This morning the Commerce Commission released it’s final report looking at the Supermarket sector identifying that in terms of competitiveness it “was not working well”. Hmm not sure much of an investigation was required to reach that startling conclusion.
The reality is the sector operates essentially as a monopoly, the two chains that have over 80% of the market having divided the country between them with few consumers living close to more than a single option. The report was an opportunity to overhaul the sector and detail how the commission would intervene to bring genuine competition.
So what have they done?
Supermarkets are to offer wholesale supply to other retailers on a voluntary basis with some limited regulation. Are you kidding me? If you leave the free market to voluntary measures, to self-regulation, you get what you asked for. Bring out the gimp - as has been, and will continue to be, played by the New Zealand public.
Prohibiting “placing restrictive covenants on land and exclusivity covenants in leases that prevented rivals from developing stores” is certainly a good move. Still I’ll believe it when I see it really being enforced.
The Commerce Commission has shown again though that it has no real teeth – it will not require the duopoly to divest of a single store to assist in creating a competitive market.
But hold on, this is an essential service you’re criticizing that got us through the pandemic. Absolutely - the workers were awesome, the behavior of owners less so.
We really saw supermarkets as the monopoly they are, and desire to be, during the lock-downs. The first thing they did when other stores, butcheries, green grocers, had to close, was to stop having weekly specials. No need for those when there is no competition unless you drive to the other chain a suburb/town away, which you’re not allowed to do. We all saw what happened to the prices of items like meat, they were without question pandemic profiteers.
Of course their staff were over worked as a result of being the only game in town. With over worked staff and a license to print money in lieu of having any competition how did the likes of New World respond? They applied for the wage subsidy!
Despite their staff being run off their feet individual stores claimed hundreds of thousands of dollars. From a fund intended to support those that could not work during the lock-down. Of course they later realized it was a public relations disaster and paid the money back, but that isn’t really the point.
It showed the natural instinct of these people at its starkest, to maximise profits with no regard for their customers, or for their employees. This was the “free market” utopia that the leader of the National Party spoke so fondly of this week as being the best mechanism for looking after people.
Profits are enormous at the best of times; local supermarket owners have become multi millionaires – not just another person in the community. We see those like retired sports people with a chunk of cash behind them buy a supermarket as owning one in the current environment is essentially a license to print money.
The supermarket sector is according to the commerce commission making more than double what would be considered a normal rate of return on capital.
In addition the way they treat local suppliers, given their monopoly, is well known. Massive mark ups while bullying suppliers by imposing costs and constraints that they are obliged to meet lest they lose access to shelf space.
The commission also identified that profitability in the sector is higher than in many other countries. That’s what happens when a monopoly operates.
You need to either intervene in the market to ensure competition exists or recognize that there is not in fact a market and cap the profits taken from the provision of food by a monopoly. This is one of the reasons we have the Commerce Commission.
Those of us who have lived overseas will be familiar with stores that offer more variety and much lower prices. New Zealand has the fifth highest prices out of 38 OECD countries compared.
We all know the stories of it being cheaper to buy a leg of lamb in the UK than here, or cheaper to get a bottle of milk in Sydney. Today in London you can buy a leg of lamb for $18.25* per kilo at what was my local ASDA whereas it is $20.90 here at my local Countdown – neither product on special. In Sydney at Coles you can get two litres of milk for $2.78. *All prices in New Zealand dollars.
This is just comparing the major chains, not the budget ones that don’t exist here. We urgently need a chain like Lidl or Aldi as an alternative providing better food affordability, but this would appear nigh on impossible to establish given current market conditions. Even the Warehouse failed to establish a supermarket alternative with the huge advantage they have over a new player of having existing sites.
Sure there are delivery services available that offer meal ingredients, but these are at the expensive end of the market, aimed at middle class families who don’t have the time to spend shopping or preparing a meal from scratch.
These services are not alternatives for families struggling to put food on the table. The people most impacted in terms of food choices when the monopoly has very large mark ups on perishable, healthy, goods such as meat, fruit, and vegetables, but much lower margins on long-lasting packaged goods, full of sugar and preservatives.
So what should the commerce commission have done?
Break them up; make each chain divest 35% of their stores so a third player could enter the market.
Restrict supermarket chains and owners from involvement in planning that impacts competition. For example at the relatively new Westgate development in West Auckland you have the ridiculous situation where one chain had input into traffic regulations making it harder for cars to get to their competition across the road.
Where land banking is taking place have a compulsory acquisition by the government. Pay the owner the purchase price but not a cent of capital gain and sell it to third party competitors at a market rate using any profit to help fund market regulation.
Oh and to those who would cry unfair, this isn’t intended to be fair but a punishment and signal that the anti competitive behaviour of the sector is unacceptable.
There should be a cap on profits if the sector is to remain a monopoly. Perhaps set a maximum mark up from which the supermarket has to cover all its costs and display a clear breakdown of what the supplier was paid alongside the retail price.
If a third party does not want to enter the market then one should be established as a not-for-profit, or co-operative, entity. Given the size of the profits you could potentially raise wages, treat suppliers more fairly, and lower prices to consumers.
Standing back and doing bugger all can’t be the option – well unless you’re the Commerce Commission apparently.
Damn I think you're right. We're going to keep getting screwed. My wife is convinced groceries in Sweden are cheaper than NZ despite their high taxes
So depressing Nick. Do you know exactly who were the authors of the report or how many people were involved. Way back a million years ago when I was young I recall that profiteering was a crime. What happened? (Btw, I love the font, makes for easy reading)