‘Conflict of interest’: NZ food and grocery sector calls for restrictions on private label products

By Pearly Neo contact

- Last updated on GMT

The New Zealand food and grocery industry has called for more restrictions to be placed on supermarkets’ private label products. ©Getty Images
The New Zealand food and grocery industry has called for more restrictions to be placed on supermarkets’ private label products. ©Getty Images

Related tags: New zealand, Private label

The New Zealand food and grocery industry has called for more restrictions to be placed on supermarkets’ private label products given the highly concentrated grocery retail market in the country, citing a potential ‘conflict of interest’ which could result in ‘harmful outcomes’ for consumers.

Since November 2020, New Zealand’s Commerce Commission has been conducting a market study into the nation’s retail grocery sector, which has the most highly concentrated supermarket ownership in the world​ with over 95% of the market controlled by two retail teams. Its first draft report was published in July 2021, with submissions and comments still being accepted.

This duopoly situation is lead by Woolworths NZ, which runs the Countdown chain of supermarkets as well as SuperValue and FreshChoice; and Foodstuffs which runs the New World, PAK’nSAVE and FourSquare chains.

In the New Zealand Food and Grocery Council’s (NZFGC)  latest submissions to the Commerce Commission regarding the retail market study – a comments document and a report dubbed Private Labels, Buyer Power and Remedies in the NZ Grocery Sector​ with research by Castalia, both of which FoodNavigator-Asia ​has viewed courtesy of NZFGC Chief Executive Katherine Rich - the council highlighted the impacts of private label products on the market, stressing that too much of these could have a ‘net negative’ impact for consumers in the long run.

“NZFGC believes that the Commission’s draft report is a meticulous and accurate reflection of the grocery market, and [are supportive of its findings and recommendations] – We just think that [there needs to be a closer review] of its work on private label and retailers preferencing their own products,”​ Rich said.

“[Research has shown] that private labels can enhance or harm consumer outcomes depending on the market context – In a diffuse, unconcentrated retail market, private labels can have sustained positive outcomes as consumers would benefit from an increased product range and lower prices.

“[But in the case of New Zealand], this is a highly concentrated retail market [which means] retailers hold a strong imbalance of power in the retailer-supplier bargaining relationship – [this] imbalance in bargaining power [will eventually] discourage supplier entry, investment, and innovation, to the detriment of consumers [who would be subject to] higher prices and lower product variety in the long run.”

According to the Castalia report, this is because the imbalance of power allows retailers’ private labels to ‘take advantage of suppliers’ product development or innovation for the benefit of the private label’​ and discriminate against rival brands in favour of private labels by giving these superior product placements, promotions, advertising and pricing.

“In the short term, consumers may benefit from lower prices initially for the private label, but these will not necessarily endure as the private label becomes established. [Suppliers may also be] disincentivised to invest in product innovations due to the risk that retailers may use [their] innovations [or] not having the same opportunities for shelf space, in-store promotion and advertising,”​ said the report.

‘Fast-followers’

NZFGC added that these concerns are a significant risk as supermarkets would be able to increase their profitability simply by applying more requirements to competing branded products and advantaging their private label products on price, shelf space, promotions and so on.

“NZFGC [believes] such practices are harmful, and considers the overall effect to be harmful rather than beneficial in the context of retailer market power. [The theory of harm, where] retailers copy innovations from data obtained through private label tenders of arrangements, or even directly taking those innovations [is real],”​ said the council

“For example, there have been occurrences where a supermarket has asked suppliers for ingredient data or information about ingredient sourcing, the clear concern being that this is for Private Label products.

“The major retailers also have access to [recipe] information from suppliers, allowing them to replicate branded products under a private label and freeride on the supplier’s R&D. This makes major retailers ‘fast-followers’ at lower cost (skipping R&D) but entering direct competition with branded products – [this] is a powerful disincentive [for brands] to invest in further R&D and innovation.

“[In short, in a concentrated retail market like New Zealand], when retailers offer private label products and therefore operate as a competitor to their suppliers, as well as a supplier to themselves, a fundamental conflict of interest is created, [and the] growth of private labels could crowd out branded products [leading to] long-term loss of consumer choice and higher prices.”

Potential solution

NZFGC has long been fighting for the establishment of a mandatory Grocery Code of Conduct to be implemented in the country and believes that this is the answer to these private label issues as well.

“The rules around private labels need to recognise the conflicts of interest between a supermarket acting as a market place and competing with other participants, how this incentivises retailers to price branded goods higher, and that there is limited shelf space available,”​ said Rich.

“There also need to be rules preventing retailers from discriminating against [any brands or suppliers] and rules preventing [the sharing of] confidential information from suppliers which would not ordinarily be provided to competitors, as this also raises cartel concerns.

“Importantly, suppliers must be enabled to specify and enforce maximum resale prices, which would provide direct consumer benefit by ensuring pass through of price reductions - This has not been able to occur due to the lack of [bargaining] power and retailers’ incentives to promote their own products.”

The Commerce Commission’s market study timeline has been extended and the final report is now due to be published on 8 March 2022 as opposed to the previous 23 November 2021.

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