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Thursday 21 October 2021

FSNI rejects excessive profit; promises grocery code, land covenant removal

15th September 2021 By Bridget O'Connell | bridget@foodticker.co.nz | @foodtickernz

Foodstuffs North Island is attempting to head off the Commerce Commission recommendation for a break-up of New Zealand’s highly concentrated $22bn grocery sector by challenging the agency’s profit estimates.

In its submission on the commission’s draft market study report, FSNI said its profits were “normal”, being less than half that of what the agency estimated.

As such, FSNI said its actual profits do not support the report’s key draft recommendation for the break-up of the Foodstuffs and Woolworths duopoly that dominates the market, or the government supporting a new entrant in an effort to increase competition in the sector.

“The analysis on FSNI returns which is at the core of a number of the commission’s draft recommendations is incomplete,” FSNI chief executive Chris Quin said.

“Our calculations on profitability, drawing on independent analysis show that FSNI’s average return on capital is less than half of what the commission has calculated it to be, approximately 9%, not close to the draft report’s close to 24%, and as such FSNI earns a normal level of returns, being below the average of the commission’s international sample of grocery retailers.”

Quin added that its calculation demonstrated “that the analysis the commission is relying on doesn’t support some of its findings underpinning key draft recommendations, such as wholesale separation or state sponsoring of new market entrants”.

The co-operative, which has 323 owner-operated stores across the North Island operating under the Four Square, New World, PAK’nSAVE, and Gilmours brands, also offered a raft of concessions in its submission setting out what it called a “comprehensive action plan”.

These included developing a grocery industry code, removing land covenants that stifled competition, and simplifying its pricing structure.

On an industry code, Foodstuffs pledged to “improve outcomes for suppliers and consumers by working together with suppliers and the government to develop a consumer focused grocery industry code to guide our dealings with suppliers and to protect their freedom to support other retailers”.

The Commerce Commission’s draft report into competition in the retail grocery sector canvassed options to strengthen suppliers’ bargaining power with retailers include introducing a mandatory industry Code of Conduct and allowing suppliers to bargain collectively.

It is also a measure that has gathered some momentum in the sector with the New Zealand Food and Grocery Council last year launching a petition seeking government support for such a code to help rectify what is seen as a power imbalance in the sector.

In response to the draft report’s finding that supermarkets were acting to suppress competition by land banking and using property covenants, FSNI promised to change its ways.

“FSNI will encourage competition and address barriers for new entry and expansion by making a commitment to end the use of restrictive land covenants and exclusivity provisions in leases, and immediately starting a process to remove all existing such clauses.”

On pricing, FSNI said it would “deliver value for customers by improving their ability to make informed shopping decisions by simplifying and clarifying its pricing and promotional practices and the terms of its loyalty programme, as well as committing to a consistent use of unit pricing”.

Quin said FSNI’s submission made clear that would “accept the clear challenge to do better for New Zealand consumers and we and all of our stores are committed to making changes that improve outcomes for customers – meaningful change will happen faster as a result of this report”.

The Commerce Commission published its draft report on 26 July. A final report is to be published by 23 November 2021.

 

 


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