That the Minister of Commerce and Consumer Affairs, David Clark, yesterday chose his words carefully when he commented on the attempts to bring more competition to the supermarket sector says a lot.
Clark told POLITIK that the supermarkets were reacting “in public” positively to what the Government was proposing.
But away from the spotlight, a critical ally of the supermarket companies was mounting a full-on critique of the Commerce Commission and its Market Study into the retail grocery sector.
The Commission identified two main areas where it considered consider changes would be desirable “to help facilitate an increase in the number of grocery retailers that compete effectively with the major grocery retailers”
One was to improve the availability of a wide range of wholesale groceries on reasonable terms.
“We consider that retail competition would be enhanced by one or more of the major grocery retailers offering wholesale supply of groceries to other retailers on a voluntary basis,” the Commission said.
The other proposal was to take measures to make more sites available for grocery retailing.
“We recommend using a range of mechanisms under planning law to ensure sufficient land is available to enable choice in sites for new retail grocery stores,” the Commission said.
“We also recommend prohibiting the use of restrictive covenants on land and exclusivity covenants in leases.”
On Budget night Clark introduced the Commerce (Grocery Sector Covenants) Amendment Bill which sought to ban restrictive covenants on land, and exclusive covenants on leases.
It also made existing covenants unenforceable.
“This legislation stops supermarkets from engaging in the anti-competitive land wars we’ve seen, where they buy up land or dictate the terms of leases to block their competitors from getting a foothold in the area,” said Clark.
Perhaps surprisingly, both supermarket chains, Foodstuffs and Countdown, have supported the legislation in submissions to the Economic Development, Science and Innovation Committee.
Foodstuffs North Island CEO Chris Quin said the Bill was consistent with the company’s “Action Plan” which it had developed in response to the Commerce Commission.
But a submission to the Committee from Food and Grocery Council CEO, Katherine Rich, suggested that the companies were able to support the Bill because they actually had much more draconian controls on who might set up shop near a supermarket inserted in the highly confidential lease agreements they entered into with landlords.
Those controls are effectively secret and unlikely to be able to be touched by Clark’s Bill in the form it was introduced into Parliament.
“What’s become apparent through our review of a generic retail lease is supermarkets aren’t using their market power to block not just fellow grocery retailers – they’re using it to block or constrain almost all retail that comes close to them,” Rich told the Committee yesterday.
“This is done by using incredibly broad definitions of what a supermarket is in leases that describe their sphere of interest.
“In summary, anything that can be sold.
“It’s an exhaustive list.
“The supermarket has defined its business as almost everything that can be sold by anybody.
“The supermarket can add any other goods at any time to futureproof opportunities or threats — all rights are reserved.
“Most New Zealanders would not think a supermarket is something that sells clothing, fashion, luggage, sports and fitness goods, appliances, shoes, computers, insurance and lending, hair dressing services, banking, arts and crafts or childcare services.
“But according to this lease, they do.”
Rich said supermarkets also gave themselves the rights to determine who the landlord leased to up to 3 years after the supermarket has vacated the property.
“But the clause that surprised us the most was the requirement for landlords to campaign to block potential supermarket competition.
“The lease we’ve quoted demands that the landlord make submissions to oppose all district plans, developments, new stores, applications for resource consent, or changes to a resource consent that affects the supermarket’s competitive position at the landlord’s own cost.
“All these sorts of oppressive clauses add up to barriers for new entrants.”
The supermarkets have an influential ally in the New Zealand Initiative, the right wing think tank which is a successor to the Business Round Table.
Both supermarket companies help fund the Initiative.
Just over a week ago in a report written by its chair, Roger Partridge, it reported on a survey of the country’s 200 largest businesses by revenue, “together with those members of The New Zealand Initiative not otherwise included in the top 200.”
Just 36 companies responded when asked to rate the Commerce Commission which was ranked as the least effective of six regulatory agencies.
Despite the very low response, the Initiative pumped out press releases and videos with titles like: “Time is up for the Commerce Commission”; “Reform needed as Commerce Commission suffers alarming slide in regulatory performance”; “Roger Partridge on new research that shows businesses are losing faith in the Commerce Commission.”
In a podcast a week ago, the Initiative’s Executive Director, Oliver Hartwich, took up the issue of the Initiative’s report.
“What came through in our survey was that many large companies actually believed that the Commerce Commission simply didn’t understand the market conditions in which they operate, that they lacked some commercial expertise,” he said.
Also on the podcast was Foodstuffs director, Peter Schultz who agreed that the Commerce Commission lacked expertise.
“From my perspective, the depth of knowledge that participants in an industry sector have relative to a group working in the commission; the difference is huge,” he said.
“So there’s got to be a great learning curve that’s required through the process.”
Hartwich repeated the message; that the Commerce Commission lacked the expertise to conduct the supermarket market survey.
“What I just heard from you, it took you the better part of a year to get the Commerce Commission up to speed on how supermarkets work and how the industry works,” he said.
Clark told POLITIK that he was getting very positive support from the public for the moves he had already announced to strengthen competition.
“I think New Zealanders understand that there’s a major issue that needs tackling and they’re really pleased to see strong, decisive action from the Government,” he said.
But what about the supermarket companies?
“I have to say at this stage that the public comments are very much in favour of increasing competition in the market.
“They certainly don’t want to get offside with consumers, so they will continue to pitch their own offerings.
“But at this stage they appear to be open to change.”
Clark’s reference to “public comments” is a hint that behind the scenes the supermarkets are playing hardball.
The role of the New Zealand Initiative as what appears to be a proxy critic of the Commerce Commission with presumably the intention that will discredit its report is obvious.
But Rich believes that one of the keys to unlocking competition is to get rid of the secret lease clauses.
“Our main message is that it’s not just a single exclusivity clause, it’s a suite of oppressive clauses that have the same effect,” she said.
“And in particular, you should certainly prohibit the ability for a supermarket to tell a landlord or anybody to go out and campaign against new developments in district plans and that sort of thing.”
“If this committee gets its definitions in this bill right then you will increase competition not just in grocery retail, but in all retail, due to these incredibly broad definitions being used to block others.
“You might even see a return of more Mum and Dad retail.”
“The Initiative’s Chief Economist Dr Eric Crampton responds: “If the Initiative were trying to further the interests of the supermarkets, we would have buried Roger Partridge’s report ranking the regulators until after the supermarket process had concluded. The final Commerce Commission report is far more sensible than Minister Clark’s proposals, and it would be stupid for us to be seeking to undermine it.
The report was ready, so we released it. Our hundred-odd respondents only ranked the three regulators they deal with most frequently. They were not asked to rank all regulators. The Commerce Commission was evaluated by 36 respondents. This was not a low response rate. Far from it. The Commerce Commission was the most frequently evaluated regulator. The next-most-evaluated regulator was the FMA, drawing 20 responses. The numbers are summarised in Table 2 of Roger Partridge’s report with full detail in Appendix 1. It is a substantial error to cast our respondents as having not provided many responses about the Commission, when it was the most frequently ranked regulator.
Nobody has been more vocal than the Initiative in advocating for the removal of regulatory barriers that block new supermarkets from entering the New Zealand market. We will continue to advocate for reform to zoning and consenting to enable entry, and for the abolition of restrictions imposed by the Overseas Investment Office that further hinder entry.”