Supermarket study hits a brick wall with New World, Pak 'n Save owners response

Commerce Commission chairwoman Anna Rawlings at a media briefing on the outcome of a draft report for its market study into the grocery sector.

OPINION: Food shoppers should be disheartened by Foodstuffs North Island’s initial response to the Commerce Commission’s draft report on grocery prices.

The co-operative said on Tuesday that it was presenting a “substantial action plan” for the industry.

I will run through the reasons why I believe the concessions Foodstuffs NI is offering are not as generous as they might seem.

But what is most important is that the New World and Pak ’n Save franchise owner is not budging on the watchdog’s core concern of over-pricing nor offering help to structurally reform the sector.

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That is 80 per cent of what the whole study has been about.

And why should Foodstuffs NI budge?

Despite the Commerce Commission fuelling consumers’ expectations of a big overhaul of the sector when it published its draft report in July, it is going to be very difficult for it or the Government to deliver change.

The supermarket chains should already be able to see how the review is likely to play out to a stalemate and if the commission wants to see a different result, it is going to have to get creative.

What Foodstuffs NI has offered

First, about those concessions.

A secondary goal of the market study – about 15 per cent of what the study was about – has been to consider whether new regulations are needed to protect supermarket suppliers from the market power of the two big chains.

The Food and Grocery Council and others have listed a litany of complaints, including suppliers having deductions unilaterally made to their invoices, having to pay for promotions and customer returns, and so on.

It even accused a New World store owner of threatening to “break people”.

On the face of it then, Foodstuffs North Island chief executive Chris Quin’s agreement to help “develop a consumer-focused grocery code for the industry to guide its dealings with suppliers and protect their freedom to support other retailers”, might seem like a big step forward.

But not really.

The reason is that the Commerce Commission and the Government can – and no doubt will – impose a mandatory code on the industry, overseen by an independent adjudicator with the power to fine them for rule breaches.

That much has been clear since Consumer Affairs Minister David Clark announced the review in November.

The Australian and British Governments already have well-oiled schemes of that nature in place and the New Zealand Government can simply cut and paste the bits it likes from each and impose its own code on the sector.

ComCom commissioner John Small says the regulator is not playing a game with supermarkets.

The Government does not need Foodstuffs’ consent or co-operation to do that, so the apparent concession from Quin is simply accepting the inevitable.

None of that is to say that Foodstuffs and Countdown might not have valid and worthwhile views to share about what should be in the code.

Foodstuffs NI is emphasising, for example, that it believes the code should be “consumer” focused.

What it is really saying by that is that it should not put all the boot on the foot of suppliers and that suppliers’ rights instead need to be balanced with ensuring supermarkets can drive a competitive deal on behalf of themselves and their customers.

That is a fair point of course.

Foodstuffs NI’s other significant competition concession appeared to be on the “3 per cent” issue of land covenants.

Foodstuffs NI has agreed to remove restrictions in property agreements it has entered into that sometimes prevent competitors, including small retailers, from opening shops near its stores.

Perhaps a bit more credit may be due here.

It is puzzling the Commerce Commission allowed such covenants to become common practice in the first place and, again, the writing has been on the wall since it published its draft report in July that it is going to change.

Foodstuffs NI’s offer to “immediately start a process” to remove them from existing agreements will presumably save the commission some paperwork and should be applauded.

But, really, it is probably just an acceptance of the inevitable.

The elephant in the shopping aisle

It is on the “80 per cent” issue of significantly shaking up duopoly control of the groceries market that Foodstuffs NI has pretty much pulled down the shutters.

The Commerce Commission raised the possibility that it might recommend “structurally separating” the two chains by requiring them to split their retail operations from their wholesale and distribution networks, and/or force them to sell off some of their stores to make way for a third entrant.

Another option it suggested was for the Government to essentially sponsor the entry of a new chain into the market.

Tough talk.

The threat of structural separation is one of the big sticks the Commerce Commission has been waving.
Abigail Dougherty/Stuff
The threat of structural separation is one of the big sticks the Commerce Commission has been waving.

But the idea of structural separation or forced store sales has real problems.

Structural separation worked in the broadband market after Chorus was split off from Telecom – and might also work in the electricity market – but only because broadband and electricity are straightforward products that are easy to regulate at the wholesale level.

Supermarket distribution centres, on the other hand, supply a vast range of different of products, often with variable qualities.

The Government could not set a regulated or contracted price for tarakihi, broccoli or cooked chicken quarters in the same way it has been able to set a contracted price for ultrafast broadband connections.

And if you can’t effectively regulate the wholesale operations, how can you ensure market power doesn’t simply switch to reside in that side of the market after any split?

How far is the Government willing to go?

It is worth bearing in mind here that even if the supermarket chains are making the excess profits that the commission believes they are, based on some of the figures in its draft report we may be talking about consumers paying less than an extra $10 a week on their weekly shop.

Even a few dollars a week add up of course but how far is it really prepared to go here?

What it seems the commission has been hoping to do is persuade the supermarkets to help it avoid the risks of a difficult and unpredictable intervention by voluntarily agreeing to supply their own stores and rival retailers with groceries on non-discriminatory terms.

And it is on this key issue that Foodstuffs NI seems to be saying ‘‘thanks but no thanks’’.

The Commerce Commission could simply pass the buck back to the Government by setting out options it might want to consider.
The Commerce Commission could simply pass the buck back to the Government by setting out options it might want to consider.

Or as it put it more diplomatically in the summary of its submission, “providing other retailers with access to its wholesale business raises a practical issue for Foodstuffs North Island as to how it might balance its current capacity with any incremental demand”.

“It also potentially raises costs to consumers, and risks agility and surety of the supply chain.

“It has not been possible for Foodstuffs NI to work through all of these sorts of issues in the time available – time and detailed consideration is required to progress this potential recommendation.”

Foodstuff NI suggested that if the Government wanted to encourage a new entrant into the market it should make changes to the Resource Management Act or Overseas Investment Act, which is about as clear as it could be that there would be no deal.

A way to up the pressure?

So where to for the commission from here?

It has riled up consumers by telling them in its draft report that supermarkets are making “persistently high profits”.

And it has heightened expectations that it might actually do something about that, by its talk of potentially forcing supermarkets to structurally separate or sell off stores.

What if it can’t now deliver?

Fortunately for the watchdog, that is not really its problem though.

The obvious course of action for the commission would be to recommend the new mandatory code setting out how supermarkets should deal with suppliers and also tackle the easy issues such as land covenants.

Then it could recommend to the Government that if it wanted to go further, it could consider structural separation, or a new state-owned supermarket chain even, and thereby simply pass the hot potato back to the politicians who asked for the market study in the first place.

The only alternative would seem to be for the commission to find some other way to ratchet-up the pressure on the supermarket chains to make a bigger voluntary move.

The only credible threat I can think of would be for the commission to suggest chucking some new bitter pill into the supplier code.

Foodstuffs NI said it would support a code that protected suppliers “freedom to support other retailers”.

In other words, supermarkets couldn’t dissuade a supplier from also selling their products through competitors.

But supposing the commission went a bit further than the Australian Competition and Consumer Commission and recommended supermarkets would risk big fines if they impeded their suppliers from selling direct to the public at the same prices that they were selling to supermarkets at wholesale?

If the public could buy a case of tinned tomatoes online from a supplier at about the same price that supermarkets could, might e-commerce and Kiwis’ love of a bulk-buying bargain help keep a lid on the profits of the supermarket duopoly?

Asked to clarify whether Foodstuffs NI was only accepting suppliers’ right to “support other retailers”, a spokesman said it “strongly supported suppliers having choice in their route to market and will only enter into exclusive arrangements where both parties agree and benefit”.

But to be clear, what I am suggesting here is that such exclusive arrangements might simply be disallowed.

Or maybe the Commerce Commission will come up with some better ideas of its own.