Analysis by Bryce Edwards.
The supermarket sector is finally about to receive some serious government intervention. Following a scathing report from the Commerce Commission, it’s now almost inevitable that the Labour Government is going to have to introduce some major changes to this vital but uncompetitive retail sector. And these moves are likely to be popular.
The report, released on Thursday, met with almost universal praise and celebration. And it surprised everyone with just how scathing it was about the supermarkets, and how radical its early recommendations are.
The first key point the supermarket sector report makes, is that the current groceries sector is utterly broken. It paints a picture of a Foodstuffs and Woolworths duopoly making super-profits – in excess of 20 per cent return on their capital – by ripping off both food suppliers and customers. The report found that food prices are the sixth highest in the OECD. Staff, too, are heavily exploited to help make billions of dollars in profits.
The second key point is the possible suite of reforms that will be necessary to fix the sector. These range from encouraging supermarkets to reform themselves, through to serious state intervention to break up the mega-entities that control the market, or even the state setting up a third supermarket chain (in the way that KiwiBank was introduced).
One of the first media articles on the report on Thursday explained that expectations for the announcement were quite low, and some were ready to be disappointed – see Hamish Rutherford’s The Commerce Commission heaps pressure on Government to deliver supermarket changes (paywalled). He says that “The supermarkets appeared shocked by the report.”
Rutherford summed up the reform options: “The Commerce Commission’s recommendations for measures to improve wholesale competition are a spectrum, ranging from modest changes on a voluntary basis, to creating a new wholesaler or even forcing the break-up of the groups into retail and wholesale. Aimed at attracting a new major retailer into the New Zealand market, it could be accompanied by forcing the supermarket to sell off certain sites to a new player.”
The mood for a more interventionist state in broken markets
In the above article, Rutherford also explains that such a scathing and radical report really puts pressure on the Labour Government and the Commerce and Consumer Affairs Minister David Clark to actually carry out some substantial reforms. Rutherford concludes: “with such a clear verdict of a duopoly exercising market power in such a mammoth sector, the Government will quickly need to find a suitable response.”
Stuff newspapers political editor Luke Malpass also emphasised how the report squarely puts the ball into the Government’s court, making it almost impossible for them to avoid doing something big. He says that normally these types of reports take the pressure off governments: “Market studies are great for governments. If nothing else, a Commerce Commission probe creates the appearance of government action long before the action happens”, but given the tenor of this particular report, “the Government will have to actually do something this time around” – see: Labour’s $22 billion supermarket problem — and opportunity.
According to Malpass, David Clark is a good fit for this role (better than the ill-fated Health portfolio), and he’s inclined towards proper reform: “His view is simple: Labour campaigned on doing this, he thinks that there is a mood for real change, and now it will be up to the Government to get on with it.”
Government intervention is also likely to be substantial, Malpass points out, because there’s now a strong public philosophical mood for the state to act: “This political landscape has changed massively from five years ago. There seems to be a pretty good public appetite for the Government to sort some of these things out. If anything, Labour’s only downside risk here is not doing enough. And if Covid has taught us anything, it’s that – rightly or wrongly – Kiwis are quite happy for governments to intervene in the right circumstances. In the coming cost-of-living political war, the party that convinces voters it is the one on their side will be rewarded.”
This mood for a bigger and more interventionist state, especially in regard to the broken supermarket sector, is very well examined by Max Rashbrooke in his column, Supermarket prices: Politicians have dropped the ball, which begins like this: “The forensic evisceration on Thursday of our uncompetitive supermarket duopoly is a landmark moment, a sign of shifting attitudes towards capitalism – and a massive test for Commerce Minister David Clark.”
According to Rashbrooke, Clark has a big job ahead, and will have to resist “a determined lobbying campaign by the supermarket duo”, but ultimately will achieve his own redemption if he can create a legacy as the Minister “who broke up the big two”. And the fact that he even has this task is a sign that the “laissez-faire thinking” of the past that allowed the market to evolve into a duopoly is out of fashion.
Rashbrooke points to other broken sectors that will also need reform, including electricity, building supplies (where “Fletchers utterly dominates”), petrol, and banking. And he suggests that in the new environment, National is likely to be onboard with radical reform, “because conservatives need capitalism to work properly and retain the public’s support.”
Economist Cameron Bagrie also thinks the Government has a strong incentive to go hard on supermarkets, and that the construction sector and banking should be next – see: Supermarkets are sitting ducks for pro-competition regulation (paywalled). He notes the Government is building up the Commerce Commission’s capacity, budgeting “$30.4 million extra for the commission over three years, and $13.9m per year thereafter.”
Bagrie believes that reform of the grocery sector will be favoured by Government because rising inflation is “not likely to be economically or voter-friendly”, and “Moving on supermarkets could help around the edges to contain inflation.”
Media commentators are also keen for the Government to deal to the supermarkets. Heather du Plessis-Allan says she’s hoping for big reforms to increase supermarket competition but is not sure this will happen, especially given that promised reforms in the petrol market don’t appear to have worked – see: We pay too much for groceries.
She says reform will be difficult, but electorally rewarding: “The easy option is to force the supermarket chains to supply a third player with wholesale groceries at reasonable prices so they can compete. The hard option is force the supermarket chains to sell off some of their stores or brands. Either way, this will kick up a storm in the sector. The Government will buy itself a fight. Does it have the courage? I’d like to see it go hard. I think there’s public support from frustrated shoppers.”
Similarly, Kerre McIvor is sceptical of reform eventuating, but says it would be popular: “waving a stick at big international companies and millionaire supermarket owners is good for votes from families doing it tough, and if this Government knows anything, it’s how to capitalise on populist causes. The big two would be sensible to take this report, and its recommendations, very seriously” – see: The supermarkets should take ComCom report seriously (paywalled).
Newspaper editorials are also favourable to reform. The New Zealand Herald’s editorial said the report findings “are unsurprising”, but “What’s important is what happens next” – see: Smashing the supermarket duopoly is a safe bet for Labour (paywalled). The newspaper says “with inflation on the way voters are sure to be supportive of any measures to increase competition.”
The Otago Daily Times argues that the reforms must be radical: “consumers, suppliers, and potential new retailers will be expecting the Government to do something more than tinker” – see: Supermarket changes unknown.
Although a lot of reform conversation is about helping assist a third supermarket chain into the market, the ODT says greater regulation of current grocery store pricing is also required: “Questions are already being raised about whether an extra big player or two would necessarily make the improvement sought without some sort of control of the margins on grocery items.”
Marketing lecturer Robert Hamlin, from the University of Otago, is also being reported as advocating regulation above what is required to get a third grocery chain into the market – see RNZ’s Strong regulation needed to counter supermarket price gouging – marketing expert.
He also believes that government price controls must be introduced, arguing supermarkets are “like a power company, they’re essential to modern living, and it’s important that they should be regulated to make sure that they actually do deliver”. Hamlin argues there’s a need for a dedicated senior Minister in charge of supermarkets, rather than just an independent regulator: “I would imagine there will be a call for an independent regulatory authority… that would be a very poor idea because I doubt if it would stay independent for very long – that it would be captured by the people it’s supposed to be being regulated by.”
Calls for a Telecom-style breakup of the supermarket duopoly
Many commentators are drawing parallels between the state of the supermarkets and how the Telecom monopoly was broken up in the mid-2000s. For the best argument in this regard, see Ernie Newman’s column, Supermarkets – the Telecom parallel (paywalled).
Newman, who was once the head of the Technology Users Association of NZ, and now advises the Food and Grocery Council, is emphatic about the need for a break-up being forced on the supermarkets, starting his column like this: “Like cracking open an egg and finding it rotten, the Commerce Commission has exposed in one dramatic report the ugly reality of market power abuse in our supermarket sector.”
He argues that the split up of Telecom and major reforms to the telecommunications market quickly brought about huge benefits for the consumer, and the same can happen with groceries: “So can consumers, and grocery suppliers, expect a similar outcome from this action against supermarkets? Emphatically yes. The core problem is the same – blatant abuse of extreme market power. The detail is different, but arguably less challenging in the distribution sector which is about trucks and real estate, unlike the technology sector grappling with massive and continual technological changes.”
However, business journalist Bernard Hickey is much less sure. He says the Commerce Commission report is “a detailed, meticulous and cracking read” but dissents from the growing chorus who suggest big structural reforms could be easily implemented – see: Don’t bet on a breakup.
Here’s Hickey’s main point: “Unlike Telecom, which was a locally-listed and a former state-owned network monopoly that could be relatively easily broken in two with legislation, a share split and a couple of minor regulatory tweaks, the two supermarket chains’ ownership structures (two cooperatives with individually owned supermarkets and an Australian-owned corporate) mean they would both be fiendishly complicated to unravel and replicate with legislation and simple corporate action.”
Land reform to help new supermarket rivals
One of Hickey’s preferred fixes involves helping foreign chains enter the market with “accelerated RMA help for [property] sites or overseas investment exemptions, which should be expedited.”
This is because the Commerce Commission report shines a light on the problem for new supermarket companies face acquiring property for stores. Suitable land is hard to get, and this is partly due to a lot of council and resource management rules and processes, but also because of strategic actions by the existing grocery companies in blocking site availability. This is all explored in Dileepa Fonseka’s Pulling out all the stops to get a new supermarket player into the market.
For more on this, see Eric Crampton’s Why it’s hard to open a supermarket in NZ. He explains that a lot of suitable sites for new supermarkets have contracts that prevent them being used for this purpose: “Existing supermarkets either own those sites already, or previously owned them and sold them off with encumbrances on the title restricting any future owner against using the site as a supermarket, or the site is part of an existing shopping centre where the supermarket has an exclusivity restriction.”
See also, Crampton’s column, KiwiGrocer is a classic Catch-22.
KiwiShop: “Where everyone is at the front of the queue”
Probably the most contentious and interesting reform option put forward by the Commerce Commission is the government establishment of a supermarket chain. Max Rashbrooke comments on this, saying “Though I can’t see the state running a supermarket well in the long term, this could be the short-term circuit breaker we need. The risks would require careful assessment, but the benefits to consumers and suppliers would probably be substantial.”
For a much more enthusiastic embrace of this idea, see Martyn Bradbury’s Why we urgently need a State owned supermarket.
The way that such a “KiwiShop” would operate is sketched out further today by marketing specialist Associate Professor Mike Lee of the University of Auckland, who says that such an idea could be as successful as KiwiBank, but operating more as a not-for-profit public service – see: Subsidies not soft drinks: The brave new world of Kiwishop (paywalled).
He argues that when the market fails, the government needs to enter: “Governments need to step in when systems fail, or when the profit incentive of the major players result in poor levels of wellbeing for the population. That’s why governments get involved in public housing, public transport, public education, and public health. So why not try public retailing?”
Lee envisages a KiwiShop that employs welfare beneficiaries, trains them up, prioritises the sale of New Zealand goods, and doesn’t sell harmful products (such as cigarettes and soft drinks).
In contrast, Herald business commentator Kate MacNamara says the KiwiShop-type idea is “risible”: “For one thing, it conjures alarming visions of the Prime Minister’s chiding hand on your supermarket trolley steering it firmly away from the biscuit aisle (renamed ‘occasional treats’ and cordoned off before mid-afternoon)” – see: The problem of supermarkets’ power and Government’s attitude to competition (paywalled).
Chris Trotter says it’s not going to happen anyhow. He says that David Clark and his colleagues are allergic to such “democratic socialist” ideas, which would be seen as too much of a threat to capitalism – see: The Sin of cheapness.
Finally, not everyone is convinced that the supermarket sector is even broken and in need of reform. Mike Hosking says that the “report found fault for no other reason than all reports find fault”, and the problems of the current market are because: “It’s not easy doing business at the bottom of the world with a small population and a weird geography” – see: Nothing will change from the supermarket inquiry.