Why are Countdown’s private label brands cheaper in Australia?
Ian Jarratt estimates it can cost him 30 percent more to shop at Countdown than to buy the same store-brand goods in Australia. Ian is a long-time Queensland consumer advocate and sometime visitor to our shores. Like many trans-Tasman tourists, he’s got a beef with our supermarket prices.
After a recent trip here, Ian compared the prices on his Countdown receipts with the cost of the same goods at Woolworths in his hometown. Woolworths is Countdown’s Aussie owner. “As I suspected when I was shopping in New Zealand, the price of most items was higher than in Oz. Only two items were cheaper and some were much more expensive,” he said.
Most items in Ian’s basket were Homebrand and Woolworths Select products. Both are the supermarket’s private label brands, sold here and in Australia. But even with identical products, the prices we pay can be significantly higher.
Our comparison of 20 Homebrand and Woolworths Select products found Kiwi consumers paid 30 percent more for the same bag of groceries. Half the items on our list cost at least a third more in local stores. For some products, the price difference was a lot more.
A pack of 20 Homebrand paracetamol tablets at Countdown costs $2.19. Across the Tasman, Woolworths customers pay just 72 cents for the same product. It’s a difference of 204 percent.
Homebrand Rolled Oats costs 96 percent more here than in Australia. The price of a Woolworths Select cereal was 57 percent higher and a packet of Homebrand pasta was 48 percent more, well above the 15 percent difference that could be explained by GST.
Only one product, Homebrand brown sugar, was cheaper this side of the ditch.
Countdown’s response to the differences we observed?
“Prices fluctuate a lot in the New Zealand market, sometimes daily, in response to competition,” it said. The store added many factors had to be considered when comparing prices between countries including exchange rates and transport costs.
With the exchange rate high and transport benefitting from lower fuel prices, these elements seem unlikely to explain the large differences in price we found.
Among the other factors that may be influencing the price we pay is the concentrated nature of our supermarket trade, dominated by Countdown and Foodstuffs, which operates the New World and Pak’nSave chains.
While Countdown’s prices can differ significantly from its Australian parent, the products in our basket were often a close match with Foodstuffs’ private label brands.
Homebrand Rolled Oats ($2) almost matched in price Pams Rolled Oats ($1.99) at Pak’nSave.
There was a similar pattern for other products.
At 11 cents a tablet, Countdown’s Homebrand paracetamol tablets were much closer in price to Pams tablets (13 cents each) than to the same product in Australia.
Depending on your view, this type of price convergence is the market working as it should. Or it shows a lack of genuine competition.
In extremely competitive markets, says competition lawyer Alan Lear, you’d expect to see similar prices for the same products as rivalry has competed away excess profits and firms’ costs are as low as possible, with only the most efficient remaining in the game.
But in concentrated markets, something else might also be going on: there’s a risk companies will simply price to match.
It’s a scenario the Commerce Commission contemplated in 2001 when it declined clearance for the merger of Woolworths and supermarkets then in the Progressive Enterprises stable (Foodtown, Countdown and 3 Guys). The commission considered the merger could result in a substantial lessening of competition and facilitate “leader-follower” pricing behaviour – a situation where stores focus on maintaining price relativity rather than pricing on the basis of costs.
The commission observed supermarkets already closely monitored each other’s prices using “systematic, thorough and quite sophisticated procedures”. Reducing the number of competitors would only exacerbate the potential for “tacit collusion” between the dominant players, it said.
The merger ultimately went ahead after the Privy Council held it had to be decided under provisions in the Commerce Act that existed at the time the application was lodged. The merger application was submitted in the same week amendments that effectively broadened the commission’s power to decline requests took effect.
Market rules
International comparisons routinely find prices for many consumer products are higher here than in other OECD countries.
In a 2014 report for the Productivity Commission, Professor Norman Gemmell, chair in public finance at Victoria University, found New Zealand had the ninth highest prices for tradable commodities out of 44 OECD countries.
The tyranny of distance – the cost of getting goods to our isolated economy – is usually fingered as a key factor influencing local prices. But in the grocery trade, the extent to which market concentration also plays a part in determining price remains up for debate.
Under the provisions of the Commerce Act in place today, it’s unlikely the merger that ultimately led to the Countdown-Foodstuffs duopoly would have been permitted.
But as Mr Lear observes, once a duopoly structure is in place it’s very hard to unwind. Competition law doesn’t regulate duopoly pricing per se, other than in cases of explicit collusion.
“Adding competition back in is by far the best for consumers over the long term,” he says.
Professor Gemmell believes the grocery market may be a case where price monitoring is required. In principle, two very large supermarkets could compete fiercely, he says. But in practice, it can be “very hard to tell” if that’s happening. Active market monitoring by regulators would shed light on the matter, he says.
Third parties
Across the Tasman, indications that supermarket prices have room to move have emerged with the arrival of German-owned discounter Aldi. The store is credited with forcing Woolworths and Coles – the two dominant players – to drop prices for their private label brands.
The Australian Competition and Consumer Commission’s 2008 inquiry into the grocery market described Aldi as a “vigorous” price competitor, concluding the store had put pressure on Coles and Woolworths to offer many of their private label products “at prices not seen before Aldi’s arrival”.
Launched in Australia in 2001, Aldi now holds an estimated 8 to 10 percent of the market – its sales were reportedly worth $5 billion last year. Coles and Woolworths still have the lion’s share of the grocery trade but commentators believe Aldi’s rise means the “two-horse race” is over.
Back here, there’s no sign of a third party upsetting the position of Countdown or Foodstuffs. These pictures show the market share of the two largest supermarkets in New Zealand and other countries:
Data are based on The Australian Government Competition Policy Review. The report was prepared for Australian Federal Minister of Small Business Bruce Billson and published in March 2015.
Aldi registered a company here in 2001 but it exists in name only and has been filing non-activity returns with the Companies Office. The store says it has no immediate plans to enter the New Zealand market.
That leaves Countdown and Foodstuffs sitting pretty. Countdown’s sales last year reached $5.7 billion, an increase of 1.6 percent on 2013. The store’s gross margin also increased during the year. Foodstuffs revenue sat at $8 billion.
We say
Our supermarket trade is one of the most concentrated in the world, with two big chains dominating the market. Concentration in any market brings with it a risk consumers will pay more than a competitive price.
Given the high degree of concentration, the supermarket sector warrants greater scrutiny. Price monitoring would be a way to shed light on the market and gauge whether consumers are paying fair prices.
About our survey
Price data for Woolworths' Homebrand and Select products were collected in March 2015 from Countdown and Woolworths online. We converted Woolworths Australia prices into New Zealand dollars. The majority of Australian products in our basket of goods were GST-free. Australian tax rules mean basic food items, including bread, cereals, fruit and vegetables, are exempt from GST. The tax is applied to all products here.
No longer no-frills
Private labels used to be the no-frills option – low-priced plain-packaged versions of basic foods. But that's changed as supermarkets look to improve their margins. Private labels have shrugged off their budget look and can now be found beside mainstream brands.
Countdown's private labels extend from its basic Homebrand to its Macro Wholefoods range. Most Foodstuffs private-label offerings are marketed as Pams, with the rest under the Budget label.
Support for a code
In Australia and the UK, where the grocery trade has also been marked by a high degree of concentration, governments have introduced codes of conduct for the sector.
A Food and Grocery Code of Conduct was introduced by the Australian government in March. The code is aimed at ensuring fair dealings between supermarkets and their suppliers. It remains voluntary but the government has signalled it will become mandatory if the big chains don’t sign up.
Similar steps here appear unlikely. Support for a mandatory code of conduct has been mounting but the government has ruled out following Australia’s example. The only sign of change on the horizon is a promised review of competition law.
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