Don’t hold your breathe.
Out of 38 OECD countries New Zealand is the fifth highest in terms of grocery spend per capita.
Our families spend more than $22 billion a year at supermarkets and grocery stores, with an average spend of $234 a week … their second largest household expense.
The Commerce Commission was asked to investigate grocery prices and has just issued its report and recommendations on this situation.
The bottom line: With Woolworths NZ (more than 180 Countdown stores) and Foodstuffs (more than 400 New World, PAK’nSAVE, Four Square stores) so dominant, competition isn’t working and we pay higher prices than we should as a consequence.
The Commission’s key findings:
- There is a market duopoly with a fringe of other competitors;
- The intensity of competition between the major grocery retailers is muted and does not reflect workable competition;
- Entry and expansion by other grocery retailers is difficult (the major grocery retailers lodge restrictive covenants on land and include exclusivity covenants in leases to prevent their rivals from opening stores);
- The profitability of the major grocery retailers appears higher than expected under workable competition (more than twice the level the Commission considers ‘normal’);
- Prices appear high by international standards (“the fifth most expensive grocery market in the OECD”);
- The level of innovation appears lower than expected under workable competition;
- Pricing, promotional and loyalty practices are limiting consumers’ ability to make informed decisions; and
- Competition is not working well for many suppliers due to an imbalance in bargaining power. The major grocery retailers can use their buying power to shift costs and risks onto suppliers, insist upon uncertain terms of supply, and limit suppliers’ dealings with other grocery retailers.
And they recommend:
- Freeing up land for supermarket development, through changes to planning laws and prohibiting the use of restrictive covenants on land and exclusivity covenants in leases;
- The major grocery retailers offering wholesale supply to other grocery retailers on a voluntary basis, subject to some limited regulatory measures;
- Addressing imbalances in bargaining power between the major grocery retailers and many of their suppliers by introducing a mandatory grocery code of conduct, considering enabling collective bargaining by some suppliers, and strengthening the Fair Trading Act’s business-to- business unfair contract terms provisions; and
- Helping consumers make more informed purchasing decisions and enhancing competition at the retail level, by introducing mandatory unit pricing, as well as asking the major retailers to ensure that their pricing and promotional practices, and the terms and conditions relating to their loyalty programmes, are simple and easy to understand.
But even with changes to curb anti-competitive practices, the Commission still concludes that competition is not likely :
“…it appears unlikely under current market conditions that any new grocery retailers (or existing grocery retailers seeking to expand) will be able to achieve scale and geographic coverage comparable with the major grocery retailers in the foreseeable future. Without this scale and coverage, other grocery retailers are unable to compete effectively for the majority of shopping missions.”
The ball is now in the Government’s Court. In receiving the report Commerce and Consumer Affairs Minister David Clark was effusive in pro-consumer rhetoric but not terribly precise – with the exception of restrictive covenants – about which of the Commission’s recommendations would be pursued or adopted.
“From today, we will immediately progress work to address the Commission’s recommendations,” he said.
“This includes exploring how a Code of Conduct between major retailers and suppliers could be developed and looking at the role a dedicated regulator for the grocery sector could play.
“The Commission’s findings indicate that restrictive covenants over land are a major barrier to supermarkets accessing new sites, so I want to ban these covenants being used to stop competition.”
“We want to see material change in the nature of the sector. If that does not happen, we will look at other options,” Clark said, indicating that three years was a suitable time frame to confirm whether the industry was reforming adequately.
So Clark will be waiting to see how responsive the two major players are – on a voluntary basis – to the Commission recommendations. Meantime, don’t expect to see much change in your grocery bill.