On 29 July 2021 the New Zealand Commerce Commission (NZCC) released its draft report on its competition study into retail grocery. New Zealand has two major grocery retailers. The NZCC began the study in November 2020 following a Government directive to investigate competitive conditions.
The NZCC’s preliminary view is that “retail grocery competition is not what we would expect in a workably competitive market”.
Our preliminary view is that retail grocery competition is not what we would expect in a workably competitive market. We have seen no evidence to suggest that there is any prospect of increased competition emerging under current conditions without some form of intervention.
We consider the best way to improve retail grocery competition is through measures that enable an increase in the number of firms competing effectively in grocery retail markets. This is particularly in relation to those competing for a consumer’s main shop. Our preliminary view is that the New Zealand market is not too small to accommodate at least one more large scale rival.
We have identified a spectrum of options for recommendations that identify different possible ways to improve competition and produce better long-term market outcomes for consumers. These are the options for which we consider further investigation may be warranted. We acknowledge the importance of assessing whether the benefits exceed the costs for any recommended changes to the status quo.
We invite comment on the options we have identified and any other others that could improve competition. Like the preliminary views expressed in our report, the options are subject to further consultation and may be altered or removed in our final report.
[Emphasis added]
The draft report’s findings
- Fringe competitors like meal kit providers, convenience stores and other specialist stores do not pose a significant constraint on the major retailers because they cannot satisfy demand for a “main shop” at a single store. 72% of consumers surveyed tend to do a main shop and 95% have one of the major grocery retailers as their main store.
- The major grocery retailers have made persistently high profits between 21.6% and 23.8% on average. This is in excess of their estimated 4.6%-6.1% weighted average cost of capital.
- NZ grocery prices appear high by international standards.
- The level of innovation seems modest by international standards and benefits of cost savings may not be passed onto consumers.
- Price competition seems weak. Evidence suggests market shares are stable over time instead of varying due to a high degree of price competition.
- Pricing strategies, promotions and loyalty programmes can confuse consumers and make it difficult to make informed purchasing decisions.
- Consumers are generally not aware of how much personal data they are giving away and how it is used when signing up to loyalty programmes.
- There are a number of restrictive covenants and exclusivity covenants on sites that could be used to prevent potential grocery retailer entrants from using the site to sell groceries.
Options for recommendation
The options for recommendation the draft report identifies include:
- To increase wholesale access to a wide range of groceries at competitive prices…
- Undertakings by the major grocery retailers to supply other retailers with groceries on fair and non-discriminatory terms
- A regulated access regime
- Operational separation
- Government sponsorship of a new independent wholesaler through a competitor tender process
- As a last resort option, structural separation of the two major grocery retailers vertically by requiring the major grocery retailers to move their wholesale business or retail business into an entirely separate company
- To free up sites for retail supermarkets…
- Consideration by the major grocery retailers of whether there is a pro-competitive justification for the imposition of restrictive and exclusivity covenants in future
- Regulatory intervention or amendment to the Commerce Act to assist with releasing, and reducing the use of, such covenants
- Consideration of effects on competition by policy makers for the new planning framework in the proposed Natural and Built Environments Act
- To directly stimulate retail competition…
- Government sponsorship of retail entry following a competitive tender process
- Government investment in a new retailer as a joint venture partner
- To implement a mandatory Code of Conduct…
- A Code of Conduct determined by the Government
- A general code-making power to be built into the Commerce Act
- Consideration of methods to authorise collective bargaining by suppliers for supply contracts entered into with major grocery retailers
- To improve the clarity of retail promotions and pricing practices…
- Mandatory use of unit pricing
- To increase transparency for loyalty programme terms and conditions…
- Voluntary steps by the major grocery retailers to ensure consumers are better informed
Comment
The draft report is comprehensive and detailed, supported by external expertise. The NZCC based its preliminary findings on testing across various reputable sources. For example when looking at international prices it used OECD, ICP, & Numbeo data sets. This reflects the complexity of the issues and the expertise of the NZCC. As the NZCC notes its conclusions and recommended options may change.
For those interested in the industry, or competition law and policy, the draft report has it all. It encompasses all aspects of modern competition law issues and highlights the intersection of competition law, consumer protection, data and privacy. It also considers vertical and horizontal issues, as well as the suite of potential remedies.
What’s next?
The NZCC is accepting comments on the draft report until Thursday 26 August 2021. Have your say here.
A consultation conference will be held from Tuesday 21 September to Friday 24 September 2021. Post conference comments are due on Thursday 7 October 2021.
The final report (including recommendations) must be submitted to government by 23 November 2021.
Links
Disclosure: Matthews Law is involved in this matter.