Foodstuffs merger: Reducing supermarket competition means Kiwis overpaying for groceries – Labour MP Arena Williams

"Tax cuts are insignificant compared to the gains households would enjoy if New Zealanders did not have to overpay for their groceries every week." Photo / Getty Images

THREE KEY FACTS:

• The country’s largest supermarket operator, Foodstuffs, is seeking clearance to merge its North and South Island divisions, which own brands including New World, Pak’nSave and Four Square.
• Foodstuffs says the merger would “deliver more value and innovation” and it could do that “better and faster” as one national co-op.
• In April, the Commerce Commission said it was concerned that if Foodstuffs became a single grocery entity, it would further reduce competition in the market.

Arena Williams is the Labour MP for Manurewa.

OPINION

While Budget 2024 was billed as a response to cost-of-living pressures, National’s income tax reductions amount to a pitiful increase for many low-income households.

In many cases, the cuts to cost-of-living programmes – such as subsidised public transport and food in schools – will increase costs on households by more than what they are getting back in tax cuts.

Budget day was a flop, but there is an upcoming day that may prove more significant for New Zealanders struggling to get ahead. That day is June 21, when the Commerce Commission decides whether Foodstuffs can merge its North and South Island entities.

The Commerce Commission’s market study in 2022 cited research which shows New Zealand has the fifth-most expensive groceries in the OECD. The commission noted the sector was highly concentrated and estimated excess profits of $430 million per year – beyond a reasonable return on capital.

Consumer NZ reported last year that “the cost of food is now listed as the second-highest financial concern for New Zealanders, after housing”.

The merger proposal in front of the Commerce Commission relates to the fact that Foodstuffs North Island and Foodstuffs South Island are currently separate legal entities. Despite this, they do not compete with one other.

Instead, they co-operate on things like branding, marketing and their private label products. What they don’t do right now is jointly manage purchasing of groceries from suppliers.

The argument from both Foodstuffs entities is that because they do not compete with one other, there should be no decrease in competition if they are allowed to merge. And they say supermarkets will then be able to extract lower prices from suppliers, which they will then pass on to consumers.

It is hard to know what impact the potential merger would have over the longer run, but New Zealand has not been well-served by a highly consolidated market and there are good reasons why we should be wary of further moves in that direction. There are a number of points in this argument where New Zealanders might want to stop and ask, “why?”

For an alternative view: Supermarket critic misses key points about inflation, says Foodstuffs boss

Why don’t the two entities (both profit-driven corporates) compete with one another directly? Why couldn’t we see, for instance, Four Squares connected with Foodstuffs South Island entering markets in the North Island where competition is particularly weak?

Second, why should we think cost reductions through squeezing suppliers will automatically be passed on to consumers? If the market was competitive, we would expect to see prices being driven down.

Instead, we have seen unconscionably high rates of profit continue. New Zealanders are being asked to believe that, in this instance, greater consolidation will lead to better outcomes for consumers, rather than further inflating profits.

Third, why should New Zealand allow a merger that does not guarantee any improvements for Foodstuffs workers? In 2022, Woolworths (formerly Countdown) workers battled for a historic pay increase, but the franchise model of Foodstuffs stores makes it more difficult for its workers to bargain collectively.

Foodstuffs owns the New World, Pak’nSave and Four Square stores in New Zealand. Photo / Mark Mitchell

First Union has proposed that if the Foodstuffs merger goes ahead, it should be conditional on a merger of workers’ collective agreements. This would save hundreds of wasteful hours of negotiations by individual stores while ensuring Foodstuffs’ employees (who, during Covid, were part of a group that we used to call “essential workers”) share in the excessive profits of the sector.

But the most significant “why” in this issue is: why isn’t the Government putting the regulation of groceries at the centre of its response to the cost of living?

Labour initiated the market study into the grocery sector, banned restrictive covenants that limited competition from new entrants, and introduced a grocery sector code of conduct. We set up the Grocery Commissioner, which National continually scoffed at during the election campaign.

By contrast, National has cut $14m of funding from the Commerce Commission, in part through slowing down work on competition studies. This will lead to redundancies in an area where New Zealanders desperately need competent and experienced regulators in their corner. In March, I proposed a select committee inquiry into food pricing in New Zealand, but this was blocked by Government members of that committee.

Many low-income New Zealanders will receive just $2.16 per week from National’s tax cuts to help them with the cost of living. This is insignificant compared to the gains households would enjoy if New Zealanders did not have to overpay for their groceries every week.

If National was serious about addressing the cost of living, it would commit to dismantling vertical integration in the wholesale market and weakening the geographic monopolies that the duopoly currently enjoys.

But National is led by people who have made their careers in monopolistic businesses – it is not in their DNA to limit corporate power. Only a Labour Government can be trusted to do that.