Labour's $22 billion supermarket problem — and opportunity

Abigail Dougherty/Stuff
Commerce and Consumer Affairs Minister David Clark comments on the Commerce Commission's retail grocery sector draft report.

OPINION: $22 billion. It’s a lot of money. It’s about $7b more than the projected deficit this year. It’s over 22 times more than the ill-conceived cycle bridge over Auckland harbour. It’s about 11 times what the Government plans to spend on the entire Covid-19 vaccine programme.

It is how much New Zealanders spend on groceries each year and, according to the Commerce Commission, it’s too much.

The commission has now made this figure – or at least part of it – Labour’s problem. Its draft report, published on Thursday, reckons New Zealanders are being ripped off and are buying the sixth most expensive groceries in the OECD, a club of advanced economies.

Prices, and profits, in the supermarket sector are too high, the Commerce Commission has said.
ALDEN WILLIAMS/STUFF
Prices, and profits, in the supermarket sector are too high, the Commerce Commission has said.

One of the key figures pointed to by the commission is that the supermarket owners – Woolworths NZ, Foodstuffs North Island and Foodstuffs South Island – have earned between a 21 per cent and 24 per cent return on average capital employed, compared with a benchmark that represents a normal (risk adjusted) rate of return called the “weighted average cost of capital”. The commission dryly notes that the returns being made by the supermarkets are “in excess of our estimate of WACC for these companies, which is between 4.6 per cent and 6.1 per cent”.

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Commerce Commission reports – and those of competition regulators worldwide – are always challenging reading for politicians, the sector and interested lay people alike. That’s because competition regulators effectively have to come to a view about how much whatever it is should cost, then work backwards from that to look at market structure, company and consumer behaviour, and what should be changed to achieve their desired price.

Commerce Minister David Clark answers questions in Auckland on the Commerce Commission report on supermarkets.
Abigail Dougherty/Stuff
Commerce Minister David Clark answers questions in Auckland on the Commerce Commission report on supermarkets.

That means competition regulator reports here and elsewhere can, and should, be viewed with a degree of suspicion. They may well be robust, but they certainly need to be raked over and their assumptions prodded. This one appears to have been informed by a lot of real-world data from the sector.

It also means that, if significant lack of competition is found – as in this instance – the Government has to decide whether it has the will to sort it out.

The commission has flagged a bunch of potential actions – the most serious one being the break-up of the supermarket duopoly – that will put a significant amount on pressure of the Government if they become preferred options in the final report due in November.

Where did this study come from anyway? Labour promised it in the leadup to the last election: at the time it gave the appearance of cracking down on the big bad supermarkets, and a strong justification for doing it after the election.

Supermarkets will no doubt begin lobbying in short order.
Karen Coltman/Stuff
Supermarkets will no doubt begin lobbying in short order.

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 now Labour has a problem. According to both the Commerce Commission and the experience of just about anyone who has shopped in other countries, the supermarkets have been using their market power to make off like bandits. That means the Government will have to actually do something this time around.

One of the most effective issues that National – and ACT – can grab on to is the rise in the cost of living. And there is definitely something to it. Quite apart from the fact that inflation is now running warm at a touch over 3 per cent, and most bank economists expect it to rise to over 4 per cent, it is clear that various prices are going up.

As ever, the political challenge will be ensuring that the blame is laid at the right feet: for the Government it will be Covid-19, international markets and all the regulatory baddies it inherited from the Nats. For the Opposition, it will be costs piled on to everything by Labour.

Both have a point: the global gyrations are clearly real. So too are the Government imposts: increased petrol taxes, higher-end income taxes, removing interest tax deductions from rental properties. A lack of immigration is driving labour costs up. Then there’s the extra cost for employers of new holidays, sick leave and so on. Obviously the merits of all of these can be strongly argued – but they are extra costs.

David Clark – formerly health minister before some ill-judged bike-riding and a lockdown trip to the beach – will be the minister in charge of this. He resigned last July before being elevated back to the Cabinet after the election.

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. Clark – a Presbyterian minister and former Treasury official – has been fascinated by market power by many years. In just about every way, his current ministerial portfolio is a better fit for him than health ever was. After last year’s debacle, it will be a big test of whether he can step up into being a strong frontline minister.

Whether the policy response ends up being at the lighter end, such as a code of conduct with the threat of sterner legislation lurking in the background, or structural separation of wholesale and retail arms of the supermarkets, or even splitting up the companies, landing the changes would be a significant part of Clark’s political resurrection.

More broadly within the Government, there is a determination to make groceries cheaper.

No doubt lobbying from all sides – suppliers, supermarkets, consumer groups – will start in earnest next week.

The interesting question now will be how the opposition parties will line up on this, particularly National. Doing something thatfits with the narrative the party is trying – not too successfully – to build is one thing. But the Government forcibly breaking up companies or compelling them to sell goods at certain prices? Tough sell. Who could be next?

The various supermarket brands owned by Woolworths NZ and Foodstuffs, from the Commerce Commission report.
SUPPLIED
The various supermarket brands owned by Woolworths NZ and Foodstuffs, from the Commerce Commission report.

And it’s not a straightforward issue: suppliers claim they are being squeezed, and stories abound. But shouldn’t that be making things cheaper for consumers?

ACT, often mistaken for a party of the top end of town, said the commission’s report was a waste of time because everyone knew the market was uncompetitive. However, it won’t at this stage support the smashing of property rights that would necessarily be entailed by forcibly splitting up the companies.

Lots of things cost too much in New Zealand, for various reasons. In a small nation, with good institutions, the cost of living should be much lower than it is.

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.