More grocery competition

Scale creates efficiencies – efficient buying, technology, logistics and distribution can reduce costs. The question is who gets the benefit. We want a market where competition forces supermarkets to pass efficiencies through to shoppers. Right now, the evidence suggests that is not happening. The cost-benefit analysis explicitly considered restructuring costs, duplicated distribution and overhead functions, and changes to supply-chain costs – it showed the benefits outweighed the costs. The Commerce Commission will be required to test this to confirm. Compared to countries of a similar size, New Zealand’s grocery market is unusual. Most developed countries of a similar size have at least three major grocery competitors, or equivalent competitive pressure from large discounters and other formats. See next Q+A.

New Zealand’s grocery market is unusual internationally. Most developed countries of a similar size have at least three major grocery competitors, or equivalent competitive pressure from large discounters and other formats.

Examples include: • Denmark: 4 large traditional supermarket groups plus Lidl. • Norway: 3 large traditional supermarket groups plus a regional supermarket group. • Ireland: 3 large traditional supermarket groups plus Aldi and Lidl. • Iceland: 3 large supermarket groups plus Costco. • Finland: 2 large traditional groups plus a global hard discounter and other competing formats.

The Commerce Commission has also said three major national supermarket networks would be significantly more competitive than two and that this is achievable in New Zealand. New Zealand also has relatively few supermarkets for its population. Commerce Commission analysis found New Zealand has 12.8 supermarkets per 100,000 people, compared with an OECD average of 16.6. Norway, with a population similar to New Zealand, has almost twice as many supermarkets per person.

There are genuine implementation risks. Distribution, logistics, supply arrangements and technology systems all matter. That is precisely why National is not simply ordering Foodstuffs to split. The Commerce Commission will have to develop and assess a detailed implementation proposal and consider:

• Commercial viability • Supply-chain resilience • Duplication and efficiency costs • Impacts on suppliers and owner-operators • Rural and regional access • Implementation costs and practical feasibility.

This does not apply to any other sector. This is a targeted, grocery-specific action which is deliberately being put through a grocery specific legislation. The current structure of New Zealand’s grocery market makes it very difficult for new players wanting to invest in and enter the market.

Market intervention of this scale is not something we considered lightly, and it is only something we are pursuing with the supermarkets, not any other sector. The evidence is clear that the grocery market is not working for consumers, the supermarket owner-operators, or the suppliers of the major supermarkets. National believes in competitive enterprise, and the current structure of the market means there is weak competition.

The Government commissioned the independent work because we wanted to understand whether structural change could materially improve competition. That work produced a serious case for pursuing separation of Foodstuffs. Given the significance of the proposal, National believes the right course is to put it before New Zealand and seek an explicit mandate. Even with that mandate, separation would not happen automatically. It would remain subject to the Commerce Commission independently concluding that a practical restructure would enhance competition and leave consumers better off.

Through the work Nicola has done, it became clear that structural separation should be pursued. That is a very significant intervention and not one that we had a mandate for, so National is seeking that mandate at this year’s election.

The oil and gas ban was a decision made without evidence, by politicians, for political purposes. This is an action where the final decision will be made by independent experts, where a lot of evidence has already been gathered that separation would benefit consumers.

The CBA tested restructuring Foodstuffs alone and both Foodstuffs and Woolworths, and found restructuring Foodstuffs alone would deliver greater benefits for shoppers.

Foodstuffs is different because it already has separate, established banners. Under this option, owner-operators would keep their stores and their brands. The change is about creating genuinely independent competing supermarket groups from the existing New World/Four Square and PAK’nSAVE businesses.

Doing the same to Woolworths would be much more intrusive. It would require individual Woolworths stores to be sold or transferred to create a separate competitor and brand, raising much greater property-rights and implementation issues. And Woolworths shoppers still benefit from stronger competition.

As the CBA puts it: “Woolworths prices will go down if/when Foodstuffs is restructured - they are not immune from the ensuing price war.” The objective is not to break up businesses for the sake of it. It is to create the strongest additional competition with the least unnecessary disruption.