Government responds to damning supermarket report on high costs

The extent of the lack of competition the Commerce Commission has identified in the supermarket sector means that more drastic action is likely, commentators say.

The report, released on Thursday morning, identified significant problems in the supermarket sector.

It said New Zealand shoppers were paying high prices by international standards, and supermarkets were making high profits.

Commerce and Consumer Affairs Minister David Clark​ said the report confirmed the feelings of many New Zealanders – that the prices of their grocery items have grown unreasonably high.

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“There has been a historic lack of action in the supermarket sector, but we have all had a sense that this has been an issue for a long time. This report today really just confirms that.”

Clark said he hoped the duopoly of Foodstuffs and Woolworths would read the report carefully, as “their reputation depends on them giving Kiwis a fair deal”.

Though Clark did not commit to one of the suggestions in the draft report of creating a state-owned supermarket chain, he did say that the report was an opportunity for the sector to change.

“We have seen in this report the extraordinary profits made by this sector over a period of time compared to international settings.”

Clark said he was determined to follow through on the recommendations of the final report, which will be released in November.

The report said supermarkets were pushing “excess risks, costs and uncertainty” onto suppliers, who had to agree because of the power of the supermarket duopoly.

It suggested a range of measures to improve competition at the retail and wholesale level, culminating in last-resort options such as a government-backed grocery retailer and requiring supermarkets to sell shops.

Economist Brad Olsen, of Infometrics, said some of the responses suggested by the Commerce Commission were tougher than had been expected.

But he said the report’s findings, including that the main supermarket retailers were not competing with each other on price, indicated a significant problem.

That meant there was much stronger impetus for change than in the earlier market study on fuel. “This is a much more compelling call for action and change to deliver cheaper prices to households.”

He said that if the active measures proposed were pursued, the Government would have to weigh up at which point it stepped back, once the desired level of competition was there.

ANZ chief economist Sharon Zollner said food prices had been steadily rising, and that was a trend that was likely to continue.

That price inflation was felt most keenly by low-income households, so work to lower supermarket prices would be a step towards reducing inequality.

The National Party’s spokesman for economic development, Todd McClay​, said the Government would need to be careful not to “rush off and legislate”. Doing so could have unintended consequences and not improve the situation for consumers, he said.

“What I'd want to do is wait and see where they finally end up with recommendations around legislative changes and assess those.”

He said profits seemed to be high, but that was true in other sectors, too.

“There are some that make the case [that] because we're a smaller economy … compared to many others, [that] makes it harder for there to be a lot of players in the marketplace. However, when it comes to food, I don't accept that.”

He said the Commerce Commission did not seem to have the resource to follow through.

“The Government gave a monopoly to this duopoly during lockdown last year, when only the large two supermarket chains could open … You're either in favour of competition or you're not. And actually competition in the marketplace is a very, very good thing.

“But I think we need to allow the Commerce Commission to finish its work. Because any changes made need to actually deliver for the consumer, as opposed to what's happened around the fuel inquiry – for the motorists that still pay too much at the pump, it feels like window dressing.”

‘Barrier to better health’

Sommer Kapitan, a senior lecturer of marketing at AUT University, said the commission highlighted what any consumer could have said: “Grocery prices are too high.”

“They are too high a percentage of most New Zealanders’ weekly budgets, among the highest in the OECD,” she said.

“Price and economic considerations are quite simply the main driver of any consumer behaviour, and that’s the biggest worry for consumer psychologists. That means Kiwis are having to make choices about food product type, like healthier food, based on price versus preference.

“Price is the first nudge towards better, healthier eating, and with obesity and diet-related disease a key concern in New Zealand, high prices are a barrier to better health for most Kiwis.

“The Government must act now to correct this imbalance and make good quality, healthy unprocessed wholefoods a more affordable price for all New Zealanders.”

She said there was a brand image issue for supermarkets.

“These supermarkets are now known widely as being expensive and charging high prices; the reputation for being too pricey is set, as 90 per cent of consumers buy from these two main players.

“The moment a new, lower-price food retailer comes into the market, it can take advantage of the ill will of consumers to rapidly grab market share from the duopoly. This will pose a real challenge to the existing food retail marketplace as the power dynamic shifts.

“Whether a new supermarket actually has lower prices, Kiwis can be anticipated to flock to any brand that advertises based on quality with lower price.”

Dairy, lamb prices jar ‘sense of fair play’

Bodo Lang, a senior lecturer in the University of Auckland's marketing department, said high prices had become a feature of New Zealanders’ lives.

“Looking at some of the draft results, the only surprise is that anybody would be surprised by the results. The Commerce Commission has found that grocery prices are persistently highly and are at the upper end of international comparisons.

“Another large-scale, nationwide grocery retailer is needed to reduce the pressure that excessive grocery prices put on all New Zealanders but particularly on those on lower incomes.

“The supermarket duopoly of Foodstuffs and Woolworths NZ is, of course, only part of the problem. There are other factors that contribute to some of the high grocery prices in New Zealand.

“One of them in particular jars Kiwis’ sense of fair play: paying export prices for primary products, such as dairy, beef or lamb, that are grown in New Zealand and for which all New Zealanders pay the environmental bills.

“However, there are also other issues that contribute to high grocery prices, which are difficult to overcome. These are the small size of the New Zealand market and its physical location in relation to where many foods are produced.

“While New Zealanders are unlikely to ever enjoy highly competitive prices, implementing some of the recommendations will go some way to reduce the burden of high grocery prices faced by all New Zealanders.”