With the first Annual Grocery Report showing no meaningful improvement in competition, the Commerce Commission has moved to unlock extra regulatory powers, focusing on what will benefit consumers and nurture retail choice.
Grocery Commissioner Pierre van Heerden said the Report painted a “concerning picture” of New Zealand’s $25 billion grocery sector, which has increasing retail margins, continued high levels of profitability, and the ongoing dominance of the industry by the major supermarkets (Foodstuffs North Island, Foodstuffs South Island, and Woolworths NZ).
In a competitive market, price competition should limit or reduce retail margin growth. The Annual Grocery Report has provided clear evidence for more decisive action.
“We want more competition and sustained pressure on the major supermarkets to deliver better consumer outcomes. We’ve brought forward this first Annual Report, which provides further evidence of the need to continue ramp-up action and unlock more of our regulatory powers,” said van Heerden.
“The information provided to the Commission didn’t indicate that these margins were being constrained. This is a red flag for the state of competition in the grocery industry in New Zealand.”
In contrast to the supermarkets’ claims, the Commission’s analysis has shown that the retail prices of the major grocery brands have been increasing faster than the prices the major supermarkets pay their suppliers.
“Our regulatory regime is the first of its type in the world, so we always knew it would be complicated to introduce changes in a well-established industry that is the product of more than 100 years of evolution. This first Annual Report gets to the core of this very complex and crucial sector, which touches the lives and livelihoods of every Kiwi.”
He added that the Commission has brought forward a review of the Supply Code, which came into effect in September last year, to more effectively address “an ongoing power imbalance and lack of trust between suppliers and grocery retailers that could undermine all of the other initiatives intended to deliver a well-functioning and competitive grocery market.”
If the Code operates effectively, it will increase the certainty of agreements between supermarkets and suppliers, giving suppliers more confidence to innovate and invest in more consumer choices.
The penalties for breaching the code could be significant—the maximum possible fine is $3 million, the value of the commercial gain, or three percent of turnover.
“Our report shows the wholesale offers made by the major supermarkets to date are having a limited impact on the sector, and the range and price of goods are not consistent with what we expect to see in a competitive wholesale market.”
The wholesale supply regime has not been working as intended and was unlikely to improve competition or benefit New Zealand consumers in its current form.
“We intend to introduce enforceable rules for the wholesale regime to address the issues raised in the Annual Grocery Report. The maximum penalty for breaching these rules could be significant—up to $10 million, three times the commercial gain, or 10 percent of turnover, whichever is greater,” added van Heerden.
“We’re also considering if we need additional stronger tools to address issues in the wholesale market, like the ability to ensure that retailers treat wholesale customers the same way they treat their stores with pricing and terms.”
The Commission can recommend to the Minister that these tools be unlocked after completing a wholesale inquiry under GICA. The Commission also supported the Minister of Commerce and Consumer Affairs’ review of the Fair Trading and Commerce Act.
He said accurate and transparent pricing was a consumer right and an expectation of a competitive market. Still, the Report showed continuing issues with pricing and promotions across the major supermarkets.
Legislative change to the Fair Trading Act could lead to significantly higher penalties with ‘more sting’ and a deterrent effect for retailers' breaches.
The Grocery Commissioner has been challenging the major supermarkets to improve their pricing practices and publicise their refund policies, which the Commerce Commission believes are either inadequate or unknown to Kiwi consumers.
“We’re not waiting for legislative changes to take action – we are putting in place disclosure requirements to make the major supermarkets report to the Commission on the rate and resolution of customer complaints.”
The Commission believed three major national supermarket networks would be significantly more competitive than two, which was achievable in New Zealand. The Grocery Annual Report pointed to regulatory hurdles and actions by existing significant supermarkets to reduce site availability and limit the opportunities for new entrants.
Progress has been made to remove restrictive covenants, such as the Commission’s case against Foodstuffs North Island for lodging anti-competitive land covenants to block competitors, which resulted in a $3.25 million fine. These restrictive land covenants are now legally unenforceable.
However, the Commission has remained concerned about the scale of land held by the major grocery retailers, with more than 100 properties currently used for purposes other than retail stores.
“We are now turning our attention to ‘land-banking’, which could be a factor reducing the number of sites available to retailers looking to enter or expand in the market.”
The Commission will further investigate the potential impact of underutilised sites on competition in the grocery industry and will report on this at the end of this year. Planning regulations could also slow the development of new stores if there are additional costs or delays in the consenting process.
To develop a supermarket in New Zealand, a retailer must comply with planning regulations, such as zoning requirements within the local council’s District Plan and, in some cases, the resource consent process.
The Overseas Investment Act 2005 can also create additional costs, delays and uncertainty about site acquisition by overseas entities looking to enter or expand in the New Zealand grocery industry.
“We’ll be engaging with potential new entrants and investors to understand their view on how we can remove remaining barriers to enable a third player to enter the market better.”
