Kiota. I'm Chelsea Daniels and this is the Front Page, a daily podcast presented by the New Zealand Herald. An investigation into the supermarket majors is underway as a merger of hundreds of stores around New Zealand fails to satisfy a competition watchdog. Ahead of its final decision later this year. The Commerce Commission said that a merger of Foodstuff's North Island and food Stuff South Island would affect significant structural change in the sector and it continues to have concerns
around competition. It's all while the Commission's investigating after Consumer and z lodged a complaint claiming supermarkets were engaging in misleading pricing. So what will all this mean for you and the price of your weekly grocery shop? Today on the front Page, we're talking all things supermarkets, first with nzet Herald reporter Kate McNamara and then with independent consultant
Ernie Newman. Kate, can you explain how food Stuffs currently operates, particularly as this North Island South Island split is a bit confusing on paper.
Yeah, So they are two separate entities, their owner operator co ops. So they're co ops the shareholders of which are the owners of the individual stores, and they are two single island co ops. So there's food Stuff's North Island and it really only sells well, it only sells in the geography of the North Island and food Stuff's South Island that only sells in the geography of the South Island. So that's at the retail level. They do
work together in a variety of areas. Largely and quite importantly for the Commerce Commission, they buy separately from suppliers, but that's not absolute, and they do overlap. They buy together, for example in some instances. One example is when they're buying for the home brands, so PAMs for example. So yeah, areas of working together. If you, as a media person go to get comment, you'll generally find that there's kind of one operation for dealing with the media these days,
or at least they share services across that area. And of course they share banners, so pack and Save New World and four Square are the main ones, and they each separately have other businesses and banners as well.
So what is food Stuffs wanting to do with this merger.
Well, it wants to become one single national entity. So on the one hand, consumers or you know, kind of ordinary people might not see a great deal of difference because broadly the same name and they share marketing and that kind of thing. So visually, certainly and from the outside it might not look very different. But they would have scope to do very many more business things together as a single entity, so it would be quite a big change.
So essentially we've got food Stuffs North Island, food Stuffs South Island, and of course the Woolworths Group end Z which is run by Walworth's Australia at the moment. Essentially, do we have kind of two point five in our supermarket's competition at the moment and this would kind of bring it down to two.
Yeah, you could think of it that way. In its market report that the Commerce Commission conducted and completed in twenty twenty two, it decided that food Stuffs together and Woolworths constitute a duopoly, essentially two big players in the market.
The Commerce Commission said the duopoly of Wilworth's ENZ and food Stuff so it was not working well dealing consumers. It found New Zealand supermarkets are making more money than those overseas, and then our grocery prices are higher. The Competition Watchdog has stopped short of calling for a major structural change to the.
Sector that does, as you kind of suggest, it masks the kind of particularities of food stuffs because they aren't one big player, although they don't compete on the retail level, because they occupy different geographies.
Why are regulators and food suppliers so opposed to the merger.
Well, we don't know that the regulator is opposed to the merger. So the process that they go through is they've chosen to go through three steps, So they issue statements of issue and they outline what they consider to be areas of law that they have not yet satisfied themselves of wherein there would not be a substantial lessening
of com petition. But because the process is still ongoing, they've just issued their third statement outlining areas where they still need to be satisfied that there wouldn't be this substantial lessening. And we'll get a decision ultimately in October. But it's not over yet, so we can't say yet
that they're opposed. Suppliers can tend and this is one of the areas where regulators still want to be satisfied that the merger wouldn't reduce competition, But suppliers contend that essentially their market, what they call the upstream market, the market for food and groceries, that that would be reduced from three players in the market to two if food
stuffs was consolidated into one. Remember, largely they operate separately as buyers, So at the minute, if you're a supplier, you likely if you supply food stuffs on both islands, you likely deal with a number of different entities. Buying is very centralized by foodstuffs North Island. It's less centralized on the South Island. Buy from a number of different buyers and you would essentially be dealing with a single entity if there was a merger. And the Commerce Commission
has outlined that it's worried about this. It has yet
to be satisfied that this wouldn't substantially lessen competition. It suggests that it might push prices down for suppliers in selling their goods, and it's not convinced that you know, if there was a price reduction, that that would flow through, for example, to benefit consumers, and that it might basically increase the market power of food stuff such that they could do a variety of things which would be potentially damaging to the suppliers, and it worries could also flow
through to damage to customers. For example, it could make it more difficult if you have this merge to food stuffs, it could essentially prove to be a barrier to entry for other competition if it were to try to enter the market. You know, a merged entity would be better able to get lower prices, arguably better able possibly to get exclusivity in and so that would potentially make it
harder to break into the market. And to the degree that it serves as a barrier to new competition, then obviously that's something that the Commerce Commission is concerned about.
You spoke with Chris Quinn, the man who will likely be in charge if this merger goes ahead. How has he defended it well.
He says that food stuffs is relentlessly focused on efficiencies and that a merger would allow the entities to be more efficient, and that efficiencies will flow through to customers and prices, and that because prices are determined by more factors than just supermarket costs, that it wouldn't necessarily be the case that we would have lower prices after a merger than beforehand, because of course you have, you know the effect of global pricing on commodities like milk and
butter and all sorts of other variables. But the degree that we're looking at the supermarket's cost then the supermarket would be able to reduce he says, its costs through these efficiencies, and so he says prices would be lower than they would otherwise have been. I don't think anyone
doubts that it would be more efficient. I think if you have you know, two entities doing broadly similar things, to condense them into one, you know, you have one head office set of overheads, you have one supply chain that you're managing, that's going to be more efficient. But
there are other factors at play. You could, happily, on the basis of improving efficiency, reduce market competition right down to one single colossus player, and I think most people would recognize that actually that would be very bad for markets, and it would allow for far too much market power. So efficiency is one consideration, but the concentration of market power is also a consideration.
Auckland and Wellington Foodstuffs have already merged in twenty thirteen. It was promised to make things much cheaper and so forth. Well, Foodstuffs North Island has made over one hundred percent increase in profit from twenty thirteen to twenty twenty three, and I'm pretty sure customers are paying for that.
You've been following this case and the widest supermarket issue for some time now, what do you make of the issues going on here?
Well, I suppose there are two big issues and the first isn't directly related to the second. So the second is the merger issue itself and the legal basis on which that decision will be made. And then there are you know, the sort of tide of public opinion which includes I think politicians thinking as well, and kind of the way in which the issue has become quite politicized.
And I think that is a very interesting moment in context for the merger application, because we have this moment that comes on the heels of three four years of very concerted and consistent scrutiny of the supermarket sector, of the very high concentration of power that the two players
wield and the profits that they make. We had through the Market Study and through the Commerce Commission we have a lot of new money through budgets successive budgets, Budget twenty twenty two, Budget twenty twenty three for a grocery team the Commerce Commission, for widened powers for the Commerce Commission to wield, and so you know, it's part of a public and political consciousness I think at the minute that concentration of power and the grocery sector. So that's
kind of the big picture. And inside of that we have this unfolding question of a merger which can't actually because the Commerce Commission has to make these decisions on their merits within the context of the law, it can't take into account or it isn't supposed to take into
account public sentiment or sentiment. So there's kind of an interesting tension there what it can do and kind of what the government has essentially armed it to do, and really the previous labor government armed it to do is to take as much time as it needs, you might say, and use considerable money and resource as the public sector has it to make this determination. So it has a
lot more firepower than it ever had. It can't change the law and the precedence within which it makes the decision, but it can throw a lot of resources at the decision making to make the right decision, and if it goes against then it will need to have done a very good and thorough job because of the possibility for challenge.
Thanks for joining us KAY.
To discuss what more needs to be done to increase competition in our grocery sector. We're joined now by independent consultant Ernie Newman. Ernie, can we start with your thoughts on the proposed food Stuff's merger.
Do you think it's a good or bad idea?
I think it's clearly a bad idea. We already have a duopoly. We already have demonstrably one of the three least competitive grocery industries on the OEPED and the whole notion of cutting two point five grocery retailers down to two is totally adverse to the interests of consumers.
The Commerce Commission has come out saying that the merger of food Stuff's North Island and South Ireland could affect significant structural change in the sector. It continues to have concerns around that competition aspect. How do we get around competition in the grocery sector in New Zealand.
Well, that's a very big question. And by way background, there are three initiatives underway with the Common Commission at the moment. There is the market Study, there is the application for the merger of food Stuff's North and Foods South South Island. And there is separate legal action by the Communist Commission in relation to food Stuff's North Island for anti competitive land to covenants. So somewhere in the middle of all that has got to be a solution
to me, the market study is the key one. You know where that is landed now is the market study was completed. A Government of the day followed the recommendation. It appointed a Grocery Commissioner who's been active now for about a year, and basically the recommendation was that we wait three years to see how effective his role would be. And so we're in that waiting game at the moment. Although there are a lot of people who would argue
we can't afford to wait another three years. It takes an action on a problem which is quite clearly staring us in the face every time we go and buy a packet of Fairnis.
Well.
This month actually marks a year since the Grocery Commissioner, Pierre van Heerden was appointed after they investigation into our supermarket duopoly. Has much changed in the last year since his appointment.
I don't think anything has changed for consumers. I think some things have changed for suppliers, but even that is pretty much at the margin. The difficulty, I think is that he doesn't have the powers that he needs to do his job. Clearly, what's needed here is to undo the harm that was done by the agglomeration of the sector over the last twenty years or so. Most countries have three or four or five or sixth competing supermarket chains.
It's a huge industry with a huge impact on cost of living and societal well being and so on, and to actually have a duopoly is totally unsatisfactory. So until we actually attack the core of the problem, which is market structure, we're not going to fix that problem by trying to change people's behavior.
Why won't other world leading supermarkets enter the New Zealand market. I'm thinking AUDI is taking over in Australia at the moment. Why is it so difficult for them to cut through this dieopoly that we're seeing.
Here because the market is arguably well and truly oversupplied. Ironically, we probably have too many supermarkets for our size, and to some extent that the actions of the jeopolis by flooding the market with kind of a store on every street corner to make it impossible for a third imprint to come in. And that's been exacerbated by the issue
of the land covenants. So back in the last ten or twenty years, the supermarkets have made a practice of tying up all the available land that a competitor might use through covenants which say, you know that you can't put a butcher or the vegetable store, or certainly not a competing supermarket on this piece of land.
Here, it's possible for large operators to prevent competitors from releasing land in.
The same area, a practice called land banking that's no longer allowed.
Over the ditch, these behaviors that have been banned in Australia for fifteen years have been perpetuated against the New Zealand consumers. Now they've been called out on that one by the Communist Commission, and in the case of food Stuff's North Island, there is action going on on that front already, but the damage has been done with those covenants and it'll take ten or twenty years to get to the point that enough land starts to free up for a thirty inprint to conumplay coming in.
You're chief executive of the Telecommunications Users Association of New Zealand for eleven years, and during that time when Telecom now Spark was split up in separate companies to end the monopoly had over the market. How does that change compare with what's happening with supermarkets now?
It was equally long and drawn out. There was equally enormous resistance from the telecom people. Interestingly, some of the same people are involved in the supermarket industry now. There was just as much of an effect on society because we had only effectively one fixed line and broadband tellic communications company to go to, so the stakes were extremely
high and it was very, very bitterly fought. The outcome of that telecommunications remedy was that we moved from the least competitive telecommunications market in the world to one of the most competitive, and we really have the value from that today and we need to aspire to get that same outcome in our grocery industry.
There was a lot of disappointment last year when Soupy, the online supermarket retailer collapsed only after a few years of operation. What do you think is preventing new players coming into the market to break up that duopoly. You've mentioned the land needed, but also online it seems as well.
Yeah, the Communist Commission has done some good work looking at that. Yes, there is a space for online competition, but the Commission has made it very clear that there is a concept called the main shop. You know, what we do was sort of on payday or the Saturday after we go out and we get our fortnight or our week or months supply of groceries, and a high percentage of our grocery spend is done in that one main shop. Now, the super type operations are not really
suited to that. They're good for top up shops. You know. Not everyone has access or wants to have access to online shopping. There is still a very very large chunk of the market for people who want to go out to a supermarket once a week, once a fortnite and stock up. And that's the part of the market that is blocked by lack of sites and by the sheer difficulty of trying to come in and compete against a very well entrenched Cooperly.
Should the government get more involved here.
I think, yes, I think this is going to require a political solution, you know, breaking up a failed market. There is precedent for it, but governments are reluctant to get in. But I think the circumstances here are so exceptional that the government will have to And interestingly, it was under a national government predominantly that the biggest steps in the telecom breakup. Stephen Joyce was the minister at
the time. But I think the government needs to find a really good creative solution to get on there and break this up and give us three or four or more players. You know, back in the day when I worked in the industry in the nineteen eighties, there were half a dozen competing supermarkets, and there's no reason why it can't recur. That it's a very big industry and pretty of money there for a lot more people.
Thanks for joining us, Ernie. That said, for this episode of The Front Page. You can read more about today's stories and extensive news coverage at nzat herold dot co dot z. The Front Page is produced by Ethan Seals with sound engineer Patty Fox. I'm Chelsea Daniels. Subscribe to the Front Page on iHeartRadio or wherever you get your podcasts, and tune in tomorrow for another look behind the headlines.