By Bernard Hickey
The allegations aired under parliamentary privilege by Shane Jones about the 'Countdown Shakedown' are ugly in many ways, but not in the obvious ways.
Shane Jones certainly made Countdown's 'dingo' corporate culture look ugly in a series of tirades that accused the Australian owned chain of "corruption, racketeering and blackmail" that would make Tony Soprano proud.
Jones even came close on Wednesday to naming the Woolworths merchandise manager that he said had fled an official inquiry into similar complaints in Australia to then do the same thing for Woolworths' Countdown chain here late last year.
Countdown has rejected his central allegation that it demanded suppliers make retrospective payments to compensate Countdown for past losses.
But Jones' repeated complaints and the Food and Grocery Council's much less inflammatory confirmation that it had heard of similar cases has been enough to cause a detailed and wide-ranging investigation by the Commerce Commission.
So be it, and now the Commission will get down to the nitty and gritty work of convincing suppliers to come forward and detail whatever went on.
It will take months and we may still never really know what was said and done in those windowless rooms where suppliers met buyers.
But what then?
What could the Commission do about it? Could this practice be stopped?
It's worth looking across the Tasman to see what Australia's Competition and Consumer Commission (ACCC) has done.
It started investigating Woolworths and Coles Myer more than a year ago over the use of petrol discount vouchers and the same issue of the bullying of suppliers to make retrospective payments.
It has already done a deal with the supermarkets to stop them issuing vouchers worth more than four cents a litre, aiming to keep them from cloning their dominance in groceries into a similar dominance in fuel retailing.
But the issue of bullying and retrospective payments is tricky.
Australia bans 'unconscionable conduct' in its Trade Practices Act, but even then it's not clear these payments fit in that category.
Suppliers have been paying for positions in supermarkets for years and the development of retrospective payments for spoilage of products and under-performance is a grey and murky extension of that.
So instead of prosecuting, the ACCC looks like turning a voluntary code of conduct agreed last year between the suppliers and supermarkets into a set of regulations enforceable by the ACCC.
This code would block retrospective payments, although there are many Australian suppliers who are sceptical it will curb the power of the supermarkets.
Ultimately, these retrospective payments are just another way that supermarkets force suppliers to charge the lowest price over the long run.
New Zealand does not ban 'unconscionable conduct' in the same way as Australia, although such an addition to the Fair Trading Act was recommended by officials in 2010. It has since stalled.
So the Commerce Commission is in a difficult position even if it does find Countdown demanded the retrospective payments. They aren't obviously illegal under the current law, unless there is overt blackmail involved, which would instead be a matter for the Police under the Crimes Act.
The other avenue for the Commission could go down would be to try to prove that any Countdown bullying was designed to "substantially lessen competition," which would breach Section 36 of the Commerce Act.
The trouble is this has been fiendishly difficult to prove in our courts, which have set a very high bar for proof. They want proof the lessening of competition was intended and not just the result of the action.
This is where it gets ugly for everyone.
This ugly practice may not be against the law. It just looks bad.
But here's the ugliest of truths.
The ruthlessness of the supermarkets in their dealings with suppliers is exactly what we all as consumers demand.
We want low prices. We bay for low prices.
We now expect deflation in all sorts of consumer and packaged goods and when we don't get it we're angry.
We have come to expect 'Every Day Low Prices' and the reason for that is bound up in the history of that slogan.
American retailing giant Wal-Mart invented the technique of every day low prices 60 years ago and has exported it around the world. It uses its buying power to drive suppliers up against the wall and force them to cut their prices to the bone.
Wal-Mart then passes on almost all those savings to consumers in the form of the lowest possible prices. It makes its money by ensuring customers always come to their supermarkets in the knowledge that they're going to get the lowest prices, thus driving up volumes.
More volumes mean buying power and even lower prices.
Wal-Mart has been rinsing and repeating this slogan all the way to near-global domination. The Wal-Mart connection in this 'Countdown Shakedown' story is not incidental. There is a direct lineage.
Woolworths has been forced to harden its attitude in Australia since 2010 because its main rival, Coles Myer, was rejuvenated by the tactics of a hard-nosed Scotsman called Ian McCloud. He arrived in Australia 2008 brimming with experience from his days as a boss at Asda, the British supermarket chain owned by, you guesed it, Wal-Mart.
Via a circuitous route of recruitments, deals and parliamentary outbursts, New Zealand finally learned this month what the Wal-Martisation of our supermarket sector might look like.
It looks ugly, but it's just what we really wanted - Every Day Low Prices.
41 Comments
Yes well, maybe if we are made aware of what goes on behind closed doors, we might not be so in love with these "low prices" Funny how shareholders don't appear to be brought into the "windowless" room to have their dividends ground down, isn't it?
I am over supermarkets for my fresh stuff, anyway. Bit lucky here in the Tron, we have what I reckon is the best fruit and veg shop I have ever come across, and judging by how many customoers are there just about any time, any day, plenty more think so as well. Fresh produce (turnover helps) and more often than not, a bit cheaper than supermarkets (I bet they don't have a huge amount of clout with growers, and they don't have avaricious shareholders with their hands out, just family). As for meat, pretty sick of the watery stuff on ghastly polystyrene so I am back to the butcher so I can avoid it.
It may turn out after all this, that a sizeable chunk of NZ is over "big" (I hope so anyway)
Mike M, I doubt it. Reality for many is that they shop on price. Sure some older folks like raegun can afford to be selective, but the rank and file kiwis shop on price.
I won't buy tinned Italian tomatos anymore (which are usually cheaper) after watching, a while ago, a tv documentary on toxic waste dumping poisioning land in Italy. The printed media have also picked it up.
http://news.sky.com/story/1185279/tuscany-hit-by-mafia-toxic-waste-dump…
http://www.nytimes.com/2014/01/30/world/europe/beneath-southern-italy-a…
ZZ - I have by and large, only lived in rural provincial NZ so the option of shopping malls haven't existed where I have lived. ;-) I don't disagree with what you say, but my comment to Mike B (which probably wasn't clear) is that those with more disposable income can afford to be picky where they shop, those who are watching their budgets/prefer the 'one stop shop', will support supermarkets over locally owned, but more expensive, butchers etc.
I have a north American family member - they initially found shopping a frustrating experience in the small provincial city where they live because it didn't have a mall. They were so conditioned to mall shopping and the convenience of it. :-)
From memory its approximately 70% of the population who shop for the cheapest.
No-one survives in business if they're not providing what the customer wants.
Supermarkets are all about price as that is what their customer want.
If you look at the layout of supermarkets the most shelving space is taken up by processed products. Fresh food takes considerably less space - although there is quite a lot of expansion into the heat and eat food side.
Fresh foods already have some competition and this competition appears to be increasing annually.
So I'm assuming much of the debacle has arisen from the processed goods side of the supermarket. Maybe there is a growing aversion to the procecceed goods which makes product harder to shift which drives prices lower. If there are retrospective payments does it not indicate that enough product wasn't moved?
Anyone who wants to take some power back from the supermarkets should throw away their loyalty card now. The information those companies derive from your use of that card gives them great power. And you don't get anything for free - all the goodies are paid for by higher prices.
What are the profit margins of the 2 chains btw?
"The supermarket operator's latest financial statements show that it earned gross revenue of $22.33 for each $100 of sales shoppers put through its tills in the year to the end of June 2011. That was up from $21.95 in 2010 and $21.61 the year before.
That's higher than UK chains Tesco and Sainsburys, which earned gross revenue of 8.30 and 5.50 respectively for every 100 that went through their tills."
That is a huge difference.
http://www.stuff.co.nz/sunday-star-times/latest-edition/6258700/Probe-c…
not so sure on us getting the low prices.
regards
steven,
The stuff article is clearly making a key mistake, in comparing apples and oranges and therefore is talking nonsense.
Tesco operating profit margin has been around 6% for most of the last few years, (although has dropped to 3% last year as they made a bunch of write offs)
Tesco Gross profit margin was around 22.45% last reported quarter- magically similar to our supermarkets it would seem.
The simple difference is that operating or net margin is after all operating costs of staff, rent, distribution and so on. The Gross margin is the simple difference between the buy price and sell price of any good- probably with some allowances for wastage.
When some people learn what goes into sausages they prefer not to eat them. When some people learn the companies that make their garments use sweatshops where people burn to death because they were locked inside factories on fire, they prefer to buy other brands. If some people read anything at all about the history of the diamond trade, they prefer to buy another pretty stone. Sunlight is better not just for stopping crime, but for making people honest about their own principles.
That said, the government are going to have a political issue if, as is looking like the case, the practises that were expressly illegal in Australia are legal here.
Good to see some light being shed on the interior methods of large companies that have a near monopoly in the market. It takes parliamentary privilege for this to happen? Noone in the media knew? No politician knew before? Shows you how intimidating large corporate power can be for politicians, journalists & small business operators.
Maybe some journalists could do more investigation in the banking industry, airlines, shipping ports, insurance, universities, power companies, Telcos, Freight, etc ... they all hold a near monopolistic grip on our small country. Free market has become market domination by a few players.
Can't understand why you would shop at Countdown anyway - they are far more expensive than PaknSave - unless you want the online shopping for convenience.
If you want nicer surroundings & friendly staff then New World is a better higher price option than Countdown.
The Comcom investigation will no doubt be watered down & narrowed & in 4 months time the media will be pressured to back off. Then back to normal. Also we may be suddenly reading background details about Shane Jones in the media that 'someone' has been suddenly 'researching' and NZ's passive media will broadcast it before realising they are acting as pawns in corporate hands. Do you think Shane Jones is going to get away scot-free from this revelation? Can you imagine what is being discussed in senior exec offices in this company?
The investigation is already watery before it even starts. If I have read right then the commission is investigating specific allegations concerning treatment of suppliers. As Bernard points out it may deliver a verdict of "not very nice but still legal". And where does that leave the country? Nowhere. The wider investigation into the market structure and how it enables market abuse is the investigation we really wanted.
That would tell us why we have to pay the 'Bought in NZ" penalty on everything not just sugar-based beverages. Strangely, given how committed to this style of free market both Labour and National have been for the last 30 years, our governments are not keen to open the can of worms you outline.
It's not just price that matters. If that were so then there would only be 'Pak n Saves'. The standard bundle of customer value factors that turn up in marketing research are:
- prices
- quality produce
- range of products
- quick checkout
Most maketing undergrads quickly work out that supermarkets don't particularly deliver on any of these attributes - or, put another way, they don't care at all about their customers. In fact when you learn about supermarket design and operation you find out they have a lot in common with casinos in that the whole environment is designed to manipulate customers into buying more than they intended.
What is corrosive about our market structure is that there is opportunity for new players who want to aggressively compete on one or more of these factors but the duopoly makes the barriers to entry way too high.
Supermarkets almost always fail outside of their own home country. It maybe because their core skill is in the manipulation of local, laws, regulations, politicians, suppliers.
They seem to have no skil at all in other markets eg Tesco - evry time it leaves the UK it looses money.
Bernard seems to have missed the idea that supermarkets do not work on supliers for our benifit but for their own. Their job is not to bring us lower prices but rather to buy as low as possible - through cutting the number of suppliers and then working on those who are left. and selling for as much as the market will bare. The less competitors there are eg in NZ only one competitor- then the esier it all is.
The destruction of a healthy supplier sector via monoply forces, is not in the interest of us citizens. Because those small businesses are us. We need to encourage a competative, variety ridden environment, with ease of entry for innovators.
Bernard. You are setting us to where every job is a McJob.
Bernard
It's worth looking across the Tasman to see what Australia's Competition and Consumer Commission (ACCC) has done. It started investigating Woolworths and Coles Myer more than a year ago over the use of petrol discount vouchers and the same issue of the bullying of suppliers to make retrospective payments.
Almost Bernard, but not quite - no cigar I'm afraid
It started a couple of years earlier when Graeme Samuel was the chief of ACCC and local suppliers were complaining like stuck pigs how they were being screwed and shafted and driven out of business
Samuel initiated a "full and thorough" investigation and invited invited suppliers to come forward, make submissions, and provide evidence.
The end result was zero. He found no cause. He did say however, not one single supplier ever came forward and supplied documentary evidence. That's how scared they were. It's all there if you search for it.
As the Australian economy dives, & they face a dose of 'Maggie Thatcher' to get their labour costs down there will be repercussions for NZ businesses as demonstrated by the Countdown pressure. Our 'Rockstar' economy consumers will pay the price - e.g. if Aus borrowers slowdown, nz operations will extract more from NZers.
The other thing that no one mentions is Foodstuffs.
They don't allow 4 Square Grocers or the next level down, the corner dairy, to buy stuff at the same pricing level as the New Worlds or Pak'n'save.
I quite often see the local dairy proprietor buying stuff in Pak'n'save.
This is probably why the Limit of 4 is in place for most things
Shane Jones may have done better to get the full story before his rant and taken the trouble to better understand retailing in general and supermarket retailing in specific.
With all due respect, 20% odd gross margin does not leave room for error or the ability to absorb losses caused by the over the top selling of a supplier on the back of some supposed advertising stint they were going to implement but did not deliver on.
Perhaps the public would prefer the supermarkets to go to the average of 50 to 60% gross margins, ex GST, the rest of that industry works on in exchange for a more relaxed attitude towards suppliers not delivering on promises.
Jones wants to position himself as a strong candidate for the Labour leadership after the election and this sort of thing that strikes at the heart of many provides plenty of sound bytes, even if it is a load of codswallop.
But while we are at it, why not look at the practices of the Warehouse, Dick Smith, Noel Leeming, Farmers, Westfield malls, the list goes on and on. That would reveal some fun (depending on your humour) issues, reams of newspaper print and will lead many to say "why would you want to supply those guys under those terms". But in the end, as a supplier, you either accept them or you don't.
(Just in case this gives the impression that I am involved in food retailing, I am not)
As the supermarkets, The Warehouse , Dick Smith, Malls etc are the 'Newspapers' biggest advertising clients , I wouldn't be expecting an expos`e anytime soon.
The Main stream media (for want of a better term) are totally compromised . both politically and commercially.
I beg to differ about the low prices issue . We are over-paying for all the basics , milk and dairy products generally , fresh veg , and all meats and fish are by any international measure really quite expensive .
The Supermakets in NZ have disproportionate power compared to the US , Canada , Australia ansd most of Western Europe where competition is much more robust .
Also the absence of proper daily fresh markets open to consumers for fruit and veg and fish such as we see in Europe means we dont have competiton in these basics.
The price is simply what the supermarket can gouge and often bears no relation to the producer price whatsoever .
The return on equity for a supermarket chain is actually something to behold , and its not a good measure to look at the gross margin / markup , beacuse of the confidential discount arrangements and kickbacks
I think you are wrong on a lot of things here. Indeed some of these things are the consquence of a free market I believe you are so keen on.
Milk etc is set on an international price I believe so we have to pay the same as anyone else, hence its higher than it should be fr our wages, but I think the volumes sold here have dropped as a result, not a bad thing, less fat is good IMHO.
Fish, is is awful quality here now let alone the price, simple its all air freighted offshore, the Japanese, Chinese etc will buy all we have, a free market in action.
Ive yet to be convinced our supermarkets are any worse than say the UK, if they were that would be shown up in excessive profits, Im not sure I see that from them.
"can gouge" welcome to the free market...not just food of course, marketing is big business convincing us we need item A and its worth the price...
Kickbacks etc would be reflected in the profits, simple...
regards
While we are at let's talk fish. Consider those European cokking programmse where they wonder down to the local harbour and buy fish straight from the adjacent market. Try doing that in NZ - not a chance in hell.. The big boys have secured the bulk of quota and our local fishing is pretty much dead. By slow increments over the last 30 years we have lost our birth rights.
I agree Rastus. First the locals were accused of over-fishing to introduce the current quota system which allowed the system we have now.
There is hardly ever a mention of the hundreds of squid boats that were in NZ waters during the 1980's. I lived at 1400 ft and viewed an enormous coastline. We could often count up to 200 squid boats operating and they weren't outside the coastal limits of the time. It often looked liked a floating city at night.
Quota was a convenient way for the Government to make extra money. First shag the existing system by making sure there is some kind of failure and then intoduce a new system where the Government can create some new revenue streams.
Notaneconomist, it's not entirely clear from your comment whether you think that it was a good thing to have hundreds of squid boats in NZ waters, and therefore blame the Government for putting a stop to that via the quota system; or whether you think that it was a bad thing, but still blame the Government for their way of putting a stop to it.
There most certainly is "some kind of failure" in an unregulated fishing industry; no Government shagging required. It is a classic case of the "tragedy of the commons" - if everybody, or nobody, owns a resource, then nobody has an incentive to manage it with a view to maintaining its value, and therefore it is likely to be over-exploited. That kind of failure is most effectively dealt with through establishing property rights which create that incentive. The establishment of fishing quotas is one way of doing that.
Certainly, the Government could have avoided creating a revenue stream for itself. It could have given quotas out for free. That would have meant a transfer of value from the public to a fortunate group of individuals who would have ended up owning something of substantial economic value without actually paying for it. I can see that those individuals would have thought that an excellent plan - everybody likes it when the Government gives them free stuff - but it's not clear that there would have been much of a public benefit.
Well said.
In fact a good in case point. Only by having a Government can "power" be effectively exercised over our land and sea to the benefit of NZers and not anybody that turns up. Say foreign fishing vessels, til its collapsed, then they move on.
So for those wishing for less or no Govn, well that effectivelt means a free for all, surely not the best outcome for NZers.
regards
MDM - the squid boats as they were called were foreign owned vessels fishing inside the limits illegally. They stripped out the fish supplies with their trawlers, I would call it incompetence on behalf of those who were tasked with enforcing the limit at the time. The fishing limits were also different to what they are today. If my memory serves me right I think we had a 13 mile zone. That was meant to protect our small local fisherman who operated small vessels around the country.
I never indicated that the quota's should be for free. I was informing on how we ended up with expensive fish that is not freely available to purchase from wharfs as the catch comes in.
Interesting that you make the comment "transfer of value from the public to a fortunate group" are you suggesting that all is in the public domain unless the Government sells it?
With that kind of thinking it want be long and you'll need a quota to sell dresses etc.
No, "all" is not in the public domain unless the Government sells it. Much is privately owned by individuals or firms, and can only change hands if the owner and the would-be buyer are able to agree on a price. This price mechanism is capable of dealing with many management, informational and distributional problems, although certainly not all.
How that resource came to be in private hands in the first place is a matter of history, the historical rights and wrongs of which may be debated; but in many cases resources have been better managed for being in private hands than they would have been had they been owned by everybody and nobody.
Where a resource is not privately owned, problems often arise with its management, notably a tendency to over-exploitation. Why should I constrain my own use of the resource, when the beneficiary of my self-constraint is likely to be the next person who comes along and snaps up the resource that I've left unexploited? This is a collective problem which needs collective action - which in modern society means action by the Government, subject to all the democratic checks and balances.
MDM - if those who were responsible for ensuring compliance of the foreign vessels had done their job the problem wouldn't have arisen in the first place. The Government could also have taken action and increased the zone within the first year. It took a long time for any action to be taken which is pretty typical of anything that comes out of Wellington and nobody factors these inefficiencies into the system let alone the long term loss of income.
Modern Society is a bollocks phrase dreamt up by idiots. The System is not able to serve the people or country effectively, efficiently and promptly. The people of NZ are exploited by the actions of Government and its Agencies.
I believe suppliers are getting squeezed as are shoppers. Why else would it be cheaper to buy NZ products overseas - even after they have been shipped all that way? In New Zealand we pay more for everything. It is quite frankly ridiculous to suggest we are benefitting from lower prices......
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