Kate MacNamara: The problem of supermarkets' power and Government's attitude to competition

The Commerce Commission has recommended a range of options, in draft form, to help fix our supermarket duopoly. Photo / NZME

Opinion

OPINION:

The Commerce Commission's deep dive into high grocery prices this week was welcome. But even wading around the shallows of high pricing in New Zealand you trip across one Government minister after another.

David Parker, Megan Woods, Michael Wood, they're all lurking in the pricing weeds (and none too camouflaged). And it makes you wonder what competition remedies the Government can possibly muster with a straight face.

The Commerce Commission has recommended a range of options, in draft form, to help fix our supermarket duopoly, undoubtedly one of the most concentrated in the developed world.

At the (relatively) easy and obvious end of the spectrum is a mandatory code of conduct for suppliers who are often squeezed by the market dominance of Foodstuffs (Pak'nSave, New World, Four Square) and Woolworths (Countdown and Fresh Choice).

The commission's more drastic recommendations involve forced divestiture, a sale of assets by the incumbents in a radical effort to create space for a third competitor, or possibly an independent wholesaler to break-up "vertical integration" in the sector.

What is risible, is the suggestion the Government itself should wade into the sector, even running some form of competitor. For one thing, it conjures alarming visions of the Prime Minister's chiding hand on your supermarket trolley steering it firmly away from the biscuit aisle (renamed "occasional treats" and cordoned off before mid-afternoon).

It's also worth considering just how much hypocrisy we'd need to swallow to see the current Government as a champion of competition, which, let's be clear, lowers prices.

Since 2017, but with increasing enthusiasm in recent months, Labour ministers have pulled so many policy levers, casually layering higher prices on New Zealanders (or readying to do so), that they look much more like a price problem than its solution.

One example is Minister for the Environment David Clark's aim to ban all new coal boilers. The policy intentions, to phase out coal, are obvious. But it would also be a strongly anti-competitive move.

Existing players in industries ranging from dairy to abattoirs to hothouses already have coal boilers, and energy is a significant business cost. After next year, under Parker's proposed rules, if you want to set up in competition against them you'll need to run your boiler on something significantly more expensive: wood chips, natural gas, or electricity.

Parker may call this good climate change policy. But, if asked, the Commerce Commission would almost undoubtedly call it a barrier to entry.

Of course, natural gas should have served as the obvious cheap and abundant "transition fuel" to carry businesses through their move away from coal. But Labour (in coalition with New Zealand First) banned new offshore development, and since it didn't consult before the decision, nobody seems to have told Energy Minister Megan Woods that such bans are lousy for competition.

New Zealand now has a sunset oil and gas industry, with competitive forces bleeding away as the number of players dwindles.

In a healthy sector, high prices work to fix high prices (especially for natural gas since we have no facility for imports). Exploration picks up, and perhaps more importantly in a geographically remote place like New Zealand, the rigs which are moved here at great expense to explorers are then used to maintain and enhance recovery from existing wells. Without that the result is wholly predictable: a rump sector is left with the consolation of high prices while existing reservoirs run down.

New freshwater management standards ushered in by Parker last year create yet other competition problems.

As the Herald recently reported, a slew of businesses warned the Government its wetland protection provisions would create a raft of problems because they are so broad.

One Fulton Hogan executive even wrote to ministers to explain the new protection is so all-encompassing that an area of overflow from a septic tank has been flagged as a wetland, threatening the viability of a residential housing development.

While Parker has admitted the freshwater rules may need to be "tweaked", he's busy following them up with stiffer biodiversity protections.

Commerce and Consumer Affairs Minister David Clark during a media stand-up on the Commerce Commission's draft report into the retail grocery sector. Photo / Dean Purcell

The problem is every time the Government layers on more difficulty for developers, it tends, like a medieval city protecting its merchant guilds, to entrench existing business, and build up ever-greater disadvantage to would-be challengers.

In its report, the Commerce Commission identified high barriers to entry into the grocery business as a key reason for the enduring duopoly. Despite whopping profit margins in the sector, no serious third competitor has sprung up. The commission reckons among the reasons are the lack of competitively priced wholesale supply and a lack of suitable sites for store development, necessary for any challenger to launch in the market.

The two major supermarket chains clearly work hard to lock competitors out of prospective sites, but it helps them immeasurably when the Government heaps on additional impediments to developing land.

Perhaps the Government's most tortured approach to competition is in the fuel sector.

Even as Commerce and Consumer Affairs Minister David Clark insisted on Thursday anti-competitive forces in the sector have been slayed by new regulations, Wood was pushing a biofuels mandate that would require petrol stations to sell us a minimum level of biofuel.

Ministers are hopeful a whole new biofuel manufacturing sector will be birthed in New Zealand as a consequence. The problem is, there is none at the minute, and the main contender for the would-be business is Z Energy (Z was a very modest manufacturer of biofuel until recently when the price of feedstock became untenably expensive).

Not surprisingly, Z Energy is a big proponent of a biofuels mandate. Biofuels manufacturing and wholesale would mesh well with its extensive fuel retail network, and the beauty of a Government "mandate" is that, while it's clear biofuel will cost far more than petrol or diesel, consumers will have to eat the higher price. If you're worried that ordinary market signals might not work in such a sector, you should be.

The problem, of course, is that the Government is armed with good intentions. But the tough job for consumers, of supermarket food as well as Government policy, is to look at consequences, and then decide if they're worth the price.