Supermarket giant Foodstuffs promises reform in advance of Commerce Commission’s final report

Chris Quin is cool and analytical in an interview to explain his supermarket chain’s latest submission to the Commerce Commission, and to list the concessions his company is willing to make as a result of intense government scrutiny.

But despite his demeanour, there’s no mistaking that the CEO of Foodstuffs North Island is an executive under fire. And the defence he is now waging is aimed at persuading New Zealanders, and their elected officials, that more drastic action to rein in the market power of the country’s supermarket duopoly is not needed.

“We get that this is challenging us to do better. And we’re going to stand up and commit to the things we can do better. Are we making that move now with urgency because of the study? Sure, the study’s had an impact, yes, but we’re responding to it,” he said.

To that end, Quin, head of the larger of New Zealand’s supermarket players, has released a list of undertakings to reduce barriers to new entrants to the market; to simplify and clarify pricing and loyalty schemes for customers; and to help ensure that suppliers to Foodstuffs NI, many of them small, get a fair deal.

The change of heart comes in the wake of a damning draft report published at the end of July by the Commerce Commission. It concluded that competition is not working well in the sector and that prices to consumers are “consistently high” and among the most elevated in the OECD.

It also found that supermarkets are enormously profitable, as measured by a shockingly fat ‘return on average capital employed’ (ROACE) of some 22-24 per cent. Quin takes issue with both points.

The Commission’s preliminary recommendations to the Government, to remedy the problems, include the forced divestiture of assets, including stores or parts of the business like wholesale. They even contain the possibility for the government itself to enter the sector directly.

The grocery sector is controlled by Foodstuffs NI and Foodstuffs South Island – the two co-operate together and do not compete, and each is co-operatively owned by its member stores – and Woolworths New Zealand, whose banners include Countdown and Fresh Choice. Foodstuffs banners include New World, Pak’nSave, and Four Square stores.

Since the release of the Commission’s report Quin has hired Auckland public relations firm Sherson Willis to help formulate a response, and “independent economists” to better explain Foodstuffs NI’s profitability: he says the company’s ROACE is a much more modest 9.5 per cent, and that the Commission has not properly understood just how much capital Foodstuffs NI has tied up.

“So we have 323 stores in the North Island and the capital base used by the Commission does not count the capital value correctly of those stores. That’s a lot of buildings and a lot of land, and a lot of balance sheets and funds that are tied up,” he said.

It’s a point which is more detailed, he says, in Foodstuffs NI’s submission (made last week) on the Commission’s draft report; the Commission is expected to release all submissions on the report within days.

Ultimately Quin’s calculation appears to be this: accept and even embrace some change now, since some Government mandated reforms are likely coming anyway. And in so doing, avert or minimise the more radical and damaging possibilities for Government action.

Perhaps most notable is an undertaking to dismantle the restrictive land covenants and exclusivity provisions in Foodstuffs NI’s leases, which form a significant barrier to entry for new competitors.

The company estimates there are 50 properties (either vacant land or land and buildings) protected by its covenants, that prevent the building and operation of a supermarket on the site. In addition, there are some 18 lease covenants, mostly protecting Foodstuffs supermarkets from competition, for example in a shopping mall.

He said Foodstuffs stopped the practice of requiring such covenants “some time ago,” but will now work to eliminate them. He couldn’t give a timeframe for elimination.

Quin’s also promising to press the Government to reform both the Overseas Investment rules and land development laws to make it easier for a new entrant to join the market.

Quin also announced undertakings to make pricing for consumers and the structure of loyalty programmes along with their terms “simpler and clearer”. He said the company will: simplify pricing and promotional practices; make the terms and conditions of reward structures and loyalty programmes simpler; provide clearer information on the collection and use of personal data; and make consistent use of unit pricing.

Though he stopped short of offering lower prices. In fact, he said increasing stress in the supply chain, including massively inflating freight and shipping costs, and a labour shortage are actually likely to push prices higher in the near future.

His final commitment is to support an industry code of conduct to help smooth relations with the company’s suppliers, many of whom complain of being squeezed through Foodstuffs NI’s tremendous market power.

“Part of the study process has established a case for a code of conduct. We should roll our sleeves up with the industry and with the government and work out what the content of that code needs to be,” he said.

However, he won’t suspend the company’s current “range review” until a code of conduct is in place. The contentious process has been under way for several years, and Quin describes it as an effort to simplify and centralise purchasing, often reducing the range of products on store shelves in line with customer demand.

Suppliers see it differently. And though they are often reluctant to speak up individually, submissions made to the Commerce Commission by their industry group, the NZ Food and Grocery Council, reveal that many see the process as a way to squeeze them for lower prices, which they don’t believe flow to consumers, under threat of reduced ranging of their products or even “deletion” from store shelves altogether.

The Commission will release its final report, including a range of remedies recommended for Government action, in November

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