Government mulls radical supermarket reform, but an expert warns excess profits are just a small piece of the high grocery price puzzle

Finance Minster Nicola Willis held an unusual press conference on Sunday to outline her thinking on supermarket reform and put out a call for more information. 

It wasn’t even an announcement about an announcement. It was an announcement about a request for information, to inform a future announcement … or something like that.

Willis said she was asking potential supermarket entrants what regulatory or law changes would be needed for them to be able to compete at a national scale, or claim at least 10% of the existing market.

Officials have been instructed to actively seek out firms already involved in grocery sales in New Zealand, such as Costco and The Warehouse, as well overseas brands like Coles, Aldi, and Lidi.

These companies will be asked to describe the 'ideal conditions' for entering and growing in the retail grocery market, and Willis said she would work to make it happen.

But how far would she be willing to go? Would she be willing to challenge the National Party’s conservative traditions and break the duopoly by force? Apparently, yes. 

Willis said she had commissioned “specialist external advice” on how to break up the existing supermarket chains into smaller competitors — a radical move in a market economy.

It might mean setting up New World and Pak’n’Save as separate businesses and forcing Woolworths to sell a percentage of its stores to a new owner. Wholesale divisions may also need to be spun out into independent businesses to serve the newly separate brands.

This would be the biggest government intervention in a market since the 1990s electricity reforms, when the state-owned Electricity Corporation was broken up into separate generation, transmission, and retail entities.

But a more recent example was in 2009, when the government helped 2degrees enter the NZ market by giving it access to mobile frequencies, which allowed it to compete with Telecom and Vodafone. Telecom later voluntarily split into Spark and Chorus to take part in the Government’s Ultra-Fast Broadband project.

Coalition to convince

Willis has ruled out setting up a state-owned supermarket, despite using Kiwibank to drive competition in the banking sector, but is open to compulsory separation.

If she pursues it, she wants it to happen quickly. She would seek a mandate from Cabinet to design reform in the middle of the year and pass any legislation before the next election.

This would require support from the Act Party, which typically opposes such intervention in free markets. Leader David Seymour told The Post that politicians, like Willis, were welcome to seek advice but that did not mean it would become Coalition Government policy. 

An “obvious” concern was that threatening to restructure NZ-based businesses might scare off the overseas investors the Government was working hard to attract, he said.

Eric Crampton, an economist at the free-market NZ Initiative, said on social media that if no competitor is willing to enter the market, even with all regulatory barriers removed, it likely indicates supermarkets aren’t making excess profits.

Groceries are expensive in New Zealand but not just because of the duopoly. In 2021, Coriolis Research estimated that above-average profits accounted for only 1% to 3% of the price difference between New Zealand and the US.

It said the lack of a fast-growing retailer like Aldi could account for another 1% to 3%, meaning competition explains just 2% to 6% of higher grocery prices — roughly $4.50 to $13 a week for the average household.

Other costs 

Bigger problems included island logistics, strict bio-security, higher input costs, lack of scale in the small market, and low productivity relative to wages. A tray of chicken breasts that costs $4.30 in Texas might cost $13 in New Zealand, but only 23 cents of that difference would be due to excess margins.

Timothy Morris, the research firm’s managing director, wrote in his submission that 90% of the difference in grocery prices was not due to profits or competition.

“New Zealand supermarket retailers are something like +50% more profitable than they should be. But due to the marginal nature of supermarket retailing, this is only pennies on the dollar,” he said. 

That’s not to say supermarkets should be allowed to take an extra 3% from New Zealanders just because they can, but we shouldn’t fool ourselves into thinking excess profits are responsible for anything more than a slither of our total shopping bill. 

Interestingly, Coriolis Research is the firm Willis has hired to provide her with specialist external advice about splitting up the existing supermarkets. 

In its 2021 submission, it proposed requiring Foodstuffs and Woolworths to reduce their market share to 27% in each region. A likely outcome of this would be Pak’n’Save and New World separating, and a firm such as Coles Australia buying 18% of Woolworths’ stores.

Morris said this would fix “a problem but not the problem” as all the other grocery cost drivers mentioned above would remain unchanged. 

Other critics, including Crampton, have warned breaking up the duopoly could unintentionally raise prices by reducing economies of scale. Excess profits could be swapped for higher operating costs—and, in turn, higher retail prices.

Willis, the Act Party, and Cabinet will need to have a strong stomach to risk intervention for what may be modest rewards.