The Commerce Commission has stopped short of a radical shake up of the supermarket sector to improve competition for consumers.
Its final report into the $22 billion sector said competition in the industry was not working well for New Zealanders.
"We have found that the intensity of competition between the major grocery retailers who dominate the market, Woolworths NZ and Foodstuffs, is muted and competitors wanting to enter or expand face significant challenges," Commerce Commission chair Anna Rawlings said.
She said while there was a growing fringe of other competitors in the sector, they were unable to compete effectively with the big two on price, product range or store location.
To tackle this, it recommended that more land be made available for new grocery stores, by making changes to planning laws and banning the use of restrictive land covenants.
It also called for the improvements to be made to the wholesale supply of a range of groceries at competitive prices, by requiring the major retailers to consider any requests they receive to supply competitors.
However, the competition regulator stopped short of saying the big two should be forced to sell a certain number of their stores to enable a third major chain to be developed.
The food and grocery sector is dominated by Foodstuffs with its New World, PaknSave, and Four Square chains, and the rival Countdown, Fresh Choice and Super Value chains owned by Australia's Woolworths.
Between them they have about 80 percent of the market.
They also dominate wholesaling and distribution and have amassed large land banks in part to stymie rivals setting up shop.
Rawlings said the biggest challenge facing competitors was a lack of suitable sites for store development and difficulties in obtaining competitively priced wholesale supply of a wide range of groceries.
Other recommendations included monitoring the conduct of the big two and their use of best price clauses, the introduction of a mandatory code of conduct, consider whether to allow collective bargaining by some suppliers, and requiring major grocery retailers to display prices in a consistent format.
The commission's report highlighted that New Zealand's retail grocery prices appeared comparatively high by international standards and the profitability of major retailers also appeared high.
The government will decide on what reforms should be made.
National Party deputy leader Nicola Willis said the recommendations looked broadly sensible, but would not address cost-of-living concerns.
"We think that there have been competition issues between the supermarket chains, that domination by the two main competitors has ... contributed to high grocery costs in New Zealand. However we also think there are broader issues with underlying inflation that are helping contribute to high grocery costs," she said.
"With 6 percent inflation, that is the major driver of increased grocery costs and the government continues to not only deny the existence of that crisis but is failing to put forward any real solutions for Kiwis struggling to get ahead.
"We've put forward our proposal with tax threshold adjustments, the challenge is now with the government to respond."
Commerce Commission recommendations:
- Making more land available for new grocery stores, by changing planning laws to free up sites, banning the use of restrictive land covenants and exclusivity clauses in leases that prevent retail grocery stores from being developed, and monitoring land banking by the major grocery retailers
- Improving access to the wholesale supply of a wide range of groceries at competitive prices, by regulating to require the major grocery retailers to fairly consider any requests they receive to supply competitors, and requiring the criteria for obtaining supply and terms and conditions of supply to be transparent
- Monitoring strategic conduct by the major grocery retailers, such as the use of 'best price' clauses and exclusive supply agreements
Recommendations on suppliers to major retailers:
- Introducing a mandatory code of conduct for grocery supply relationships to improve transparency and ban unfair conduct
- Strengthening the existing law prohibiting the use of unfair terms in standard form contracts
- Considering whether to allow collective bargaining by some suppliers
Consumer information and stimulating competition:
- Requiring major grocery retailers to ensure promotional and pricing practices, and the terms and conditions of loyalty programmes, are easy for consumers to understand
- Requiring grocery retailers to display unit pricing in a consistent format
Govt not ruling out further measures
Minister of Commerce and Consumer Affairs David Clark told Midday Report the finding was "very clear that competition and the retail grocery sector isn't working" for consumers who could get better prices and quality.
"We accept that finding. We're going to work our way carefully through the recommendations which the Commerce Commission says will make a material difference to this sector."
He said he had written to the grocery sector asking for support to implement the recommendations.
Clark did not rule out forcing supermarket chains to sell stores if the Commerce Commission's recommended changes failed to reduce prices for consumers.
"<=Making it easier for grocery retailers to enter the sector by looking at how we can make availability of new sites easier, that could be either through the RMA or through prohibiting the use of restrictive covenants, developing a mandatory code of conduct."
He also talked about a new regulator and dispute resolution scheme to oversee all the changes.
"If the recommendations they propose don't achieve the level of competition we need, I am not ruling out further measures."
New Zealand Food and Grocery Council chief executive Katherine Rich welcomed the report and told Midday Report the recommendations of a mandatory code of conduct plus a grocery sector regulator would "just ensure that there's greater transparency of business relationships and just add a few more ground rules, because certainly over the last 20 years, we've just seen a shift of risk and cost onto suppliers and profits to the retailers".
Having a grocery sector regulator would mean the recommendations stayed "live" and "be an ongoing discussion, not just for the next three years, but beyond that", she said.
For suppliers, changes needed to be made immediately to be able to the effects, Rich said .
"Ideally we still want four to five different operators in the market. It's still going to be a duopoly, but the sunlight that's been shone on the grocery industry will change behaviour.
"Until you get genuine competition where the retailers aren't just matching each other but competitively going out and competing on price you're not going to see much movement, that's why a new entrant is important."