Successive governments have threatened to break the supermarket duopoly. Can Nicola Willis actually do it?
Milton Friedman, the patron saint of modern capitalism, once observed that “businessmen favour free enterprise in general but are opposed to it when it comes to themselves”. This is the tension playing out between Finance Minister Nicola Willis and the nation’s supermarket duopoly, and within the coalition between National and Act.
For many years, successive governments have commissioned reports into our soaring food prices. These have duly identified a conspicuous lack of free enterprise in this over-concentrated sector, resulting in market failure and excess profits.
A procession of commerce and finance ministers have responded by “putting the supermarkets on notice” – and then doing nothing.
There were two reasons for this inertia. The first is the sector’s lucrative turnover of $27 billion a year. It is thus powerful, with well-connected lobbyists and a loud voice in the media staunchly defending the rights of local family grocers (a number of supermarket owners appear on NBR’s rich list).
The second is that fixing the failures in this market is challenging. New Zealand’s last great structural separation was Telecom, the rapacious telecommunications giant that was broken into three separate companies in 2011. That was a single nationwide entity.
Between them, Foodstuffs and Woolworths control 90% of the market, but they accomplish this via hundreds of stores, many enjoying regional monopolies. A town or suburb might contain a Pak’nSave and a New World, both brands owned by Foodstuffs, or multiple Woolworths.
Even in cases of different operators, the duopoly model allows for the stability of tacit collusion, where firms co-ordinate prices without explicit agreement.
This collusion is likely to break down when a third party enters the market. Marriages based on unspoken understandings can endure for decades, but love triangles are more combustible.
Raising the barricades
Given the significant profits to be made, there should be hordes of new entrants lining up to compete. But both incumbents like to landbank potential construction sites so no one else can build on them, and to negotiate zoning regulations with local councils to prevent the establishment of nearby competitors.
If a rival does set up shop, the duopoly employs a technique called pocket pricing, in which their nearby stores lower prices while keeping them high across the rest of the country. They employ their market size to enter into exclusive agreements with suppliers, pressuring them into discounting their products and restricting them from selling to rivals.
To make a real difference, a third supermarket chain would need to overcome the zoning and regulatory challenges, construct dozens of stores nationwide despite the lack of suitable sites, establish rival supply chains across hundreds of product lines, then fight a price war with wealthy and well-established incumbents.
The plan of attack
Willis’s plan of attack is to announce a six-week investigation into the possibility of a significant third player entering the market, and to identify any regulatory assistance that could help them operate at scale. She is simultaneously looking into the prospect of breaking up the existing players, demerging brands or splitting the wholesale and retail operations.
This would be a more drastic form of intervention than breaking up Telecom, and is likely to encounter fierce resistance.
The lobbyists warn that such a move would somehow lead to higher food prices. The same thing was said about phone charges before the telecommunications demerger; prices subsequently fell dramatically.
The New Zealand Initiative – a right-wing think-tank with Foodstuffs North Island chief executive Chris Quin on its board – is appalled, and there are mutinous whispers across the nation’s boardrooms that Willis is anti-business. Which she is, in much the same way Friedman was anti-business: in a trade-off between competitive free markets and protecting the returns of companies that profit from dysfunctional markets, serious capitalists choose the former.
Opposition within
Act is unlikely to see things this way. The party trades as the Association of Consumers and Taxpayers but tends to operate as the association of shareholders and property owners. It will argue that separating the companies is an attack on property rights, and that it exposes investors to sovereign risk. Why should international companies put their money into New Zealand if the government could punish success by breaking up their businesses?
National would probably need support from Labour to pass any anti-duopoly regulation before the election, which would suit David Seymour very nicely; he could position himself as the champion of business against the predations of big government.
How did we get here? Markets are not magical, they don’t work if there’s no competition, and a recent OECD report warned that New Zealand’s small size and geographic isolation make us unusually vulnerable to market concentration.
It’s a shame successive governments have spent the last four decades cheerfully waving through a string of mergers and acquisitions that have left us with a number of uncompetitive sectors and the anaemic productivity typical of closed economies.
The government is looking at strengthening the Commerce Commission, but it will take years to repair the mess it’s created. Groceries are National’s priority. The party campaigned on cost of living, still the most important issue for voters. But even if it gets legislation through this year, National will be lucky to see lower prices before the election – and it will face a bitter fight to deliver better markets in the teeth of relentless opposition from big business.
