Supermarkets have us by the wallet

The Commerce Commission has examined the situation and concluded that there is not enough competition amongst New Zealand supermarkets. 

I’m a supermarket addict. Almost always the first place I got when I get off the international flights I used to take, is to a supermarket. There is nothing that speaks to me more about the culture of a country than its food and supermarkets are endlessly fascinating. 

It’s been a lifetime of visiting supermarkets here too, originally tagging along with my dad to meetings with Foodtown in the 1980s. Back then Foodtown were the kings of retail in Auckland and so much more impressive than what you saw in the provinces.

Foodtown is one of the banners of yore, along with Write Price, 3 Guys, Big Fresh, Woolworths and Price Chopper. Each of these was either abandoned as a format and rebranded or taken over by Foodstuffs (New World, Pak’nSave and Four Square) or Countdown. 

The last of the acquisitions began in 2001 when Countdown sought to acquire Woolworths. The Commerce Commission approved the merger, and after various legal appeals it stood.

Twenty years on and the Commerce Commission has examined the situation and concluded that there is not enough competition amongst NZ supermarkets. The profit margins they reveal make it difficult to reach any other conclusion.

Where you have a small number of look-alike businesses that dominate a sector then there are always fingers being pointed at these companies. It’s a clear regulatory failure and one that can be seen with service stations, banks and supermarkets. If you changed the sign on the door of these businesses, the customers probably wouldn’t notice. These are cozy cartels that don’t engage in vigorous competitive behavior that would make them all poorer. They don’t need to collude to do this, just to monitor their competitors’ prices, which you can now do on your smartphone in about 15 seconds.

The relationship of both suppliers and customers to the supermarket is based on the ‘balance of power’. 

If you are Goodman Fielder, who supply bread brands Molenberg and Vogel’s, you are indispensable, and the supermarket actually likes that they’re relatively expensive products. They are simply margin traders and make more money from selling more expensive lines. There are cheaper options but brand power, quality and consistency mean big brands do OK. If you’re a new bread maker, you better have either the cheapest bread offer or some deeply compelling new product. If not the supermarkets and consumers don’t really need you and you’ll struggle to get on the shelf. 

I know this as I supply Yummy apples, which every supermarket wants and Paynter’s Cider, which nobody wants.

Supermarkets also present a ‘basket of goods’ conundrum. If you’re buying a pair of shoes it’s easy to compare and contrast the options, while a basket of perhaps 50 items from the supermarket is a much more complex proposition. It’s likely they have some excellent specials but may well markup other items to compensate for their loss of earnings. A consumer has options available to work out how much they spend on power, fuel or insurance, but in most cases won’t know what their food bill is until the checkout operator makes the announcement.

Land bankers 

The only power the consumer wields is the ability to shop elsewhere. In truth we’re all either too lazy or too busy to bother, so we just pay the fine and get on with our lives. 

Supermarkets know that only about 20% of customers can be lured by weekly promotions and that is more powerful in urban centres where the density of supermarkets allows this choice with minimum of inconvenience. I watch prices and you can generally get a better deal in Auckland than you can do in Hawke’s Bay as the competition is more intense.

Supermarkets don’t sell things so much as manage logistics and real estate. They will acquire land or establish covenants on properties such that competitive businesses can’t become established. 

There are many examples of this in Hawke’s Bay. When Countdown acquired Woolworths they were left with two stores within a stone’s throw of each other in central Napier. They were never going to sell one as, at the time, Foodstuffs had no central city stores and Countdown were keen that their local monopoly remained. 

Havelock North is the same, where Foodstuffs have a local monopoly with New World, but a larger store has been in works for years. They purchased the Nimon site in Martin Place some years ago, but nothing has happened there. They now own the Tumu ITM site on Havelock Road where a new store will likely be built. One thing you can be certain of is that they will not allow Countdown to become established on either their old site, or in Martin Place. They’d rather turn them into carparks that let this happen. 

Supermarkets’ competitive advantage lies in their store locations because we all live busy lives and mostly shop at the closest store, all the while complaining about their prices. 

The supermarkets are just playing by the rules that currently exist. So, let’s change them. 

Government should prohibit the acquisition of land by a supermarket within say 3kms of an existing store, unless they are seeking to build a new one. They should also require them to divest by blind tender, their old stores or any land inactively held for a period of time. They also need to restrict their activities on any land to supermarkets’ core business or they will build retirement villages, fast food clusters or whatever is required to keep their competitors out. 

Billionaire and some-time New Zealander, Peter Thiel says ‘competition is for losers’ and all businesses try to avoid it where they can.

Dealing with the property grab is probably the only effective change government can make to the retail landscape. 

Prices here to stay?

There are competitors that could change the competitive landscape. Arriving next winter is the first Costco in New Zealand. Costco are gargantuan big box stores that sell food, but also tyres for your SUV, coffins and toothpaste, 10 tubes at a time. Their prices are great, but they are not suited to everyday shopping and will likely only ever have a few stores in populous areas.

A more ominous threat are the small format German discounters Aldi and Lidl. The discounter experience is one of small format austerity. They are not so much supermarkets as selling machines. 

They sell most products off a pallet dumped in the store, there is little restocking, limited staff and often long queues at peak hours. There is a heavy reliance on prepackaged food for checkout efficiency. They also only carry about 1,500 stock keeping units (SKUs) whereas the local New World might have 20,000. Instead of 15 types of olives, you get a choice of black or green. This approach allows them to sell for about one third of the gross margins of mainstream retailers. You can expect every item in produce to be about $1 cheaper than in a conventional store. 

(Don’t get too excited though; rumours are that our small population and unfriendly geography isn’t attractive to them.) 

Conversely, there is pressure on Foodstuffs store owners to constantly seek better margins. A store owner seeking to sell up might squeeze a bit more out of customers for a year, make a fantastic profit and sell to an up-and-coming new franchisee for top dollar. The new owner will be up to their eyeballs in debt and, sympathy for the devil, they somehow need to extract even more from you to pay it off. So, there is continual pressure to maximise profit. 

A capitalist economy is efficient only where there is adequate competition. If the Commerce Commission is to be believed, that isn’t happing in our grocery sector. I’m always slow to cry ‘Regulate!’ but with only two major retailers it would seem necessary. 

Be cautious with your expectations though. Smart people in the private sector are usually one step ahead of the regulators or will weave their way through the words and find a loophole. History has also shown that governments of all brands have consistently failed to tame the profits of power companies or banks who have similar dynamics. That shouldn’t stop us trying though. 

Even if we get the regulation right, food will never be cheap in New Zealand. 

We have relatively high costs of labour, land and energy as well challenging distribution networks, a volatile climate, many small producers and a small population. When cauliflower is $12, it’s likely the grower is losing money and the remnants of a tropical depression have turned their fields into a quagmire. Whereas in some continental countries you can set your watch by rainfall events. 

And while we might complain about prices, the quality of our produce, meat, dairy, wine or restaurants is as good as I’ve seen anywhere. 

I’m happy to pay the prices, but cheaper is better and I would like the profits to fall more equitably.