There has been no meaningful improvement in competition between supermarkets since the Commerce Commission’s market study was published in March 2022, according to the first annual report published on Wednesday.
Grocery Commissioner Pierre van Heerden said major retailers had actually increased their margins, while retaining high levels of market share and profitability.
Retail margins on non-fresh products across the New World, Pak’nSave, and Woolworths brands have increased by 3.1 percentage points on average, and fresh food margins have increased a lesser 0.4%.
The report said a competitive market should limit or even reduce margin growth, but information provided to the commission did not show any constraint.
“This is a red flag for the state of competition in the grocery industry in New Zealand,” it said.
Supermarkets said higher retail margins were necessary to cover rising operating costs, but the Commission said bottom-line earnings had remained constant, or had even increased.
“If you compare an annual return on the supermarket’s assets against a normal rate of return for supermarket retailing in the period 2019 to 2023, it shows that the major grocery retailers continue to achieve higher levels of profitability than the Commission would expect in a competitive market,” the report said.
New World stores had the largest margin expansion between this period, with a 3.9% increase, and the smallest increase was Pak’nSave with a 2.3% increase — both are part of the Foodstuffs North Island group.
The Grocery Commission said he would introduce a requirement for major grocery retailers to report on margins.
Other issues
Van Heerden also said there were concerns about misleading pricing on supermarket shelves and the Commission had opened investigations into all three major retailers under the Fair Trading Act.
He gave examples of items being advertised as “2 for 1” but the combined price being higher than the individual price, and incorrect price stickers meaning customers get charged a different price at the till.
Another disclosure requirement will be created to help tackle this issue. Supermarkets will have to regularly share information about customer complaints and pricing issues.
Despite success removing land covenants, which were blocking new entrants from opening supermarkets, the Commission has become concerned about possible land-banking.
Major grocery retailers currently own more than 100 properties which are not being used for retail stores, which may be reducing the number sites available for competitors. Van Heerden said some of these sites may have legitimate uses, such as for storage or car parking, and further investigation was needed.
Van Heerden said the report showed that improvement in grocery competition was still many years away and was reliant on a third national supermarket network being created.
“Even if a significant challenger were to emerge tomorrow, it would take some time for them to establish themselves and grow market share. Major third entrants to grocery markets in Australia and Finland took over a decade to reach 10% market share,” he said.
“This is a $25 billion sector — roughly the size of New Zealand’s tourism and dairy sales combined — so it’s crucial that we get this market working effectively."
17 Comments
I am starting to wonder if we would actually be better off with competitive supermarkets. Do we really want a race to the bottom with food to save a few bucks each week? In a highly competitive market they will pull out all the stops to save a few cents; next minute we're eating horse meat and drinking melamine milk.
Are we big enough for the likes of Aldi?
I get the feeling that more chains will lead to more fixed costs but less sales, hence higher prices. Imagine if 10 new hardware giants started competing with Bunnings and Mitre 10, would that make Bunnings and Mitre 10 cheaper, or would they have the same costs and less customers hence higher prices?
Its difficult to justify lots of big chains with such a low population. And if the chains are small, they can't make enough sales to justify a low margin.
Aldi generally controls all aspects of the supply chain, which is why it works in Australia, since they own the farms which make the beef and milk through to the fresh fruit and veg to the canned stuff that they sell, even to the logistics side. The large initial investment for low or any return in a tiny country wouldn't make it work. It certainly won't be much cheaper than what Pak N Save are.
Recently had the pleasure of spending a few weeks in rural Ireland. Smallish Town with a population of ~10k had five full sized supermarkets (Aldi, Lidl, Tesco, Dunne's, SuperValu) and one nearly full size (Costcutter), all within walking distance from one another. Accept proximity to UK skews things but this is a town around the size of Wanaka. The supermarkets need to be broken up!!!
Sure, but the fixed costs are largely shared amongst the brands. For example, New World, Pak n Save and Four Square all sell Pams products, so the fixed cost of Pams is shared. Likewise when they negotiate with suppliers, Four Square can get as good a price as Pak n Save can. Are you sure they would be cheaper if they were broken up?
So we have a concentration of a specific "budget" in house brand across 50% of our supermarkets and you think that provides scale that benefits consumers and not the bottom line?
Can you provide an example of an industry (not heavily Government regulated) where increased competition has resulted in worse outcomes through reducing "scales of economies"?
The meat cuts the cartel supermarkets foist upon us are pretty bad. How do you know you're not already eating horse? What kind of Stockholm syndrome is this? I swear the NZ population is the most apathetic in the world when they're getting raped in the wallet. All the concerned people probably left...
I have lived in the UK, the quality of supermarket food here is significantly higher. The UK was significantly cheaper, but 15% of that comes down to no VAT on food, and a lot of the remainder will be due to the size of the market (both customers and suppliers).
Whether the supermarket makes 2% profit or 4% profit makes very little difference to your bill ($2 per $100 spent), but it makes a big difference to their profits and their willingness to cut corners for a few cents.
Competition in most industries is on both price and quality. I will happily pay less for cheaper milk. I will also happily pay more for milk without melamine...
In more competitive markets supermarkets get punished by consumers for serving melamine milk. In less competitive markets they can get away from it as consumers have no choice and still need their milk. Thankfully, you've got it backwards :)
We seem to be more or less locked in a cycle now where the government and the grocery commissioner regularly express outrage at grocery prices and the lack of supermarket competition without any practical action happening. How long is this going to go on for? Where is the Minister responsible? What's the plan?
New Zealand seems to have this strange quirk where our response to any problem is one of collective outrage masquerading as a solution. It's the same for banks, supermarkets and petrol. I'm over it.
Even a duopoly is sufficient competition, if consumers are willing to trade them off against each other. However consumers tend to exhibit brand loyalty, and the supermarkets are aware of this and will charge a premium for brands that the other participant doesn't stock. We also see this at Mitre 10 and Bunnings with power tools (best deals on the brands that both stock, IIRC it's Makita). It's still sufficient competition, but requires effort on the part of consumers. Online shopping actually makes this easier than ever before. I'm not worried about our lack of comptetion, I'm worried about the government deciding to "do something" for political face and making things worse.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.