Tensions between supermarket giant Foodstuffs and some of its suppliers over a stock shake-up have dragged long-standing grievances about NZ's duopoly back into the spotlight, writes Kate MacNamara.
New World supermarkets are reducing and changing the range of choice they offer across their grocery shelves and, in the process, culling some of the stores' suppliers and dropping products.
Supplier companies in grocery categories ranging from frozen fruit to vitamins to pasta have been asked by New World's co-op owner, Foodstuffs North Island, to tender for the ability to keep selling their wares.
Several suppliers involved in the process said they see the request to tender as an effort by Foodstuffs to ratchet down the wholesale prices it pays, in order to boost its own margins. The suppliers said their capacity to negotiate with Foodstuffs is hampered enormously by the threat that their products could simply be blocked entirely from the retailer's shelves.
Suppliers who spoke to the Weekend Herald were granted anonymity; they fear speaking up will invite repercussions from the grocer.
Foodstuff's NI chief executive Chris Quin cast the situation in a different light. The grocer's current business transformation — including the tender process — is driven by a sharp, data-driven focus on customers. The company, he said, is reducing duplication and clearing shelf space for new products. He didn't say "sour grapes" but he did say when "someone doesn't win ... it can be hard not to point to another reason".
In a well-served grocery market all this might pass for little more than the rough and tumble of contract negotiations. Suppliers who were dropped by one chain might simply expect to sell their wares through competitors' outlets. But New Zealand's grocery sector is anything but well served.
Just two big players, Foodstuffs NI and Foodstuffs South Island (which co-operate together) and Woolworths New Zealand (previously Progressive Enterprises), carve up the market. It's not a new situation, but it is one that has the Government's attention. And longstanding gripes about practices that may range from anti-competitive to immoral to simply just tough business negotiations are now brightly spotlit.
The upshot, observers say, is that the chance of change, and scope for redress for suppliers to the sector, is better than it's been for decades, though nothing's likely to happen quickly.
Bodo Lang is a senior lecturer at the University of Auckland with expertise in marketing communication: "The balance of probability is definitely shifting in favour of change. We have suppliers speaking up about practices that may or may not be illegal, which some would find immoral. We have a Labour Government that is focused on the issue, we have media focus on the issue, and we have multiple organisations, including the Commerce Commission [the country's competition and consumer regulator] analysing what is going on. Those are all the right ingredients."
THEN THERE WERE TWO
Ironically, it was a government decision that established the current supermarket duopoly (Quin disputes there is a duopoly, citing Foodstuffs' hundreds of individual store owners, though they are co-operatively joined together, and North Island and South Island Foodstuffs do not compete with one another).
In 2001, the Government of the day allowed Australian-owned Progressive to buy Woolworths NZ, leaving just a single large-scale competitor for the biggest player, Foodstuffs.
That level of concentration is extraordinary among the world's developed economies. In recent decades supermarkets around the world have taken a steadily rising share of grocery sales, but it's hard to find a country with more market concentration than New Zealand.
Both New Zealand supermarket groups command greater grocery dominance than Walmart in the US, Tesco in the UK and either Woolworths or Coles in Australia.
Foodstuffs North Island and Foodstuffs South Island are store-owner co-operatives and divide the country under the banners of New World, Pak'nSave and Four Square.
Australian-owned Woolworths, encompassing Countdown, SuperValue and FreshChoice, is Foodstuffs' similarly sized competitor. Between them, Woolworths and Foodstuffs sell about three quarters of all New Zealand's groceries (The Warehouse accounts for much of the balance).
That predicament isn't new but it is under fresh scrutiny. Last year research by the Productivity Commission showed that competition measures across the category "supermarket, grocery stores and specialised food retailing" have followed a downward trend in recent years.
And last month the Commerce Commission began a market study into the retail grocery sector, with a focus on the supply and acquisition of groceries by retailers.
The possibility for unequal bargaining power between suppliers and the supermarkets was outlined as a particular concern in the November Cabinet paper that outlined the rationale for the study.
The market study also coincides with two anticipated legislative changes which grocery store suppliers and their advocates hope will hand them more power. The first is a proposed amendment to Section 36 of the Commerce Act, and is intended to make the prosecution of anti-competitive behaviour easier. A bill is expected to be introduced in 2021.
The gist of the change is that prosecutors of anti-competitive practice would need to prove only that an action had an anti-competitive effect, whereas currently they must establish anti-competitive intent.
"It really does remain to be seen whether it makes prosecution easier, or whether it's even relevant to the conduct that suppliers to supermarkets are concerned about" according to Tony Dellow, competition lawyer and partner at Buddle Findlay.
"An 'unconscionable conduct' provision might make a bigger difference because it would be directed at the kind of conduct that suppliers seem to consider should be addressed."
A provision against "unconscionable conduct" is at the heart of another legal amendment with the potential to affect how supermarkets do business with their suppliers. The Fair Trading Amendment Bill is awaiting its second reading, likely next year. In its formulation, the Commerce Commission described possible applications that included "taking advantage of unequal bargaining positions."
COMMERCE COMMISSION PROBE
The market study lately under way through the Commerce Commission has broad scope to examine the competitive landscape for supermarkets. Cabinet documents relating to its initiation describe particular concern for the possibility that "unequal bargaining power may allow supermarkets to push prices unreasonably low for suppliers ... "
Ultimately recommendations could range from an acceptance of the status quo to legal prosecution, but many observers expect that they will, at least, lead to an industry code of conduct.
That's certainly an outcome the supplier industry group, the New Zealand Food and Grocery Council, would welcome. Chief executive Katherine Rich said she has spoken up recently about suppliers' concerns and is now choosing to let the Commerce Commission do its work.
Rich is currently gathering support for a petition to ask Parliament to help establish a food and grocery code of conduct. She'd like a code that's similar to Australia's, brought in five years ago.
The Australian code sets out processes for suppliers and supermarkets to follow; chief among them, suppliers cannot be arbitrarily dropped ("deleted" as the industry has it) from supermarket shelves, and such a decision can only be taken through defined steps and in light of a number of objective measures, including sales data.
In the case of Australia, the country's competition and consumer regulatory commission oversees the process, and wields enforcement mechanisms.
Supermarkets, unsurprisingly keen to preserve as much latitude as possible to act and update their businesses, are not proactively supporting an externally enforced code.
Countdown spokeswoman Kate Porter cited the company's own code of conduct and supplier charter, and noted that, "if the market study results in a code of conduct in New Zealand, then we'd of course take part in this."
Foodstuffs NI's Quin also pointed to his company's supplier relations charter and regular meetings with a Food and Grocery Council working group.
He said he's not familiar with the details of the Australian code, but would support some kind of external "fair play arrangement".
WHAT ABOUT PRICES?
It's not clear whether any of the possible changes will lower New Zealand's notoriously high grocery prices.
Consumer NZ chief executive Jon Duffy said estimates for the price of New Zealand food and groceries ranged from 10 per cent to 30 per cent higher than those in Australia, though comparisons are hard to pin down.
He also pointed out that the reasons for the difference are complex, and include New Zealand's (internationally extraordinary) levy of 15 per cent GST on fresh food as well as transport costs and its smaller scale.
But he noted that competition concerns extend well beyond the price at the checkout.
"A big part of this puzzle is margin; if suppliers are being screwed through the market power of the supermarkets, and the supermarkets are just using that to make big profits, not passing it on to consumers, then that's a big issue."
The focus on competition makes an uncomfortable backdrop for Foodstuff NI's transition to what it calls its new commercial operating model.
Quin is promoting a suite of changes as a transformation with customer preference and experience at its heart. The commercial decisions of the past, he said, must now stand up to the test of customer tastes, measured in new and revealing ways.
Driving the new strategy, which includes centralising, streamlining and making the most of store space, are large quantities of customer data, digested by analytics giant Dunhumby, owned by UK-based Tesco.
In particular, Quin said, Foodstuffs NI is engaged in the process of reviewing and paring the range of products it offers across grocery categories, especially where the differences are minimal, and of boosting offerings where demand is building.
One aspect of the streamlining is a change to the complicated payments suppliers make for the special promotion of their products in stores.
Quin, and David Stewart, the company's general manager of merchandise, are keen to promote the simplicity of the new system. But here again, suppliers have objections. The new process, whereby suppliers pay for promotions, calculates what they owe as a percentage of the retail sales value to Foodstuffs NI.
Nick Hogendijk, a Melbourne-based consultant and managing partner of Hexis Quadrant, works for a number of New Zealand supermarket suppliers.
"The retail price is something suppliers have no control over, so it's not difficult to see why they don't want to pay a percentage of that," Hogendijk said.
He suggested invoice sales value, arising from the price at which the supplier sells, as a more suitable base.
"I have emails in my possession from Foodstuffs NI to clients of mine, they describe a new business process, for promo rebates for example, and they lean on the suppliers in a very coercive way. They essentially say sign up or you're out."
Stewart characterised the process as a more collaborative one: "we've had good communication, discussions with suppliers ... and in all cases we've worked to a point where they're comfortable, or if not, they don't step into the framework [meaning they haven't had to move to the new system]."
One supplier described a continued objection to the use of retail price to calculate the percentage-based cost she paid for promotions, but said her company was too small to pursue this.
The Commerce Commission has its work cut out for it. Not only will it spend the coming months hearing from such witnesses and wading through commercial documents, it may also consider the communications which shed light on how commercial terms were reached, including correspondence.
The final study is slated for release late next year, and even a resulting code of conduct would take 18 months, by some estimates, to hammer out thereafter.
What could take root more quickly is a narrative of New Zealand producers, farms and family businesses, struggling against the Goliath market power of the supermarkets. Dominant players have many reasons to tread cautiously.