Shopping for change: breaking the supermarket duopoly

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The duopoly power of New Zealand supermarkets has made it difficult to entrench competition. Photo / 123RF

By Sarah Robson of RNZ

In Feilding, in the late 1990s, there were three supermarkets in town: a New World, a Write Price and a Price Chopper.

Now, like much of the country, there are only two brands left: New World and Countdown.

For two decades now, the New Zealand supermarket sector has been a duopoly dominated by Foodstuffs and Woolworths.

But in 2020, amid growing outcry over the price we pay at checkout, the Commerce Commission was commissioned by the government to carry out market research to determine if competition in the grocery sector was working. – and if not, what could be done about this.

When its final report was released in March, the Commerce Commission’s conclusions were stark: competition is not working well for consumers, and if competition were more effective, retailers would face greater pressure to offer the right prices, the right quality and the right range.

The government is already taking action – but will it make a difference to what we pay for groceries?

The beginning of the end

According to Jon Duffy of Consumer NZ, a series of mergers and acquisitions in the 1980s and 1990s eventually led to the status quo.

People might remember supermarket brands like Foodtown, Big Fresh, Write Price and Price Chopper.

“Over the years what is now the duopoly crumbled and acquired and merged and finally in the early 2000s the last brand standing was Foodtown.

“The company now called Woolworths – then called Progressive Enterprises – applied to the Commerce Commission to buy Foodtown,” Duffy said.

After a long legal process, the merger finally took place.

“It was the beginning of the end, it was the beginning of the status quo, which was to say that the New Zealand grocery sector was served by a duopoly.”

Since then, these companies have continued to consolidate – and vertically integrate. This means that they bought the wholesale chain and in some cases even source themselves, own fishing fleets, etc.

“From the moment a fish is caught until the moment it is scanned at the checkout, it is entirely owned, in one case, by a single entity,” Duffy explains.

“When you own the entire supply chain, it’s much easier to control the prices charged through that supply chain, and that’s what we end up carrying at the supermarket checkout.”

But a duopoly is competition, isn’t it?

Duffy says the Commerce Commission’s market investigation highlighted various activities that made it difficult to entrench real competition. The competition between the two big players could be described as “silent”.

“They may have competed more vigorously in the beginning but what we’re seeing now is through supply chains, through supplier requirements, it’s very rare to see a special in a supply chain. supermarkets and not to see it repeated in a very short time ordering in the other supermarket chain.

“To say that the offers are really differentiated and they compete on different services – it’s hard to hit that bar in New Zealand.”

The Commerce Committee intervenes

Duffy explains that the Commerce Commission has been asked to examine the state of competition in the market.

“The reason behind this is that when competition works effectively, we see companies competing as the name suggests, but we see price competition, we see service competition, we see good things like the market innovation, etc.

“When competition is muted or not performing well, there is often an absence or low level of these good positives.”

Duffy says that until the commission delivered its final report, advocates like Consumer NZ believed “something is great about this market” – but they didn’t know exactly what it was, although they suspected that it was something to do with market structure and the behavior of duopolists.

“But we needed the resources to really identify the problems and the Commerce Commission’s analysis identified exactly where the problems lie.

“The headline was that competition was not working well for consumers, and then they were able to dig deeper into supermarket profitability and came to the conclusion that supermarkets were earning $1 million in excess profit every day.”

What happens next?

The government acted quickly on the recommendations of the Commerce Commission.

Legislation was introduced to outlaw land covenants, which allowed supermarkets to buy land or dictate the terms of leases to prevent competitors from moving into the area.

A grocery commissioner is appointed to regulate the sector – Trade and Consumer Affairs Minister David Clark said the commissioner “will keep a watchful eye on supermarkets… they will be a referee for the sector, in keeping the duopoly honest and proactively blowing the whistle if a problem is suspected”.

Duffy says it’s important for the commissioner to do an annual review of how competition is working in the sector.

“Rather than drifting around for 20 years like we’ve been doing for the past 20 years without really knowing what the problem was or being able to pinpoint exactly what the problem was – but having a vague sense that there was a problem – we’ll know every year how the supermarket industry is performing and whether the competition is doing what it should be doing to deliver those good results for consumers and suppliers, or whether additional regulation might be needed. “

The government is also introducing a code of conduct on how supermarkets interact with suppliers, to prevent major retailers from using their power to pass costs and risks onto suppliers.

Will it be easier for foreign companies to set up here?

Duffy says that will depend on whether the two supermarket giants open up their wholesale supply to competitors. The government has indicated that it will regulate to do so, if companies do not act on their own.

“If you’re a competing supermarket, not only do you have to build a retail chain, but you have to bring all of your wholesale and all of your distribution with you, you’re not going to come in and that’s why we don’t have seen no entries in the past 20 years.

“But if you know you have a guaranteed source of wholesale groceries that you can then sell to customers and can get them at a fair price regulated by a code of conduct overseen by an independent regulator, that’s much more attractive prospect for you to come in and set up a retail business.”

A more transparent regulated system could also give national brands looking to grow more confidence to take that risk.

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