A more competitive grocery market remains years away and more aggressive regulatory tools are needed to open up the sector and protect consumers in the meantime.
That was the conclusion of the Grocery Commissioner’s first annual report, which was published on Wednesday morning. It made for fairly bleak reading.
Pierre van Heerden, the Commissioner, told reporters he wouldn’t “sugarcoat it." The report showed no improvement in competition since the Commerce Commission's market study was published in 2022.
New Zealand’s $25 billion grocery sector was full of “red flags” which showed the three major supermarkets (Woolworths, Foodstuffs North Island and Foodstuffs South Island) were still reaping the profits of industry domination, he said.
A major concern was the analysis showing supermarkets had expanded sales margins and maintained or even increased profitability since 2019. Van Heerden backed the claim, despite supermarkets disputing it.
“Retail prices in the major supermarkets have been increasing faster than the prices they pay to their suppliers. This is despite major supermarkets claiming otherwise,” he told reporters.
This information was sourced directly from Foodstuffs and Woolworths NZ, and showed they had either maintained or increased their profitability between 2019 and 2023.
While the Grocery Commission's report highlights increased margins, Woolworths NZ disputes these claims, pointing to its own financial reports that show a decline in profitability.
Those earnings reports show both gross margins and earnings before interest and tax (EBIT) margins in NZ declined between 2019 and 2023, from 24.4% to 23.1% and 4.4% to 3.2%, respectively.
Spencer Sonn, the managing director of Woolworths NZ, said the 2024 financial year had been even worse. The company made a loss of 0.5 cents for every dollar spent in stores, and overall profit was cut in half.
“At Woolworths, like other businesses and New Zealanders, we have felt the impact of inflation in the last couple of years and our profits are at their lowest levels since [2016].”
To-ma-to, tom-a-to
Part of the disagreement between the Commission and Woolworths may be due to the different kinds of margins and profits being measured.
The Commission looked at price-cost margin, which is the difference between what a retailer receives from a consumer and what it pays to a supplier. It doesn’t factor in the wider operating costs included in EBIT margins, which is the gap between revenue and cost of goods sold as well as wages, property costs, advertising, and any other operating expense.
Price-cost margin is most comparable to gross margin, which Woolworths also reported as being down, but it is more granular and focused on the profit made from each individual unit.
Overall gross margins could include earnings from non-core grocery items, which may face competition in the wider economy and are of less interest to the Commerce Commission.
Foodstuffs’ North and South Island co-operatives, which have a 53% market share, issued a statement which claimed they had kept price increases below the rate of food price inflation.
This was an odd claim as many of Statistics NZ’s measures would be of prices taken directly from Foodstuffs’ shelves, so the co-operative was essentially comparing itself against itself.
Van Heerden was clear that within non-fresh grocery products, which is the category most dominated by supermarkets, all three had expanded their margins over the past three years.
Fresh food margins had also increased to a lesser degree, but these items face more competition from independent butchers, grocers, and bakeries. Non-fresh products also make up the majority of consumer purchases.
The audacity
Gemma Rasmussen, head of advocacy and research at Consumer NZ, said the expanded retail margins spoke to “the audacity of the duopoly.”
“Despite declining public trust and increased regulatory pressure, they continue to squeeze suppliers and increase their margins at the checkout,” she said.
“We agree with the Commissioner that the time for talk is over. His analysis of the two years since the market study clearly shows that the supermarkets won’t move unless they’re pushed.”
Van Heerden said the annual report gave the Commission the evidence it needed to unlock more regulatory powers to further open up the wholesale market.
Less than 1% of supermarket sales were being conducted through the wholesale market, as supermarkets are vertically integrated and have direct supply agreements with producers.
The Commissioner wants to grow the number of customers using this wholesale market to make it easier for smaller grocery retailers to challenge the supermarkets. It could also create an easier path for a full-scale competitor to enter the NZ market.
“We believe that three major national supermarket networks would be significantly more competitive than two, and that this is achievable in New Zealand,” Van Heerden said.
The Commission will introduce an enforceable code of conduct for wholesale providers, with penalties of at least $10 million, three times any commercial gain, or 10% of turnover.
It will also explore requiring major supermarkets to sell products to wholesale customers at the same prices as those offered to their own stores.
Commerce and Consumer Affairs Minister Andrew Bayly agreed with the Commissioner that stronger regulatory action was needed and signalled he would agree to unlock these additional powers.
However, some want the Government to go further. Both the Green Party and the Grocery Action Group (GAG) called for a breakup of the supermarket’s retail and wholesale businesses.
GAG chair Sue Chetwin said the authorities were “tinkering in a market that has structurally failed”. Van Heerden, however, asked for some patience.
“I want to assure you all that we are doing everything in our power and at pace to get change done in the industry. However, this does take time, as we've seen in the telecommunications industry, it's not something that gets fixed overnight,” he said.
Even with immediate improvements in competition, consumers should temper expectations, as the report implied that grocery bills might not fall as much as some might expect.
And finally, a word of warning to readers: even if perfect competition appeared overnight, grocery bills might not fall as much as you imagine.
The report estimated supermarkets would have made $372 million less profit each year in a more competitive market. This equates to $75 per person annually, or roughly one-third of the average household’s grocery bill per shopping trip.
31 Comments
"The Commission looked at price-cost margin, which is the difference between what a retailer receives from a consumer and what it pays to a supplier. It doesn’t factor in the wider operating costs"
This is just stupid and shows that it is an ideologically driven witch hunt. Wages, security and electricity costs have increased for supermarkets just like they have for everyone else, and the profitability of any other business is based on net margins, which are minimal for supermarkets. The sub 5% net profits in the supermarket industry would be considered unprofitable in almost any other industry, it's only the sheer volume of turnover that makes it worthwhile. The last thing that we want is to push Woolworths out by making it too hard to do business here, and reduce competition further.
I wonder if supplier rebates are deducted from the "cost of sales" on the financial statements? In the case of Foodstuffs members, these could be some lucrative "off the books" payments even if declared to IRD for personal income tax.
8.144 We have heard concerns about grocery retailers setting off amounts against supplier invoices without prior consent.1147 Set-off is where a retailer deducts any amounts it is owed by a supplier when paying a supplier’s invoice. This can occur where a retailer takes rebates which are not already deducted from the supplier’s invoice.
https://files.lbr.cloud/public/2022-03/NZCCFinalGroceryStudy.pdf
hmm... I read it until I saw the comparisons to places in Europe, like Ireland. With the EU CAP funding schemes for farmers Irish farmers are getting cash money subsidies, I think a share of Euro 10 Billion from 2023-2027. I am sure that this helps to keep the cost to supply into the supermarkets slightly lower in those regions. They should be looking further up the supply chain.
"This equates to $75 per person annually" - so about a dollar per shop. People have this idea that breaking up the duopoly will give us prices similar to other countries, but those other countries don't pay GST on food, so our prices are going to be 15% dearer no matter what they do. And we don't have enough scale, breaking up the supermarkets won't help with that.
A saving of almost $6 per weekly shop for a family of four isn't nothing where some families are struggling to make ends meet.
From shopping around, buying specials and being part of the local buying club, using handy price comparison tools like the Grocer App before heading out, our family saves $50-$80+ per week vs going to the nearest supermarket.
... exactly ! ... 20 cents per day ain't worth getting one's knickers in a twist over ... the MSM & Labour/Greens can hysterically screech all they want about " excess profits " , but none of them can accurately quantify what an " XS profit " is , compared to a regular profit ...
Commission doesn't call it 'excess profit' but they calculated it by the gap between the standard rate of return an investor would expect in return for their capital, and the actual rate of return supermarkets earned on their capital. If supermarkets had just returned the standard rate, it would have been $300m less profit.
I understand that excess profit amount was quite a few years ago and food price inflation has risen a lot since then. No doubt NZers are paying more for food than they should. I remember when food prices in the UK were a lot more than in NZ, but now they are quite a bit cheaper. The regulators should never permitted a duopoly to occur as the cost has been massive to NZers and very expensive to change things.
This highlights the incompetence of much of the media and journalists - effectively just mouthpieces repeating the company press release.
They're not capable of reading the financial statements, and what you read isn't true.
The profit was down due to creative accounting and lower property gains.
There are 6 main chains in the UK (where prices are a lot cheaper), one per 11 million people. We currently have one main chain per 1.6 million people.
While I get that duopolies suck, I'm not convinced that reducing their scale by splitting them up will make prices cheaper, it could have the opposite effect. There is a reason that supermarkets are cheaper than dairies, its due to the volume they sell.
If they do split them, I don't think splitting by brand would achieve much. Each brand has a market segment; I doubt New World are going to start competing with Pak and Save on price if they were split. But both chains would have increase fixed costs, for example they will both need their own home brands, they will have reduced bargaining power, etc.
They all have their own quirks. New world isles are wider than Woolworths giving a more spacious and premium feel along with higher staffing and efforts for presentation and keeping shelves stocked. Woolworths have volume of stores and smaller on average with less storage space which requires more shipments which adds to costs. Pak n' Save have large premises allowing for greater stock levels, as well as the higher roof and storing goods on top of shelving, less staff adding to volume to pass on savings.
I do wonder if there's any measure of how well the supermarkets are run: high prices could be becasue of an industry that's never had to become efficient and has always been more focussed on controlling competition.
And a lot of the other commentators have a good point: how do you leverage volume to reduce prices when we are a tiny market, spread across a geographically difficult country, and we demand broad consumer choice? Reducing the size of the individual sellers may push prices up unless we can attach our demand to much higher volume markets...and then we essentially cede control of the sector to overseas companies.
I'd look at the basic efficiencies first.
I must say, the unit pricing initiative by ComCom is great.
So is the Grocer app for comparing live availability prices across supermarkets before we head out the door
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