Nick Hogendijk, Managing Partner Hexis Quadrant
In a world where grocery shopping is an integral part of our lives, the idea of competition and choice should be a given. However, for smaller countries like New Zealand, with a population of 5.1 million, breaking the stranglehold of a grocery duopoly can be a daunting task.
In this article, we'll explore what it would take to disrupt the status quo and introduce healthy competition in such a market. We'll discuss the role of government intervention, access to land and sites for stores, the development of a sustainable supply chain, the financial challenges involved, and the impact of high inflation and a costly environment. The goal? To provide consumers with lower grocery prices in the long term.
Government Intervention
One of the first and most critical steps in breaking the grocery duopoly is government intervention. In a small country with a limited population, the market may not be robust enough to naturally foster competition. Therefore, the government must step in to level the playing field. This intervention can take several forms, such as implementing policies encouraging new market entrants, breaking up monopolistic practices, and ensuring fair competition. A lot of this has already been implemented over the past few years, yet still, New Zealand consumers are seeing little change.
On the surface, one effective approach is to set up a regulatory authority that monitors and enforces competition in the grocery sector. This is now in place with Pierre van Heeden being appointed to the position of Grocery Commissioner. His broad-reaching responsibilities include having the authority to oversee market dynamics, investigate anti-competitive behaviour by retailers and suppliers, and enforce penalties when necessary.
If the newly appointed government wanted to take a more powerful stance, they could look to provide financial incentives, like grants or tax breaks, to encourage new players to enter the market, be they local businesses of foreign entrants. These incentives would help offset the high start-up costs and attract potential competitors.
The recently announced Foodstuffs merger adds another degree of complexity to the New Zealand grocery sector. A national Foodstuffs outfit will have a highly dominant market share worth approximately 65 percent of the New Zealand grocery market and almost 68 percent of the 768 stores it and Woolworths New Zealand operate in New Zealand. Even Woolworths New Zealand must be looking at this and starting to work on a strategy to protect their business from a company that will dwarf them in size, scale, and share of supplier and consumer wallets.
It is not up for debate that Foodstuffs is an incredibly well-run business. Although I am uncertain of how this is good for competition, as it will make the already impressive Foodstuffs outfit even more so. But at what cost to consumers and suppliers? Foodstuffs will be able to streamline its back office further and drive greater efficiencies, in turn improving its already world-class margin, though none of this means cheaper prices at the register, and a more centralised buying model only serves to drive more focussed pressure on its supplier base.
With Foodstuffs now entering discussions with the Commerce Commission regarding a merger between its North and South operations to form one national Foodstuffs New Zealand organisation, there are multiple interventions the government could undertake if they gave the green light to the proposed merger. Such as:
Forcing a divestment of Foodstuffs Wholesale operations as part of the merger. However, this doesn’t reduce their retail presence and their overall demands for margins and investments to be maintained from suppliers. On the surface, this option would simply add another layer of cost to suppliers as they commence negotiating with a wholesaler (in addition to the retail operation) who, in turn, supplies the retailers.
Permitting the merger under the condition Foodstuffs separates its retail brands into two independent entities to create a third retailer could instantly stimulate competition. This would deliver three retailers with comparable market share; thus, competitive tension would increase.
Alternatively, forcing both Foodstuffs and Woolworths to separate their businesses into four retail businesses would have a similar effect to the previous option, though it would be a time-consuming, messy, and likely litigious process for the government to navigate.
In any event, the second and third of these options would likely receive stiff opposition from the duopoly and require significant courage and determination from the newly formed government to weather the inevitable legal storm they could expect from such actions.
Access to Land and Sites for Stores
A primary challenge any new entrant will face when entering the New Zealand grocery market will be access to land. Put simply, new grocery stores, warehouses, staff, inventory, and infrastructure will need to be developed. Finding suitable land and sites can be a significant challenge, especially when the existing duopoly carries a clear advantage in this area. To address this issue, the government can play a crucial role by designating and zoning areas for grocery store development. These areas should be strategically located to ensure accessibility for consumers and to break the duopoly's stranglehold on prime locations.
Additionally, the government can provide financial support or subsidies to encourage real estate developers to invest in grocery store properties in these designated zones. This could reduce the upfront costs for new entrants and provide them a competitive advantage.
Developing a Sustainable Supply Chain Model
A robust and efficient supply chain is the backbone of a successful grocery business. A new competitor will need to focus on developing a sustainable supply chain model that can rival the existing duopoly. This might involve building partnerships with local farmers and producers, implementing advanced inventory management systems, and ensuring timely and cost-effective distribution.
Collaboration with local farmers will not only support the local economy but also guarantee a fresh and diverse selection of local products. Investing in modern technology for inventory management will help minimise waste and reduce operational costs in the long term. Efficient distribution channels can cut down on transportation expenses, which can be a significant factor in a small country.
Financial Breakeven Point
Competing against the well-established duopoly in New Zealand will take work, and setting realistic expectations is essential. The likelihood is it will take a minimum of three to five years just to reach a financial breakeven point, given the significant and ongoing investment required. New entrants must be prepared for this prolonged investment period and initial losses. The government can provide financial support, like low-interest loans or grants, to ease this burden and encourage businesses to stay the course.
During this time, a new entrant would need to focus on building their brand, gaining consumer trust, and continually improving their operations and the efficiencies needed to remain sustainable. Pricing strategies will need to be competitive, even if it means operating at a loss in the early stages, to attract consumers away from the duopoly and to re-base pricing to a more acceptable level for New Zealand consumers.
Challenges of Breaking the Duopoly
The existing duopoly holding a (circa) 90 percent market share will not relinquish its dominance without a fight. Any new entrant will face significant challenges as they cut into the stranglehold of these established and well-run businesses. It should be expected that the duopoly would resort to various tactics to maintain their favourable market positions, such as aggressive pricing, exclusive supplier contracts, expanded private label offerings and aggressive marketing campaigns, as they are entitled to do so to protect their business.
To counter these challenges, the government's regulatory authority must be vigilant and swift in addressing anti-competitive behaviour. Policies and regulations exist to prevent such practices and will need to be monitored closely to protect the interests of any new entrant. Moreover, consumers will play a pivotal role by supporting the new entrant and demanding choice and diversity in the grocery market.
Providing Long-term Competition
The goal of breaking the grocery duopoly in New Zealand is to provide meaningful competition that leads to lower grocery prices for consumers in the long term. This can be achieved by fostering a sustainable environment for new entrants to thrive. It includes continuous government support, active consumer involvement, and a commitment to fair competition.
Any new competitor will need to focus on building a loyal customer base by offering high-quality products, competitive prices, and excellent customer service. Over time, they can expand their operations, innovate, and adapt to changing consumer preferences. In this way, they can gradually reduce the market share of the duopoly and create a more competitive grocery landscape.
Conclusion
Breaking the grocery duopoly in New Zealand is a complex task that most likely requires government intervention, access to suitable locations, a sustainable supply chain, and the ability to withstand financial challenges. Overcoming the dominance of Foodstuffs and Woolworths will demand perseverance and dedication. The government, consumers, and new entrants must work together to create a competitive grocery market that ultimately benefits consumers with lower prices and greater choices. In the end, a more competitive grocery landscape can lead to a healthier economy and improved living standards for all.
