By Tim Hazledine*
I’ve just finished wading through the 609 pages of the NZ Commerce Commission’s Market Study into the Retail Grocery Sector: Final Report.
Why have I done this? So that you don’t need to. Do you want to know whether the Commission found that the big two dominant supermarket chains -- the NZ-owned Cooperative, Foodstuffs, and the Australian-owned Corporate, Progressive (Woolworths) -- are ripping off New Zealand grocery customers?
Well, I can tell you that the answers are (a) that it’s really hard to be sure, but (b) they probably are, somewhat, but (c) there’s nothing much to be done about it.
I agree with all three of these conclusions – in particular (c): this for reasons which may surprise you, to which I will return. But first, why is it so hard to be sure what is going on in this market, in which just about all of us are experienced, regular participants: the weekly supermarket shop? Why not just make a big list of the most popular grocery products; check out their prices in New Zealand and, say, Australia (easy to do now with online shopping), and compare the total costs at checkout?
Well, the Commission did in effect do this, and not just comparing NZ with Australia, but also with 36 other rich (OECD) countries. However, there really are difficulties here. Take an apparently easy one like breakfast cereals, for example. I have always been a ‘Weet-Bix Kid’, and last week I went down to my local New World supermarket to stock up. The large 1.2kg Sanitarium Weet-Bix box was $789. When I got home I checked out the same branded product online from Coles in Australia: just $5 for 1.2kgs.
Big difference, huh! But: we need to make two adjustments. One, of course, is the exchange rate: five Aussie dollars is about NZD 538. And then, the product is taxed at 15% GST in New Zealand, and not taxed at all over the ditch. So take that off the NZ retail price, which brings it down to $686.
[Note that a major failing of the Commerce Commission’s study is that they did not adjust for sales taxes. This will definitely bias their price comparisons against New Zealand, because we are unusual – perhaps, unique – in not having bowed to the Farm Lobby to have ‘food’ exempted from GST.]
Well those adjusted prices still imply a quite hefty price differential going against the Kiwi shopper – more than 25 percent. But, there are two more buts to come.
First, I didn’t purchase the expensive branded Sanitarium Weet-Bix. Right below it on the shelf were 1.2kg cartons of New World’s house-brand, ‘Pam’s Wheat Biskits’, on sale at just $5 – or $435 net of GST, which is well below the Australian price! Of course, that is what I bought, because I happen to know that ‘wheat biskits’ and ‘weet-bix’ are exactly the same product, off the same assembly line in Sanitarium’s Pah Road factory (naturally, they don’t tell you this on the box, but now you know).
Shouldn’t I compare the Wheat Biskit price with an Australian house brand? Yes, and I find Woolworths offering their ‘Wheat Biscuits’ for the equivalent of just NZD 403. So, that’s about 10 percent cheaper in Australia, if the house brand is, as in NZ, of identical quality to the Sanitarium brand (it may not be).
But then (the last ‘but’ for now), even if the researcher corrects for all the myriad of difficulties in comparing prices, and if they find that, say, Australian prices are on average somewhat lower than ours, we still can’t infer that we have a problem of our supermarkets ripping us off. We have to compare prices with costs. If costs are also higher in New Zealand, then the profit margins earned by the supermarkets could be no higher here – maybe even lower.
Could this be the case with Weet-Bix? Plausibly, yes. By weight, your weet-bix is 97 percent whole grain wheat -- they do tell you that on the label. Australia is a big wheat growing country; New Zealand is not, and indeed it is quite likely that Sanitarium here imports most of its wheat from Australia, which is surely going to add to costs.
The list goes on. Two litre milk cartons, for example: much cheaper in Australia, with some but not all the price difference rationalised by Australian dairy farmers being paid less for their raw milk. I did come across the odd exception in my own investigations on-line -- Marmite (made in NZ), and Vegemite (made in Australia) were both a bit cheaper here, at least in the small pot sizes.
Overall, however, I do believe that a reasonable conclusion to be drawn from the substantial body of evidence documented in the Commerce Commission’s 600+ pages Report, is that grocery prices are indeed systematically higher in NZ than in Australia (which is really the only comparison market we should be concerned with), and that at least some of the excess cannot be accounted for by higher costs: it’s higher profits, too.
But I think it unfair to criticise the Commission for not going on to recommend swingeing interventions in the grocery market, such as breaking up one or both of the Big Two into smaller competitors. Why? Because I don’t expect that anything the government could do to try to extract more competitive behaviour from the supermarkets would be effective.
Why not? Because slack competitive behaviour is deeply engrained in Kiwi business culture, and not just in the grocery sector.
That’s the point. If high grocery prices were an anomalous blip in an otherwise sharp-as-a-tack competitive business landscape, then a focussed anti-monopoly policy blitz might well be warranted. But if slack competition is the widespread norm – well, why pick on supermarkets? Not fair!
As far as I know, neither the Commerce Commission nor anybody else has carried out a systematic, economy-wide comparison of the extent of competition on both sides of the Tasman. I certainly haven’t tried it. But I have been on the alert for scraps of evidence as they turn up, and these are by now adding up to quite a pile, nearly all pointing in the same direction. As well as groceries, we pay:
- Higher bank merchant service fees (about $13,000 more per retailer per year)
- Higher real estate agent commission rates and conveyancy fees
- More for our mortgages
- Higher hotel room rates
- More for books, beer
- Much higher building materials costs (and costlier construction practices)
- More for clothing and footwear
Exceptions? Apart from Marmite, I did once find that regional airfares in New Zealand (linking smaller cities and towns to the main trunk routes) were significantly lower here than in Australia (and Canada, and the US, and Scandinavia). I am not sure why, but it was a fact.
Interest.co.nz readers will be able to add their own insights and examples, and of course these could go either way. I am betting that they mostly don’t – that the more we learn, the more we realise that we are here talking about, not isolated examples of reprehensible price gouging, but a whole way of life; pervasive throughout our business culture, and as such, something to be tolerated -- even, respected, not ineffectually bemoaned.
It’s the Kiwi way – the ‘bach, boat & BMW’ limitations on the aspirations of our entrepreneurs; the unwillingness to sign on to life service in stultifying corporate bureaucracies; the high degree of mutual support that we show each other; the mate’s-rates/she’ll be right/no problem attitudes.
All this is reflected in often startling differences in business cultures. When New Zealand workers head to Australia -- as one in ten of us do – they fit in seamlessly; easily earning the higher wages and salaries paid there. But when our companies make the move – well, as often as not they get totally trashed, as was the most successful NZ firm of the 1990s – The Warehouse -- when it took its business model across the Tasman. Reflecting on this later, founder Sir Stephen Tindall said that the most surprising thing to him was the intensity of the competition which Australian firms turn on to invaders of their territory. Perhaps someone should have told him about this.
None of this is intended as criticism of New Zealand; nor of Australia, for that matter. It’s just the way we are: different.
So it is rather hypocritical for most middle class folk here to complain about high prices. For every over-payment by a customer there is over-charging by a supplier – are you one of those suppliers?
But there is an important exception to this line of reasoning, that does justify some government action: the plight of low income New Zealanders. We all pay the higher, universal, sales tax on food, etc, in NZ, but most of us get that back – compared with counterparts in Australia -- with lower marginal income tax rates on higher incomes.
Low income people all pay the GST, but get little back because they don’t earn enough to pay much in income taxes in the first place. And, in general, they have little opportunity to benefit on the supply side of the deal, because they have no market power to themselves grab a share of the excess profits.
So, given that there really are such excess profits in the supermarket sector – that the same wheat biscuits that are sold for $789 can be profitably sold for just $5 -- and given that there is nothing that can, or, anyway, will be done about it in general, then I’d say there is now a good case for direct action, focussed on helping out low-income households.
An idea which is often mooted is that government should set up ‘KiwiShops’ in lower decile suburbs, offering a simplified range of regular branded products at prices just covering full costs of supply. The Commerce Commission does have a few very cautious paragraphs on this option right at the end of their Report, but concludes that it would be best to leave this for now, until supposed restrictions on securing land for new small supermarkets are dealt with, which they propose to check on in another Report in three years’ time.
I’d say that a determined government, probably in collaboration with local agencies and Iwi, could find some land in South Auckland, etc. And I don’t really expect that there would be a lot of opposition. Foodstuffs and Woolworths are not evil people, and they might welcome localised market innovations which would take some public pressure off them. And wouldn’t grocery manufacturers be willing to come to the party? The Sanitarium Health and Wellbeing Company is owned by the Seventh-day Adventist church. Couldn’t they find it in their christian hearts to offer KiwiShops at least as good terms on their weet-bix and marmite as they do the big chains? Worth a second look, perhaps.
Tim Hazledine is Emeritus Professor of Economics at the University of Auckland.
62 Comments
It’s a mistake to say we should only compare ourselves with Australia. They have similar issues to us, with a duopoly by far the most prevalent.
as for milk, isn’t the core product price set internationally? If not then they should have an inquest into fontera, why should we pay more than the international price?
The article touches on something key; a lot of our industries are lower volume, so the margins need to be inherently higher.
Maybe relying solely on duopolies for your dietary requirements is something people need to take stock of.
But hey, our Domino's pizza seems to be cheaper than most of the rest of the world (including developing nations), so that's a win, right?
I'm a bit light on details, as I can't find the source, but I was reading recently that Domino's pizza was actually more expensive or the same here, once you take into account the pizza sizes.
For example, an extra large Domino's Pizza is 11 inches in NZ but 16-18 inches in the US. Apparently.
Suggest suspect syntax too. “ So it is rather hypocritical for most middle class folk here to complain about high prices. For every over-payment by a customer there is over-charging by a supplier.” The only way that could make sense would be, that most middle class folk are suppliers. Count me in the minority then.
There is actually a lot that can be done about it. But first see the Commission's suggestion of 'monitoring' as useless, and job security for itself.
Limit the number of outlets for each group to say fity tops. The chains themselves can work out to break up. You would then see actual competition, and better the arrival of new innovative startups. With multiple groups it's to hard to operate the cartel.
As for the 'hypocrites' wisecrack, significant harm is caused by the duoply to smaller enterprises. (that BBB middle class crowd) They are simply shut out. Unleash their innovative food products and energy from restrictions and they would flourish, and consumers would benefit too.
I'd seen somewhere that profit margins of the supermarkets was in the vicinity of 5%, suggesting that prices would only be 5% lower if they were non-profit "kiwishops".
I expect that if this government had a shot at it their costs would be far more than 5% higher due to shambolic organisation.
But that is the thing with monopolies and duopolies, they often don’t make that much profit as they have no reason to be efficient. I bet if we had 5 independent options instead of 2, prices would come down. And even a 5% decrease is significant, probably more than Nationals tax cuts for most families.
I think that's precisely the point. When I looked back at it a while ago Aldi has profit margins of around 2.5% while their operating expenses is 11% of turnover. Countdown is working off around 4.5% profit margin and gross margin of 24.5%, so operating expenses of ~20% (wouldn't be surprised if there is fees back to Australia counted in the expenses).
I'm not sure how Foodstuff's works, but the fact that there is rich listers on the back of owning Pak n Save's and New World's show that there is some very fat margins. I think we can all agree the NZ supermarket shopping experience is not great and lacking any real artisan experience.
Costco is going to start eating away at some of it as I suspect there is a fair number of people that will buy as much as they can from there and reduce their overall weekly shop at the supermarkets.
A not for profit supermarket chain? That's an interesting concept.
One observation I Would make is that kiwis, despite our humble recent beginnings, seem to have developed to a point where we like things bespoke and fancy. Not oppulant (clavier and high tea). But hand crafted with a nice marketing feel. we seem happy to pay for it. Also companies in NZ are very good at marketing to this. Prices are set at the maximum possible to maximise profit after all.
I also get the impression that as kiwis we do also get a little stockholm syndrome accross many aspects of life. Our isolation means once social behaviour takes hold it's hard to budge (house price mania over 20years for example - how much of that issue is due to built up marketing activities?)
It would be interesting to see how this system would survive a genuine long recession, that is if the money printers ever allowed one... (I jest).
I would strongly (suspect most would) support a breakdown of the duopoly. I disagree that it sets a Wider precedent to be concerned with. It would only provide long term benefits.
How many other industries have both such a major role in daily life, as well as such a strong command of the market by only 1 or 2 players? I can't think of one.
Good article, thanks.
I have come across not-for profit supermarkets before, mostly in form of co-operative supermarkets for a group of people with large enough numbers (e.g. teachers, healthcare sector workers etc). Sometimes such co-ops are multiple groups coming together (think firefighters, police, teachers, nurses, etc all forming an alliance). The co-opp supermarket will be buying everything on behalf of its members.
Having said that, in my observation, these co-ops are unlikely to offer a sustainable net positive return to their members (or general public where shopping is open to everyone) compared to the private, for profit competition. They often struggle with quality of products and their range, as well as sustained reasonable prices. Theoretically , a well run co-opp supermarket could work, but actually implementing it is much more difficult than it may seem.
Actually, eating less meat and eating more fresh, seasonal vegetables improves one's standard of living.
I didn't say go vegetarian. But you can if you want!
Many people in the west eat far too much meat.
Meat is good for you, but only up to a point.
Same with booze!
I'm cutting back on the booze, both because it's better for my health to do so and better for my wallet.
I was previously a moderate-heavy drinker. I'd say I'm at the light end of moderate now.
By reducing both our household's meat and alcohol consumption by about 30-40%, we are probably saving $60-$80 pw.
Almost everyone in the country would benefit from eating less food. I would skip breakfast altogether, go for a run instead, eat eggs for lunch and a smaller evening meal of chicken drumsticks or fatty beef mince as the foundation if you are on a budget. Maybe have small portions of rice or potato and some cheap seasonal greens if you really must. Go easy on the fruit and eschew any processed foods, no flour or sugar. Mix in more exercise and forgo alcohol altogether as it's health benefits are dubious.
NZ is #22 in the list of most obese nations and the Pacific Islands are right at the top.
List of countries by obesity rate
Don't eat anything with added sugar, flour or grains. Limit fruit (grapes are 25% sugar!) and never drink juice. Avoid all the 'vegetable' oils.
Good post.
And note we are second worst of western nations in terms of obesity.
so many people have a misunderstanding of healthy weight in this country. There was a scientist in the Herald the other day whinging about his nasty covid experience as some kind of warning.
He talked about his healthy weight, at 180cm and 90kg. That’s not healthy, that’s overweight! Ridiculous coming from a scientist.
I am 186cm and 92 kg, even that is a bit overweight. I should be around 85kg, and that scientist should be around 80 kg.
Within reason, equating weight and height together is like BMI, i.e. a crude, blunt instrument. Everyone is different and some are naturally more muscular than others: I am 193 cm and 105 kg, but not carrying any ballast around the waist (visceral fat). I eat healthily and avoid the snacks which most of us do not need.
There are a lot of obese people around, though on the whole though. South Auckland, where we used to live is terrible.
Most people aren't as physically fit as professional rugby players either. The fact that they're statistical outliers for this kind of thing should be an indication that they're statistical outliers, not that a general risk measurement tool for wider population health that doesn't consider athletes has no value.
Groan there is no direct relationship between weight and height in terms of health. Its all about body composition. I'm 183cm and 107kg, the BMI metric is stupid if your exercising like a manic or bodybuilding.. Probably your better off just pulling out a tape measure or stating what the waist size is on your Jeans to get a better idea because for guys any excess fat goes straight to your guts.
Certainly a protruding belly is never a healthy sign. It astonishes me that after two years of COVID-19 men are still walking around with these.
Supermarkets could be partly to blame as they often offer discounts if you buy two of something however it's really just a lack of will power. It's actually very easy to lose weight, it's maintaining a healthy weight that is a bit more difficult. Your body gets used to lower calories so if you return to old eating habits your weight will go straight back up faster than it did the first time.
"It astonishes me that after two years of COVID-19 men are still walking around with these."
I still have my spare tyre but I've cut out booze totally, down to sugar-free soft drink alternatives (Steviol etc) and just can't get to a gym for time or financial reasons. But I'm also finding it harder to stitch together a lean diet due to the spiralling cost of white meat like fish, and we're swapping more meals with lentils and black bean-based proteins.
So I think a lack of willpower is a little unkind, given we're eating a third as much meat as we were and our shop is still 30% more expensive. I shudder to think what it would be if we were cooking fresh for every meal instead of freezer-banking where we can.
... so true ... when everyone's complaining that cauliflowers are $ 14 a head ... or avocados are $ 8 each : dont buy them ! ... buy what is seasonal & cheap ... get frozen veges in the supermarket ... brown rice is always cheaper than potatoes , and far more nutritious & full of fibre .... weatbix/cornflakes/rolled oats : always cheap , & no added sugar ...
The likes of Sanitarium and Fonterra are big supporters of free food in schools program, so there is that.
At least in Auckland, there's no need to pay premium supermarket prices, especially for milk, bread, fruit and vegetables. There's a plethora of independent retailers, plus the Otara and Avondale markets.
The competitive market is BS and people are just being taken for a ride.
All those consumer goods on supermarket shelves implying competition amongst brands, yet follow the chain upwards and find there's only 5 owners. Go further and it probably becomes 2 major financial institutions. Yeah, it's a really competitive market. I wonder how much this industry siphons out of NZ compared to the banks.
As for other industries from tradies to lawyers and accountants - once the "market" price has been set everyone pretty much falls in line and charges similar rates.
This is an odd take. The article ignores three of the most significant findings of the report:
1. Our duopolies have legal and real estate teams who buy up land, and then either hold onto it, or sell it on with legal covenants that prevent it being used for grocery retail. The extent of this protectionism is incredible and the report did a great job of uncovering this.
2. The major flaw in our grocery system is duopoly control of the wholesale market. That's why the groceries in your dairies will often come from pak'n'save. This is where the report should have gone further - forcing a break between wholesale and retail.
3. If you want to sell groceries in NZ you have to buy space on the shelves at the duopoly - and the better shelf position you want, the more you have to pay. You will also have to offer regular discounts on your products - these are passed onto the consumer but the duopoly retain their profit margin. Some suppliers even get charged shelf stacking fees! If you have not been pushed into an exclusivity deal and you want to sell your stuff to a new start-up competitor, you can expect the duopoloy to move your stuff to the bottom shelf, or to simply stop stocking it (meaning you're out of business).
All of the above is a clear abuse of market power and is why profit margins in NZ are 8% to 10% compared to 2% - 3% in the UK. The profit extracted is basically as much as the dupoloy think they can get away with without being regulated. The answer is absolutely not to compensate poor people for getting ripped off whilst letting the middle classes enjoy the high prices and bag packers. As a start, Govt should force the duopoly to split off its wholesale and retail arms into two separate companies; end the anti-competitive covenants; and force the sale of any banked land.
ABSURD.
a) Just because monopolies & oligopolies are entrenched in NZ doesnt mean we shouldn't start removing them. Supermarkets provide a high proportion of NZ's food to consumers and are thus a critical area to address.
b) The commerce commission decision is gutless. They should have recommended breaking up the big two.
c) Perfect competition requires a minimum of 7 market players with equal market shares. We are nowhere near that.
d) The government and commerce commission are also at fault for letting the situation occur in the first place. The commerce commission shouldn't have allowed the original mergers and the government's competition law needs to be stronger.
... agree 100 % ... but , in the light of a gutless CC & a dysfunctional useless government , what can the Kiwi consumer do ?
I'd say it takes a little effort & personal responsibility to prepare ones own meals , from whole foods ... avoiding sugary goop & processed junk ... buy in season fruit & vege , grow a few fresh herbs , spring onions at home ...
... there are ways & means to get better value ... and better health ...
Oh awesome, all I need is land and time then. Good thing those aren't in short supply for a huge chunk of Kiwis at all, and falling back on the 'personal responsibility' trope isn't just lazy finger-wagging and an excuse to look down your nose at people for what is a totally unreasonable expectation for a big chunk of home owners and renters.
We've stripped back our proteins to lentils and blackbeans. Chicken and fish are getting too expensive, and I can't exactly grow my own fish, can I? The only alternative from here is to not eat proteins at all. Not sure how that fits in with 'better health'. Our shop is still $60 more expensive a week than it was two years ago, despite almost having no meat in it these days.
I've gotta say, I don't find the argument "most of our markets are anti-competitive so let's not make the supermarket industry competitive". It feels to me as if the appropriate response is to hugely increase the strength and resources of the commerce commission, because clearly they have got a lot of work to do!
If as many of our markets are operating in this manner as you believe Tim, then surely work done by the commission to remove the deadweight losses imposed by anti-competitive behavior is a surefire way to raise living standards for nzers
It can depend on where you shop. A survey was done on price of basic groceries across Central Otago and Wanaka. The results are here:
https://digital.thenews.co.nz/html5/default.aspx
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