Kiwis Waiting Out Commerce Commission's Long Game – It Ain’t Over Till It’s Over

• CommComm has taken a pragmatic, strategic approach and has not attempted to engage in a pitched battle that it does not have the resources or political support to win.
• Public opinion has shifted: the duopoly are light on friends
• Iwi interests have been awakened
• There’s a new sheriff, with powers as yet to be determined
• The Minister deserves credit for commissioning the study and has dodged a bullet
• CommComm has awakened the Taniwha
• The EU is in the wings
• The game isn’t over

 MonopolyWatch NZ has studied the entrails of the Commerce Commission’s final report on the Market Study into the Grocery Sector and thinks its approach to improving competition in supermarkets is more strategic than it is being given credit for.

We believe that, rather than tabling an immediate and emotionally satisfying solution, the Commerce Commission is playing a long game, avoiding protracted litigation and political grandstranding (that’s not a typo). It has avoided engaging in a pitched battle that it does not have the resources or political support to win. Instead it has set up a scaffold, gathered a crowd and given the duopoly plenty of rope.

To those who say the study failed to deliver we respond that, in the three weeks since the Commerce Commission released its final report on the Market Study into the Grocery Sector, one thing is clear: the ground has shifted.

Did the Commerce Commission recommend dismembering the duopoly and create an opportunity for a third party to step in and pick up something? No that didn't happen. But, in truth, a quick decisive strike like that was never anything but a rank outside bet, a twenty to one long shot. A CommComm recommendation to that effect would have been stymied by Cabinet, Parliament, the Courts, lobbying, lawyers, the threat of disrupting and essential service, all under the smokescreen of socially responsible window dressing that the duopoly is so good at. (As an aside, we would like every charitable donation or good cause that enjoys supermarket support to carry a sticker: “Generously paid for by you and other Kiwi families, through higher-than-reasonable prices.”)

But the report and the media activity that has followed have exposed some of the duopoly’s rotten behaviour. It has encouraged informed, intelligent conversations that have been twenty years in the making. It has significantly shifted the dial of public opinion. It has brought together parties interested in effecting change. It has created some opportunities for suppliers and marginalised fringe competitors. Though minor, that is, in itself, something.

More significantly, it has surrounded the duopoly with a wall of disapproval that we haven’t seen since the last days of the Telecom Empire. Has any politician publicly applauded the supermarkets for their retention of status? Has any media outlet said, “Good on you”? Are conversations in pubs, clubs, at dinner parties and around barbecues anything but one-sided? No. The duopoly are without friends, regarded as pariahs who have taken advantage of their protected role as providers of an essential service to exploit suppliers and consumers alike.

They’ve acknowledged their bad behaviour, promised to behave better in future and essentially thrown themselves on the mercy of the court, which has ordered that electronic monitoring bracelets be wrapped around their sturdy legs. That may not be the public excoriation that some sought, but it will hobble them.

So where are we today and how did we get here?

To recap. The Minister of Commerce and Consumer Affairs asked CommComm to carry out a market study into the retail grocery sector. The terms of reference were published on 20 November 2020. It wasn’t a declaration of war, just a movement of troops to the border.

After initial skirmishes, the first real ordnance exploded on 29 July 2021, when the Commission published its draft report. One line stood out, and has not seriously been contested since:

“Competition is not working well for consumers in the retail grocery sector.”

There were others:

“The retail grocery sector can best be described as a duopoly with a fringe of other competitors.”

“New Zealand prices are relatively high by international standards.”

“While there has been innovation in the sector, it is modest by international standards. High profits do not appear to be rewarding retailers who have invested in innovation, as slow adopters also appear to enjoy them.”

And at the end, under Options for Recommendations, CommComm delivered its bombshell:

“… measures to facilitate or create entry by further major grocery retailers. These include direct sponsorship of entry by government either by encouraging investment, by direct entry, or by requiring the major grocery retailers to sell some of their stores to create additional major grocery retailers.”

Yet the final report, published on 8 March 2022, ignored that option – for now.

The report was greeted with widespread expressions of disappointment, incredulity and outrage. Three weeks later these continue. Kiwis now know they’re being fleeced and have no patience with the duopoly’s glib, pre-baked statements about the complexities of comparing pricing, when asked why it’s cheaper to buy groceries in Australia and ship them over here.

Monopoly Watch NZ was disheartened to see there was no mandatory divestment of supermarkets or wholesaling to a scalable third or fourth operator. We think that would have ignited both lower grocery prices and innovation benefits for low- and middle-income Kiwi consumers. However, uncharacteristically, we kept our mouth shut. We prefer solutions to complaints and we have taken time to consider CommComm’s detailed and comprehensive 609 page report.

Here’s what we see.

The Commission undertook a professional, detailed and sensible analysis programme. We respect the Commissioners’ work and compliment retiring commissioner Anna Rawlings for a fair and inclusive programme of research. Commissioner Rawlings has one of the most difficult independent government agencies to operate.

That said, we beg to differ with some of the conclusions:

• We do not agree with the decision to raise the beta coefficient, which impacted WACC rates used. The beta coefficient has a tautologous relationship with the market structure. A low-risk market has a lower beta coefficient, and a lower cost of capital, than a high-risk market.
• We do not agree with the ROACE adjustments on page 471 (b85) of the final report. We feel a capitulation to the monopolists who have successfully hidden profitability, does not reflect the fact that the social contract between regular Kiwis and the supermarket monopolists is broken. It is essential to identify how excess profitability is shared and concealed in property plays and shared with other stakeholders (including suppliers).
• We think the report’s recommendations will only benefit some suppliers and luxury-end fringe players. leaving those poorer Kiwis who don’t have private jets and Perini Navi Yachts exposed to more expensive food outcomes. On a two-sided bottleneck analysis problem (suppliers and consumers) only suppliers’ problems have been potentially improved by recommendations in the final report.
• Foodstuffs and Woolworths have made a big deal about removing property covenants. This was banned by the ACCC 10 years ago, yet Woolworths has perpetuated this anti-competitive action in NZ for almost a decade after – something for the Woolworths ESG ratings agencies to consider. This regulatory decision is in effect meaningless as the horse has bolted and the monopoly is already entrenched. It's akin to regulating black and white TV in 2022.
• Capital providers who invest in big businesses must be entitled to a fair and competitive return on their capital. When barriers exist and profitability is too large, a regulator must intervene, particularly when the industry is a basic or lifeline utility. Despite having no capital, consumers are entitled to “vote” through their expenditure to reward competition which delivers for them, in this case that vote is meaningful like for like competition not a geographic monopoly with a fringe.

Here's how the spoils will be divided

MonopolyWatch understands that, when the final report was released, the Auckland Ferrari dealership extended its trading hours. The duopoly, wisely, laid low and have since said (almost) nothing. But behind closed doors the calculators are out.

Economic literature on monopoly game theory makes compelling reading for those public policy analysts who believe in a fairer future. There is much written about how monopolists must share their monopoly rents with management teams. MonopolyWatch will be endorsing this principle by recommending, in an open letter, that the Foodstuffs board bonus NZD$120m to the CEO and the six other executives in the policy team and that the Woolworths’ board bonus $102m to the five executives who ran the campaign to stop regulation of this industry. This is approximately 50% of the annual benefit to both those organisations from not having effective competition, so sharing benefits 50:50 between management and shareholders rewards both.

Here's what happened next:

The Minister of Commerce immediately expressed his disappointment and committed to keep an open mind with a further review of CommComm’s final report on supermarkets. We applaud that. The Minister has demonstrated that he understands game theory and is well positioned and armed with enough research to continue the crusade. He would have been placed in a very difficult position had the Commission recommended a break-up: protracted litigation and an ugly, untreatable open sore festering forever leaving him vulnerable to attack from all sides. We respect any Minister or government official who stands up to monopolies, researches them and places the public interest ahead of their ability to continue to extract monopoly rents. We urge the Minister to keep the final report on his desk and trust his instincts on what needs to be done and thank him for having the guts to open the market study.

There will be a new referee on the field. While his or her job will initially primarily be focused on suppliers, we believe it must ultimately be focussed on outcomes for consumers. And while the ref won’t have the power to make scalable change to ignite a market structure change to help those consumers, he or she will have the power to require far more disclosure and far greater transparency. And, as we all know, unequal information creates power imbalances, continuous disclosure helps redress them.

However, whether any single organisation can take up the opportunity to create a viable, market-structure-altering third alternative remains a question for another day. We think it inevitable that the status quo will be unwound. History tells us that governments ultimately break up monopolies. The real questions are when, how, by whom and to whose advantage.

And here’s what has really shifted

The market study has awakened the Taniwha. Iwi are now fully aware of both the scale of the problem and its health and social impacts on their people and of the economic and social benefits that can accrue to them and their people through their large scale considered participation in this sector. Iwi, acting together, would be one of the few groups in Aotearoa with the asset base, the motivation, the stakeholder support and the patience to take on the duopoly.

An even bigger power threatens. Sad it is, but true, that the Commerce Commission is not funded to sustain a protracted legal battle with commercial interests who have deep pockets and are committed to protecting a vested position. That was proven in its battles against Telecom and in the three-to-two supermarket merger. However, the EU Commissioners are under no such constraints and, once a trade deal is signed, you can expect them to scrutinise the level of competition in the grocery sector. The FTA will give them that right, they will be pressed hard by commercial interests to make use of that, and they have no qualms about deploying their resources in the exercise of the EU’s authority. Ask Google. Ask Apple. Ask Facebook.

Monopoly Watch will continue to submit and analysis market structures in NZ to advance competition in the public interest. Our team respects and congratulates New Zealand’s 44,321 supermarket workers who have navigated Covid so well, most of whom work for Countdown and Foodstuffs. We thank all the Monopoly Watch NZ supporters who have assisted and supported our advocacy.

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