Labour’s move on the supermarkets yesterday is not only likely to be widely popular but also marks a huge victory for the food and grocery suppliers.
And the big winners are likely to be grocery shoppers.
The measures announced yesterday will force the two supermarket chains to open up their wholesale operations to competitors but there were heavy hints that the Government is still considering also forcing them to divest some of their stores to new competitors.
The Prime Minister may underline the moves today with a visit to a potential competitor in Auckland.
The suppliers’ industry body, the Food and Grocery Council, has led the charge against Foodstuffs and Countdown.
Relations between the industry body and the supermarkets were so bad that in recent years when annual conference participants were asked to rate their experience of dealing with the supermarkets the results were damning.
The only ally the supermarkets appear to have is the right-wing New Zealand Initiative (which both companies are members of) which has maintained a stream of comments defending their position.
Even National was notably silent yesterday about the Government move.
But the ultimate charge against the supermarkets was repeatedly referred to by the Prime Minister at yesterday’s media briefing on the new moves; that the Commerce Commission found the supermarket duopoly by its price rigging was costing New Zealand shoppers $1 million a day.
At the heart of yesterday’s announcement was the vertical integration of the two companies.
Both own wholesale companies; Woolworths (the owners of Countdown) and Foodstuffs (New World and Pak and Save) own three companies; Wholesale Distributors Ltd, Trends and Gilmours) which effectively control access for small grocery and convenience stores to most grocery items.
There is however, wholesale competition in fruit and vegetables, and meat.
A Commerce Commission inquiry in March heard evidence from the South Island convenience store chain, Night’n Day, who claimed the wholesalers were charging independent retailers like them, on average, more than 43 per cent above what they were charging themselves for the same items for sale in their supermarkets.
In that March report, the Commission had recommended that two conditions needed to be satisfied before it would be practical for an increase in the number of grocery retailers that competed effectively with the major grocery retailers.
- freeing up sites for retail grocery stores; and
- improving access to groceries for resale.
So the Government has decided to up the ante on the Commission’s report by essentially mandating the regulation of the two companies wholesale prices.
The Commission would have powers to seize documents when investigating complaints by independent retailers of discriminatory pricing.
“Under these changes, the existing duopoly will be required to negotiate wholesale offerings to their competitors on commercial terms,” said Commerce and Consumer Affairs Minister David Clark.
“However, if those prices are not what we would expect in a competitive wholesale market, the new Grocery Commissioner will be able to impose additional regulations to force fairer prices.
“Ultimately, if these interventions don’t deliver a fair deal, new regulations can be utilised to require the major retailers to provide wholesale supply at certain terms, including price and range.”
At the media briefing, Clark continually emphasised that competition would ultimately be the key to getting lower grocery prices.
“We know increased competition improves prices,” he said.
“Increasing competition improves prices; we know that from competition studies around the world.
“What you can see already is changes in the behaviour of the duopoly.
“So we’ve seen them welcome the removal of (real estate) covenants; we’ve seen them welcome a code of conduct and the Grocery Commissioner, and we’ve seen them take price rollbacks and price freezes already.
“So we’ve already seen a change.
“But what I’d stress about that is that is for now, while the spotlight is on them and what we want them to do is change the structure so that we see that competition continue into the future so that we do get those quality prices that we would expect.”
The big question about changing the structure is whether the Government will go as far as to force the two supermarket companies to divest stores to new competitors.
Clark emphasised that the measures announced so far were building blocks, implying that there was more to come, and that was likely to be divestment.
“We see this as a critical building block in that whole challenge to those systemic issues,” he said.
“You cannot stock a retail offering without access to wholesale.
“If you are a new competitor in the market, you simply can’t compete if you can’t get access to wholesale.
“So no matter where we went, for example, with divestment, if we decided to go down that path, you still need wholesale access.
“This is one of the absolutely critical building blocks in any response to make sure that we have a structurally competitive market into the future.”
Not surprisingly, the moves were welcomed by the Food and Grocery Council.
CEO Katherine Rich said it was great the Government had accepted the wholesale market was broken.
“In a well-functioning and competitive wholesale market, these steps by the Government wouldn’t be needed, and it’s just further proof of how broken, and uncompetitive the grocery market is right now.
“But what we do need in the long term is an independent wholesaler and other independent retailers to enter the market.”
But the Government is also proposing to help Rich’s members.
“Alongside these improvements to wholesale access, the Government is also building flexibility into its approach to a collective bargaining exemption for grocery suppliers,” said Clark.
“Many suppliers, particularly small ones, are unable to effectively negotiate terms of supply with the major grocery retailers on their own.
“This exemption will allow greater scope for them to do this collectively, helping to address imbalances in bargaining power.”
Prime Minister Jacinda Ardern said she wanted to see the legislation in the House this year with a full Select Committee process to follow but it would seem likely that the Government would want the legislation in place by the end of the first quarter of next year.
However, Ardern suggested that just the threat of the legislation might start to see changes take place.
“We are fairly confident that even though we have a full legislative process to come, that we will see change before these rules take effect,” she said.
“And that’s because if the grocery sector wants to ensure that they’re able to do things on their terms, they need to make a change now themselves.
“Otherwise, these regulatory measures are available for the Commerce Commission to use.
“And so we have confidence that change will happen even while we’re going through this process, and that will benefit consumers.”
The Government asked the Commerce Commission to look at the grocery market back in November 2020 when inflation was not an issue.
But the market study and the Commission’s recommendations have been given added urgency by the recent increase in the consumer price index.
Research by the Labour party’s pollsters, Talbot Mills, into the factors that drove Australian voters during the recent election there shows that the cost of living was the most important.
So, being able to point to downwards pressure on supermarket prices could now be an important tool for Labour here in next year’s election.