ComCom commissioner John Small says the regulator is not playing a game with supermarkets.
Consumer advocates, unions and food suppliers have piled into supermarket giants Countdown and Foodstuffs after the Commerce Commission found a lack of competition had pushed up their prices.
The watchdog’s draft report into the industry showed consumers had not been getting a fair deal and regulation was required, Consumer NZ chief executive Jon Duffy said.
Consumer Affairs Minister David Clark said the commission’s findings indicated there were problems in the market.
“Consumers deserve to know if they are getting a fair deal at the supermarket checkout, and the draft findings indicate they may not,” he said.
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The commission found food prices in New Zealand were the sixth highest in the Organisation for Economic Cooperation and Development in 2017, and that the chains’ profits were “persistently high”.
That is despite the country being a big food producer and exporter.
The chains had been earning about a 22 to 24 per cent return on their capital, the commission found.
Commerce Commission chairwoman Anna Rawlings surprised many observers by waving the biggest of sticks available to the commission.
The commission could “vertically separate” the two supermarket firms by requiring them to divide their wholesale businesses and store networks into two “entirely separate companies”.
The watchdog could also recommend that Countdown and Pak’n Save and New World-owner Foodstuffs be forced to sell some of their stores, Rawlings said.
Both steps could help pave the way for a third supermarket group to enter the market.
“Without intervention, we currently see little prospect of a new or expanding rival being able to constrain the major retailers effectively, and improve competition in the sector,” Rawlings said.
But fellow commissioner John Small said he believed engagement by the supermarkets on a deal was likely.
That could see the chains agree to supply goods to rival retailers, including existing businesses, from their warehouses on “non-discriminatory” terms.
Small suggested that could bring about faster and perhaps also deeper change than requiring the sale of individual stores.
Food & Grocery Council chief executive Katherine Rich said the commission’s report did not disappoint.
Confirmation by the commission that it was set to recommend a mandatory code of conduct setting out how supermarket chains should treat food suppliers would be a big step forward for her members, she said.
Rich said practices by supermarkets that concerned the council included them “fattening their margins” and shifting risks on to suppliers, and its members being forced to pay for in-store promotions that they did not receive.
Merchandisers employed by suppliers to promote products in stores had been bullied and intimidated to the point where it had become a “health and safety issue” in some parts of Auckland and Hamilton, the former National Party MP said.
Rich said she had raised what she described as some serious behavioural issues with Foodstuffs management and “got nowhere”.
Foodstuffs has been contacted for comment.
The commission’s report was an important step in getting the industry’s business culture right, Rich said.
Even as the commission was conducting its review, Foodstuffs North Island was adopting a new business model that was seeing it reduce product choice in its stores for products including pasta and breakfast cereals by “deleting” suppliers, she said.
First Union secretary Tali Williams said the commission’s report showed the supermarket duopoly was unduly powerful and profitable, and believed some benefits of reforms needed to flow through to shop workers.
“Low wages and a miserly attitude to bargaining with their workers are a big part of the reason Foodstuffs profits are so high,” he said.
The union clashed with Foodstuffs in February, expressing disappointment Foodstuffs had lobbied MPs against an increase in minimum statutory sick pay for 10 days because it was worried about the impact on its franchisees’ profits and costs.
Rawlings said that if competition in the supermarket industry was more effective, retailers would face stronger pressures to deliver the right prices, quality and range to satisfy a diverse range of consumer preferences.
But as it was, the chains avoided competing strongly with each other, particularly on price, she said.
“Meanwhile, competitors wanting to enter the market or expand face significant challenges, including a lack of competitively-priced wholesale supply and a lack of suitable sites for large-scale stores.”
Rawlings said that during the market study the commission had uncovered some conduct by the supermarket chains that it might need to separately investigate to determine if it breached the existing provisions of the Commerce Act or Fair Trading Act.
If the Commerce Commission did go as far as recommending the supermarket chains be forced to sell some of their stores it would need to consider whether that might, for example, involve requiring Foodstuffs to sell either its Pak’n Save or New World chains, or the sale of a mix of stores.
Rawlings indicated the latter might be more likely, saying it would be seeking to achieve a “national spread”.
The Commerce Commission is looking into how competitive New Zealand’s grocery retailers are.
Countdown managing director Spencer Sonn said some of the recommendations in the draft report would have “significant implications” that it would need to work through to understand.
“We’re proud to partner with 1400 suppliers, including 120 produce growers and 900 small suppliers, and having good relationships is incredibly important to us,” he said.
He appealed for people not to take out any sentiments they might have on shop workers.
“We appreciate that many Kiwis will have strong thoughts and feelings about the report and would ask that they keep it kind when shopping in our stores and treat our teams with respect,” he said.
The commission is due to finalise its study into the $22 billion industry and its recommendations in November, after holding a conference on the matters it has raised in September.