There’s been a lot to take in from the Commerce Commission’s draft report on their market study into New Zealand’s grocery sector.
There’s no doubt everyone wants lower grocery prices, and that’s what was behind the Government’s instruction to the commission: was competition working well, and if not, what could be done to improve it?
As part of the study they looked at a range of things, including: how retailers deal with suppliers; competition at the supplier level of the market; who consumers buy groceries from and who supplies those retailers; competition between retailers; and what retailers charge for groceries and how they decide on their prices, as well as the associated levels of service, product ranges and quality of groceries.
No wonder it took eight months to get to the first draft! They certainly did a thorough job, and it’s not over yet. It’ll be a further five months to get to the final recommendations to the Government.
Their findings were perhaps not surprising. Our prices are the sixth highest of the 28 most-developed countries, and they concluded: “If competition was more effective, retailers would face stronger pressures to deliver the right prices, quality and range to satisfy a diverse range of consumer preferences.”
What surprised were some of the options to boost that competition: existing retailers could be forced to supply other retailers on fair terms; their wholesale operations could be run separately from their retail business; room could be made for a new independent wholesaler; Woolworths NZ and Foodstuffs could be required to separate their wholesale and retail business into entirely separate companies.
There were other options around stimulating competition, the most radical being requiring retailers to sell some of their stores to create a third retailer.
There’s little doubt we need more competition in retail if we are going to get closer to the sort of pricing New Zealanders expect at the checkouts, and it’ll be fascinating to see what the final report recommends to the Government on some of this.
But of particular interest to the growers, manufacturers, processors and importers that make up the Food & Grocery Council were the commission’s findings on how the system was working at the supply end of the sector.
Basically, they confirmed all the issues I have written about here in the past: that competition is not working well for suppliers for many reasons.
Among the positive feedback about retailers (support for promotions or displays, stocking new products, and supporting innovative ideas), the commission found a raft of issues.
They summed it up like this: “Many suppliers have few options and are reliant on the major retailers to sell their products. This can create an imbalance of bargaining power, and the major grocery retailers can use their buyer power to shift costs and risks onto suppliers, insist upon uncertain terms of supply, and limit suppliers’ dealings with other grocery retailers. This can reduce suppliers’ incentives to invest and innovate, ultimately leading to lower quality goods and reduced choice being available to consumers.”
Apart from the recognition of what suppliers have been going through behind the scenes was the commission’s agreement that a major way of fixing this would be a mandatory Code Conduct.
The Food & Grocery Council has long pushed for such a code, and the commission said it would “help strengthen suppliers’ bargaining power with retailers and prevent current conduct which reduces and ability and incentive of suppliers to invest and innovate”, and that would flow into lower prices and more choice for consumers.
We look forward to working with the commission on the steps towards this.
There’s no doubt the commission has raised some very important issues and I hope the supermarket chains will take them on board.
But it’s not just what goes on in negotiations in head offices and at store level – I’m also talking about what happens on the store floor around the treatment of our merchandisers.
All-round attitude needs to change, and I believe this study is a wake-up call that that must happen for the benefit of everyone.
(Originally published in Supermarket News)