entity.
The wealthy individuals identified were Graeme Hart, the Todd Family, Mark Stewart, Alan Gibbs and Tom Sturgess. Local funds with food interests listed included Waterman Private Equity (My Food Bag); Pioneer Capital (Raglan Food Co); Oriens Capital (Van Dyck Fine Foods, Rockit); Pencarrow (The Collective, Brew Group); and Rangatira (Fiordland Lobster, Mrs Higgins, NZ Pastures).
Existing retailers identified as possible buyers were The Warehouse Group and Briscoes. And iwi listed as potentially interested in investing included Ngāti Whātua, Waikato-Tainui, Tūhoe, Raukawa, and Ngāi Tahu.
Among the large, well-capitalised global supermarket groups with international activity which could be interested buyers, Coriolis listed: Albertsons (Safeway); Schwarz Group (Lidl, Kaufland); Auchan; Aeon; Sainsbury; Loblaws; and Coles Group.
It also selected examples of large, well-capitalised private equity firms which have historically invested in supermarket chains and or retailers. This list included: TDR Capital (Asda); Cerberus Capital Management (Supervalue, Safeway); Apollo Global Management (Albertsons); Lone Star Funds (Winn-Dixie, Piggly Wiggly); KKR (Boots); and Blackstone Group.
The lists were based purely on speculation, and no effort was made to verify any specific interest.
Coriolis also noted historic cases of poor supermarket performance in New Zealand, including that of Dairy Farm, a Hong Kong-based retailer and conglomerate which bought Woolworths NZ in 1990, and the case of Foodland Associated Ltd (FAL), which bought Woolworths NZ from Dairy Farm in 2002 and was itself bought by Woolworths Australia in 2005 following a long period of underperformance (at that time Woolworths NZ and Woolworths Australia were separate entities).
“You cannot assume positive outcomes; NZ supermarket history shows numerous examples of situations where things did not work out as expected,” the report says.
Chris Quin, managing director of Foodstuffs New Zealand, called forced divestment “a step too far and [one that] is not supported by evidence or justified”.
He said “the Government has made major progress in addressing genuine competition concerns in the grocery sector and we support that and are delivering on our commitments.
“After 18 months of detailed investigation, the Commerce Commission said forced divestment wasn’t a credible option for increasing competition, noting it would be unprecedented and could lead to a loss of efficiency in the sector i.e., risking making groceries more expensive.”
He noted that a New Zealand government had never required divestments to reduce market power, including in telecommunications and fuel, and warned that any such policy would come with a high price: Kiwi grocers losing their businesses and higher prices.
The benefit would be for “opportunists wanting to snap up Kiwi-owned grocery stores on the cheap”, he said.
Woolworths is also opposed to forced divestment, and in September last year it prepared, with Boston Consulting, a preliminary report entitled: “Forced divestment of grocery retail: An indicative look at costs and risks”. It supplied the work to MBIE.
The report, provided to the Herald by Woolworths, raises concerns including the likelihood that forced divestment would reduce economies of scale for supermarkets and lead to price increases, and that a new competitor, formed through forcibly divested assets, would be at high risk of failure.
“What we can see from preliminary analysis is that the costs and risks of forced divestment are high,” the report concludes. “While it may suit a narrative to ‘break up supermarkets’, it would result in billions of dollars of cost; disrupt people, delivery networks and infrastructure; and would raise food prices by up to 6 per cent. It would be a highly complex, costly and risky world-first undertaking, that is likely to make the problem of food price inflation worse, rather than help.”
The MBIE documents state that though the cost-benefit work did not involve any formal consultation, officials “did meet with several stakeholders on an informal basis during the analysis”. These included Foodstuffs North Island (one of the two owner-co-ops which makes up Foodstuffs) and Woolworths.
The documents also note that officials met representatives of Boston Consulting Group (BCG), which Woolworths engaged to undertake an analysis of the costs and risks of forced divestment.
Officials noted to Clark that the BCG work “did not consider consumer benefits from divestment”.
Foodstuffs NI also provided officials with “advice from HoustonKemp Economists on essential elements for a divestment CBA [cost benefit analysis]. These elements included specification of the options included in the analysis, the comparison of these against a counterfactual, and the calculation of a net present value from the estimated streams of future costs and benefits. This advice also warned against the risks of intervention within a sector that has relatively slim margins overall,” said the December 1, 2022 briefing to Clark.
Quin, however, said Foodstuffs has had “no input into this process” and has never seen an outcome. “As soon as the Government indicated it was setting up the divestment workstream, our team repeatedly tried to engage, with very limited response,” he said.
“We didn’t get any input into the CBA - our input was not sought. There was no consultation process. We have not seen a copy of the CBA. This has caused significant uncertainty for our members at a time when they have been focused on fighting cost inflation, global supply challenges and labour shortages.”
The cost-benefit work on divestment was undertaken by a consortium headed by Coriolis Ltd, and including economic consultants Sense Partners and a specialist in competition and regulation, Cognitus.
The Coriolis work released contains the caveat that it draws entirely on publicly available information and that none of the third-party data was verified.
OPINION: December is often the month in which we spend money like it’s confetti.