Anyone doubting the thoroughness with which the Commerce Commission would conduct its market study into competition issues concerning consumers, retailers and suppliers in the grocery sector would have been well and truly silenced by their draft report.
At a whopping 517 pages, it’s the biggest report I can recall, even from my time as an MP. But it’s not just the size. Having read every page, I can assure you it’s also one of the most comprehensive.
And there’s more to come. By the time you read this, stakeholders will have made their third round of submissions and there are two more opportunities to come: a special conference in September, and then further comments on that.
It’s thoroughness that gives comfort that whatever the Commission’s final recommendations to the Government in November, they’ll be the best informed possible.
So, what of the draft findings? My conclusion after reading those 517 pages is they are an accurate reflection of the market.
The Commission found competition for a consumer’s main shop is dominated by Foodstuffs and Woolworths NZ, with a fringe of others unable to compete on price and range. They said there were “significant challenges” for those fringe competitors, including a lack of competitively priced wholesale supply and a lack of suitable sites for new stores. Also, the major retailers avoid strongly competing with each other on price and generally do not have lower prices.
- “Competition … is not working well for consumers,” and if it was more effective, retailers would face “stronger pressure to deliver the right prices, quality and range”.
- “… the core problem is the structure of the market. In competitive terms, Woolworths NZ and Foodstuffs are a duopoly, and while there is an increasingly diverse fringe of other retailers, they have a limited impact on competition.”
- The best option for improving competition is to increase the number of retailers directly competing against those two.
On how this lack of competition affects suppliers, the Commission found:
- Many suppliers have few options but to supply the major retailers, which allows the retailers to exercise their power to push “excess risks, costs and uncertainty onto suppliers. Suppliers report agreeing to these terms because they fear that otherwise their products may not be stocked. This conduct can reduce suppliers’ ability and incentives to invest and innovate, ultimately leading to less choice, lower quality, and potentially higher priced goods for consumers.”
- The retailers use their strong negotiating position to:
- limit suppliers’ ability or incentive to provide competitive supply terms to other retailers
- transfer costs and risks to suppliers, despite retailers being better placed to manage them, and this may reduce efficiency and increase prices
- reduce transparency and certainty over supply terms.
This is why the Commission concluded a grocery Code of Conduct would be “beneficial”.
It said a Code could set minimum standards for supply terms between retailers and suppliers, and might include quantity and quality standards, delivery requirements, when groceries may be rejected, the maximum period for payment, and circumstances when payment may be withheld or deductions made. It could also impose limits on retrospective variations of supply terms and on unilateral variations of supply terms.
Such a Code may need to be mandatory otherwise there is a risk not all retailers would sign up, which “would likely undermine the effectiveness of a Code”.
All of which is precisely why the Food & Grocery Council has been pushing for one.
We must guard against everything that makes the playing field uneven at present, including coercive behaviour, bullying, threats of delisting, retrospective payments or deductions without consent, unexpected “investment” in store wages accounts, payments for shelf space.
The market study offers suppliers an opportunity to finally move the dial towards better and more transparent supplier relationships.
It’s an opportunity we must take.
(originally published in FMCG Business magazine)