Taken together, the changes are significant. But hopes of a meaningful reduction in the market power of the current duopoly are tinged with considerable doubt. Photo / Getty Images
The watchdog patrol of the Commerce Commission expanded again in this year’s Budget.
The Government’s new regulatory regime for the grocery sector received a further $28.84m over four years to carry through sweeping reforms aimed at improving weak competition in the duopoly-dominated market. The money follows one-off funding for the grocery regime of $4.8m last year.
It’s been a little over a year since the Commerce Commission concluded a market study recommending a range of remedies to counter the market power of supermarket chains Woolworths and Foodstuffs, which account for a whopping 80 per cent of retail food and grocery sales.
Those recommendations, most of them taken up by the Government, are now culminating in a dedicated team of grocery regulators, already numbering some 13 staff spread across the Commission’s Wellington and Auckland offices. Recruitment is under way for three more.
The posts include: a manager wholesale, manager compliance, implementation director, several investigators, a project co-ordinator and more than half a dozen analysts and advisers.
A dedicated grocery commissioner will be announced to head the team, following the enactment of the Grocery Industry Competition Bill now in the final stages of its passage through Parliament.
The Ministry of Business, Innovation and Employment is “currently assessing applications for the appointment of the Grocery Commissioner”, according to an MBIE spokesperson.
The final selection will be made by Dr Duncan Webb, Minister of Commerce and Consumer Affairs.
Nick Russ, general manager, market regulation branch at the commission, said he expects the grocery team to swell to some 25 full-time positions by next year. That would make grocery the regulator’s largest dedicated team, just a pip ahead of electricity.
The grocery bill confers considerable new powers on the commission to oversee and administer a set of new rules.
That includes a mandatory code of conduct between grocery suppliers and supermarkets (an independent specialist provider is expected to be appointed to supply dispute resolution); mandatory wholesale supply by supermarkets to competitors (only Foodstuffs and Woolworths are covered so far); provisions for greater transparency in retailers’ pricing and loyalty schemes; and, a ban on restrictive land and lease covenants (already legislated and in place).
The commission will also have to report annually to the Government on the state of competition in the sector, and will have the power to take modest enforcement action. It would need to apply to the court for financial penalties, injunctions or to seek compensation or damages on behalf of parties.
Taken together, the changes are significant. But the hope that they will result in a meaningful reduction in the market power of the current duopoly, and ultimately lower grocery prices for New Zealand shoppers, is tinged with considerable doubt.
Russ said the commission has deep institutional knowledge of market regulation. While one of its two main regulatory branches is focused on monopoly infrastructure like gas pipelines, airports, and electricity, the other centres more broadly on markets: telecommunications, dairy, fuel, retail payment systems and now grocery.
It’s one reason he’s “very optimistic” the commission can achieve the Government’s stated aim of better competition and lower prices for grocery.
He also recognises that, given the inflation-weary public’s heightened sensitivity to soaring prices - food especially, which climbed a whopping 12.5 per cent in the year to April - his agency and its work will likely be subject to unprecedented interest.
Market regulation, outside the realm of old-order infrastructure monopolies, is also an area of regulation that’s expanded considerably only in recent years.
Its track record is either mixed, or remains in large measure to be established.
Expansions into fuel, retail payment systems and now grocery have all been added in the last few years and have helped to nearly double the Commission’s budget since 2017/18, when revenue was $44m (almost all from the Crown, though roughly a third is raised from regulated industries through Crown levies).
Last fiscal year revenue was up to $72m, and the latest budget will push that close to $80m.
New money is made up of some $7m for grocery and $1m for further fuel monitoring and backstop measures, and is offset by a $2m cut to the litigation fund.
An industry levy - commonly used to defray the cost of regulation - is not anticipated for the grocery sector.
Optimism for the new regime in some groups is high, including the New Zealand Food and Grocery Council (NZFGC), which represents suppliers to the supermarkets and has long pushed for a code of conduct to buffer its often small and medium-sized members from the negotiating power of the duopoly.
Raewyn Bleakley, the group’s chief executive, said the level of funding in the Budget for the new grocery regime is both “heartening” and “highly appropriate for the job the Government is asking the commission to do”.
But it’s too early to know how effective the changes will be.
A detailed code of conduct, for example, has yet to be released for consultation (an early version was consulted on, but a second round is still pending). A final text will require Cabinet approval and that’s unlikely this side of the October election, meaning the code will come into effect very late this year at the very earliest.
The NZFGC remains concerned the new wholesale regime could have unintended consequences, but Bleakley said that’s not a reason to stick with the status quo.
Currently wholesale grocery supply only exists at scale across New Zealand within the businesses of Foodstuffs and Woolworths. Measures to force the companies to sell, fairly, to competitors, including dairies, startups and others, is intended to encourage both new competitors and the growth of small ones.
“The wholesale regime will be unique to New Zealand, yes, that comes with some heightened risk, but we also have to recognise that the grocery market in New Zealand is unique in its level of market concentration … and there are times when we just have to innovate here because our conditions are different,” Bleakley said.
She will be watching for any perverse effects on suppliers. Her hope is that officials will act swiftly with a remedy if any eventuate.
It’s a concern that was also taken up by Westpac economist Paul Clark, in a report published earlier this month that called the current suite of changes “positive steps, but not transformative”.
In particular, it highlighted difficulty the regulator may have in enforcing provisions of the new regime, like wholesaling to competitors, without triggering unintended consequences.
Specifically, Clark wondered if the commission would be able to keep up with real-time dealings between parties, especially if it chooses to impose price controls across many or some of the thousands of products in the wholesale trade (something the new legislation provides for).
“Introducing price controls is also likely to lead to distortions up and down the value chain. A key question is how would controlled price levels be determined and how responsive would they be to real-time dynamics in upstream supplier markets?
“If they are unresponsive, it’s quite possible that suppliers could find themselves being squeezed should their market-determined input costs begin to rise. It is also possible, of course, that wholesalers facing price controls might look to reassess their product lines and focus only on those that are the most profitable.
“That would have the effect of reducing the range of products available, which is the exact opposite of what the Government is looking to achieve,” Clark wrote.
Clark’s report suggested only a forced break-up of the existing duopoly would generate enough competition in the grocery sector to meaningfully affect prices.
Such a course would be fraught with the possibility for unintended consequences, including increased prices, especially in the short-term, Clark said, but would constitute a best shot at undoing the harm of New Zealand’s unfortunate history of market consolidation.
Those big risks were also considered by the Commerce Commission in its market study of the sector released last year. Its final report recommended against forced divestment, largely because of the possibility that it would do more harm than good (through reduced efficiency, and spooked potential investors for example).
The possibility, however, for such strong medicine remains on the Government’s back burner.
A “market performance team” at MBIE commissioned a cost-benefit analysis for retail divestment in the grocery sector last year, though it refused to make the work public on the grounds it constitutes confidential advice to the Government.
Both Foodstuffs and Woolworths are opposed to forced divestments.
Work commissioned by Woolworths last year from Boston Consulting and provided to MBIE warned of the likelihood that forced divestment would reduce economies of scale for supermarkets and lead to price increases, and a new competitor, formed through forcibly divested assets, would be at high risk of failure.
Chris Quin, managing director of Foodstuffs New Zealand, told the Herald in January a New Zealand government had never required divestments to reduce market power, including in telecommunications and fuel, and he warned any such policy would come with a high price: Kiwi grocers losing their businesses, and higher prices.
Jon Duffy, head of Consumer NZ (and formerly a senior investigator at the Commerce Commission), is in the first instance inclined to agree with the supermarket bosses: “We have to look at the changes we’re already making and we have to give them time to work.”
He’s hopeful that, over time, the changes will be sufficient to loosen the duopoly’s hold and will make room for significant new competition.
But the commission, he said, also has another job.
“I would hope that they are already gathering data, because we need to build a really good evidence base about what’s happening in the sector. For profitability, for wholesale and retail prices, for the state of competition generally,” he said.
The purpose of that data is considerably hawkish: “If these changes don’t work, we’ll need really strong data to show that. And we do have to be prepared to push the nuclear button and go for break-up.”