Commerce Commission report “persistently high profits being earned by the major retailers”

Chris Lynch
Chris Lynch
Jul 28, 2021 |

The Commerce Commission report into competition in the retail grocery sector has found that “competition is not working well for consumers.”

In November last year, the Government asked the Commission to look at whether competition in the $22 billion a year grocery industry was working well and, if not, what could be done to improve it.

Commission Chair Anna Rawlings said if competition was more effective, retailers would face stronger pressures to deliver the right prices, quality and range to satisfy a diverse range of consumer preferences.

“Our preliminary view is that the core problem is the structure of the market. In competitive terms, the major retailers, Woolworths NZ and Foodstuffs, are a duopoly, and while there is an increasingly diverse fringe of other grocery retailers, they have a limited impact on competition. This is because they are unable to compete with the major grocery retailers on price and product range in order to satisfy the widespread consumer demand for a main shop at a single store.”

Commission observed “persistently high profits being earned by the major retailers and high grocery prices when compared internationally. The level of innovation in the sector also appears modest by international standards.”

The major retailers appear to avoid competing strongly with each other, particularly on price.

Meanwhile, competitors wanting to enter the market or expand face significant challenges, including a lack of competitively priced wholesale supply and a lack of suitable sites for large scale stores.

Other observations which indicate the market is not working as competitively as it could be also include:

  • the complexity of the major retailers’ pricing strategies, promotions and loyalty programmes can confuse customers and make it difficult for consumers to make informed purchasing decisions

  • many suppliers have few alternatives but to supply the major retailers. This allows them to exercise their buyer power to push excess risks, costs and uncertainty onto suppliers. Suppliers report agreeing to these terms because they fear that otherwise their products may not be stocked. This conduct can reduce suppliers’ ability and incentives to invest and innovate, ultimately leading to less choice, lower quality, and potentially higher priced goods for consumers.

“Without intervention, we currently see little prospect of a new or expanding rival being able to constrain the major retailers effectively, and improve competition in the sector,” said Ms Rawlings.

“We consider the best options for improving competition are those that enable an increase in the number of retailers directly competing against Foodstuffs and Woolworths NZ for a consumer’s main shop.”

These draft options for recommendations include:

  • Making it easier for new competitors to enter or existing independent retailers to expand by increasing wholesale access to a wide range of groceries at competitive prices. A spectrum of potential options for achieving this is discussed in the draft report.

  • Making land more available through changes to planning laws and restrictions on the use of covenants.

If these options were not feasible, had proved ineffective, or did not appear likely to improve retail competition within the desired timeframe, another potential option is to directly stimulate retail competition by creating a further major grocery retailer.

Options to strengthen suppliers’ bargaining power with retailers include introducing a mandatory industry Code of Conduct and allowing suppliers to bargain collectively.

Options to help consumers make more informed purchasing decisions and to enhance competition at the retail level include the introduction of mandatory unit pricing, as well as asking the major retailers to simplify their pricing and promotional practices, and ensuring that the terms and conditions relating to their loyalty programmes are clear.

“Our draft options encompass a range of possibilities and we look forward to now testing our draft findings and options for recommendations in coming weeks through public submissions and a consultation conference, before publishing our final report,” said Ms Rawlings.

Chris Lynch
Chris Lynch

Chris Lynch is a journalist, videographer and content producer, broadcasting from his independent news and production company in Christchurch, New Zealand. If you have a news tip or are interested in video content, email [email protected]

Have you got a news tip? Get in touch here

got a news tip?