Grocery Commissioner, Pierre van Heerden, says the Report paints a "concerning picture" of New Zealand's $25 billion grocery sector – with increasing retail margins, continued high levels of profitability, and ongoing dominance of the industry by the major supermarkets (Foodstuffs North Island, Foodstuffs South Island, and Woolworths NZ). 

The Annual Grocery Report provides clear evidence for stronger action. Mr van Heerden says "we want to see more competition and sustained pressure on the major supermarkets to deliver better outcomes for consumers."  

"We've brought forward this first Annual Report which provides us with further evidence of the need to continue to ramp-up action and unlock more of our regulatory powers." 

In a competitive market, Mr van Heerden says retail margin growth should be limited, or reduce, with price competition. 

"The information provided to the Commission didn't indicate that these margins were being constrained. This is a red flag for the state of competition in the grocery industry in New Zealand." 

In contrast to the supermarkets' claims, the Commission's analysis shows that the retail prices of the major grocery brands have been increasing faster than the prices the major supermarkets pay to their suppliers.  

"Our regulatory regime is the first of its type in the world, so we always knew it would be complicated to introduce changes in a well-established industry that is the product of more than 100 years of evolution. What this first Annual Report does is get to the core of this very complex and crucial sector, which touches the lives and livelihoods of every Kiwi."

Fixing the supplier-retailer power imbalance

Mr van Heerden says the Commission has brought forward a review of the Supply Code that came into effect in September last year to more effectively address "an ongoing power imbalance and lack of trust between suppliers and grocery retailers that could undermine all of the other initiatives intended to deliver a well-functioning and competitive grocery market".  

If the Code is operating effectively, it will bring increased certainty to agreements between supermarkets and suppliers that will give suppliers more confidence to innovate and invest in more choice for consumers, he says.  

The penalties for breaching the code could be significant – the maximum possible fine being the highest of $3 million, the value of the commercial gain, or three percent of turnover.

Ensuring equal access to wholesale products to support more retailers to compete

Mr van Heerden says the Commission will also be "moving with urgency" to improve the levels of uptake in the wholesale market. 

"Our report shows the wholesale offers that have been made by the major supermarkets to date are having a limited impact on the sector and the range and price of goods are not consistent with what we would expect to see in a competitive wholesale market." 

The wholesale supply regime - introduced under the Grocery Industry Competition Act (GICA) to address a key barrier to entry and expansion in the retail grocery market in New Zealand - is not working as intended and is unlikely to improve competition or benefit New Zealand consumers in its current form. 

We intend to introduce a set of enforceable rules for the wholesale regime (wholesale industry participation code), aimed at addressing the issues raised in the Annual Grocery Report. The maximum penalty for breaching these rules could be significant – up to $10 million, three times the commercial gain, or 10 percent of turnover, whichever is greater. 

"We're also considering if we need additional stronger tools to address issues in the wholesale market, like the ability to ensure that retailers treat wholesale customers the same way they treat their own stores with pricing and terms." 

The Commission can recommend to the Minister that these tools are unlocked after the completion of a wholesale inquiry under GICA. The terms of reference have been released today. 

Mr van Heerden says the issues with the wholesale regime may not be confined to the major supermarkets, as suppliers opting out of the wholesale regime, major supermarkets withholding their own private label products, and the common practice of suppliers and the major supermarkets agreeing significant payments or discounts on products in association with promotions ("trade spend") are all parts of the problem that may need to be addressed.

Supporting Fair Trading Act penalties with more 'sting' for retailers to deter pricing inaccuracies

The Commission also supports the Minister of Commerce and Consumer Affairs' review of the Fair Trading Act and the Commerce Act. Mr van Heerden says accurate and clear pricing is a consumer right and expectation of a competitive market, but the Report shows continuing issues with pricing and promotions across the major supermarkets. 

Legislative change to the Fair Trading Act could lead to significantly higher penalties with 'more sting' and a deterrent effect for breaches by retailers. The Grocery Commissioner has been challenging the major supermarkets to improve their pricing practices and publicise their refund policies which the Commerce Commission believes are either inadequate or unknown to Kiwi consumers.  

"We're not waiting for legislative changes to take action – we are putting in place disclosure requirements to make the major supermarkets report to the Commission on the rate and resolution of customer complaints."

Enabling easier entry into the grocery market

The Commission believes three major national supermarket networks would be significantly more competitive than two, and that this is achievable in New Zealand. The Grocery Annual Report points to regulatory hurdles and actions by existing major supermarkets to reduce site availability and limit the opportunities for new entrants. 

Mr van Heerden says important progress has been made to remove restrictive covenants, such as the Commission's case against Foodstuffs North Island for lodging anti-competitive land covenants with the purpose of blocking competitors, which resulted in a $3.25 million fine. These restrictive land covenants are now legally unenforceable. However, the Commission remains concerned about the scale of land held by the major grocery retailers with more than 100 properties currently used for purposes other than retail stores. 

"We are now turning our attention to 'land-banking', which could be a factor reducing the number of sites available to retailers looking to enter or expand in the market." 

The Commission will further investigate the potential impact of underutilised sites on competition in the grocery industry and will report on this at the end of this year. 

Mr van Heerden says planning regulations can also slow the development of new stores if there are additional costs or delays in the consenting process.

"To develop a supermarket in New Zealand, a retailer must comply with planning regulations, such as zoning requirements within the local council's District Plan, and in some cases the resource consent process. The Overseas Investment Act 2005 can also create additional costs, delays and uncertainty in relation to site acquisition by overseas entities looking to enter or expand in the New Zealand grocery industry," he says.  

"We'll be engaging with potential new entrants and investors to better understand their view on how we can remove remaining barriers to enable a third player to enter the market."