Supermarkets could be forced to sell their wholesale businesses or some sites to boost competition, after the Commerce Commission warned competition in the $22 billion grocery sector "is not working well for consumers".
While the Commerce Commission's draft market study into supermarkets did not say how much cheaper groceries should be, it said it would expect consumers to pay less if competition was better.
"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," Commerce Commission chair Anna Rawlings said.
Rawlings said the market could be best described as a "duopoly" with a fringe of other smaller and increasingly diverse competitors.
However the commission found the other players were doing little to boost competition, as the two major supermarket groups, Woolworths (Countdown) and Foodstuffs (New World and Pak n Save), considered only each other when considering prices.
"Our preliminary view is that the core problem is the structure of the market," Rawlings said.
"In competitive terms, the major retailers, Woolworths NZ and Foodstuffs, are a duopoly, and while there is an increasingly diverse fringe of other grocery retailers, they have a limited impact on competition. This is because they are unable to compete with the major grocery retailers on price and product range in order to satisfy the widespread consumer demand for a main shop at a single store," Rawlings said.
The structure of the market is leading to major profits.
The commission found that New Zealand's two major supermarket groups were enjoying profits which were "consistently and materially above what we would expect in a workably competitive market".
It found that both Woolworths NZ and Foodstuffs' North and South Island businesses were all enjoying returns on capital in excess of 20 per cent, several times higher than the capital costs of the sector.
These profits were not only high, they were high enough that in a competitive market they were likely to attract in other players to try to share in the profits, Rawlings said.
"If competition was working better, we would expect these profits to encourage other players into the market" or expansion by smaller players, to share in those profits.
"We haven't seen that," Rawlings said.
"The major retailers appear to avoid competing strongly with each other, particularly on price. 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.
While the commission said there was innovation in some supermarkets, from niche offerings to elements like instore pharmacies which were welcomed by consumers, it did not appear that it was the innovators that were enjoying more profits. Instead, above normal profits appeared to be being enjoyed across the board.
Rawlings said the pricing and loyalty programmes were so complex as to be confusing, making it difficult to make informed decisions. Consumers often did not appear to know how much personal data they were giving to the supermarkets when they signed up, or how it was used.
The rewards also require high levels of spend for a relatively low return. In one prominent loyalty scheme, shoppers are required to spend as much as $2000 to receive a $15 voucher in return.
Treatment of suppliers
The report also looked into the behaviour of the supermarkets towards suppliers.
It found that "many suppliers have few alternatives but to supply the major retailers". This allowed the supermarkets "to exercise their buyer power to push excess risks, costs and uncertainty on to suppliers", the commission said.
"Suppliers report agreeing to these terms because they fear that otherwise their products may not be stocked. This conduct can reduce suppliers' ability and incentives to invest and innovate, ultimately leading to less choice, lower quality, and potentially higher priced goods for consumers."
Rawlings said competition was not working for suppliers.
"There is an imbalance of bargaining power between the two major supermarket groups and their suppliers," Rawlings said.
Supermarkets could be forced to sell
As well as a lack of good sites available, a major part of the problem was a lack of competitive wholesale sales of food, the commission found, with dairies and other small retailers often finding that the best way to source food was to buy off supermarkets.
"We don't consider that New Zealand is too small" to cater to a third major player. It was unlikely that a third player of scale would enter New Zealand "without intervention", Rawlings said.
The report made a range of significant recommendations which, at the extreme, could see the supermarket groups forward to sell their wholesale businesses, or at least operate their wholesale businesses as separate parts of the business.
It also floated the idea of "the facilitation or sponsorship of a new independent wholesaler through a competitive tender process" to give grocery suppliers a third significant wholesale channel.
The commission warned that even greater wholesale competition might not stimulate the creation of a third retail group, so is consulting on a competitive tender to create a third group as well as potentially force the major grocery companies to sell some of their sites to a new player.
Response from supermarkets
Spencer Sonn, the managing director of Woolworths New Zealand, said that on face value some of the recommendations would "have significant implications" on the business.
"We will now take the time to read it so we can provide our feedback within the required timeframe."
Sonn said that his company worked hard with suppliers to distribute food and groceries around the country.
"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.
Background to report
Shortly after the election, Commerce and Consumer Affairs Minister David Clark announced the competition watchdog would undertake a market study into supermarkets to determine "whether the sector is as competitive as it could be".
The market study is the second of its type under new powers to compel companies to provide detailed financial information, following an examination into petrol companies ordered by Prime Minister Jacinda Ardern in 2018.
For months, the Wellington-based competition watchdog has been receiving evidence and interviewing witnesses, sometimes under oath.
Like many industries in New Zealand, it is a sector dominated by two companies. Foodstuffs, which counts New World, Pak'nSave and Four Square among its subsidiaries, and Australian-owned Woolworths, the owner of Countdown.
The market study is set to take around 12 months but even the draft report is likely to run to hundreds of pages and make recommendations to improve competition levels.
Multiple parties are speculating that among its recommendations would be a binding code of conduct for supermarkets to adhere to, the regulator could urge the Government to consider requiring a break-up of some parts of the sector.
The study has been a long time coming. In 2014, Shane Jones, then a Labour MP, used parliamentary privilege to assert that Countdown was treating many of its suppliers poorly.
Katherine Rich, the former National MP and long time chief executive of the Food and Grocery Council, has been providing materials to the commission including research that suggests most suppliers believe the supermarket groups engage in anti-competitive behaviour.
This week, Rich launched a stinging attack targeting Foodstuffs' North Island business, claiming that even on the eve of the draft report, its members were facing the threat of having their products removed from shelves as part of negotiating tactics, demands for a "display fee" which did not promise any actual prominence or contribution to staff wages.
Foodstuffs was "either not reading the political environment or dismissing government concerns which led [Clark] to call for the Study", Rich wrote on her LinkedIn page.
Foodstuffs did not respond to a request for comment on the claims.