Hamish Rutherford: The Commerce Commission heaps pressure on Government to deliver supermarket changes

OPINION:

Ahead of the release of the Commerce Commission’s draft report into supermarket competition, Katherine Rich was braced for disappointment.

For much of the past decade Rich, the chief executive of the Food & Grocery Council, has been vocal about what she says her members – grocery producers from family businesses to multinational giants – see as they deal with the two main supermarket groups.

Only this week she published a series of alarming claims, that even on the eve of the commission’s report, Foodstuffs was threatening to delete product lines as part of negotiations and seeking display fees without guarantee of prominence, among other demands.

Rich predicted hopefully that Foodstuffs had failed to read the room, with the behaviour unlikely to win it friends in Wellington.

But would the Commission, which delivered a fairly mild set of recommendations when it looked into the petrol industry in 2019, read the evidence in the same way she did?

The skepticism was unfounded. The Commission’s report into the retail grocery sector was a searing assessment of an industry worth more than $20 billion a year.

Commerce Commission chair Anna Rawlings said in no uncertain terms that the supermarket sector was not working for consumers, the supermarkets are excessively profitable and that the way supermarkets dealt with suppliers was leading to a loss of choice for consumers.

Some of the behaviour observed was so bad that it may have been a breach of the Fair Trading Act, and while the behaviour was not the subject of the market study, the Commerce Commission may decide to go back, look more closely and potentially prosecute.

The wholesale market – in which retailers access their supplies – was so utterly dominated by the two supermarket giants, Foodstuffs and Australian-owned Woolworths (the owner of Countdown), that many owners of small dairies tended to buy much of their goods from the supermarkets.

Although far from a surprise, the Commission’s comments on supermarket profitability are likely to be the driver of change, possibly even structural change which until Thursday seemed highly unlikely.

Both supermarket groups are, according to the Commission, earning a return on capital of more than 20 per cent. This is several times higher than what would be considered normal in a relatively low-risk industry. Normally, this kind of excess would attract others in to share (and reduce) the spoils. But it has not.

The Commerce Commission’s recommendations for measures to improve wholesale competition are a spectrum, ranging from modest changes on a voluntary basis, to creating a new wholesaler or even forcing the break-up of the groups into retail and wholesale.

Aimed at attracting a new major retailer into the New Zealand market, it could be accompanied by forcing the supermarket to sell off certain sites to a new player.

The supermarkets appeared shocked by the report. Woolworths said it would have a significant impact on its business and asked customers not to take the report out on its staff. Foodstuffs has not responded to Rich’s claims, or the commission’s.

As well as putting the supermarkets on notice that change could be forced on them, the Commerce Commission has heaped pressure on the Government to deliver changes.

Remember when Jacinda Ardern told the public that it was being fleeced on petrol prices and she was going to do something about it?

Now, we have an independent regulator telling her that the public is paying too much for groceries and suppliers are also being squeezed, at the hands of a powerful duopoly.

Unlike fuel retailers, which are a sunset industry, supermarket sales are growing and will continue to grow.

While the report is only a draft – the final report is due in November – the substance of the report is unlikely to change significantly.

Commerce and Consumer Affairs Minister David Clark, who ordered the investigation, made no clear commitments.

But with such a clear verdict of a duopoly exercising market power in such a mammoth sector, the Government will quickly need to find a suitable response.

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