The supermarket sector in New Zealand has been in the news a lot recently. Bryce Edwards' Political Roundup column in the New Zealand Herald last week did a great job of summarising the media coverage. The column is worth reading in its entirety, but I want to focus on just one bit:
Grocery Tsar Pierre van Heerden made it clear this week how unimpressed he is with the duopoly he’s trying to regulate. He says he proposes further regulatory reform to the Government.
The first proposal is to reform the failed “regulated grocery retailers” scheme to make it mandatory that Foodstuffs and Woolworths treat rival retailers equally in providing them with wholesale groceries. However, commentators have been less than convinced by this. The supermarket reform advocates, Grocery Action Group (GAG), have called this proposal “tinkering in a market that has structurally failed”. And the Post’s business journalist Tom Pullar-Strecker suggested that the supermarkets might treat such regulations in the same way that electricity gentailers have managed to game the system: “If the supermarkets do need to supply rival retailers on the same terms and prices as their own stores, one question will be what might stop them making those prices high and shifting their profits from their retail to their wholesaling arms.”
It should be no surprise to anyone that the 'regulated grocery retailers' scheme has failed its objectives, and that further tinkering wouldn't make much difference. In fact, I predicted as much in this post in 2022:
Finally, the supermarket firms are not just retailers, but wholesalers. By itself, this proposal on retail prices would need to be carefully designed. Otherwise, the supermarkets will simply route around it by separating out their wholesale operations into a different business, which sets the wholesale prices, upon which the retail prices (cost-plus wholesale) will be based. Then the supermarket profits will simply back up one step as wholesale, rather than retail, profits... This might be one way that the supermarkets will respond to the Commerce Commission's recommendation that the supermarkets be required to offer wholesale supply to other grocery retailers (see here) anyway.
Why isn't the scheme working? It's more-or-less as I predicted (from Edwards' column):
According to the report, the scheme hasn’t been working as intended. Although former Prime Minister Jacinda Ardern claimed the regulation would “unlock the stockroom doors” of the duopoly to smaller players, instead, Foodstuffs and Woolworths had found a way to jack up the wholesale prices.
The report said: “In our analysis we found that as many as 54% of the products offered by RGRs (regulated grocery retailers) in wholesale could be purchased cheaper at retail”. It seems that the duopoly had managed to exclude competitors from gaining access to the various trade discounts from an array of rebates, payment arrangements and special deals.
So, rather than the scheme resulting in supermarkets and their competitors all facing the same wholesale price, the supermarkets have been giving trade discounts or rebates to their own stores (and presumably not to their competitors' stores). So, while the list price may look the same for everyone, in practice the supermarkets' own stores end up paying a lower wholesale price. And so the big supermarkets continue to profit because the higher wholesale price that their competitors pay ensures that the big supermarkets profit margins are not competed away.
The Grocery Commissioner's proposal to reform the scheme is also doomed to failure, as I noted in my 2022 post and Tom Pullar-Strecker has also pointed out. One solution, which no one seems to have suggested so far, and which might be worth considering, is to regulate wholesale grocery supply to operate under a cooperative model. Under this model, all grocery retailers would be 'members' of a single national wholesale cooperative, with ownership shares in proportion to their wholesale purchases. This is essentially a form of structural separation. Grocery retailers would all receive the same prices and special terms from the wholesale cooperative, which might be prohibited from offering quantity discounts (to prevent the big supermarkets from simply using those discounts to continue to receive lower wholesale prices than their competitors). This would also prevent the big supermarkets from simply shifting high prices to the wholesale level and continuing to profit overall, since the whole sector would now receive the same wholesale prices, whether they are high or low. It's not a perfect solution, and the wholesale cooperative will have a huge amount of market power over its suppliers (even more than the current supermarket duopoly does). But in terms of opening the path to more competition, it is a solution that is certainly worth thinking about.
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