The Commerce Commission’s draft report into competition in the retail grocery sector has found that competition is not
working well for consumers.
“If competition was more effective, retailers would face stronger pressures to deliver the right prices, quality and
range to satisfy a diverse range of consumer preferences,” said Commission Chair Anna Rawlings.
In November 2020, the Government asked the Commission to look at whether competition in the $22 billion a year grocery
industry was working well and, if not, what could be done to improve it.
The Commission’s draft findings are preliminary and subject to consultation prior to its final report being published in
late November.
“Our preliminary view is that the core problem is the structure of the market. In competitive terms, the major
retailers, Woolworths NZ and Foodstuffs, are a duopoly, and while there is an increasingly diverse fringe of other
grocery retailers, they have a limited impact on competition. This is because they are unable to compete with the major
grocery retailers on price and product range in order to satisfy the widespread consumer demand for a main shop at a
single store,” said Ms Rawlings.
During its study the Commission observed features of the grocery sector which indicate the market is not working as well
as it could be. These include persistently high profits being earned by the major retailers and high grocery prices when
compared internationally. The level of innovation in the sector also appears modest by international standards.
“The major retailers appear to avoid competing strongly with each other, particularly on price. Meanwhile, competitors
wanting to enter the market or expand face significant challenges, including a lack of competitively priced wholesale
supply and a lack of suitable sites for large scale stores.
Other observations which indicate the market is not working as competitively as it could be also include:the complexity of the major retailers’ pricing strategies, promotions and loyalty programmes can confuse customers and
make it difficult for consumers to make informed purchasing decisionsmany suppliers have few alternatives but to supply the major retailers. This allows them to exercise their buyer power
to push excess risks, costs and uncertainty onto suppliers. Suppliers report agreeing to these terms because they fear
that otherwise their products may not be stocked. This conduct can reduce suppliers’ ability and incentives to invest
and innovate, ultimately leading to less choice, lower quality, and potentially higher priced goods for consumers.
“Without intervention, we currently see little prospect of a new or expanding rival being able to constrain the major
retailers effectively, and improve competition in the sector,” said Ms Rawlings.
“We consider the best options for improving competition are those that enable an increase in the number of retailers
directly competing against Foodstuffs and Woolworths NZ for a consumer’s main shop.”
These draft options for recommendations include:making it easier for new competitors to enter or existing independent retailers to expand by increasing wholesale access
to a wide range of groceries at competitive prices. A spectrum of potential options for achieving this is discussed in
the draft report.making land more available through changes to planning laws and restrictions on the use of covenants.
If these options were not feasible, had proved ineffective, or did not appear likely to improve retail competition
within the desired timeframe, another potential option is to directly stimulate retail competition by creating a further
major grocery retailer.
Options to strengthen suppliers’ bargaining power with retailers include introducing a mandatory industry Code of
Conduct and allowing suppliers to bargain collectively.
Options to help consumers make more informed purchasing decisions and to enhance competition at the retail level include
the introduction of mandatory unit pricing, as well as asking the major retailers to simplify their pricing and
promotional practices, and ensuring that the terms and conditions relating to their loyalty programmes are clear.
“Our draft options encompass a range of possibilities and we look forward to now testing our draft findings and options
for recommendations in coming weeks through public submissions and a consultation conference, before publishing our
final report,” said Ms Rawlings.
Comments on the draft report are due by Thursday 26 August. A consultation conference will be held in Wellington from
21-24 September, with public sessions open to media (subject to space). Post conference comments are due by Thursday 7
October.
An executive summary, the full draft report and infographics on the draft findings, recommendations and themes from the
consumer survey conducted in March are available on the Commission’s
Background
What is a market study?
A market study examines whether competition is working well and, if not, what can be done to improve it. It looks at the
structure, conditions and performance of a sector rather than whether there has been any breach of the laws that we
enforce. If information collected during a market study suggests that it is warranted, we may separately consider what
further action may be required utilising our compliance or enforcement functions and powers.
What can be the outcomes of a market study?
Outcomes of our work may range from a ‘clean bill of health’ for the sector to recommendations for changes to enhance
market performance. The Commission’s recommendations are non-binding, but the Government must respond to any
recommendations within a reasonable period.
The full terms of reference for this study can be found
.