The Government and Opposition have vowed to clean up the New Zealand supermarket sector. It’s fair to say that in accepting 12 out of 14 of the Commerce Commission’s recommendations, and taking stronger action on the other two, the Government has gone further than many thought it would.
It will be a major job unravelling the harm caused by our duopoly market structure, but the Government has made the direction very clear, and it will be welcomed by most consumers, suppliers and other retailers. The Government’s actions are its response to the Commerce Commission’s market study into supermarkets, which found they earn excess profits. It recognises change needs to happen if there is to be genuine competition and an improvement in retailer behaviour.
Among the recommendations the Government says it will introduce are:
- an industry regulator
- compulsory unit pricing on groceries
- stopping major supermarkets blocking competitors from accessing land for new stores
- more transparent loyalty schemes for consumers
- consistent pricing displays
- collective bargaining for suppliers
- a mandatory code of conduct for supermarkets in their dealings with suppliers
From the Food & Grocery Council’s point of view, the emphasis on a mandatory Code of Conduct – our goal since 2010 – is particularly welcome.
A code will give suppliers greater certainty they will not be subject to some of the behaviours we’ve seen from supermarkets over the years, including transferring costs and risks to suppliers, reducing transparency and certainty over terms of supply, and limiting suppliers’ ability or incentive to provide favourable supply terms to other retailers. These lessen suppliers’ incentives and ability to innovate and invest in production, capacity, product quality and new offerings that will benefit consumers.
While change is coming, it’s clear some supermarket buyers haven’t got the memo yet, as FGC continues to receive reports about pressure on companies supplying The Warehouse, despite the Commerce Commission being given assurances this would not happen.
The two recommendations the Government didn’t accept were implementing a voluntary wholesale grocery access regime and a review of competition in three years.
On wholesale access, it’s developing a mandatory backstop for the voluntary scheme recommended by the Commission, and says if Foodstuffs and Woolworths NZ can’t strike good-faith wholesale deals with competitors at fair prices by the end of this year, the backstop will kick in. This is designed to give competitors an incentive to enter the market, because if competitors don’t have proper access to wholesale, there’s no incentive to enter the market and give it the competition it needs.
Three years was too far away for a state-of-competition review, and the Government wishes to maintain scrutiny. So, the new regulator will be required to do them every year, as well as run a resolution scheme to mediate disputes between suppliers and retailers.
In addition, government officials are doing work on requiring the major supermarkets to divest some of their stores or retail banners in case more competition is needed. But that’s complex work and will take some time.
The supermarkets have already agreed to many of these changes, including stopping the use of covenants on land and leases so competitors can set up shop in certain suburbs and shopping centres. Legislation to ban this behaviour is already being considered by a parliamentary select committee, but what FGC revealed on the first day of submissions came as a surprise to the members of Parliament present.
We presented excerpts from a supermarket lease for space in and it showed a suite of oppressive clauses designed to block competition. As I told the committee, this lease, which we understand is typical of supermarket leases in force around New Zealand, showed supermarkets aren’t using their market power to block just fellow grocery retailers – they’re using it to block or constrain almost all retail that comes close to them. The lease showed this is being done by using incredibly broad definitions of what a supermarket is.
The list is long, but includes everything from clothing, footwear, toys and games, computers, and tools, to optical ware, carpets, insurance, and appliances. (the full list is on page 3 of our submission on our website: https://www.fgc.org.nz/commerce-grocery-sector-covenants-amendment-bill/).
Most people wouldn’t think a supermarket sells all those things, but according to this lease, they do. Basically, this particular supermarket has defined its business as almost everything that can be sold by anybody.
There are also other areas in these leases that aren’t reasonable. Supermarkets also give themselves the right to determine things such as who the landlord leases their previous premises to up to 3 years after they have packed up and terminated their lease – for 3 years they get to say who can use the landlord’s property.
But the clause that surprised us most was the requirement for landlords to campaign to block potential supermarket competition. The lease we quoted to the committee says the landlord must make submissions to oppose all district plans, developments, new stores, applications for resource consent, or changes to a resource consent that affects the supermarket’s competitive position – and it must do this at the landlord’s own cost. The lawyers just went too far because they could.
These sorts of oppressive clauses add up to major barriers for new entrants.
We suggested the committee use its powers to request copies of other leases to get a wider picture of the sorts of tactics being used to block others from competing in our duopoly market.
As Commerce Minister David Clark said, “The Government and New Zealanders have been very clear that the supermarket industry doesn’t work. It’s not competitive and shoppers aren’t getting a fair deal. The duopoly needs to change, and we are preparing the necessary legislation to do that.”
When you see documents like this you can see why change can’t come soon enough.
(as published in Supermarket News)