By Kyle Maxwell

Introduction

As many Kiwis feel the crunch of the cost of living, the chunk out of our wallet is most apparent when it comes to our most fundamental necessity: food. Driven by a macroeconomic whirlwind, Kiwis are paying 12.5 cents more for every dollar of groceries than last year. Meanwhile, Woolworths and Foodstuffs rake in $430 million more annually than expected in a competitive market. With grocery costs our biggest worry, New Zealanders can no longer overlook the glaring inadequacies in the grocery market. In March 2022, the Commerce Commission delivered its report on consumer issues, their causes, and potential solutions. This article will break down what the report found, as well as what the commission is proposing to do about these findings. 

Market Structure

The Commission found the grocery market to be a duopoly with a fringe of competitors. A duopoly is a form of oligopoly, characterised by two strategically dependant (copycat) companies holding a large market share and offering similar products. Foodstuffs owns PaknSave, New World and Four Square while Woolworths owns Countdown, SuperValue and FreshChoice. Together, they have roughly an 85% market share while retailers like Farro Fresh and Supie make up the rest.

Consumer Issues

Unsurprisingly, we are paying steep prices by international standards. In the OECD, we have the fifth highest grocery prices and spend the highest proportion of our incomes on groceries. 

A plethora of confusing promotions exacerbate these high prices. Indeed, $6 out of every $10 spent on groceries was on a promoted product in 2017. However, we are 50% to 90% more likely to purchase bundles of goods that don’t best suit our needs when choosing products across a range of promotions. “Multi-buy” discounts, where several items are sold for a discounted price, frequently result in the worst decisions. 

The lack of standardised unit pricing significantly contributes to this. The report found unit pricing displays (e.g. $1 per 100 grams) to be inconsistent and frequently obscured by promotional pricing labels, preventing price comparisons. 

With two million Kiwis scanning Countdown’s Onecard and 1.6 million swiping New Worlds Clubcard, Kiwis are unaware of the actual cost of these schemes. Customers unknowingly consent to Foodstuffs and Woolworths sharing or selling non-identifying personal information to third parties deemed in the customer’s interests. Privacy Principles 10 and 11 under the Privacy Act dictate that information can only be shared when it is directly related to the purpose for which it was gathered: participation in rewards programs. However, Foodstuffs and Woolworths cite contractors, suppliers and affiliates as third parties, which are unlikely to all be related to the schemes. 

On top of this, supermarkets frequently mislead customers about whether a product is genuinely discounted. Despite section 13(g) of the Fair Trading Act prohibiting misleading representations regarding price, over 25% of products in North Island PaknSave’s were discounted for over half of 2019. Strandbags was recently fined $780,000 for similar breaches. Overall, Woolworths and Foodstuffs demonstrate little integrity but consistently get away with it due to a lack of competition.

Barriers to Entry and Expansion

The Commission deemed that such conditions primarily thrive due to a lack of sizable competition. However, it also recognised severe barriers to entry and expansion, preventing competition. 

Firstly, Foodstuffs and Woolworths’ dominance extends beyond retail. Their own wholesalers (bulk resellers) supply them and, for some products, own the whole supply chain. Other retailers typically cannot source products from them, with many smaller retailers buying directly from stores like Countdown. As such, a competitor would face the enormous cost of establishing their own wholesaler. 

Alternatively, new entrants can go directly to suppliers (original producers). Unfortunately, suppliers fear the duopoly to the extent that they are often unwilling to supply anybody else. Suppliers have also dictated to The Honest Grocer and Supie that they must resell their products at a higher price than Woolworths and Foodstuffs. Concerningly, this indicates suppliers are more fearful of the duopoly than prosecution, as Section 37 of the Commerce Act prohibits this.

Woolworths and Foodstuffs have also taken more creative measures to kill off any competition before it is born. Together, they have sold or leased over 190 sections under restrictive covenants preventing competitors from setting up shop. For instance, exclusivity covenants in leases frequently allow shopping centres to host only one supermarket. 

Finally, regulations hinder new entrants. Primarily, the Overseas Investment Act adds delays and legal costs as a consenting process is required to purchase ‘sensitive’ land for stores. Sensitive land can include land bordering reserves, streams, residential-zoned, and coastal land. 

Recommendations

The Commerce Commission recommended 14 measures in response. Several of these are particularly relevant in achieving fair outcomes. 

In terms of pricing, it recommended the mandate of standardised unit pricing. Supermarkets would have to display their prices per the same measurement units as other products and retailers. Further, it recommended simplifying promotions, including using different tickets for different promotions and ensuring the usual price is unobstructed. 

Disappointingly, the Commission only recommended clear and concise privacy policies rather than investigating potential Privacy Act breaches.

A Code of Conduct is a key measure recommended to facilitate competition. It aims to help suppliers negotiate fair deals and offer better prices to competitors by governing supplier-retailer relations. Specifically, it would prevent retailers from unreasonably delisting suppliers’ products or withholding payment, amongst other measures. 

The Commission also recommended a sector regulator to enforce these measures and other prohibitions, such as bans on restrictive land covenants. 

Government Action

Thankfully for Kiwis hungry for change, the Grocery Industry Competition Bill is expected to be passed by mid-2023. It implements, or provides authority to implement, 12 of the Commissions recommendations and takes an even stronger stance in other instances. Notably, the Bill forces the duopoly to open up their wholesale branches to competitors. Furthermore, the Government has not ruled out direct introduction of competition if necessary. In the meantime, the Commission is actively investigating Commerce Act breaches. Kiwis will eagerly await the effect of this action as they look forward to tearing into their grocery bill. 

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Featured image source: Freerange