The recent draft report by the Commerce Commission confirmed New Zealand’s supermarket market structure is a duopoly, that there is weak competition and that the returns are high. While there are few opportunities and competition to own a supermarket, there’s not much competition once you have one.
Enter Tex Edwards, a former trolley boy for Countdown supermarkets and the founder of telecommunications company 2degrees. Setting up 2degrees was no small feat and to do that he took on the Telecom monopoly, not a duopoly.
His language, flamboyance and dogged approach to lobbying at that time was awesome, in terms of the accurate literary meaning of the word. He created awe. When lobbying for telecommunications change, he was a familiar figure around Parliament. I recall he visited me twice while I was an MP and Chair of the Commerce Select Committee. His attention to grocery retail is certainly an interesting development many grocery suppliers are welcoming.
They are welcoming the discussion of market alternatives at a time the supermarkets themselves are staying relatively quiet. He has spoken about splitting the supermarkets into four or five separate players, not just two. It’s not a pie in the sky scenario because New Zealand did have a similar number of options, though some decades ago now.
Consolidation since the last three-to-two merger has meant incremental but steady increases in power, margins and earnings for the supermarkets, while costs and risks have been shifted back to suppliers strategically over time.
The Commerce Commission’s analysis showed this clearly. So far, the rebuttal has been weak. Supermarkets have repeated the classic lines about being a high-volume, low-margin business that profits only a few cents in every dollar. An example given to Newshub: “Every dollar spent in a supermarket, 68c goes back to the supplier, 13c is tax, and the supermarket takes 19c. Fifteen cents of that is used for things like paying staff so it only profits 4c.”
Of course, the grocery business is high volume, but the margins are not insignificant and the profits are high compared to other markets. Whether the line is 64c or 68c, the line about a large proportion of money going to “the supplier” is not true.
For a start, that money does not go to one supplier and does not represent the money made by the supplier. That 68c represents many in the supply chain who play a role in creating the product, from manufacturers, sales and distribution agencies, raw ingredients sellers, growers, farmers, warehousing and distribution operators, transporters, merchandisers – all those who have played a role in growing or making the product and getting it on the shelf.
Referring to “the supplier” is designed to create the impression he or she takes the lion’s share and the retailer takes only a small fraction. Even taking into account all the entities represented by supermarkets as “the supplier” it’s still not the full 68c in every dollar sale. Analysts suspect from figures released by Foodstuffs North Island that this probably includes their own warehouse margins and freight costs, plus may not include all the extra deductions from suppliers for promotional costs and display fees, settlement discounts, rebates, and other fees that add to profits alongside the new supermarket cost du jour – data.
A more realistic comparison is made by looking at where the profits are made throughout the supply chain, and that’s where the supermarkets dominate.
According to FGC members, retailers’ cash margin for the provision of shelf space is close to three times that of suppliers. When, in many cases retailers are not even paying to put the product on the shelf and have shifted so much risk and cost back onto suppliers, it’s no surprise the Commerce Commission concluded returns were higher than would be expected if there was more competition.
But back to the 4c profit scenario that does have a useful role in explaining grocery profits for those seeking reform. At 4c, that admits some supermarkets are still more profitable than others in comparable markets. I know 4c doesn’t sound like much to consumers, but if you are a PAK’nSAVE store turning over $5 million a week then $200,000 is clear profit per week – $10m a year. After costs.
This probably goes a long way to explaining why there’s a crush at the gate to get a store, and as a PAK’nSAVE owner you’re more likely to end up on the NBR Rich List than a food maker or farmer.
(originally published in Supermarket News)