Before the election, the Labour Party said it would get the Commerce Commission to undertake a market study into grocery pricing. Jacinda Ardern said there is “some evidence to suggest competition problems exist in these markets”.
Though the Food & Grocery Council had not lobbied for such a study, we believe it’s time to have a look under the bonnet of the grocery sector machine, so we welcomed the announcement.
The two main retailers are like prize fighters in the ring following each other’s prices and calling manufacturers every time there’s a better price in a flyer or on a shelf.
But from suppliers’ viewpoint, there’s limited competition. Many supply one supermarket chain or the other. In economic terms, the market for grocery suppliers is a duopsony – two buyers with immense buying power. We have the most concentrated market in the world and that’s why the treatment of suppliers is so important. In markets of such extreme dominance, special oversight can be required to ensure it doesn’t deteriorate into supplier bullying and abuse.
Again, in economic terms, where there is healthy competition, there is bargaining power on both sides – a willing seller can sell to a willing buyer or go elsewhere – which, in theory, results in profits a manufacturer can put into innovation and investment. In a duopsony, when suppliers have little or no bargaining power, price can be struck well below the market price because the supplier has no choice. I regularly hear of real-life examples of this.
As a result, suppliers’ margins are squeezed, but the margins expected by supermarkets have been constant and remain some of the highest in the developed world. This privileged position has led to hikes in margin expectations over the past decade. A good example is a recent tender opportunity from Foodstuffs North Island for pasta, noodles and oils, which asked for applications offering double the current margins. Attempts like this would not happen where there were many suppliers and many retailers, because competition would prevail.
The supermarkets work hard to emphasise the importance of professional and respectful behaviour. For example, Foodstuffs has an excellent Supplier Relationships Charter, which includes commitments to:
- act ethically, in good faith, and with honesty, fairness, integrity and courtesy in all dealings with suppliers
- work with suppliers to build long-term business relationships where mutual benefits exist
- honour payment terms and time frames
- base business decisions on evidence and sound economic criteria, and take into account genuine social and environmental considerations
- respect freedom of association between supply partners
- respect suppliers’ intellectual property rights in branding, packaging and advertising.
Head office has done an excellent job developing commitments that embody these values. If it was a living document implemented by all stores, an Australian-style Grocery Code of Conduct would not be as relevant here. Unfortunately, a minority of stores seem to have missed the memo and regularly conduct themselves in a manner that breaches parts of it. Due to immense market power and fear of retribution, suppliers seldom take a stand.
It’s time to implement our own Grocery Code of Conduct. Woolworths support the Australia Code and it seems Woolworths NZ are already running their approach under such an umbrella.
Recently, Australia improved their code to include:
- tough restrictions on retrospective and unilateral variations to supply agreements
- greater transparency around shelf allocation for branded and private label products
- a low-cost, fast-track dispute resolution mechanism.
Each of these and more would go a long way to reducing friction for grocery supply and knock the worst store behaviour on the head.
A Code would always preserve robust and professional business dealings between parties, and FGC members would not have it any other way. But it would set clearer rules around behaviour, and that would only enhance the culture and health of our industry.
(originally published in FMCG Business magazine)