24 Aug 2022

Minister gives supermarket duopoly ultimatum over wholesale deals

1:41 pm on 24 August 2022

The government has given the supermarket duopoly a year to reach "substantial" agreement with wholesale customers, or be forced to sell at prices set through a regulator.

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Prime Minister Jacinda Ardern says the government's work to increase competition in the sector is a key part of its responses to the rising cost of living.

"Limiting the supermarket options on offer for consumers severely restricts their ability to shop around for a better range or products and of course, a better price."

She says the Grocery Commissioner will be able to take action and issue substantial fines where necessary.

"Alongside the retail stores, supermarkets have wholesale arms. We have called on the duopoly to open these up to would-be competitors at a fair price. We've said if this does not happen a regulatory backstop will be triggered."

Minister of Consumer Affairs David Clark confirmed that if wholesale customers are unable to secure agreements promised under a voluntary regime within a year, the Grocery Commissioner will be brought in to make recommendations.

The minister could then require the two big operators - Countdown and Foodstuffs - to sell at set prices and terms based on those recommendations.

"We have decided to take stronger action than the Commerce Commission suggested. They said any wholesale regime should be voluntary. We're not confident that will deliver the results consumers deserve," Clark says.

"The existing duopoly will be required to negotiate wholesale offerings to their competitors on commercial terms. However, if those prices are not what we would expect in a competitive wholesale market the new Grocery Commissioner will be able to impose additional regulation to force fairer prices.

"Ultimately if these interventions don't deliver a fair deal new regulations can be utilised to require the major retailers to provide wholesale supply at certain terms, including price and range."

The duopoly would be required to meet three deadlines to avoid the mandatory regime:

  • Within three months of the regime being put in place, they must set formalised rules, criteria and procedures or standard terms and conditions
  • Within six months they must have the necessary systems ready to provide access to groceries for wholesale customers
  • Within a year, substantial agreements must be reached with wholesale customers who have sought access through good-faith negotiations

Clark says the wholesale requirements are a centrepiece for the government's response.

"Put simply if there is no proper access to wholesale goods, there is no incentive for competition to enter the market. We need to address wholesale access because you cannot run a supermarket on empty shelves.

"This is one of the absolutely critical building blocks in any response to make sure that we have a structurally competitive market into the future."

'A more competitive grocery industry'

He says the grocery sector needs to change so competitors - like independent dairies, smaller chains or new entrants - can offer a wider range of products at competitive prices.

"This work will improve competition and competition will improve prices. Imagine, if you will, being able to do an affordable shop at a local dairy or corner store."

He says, to the duopoly's credit, there has been some progress towards a voluntary regime but the mandatory one - a "regulatory backstop" - will serve to give the Grocery Commissioner additional powers that can be used "if these wholesale arrangements do not meet the threshold of expectation".

Clark says the government will also have new powers to step in and demand retailers provide wholesale supply at certain times, including price and range.

He says supermarkets would be well advised to lock in good-faith wholesale arrangements on their own terms, "since otherwise government will have no problem stepping in to do it for them. We will see a more competitive grocery industry one way or another".

Suppliers to get 'fair amount of say'

Clark says he understands there are expression of interest processes to move ahead with the voluntary regime, but those are subject to commercial negotiations.

He says the Commerce Commission, which will host the Grocery Commissioner, will have powers to require supermarket operators to open their books so fair prices can be set.

The government has not yet completed the work it is doing on divestment, he says, and has nothing to announce about that today.

He says the commerce commission is provided with a toolbox of measures it can use, one of which includes supply on non-discriminatory terms.

"There's a range of options they could choose to deploy, and ultimately I think they'll think carefully about which one is going to encourage competition should we not see those commercial deals being reached ... I fully expect the commercial deals to be reached because the supermarkets will be wanting to do that and I think those who want to expand in the market are keen to get on with it too.

"Suppliers will be able to go direct to anybody, and suppliers have a fair amount of say in the regime."

Clark says the existing Commerce Commission is currently acting as the Grocery Commissioner, and as soon as the legislation is passed the government will look to appoint someone to the role permanently.

Ardern says even as inflation drops, there will still be systemic problems in the grocery sector if the problems there are not addressed.

She says there has been change since the Commerce Commission's initial report, but that change needs to continue.

"It needs to in particular allow new entrants and support new entrants into the market through access to products ... we believe by taking these next steps we will continue to see the grocery sector alter the way it operates and that will be good for all Kiwis," Ardern says.

The Commerce Commission made a number of recommendations after investigating the supermarket sector.

Its final report into the $22 billion sector in March said competition in the industry was not working well for New Zealanders, with supermarkets making about $1 million a day in excess profits.

Commerce Commission chair Anna Rawlings 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.

The government confirmed in May it had accepted all 12 of the commission's recommendations and planned to go further in respect to two of them.

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