Supermarket competition: Why the duopolies require a regulatory kick up the backside - Tim Hazledine

THREE KEY FACTS

• The grocery sector has had no meaningful improvement in competition, the Commerce Commission’s first Annual Grocery Report concludes.
• The entrance of new competitors is being stifled and major grocery retailers’ explanations for rising costs contradict sustained levels of high productivity.
• The report found retail margins of major supermarket brands, including New World and Woolworths, have increased.

Tim Hazledine is emeritus professor of economics at the University of Auckland.

OPINION

The problem with regulation of monopoly power in New Zealand is the regulator is itself an unregulated monopoly.

The NZ Commerce Commission (NZCC) is our only adjudicator of market power matters, such as mergers. Although the higher courts can be brought into play on appeal, we have no other specialist authority closer to the regulatory action, such as the Australian Competition Tribunal, which provides a check on the merger decisions of the Australian Consumer and Competition Commission.

So I was quite hopeful about the July 2023 appointment of Pierre van Heerden to the new position of Grocery Commissioner, following the commission’s 2022 report finding evidence of substantial exercise of monopoly power by NZ’s supermarket chains.

Van Heerden’s supporters predicted he would “hold the supermarkets to account”, and I hoped he might also hold the commission to account.

The $25 billion grocery sector warrants an independent regulator to, if you will, compete with the NZCC. But it turns out the new commissioner was given no commission or secretariat of his own and is, in effect, just another employee of the NZCC, albeit with a fancy job title. Nevertheless I, and no doubt many others, was keen to read his first Annual Grocery Report, issued last week.

It’s very good, as far as it goes, which - unfortunately, in my view - firmly stops short of “making any direct policy recommendations”.

In particular, the report is utterly silent on the most important development in our grocery industry over the past 12 months, that being the application made in December 2023 by two of the three big supermarket chains - Foodstuffs North Island and Foodstuffs South Island - for clearance to merge into one business entity (with the third player, of course, being the Australian company Woolworths, formerly trading here as Countdown).

This is particularly worrying given perhaps the most striking evidence brought forward in the Grocery Report is that profit margins in the NZ supermarket industry - already found to be excessive in the NZCC’s substantial 2022 Grocery Market Study - have widened further over the past year.

Grocery Commissioner Pierre van Heerden was appointed in July 2023. Photo / Mark Mitchell

Pierre van Heerden came into his new job seeing it as a “once-in-a-generation opportunity to level the playing field in the grocery sector”.

Unfortunately, a level playing field is not much use if nobody turns up to play - or, at least, nobody new, to ginger up the performance of the canny old crew who have been kicking the ball around among themselves for decades.

And that is the story of retail grocery competition in New Zealand: no substantial new third competitor for Foodstuffs and Woolworths ever appears and the Commerce Commission never does anything about it.

Not that entry per se is a panacea. The commissioner’s report documents the time and difficulty faced by the highly capable German low-price grocer Aldi in achieving significant penetration of the Australian market, which also has a dominant duopoly.

But there is a solution staring us in the face - one so obvious everyone seems to have missed it.

We already have in NZ three fully functional, successful supermarket chains. The problem is two of them don’t compete with each other at retail - the two Foodstuffs co-operatives stick to their respective markets in the North and South Islands - so we have, in effect, two regional duopolies in the grocery sector.

And there are plenty of stores: more than 200 full-size Foodstuffs supermarkets spread across the country. Even quite small towns such as Queenstown and Wānaka have at least two Foodstuffs outlets - two New Worlds, or a New World and a Pak’nSave. And all these stores are operated as separate franchises, with no cross-ownership of franchises.

So, were there the will, the Foodstuffs supermarket empire could quite easily be carved up and reorganised into two - or more - distinct entities to compete with each other and Woolworths right across the country.

But we have not so much as a whisper from the NZ Commerce Commission about what authority it would need to effect such a desirable transformation of the competition landscape.

The economist Sir John Hicks once said “the best of all monopoly profits is a quiet life”. Our unregulated monopoly competition agency has opted for the relatively quiet life of smoothing out the supermarket playing field.

It needs a regulatory kick up the backside - perhaps administered by Parliament - to make it raise its game to actively create more competition in the sector, in the cause of shaving a billion or two off the prices paid by New Zealand households for their groceries.