The Commerce Commission has spotlighted two commercial behaviours it believes are reinforcing the powerful positions of the major supermarkets and big grocery suppliers.
“We know the current grocery market is not serving Kiwi consumers well. The status quo lets a few major players set the rules for the rest of the industry, which is negatively impacting consumers, new and expanding competitors, and small suppliers,” said Grocery Commissioner Pierre van Heerden.
“These major players are the three main supermarkets and large national and multi-national suppliers. Their significant market share allows them to influence the market settings. This limits the ability for competing retailers to enter and grow in the market and often results in smaller suppliers getting an unfair deal."
The Commission has released its draft report on the review of the Grocery Supply Code and Initial Views on the Inquiry into the Wholesale Market, focusing on two issues it believes need to be addressed to improve outcomes for consumers.
Suppliers covering retailer costs
“We’re proposing to simplify the Grocery Supply Code to reduce the range of payments supermarkets can charge their suppliers."
With combined purchases of over NZD 15 billion and 82 percent of the New Zealand grocery market, the major supermarkets are the largest customers for most grocery suppliers.
van Heerden was concerned that the power imbalance between the major supermarkets and small suppliers creates a reluctance among suppliers to push back on supermarket demands or behaviour for fear of damaging relationships or losing access to supermarket shelves. This leads to smaller suppliers taking on costs and risks that the retailer best manages.
“The changes we’re suggesting would prevent the supermarkets from charging suppliers for ordinary retailing activities such as stocking shelves and setting up displays. It would also require the supermarkets to keep records of certain activities charged to suppliers, including promotions," said van Heerden.
“We believe that setting these rules in place will help mitigate the power imbalance and allow suppliers to be more confident market participants so they can innovate and invest in better products and more choice for consumers."
Promotional payments in the wholesale market
A significant issue new and expanding supermarket competitors face is securing access to cost-effective groceries from large suppliers.
The prices the major supermarkets pay suppliers are subsidised by around NZD five billion in rebates, discounts, and promotional payments. Competing retailers can’t negotiate similar levels of support due to their weaker buying power.
The majority of these payments go to supermarkets in exchange for products being ‘on special’.
“Consumers lose out because prices jump around more. This can mean the average price is more expensive, and it’s harder for consumers to assess the value of products."
Major supermarkets in the United States use high-low pricing more frequently than those in other countries. Large suppliers and the major supermarkets need to reduce their reliance on promotions and specials so that prices can be lower and more stable.
This would benefit consumers because pricing would be more straightforward, and new competitors would put competitive pressure on existing supermarkets to deliver on price without the high-low price distraction.
“With less promotional funding, we’d expect suppliers to factor that saving into the price they charge retailers, which retailers would then pass onto consumers in the form of more stable and lower everyday prices. The best option is for large suppliers and the major supermarkets to voluntarily change their behaviour. If they don’t, we’ll have to consider our other alternatives."
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