Supermarket duopoly 'perfect target for investigation'

Friday, 12 October 2018

It's time for New Zealand's supermarket sector to show it's not ripping shoppers off, analysts say.

Prime Minister Jacinda Ardern said this week that she would 'not be surprised' if the Commerce Commission conducted a market study into the supermarket sector, once legislation allows it to.

The Commerce Amendment Bill will give the commission the ability to compel companies to provide information to prove they are behaving competitively.

New Zealand's supermarket industry has two main players: Foodstuffs and Countdown.

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A Countdown spokeswoman said the grocery industry was very competitive. 'If the legislation is passed and a market study relevant to us was undertaken, we'd cooperate fully.'

Foodstuffs said it had no comment to make.

But commentator Shamubeel Eaqub​ said, as a duopoly, it was exactly the sort of market that the Commerce Commission should look at.

Consumer NZ head of research Jessica Wilson said New Zealand had one of the most concentrated grocery markets in the world.

 'That concentration comes with a risk consumers will pay more than they should. '

University of Auckland Business School head of marketing Bodo Lang said New Zealand was 'really expensive'.

'If you look at international prices it's obvious that our prices are outrageous. Supermarkets are pretty profitable even though when an inquiry starts they say their margins are small. It always depends how they calculate the margins.'

He said the supermarket retailers took little risk but received ample reward.

The barriers to entry in the New Zealand industry were high, he said, which limited the competition that was possible.

But Jonathan Elms, the Sir Stephen Tindall chair in retail at Massey University, said there were other factors at play, such as New Zealand's geographical isolation.

That presented challenges in getting products on to shop shelves and the size of the market prevented buying at scale, he said.

Some things were noticeably expensive here, he said, such as dairy products, where prices were 'excruciatingly high', and out-of-season fresh produce.

An investigation would be welcome, he said, but any findings were unlikely to be black-and-white.

'I do think theres a place for a third option to enter the market place.'

Economist Gareth Kiernan, of Infometrics, said the Commerce Commission should not have allowed Woolworths and Countdown/Foodtown to merge in 2002.

'It seemed fairly obvious at the time that the shift from three to two main chains would lead to a reduction in competition. However, it was very rare for anything to be turned down by the Commerce Commission back then.'

He said the two players had a degree of market player as a buyer and a seller.

'I would argue that their market power as a buyer is possibly more problematic given the reports I've seen of them placing pressure on suppliers to reduce the prices at which they sell to the supermarkets,' he said.

'From the consumer's perspective, the fact that there are only two genuine options to buy groceries implies a possible lack of genuine competition in the market. Although there is, in theory, little to stop other businesses entering the market, the relative scale enjoyed by Foodstuffs and Woolworths makes it difficult for new firms to become established if they're trying to compete on price.'