Supermarkets' super profits - where’s the fair pricing for Kiwis?

At Consumer NZ, we waited with great interest for the Grocery Commissioner's first annual report, which came out in September 2024. This was the first report on supermarket earnings and conduct since the grocery market report of 2022.

In the 2022 market report, the Commission dropped the bombshell about Foodstuffs and Woolworths’ profits being consistently higher than they should be, to the tune of $1 million a day. Our nationally representative sentiment tracker research found that trust in the supermarket sector took a sharp dive after that information release – people might have suspected prices were high and something fishy was going on, and here was the proof.

Since that report, we've spoken to a lot of people about the state of the industry – suppliers, economists, employees at Foodstuffs and Woolworths, as well as the public about their experiences. The saying 'sunlight is the best disinfectant' came up a few times. Surely, after the duopoly was called out for its excessive profitability, the two culprits would take stock, clean up their act and start delivering fairer prices for New Zealanders. However, some, particularly those from the supplier side, felt cynical about ever seeing change because, as one anonymous source said, the supermarkets’ “power is too great”, and they will “do anything to protect their bottom line”.

The Grocery Commissioner’s inaugural report from September last year raised two significant points: competition is not improving and, audaciously, retail margins are increasing despite firmer regulatory pressure.

The supermarket bosses were quoted in the media, referencing the scale of new regulations and the progress they feel has already been made.

Woolworths then managing director Spencer Sonn said “There has been a significant number of major new regulations and initiatives in the grocery sector over the last year, like the Grocery Supply Code, unit pricing and the establishment of rules around wholesale. We’re surprised the Commission hasn’t given these a chance to bed in before looking at further change.”

Foodstuffs South Island chief executive Mary Devine talked of the strides made by the co-operative.

"The progress we've made, whether in keeping prices below food price inflation or expanding wholesale supply to other retailers, demonstrates our commitment to the sector’s shared objectives.”

Profits are still too high, but what can we do about it?

Facing such weak excuses from the heads of our major supermarkets, here we are, still paying too much for our groceries, with millions of taxpayer dollars funnelled into monitoring the sector and several recommendations for improving the state of play. So, how effective are the measures we currently have in place?

The Grocery Industry Competition Act 2023 focuses on reducing barriers to entry, improving access to wholesale groceries and enhancing supplier relations. Yet competition is still not improving, so the Commission is conducting an inquiry to see what needs to be addressed in this space. It’s also reviewing the Grocery Supply Code, which aims to even out the playing field between the supermarkets and suppliers.

The Commission is eager for a third player to enter the market because, as it says, “three national supermarket networks would be significantly more competitive than two”. To make this happen, the Commission plans to engage with new players and investors to better understand how to remove barriers to entry.

Yet none of these measures are the magic bullet, and Grocery Commissioner Pierre Van Heerden has been quick to temper the media’s expectations of a healthier grocery sector developing any time soon.

The Commission is only as good as its resources and the powers it has at its disposal, so a heftier intervention would have to come from the Government, if, or when, it accepted that the current interventions are not strong enough.

What supermarkets are saying

Last August, Woolworths released its New Zealand earnings before tax, stating a decline of 57% from the previous year. Media dutifully ran the headline, news outlet Stuff reported it was the lowest earning, before tax, the company had seen in 10 years.

Woolworths New Zealand then managing director Spencer Sonn painted a picture of dire challenges. He told Stuff “Lower sales, combined with our investments in lower prices for our customers and material wage costs to support our team all had an impact on earnings in F24. Encouragingly, we saw improved trading in Q4 …”

Yet mere weeks later, the Grocery Commissioner released his report, which painted a very different picture of the supermarkets’ profits. So, whose figures should we trust?

Max Rashbrooke is a journalist, researcher and author of the book Too Much Money: How wealth inequalities are unbalancing Aotearoa New Zealand. It’s clear who Rashbrooke thinks is more reliable.

“The Grocery Commissioner is more on the mark. The first thing I'd say is that Woolworths is only half of the duopoly, so you have to look at Foodstuffs' situation too. Also, reported corporate accounts and what they cover are very complicated. With Woolworths, does this reporting really represent what's going on in individual stores? Some of the reported decrease in profit is from company-wide things like depreciation. And where is the $400m spent on rebranding as ‘Woolworths’ factored in? The Grocery Commissioner's report shows big increases in margins up to last year, and equally big margins expected in the future. These are companies with huge, unjustified profits, so I would be skeptical of the line Woolworths is pushing.”

Rashbrooke offered two solutions to the situation of food retailers being highly profitable while a large number of households are feeling the effects of financial food stress.

“Broadly speaking, there are two avenues. You can increase competition in the market by introducing new players, or you can treat supermarkets more like a utility, where they are strictly regulated. It’s bizarre we only have two major supermarket chains. In Ireland and Denmark, which have comparative landmasses and populations, shoppers enjoy the choice of multiple chains. The situation we face here would not be tolerated in other countries.

“Introducing a third supermarket player should be the focus – and it needs to be a full competitor who can really compete to help force down prices or stop the duopoly from accelerating their prices. Whatever happens, we need much tougher regulation on our supermarkets.”

A glance across the ditch

A check-in with our closest neighbour makes action here seem weak. Australia boasts three major supermarket players, Coles, Woolworths and Aldi. Recently market dominators Coles and Woolworths have been subject to political, media and public scrutiny as Australians face rocketing supermarket pricing, and things are only heating up.

Last year, the national broadcaster ABC released an in-depth investigation into accusations of price-gouging at the two major supermarkets. Australian consumer watchdog Choice awarded both Coles and Woolworths with a ‘Shonky’ (a worst-of-the-worst business award) for announcing billion-dollar annual profits and cashing in during a cost-of-living crisis.

This is despite Australia not yet undertaking any type of formal grocery market study, like we’ve had in New Zealand. In January 2024, the federal government instructed the nation’s regulator, the Australian Competition and Consumer Commission (ACCC) to conduct an inquiry into the sector, looking into “the pricing practices of the supermarkets and the relationship between wholesale, including farmgate, and retail prices”.

Less than a year later, the ACCC filed separate legal proceedings against Woolworths and Coles for “misleading consumers through discount pricing claims on hundreds of common supermarket products”.

In short, the ACCC accused the supermarkets of increasing prices on products before dropping them and then promoting them as “Prices Dropped” at Woolworths and “Down Down” at Coles. The regulator found this was happening on a large scale, identifying 266 different affected products.

The ACCC estimated the two supermarkets “sold tens of millions of the affected products and derived significant revenue from those sales”. Australian Prime Minister Anthony Albanese summed it up well when he said “If this is found to be true, it's completely unacceptable. This is not the Australian spirit. Customers don't deserve to be treated as fools by the supermarkets.” If the ACCC successfully prosecutes the supermarkets, the cost could be in the order of millions of dollars, which would certainly sting the big two.

Whether it’s here or in Australia, it’s clear the major supermarkets are taking a reputational beating, but this alone is unlikely to be enough to make them clean up their act.

Food vulnerability

Talking to Mark Smith, a senior economist at ASB Bank, the picture of financial food vulnerability in Aotearoa is not particularly pretty: many New Zealanders are doing it tough.

“If you look at income growth for households, that has slowed considerably of late. We’ve also seen unemployment in New Zealand rise, and it looks to be increasing over the next 12 months. Many households are having to dip into savings to stay afloat, but the reality is that many households do not have a financial safety net to lean into.

“We are quite different to many other OECD countries in that we don’t save a lot. So many people are living on the breadline. This can be attributed to New Zealand having lower incomes compared with other developed countries. The other challenge we face is the proportion of income we allocate to the essentials. We typically spend around 20% of our income on food, which is quite high. For a lower socioeconomic household, that would be even higher, with the majority of a pay packet allocated to essentials like food, rent and fuel.”

Consumer’s sentiment tracker found about half of New Zealanders are anxious about how much they have saved or have no savings at all.

“The other complicating factor is the consumer price of food. In New Zealand, the retail price of some food items tends to be higher compared with other OECD countries. New Zealand’s small domestic market, comparative isolation and the potential lack of competition in food retailing are potential catalysts, with the Commerce Commission having conducted market studies into the grocery sector,” said Smith.

‘Now We Are Twelve’ is a 2023 report released by the Growing Up in New Zealand longitudinal study of child development. It found 17% of 12-year-olds in Aotearoa experienced moderate to extreme food insecurity, with Pacific children, rangatahi Māori and children living in high-deprivation areas most likely to be affected.

At Consumer, our concern is with the real-time impact of supermarkets’ excessive profitability. While we recognise that changes are afoot, knowing the shoppers won’t see any meaningful change at the checkout any time soon begs the question when should firmer government action be called for? Financial stress around food is second only to stress around housing, with the majority of New Zealanders citing it as a significant source of concern. Three years ago, financial food stress was ranked as a low priority, coming sixth in a list of 10 concerns. There are many ways to frame it, but the outcome remains the same: financial food stress has ramped up across the motu. All the while, the supermarkets continue to profit at a rate that is just too high.