The Government should encourage a private wholesale operator to enter the market by offering tax breaks, an Australian expert says. Photos / NZME
A $2 billion wholesale grocery market opportunity is going begging in New Zealand that would relieve the wallets of low- and middle-income earners if the Government played it smart, says a grocery sector specialist.
But Nick Hogendijk, an Australian consultant who sat through the Commerce Commission hearings that concluded New Zealand has competition issues in its supermarket sector, fears the Government has "missed the point" in intending to put a regime in place to create more retailer access to wholesale grocery supply.
The supermarket duopoly of Foodstuffs and Countdown are vertically integrated operations, meaning they control most of the access to wholesale groceries as well as 80 to 90 per cent of the consumer primary and secondary shop market, and have enormous power over suppliers.
Hogendijk, managing partner of Hexis Quadrant which specialises in the grocery sector and has worked with the NZ Food & Grocery Council, said the duopoly is going to have even more market power in a mandatory regime, because collectively they will push more volume and prices through this vehicle and demand "even better prices off their suppliers".
The founder of grocery alternative Supie, Sarah Balle, also believes putting a regulatory backstop on wholesale supply is effectively giving more power to the duopoly. She said the food system will become more reliant on the two companies and their supply chains.
So what should the Government do to break up the wholesale market duopoly?
Hogendijk said it's essential to introduce an independent wholesale grocery supply vehicle.
The commission had concluded the grocery sector was valued at $22 billion a year and only 10 per cent of it was outside the duopoly, he said.
"That's a $2.2 billion business in its own right. If you take out the retail margin, let's call it a $1.6 billion wholesale sector.
"If someone can't make a $1.6 billion sector work then there's something wrong with them."
Hogendijk said the Government could encourage a private wholesale operator by offering tax breaks.
"We are not talking about setting up a supermarket chain, we are talking about setting up a shed which trucks go in and out of.
"You need a big fridge inside that metal box and a big freezer and lots of shelving, and a loading base for trucks. To set up a warehouse facility we are talking about $100m to $130m to build and fill a warehouse.
"Realistically you want one in the North Island and one in the South Island. I was at a meeting last week with 100 wholesale operators whose businesses run from $100m a year to $900m, all of whom could satisfy that requirement."
The warehouses would sell grocery supplies to fringe retailers.
"Organic growth would occur if they could get access to product at a meaningful and competitive price."
Hogendijk said the other big primary issue for a new entrant had been land availability, a market the duopoly had blocked. However the Government this month introduced urgent legislation to stop the supermarkets blocking new entrants trying to get land for stores.
He believed the Government this week had made it clear "they're looking for people to step in". Finance Minister Grant Robertson has since said international operator Aldi was "one of the players" interested.
Economist Cameron Bagrie said the independent wholesale operator idea didn't address the "big issue" that a third or fourth operator would need economies of scale and distribution capability to compete in the grocery staples market. The 10 per cent of retailers outside the duopoly didn't have that.
Bagrie thought the most important, but buried, part of the Government's announcement this week was the mention it was doing more work on requiring "major grocery retailers to divest some of their stores or retail banners".
Hogendijk said Bagrie was correct that New Zealand needed a third or fourth player.
"But you've also got 10 per cent of the market which has no meaningful access to supply and its worth $2.2b. Potentially the third and fourth player will not be a full service supermarket with 18,000 lines in their range. They will be more compact and focus on staples."
A third or fourth full supermarket operator was also going to want to be vertically integrated, he said.
"That doesn't satisfy the low- and middle-income earners who are still going to be squeezed, particularly in more remote areas.
"There's a $2.2b sector with no ability to compete and grow because they can't get meaningful access to supply."
Hogendijk said the old argument the duopoly was the result of New Zealand's market population being too small didn't wash. He noted Perth in Western Australia had a population much smaller than New Zealand's, yet had more than 100 supermarkets operated by at least five major competitors. Added to that, the distance grocery supplies had to come from Australia's east coast was further than that between Australia and New Zealand.