Open letter to Minister David Clark about the supermarket sector

Dear Minister

Grocery sector – recommendations for access to wholesale supply

Consumer NZ supports many of the Commerce Commission’s recommendations in the final report on the grocery sector. However, we are disappointed the recommendations don’t go further on a number of issues, particularly access to wholesale supply. It is critical the Government addresses this issue as a matter of national importance.

We agree with the commission’s analysis that improved access to wholesale grocery products is likely to materially improve competition and create better outcomes for consumers. However, we do not consider the recommendations in the final report are sufficient to bring about these outcomes.

Relying on supermarkets to supply other retailers on a voluntary basis will not achieve the level of certainty new players would need before committing to entry. Opening up their wholesale businesses to competitors is clearly not in the supermarkets’ interests. The duopoly has had ample time to alter its behaviour in the 20 years leading up to the commission’s study, but has actually moved in the opposite direction over time.

The commission itself acknowledges that relying on the goodwill of the supermarkets could fail, stating: “It is possible that attractive commercial wholesale supply arrangements nevertheless do not develop.”

To address this, it suggests reviewing the market in three years. However, New Zealand consumers are facing this problem now and need brave solutions that will increase competition in the short to medium term.

Therefore we are writing to request you instruct MBIE officials to investigate other options for ensuring access to wholesale supply on reasonable terms, including:

(a) regulating access to wholesale supply, or

(b) setting up a state-owned wholesaler.

Regulating access to wholesale grocery supply

Regulating access to wholesale supply was ruled out by the commission on the basis that:

• the two main players indicated a willingness to enter voluntary commercial arrangements to provide wholesale supply to other parties;

• regulated access was not widely supported, including by the major retailers.

We strongly urge you to give this option further consideration. The commission’s reliance on voluntary action by the duopoly is unlikely to provide adequate levels of confidence to incentivise other players to enter the market.

By regulating access to wholesale supply, a third or fourth player would have the ability and confidence to enter, or expand, in the market, thereby increasing competition and reducing prices for consumers.

Fringe retailers such as convenience stores, dairies and petrol stations would also benefit from access to wholesale groceries on reasonable terms.

We accept that regulating access to wholesale supply presents challenges and would be complex. Nonetheless, given the detrimental outcomes the existing market structure is creating, we consider it is a challenge the Government should take on, for the benefit of all New Zealanders.

State-owned wholesaler

The commission dismissed the idea of a ‘Kiwishop’ or state-sponsored entrant in the retail market. However, we believe there is considerable merit in state involvement in an essential sector that is currently failing consumers and suppliers.

The state has a role to play in ensuring security of food supply, positive health outcomes for consumers and increasing the resilience of domestic food producers. The Covid-19 pandemic has highlighted our vulnerability to, and reliance on, global markets as well as the supermarket duopoly.

We agree with the commission’s assessment that, at the retail level, a state-funded entrant may not be viable. However, a state-owned wholesaler is worth further consideration.

At a conceptual level, a state-owned wholesaler could:

• Provide the scale, security of supply and certainty for existing smaller players to expand, or to support new market entrants.

• Provide a fair market for suppliers to sell into, on reasonable terms and with competitive yet sustainable pricing. This would allow suppliers to invest in innovation to increase their supply chain sustainability and improve New Zealand’s resilience to global supply chain volatility.

• Enable the provision of a wider selection of groceries to the public and compete with the increasing dominance of the duopoly’s home brands.

• If appropriate, eventually be sold to a new entrant or expanded smaller player, with the profits returned to the Government.

According to the Ministry of Social Development, it provides significant funding for food and other essential wellbeing items, with almost $25 million having been allocated since August 2021. This is in addition to the $32 million issued under the Budget in 2020.

We understand that, for the most part, food acquired by community providers to help those in need is purchased from the major supermarkets at retail prices. By establishing a wholesaler, the Government could source groceries for MSD clients directly from suppliers and reduce the overall cost of feeding our most vulnerable citizens.

The Government would also be able to use the resources of the state to ensure supply and distribution chains meet high levels of environmental sustainability.

Please let us know if you require any further information or would like to meet to discuss these issues further.

Yours sincerely,

Jon Duffy
Chief Executive