NZ’s grocery duopoly at risk: Commerce commission report and industry body back new retailer entry

03-Aug-2021 - Last updated on 03-Aug-2021 at 01:49 GMT

The New Zealand food and grocery industry has voiced its support for the potential entry of foreign supermarkets to break up the current local retail duopoly held by Foodstuffs and Countdown. ©Getty Images

Related tags New zealand Supermarket Competition

The New Zealand government assigned Commerce Commission New Zealand the task of carrying out a study into the state of competition within the local grocery sector, and the commission’s recently-published draft report revealed preliminary findings that the competition ‘is not working well for consumers’.

“If competition 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 this is] not working well for consumers [currently],” said the commission in its report.

“The retail grocery sector can best be described as a duopoly with a fringe of other competitors – [at prestnt], the grocery market is dominated by Foodstuffs and Woolworths NZ’s (Countdown’s) supermarket chains.

“Competition tends to be weak in a duopoly, unless it is easy for rivals to enter and/or expand to a scale to directly compete with the duopolists [but] this does not appear to be the case here [and both stores] choose strategies that limit competing directly with each other, particularly on price. For example, each supermarket banner targets a different section of the consumer population.

“Other grocery retailers are largely unable to compete on price and offer the full product range to satisfy the consumer preference for one-stop shopping [allowing] the major grocery retailers to operate without fear of losing too many consumers to other retailers, even in the main urban areas.”

To increase competition, the recommendations made by the commission include to improve the conditions for entry and expansion by existing rivals, e.g. improving access to wholesale groceries at competitive prices, and implementing measures to help other major grocery retailers from other countries enter the market.

“These include direct sponsorship of entry by government either by encouraging investment, by direct entry, or by requiring the major grocery retailers to sell some of their stores to create additional major grocery retailers,” said the commission.

The New Zealand Food and Grocery Council (NZFGC) has met the draft report and recommendations made with a warm welcome, calling it a ‘meticulous and accurate reflection of the grocery market’.

““The report shows there are big problems in the market, and consumers would get better prices, wider ranges, and better quality if there was increased competition,” NZFGC Chief Executive Katherine Rich told FodoNavigator-Asia.

“It [also] accurately reflects the reality faced by many suppliers of food and grocery products to the two supermarket chains around the imbalance of power in negotiations on issues such as price, promotions, and discounts - [being] reliant on just two major retailers has allowed the retailers to push excess costs, risks, and uncertainty onto suppliers, with fears of delisting if they do not agree to their terms.”

Rich also expressed support for the commission’s suggestion to introduce more major supermarkets into the country’s retail sector.

“We are supportive of all new entrants which might contribute to extra retailers from Costco or Aldi to new online providers,” she said.

“Everyone benefits from a flourishing food industry where suppliers have a genuine chance to negotiate and receive fair terms, and which ultimately benefits consumers in terms of innovation and range.”

Grocery Code of Conduct

NZFGC has long been an advocate for the implementation of a Grocery Code of Conduct in New Zealand, and is over the moon that the commission’s report has indicated this should be not only established but made mandatory.

“We were particularly pleased the Commission concluded it would be beneficial to introduce of a mandatory code of conduct to strengthen bargaining power and prevent current conduct which reduces the ability and incentive of suppliers to invest and innovate, [and] have drafted a framework for a Code which we intend to share with the Commission and members to start the conversation,” said Rich.

“This is exactly what is needed to give suppliers something closer to a level playing field when it comes to negotiations.

The draft report is currently open for public comment until August 26 2021, and the commission’s final report will be published by November 23 2021, upon which the New Zealand government willd deliberate and respond.

“NZFGC will be making a full submission in support [of the commission’s findings],” said Rich.

“[The only area we] think the Commission might consider reviewing [is] its work on private label and retailers preferencing their own products.”

At present, the draft report has found that private label products can benefit consumers through lower prices and greater choice, but also pose the risk of crowding out supplier branded products, and reduce options and raise prices for consumers over the longer term.

The commission’s preliminary view on the whether the overall longer-term risks posed by private label products outweigh any potential benefits to consumers in the short term is that this is ‘not clear’ at this stage.