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Tuesday 28 June 2022

Wednesday letter: ComCom’s competition damp squib

9th March 2022 By Bridget O'Connell | bridget@foodticker.co.nz | @foodtickernz

Despite all the sound and fury, the Commerce Commission’s highly anticipated final report arrives with a whimper when it comes to competition, writes the Ticker’s Bridget O’Connell.


Bridget O’Connell

Underwhelming. Disappointing. A missed opportunity.

The Commerce Commission’s long-awaited report into New Zealand’s $22bn grocery market left many in the sector cold when it concluded that a structural lack of competition and culture of power-plays and profits would be sufficiently addressed with a bit of tinkering around the edges.

Instead of taking action to restructure a stifled market to foster genuine competition, the report’s recommendations came across as a list of safeguards to curtail the worse excesses of the duopoly.

One supplier told the Ticker that she swore she could hear the champagne corks popping in Foodstuffs and Countdown’s Auckland head offices from where she was sat miles away reading the 609-page final report.

Despite its final shortcomings, the market review process was invaluable. The commission did a stellar job identifying and exploring the market and competition issues plaguing the sector for consumers, retailers and suppliers.

And, as a result, it has made some recommendations that have the potential to make a genuine difference to the operations and success of suppliers.

The mandatory Code of Conduct to be determined by the government will be a big win for suppliers and its main proponent of 12 years, the New Zealand Food and Grocery Council.

It will codify requirements for good faith dealings and transparency and crucially, will have a disputes resolution mechanism.

It aims to end practices such as unilateral contract variation, retrospective requests for additional payments, shrinkage or wastage payments, discrimination on ranging and shelf allocation in favour of private label products and the sometimes murky circumstances surrounding delisting.

As a supplier put it, such a code will mean you can no longer be delisted just because you did not get on with your category manager.

The creation of a grocery regulator to monitor and enforce the code, with wide-reaching information gathering powers, public and private reporting powers, and the threat of financial penalties for bad behaviour at their disposal, is also welcome.

But where the report falls down is in the measures it suggests that will promote more competition in the sector, which results in fairer deals for both consumers and suppliers – surely the Commerce Commission’s main objective.

The commissioners concluded that by identifying and addressing two of the barriers to entry that have been suppressing competition – namely access to land and wholesale grocery supply – the market would fix itself.

Getting the duopoly to remove restrictive covenants that hinder supermarket development in prime sites and sell off their land-banks might improve market conditions for entry and expansion.

Ripping through red tape to ease zoning restrictions and making sure the Overseas Investment Act and the Sale and Supply of Alcohol Act do not unduly impede entry and expansion may also make the market more attractive to a deep-pocketed foreign entrant.

And ensuring the supermarket-controlled wholesalers have to at least engage with external retailers in an effort to agree practical and competitive terms for grocery supply (but not actually supply them, by the way), on paper provides better conditions for a competitor looking to secure cost-effective purchasing.

But this is a far cry from real, tangible competition taking place.

Any potential new entrant will still enter a market where two players control the retail and wholesale segments with a combined market share north of 80%.

Maybe the changes will help Costco secure its Wellington and Christchurch sites – its current ambition for expanding beyond Auckland.

But without forced divestment, there simply is not enough market share to go around to support the creation of a third major player. Telecoms market disruptor Tex Edwards says a network of 150 stores is needed to support any meaningful challenger.

Even with sites freed up, a challenger still cannot generate enough scale to be competitive under the current dynamics. And given the duopoly’s willingness to voluntarily change their historic property practices, one might conclude they know that too.

The commission said the recommendations were also about improving conditions for existing fringe competitors, with Sarah Balle’s Supie and Mathew Lane’s Night ‘n Day being two such players.

Neither believed the recommendations went far enough to result in any meaningful change, either for their own businesses or for rivals and consumers to get groceries on better terms.

Lane said the commission was basically guiding how an entrenched duopoly should work in a market rather than addressing the problems caused by it.

Not breaking up wholesale control – at least operationally – means businesses like Night ‘n Day are forced to operate by buying products off competitors who could simply open a store next door and offer better prices.

Balle says it will do nothing to aid her online challenger, or foster competition in general, or curb the excess profitmaking the commission itself has highlighted.

“It was a missed opportunity in providing an industry reset and really thinking about what we want New Zealand’s food future to look at over the coming decades.”

The Commerce Commission suggests a three-year backstop, at which point if nothing has changed then the issues will be revisited.

Of all the scenarios played out during the 15 months of the commission’s inquiry, perhaps that will be the most likely. More likely in any case than the existence of a vibrant, competitive grocery sector in a country that produces enough food to feed 40 million people delivering a fair deal for all New Zealanders.

Wednesday Letter is Food Ticker’s new weekly industry column and we welcome submissions from all food and beverage stakeholders keen to share their thoughts on an industry issue with our professional audience.

 

 


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