On 8 March 2022 the New Zealand Commerce Commission (NZCC) released its final report on its study on competition in the retail grocery sector. The final report is the product of over a year of work after the NZCC was directed to look at factors affecting competition in the retail grocery sector on 17 November 2020.
The 609 page final report sets out the NZCC’s findings on the state of competition and recommendations to enhance competition in the retail grocery sector.
Key findings – competition is not working well for consumers
Unchanged from the draft report, the final report’s key finding is that competition is not working well for consumers. Several features of the grocery sector indicate that competition is not working well:
- The retail grocery sector is characterised as a duopoly with a fringe of other retailers. The major grocery retailer duopoly have a combined national market share of at least 70-80% and internal market share estimates show a combined share of more than 90% for consumers’ main shop and 80% for top up shops. The intensity of competition between the major grocery retailers is muted and does not reflect workable competition.
- The NZCC’s profitability analysis indicates the major grocery retailers have been able to achieve higher levels of profitability than would be expected in a workably competitive market. The average ROACE of the major grocery retailers for 2015-2019 is between 12.7%-13.1%, compared to the NZCC’s estimate of a normal rate of return of grocery retailing in New Zealand of 5.5%.
- It appears New Zealand grocery prices are relatively high by international standards. New Zealand ranked within the top five most expensive grocery markets out of all 38 OECD countries in 2017.
- The scale and pace of innovation appears lower than might be expected in a workably competitive market, for example some of the major grocery retailers have been slow to introduce online sales channels.
- Entry and expansion by other grocery retailers is difficult. Barriers to entry and expansion identified include:
- Lack of suitable and available sites for the development of retail grocery stores.
- Lack of wholesale access to a full range of groceries for resale at competitive prices.
- Cost advantages available to the major grocery retailers from vertical integration cost efficiencies and access to economies of scale.
- Suppliers refusing to supply other grocery retailers due to their existing relationships with, and concern about possible responses from, the major grocery retailers. The NZCC intends to investigate this issue independent of this study.
- Pricing, promotional and loyalty practices limit consumers’ ability to make informed decisions.
- Competition is not working well for many suppliers due to an imbalance in bargaining power.
Recommendations
The final report makes recommendations to (1) improve conditions for entry and expansion (2) improve competition for the acquisition of groceries (ie improve relationships between grocery retailers and suppliers) (3) improve the ability of consumers to make informed decisions and (4) support these recommendations.
(1) Recommendations to improve the conditions for new retailers to enter and existing retailers
- Improve the availability of sites for retail grocery stores under planning law.
- Prohibit restrictive and exclusive covenants that inhibit retail grocery store development.
- Monitor land banking by the major grocery retailers.
- Provide for wholesale supply by major grocery retailers by requiring the major grocery retailers to consider requests for wholesale supply in good faith and put in place and disclose principles and terms and conditions of wholesale supply.
- Consider whether entry or expansion by grocery retailers unduly impeded in the next reviews of the Overseas Investment Act (due to its impact on conditions of entry and expansion for foreign-owned grocery retailers) and Sale and Supply of Alcohol Act (due to its impact on restricting some existing or potential grocery stores from selling alcohol)
- Monitor strategic conduct that affects conditions of entry or expansion, such as suppliers refusing to supply grocery retailers which set retail prices below a certain level, supply arrangements affecting the terms on which suppliers can supply to other parties, and attempts at strategic acquisitions of actual or potential competitors.
(2) Recommendations to improve relationships between grocery retailers and suppliers
- Introduce a mandatory grocery code of conduct to govern relationships between the major grocery retailers and suppliers.
- Consider a statutory authorisation or exception for collective bargaining by grocery suppliers.
- Amend the Fair Trading Act to strengthen the business-to-business unfair contract terms regime, for example by allowing private parties to bring proceedings and increasing the current NZ$250K trading relationship value cap.
(3) Recommendations to help consumers make more informed decisions
- Introduce mandatory unit pricing requiring retailers to display prices in standard units.
- Major grocery retailers should ensure their pricing and promotional practices are simple and easy to understand, and loyalty programmes and data collection disclosure and use practices are clear and transparent.
- Major grocery retailers should co-operate with any grocery price comparison service.
(4) Recommendations to support the above recommendations
- Establish a grocery regulator and dispute resolution scheme. The functions of the grocery regulator would include enforcing the grocery code of conduct, monitoring requests for voluntary wholesale supply, collecting information and overall stewardship of the relationship between major grocery retailers and suppliers.
- Review the state of competition in the grocery sector three years after implementation of recommendations and collect information in the interim to support the review.
In making these recommendations, the NZCC made high-level judgements about the likely scale of the costs and benefits of the recommendations. Any formal cost-benefit analysis would be undertaken by the Ministry of Business, Innovation and Employment.
Next steps
The NZCC has presented the final report to the Minister. It is now for the Government to consider the findings and recommendations before deciding whether to implement the recommendations. In response to the release of the final report, the Minister of Commerce and Consumer Affairs stated “I know there is a desire to see us act swiftly on this too, and I want New Zealanders to know this will be the case. From today, we will immediately progress work to address the Commission’s recommendations“.
More information
NZCC grocery market study page
NZCC summary of findings infographic
NZCC summary of recommendations infographic