Ernie Newman: Supermarkets – the Telecom parallel

Like cracking open an egg and finding it rotten, the Commerce Commission has exposed in one dramatic report the ugly reality of market power abuse in our supermarket sector. And as with the smell of a rotten egg, every head has turned.

Instantly, and correctly, comparisons were made with the Government running out of patience with Telecom in the mid-2000s after its years of abusing its market power had become a drag on the whole economy.

The results then were quick and massive – New Zealand now has more than 100 retail suppliers of telecommunications services with prices that are middle-of-the-road by global measures.

So can consumers, and grocery suppliers, expect a similar outcome from this action against supermarkets?

Emphatically yes. The core problem is the same – blatant abuse of extreme market power. The detail is different, but arguably less challenging in the distribution sector which is about trucks and real estate, unlike the technology sector grappling with massive and continual technological changes.

The immediate and near-unanimous support from politicians and media shows that everyone understands the issue. There is serious political capital to be made from implementing the commission’s recommendations.

And what an indictment the report is. Supermarket profitability is “consistently and materially” above comparable countries, it says. Competition between retailers is “weak” despite the huge efforts to create the illusion of a vibrant market. Major retailers actively limit competition between their retail banners. New entry has been non-existent since 2006 partly due to the chains placing restrictive covenants on more than 80 available retail sites around the country – how cynical is that!

Consumers are confused about pricing and loyalty schemes, the commission says. Consumer choice is diminishing due to range reduction aimed not at lowering consumer prices, but increasing profits.

Suppliers, even large companies, live in terror of having their products “delisted” if they dare to complain, or if they deal with other retailers.

In short, when the warm and fuzzy advertising and “boy have I got a deal for you” price specials are put to one side, the commission has exposed our supermarkets as a money-grabbing, price gouging duopoly that cynically abuses its market dominance at the cost of every New Zealand shopper.

Its suppliers are its targets, too. Pity Sarah Hedger, the entrepreneurial muesli manufacturer from Nelson, who had the courage and integrity to “out” the Foodstuffs group this week for alleged bullying behaviour and an apparent threat to delete her products as part of an obviously profit-driven range reduction. (Commerce and Consumer Affairs Minister David Clark said on Friday as the draft report was released that “We’ve certainly heard anecdotes about suppliers facing unreasonable pressures from the big chains and “Some of the stories I’ve heard sound really unacceptable.” Foodstuffs and Woolworths NZ said they would take time to assess the report before commenting.)

Where will innovation come from if successful new suppliers have no mechanism for selling once they get too big for the farmers’ markets?

Rotten eggs can’t easily be restored to mint condition. Fortunately, the commercial structure of grocery distribution can. The commission has outlined a range of options which it will refine after receiving submissions over the coming weeks. Government action will undoubtedly follow.

The very similar intervention of the Commerce Commission resulted in the total transformation of out telecommunications. Will we see the same outcome in the grocery sector? You bet. Watch this space.

Former Technology Users Association of NZ (Tuanz) head Ernie Newman is a Waikato-based consultant who has worked as a lobbyist in both the telecommunications and grocery industries. He advises a number of clients including the Food and Grocery Council, but the views in this article are entirely his own.

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