Opinion: That Dreaded Telecom Moment

OPINION | "Astonishingly, it's 40 years since I worked in the grocery sector – as Executive Director of the then Grocery Manufacturers' Association, precursor to today's Food and Grocery Council. But when I saw the Commerce Commission Market Study recently, random memories came flooding back. For example, I realised that I could recall the names, faces, and companies of every one of the eight men (yes, all-male) who made up the GMA's Governing Committee in those days.

More usefully, I had a flashback to a prescient presentation by our Chairman at the time to a GMA conference around 1983. He talked about the three "ages" the industry would go through in the coming years.

Back then, he said, we were in the "age of the manufacturer". Manufacturers held most of the cards because they controlled powerful brands that consumer demand kept on the shelves and had dual trading relationships with individual stores and wholesalers.

The next stage would be the "age of the retailer." Retailers would grab control by strengthening cooperative wholesalers, eliminating direct deals with manufacturers, and dominating the branding by focusing on house brands and generics.

The third stage would be "the age of the customer", at every level of product and service, customers spoilt for choice. Prices would become amazingly competitive, and the industry would have a dynamism as we had never experienced.

With four decades of hindsight, he was right about stages one and two. The wholesalers and their tied retailers have achieved a dominance that seems to have the suppliers shaking in their shoes.

But whatever happened to stage three – "the age of the customer?"

The Commerce Commission could hardly have been more damning. Supermarket profitability is "consistently and materially" above comparable countries. Competition between retailers is "weak," major retailers actively limit competition between their retail banners, and new entry has been non-existent since 2006. NZ ranks as one of the most expensive OECD grocery markets, and "excess returns" are made by the big two.

The only comparative country that has more expensive groceries in all categories is Iceland – perhaps understandable as it's not the most hospitable place to grow food.

These are not just vague opinions of the Commission. A massive volume of evidence backed up by 517 pages of painstakingly argued economic data is at the top of my reading pile.

So we're not in the "age of the consumer." Somehow the New Zealand grocery industry morphed into the "age of the retailer" but then stopped for a very long profitable break.

The surprising part is that nobody blew the whistle earlier. As consumers, we've all known that grocery prices are over the top compared internationally – we've seen that every time we've travelled. Most know that underlying the apparent competitive tension between the various banner groups, it's just two "Mr Bigs" that control our grocery market.

We've all known that behind the façade of loyalty schemes and constant price specialling, there is only one winner, and it isn't us. Sixty percent of our groceries, according to Nielsen, are purchased on promotion. The telecommunications sector openly admitted "using confusion as a marketing tool." Sound familiar?

The similarities between the telecommunications and grocery sectors, once they finally got the full attention of the regulator, are many. You have to wonder whether the industry leaders solely focused on maximising the year's profit and bonuses. In both cases, they forgot about the danger they created for the very survival of their business models over the medium to long term.

So what will happen now?

The government will act. Despite its reputation for too much talk and too little action, it cannot afford to put the Commission's work in the too-hard basket. I'd pick either some form of structural separation, an enforced sell-off of some stores, or action to bring in a third entrant. Economists argue that three players are the magic number where the tacit collusion the Commission has identified becomes far less likely.

Whatever the outcome, I would predict a much better grocery distribution sector will emerge. That's what happened in telecommunications. Telecom, forcibly split back then, became Spark and Chorus, both highly successful and profitable. Alongside them, scores of smaller retail telecommunications companies entered the fray. New Zealand went from the absolute bottom of the OECD for telecommunications services and pricing up to the mid-range. I predict the same in the grocery industry.

That sounds to me like we can enter the age of the consumer. The GMA Chairman I recalled might have been right – just his time scale was out of whack. Change is coming, and with it, new opportunities for all. Let's all look forward positively."


Ernie Newman is a Waikato-based consultant who worked as a lobbyist in the telecommunications industry in the 2000s when he was at the heart of the campaign for more competition and the grocery industry in the 1980s. He advises many clients, including the Food and Grocery Council. The views in this article are entirely his own.