Government responds to Commerce Commission report into supermarket industry

Supermarkets across the country are said to be making excess profits of around $1 million a day, with the Government accepting consumers could be getting better prices at the checkout.

Commerce and Consumer Affairs Minister David Clark has responded to the findings of the Commerce Commission's final report into New Zealand's $22 billion supermarket industry.

He says the report makes it clear the sector is not working.

Clark said consumers would get better prices if there was more competition, and has pledged to take action to achieve that.

As a first step, the Government would be making it easier for supermarkets to enter the market through opening up more sites.

Clark said at the moment New Zealand supermarkets operated as a duopoly and there were no new supermarkets looking to enter the sector.

He said these supermarkets were making more than double what was considered a fair rate of return on capital investment, deriving excess profits of around $1 million a day, every day, across New Zealand.

Clark said moving forward there would be a new regime around wholesale supply, as well as a mandatory code of conduct, addressing issues like bargaining power, and resolution schemes.

He said supermarkets could immediately take action including around transparency on prices and loyalty schemes.

The Minister had written to supermarkets to urge them to make these changes, and said he would take further action if they did not abide.

Clark said these recommendations could start immediately around pricing practices, and said supermarkets had pledged to act early.

He said they wanted to see a material change, and if that didn't happen they would look at other options. Legislation would be introduced this year to support the changes.

The commission this morning said competition was "not working well" and recommended a mandatory code of conduct for suppliers.

However, the competition watchdog stopped short of requiring a major structural change to the sector.

New Zealand's two major players, Foodstuffs (New World, Pak'nSave and Four Square) and Woolworths (Countdown, Super Value and Fresh Choice), have operated effectively as a duopoly, Commerce Commission chair Anna Rawlings said.

"We have found that the intensity of competition between the major grocery retailers who dominate the market, Woolworths NZ and Foodstuffs, is muted and competitors wanting to enter or expand face significant challenges.

"While there is an increasingly diverse fringe of other competitors in the sector, they are unable to compete effectively with Woolworths NZ and Foodstuffs on price, product range, and store location to offer the convenience of one-stop shopping for the many different kinds of shopping missions that consumers undertake."

The report's key recommendations included:

• Addressing imbalances in bargaining power between the major grocery retailers and many of their suppliers by introducing a mandatory grocery code of conduct;
• Freeing up land for supermarket development, through changes to planning laws and prohibiting the use of restrictive covenants on land and exclusivity covenants in leases;
• The major grocery retailers Woolworths and Foodstuffs offering wholesale supply to other grocery retailers on a voluntary basis, subject to some limited regulatory measures;
• Helping consumers make more informed purchasing decisions and enhancing competition at the retail level by introducing mandatory unit pricing.

Woolworths and Foodstuffs have a combined market share of about 80 per cent in New Zealand.

While Rawlings said the Commerce Commission found that profitability in the sector was higher than in many other countries, it had seen evidence late in the study process which meant it now believed the sector was not as profitable as it believed in its interim report in July 2021.

In July, Rawlings said the interim conclusion of the commission was that the problem in the grocery sector was structural. Today's release stopped short of recommending that the sector be forced to create an independent wholesale operator.

She said such a body was unlikely to be sustainable in the long term.

The commission found that the nature of retail pricing and promotional strategies, and the major grocery retailers' relationships with suppliers, indicated "that competition is not working as well as it could".

"In addition, it has highlighted that New Zealand's retail grocery prices appear comparatively high by international standards, the profitability of major retailers also appears high, and while consumers benefit from a range of innovations, there is scope for more.

"The best way to improve competition in the retail grocery sector is through measures that will make it easier for independent grocery retailers to set up and expand," Rawlings said.

"We found that the biggest challenges facing competitors are a lack of suitable sites for store development and difficulties in obtaining competitively priced wholesale supply of a wide range of groceries."