Private labels do more harm than good for suppliers and consumers in New Zealand’s highly concentrated grocery sector, according to independent research commissioned by FGC.

Researchers examined the effects of private labels on consumer outcomes in the retail grocery market and the implications for intervention, and found that “Given the high concentration of the retail market in New Zealand … private labels are likely to accentuate and entrench the strong imbalance of bargaining power held by retailers for many grocery suppliers.

“We derive this conclusion by extending the bargaining framework used by the [Commerce] Commission [in its draft report on the grocery sector market study] to examine the balance of power between retailers and suppliers to additionally consider the effects of private labels.”

The report, entitled the ‘Private Labels, Buyer Power and Remedies in the NZ Grocery Sector’, examined the role of the private label in negotiations between buyers and suppliers – in both a concentrated and diffuse grocery market – where, it says, having more options effectively means having more power.

It was compiled by strategic advisory firm Castalia.

It found that in a concentrated retail grocery market, private labels tilted the balance in favour of buyers by providing them with another option to stock on its shelves, whereas the supplier may not have another retailer it could turn to.

“If a retailer introduces a private label that is a sufficiently close substitute for an existing named brand, then the retailer’s bargaining power will increase if the named brand cannot easily switch to its supply to other retail channels,” the report says.

“The private label gives the retailer an outside option which improves the retailer’s negotiating position – and conversely harms the supplier’s negotiating position.”

The report suggests in a concentrated retail grocery market private labels could also be detrimental to consumer outcomes.

“… retailers already have strong buyer power, which can stifle innovation and reduce competition in the long run. Because private labels further add to this buyer power, they exacerbate these negative effects. Additionally, private labels can lead retailers to undertake further discriminatory practices which leverage dominant buyer power.”

It also notes that when retailers have market power – such as in a concentrated market – they “may be incentivised to discriminate in favour of its private label”.

Examples of this were:

  • superior product placement of private labels and greater in-store promotion or advertising
  • levying charges on rival brands while not applying the same charges to private labels
  • maintaining a “price gap” between the private label and the named brand.

The report says strong buyer power will, over time, hollow out the upstream supplier market.

“As retailers take profits from suppliers, some suppliers may leave the market, and the remaining ones will likely reduce investment and innovation. Retailers’ ability to discriminate in favour of their own brands and to expropriate named brand innovations and developments will further discourage innovation, or new entrants into the supplier market.”

It adds, “the anti-competitive effects of strong buyer power – which is exacerbated by private labels- will likely lead to price rises over time”.

It also says a mandatory code of conduct that is overseen, monitored, and enforced by an independent body is necessary to reduce the harm that results from high retail market concentration.

“Whistle-blower protections are required – for example to allow suppliers to notify the independent body if a retailer requires suppliers to limit the supply of a product to the retailer’s rivals. In addition, provisions to prevent boycotting (through delisting) would be necessary. These interventions provide low-cost ways to help improve competition in the retail market and address the imbalance of bargaining power between suppliers and retailers.”

International outcomes indicate New Zealand has the scale to support more independent large supermarket retailers.

“Numerous comparable countries to New Zealand (in terms of population and geography) have four or even more independently owned large supermarket chains. Therefore, if the strategic barriers to entry can be addressed, a new entrant may enter the retail market without the need for more intrusive intervention.”

The report was submitted to the Commerce Commission as part of FGC’s response to its draft report published on 26 July.

Read Castalia’s full report here