The Commerce Commission has recommended a series of tweaks to the supermarket sector but stopped short of some of the tough measures it contemplated

The Commerce Commission has recommended a series of tweaks to the operation of the supermarket sector, but in the final report of its inquiry into the sector has stopped well short of some of the tough measures it earlier contemplated.

Some of the tough measures that had been mooted included making market participants structurally separate their wholesale and retail businesses, or even being forced to divest some of their brands.

Instead, in the final report, much emphasis has been placed on things such as easy availability of land for development of new supermarkets.

The commission is recommending that both a grocery sector regulator and a dispute resolution scheme be established.

"A sector-specific regulator could have responsibility for general oversight of the retail grocery sector. This could include monitoring and reporting on its performance, both publicly and to government," the commission says.

The commission is proposing another review after three years:

"If competition is still not working as well as it could after three years, the review could consider whether other initiatives are required."

On improving the prospect of competition through new players in the market, the commission says this:

"We consider that the best way to improve competition in the retail grocery sector is through measures that are likely to improve the conditions for entry and expansion. Improving the conditions for entry and expansion is likely to be particularly beneficial for consumers where this enables a greater range of grocery retailers to offer a convenient one-stop shopping option.

"We consider that the New Zealand market could sustainably accommodate at least one more large‑scale rival, and that reducing current constraints on entry and expansion would help to facilitate this.

"In the long term, actual entry or expansion is likely to be the greatest driver of competition. There are two main areas where we consider changes would be desirable to help facilitate an increase in the number of grocery retailers that compete effectively with the major grocery retailers:

→ freeing up sites for retail grocery stores; and

→ improving access to groceries for resale."

The commission said it considered other options such as a regulated wholesale access regime and vertical separation of the major grocery retailers (which would require their wholesale businesses to be run separately from their retail businesses).

"However, we do not recommend these options because:

→ introducing a regulated wholesale access regime for groceries would be very complex due to the wide range of products and dynamic nature of the sector; and

→ there are significant efficiencies associated with integrated retail and wholesale grocery operations, and there would be a range of practical challenges and transaction costs associated with separation."

Therefore it was recommending that the major grocery retailers "be given the opportunity" to negotiate commercial wholesale supply arrangements with other retailers, with regulatory oversight.

"The major grocery retailers have publicly stated that they are open to, or are exploring, the possibility of negotiating commercial wholesale supply in certain circumstances."

The executive summary of the final report is here.

The full report (warning, it's 609 pages!) is here.

This is the media release from the commission:

The Commerce Commission’s final report from its study into the retail grocery sector has recommended a suite of changes to increase competition and help improve the price, quality and range of groceries and services available to New Zealanders. 

In November 2020, the Government asked the Commission to take an independent look at the factors affecting competition in the $22 billion a year industry. 

Commission Chair Anna Rawlings says the final report has concluded that competition in the grocery sector is not working well for New Zealand consumers. 

“We have found that the intensity of competition between the major grocery retailers who dominate the market, Woolworths NZ and Foodstuffs, is muted and competitors wanting to enter or expand face significant challenges,” says Ms Rawlings. 

“While there is an increasingly diverse fringe of other competitors in the sector, they are unable to compete effectively with Woolworths NZ and Foodstuffs on price, product range, and store location to offer the convenience of one-stop shopping for the many different kinds of shopping missions that consumers undertake.”

The Commission has also identified that the nature of retail pricing and promotional strategies, and the major grocery retailers’ relationships with suppliers, indicate that competition is not working as well as it could. In addition, it has highlighted that New Zealand’s retail grocery prices appear comparatively high by international standards, the profitability of major retailers also appears high, and while consumers benefit from a range of innovations, there is scope for more.

The Commission has recommended a suite of changes and new regulatory measures to help improve the conditions for competition in the sector.

It has also proposed a dispute resolution scheme and an industry regulator responsible for monitoring and oversight to help ensure those changes have the desired effect.

“The best way to improve competition in the retail grocery sector is through measures that will make it easier for independent grocery retailers to set up and expand,” says Ms Rawlings.

“We found that the biggest challenges facing competitors are a lack of suitable sites for store development and difficulties in obtaining competitively priced wholesale supply of a wide range of groceries.”

To address these challenges, the Commission has recommended: 

• Making more land available for new grocery stores, by changing planning laws to free up sites, banning the use of restrictive land covenants and exclusivity clauses in leases that prevent retail grocery stores from being developed, and monitoring land banking by the major grocery retailers
• Improving access to the wholesale supply of a wide range of groceries at competitive prices, by regulating to require the major grocery retailers to fairly consider any requests they receive to supply competitors, and requiring the criteria for obtaining supply and terms and conditions of supply to be transparent
• Monitoring strategic conduct by the major grocery retailers, such as the use of ‘best price’ clauses and exclusive supply agreements.

The Commission has also identified that competition is not working well for many of the businesses that supply groceries to the major grocery retailers.

“Many grocery suppliers fear having their products removed from store shelves if they do not agree to accept some costs, risks, and contractual uncertainty. This can reduce the ability and incentive for suppliers to invest and innovate, reducing choice for consumers,” says Ms Rawlings.

The Commission has recommended:

• Introducing a mandatory code of conduct for grocery supply relationships to improve transparency and ban unfair conduct 
• Strengthening the existing law prohibiting the use of unfair terms in standard form contracts
• Considering whether to allow collective bargaining by some suppliers.

Recommendations to help consumers make more informed purchasing decisions, and stimulate competition between retailers, include:

• Requiring major grocery retailers to ensure promotional and pricing practices, and the terms and conditions of loyalty programmes, are easy for consumers to understand 
• Requiring grocery retailers to display unit pricing in a consistent format.

“The market study has brought an increased focus on the sector and the major grocery retailers have publicly committed to address some of the practices covered by our recommendations. 

“Nevertheless, the Commission has recommended formal regulatory requirements, monitoring and oversight by a grocery regulator, and a dispute resolution scheme to resolve wholesale and supplier disputes. These regulatory measures will help deliver the changes to competition that we have identified are needed,” says Ms Rawlings.

“In addition, we have recommended a review of competition three years following the implementation of any changes to evaluate their effectiveness.”

The final report and recommendations are now with the Government to review and consider. 

An executive summary, the full draft report and infographics on the findings and recommendations are available on the Commission’s website.

Commerce and Consumer Affairs Minister David Clark issued this statement:

New Zealanders will soon benefit from a much more competitive grocery sector as a result of market study findings unveiled by the Commerce Commission today.

“The report is clear: competition in the retail grocery sector is not working. Consumers could get better prices, range and quality if action is taken,” Commerce and Consumer Affairs Minister David Clark said.

“We made a manifesto commitment in 2020 to address the rising cost of groceries and to make sure shoppers are paying a fair price at the checkout. It’s especially important as the economy recovers from the impact of COVID-19.

“This is the second of three market studies commissioned, to help Government continue to deliver on our promise to ensure hard-working kiwis are getting a fair deal for the things they buy and consume.

“I know there is a desire to see us act swiftly on this too, and I want New Zealanders to know this will be the case. From today, we will immediately progress work to address the Commission’s recommendations.

“This includes exploring how a Code of Conduct between major retailers and suppliers could be developed and looking at the role a dedicated regulator for the grocery sector could play.

“The Commission’s findings indicate that restrictive covenants over land are a major barrier to supermarkets accessing new sites, so I want to ban these covenants being used to stop competition.

“The report sets out a clear justification for change in the grocery market. The status quo will not deliver fairer prices for consumers and a better deal for producers and wholesalers, and I hope the sector will constructively engage in the changes that need to be made.

“Given the importance of achieving healthy levels of competition in our retail grocery sector I have not ruled out some of the other options that the Commerce Commission tabled while developing its report, if consumer benefit is not achieved from the changes recommended in the report.

“When New Zealand supermarkets are making more than double what the Commerce Commission considers to be a normal rate of return on capital for grocery retailing, it’s clear there is a problem with competition that needs to be fixed.

“New Zealanders are paying more at the checkout than most. Out of 38 OECD countries we’re the fifth highest in terms of grocery prices. This report makes a serious case for change when it comes to competition in the sector, so kiwis don’t have to pay so much for the basics,” David Clark said.