Stop waiting for a foreign hero: NZ’s supermarket sector needs competition from within

By Lisa M. Katerina Asher, Catherine Sutton-Brady & Drew Franklin*

New Zealand’s concentrated supermarket sector is back in the spotlight after Finance Minister Nicola Willis said she was open to offering “VIP treatment” to a third international player willing to create competition.

However, New Zealanders hoping for a foreign hero to break up the current supermarket concentration will be waiting a long time.

It could take five years or more for an international brand such as Aldi to enter New Zealand and establish a nationwide chain. It is a risky bet. So far, no foreign operator has expressed interest publicly in setting up shop here on a national scale.

To create more competition in the supermarket sector, the New Zealand government needs go back to where the issues began: allowing multiple companies to merge until there were few alternatives for shoppers.

Breaking up two of the major entities in the sector would be a relatively quick way to reintroduce competition and improve affordability for everyone.

The rise in concentration

The current state of New Zealand’s supermarket sector – dominated by Woolworths (formerly Countdown), Foodstuffs North Island and Foodstuffs South Island – is a result of successive mergers and acquisitions along two tracks.

The first was Progressive Enterprises’ (owner of Foodtown, Countdown and 3 Guys banners) purchase of Woolworths New Zealand (which also owned Big Fresh and Price Chopper) in 2001.

Progressive Enterprises was sold to Woolworths Australia, its’ current owner, in 2005. In less than 25 years, six brands owned by multiple companies were whittled down to a single brand, Woolworths.

The second was the concentration of the “Foodstuffs cooperatives” network. This network once included four regional cooperatives and multiple banners including Mark'n Pak and Cut Price, as well as New World, PAK’nSave and Four Square.

The decision of the four legally separate cooperatives to include “Foodstuffs” in their company name blurred the lines between them. The companies looked similar but remained legally separate.

As a result of mergers, these four separate companies have now become Foodstuffs North Island – franchise limited share company, operating according to “cooperative principlies” and Foodstuffs South Island, a legal cooperative.

In a recent failed application to merge into one company, Foodstuffs North Island and Foodstuffs South Island admitted to sharing information between the two legally separate companies. They are also not meaningfully competing with each other as they operate in regions which do not overlap.

Breaking up the current players to compete

While the Commerce Commission declined the clearance for Foodstuffs North Island Limited and Foodstuffs South Island to merge into one single national grocery entity, more can be done to drive competition in the supermarket sector.

The fastest option would be to break up the “Foodstuffs” companies into smaller entities, with the breakaway and re-branding of PAK’nSave across both islands.

But to do this the government would need to update legislation to allow parliament to force divestiture, consistent with the United Kingdom and the United States.

This would allow New Zealand to go from three supermarket companies to five or more in a short period of time.

Reducing the power dependency of suppliers and customers on the current companies would also reduce barriers to entry for overseas brands.

Global players will take too long

Breaking up the local dominant supermarket players is simply faster, and more straightforward, than waiting for a foreign company to enter New Zealand. It takes time and is expensive to build scale with stores. It can also be risky, as recent history in Australia shows.

Aldi Australia, a favourite of New Zealand consumers hoping for a global alternative, took 20 years to reach scale as a third major player in that country. Originally from Germany, Aldi entered Australia as a declining brand – Franklins – left the market.

In 2017, another German company, Kaufland, announced ambitious plans to enter the Australian market, starting with 20 stores. It purchased its first site in 2018 and hired 200 staff. However, the company abandoned launch plans in 2020 and divested completely from the market.

Additionally, it took US-based bulk retail store Costco three years – and NZ$100 million – to go from announcing its plans for one New Zealand store to open. The retailer has hinted at opening a second location but this has not yet happened.

In the end, the solution to New Zealand’s concentrated supermarket sector needs to come from within. Breaking up the power held by the dominant supermarket companies will allow prices to come down more quickly than waiting for a foreign supermarket to arrive.

The government allowed the market to become concentrated, so it can now fix it. An international brand is not the hero – local, New Zealand-owned competition is.

*Lisa M. Katerina Asher, Retail Academic Researcher, PhD Candidate & Sessional Academic, University of Sydney; Catherine Sutton-Brady, Associate Professor of Marketing, University of Sydney, and Drew Franklin, Senior Lecturer in Marketing, University of Auckland, Waipapa Taumata Rau.

This article is republished from The Conversation under a Creative Commons license. Read the original article.