08.08.2022

Commerce Commission releases draft report for residential building supplies market study

On 4 August 2022 the Commerce Commission (Commission) released its draft report setting out preliminary findings from its market study into the residential building supplies industry.

The study’s focus is whether competition for residential building supplies in New Zealand is working well and, if not, what can be done to improve it.  The Commission was directed to consider factors that are affecting competition for the supply or acquisition of key building supplies used to construct residential buildings. These include foundation, flooring, roof, walls (structural and nonstructural interior and exterior) and insulation.

Key findings

The Commission has reached the preliminary view that competition for the supply and acquisition of key building supplies is not working as well as it could.  It suggests two main factors are negatively impacting competition for building supplies:

  • The regulatory system incentivises designers, builders and building consent authorities to favour ‘tried and tested’ building products over new or competing products; and
  • Quantity forcing rebates paid by established suppliers to merchants appear, under certain conditions, to be reinforcing barriers to distributing new or competing products in some product markets.

Like its previous market studies into the retail fuel and retail grocery sectors, the Commission has identified the use of restrictive land covenants and exclusive lease terms as having the potential to impact on competition between merchants of building supplies.

Identification of issues with the regulatory regime

The Commission states that while the building regulatory system seeks to ensure the provision of safe, healthy, and durable homes for New Zealanders, pathways such as Codemark certification and BRANZ appraisal to ensure compliance with the Building Code can also be slow, costly, and uncertain to enable new products being introduced and becoming widely accepted. 

The Commission recommends including competition as a key objective of the building regulatory regime.  It further recommends creating further pathways for compliance to incentivise greater innovation and availability of building supplies (including for green building supplies – sitting alongside government initiatives such as the Building for Climate Change programme and the government’s Emissions Reduction Plan, and the need for better engagement with Māori in the building regulatory system), and the use of those products by designers and market participants.

The use of quantity-forcing rebates

Quantity-forcing rebates reward merchants for purchasing a greater volume of product through a single supplier.  The Commission has identified that rebate structures can deter merchants from stocking or expanding sales of competing products making it more difficult for new or small merchants to become established.  It does acknowledge, however, that rebate structures do not always lessen competition and can enable suppliers to pass through lower costs per unit to consumers.  In particular, the Commission’s preliminary view is that rebates for plasterboard appear to be contributing to difficulties for alternative suppliers accessing the merchant channel.  Rebate structures for timber and ready-mix concrete have less of an impact, particularly because these items are often supplied directly to customers rather than through merchants.

Restrictive land covenants

The Commission has identified approximately 60 restrictive covenants and 80 exclusive leases benefitting major merchants, which it considers may restrict competition between building supplies merchants.  It notes that independent of the market study, it is taking enforcement action in relation to the use of a restrictive land covenant in the building supplies industry (although it appears the detail of this action is not yet public) and intends to launch a compliance programme later this year.

While the Commission notes that the use of land development covenants is not widespread, it has identified covenants in the Hawke’s Bay region and is continuing to gather information to consider their prevalence and impact for its final report.  It further recommends an “economy-wide” review of the use of restrict land covenants and exclusive leases to consider whether a multi-sector approach is required.

Focus on specific products

The Commission used case studies of plasterboard, structural timber and ready-mix concrete (including cement) to demonstrate how these factors may apply to different key building supplies.  The Commission observed that where a product has a clear pathway to comply with the Building Code, it is more likely to be specified and used in residential building designs.  For example, the Building Code pathway for plasterboard permits wall linings that provide structural bracing, which has become a popular method in New Zealand.  Although there are alternative design methods and alternative products to plasterboard because they are not commonly used in New Zealand, other plasterboard suppliers have struggled to have a presence in the supply chain.

For ready mix concrete (including cement), the report found that the regulatory framework better facilitates competition between imported product and domestic supply as there are clear performance measures stipulated for the Building Code compliance pathways.

For structural timber, chemical treatment standards which are highly prescriptive and unique to New Zealand may limit the scope for competition for imported timber.  Domestically the Commission considers switching between New Zealand timber appears to be relatively easy, particularly because designers and builders are generally brand indifferent. 

Commission’s recommendations

The Commission suggests its draft recommendations, broken down into three categories will improve competition and produce better long-term market outcomes for homeowners and end consumers.  The eight draft recommendations are:

Enhance the regulatory system

  • Introduce competition as an objective to be promoted in the building regulator system.
  • Better reflect a Māori perspective in the building regulatory system
  • Create more compliance pathways for a broader range of key building supplies
  • Explore ways to remove impediments to product substation and variations.
  • Investigate whether the barriers to certification and appraisal can be reduced.

 Support sound decision making

  • Identify and develop methods to centralise information sharing about key building supplies.

Address strategic business conduct

  • Promote compliance with the Commerce Act, including by discouraging the use of quantity-forcing supplier-to-merchant rebates that may harm competition.
  • Further consider the economy wide use of restrictive land covenants and exclusive leases.

The executive summary and full draft report can be accessed here.

The report identifies that for many key building supplies, relatively few suppliers have controlled a large share of supply over time and therefore promotes a move towards an increase in competition.  Although subject to change, the recommendations may have an impact on those in the construction and building supply industries.  The report also notes that changes to s 36 of the Commerce Act which come into force in April 2023 will expand the prohibition on taking advantage of market power by introducing an “effects” test, which may affect supplier rebate structures and how these operate (as well as other practices).  Those in the industry should be aware of these recommendations and the potential impact on business whether you are a supplier, merchant or customer.

The Commission now invites parties to comment and provide submissions on the draft report.  A consultation conference will be held in the last week of September with the final report due to be delivered on 6 December 2022.  We will provide a further update once the final report is released.

If you would like to discuss the Commission’s draft report or would like to provide a submission on the draft report, please get in touch with our Construction or Business Advice Teams or your usual contact at Hesketh Henry.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

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Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

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