Democracy Briefing: The supermarket break-up is back

Nicola Willis has confirmed she is seriously examining structural separation in the supermarket sector, including forcing Foodstuffs to split Pak’nSave and New World into separate businesses.

As reported by Tom Pullar-Strecker in The Post today, the Economic Growth Minister says there could be merit in such a “banner split”, and that officials are working through what it would cost, how it could be implemented and whether it would produce lower prices.

Willis told Pullar-Strecker there was “clear evidence” that the groceries market was not as competitive as those in comparable countries. “The option of a structural separation in which we take interventions to encourage them to compete more strongly with each other ... is one that I have been looking at in detail,” she said.

It is essentially a version of the policy Winston Peters announced in April. Labour has now made clear that it opposes forced banner sales.

Nothing has been decided. No proposal has gone to Cabinet. The cost-benefit work may eventually be used to explain why a split would be too expensive or risky. We have seen plenty of stern warnings to the supermarkets turn into very little.

But this is an important change. Structural separation is no longer just an idea promoted by New Zealand First, the Opportunity Party, consumer advocates and anti-monopoly campaigners. A senior National Party minister is taking it seriously.

The split is back on the table

Officials are considering how a forced restructuring of Foodstuffs would work, what it would cost and whether it would genuinely produce lower prices and more choice. Willis says the cost-benefit analysis is also undergoing external review, and that the results of the work will be released before the end of the parliamentary term.

National will then decide what policy it takes into the election.

Willis is right to be cautious. Forcing a major restructuring of privately owned grocery co-operatives would be an extraordinary intervention, and the consequences could not easily be reversed.

“We would want to have confidence that the end result would be a more competitive industry that would deliver better prices and better options for the New Zealand shopper,” Willis says, “and so it’s not something you go into lightly.”

Yet it is also the option politicians have spent years avoiding because it is difficult.

In March last year, Willis put the supermarkets “on notice” and declared that “all options are on the table”, including structural separation. By August, the emphasis had shifted to making New Zealand more attractive to an overseas entrant: faster consents, easier overseas investment processes and a worldwide hunt for another supermarket company.

Willis acknowledged the limit of that approach at the time: “I can’t force a third entrant in. All I can do is open my arms as wide as possible.”

Despite the invitation, nobody has committed to entering.

Why the red carpet failed

Just over a week ago, David Seymour was in the Beehive announcing that “we are rolling out the red carpet”. The Government was doing everything it could, he said, “short of putting a big sign at Cape Reinga”.

Seymour said the Government had “led a horse to water, but not made them drink just yet”. Aldi and Lidl had declined to participate in the Government’s search for a new entrant, while Willis’s meeting with Tesco had led nowhere. No supermarket company had applied to use the special fast-track process.

Seymour remained hopeful: “Just because something hasn’t succeeded to date doesn’t mean it’s not a good strategy.”

Tom Raynel reported in the Herald last week that officials had drawn up a list of 21 target grocery companies and contacts across ten countries. At least five held meetings or discussions with officials, three declined to engage, and six were contacted with little or no response.

Officials approached Carrefour, Coles and other overseas businesses without getting anywhere. No international supermarket chain has confirmed an intention to enter the New Zealand grocery market.

Willis has now acknowledged the weakness in the strategy. Removing planning and investment barriers may not be enough when a new business would still have to confront two deeply entrenched incumbents.

“What I’d acknowledge is that for anyone thinking about entering the New Zealand supermarket sector right now, what they see is a very powerful duopoly with two major players in the form of Foodstuffs and Woolworths that have significant market power,” she told Pullar-Strecker.

“So it’s a big ask to say ‘let’s come in and compete effectively and not get squashed by those big guys’, and that’s the nub of the issue that I’m exploring.”

Sue Chetwin, Tex Edwards and Consumer NZ have been making versions of this argument for years, often from the margins of the official policy debate. It has taken until election year for a senior minister to put the point so plainly.

Planning barriers are real

Seymour is not wrong that planning rules have protected the incumbents and made entry much harder. Eric Crampton of the New Zealand Initiative (which has supermarkets as members) published new research in The Post this week examining planning rules in Auckland, Hamilton, Wellington, Christchurch and Dunedin.

His provisional mapping project identified 13 areas that explicitly cap the number of supermarkets. Other areas restrict their total floor space, while applicants can be required to prove that a new store will not damage the “vitality and viability” of an existing commercial centre.

Crampton’s response is characteristically blunt: “If this kind of geographic market segmentation were done by a quiet handshake among the larger retailers, they’d be in court on charges of anticompetitive conduct. But planners can do it with impunity.”

The Government is right to remove such barriers. Councils should not protect existing supermarkets from competition, whether deliberately or through planning rules that assume another store is unnecessary because one already exists.

The new supermarket fast-track processes and changes to overseas investment rules are sensible. But Aldi does not look at New Zealand and see only a complicated district plan or an Overseas Investment Office form.

It sees a small and remote country in which Foodstuffs and Woolworths hold most grocery sales. The two groups have stores in many of the best locations, established distribution systems, strong supplier relationships, popular home brands and large customer databases.

Chetwin made the same point in the Herald last week. The Government’s invitation to international supermarkets sounded sensible, she said, but “if that were the answer, it would have worked by now”.

She argues that easier planning and overseas investment rules leave the central problem untouched: “the power of Woolworths and Foodstuffs, and a market structured around protecting them”.

Foodstuffs presents a very different account. Foodstuffs North Island chief executive Chris Quin told an industry conference last month that the grocery market had “become more competitive”, with competition arriving “from every direction”. He pointed to Costco, ethnic supermarkets, pharmacies, hardware stores and meal-delivery companies.

Quin puts the combined Foodstuffs-Woolworths share at about 77%. The Commerce Commission’s latest annual report puts it at 82%, essentially unchanged over five years.

The difference between those figures needs explaining, but neither describes a healthy market. If competition is coming from every direction, the main supermarket groups are coping with it remarkably well.

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