The Government is urged to break up duopoly to enhance competition and lower prices.
Dr Bryce Edwards is Political Analyst in Residence, Director of the Democracy Project, School of Government, Victoria University of Wellington.
OPINION
New Zealand politicians and public servants love to tinker – especially in sectors of the economy that aren’t working. Unfortunately, they hate to do anything more than make tweaks, leaving dysfunctional markets like banking, building supplies, and electricity to the dictates of the businesses that dominate them. It’s probably a hangover from the neoliberal days of the 1980s and 1990s that politicians from across the spectrum fear the idea of “government interference in the market”.
We are seeing this endlessly regarding New Zealand’s broken grocery sector. New Zealanders have some of the most expensive groceries in the world, and it’s mainly due to a lack of competition – a duopoly of Foodstuffs and Woolworths controls over 80% of the grocery trade. This means that supermarkets make super-profits, and the public gets ripped off.
Experts, including the OECD, point to the urgent need to break up the harmful supermarket duopoly, yet the political will to do anything like this is feeble. Duopolistic forces use every available lobbying and influencing mechanism to protect the status quo.
The embarrassing Grocery Commissioner’s annual grocery report
This week saw the release of the first annual grocery report from the new Grocery Commissioner, Pierre van Heerden. He summed up the release of his report by saying the duopoly supermarket chains are “ripping us off”.
His report has been highly anticipated because it’s been two years since the Commerce Commission released its market study on the grocery sector, leading to a “crackdown” of tightened regulatory changes. The public wanted to know if these had worked. But the answer turned out to be “no”, and things at the supermarket are getting worse rather than better.
Many commentators have called the report “scathing” about the duopoly of Foodstuff and Woolworths, which the report says dominate the market with 82% of sales. Others have been more colourful in their description. Stuff business journalist Tom Pullar-Strecker’s news report was titled: “Supermarkets get terse tongue-lashing for ‘ripping off’ Kiwis”.
Similarly, Pattrick Smellie of BusinessDesk called it a “ripping read” and “an eye-opener”, pointing out that it was in marked contrast to the Commerce Commission’s moderate market studies. He said the new report was “as close as you’ll get to a punch in the nose from a regulator without finding yourself in court”.
Grocery Commissioner Pierre van Heerden at the Commerce Commission offices in Wellington. Photo / Mark Mitchell
Essentially, van Heerden’s report said that despite the tightening of regulations, the supermarket chains hadn’t made the changes that the Commerce Commission wanted. He then catalogues how the duopoly continues to abuse its market position. The report says that consumer prices are getting higher while the suppliers are being even more exploited. This is expressed in an increase in price-cost margins going up by 3.1 percentage points on average for non-fresh groceries.
According to the report, supermarkets are still making super-profits, stating that because there is no genuine competition, the duopoly is making an extra $372 million more profit than the Grocery Commission thinks they are entitled to. To work this out, the report compares the duopoly’s assets against the standard rate of return for supermarket retailing. It suggests that if the sector were genuinely competitive, the profits would only be a 5-6% return on capital. Instead, the report says the profits tend to be about a 10-12% return on capital.
The Grocery Commissioner is especially disappointed to find that one of the major “solutions” recommended by the Commerce Commission, implemented by the Government, has proven farcical – the “regulated grocery retailers” scheme (RGRs). The previous Labour Government had promised that the RGRs would require the big supermarkets to open up wholesale deals for competitors.
According to the report, the scheme hasn’t been working as intended. Although former Prime Minister Jacinda Ardern claimed the regulation would “unlock the stockroom doors” of the duopoly to smaller players, instead, Foodstuffs and Woolworths had found a way to jack up the wholesale prices.
The report said: “In our analysis we found that as many as 54% of the products offered by RGRs (regulated grocery retailers) in wholesale could be purchased cheaper at retail”. It seems that the duopoly had managed to exclude competitors from gaining access to the various trade discounts from an array of rebates, payment arrangements and special deals.
Further tweaks proposed by the Grocery Tsar
Grocery Tsar Pierre van Heerden made it clear this week how unimpressed he is with the duopoly he’s trying to regulate. He says he proposes further regulatory reform to the Government.
The first proposal is to reform the failed “regulated grocery retailers” scheme to make it mandatory that Foodstuffs and Woolworths treat rival retailers equally in providing them with wholesale groceries. However, commentators have been less than convinced by this. The supermarket reform advocates, Grocery Action Group (GAG), have called this proposal “tinkering in a market that has structurally failed”. And the Post’s business journalist Tom Pullar-Strecker suggested that the supermarkets might treat such regulations in the same way that electricity gentailers have managed to game the system: “If the supermarkets do need to supply rival retailers on the same terms and prices as their own stores, one question will be what might stop them making those prices high and shifting their profits from their retail to their wholesaling arms.”
The next “solution” was to crack down on Woolworths and Foodstuffs from holding onto strategic plots of land to prevent competitors from setting up stores – i.e. “land banking”. Van Heerden said the duopoly continues to hold more than 100 properties not being used for supermarkets, and they could be forced to either use that land or divest it. The Commerce Commission will, over the next year, investigate this.
But Pullar-Strecker comments, “Anyone expecting the commission’s investigation… to help much in that regard may need to be braced for disappointments.” And van Heerden himself signalled that there doesn’t seem to be any competition on the horizon.
New Zealanders have some of the most expensive groceries in the world. Photo / Sylvie Whinray
Momentum building for radical reform
Scepticism and impatience have become commonplace by those receiving and reading these regulator reports. Broadcaster Heather du Plessis-Allan wrote a column in response to the report, titled “I’m hoping the next supermarket call might be more promising”. She said this week’s disappointing report on the changes to supermarket regulation was entirely predictable: “Who thought that was going to make a difference? It doesn’t take a rocket scientist to tell you that wasn’t going to change anything. We said on this very show that that ain’t gonna change nothing. And here we are – it didn’t work.”
Consumer NZ’s spoke out about the need for much more significant reform. The organisation’s head of research and advocacy, Gemma Rasmussen, spoke out about “the audacity of the duopoly”, saying that the Government would need much bigger actions to bring them into line. She said the report “shows that the supermarkets won’t move unless they’re pushed. It is time for action by the commission and the Government”.
Rasmussen said that Consumer NZ wanted significant and urgent state intervention: “Ultimately, it is the role of the Government to introduce greater intervention like structural change and market break-ups – so the question is how long will New Zealand shoppers be expected to wait for an improved market or more drastic action?”
Sue Chetwin, of the Grocery Action Group, backed this up, saying: “We’ve got a broken market here. That’s what regulation is for.” She went on Newstalk ZB, saying that big reform was now needed: “All of the rules that they have put in place are all very well-meaning, but have not worked. They have really just tinkered around the edge. So, unless you make some structural change to encourage competition or to allow competition to happen, then we are just going to get more of the same.”
For many observers, this extensive reform needs to involve the creation of a third big supermarket network to rival Foodstuffs and Woolworths. The Commerce Commission itself also suggests that this is the ultimate answer: “We have asked ourselves what success looks like in this industry and concluded that it requires a third major network of supermarkets, offering a full range of groceries nationwide.”
The New Zealand Herald editorial today also backs this up, arguing that “New Zealand needs a major player like an Aldi or Lidl – supermarkets that have made inroads in Australia and Finland.”
Break up the duopoly
The one significant reform that is increasingly talked about among advocates for change is for the Government to compulsorily break up the two big supermarket chains. Sue Chetwin explained this to Ryan Bridge this week on Newstalk ZB: “Critically, and I think the OECD also recommended this, they need to look at forcing the supermarkets to sell some of what they own. So, maybe breaking up Pak’nSave and New World, and maybe Woolworths needs to divest some of its supermarkets as well. So, unless you get that structural change you’re not going to get more competition in New Zealand.”
Anti-monopolist Ernie Newman is also a proponent of this solution. He was centrally involved in the successful campaign to break up Telecom when the telecommunications market was seriously dysfunctional. This week he wrote on LinkedIn that New Zealand needs to learn from the telecommunications precedent, in which the Telecom monopoly strongly resisted change or promised to reform itself:
“For years the regulators of the day went down this same track, trying to enforce “voluntary” separation on a company which had every incentive to resist it. That strategy failed in telecommunications, and I see nothing to persuade me that it will be anything other than a failure in grocery. We need to learn from the past. Parliament needs to give the regulator powers to enforce a structural breakup. Delay while we go through a whole lot more reports and enquiries to prove that the earth is indeed round will condemn another generation of Kiwis to some of the world’s most expensive necessities of life.”
A duopoly of Foodstuffs and Woolworths controls more than 80% of the grocery trade. Photo / NZME
The Coalition Government’s response
The first “Annual Grocery Report” has been well-received by the Coalition Government. RNZ reported that the Minister of Commerce and Consumer Affairs Andrew Bayly “said the commissioner was right to use his powers more forcibly and the Government would support him to do so.” He labelled the actions of supermarkets, detailed in the report, as “disappointing”, and he raised questions of whether Foodstuffs and Woolworths might currently be breaking the law.
The Herald also reported that Bayly was keen to move on bringing in a third major supermarket to New Zealand, saying he “confirmed he has spoken to potential third-party operators and wanted to create an environment welcoming to them.” He has also talked about the Government’s reforms of the Resource Management Act and the Overseas Investment Act as potentially helping in this regard.
However, when it comes to the idea of forcefully breaking up the Woolworths-Foodstuffs duopoly, Bayly was reported by RNZ to regard it as a “last resort” option. He was also reported by The Post to be “open-minded” about the proposal but kicked it for touch: “It’s obviously a new idea. In concept, I’m open to it. But I’ve got to rely on the commission to come up with a view on that”.
Progress will depend on battling the influence of ‘Big Food’
Looking at the political response to this week’s report, one observer summed it up with: “Words are one thing, results are another”. And so it begs the question of what keeps preventing the strong words about the duopoly problem from being converted into real action?
It seems that the $25 billion sector has a lot of political clout. We learnt last year, for example, from Guyon Espiner’s excellent RNZ series on corporate lobbyists, that some highly influential political figures are successfully pushing the duopoly’s agenda in the Beehive.
For example, Neale Jones and Mike Jaspers, of lobby firm Capital Government Relations, had worked, first, in the Beehive for Jacinda Ardern, and then lobbied the Beehive on behalf of supermarket clients once they had left. Similarly, Ellen Read, who was Ardern’s deputy chief press secretary left the Beehive to work as the head of public relations for Woolworths.
Another lobbyist, Andrew Kirton, lobbied for supermarkets, but went through the revolving door the other way. Espiner outlined how Kirton had lined up dinners between Cabinet ministers and Woolworths executives and then “Kirton resigned from the lobbying firm just one day before he was announced as chief of staff for Prime Minister Chris Hipkins on 1 February 2023″.
Other revelations from Espiner were about the Commerce Commission hiring lobbying-PR firm SenateSHJ to help them with supermarket reforms, despite the lobbying firm having a conflict of interest in their own work for supermarkets.
There are obviously plenty of influential individuals and entities the supermarket giants are currently using to keep regulation and reform away. For example, this week’s report details how Foodstuffs North Island employs the Infometrics consultancy firm to put out a monthly index of the prices that the supermarkets have to pay their suppliers. This “Grocery Supply Cost Index” is put out to the media by Infometrics to show that the supermarkets have to pay very high prices to their suppliers.
However, the Grocery Commissioner essentially suggests that this is propaganda rather than credible evidence. Infometrics uses a methodology that ignores the billions of dollars of trade discounts and rebates forced on the suppliers. Commenting on the Grocery Commissioner’s objection to Infometric’s reports, BusinessDesk’s Pattrick Smellie concludes: “The report stops short of calling this lying. Let’s settle for embarrassing.”
That seems to be a valuable summary of how oligopolistic markets remain unregulated and escaping reform. An embarrassing big con is being sold to New Zealanders. Hopefully the politicians and public soon learn to look beyond the duopoly’s plea to only have tweaks made to their dominance, and then genuine reform can come.
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