Competition in NZ Grocery Retail

Closing comments made to Commerce Commissioners at the completion of the Virtual Conference for the Market Study into grocery retail concentration in New Zealand.

I’m Katherine Rich, CEO of the New Zealand Food and Grocery Council.

I’d like to thank the Commission and the commissioners for hosting the conference in trying circumstances – I believe you’ve done an excellent job in facilitating thought-provoking discussion.

I also thank all the other conference participants for sharing their perspectives and insights.

The grocery sector is of fundamental importance to every New Zealander.

It provides for the necessaries of life, and a productive and secure economy.

This study is of fundamental importance.

I hope it will bring about a more competitive grocery retail market that benefits not only consumers by way of quality, price, choice and innovation, but also improved treatment of growers, farmers, and manufacturers who produce those food and groceries.

One of the promises in the Hippocratic Oath about first doing no harm has been mentioned during the conference by speakers.

Based on my experiences leading the industry body for nearly 13 years and I would say to commissioners that harm will continue if you do not act to introduce competition.

We are losing food manufacturing capacity and the jobs in communities that come with them.

This market study happened because of ongoing concern from many parts of New Zealand society.

While, as an individual citizen, I support many of the consumer and NGO groups’ views put forward, my role in this process has been to advocate for suppliers and their treatment.

It’s been a long journey since the last major supermarket merger in 2002 – and the imbalance of power between retailers and suppliers has only grown since then.

As far as suppliers are concerned, each retailer has their own monopsony and this has enabled unacceptable conduct such as payment demands, IP appropriation and coercion.

Market power also influences the treatment of people, and appalling treatment of some supplier merchandisers and sales representatives in certain stores has been tolerated for far too long.

These behaviours need to change, and improving competition is a big part to giving suppliers greater choices. ?

I would like to pay tribute to the many suppliers who have courageously told their stories to the Commission despite fear and the risk of punishment – also to former suppliers who have spoken during this conference.

I’m sure the Commissioners have noticed that not one current supplier has contributed during this process to air concerns. We’ve heard from one contractor for Pams who spontaneously popped up today to talk about how dealing with the supermarkets is wonderful and that he’s never had a problem.

The FGC has always recognised that some suppliers do have close and rewarding relationships and I can sure the speaker that nothing proposed during this process will change already positive business relationships, but that’s not why we are here advocating for change.

This lack of preparedness to speak up for fear of retribution speaks volumes and should be viewed as evidence of the power of a duopoly.

This consultation conference has reinforced that the major retailers are not constrained in the prices they charge, the profits they make, and nor are they pressured to innovate or compete.

We’ve heard arguments from the major retailers on mission shopping and competition from other sources such as Chemist Warehouse and My Food Bag, but thus far we have failed to see any evidence showing mission shopping or other fringe providers materially constrain them.

Instead, stable market shares support the existence of a steady, stable duopoly.?

We’ve heard the major retailers repeat their self-assessed, unaudited, profitability figures.

We remain skeptical whether many of these calculated averages are fully consistent with economic reasoning, and question what could be hidden, such as the treatment of salary, the treatment of supplier payments, the treatment of transport costs.

Their claims of 4 cents in the dollar profit would be unlikely to hold if solely assessing the profitability of the New Worlds and Pak’nSaves.

The high proportion that goes to suppliers has been repeated as if that’s an indication suppliers are raking in the cash.

Continually saying 68 cents goes to suppliers overlooks the fact someone has to farm or grow the ingredients or actually manufacture the product to fill the shelves.

Of course costs matter, but the relevant debate is about share of margin – and the retailer is often making 3 times what the supplier makes due to the imbalance of market power and lack of ability to be part of a genuine negotiation.

Over time, the retailers have moved many genuine retail costs and risks back onto suppliers.

And they have used their market power to enforce margin demands and arrangements that would not be accepted by suppliers in a market with greater competition.

Most suppliers have little choice, and the negotiation for smaller suppliers is perfunctory.

As one FGC member told me on being sent a one-sided contract, quote: “I was told sign it, don’t sign it, up to you, that was the extent of the negotiation”.?

This process has ensured many grocery categories have become highly concentrated on the supply side too, and retailers have pointed the finger at certain categories.

But rather than be a fault of suppliers, I would argue it’s once again symptomatic of the duopoly, where suppliers are played off against one another to such a degree that 10 suppliers can become 2 plus a private label offering.

So yes, duopolistic market power is concentrating the supply side, too.

Private labels and their role are worth additional consideration by commissioners.

As I have said, private label is a ubiquitous offering around the world.

But in a highly concentrated market like New Zealand’s there is harm that arises from the inherent conflict of interest where suppliers deal with their customer who is also a competitor.

I have provided examples to the commission where private labels have blocked lower-priced, better-quality offerings for consumers.

We have heard the major retailers support and accept a mandatory Grocery Code of Conduct.

However, a reasonable person would interpret from what the duopoly has said on the record to commissioners that they will accept and abide by a code similar to those in Australia and the United Kingdom.

This is a step forward.

Those codes include:

·??????principles of fair dealing

·??????no payments for shelf position or theft or shrinkage

·??????no obligation to pay for marketing costs

·??????no deletions except on commercial grounds

·??????no pressure to hand over intellectual property … among others.

The Food & Grocery Council has said all aspects of those two codes are relevant and we see nothing particular about the New Zealand market that would warrant years of delay or MBIE starting from scratch.

A Code could be developed and launched within a year, given the work that has already been done and the fact both retailers have agreed to one.

I cannot emphasise enough the importance of commissioners recommending work on a code be an independently managed process and not become another supermarket negotiation resulting in something that’s diluted or innocuous.?

A code plan must also include the appointment of someone to oversee it and champion it.

Whether it be an ombudsman, an adjudicator or a commissioner – the name is not as important as the ability to deal with complaints fairly and within a reasonable timeframe.

That watchdog role might also be useful to ensure fair dealings for independent grocers if the duopoly provides wholesaling services to ensure pick costs, logistics movement, and other costs are fair and appropriate.

The watchdog would be a champion for the Code and the benefits that flow from it.

As Christine Tacon told us, she worked well with both suppliers and retailers to create a shift in the business culture in grocery retail.??

As a final comment while this discussion has been robust, I think it is important that the supermarkets confirm publicly their intention to continue working constructively with FGC and its members on day-to-day industry issues. Withdrawing engagement has previously been used as a punishment when FGC speaks out and there has been little recognition of FGC’s important role in being a voice for members.

Working with retailers on the issues is very important to my members and during this process there have been veiled threats to stop working with our various interest groups. We cannot have a repeat of the behaviour after the last Commerce Commission enquiry in 2014 where the supermarket involved refused to engage in a material way with FGC for nearly 5 years and at one point said reengagement required a new FGC Chair, new CEO and a seat on our board.?

That sort of behaviour will not be tolerated this time.

Commissioners, the grocery sector is long overdue for change, innovation, and competition – real competition that can bring better pricing and choice, and can drive innovation and efficiency, and make sure retailers can’t coerce suppliers without consequence.

We look forward to your final report and recommendations.

Thank you for this opportunity to speak.

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