The New Zealand Commerce Commission (NZCC) released its residential building supplies market study final report (Report) on 6 December 2022. The Report largely reinforces the findings and recommendations in the draft report with the benefit of further consultation and evidence.
Unchanged from the draft report, the Report’s key finding is that “competition for the supply of key building supplies is not working as well as it could if it was easier for building products to be introduced and for competing suppliers to expand their businesses”.
The two main factors that make entry and expansion difficult are:
- The building regulatory system continues to incentivise designers, builders and building consent authorities to favour familiar building products over new or competing products. Compliance with the regulatory system is complex. Familiar products have easier paths to compliance while new products have more difficulty. This creates a self-reinforcing cycle that prefers familiar products.
- Quantity-forcing rebates paid by established suppliers to merchants can make it difficult for new or competing products to access distribution channels and increase sales. Rebates between suppliers and merchants are widespread and can be significant in value.
Other findings include:
- Māori needs are not well-served by the building regulatory system currently
- Competition between merchants appears to be working relatively well at the national level, but widespread use of land covenants and exclusive leases could affect competition
- There is no evidence that vertical integration of two of the five major merchants normally has a material adverse effect on competition at the supplier level or merchant level. Outside of recent supply shortages where vertical integration has benefitted some merchants, non-vertically integrated merchants do not appear to struggle to access products. It does not appear that internal information sharing, margin squeeze, or cross-subsidisation, are strategies are being used by vertically integrated businesses to reduce competition.
- Innovative building supplies, eg ‘green’ building supplies and offsite manufacturing, appear impeded by the same factors affecting competition between suppliers
- Greater scale would be beneficial in construction activity and product manufacturing
The Report makes 9 recommendations under three groups. There are two key changes from the draft report’s recommendations – a new recommendation to support offsite manufacturing and a more active recommendation for addressing Māori interests.
- Recommendations to enhance the regulatory system
- Introduce competition as an objective to be promoted in the building regulatory system
- Better serve Māori through the building regulatory system
- Create more clear compliance pathways for a broader range of key building supplies.
- Explore ways to remove impediments to product substitution and variations
- Recommendations to support sound decision-making
- Establish a national system to share information about building products and consenting
- Establish an education and mentoring function for building consent authorities to facilitate a better co-ordinated and enhanced approach to consenting and product approval processes.
- All-of-government strategy to coordinate and boost offsite manufacturing
- Recommendations to address strategic business conduct
- Promote compliance with the Commerce Act, including by discouraging the use of quantity-forcing supplier-to-merchant rebates that may harm competition
- The NZCC encourages suppliers, particularly those in highly concentrated markets, to review their rebate structures for compliance with the Commerce Act, particularly with amendments to the misuse of market power prohibition coming into force on 5 April 2023.
- The NZCC does not recommend legislative change to prohibit the use of such rebate structures across the key building suppliers industry because rebates can provide benefits. Whether they are harmful is dependent on the specific circumstances.
- The NZCC has opened a new investigation to collect more information about Winstone Wallboards’ use of rebates. The NZCC previously investigated rebate structures used by Winstone Wallboards in 2014 and found at the time the evidence did not support a conclusion that Winstone Wallboards had breached the Commerce Act.
- Consider on an economy-wide basis the use of land covenants and exclusive leases and contractual provisions with similar effect
- This is the third market study the NZCC has identified this as an issue. After the grocery market study, specific legislation was introduced to address restrictive covenants in the grocery sector.
- The NZCC will be undertaking a compliance programme in early 2023 to promote Commerce Act compliance relating to restrictive land covenants and exclusive leases.
Next steps
It is now for the Government to consider the findings and recommendations in the Report. The Minister of Commerce and Consumer Affairs has indicated “In the coming weeks and months, we will talk to stakeholders, with a Government response expected in March 2023. In the meantime, important work already happening, will continue”.
Links
NZCC market study into residential building supplies page
NZCC summary of key findings infographic