Why our supermarkets really are super
Labour governments love to talk tough to big, profitable, independent industries that serve the public well. It is red meat for the base and plays well with the wider populace too. Providing good value for profit is a thankless business.
Probably no industry in the private or public sectors serves the public better than supermarkets. Everywhere you go, in cities and towns, suburbs rich and poor, you know you will find at least two of their familiar brands over a big barn that will be stocked with what you want when you want it.
They stay open well after other shops have closed. They are always bright, clean and tidy, they are constantly restocked and their prices are lower than you will be charged for the same goods in a dedicated shop.
In a time of inflation, demonising the industry serves an additional purpose for a government. It helps to deflect blame from itself and pretend to be doing something about the rising cost of living.
So in the wake of a Budget containing the largest increase in spending we have ever seen — leaving the Reserve Bank to fight inflation alone by raising interest rates very rapidly, making a recession more likely — the Government is talking tough to supermarkets.
Commerce Minister David Clark warned them this week they are “on notice”. They must “change at pace to increase competition and be prepared for regulation.
“The supermarket industry doesn’t work”, he declared. “It’s not competitive and shoppers aren’t getting a fair deal.” Rising to full, hairy-chested mode, he said, “I spoke with both supermarket companies this afternoon to make this very clear. They know what is expected of them and the length of time we are prepared to give them to change before regulation kicks in.”
When politicians wade into an industry like this they are bound to make a mess of it. What the Government has specifically ordered the supermarket “duopoly” to do is, open their wholesale operations to potential retail competitors.
That is unlikely to reduce prices for consumers and will make things worse for those really at the mercy of supermarkets, suppliers of food and groceries who have less bargaining power than the wholesale buyers.
The suppliers need more competition in the wholesale market. To regulate the market, as the Government appears to intend, will only ensure new retailers have no need to set up wholesale buying arms that would compete for supplies. If that were to happen prices to consumers would likely go up, not down.
Consumers are actually beneficiaries of the duopoly’s market power not its victims, but it serves the Government’s political purpose to pretend otherwise. It cites a study carried out by the Commerce Commission at the Government’s request which concluded New Zealanders may be paying too much for groceries.
“Out of OECD countries, New Zealand ranked sixth highest in terms of grocery prices, as well as fourth and fifth-highest in terms of grocery expenditures,” the commission reported. But it went to say, “Factors other than competition are likely to affect prices relative to other countries. Examples of these for New Zealand may include our geographic isolation, biosecurity regulations, labour and distribution costs.” You think?
Economies of scale matter. We are a tiny population a long way from anywhere. We are lucky not to be paying the highest prices in the OECD. The reason we are not is probably the protection others give their food producers.
We owe our living standard to free markets open to competition, which is not easy to see. Competition is not usually made visible by price wars or small businesses struggling to survive. It tends to produce settled prices and companies that have found the shape and scale to provide the goods at lowest cost for best return.
Governments need only ensure potential competitors can come into the market if the incumbents’ prices or profits are higher than they need be. The Commerce Commission initially suspected New Zealand supermarkets were making “excessive profits” but its final report reduced its assessment from 20 per cent to a 13 per cent return overall.
The lower estimate still causes the commission to believe there should be competitors coming in and if they have not, the incumbents must be guilty of restrictive practices. It identified one — covenants made with shopping malls to bar rivals under the same roof.
The Government is rightly legislating against that one but now it threatens to go much further.
It would do better to concentrate on making the likes of schools, health services, courts and police match the reliable quality and equity of the service we get from supermarkets.