1.09.2021

Spotlight on the Retail Grocery Sector: Commerce Commission releases preliminary results from its market study into the Retail Grocery Sector

The retail grocery sector has garnered considerable publicity in recent times. Lockdown has intensified scrutiny on the pricing strategies and structures adopted by retailers in this sector. This follows on the back of the Commerce Commissions broader investigation of competition issues within the sector.

On 29 July 2021 the Commerce Commission released a preliminary report from its year-long study into competition in the retail grocery sector.  The study was announced in November 2020 by the Minister of Commerce and Consumer Affairs, Dr David Clark, to assess whether competition is working well for New Zealand consumers.  You can read our previous article on the scope of the study here.

A full copy of the draft report can be accessed here

Summary of findings

 The Commerce Commission has found that market competition in the retail grocery sector is not working as well as it could be for consumers.  It says this is largely due to the persistently high profits being earned by major retailers, high grocery prices, and the low levels of innovation in the sector in comparison to international standards.

In particular, the Commerce Commission has formed a preliminary view that New Zealand’s two major grocery retailers, Woolworths NZ and Foodstuffs, are avoiding competition by targeting different consumer sectors and making it more difficult for consumers to compare prices due to the frequency and variety of promotions and loyalty programmes.  In addition, the imbalance in buying power between Woolworths NZ, Foodstuffs and most grocery suppliers means that suppliers are often forced to accept higher costs and excess risk (including unfair supply terms) to ensure that their products enter the market.  This is a significant flaw in the current market structure which reduces suppliers’ ability to innovate, leading to lower quality products and higher priced goods for consumers.

Another issue which the Commerce Commission says contributes to poor market competition is that “fringe” grocery retailers often face significant barriers to market entry and expansion (and often cannot compete with major retailers in terms of price and product range).  This includes a lack of competitively priced supply and the low availability of sites for store development.  This means that fringe grocery retailers have a very limited impact on market competition.

We note that the Commerce Commission’s findings are preliminary and are due to undergo review and consultation before a final report is published on 23 November of this year.  It is possible that the final report may address any issues uncovered as a result of the most recent Covid-19 Alert Level changes.

Recommendations

The Commerce Commission has proposed some draft recommendations that may improve market competition and increase the number of grocery retailers.  These include:

  1. Improving access to a wider range of products to ensure that potential competitors and/or existing retailers are able to expand and enter the market (for example, by requiring Woolworths NZ and Foodstuffs to supply other retailers at a wholesale level, or by making land more available through changes on the use of covenants);
  2. Creating a third viable major grocery retailer through government sponsorship or by selling some of the land currently held by Woolworths NZ and Foodstuffs;
  3. Empowering consumers to make more informed purchasing decisions (for example, by simplifying promotional pricing and disclosing the terms and conditions relating to loyalty programmes);
  4. Reducing power imbalance between suppliers and retailers by introducing an industry-wide “code of conduct” and changes to restrictions against collective bargaining by suppliers.

The Commerce Commission will now be considering submissions on the draft report with the final report due in November.  We await this with interest.

Covid-19 issues 

There has been considerable public interest in the supply and pricing of groceries as parts of the country have been in lockdown.  It is important to remember that high prices, of themselves, do not breach the Commerce Act 1986.  We anticipate that the Commerce Commission will keep a close eye and act on any information it receives in relation to potential breaches (e.g cartel conduct) or any issues under the Fair Trading Act 1986 relating to pricing and promotional activities (not just for the retail grocery sector, but for all businesses supplying essential services).

If you have any questions about this article, please get in touch with our Disputes Team 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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Contact the expert team at Hesketh Henry.
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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