New Zealand Food and Grocery Council CEO Katherine Rich talks to Kate MacNamara about the country's supermarket duopoly, the Commerce Commission's market study of the grocery sector, and the changes needed.
The goliath market power of New Zealand's supermarket duopoly is now clearly in slingshot range of the Commerce Commission, but it is Katherine Rich who has carefully collected many of the stones.
When the Government announced it would pursue an investigation into the state of competition in the grocery sector last year Rich, the CEO of the New Zealand Food and Grocery Council (NZFGC), swung into action.
She likes to describe herself as the only full-time employee of the NZFGC. But she also hired a team of consultants to help her members - the suppliers and manufacturers who sell to the supermarkets - speak up about their difficulties in trading with just two behemoth retail players, and to carefully filter their stories through the lens of economics and competition.
Rich's team has included competition lawyer, Andrew Matthews, who's helped in other areas too, including the proposed reforms of the Commerce Act (relating to the abuse of market power) and the reform of the Fair Trading Act.
She brought in Australia-based Black Market Research to survey her members and document their complaints and "drew on the expertise" of Australian retail consultancy Hexis Quadrant.
And the FGC also hired economists and accountants at international advisory Castalia to help provide an economic framework, and to contest the assertions of the supermarkets - that they are not extraordinarily profitable, for example - and to drill into such esoteric distinctions as the difference between economic and accounting profits.
Rich is a diminutive figure with a bookish interest in the history of the grocery sector and a room in her home dedicated to old issues of Woman's Weekly. But Rich is also a seasoned politician and lobbyist; she was a National MP from 1999 to 2008, and she's held the post at the NZFGC since 2009. Behind her trademark string of pearls (paired with a floral print on the day we speak by Zoom) she's clearly a steely adversary.
In the past year, she has been tireless in her push for a government-administered code of conduct to govern dealings between supermarkets and suppliers. She has taken a petition to Parliament and pressed MPs of all stripes to take up her cause. She has coaxed and cajoled her members to speak up about their grievances, and she has called out publicly and repeatedly supermarket practices whereby, she says, suppliers have been steamrolled.
At the end of July, Rich won a significant battle. The Commerce Commission's draft report confirmed that Foodstuffs and Woolworths constitute a duopoly in New Zealand's $22 billion a year food and grocery retail market. And it found that retail prices are "consistently high" by comparison with other OECD countries and that competition is not working well. The final report, which will recommend to Government what change to pursue, is now delayed to March 8 because of the current Covid outbreak.
Foodstuffs central buying
In recent years, Foodstuffs North Island has been cited most frequently by grocery suppliers, and by Rich, for behaviour they say is unfair and indicative of an unhealthy lack of competition amongst supermarkets.
Foodstuffs NI is co-operatively owned by its individually owned member store-owners (it includes the Four Square, New World and Pak'nSave banners among others). Foodstuffs NI co-operates in a variety of ways and agrees not to compete with Foodstuffs South Island, an entity comprised of much the same banners and likewise co-operatively owned by member stores. Woolworths NZ, which owns Countdown and controls several other banners, is Foodstuffs' main competitor.
Supplier grievances with Foodstuffs are now well aired: some say they have been made to pay for in-store theft, or for promotions not received; or that they've simply been squeezed for ever-deeper discount prices that are not passed on to the consumer.
It all happens under threat of "deletion", Rich says. That's the threat that a supermarket will drop even popular-selling products if their suppliers refuse to accept the unpalatable terms.
Rich cites San Remo pasta and Orchard Gold frozen berries as examples of popular products dropped from centralised buying for New World and Four Squares, under circumstances that, she says, are best explained by the suppliers' refusal to offer a sufficiently fattened discount price. (San Remo remains on the shelves of some New World stores through individual store purchasing).
Foodstuffs NI declined to respond to specific claims about San Remo and Orchard Gold.
But Rich's willingness to name at least a few names is clearly part of an effort to beef up her campaign.
In its latest submission to the commission, Foodstuffs NI's general council Mike Brooker said that the FGC "has raised (and often repeated) a number of allegations in regard to our relationship with our suppliers, many of them serious in nature. The allegations are mostly unsubstantiated and, we say, without context nor the complete facts."
San Remo New Zealand manager, Jacqueline Archipow, did not respond to a request for comment. But Jason Foord, director of Ffowcs Williams, which owns the Orchard Gold brand, confirmed that in late 2019, Foodstuffs NI dropped his products from New World central buying and that furthermore it blocked individual New World stores from continuing to purchase his products (they remained in the company system and available to Pak'nSaves which are only now being brought into the centralised buying system).
Foord said that suppliers like him are typically too frightened of repercussions from a dominant market player to speak up. He said he didn't find the reasons Foodstuffs NI gave for blocking his products credible, and that "the power imbalance between suppliers and the retailer is such that there is a desperate need for an effective, independently arbitrated code of conduct".
Rich says there's been a focus on the practices of Foodstuffs NI because, "they're the supermarket that has provided the most contemporary evidence of some of the behaviours that we have been highlighting".
But her aim is to reshape the industry. Back in 2014 (when the Commerce Commission last examined the grocery market) the spotlight was on Countdown, she points out, though their treatment of suppliers has improved in recent years.
"We've always said, they're [Woolworths is] only another leadership change away before things can change completely so that's why we've focused on changing the regulatory environment."
The fine details of behaviour wouldn't matter so much if there were three or four other big retailers to sell through, Rich points out. But there aren't. And the likelihood for a mandated code of conduct is now so overwhelming that even Foodstuffs and Woolworths have changed their tune; each announced in September that they now favour a code.
"Baby steps," Rich says, arguing the supermarkets have only made "concessions on things that the Commerce Commission is most likely to move on".
Following the Commission's damning draft report, Woolworths and Foodstuffs have offered other concessions too. Both Foodstuffs NI and Woolworths have undertaken to dispense with anti-competitive covenants over land and leases, which form a barrier to competitor entry. And Foodstuffs SI has made a similar, though more circumscribed commitment. Rich accepts the undertakings as "welcome" and dismisses the covenants as "indefensible".
"Now, the use of covenants and other tactics to block out competition, I think, is indefensible and I think the supermarkets themselves have really struggled when they've tried to explain why they do it, to the media and to the public, because when they say out loud why they use such covenants it just doesn't sound right ... so that was something that ComCom was likely to move on," she says.
Indeed Rich now appears to have her eye on more sweeping change, noting that the commission's draft remedies include the possibility for government-mandated divestiture, and other efforts to actively facilitate competition.
"Things like splitting the banners, because you could have Pak'nSaves versus New Worlds versus Four Squares. There are lots of things that the commission is currently looking at in terms of structural separation. But all of this is designed to increase competition and to knock out some of the more egregious behaviour in terms of the way suppliers are treated by the retailers," Rich says.
Foodstuffs NI and SI could be required to compete, she notes. Or divestiture could be required of Foodstuffs and Woolworths beyond the retail end of the business: "[Foodstuffs NI is] very integrated in terms of owning fishing companies, owning transport companies, so much of the supply chain is being locked up and adding to that duopolistic power..."
A recently published submission to the commission by a group calling itself "Northelia 1.4" shows Rich isn't alone in pushing for transformative change.
The group claims to have a billion dollars in funding to start a competitor supermarket, if the Government acts to force a break-up of the current duopoly. Tex Edwards, who founded 2degrees and broke the duopoly in the mobile phone market, is reportedly behind the bid. He did not respond to a request for comment.
Dissension in the ranks
Rich has also wrestled with divisions within her own organisation; while it may not have any other full-time employees it's got a board of directors loaded with heavyweight grocery suppliers. And not all of them have relished Rich's battle tactics, spilling, as they have, beyond the private confines of the "industry working group" of supplier and supermarket representatives.
Tim Carter, chief executive of Dairyworks, resigned from the board of the NZFGC in April. In a submission of his own to the Commerce Commission he described his view of an episode that involved a leaked email written to him by Chris Quin, CEO of Foodstuffs NI.
"So this is "CEO has been asked to stop" the email says. And while a media story suggested that the leaked email demonstrated that Quin had leaned on the NZFGC to rein in its CEO and her critical public remarks, Carter says that Rich had a hand in leaking it, and that it was taken out of context.
"The only people who did ask the CEO, Katherine Rich, to stop her tactics of publicly calling out our retail partners were FGC board members and supplier members," Carter contends in his submission. Contacted by the Herald, Carter declined to make further comment.
Rich refutes Carter's version, and insists Quin put heavy pressure on the NZFGC board to muzzle her: "yes, that's what I experienced ... in the context of all the emails, the texts and having lived through it, I have no doubt as to what occurred at the time of the 'CEO asked to stop' emails and texts last November."
However, she does concedes that there has been division among suppliers: "...you're right it hasn't been easy, we've had some members who're probably more benefited by the status quo, because they've got a relationship that nobody else has, but there are only about five companies that have such significant brand power that they have the Batphone straight through to the [supermarkets' CEO]."
Rich insists she's pushing for a regulatory environment that can help preserve "the health of the whole NZ food manufacturing industry. It is just getting that much harder for small to medium-sized food manufacturers to grow to export because if you supply a supermarket you cannot make normal profits to be able to invest back into innovation and R&D and export strategy."
That issues around competition have managed to overshadow the day-to-day scramble of a Covid lockdown in the grocery sector, and efforts to navigate an ever-spreading web of new regulation, is a mark of just how extraordinary the last year has been. It is a moment ripe for change, and Rich is determined to seize it.
Children: Georgia, 19, a barista at Mojo in Wellington; Jonathan, 20, commerce student at Otago University; step-son Daniel, 30, sales manager with a food company; step-daughter, Emma, 28, nurse. Andrew and I are very proud of them.
Books read on holiday on Stewart Island last month: Klara and the Sun, Kazuo Ishiguro; The Spy and Traitor, Ben Macintyre.
Favourite foreign supermarket: A small-format store, The Marketplace, Barangaroo, Sydney. It's part of Bel & Brio.
Favourite piece of grocery (or other) memorabilia from your collection: "I am glad you said collection not hoard ... one of my favourites is a New Zealand lard promotion pamphlet from the 1940s I bought at Dead Souls Bookshop in Dunedin. Lard has vanished from recipes today.