The grocery industry, lest we forget, is basically trench warfare, Tim Morris insists.

As managing director of Auckland-based consultancy Coriolis Research, Morris has been analysing the food industry for more than 20 years.

In the United States, supermarkets have been losing sales to hypermarkets, warehouse clubs and drug stores for more than a decade, he observes. Globally, the main chains are consolidating and fighting a fierce battle over a shrinking market share.

New Zealand might be a bit behind that trend, but we're already down to two main players who between them are scrapping over a pretty mature market, he suggests.

If you really want to get him going, just whisper the words "cosy duopoly".

"Woolworths imagined in their mind they were going to come into New Zealand and romp home, and to date they've had their head handed to them on a plate," he exclaims.

"They have now stopped the bleeding, but there will be lots of fighting and waves of troops into the trenches to achieve not a lot. They battle over very marginal market share gains and most of the gains they get are from opening new stores. The reason Foodstuffs has succeeded over the past decade is they have opened over 30 new stores, while Progressive has opened a net of none."

In fact, Progressive has opened two new stores in the past six months. And it has started to compete more vigorously with independent bakeries, butcheries and fruit and vegetable sellers, as well as the farmers markets and other outdoor markets that have grown enormously in recent years.

So far, however, the Commerce Commission has refused to consider these rivals as direct competitors, pointing out that for most people, the one-stop convenience of supermarkets is hard to beat.

Morris reckons Asian supermarkets now account for at least 5 per cent of sales in Auckland, but he concedes Foodstuffs and Progressive still have a huge stranglehold nationally.

In 2005, he estimated that between them they controlled 78 per cent of all retail food purchases in New Zealand.

Their combined spending on advertising, at ratecard rates, was calculated by Nielsen to be nearly $110 million last year. Combined sales were $13 billion and together they employ more than 50,000 people.

Foodstuffs is, in fact, New Zealand's second-biggest business behind Fonterra.

Tony Carter has headed the giant co-operative since 2001, after doing time in the family firm (Carter Group) and then working his way up to the chairmanship of Mitre 10. Carter, who incidentally is the brother of Agriculture Minister David Carter, admits few people seem to appreciate its size.

"No, they don't," he agrees. "And we quite like that."

Made up of three regional co-operatives, Foodstuffs is better known for its Pak'N Save and New World stores. However, it also owns a huge number of dairies and Four Squares, has a big chunk of the wholesale grocery sector, a significant stake in the retail liquor industry, and owns the Bell Tea & Coffee Company.

Carter insists Foodstuffs competes "bloody vigorously" with its Australian-owned competitor, Progressive.

"There are always suggestions that it's a cosy duopoly - I assure you it's not. We live and breathe our market share figures every day."

If market share is the measure by which the supermarkets wish to be judged, then Foodstuffs is clearly winning the grocery wars.

In 1992 it had a 39 per cent share of supermarket sales. When Woolworths bought Progressive in December 2005, many thought Foodstuffs had finally met its match. Its share then was about 55 per cent. It's now 57 per cent.

In some ways, Foodstuffs and Progressive are a bit like Telecom and Vodafone. Although Foodstuffs is a behemoth by New Zealand standards, Woolworths is a much bigger global operator. With total sales of nearly $50 billion last year, it is ranked as the 26th biggest retailer in the world.

In Australia it owns a plethora of petrol outlets, hotels and poker machine outlets, liquor stores, supermarkets and general merchandise stores, and has recently partnered with US giant Lowe's to launch its own home improvement centres. It also owns the Dick Smith electronics chain.

The Australian company is not related to the Woolworths chain in England, which collapsed in 2008, nor was there any previous link with Woolworths stores here.

When it took over Progressive it inherited a clutch of brands including Foodtown, Countdown and Woolworths, and two franchised chains, SuperValue and FreshChoice.

Last year it announced it was scrapping the Foodtown and Woolworths banners and would spend $200 million a year revamping all its stores, modelling them on a successful format it has rolled out in Australia.

It has decided to keep the Countdown name, but has given the chain its new Australian logo - a stylised "W" for Woolworths.

The decision to rationalise its brands here had been well flagged, but it still took a few people in the industry by surprise.

In a submission to the Ministry of Economic Development this year, Foodstuffs suggested the decision had been driven by cost, rather than marketing considerations.

"It will reduce brand choice for consumers [so] the move appears to be designed to deliver even greater operating efficiencies and further lower the cost of business as a competitive tool," it claimed.

Progressive's former managing director, Ted van Arkel, is these days on the other side of the supermarket/supplier fence, as chairman of juice company Charlie's and as a director of Nestle. He is not yet convinced the new owners have made the right call.

"Their competitor has two very strong brands, and they are sitting in the middle," he says. "Their argument is that one brand works very well for them in Australia, so why not in New Zealand. There is a cost saving, and the reposition they've done with the ex-Foodtown or ex-Woolworths stores has become a great store, but in my mind the jury is still out."

While it's tempting to portray the grocery wars - like many other business battles in New Zealand - as a typical tussle between the plucky Kiwis and the arrogant Aussies, those involved point out that in this case the usual stereotypes do not necessarily apply.

In August 2006, not long after Woolworths bought Progressive, negotiations broke down between the company and the National Distribution Union over the union's demands for a national collective agreement. More than 500 staff were locked out and large gaps appeared on its shelves. The dispute dragged on for a month and became big national news.

Some claim the company is still suffering from the market share it lost at that time.

The union says relations have since noticeably improved - for which it credits Woolworths bosses in Australia.

"It's a tragedy in many ways that the new and better relationship has been imposed by Australia," says national secretary Robert Reid. "It says a lot about us as a country. Maybe because Australian unions are seen as bigger and stronger, so companies get used to them over there."

According to Reid, Progressive members generally earn more than Foodstuffs members, for whom the minimum wage is the norm outside of Auckland.

Foodstuffs, he says, is "one of the most anti-union companies in New Zealand" and is more like "a libertarian think-tank that happens to run supermarkets".

"We don't try and destroy Progressive and neither should we because it employs a lot of people in New Zealand, but neither do they try to destroy us. But we can't say the same about Foodstuffs. Given any opportunity in any of their three co-operatives or any of their hundreds of stores, they will try to undermine our work."

He also claims Foodstuffs plays either its national or local card, depending on what suits.

The union is seeking legal advice in the wake of the announcement by the Government that it is considering criminalising cartel behaviour. Reid notes that Foodstuffs' structure is unlike other franchises, as each store is individually owned and there are no national policies.

"The reason we are told they don't do corporate policy, such as HR and that sort of thing, is because each of their Pak'N Saves is an individual business. They tell us their competition is the next-door Pak'N Save. If that is the case, then they are operating absolutely as a cartel."

Carter acknowledges Foodstuffs' structure is "absolutely unique". But to describe it as a cartel is absurd, he says. He also acknowledges the union would prefer to have a national collective agreement.

"That's not going to happen because they are individual employers who will make their own arrangements with their own staff."

Most of its operators are "very fair" employers, he says. "They have been in business a long time and have very loyal staff. I honestly don't even know the individual pay rates. We don't get involved." Nor does head office get involved in direct negotiations with suppliers.

According to Reid, suppliers have traditionally complained more about Progressive than Foodstuffs. "These days they're much of a muchness," he claims.

Former National MP Katherine Rich tends to agree. Rich's new role is head of the NZ Food & Grocery Council, which represents most of the industry's bigger suppliers.

Woolworths initially tried to get New Zealand suppliers to match Australian prices, without taking into account economies of scale, she says.

"That created a lot of debate and anxiety at the time. I think the Australians realised that although our countries are side by side there is a different way of doing business here, and they backed off a little bit."

There were also issues when it shifted its payments facility from New Zealand to Tasmania, although it tried hard to minimise the problems, she says.

Some suppliers have noted that Woolworths seems to have replaced many of its Signature Range products, which are generally made in New Zealand, with items from its Select range in Australia. Interestingly, the retail price has not always been cheaper. It has also pushed private labels much harder than Foodstuffs.

According to Carter, most of Progressive's Home Brand and Select items are produced in Australia. "They don't actually own the rights to Signature Range in Australia - that actually belongs to Metcash. I think that's the issue from their point of view. Signature Range is an NZ-only private label and they prefer to have a transtasman private label."

Rich notes that while there have been significant changes at Progressive, there has also been significant investment, which has encouraged many suppliers.

"A number of issues have settled down and I think there has been a conscious decision by Progressive to engage with suppliers. I've been told that's been noticeable in the last year."

But there is also no doubt that margins have been squeezed. And she is dismissive of any talk of cosiness between the two main players, describing it as "absolute rubbish".

"The two supermarket networks are like prizefighters. As you know, there are only two in the ring, but they fight extremely aggressively, right down to a store-by-store fight. If one does one thing, the other store down the road will try to beat it. There's intense competition."

That might be generally true, but even before Progressive acquired Woolworths NZ in 2001, the Commerce Commission pointed out that some regions tend to be more competitive than others.

The commission initially approved the merger, saying it was satisfied the new entity would not dominate the market.

Progressive got its application in just one day before the law changed to a tougher test used in Australia, and Foodstuffs asked the courts to clarify the situation. It argued that the new test - whether the new entity would "substantially lessen" competition - should apply. The issue went all the way to the Privy Council.

If a week is a long time in politics, then 24 hours can be even longer in business. Had Progressive waited another day, the merger might not have happened, as the commission later decided it would have failed under the new test. As it happened, the Privy Council ultimately decided the old test applied.

While the commission estimated a merger between Foodtown, Countdown and Woolworths was unlikely to see prices rise by more than about 2 per cent, it also suggested that a rationalisation of brands and the closure of some stores could lead to even higher prices, and lower service levels.

Given the billions at stake, it was even possible that price increases of less than 4 per cent might constitute a substantial lessening of competition, it argued.

According to the commission, there were already some hints in 2001 of potential collusion on pricing. In its opinion the chains appeared to be more concerned with maintaining the relativity of their prices, than their marginal costs.

In Napier, for example, prices appeared to have experienced a "steady upward drift... far in excess of what is observed in other areas," despite having a Pak'N Save, Countdown, and Woolworths, it noted.

The commission also sounded warnings of the "two's company, three's a crowd" variety, making it clear it believed there was a "real likelihood" of further collusion with a duopoly.

With only each other to worry about, Progressive and Foodstuffs would be able to monitor each other more easily, have greater certainty about how the other might react, and would have more appreciation of their common interests, it claimed.

It also suggested several other factors that pointed to the likelihood that the merger would "materially increase" the potential for coordinated market power.

Despite the grumbling from consumers and suppliers, it seems unlikely the issue of collusion will be revisited in the near future, given that the commission would need some pretty explicit evidence to take a case.

The way New Zealand's competition laws are written, it is at the clearance stage that the commission wields most of its power. While it can order companies to divest assets as part of a merger, it cannot order them to do so subsequently - unlike in the US.

And nor, it seems, is there any political will to rattle any sabres, despite the fact that both the Australian and British competition authorities have held several inquiries into the power of supermarkets.

When Consumers Institute chief executive Sue Chetwin expressed concern last year about rapidly rising prices, she was pointedly ignored by the Minister of Consumer Affairs, Act MP Heather Roy.

"There have of course been calls for 'Government to do something'," said Roy in a press release. "If anyone seriously thinks government should interfere in, or enter, the supermarket trade they should look around for any example of government running a business well. There isn't one."

One issue the Food & Grocery Council may yet pursue is whether New Zealand should follow Britain's example and set up an ombudsman to mediate between supermarkets and suppliers.

According to Rich there have been clear cases where Foodstuffs has bullied suppliers, and threatened to blacklist them if they don't agree to specific terms. Some of the friction has been caused by Progressive's success with exclusive pack sizes.

"If you get a listing with Woolworths you get a listing throughout their whole network, but there has been some behaviour by individual Pak'N Save owners - who are kings of their own castle - that are more debatable than anything that could be introduced from Australia."

She is not yet convinced an ombudsman is the answer. "We would argue that if a relationship gets as far as the ombudsman, it's stuffed anyway." But she is reserving the right to float that option if suppliers continue to complain.

Suppliers are so terrified of getting offside with supermarket owners that none will speak publicly. But Horticulture New Zealand, which represents many of the country's growers, has recently spoken out on behalf of the industry about what it claims is a gradual erosion of margins and increasingly expensive demands from supermarkets.

"There are definitely some issues that Woolworths Australia have brought in to the market," says chief executive Peter Silcock. "There are a lot of people who feel there is a lot of pressure on. I'm not aware that it's created a lot of opportunities for people."

Both Foodstuffs and Woolworths admit their aim is to get "the very best price" for shoppers.

"Having said that, we have obligations around treating people fairly and I hope we honour that," says Carter. "If we don't have growers, we don't have a product to sell. We're not stupid - we're not going to do something that's going to eliminate people going to be able to supply us."

He notes that Foodstuffs has agreed to set up a voluntary code of ethics for dealing with suppliers. And he points out that it's the customer who loses if a buyer is blacklisted.

"I can't say it doesn't happen but I don't think it's a common theme."

For many people, the saga of the Wairau Road Pak'N Save, which Progressive successfully opposed for more than a decade, is an obvious example of how customers don't always come first. The case became one of the catalysts for changes to the Resource Management Act.

However, the game being played over the future of the Warehouse has much higher stakes.

In the middle of 2006 Foodstuffs bought a 10 per cent slice of the Warehouse, to prevent a full takeover of the retail chain by Woolworths.

The Warehouse had signalled its own move into the grocery market with its Warehouse Extra stores. The experiment failed and Warehouse shares have since tanked.

Foodstuffs is believed to have paid up to $5 a share for its stake, at a total cost of more than $150 million. Their face value is currently just $3.80 each.

Foodstuffs' only consolation, perhaps, is that Woolworths is also stuck with a 10 per cent stake, which it bought a few months later at up to $6.50 a share. Last year it decided to write off around $86 million of that in its accounts.

The situation remains a stalemate in the wake of a Commerce Commission decision not to allow either Woolworths or Foodstuffs to acquire the Warehouse, although rumours are again circulating that talks have resumed behind the scenes.

Carter will only say that Foodstuffs' position hasn't changed. "We said at the time it was a passive long-term investment."

To outsiders, it probably seemed curious that Stephen Tindall seemed keener on doing a deal with an Australian company with a reputation as a brutal champion of the bottom line, than a local organisation which ploughs its profits back into local communities. But the issues were partly personal.

Relations between Foodstuffs and the Warehouse have never been particularly friendly. Given that the Warehouse is so closely modelled on the giant US chain Wal-mart, it must have been obvious to Foodstuffs that the Warehouse would eventually expand into groceries. Nevertheless, Tindall was not at all impressed by the hostile raid.

In the small world of big box retail, issues have also become personal between the Warehouse and Woolworths, particularly since an expat Kiwi, Greg Foran, became part of its management team.

Foran, who began his career packing supermarket shelves in Hamilton in the '70s, was one of two men Tindall hand-picked back in the '90s to be his potential successor. The other was Greg Muir. Muir was eventually given the job as chief executive of the Warehouse, while Foran was asked to head its Australian operations.

The two men didn't get on, and blamed each other for the Warehouse's failure in Australia. When Foran jumped ship to Woolworths, shortly after cashing in his generous share options, Tindall was said to be have been apoplectic. Not long after, Muir also fell out with Tindall and left the company.

Foran was originally put in charge of Woolworths' Big W retail chain in Australia. He has since been promoted to head of its supermarket division and according to some in the industry, is seen as a potential successor to managing director Michael Luscombe.

In February he accepted an invitation to speak to New Zealand suppliers at a function organised by the NZ Food & Grocery Council.

It was a slick presentation. Foran stressed his Kiwi roots and professed to back the All Blacks. He also made it clear Woolworths was determined to not only survive, but thrive, in a "pretty brutal" retail environment in which value has become all-important.

"The market has changed, our customers have changed and our businesses have had to adapt very quickly... To achieve this we have essentially had to do open heart surgery," he stressed.

Rich says Woolworths seems to be on a charm offensive. "But as one of my suppliers said to me: 'It's a charm offensive that seems to be working'."

If it's charm suppliers want, then Foodstuffs is also rising to the challenge. Tony Carter, who is highly regarded but also renowned for his no-nonsense attitude, confirmed this week he will be leaving in October - slightly sooner than expected.

His successor at a national level will be Steve Anderson, who currently heads Foodstuffs' South Island co-operative. Murray Jordan, who has a background in property development, will take over the running of the Auckland co-operative.

Jordan, who is already working alongside Carter, oozes affability. When we meet at Foodstuffs' headquarters in Mt Roskill, he lets Carter do almost all the talking. Afterwards, however, he gushes about the challenges ahead, using all the usual epithets.

Anyone in any doubt about how significant supermarkets are in our culture need look no further than Ponsonby, he notes, where on any given day you're likely to spot someone strolling down the street with a t-shirt emblazoned with the image of "Charlie the Four Square man".

That such a quirky illustration could become such a significant symbol of Kiwiana probably says as much about artist Dick Frizzell as it does about the grocery business. But Frizzell also gave us our own version of Andy Warhol's Campbell's soup - it was Budget baked beans.

The Budget brand also belongs to Foodstuffs. So has the Countdown begun for Charlie?

Trade journal Supermarket News claimed in a recent issue that the gossip among local suppliers was that that was indeed the case.

"It's what you hear outside the formal part of conferences that is always more interesting," it noted. "Delegates at the recent annual conference of the New Zealand Food & Grocery Council in Australia were pretty convinced that what we are currently seeing in the grocery industry is not going to last."

In the last two quarters, Progressive has clawed back some market share. It claims to be thrilled with sales from its revamped stores, and most analysts believe that all its hard work getting its back office functions synchronised is starting to pay off at last.

"Their whole strategy has been getting the back end working first," one told The Business. "Their autostocking system has the front end talking to [its distribution centres]. It's probably taken a bit longer than people expected, but we're starting to see some top-line momentum. As we go forward I think you'll start to see some of those gains come through to a greater degree."

Katherine Rich agrees. "Over the last couple of years they've had a huge reorganisation of almost every aspect of their business, and there were a few hiccups along the way. But they're fast getting to a position in terms of competition that they'll be a force to be reckoned with. The new-look Countdowns are a lovely shopping experience, so I think it will be game on."

As food price inflation settles, consumers may stop fretting about the danger of duopolies. And they may be able to console themselves that it is probably only a matter of time before German discount operator Aldi enters the fray.

Ted van Arkel is convinced that moment will come sooner, rather than later. Aldi has now opened 200 stores in Australia.

Despite gossip to the contrary, Tony Carter has not yet seen any evidence that Aldi has secured any sites here. But he acknowledges there are plenty of suitable sites available.

The chain, which stocks only a limited range of groceries, almost all of which are private label, tends to prefer small urban sites. It has stated publicly that Australia, where it undercuts its rivals' prices by up to 20 per cent, is the most successful market it has ever entered.

For New Zealand suppliers that's not necessarily good news. As it is, margins look likely to be squeezed further in the next few years.

If the supermarket industry really is trench warfare, then a lot more blood could be spilt in the aisles yet.