Politics behind latest move to consider supermarket breakup COMMENT
THE dream of breaking up New Zealand’s supermarket chains is hard to kill.
On the surface of things, a plan to force the sale of parts of New Zealand’s current supermarket duopoly — Foodstuffs (New World, Pak’nSave, Four Square) and Woolworths (Countdown, Fresh Choice) — could already be in train.
Since April, Commerce and Consumer Affairs Minister Dr David Clark has been saying that the Government may need to take more radical steps to improve weak competition in New Zealand’s grocery sector than those recommended by the Commerce Commission in its recent market study. And Dr Clark has promised to report to the Cabinet next month on the prospect of forcing the divestment of supermarket assets.
To that end, the Ministry of
Business, Innovation and Employment (MBIE) has commissioned a considerable chunk of ‘‘expert grocery sector advice’’ and ‘‘costbenefit analysis’’ to explore options for forced sales.
The work is being done by a consortium of consultancies led by Tim Morris at Australiabased Coriolis. Mr Morris is an expert in food and grocery retailing, and he, along with Aucklandbased Cognitus, the oneman shop of economist Dr Richard Meade, and Wellingtonbased Sense Partners have been hired to report on ‘‘the costs, benefits and risks’’ of supermarket divestment in New Zealand.
The prompt for the Government’s sudden interest in outstripping the ComCom’s competition remedies lies in soaring inflation (it rose 7.3% in the year to June 30) and the consequent erosion of the real value of wages. There’s an election next year and incumbent governments are typically ousted when households are this badly squeezed; the price of bread and butter has rarely been so political.
That’s why Prime Minister Jacinda Ardern was front and centre and repeating a newly favoured phrase, ‘‘a fair deal at the checkout’’, in a recent tour of Costco as it prepares to open its first New Zealand store. And that’s also the likely reason she took the unusual step of joining Dr Clark on a phone call with Costco’s country manager, Patrick Noone, in April.
Nothing is likely to buoy shoppers’, aka voters’, sense of progress towards greater competition and lower prices more than a new entrant in the market (Costco’s decision to expand into New Zealand was made in 2019, before any of the recent moves to help new entrants).
But while the Costco story is a useful demonstration of increased choice for shoppers, it’s just one Auckland store for the time being. And none of the changes the Government is pursuing — from a code of conduct to help shield supermarket suppliers from the power of their customers to a new law banning the covenants that have hindered wouldbe competitors’ access to land — is likely to dent food and grocery prices quickly or, in many cases, at all.
The best way for the Government to persuade New Zealanders that something substantive is happening to alleviate high prices is to conjure a third serious competitor. But, short of extending MBIE’s remit to peddling grocery staples up and down the country, that’s hard to do.
Politically speaking, the next best thing to welcoming a new competitor is talking about the options you’re considering to force such a player into existence. That’s where MBIE and Mr Morris et al. come in (funded, incidentally, by a new $10.7 million pot of money in the May Budget, dedicated to considering competition remedies).
We already know that Mr Morris is likely to tell the Government that if it wants new competition from traditional supermarkets it will need to force it. And setting a market share cap, for example, would probably produce banner separation at Foodstuffs (whose stores are independently owned but which cooperate through shareholdings in two central bodies, which themselves cooperate) and force the sale of stores by Woolworths.
Mr Morris put this view in a written submission to the
ComCom late last year. He didn’t think the process would be as unwieldy as many fear, but the fly in the ointment is that neither did he think it would go far in denting New Zealand’s undeniably high grocery prices. He suggested more important factors are: our ‘‘island supply chain’’, our small population and the cost of regulation, including very stiff biosecurity rules.
It’s hard to imagine that the costbenefit work slated to land on Dr Clark’s desk in the coming weeks will suggest enough fat benefits to outweigh the costs and risks of what would be, after all, an extraordinary raid on private property.
Independent observers warn that there would have to be very significant excess profits made at the moment, and considerable inefficiencies, to warrant action.
Wellingtonbased economist Dave Heatley called the $1 million per day in excess profits that the ComCom concluded the duopoly is currently making ‘‘a very small number’’, especially when compared with the likelihood that forced sales would require the creation of new, expensive distribution systems to sit behind retail operations (a recently announced change to force incumbent supermarkets to wholesale to competitors is expected to be taken up only by very small players).
The consultants are unlikely to conclude that forced sales are a clear or easy path to lower prices, and the Government is equally unlikely to bite on such an extraordinary and uncertain remedy. But the work’s value never lay in the world of ordinary people where money is tight and carefully spent; it exists, rather, in the political sphere. And its greatest utility will be to ministers, whose need to talk about remedies to the soaring cost of living is only intensifying. —