On Supermarket Rip-offs

If you make the land available, they will come. The cargo cult thinking behind the key recommendation of the Commerce Commission’s final report into the supermarket industry would have us believe that if land is made available, a white knight will come riding in over the horizon to create true competition, save us from predatory pricing and obviate the need for structural change in the industry. Dream on.

Keep the scale of the problem in mind. The two chains are running the most lucrative supermarket extortion racket pricing operation in the entire OECD. Foodstuffs and Woolworths are extracting $22 billion from New Zealanders in annual profits, well in excess of the rampant profit-taking by the Aussie banks. Last year in its draft report, the Commerce Commission lamented how harmful the current set-up was to consumers. It also outlined what was wrong with industry practice – ie, everything – and set out the range of possible actions that could be taken to address the problems. Here, a year ago, was Anna Rawlings (the chair of the Commission’s working group) forthrightly spelling out the problem :

“Our preliminary view is that the core problem is the structure of the market. In competitive terms, the major retailers, Woolworths NZ and Foodstuffs, are a duopoly, and while there is an increasingly diverse fringe of other grocery retailers, they have a limited impact on competition. This is because they are unable to compete with the major grocery retailers on price and product range in order to satisfy the widespread consumer demand for a main shop at a single store,” said Ms Rawlings.

During its study the Commission observed features of the grocery sector which indicate the market is not working as well as it could be. These include persistently high profits being earned by the major retailers and high grocery prices when compared internationally. The level of innovation in the sector also appears modest by international standards.”

That opening line bears repeating: “Our preliminary view is that the core problem is the structure of the market.” What happened? Because in its final report, the Commission has recommended no structural changes at all. It is not moving to break up the cosy duopoly. It is not requiring the duopoly to divest any of the various parts of the market that it currently controls. It is not taking any structural steps to break the “monopsony” purchasing power that the chains have over their suppliers. This power as the sole buying game in town is reportedly being deployed by the chains to force the suppliers to carry many of the costs and risks of doing business.

The Commission is not even strongly advocating that suppliers be enabled to bargain collectively with the chains, and thereby gain some respite from the stranglehold that the chains have over the entire operation, including (a) the ability to pick off and coerce stroppy suppliers into silent submission, and (b) the ability to advantageously promote their own product lines on the supermarket shelves, again at the expense of suppliers.

Beyond a few cosmetic changes, the Commission’s main recommendations include: the freeing up of land for theoretical rivals to build theoretical stories to create a theoretically better form of competition, a new and voluntary Code of Good Conduct, a promise to act in good faith, and lastly, a “regulator” to oversee how the supermarket chains do behave in future. Think for a moment what powers such an external watchdog would need to possess in order to be effective in this situation. To ensure compliance, such an office would need sufficient resources to be proactive, not merely re-active; it would need investigative powers and the ability to requisition documents; it would need to be able to impose a penalty regime for non-compliance; it would also need a legislative Commerce Act framework where it was not deemed necessary to prove that the chains intended to act uncompetitively, in order to win a conviction. (Honest, I didn’t intend to be mean and exert my market dominance unfairly. It just happened.)

Even if the proposed supermarket regulator’s office was set up and resourced adequately – and if the Ombudsman’s office is any precedent, it won’t be - this would still be a poor substitute for the structural changes the Commission had previously flagged as being essential. Instead of having a bureaucratic Mr Plod coming along afterwards to arbitrate on the rip-offs to which consumers are being daily and systematically subjected, wouldn’t it have been better to remove the structures that enable the chains to routinely commit these rip-offs in the first place ?

Ultimately, an external regulator is better than nothing, but is just tokenism. Inevitably, such under-resourced offices are prone to capture, and being external, they have inherent problems in accessing the relevant information from the very people they are supposed to be monitoring. (e.g. see the problematic oversight role of the SIS Inspector-General with respect to the security services.)

What happened?

We will never know what happened to the Commerce Commission during the period between the writings of the forthright draft report, and its bland final report. Lets just say the Commission did a far better job in identifying what’s wrong with the industry than it did in putting forward remedies. If the difference was the product of a lobbying effort by business, the lobbyists involved certainly earned their money this time. Consumers lost a lot of ground during the time that elapsed between the two reports. As TS Eliot once put it:

Time for you and time for me

And time yet for a hundred indecisions,

And for a hundred visions and revisions,

Before the taking of a toast and tea.

And indeed there will be time

To wonder, “Do I dare?” and, “Do I dare?”

Evidently, the Commission didn’t dare disturb the universe, and go to where its prior analysis had told it that it should. Why this onrush of timidity, evident in both the bureaucracy and in the political sector on this issue? After all… Even at this late stage, the Ardern government is not absolutely bound to remain within the parameters of the Commerce Commission’s recommendations. It could, if it chose, initiate structural change off its own bat, much as David Cunliffe did in 2009 when he split Telecom into three parts. Currently, Labour has the majority in Parliament to do the same sort of exercise again. In fact, if Labour had the gumption to impose structural change on the supermarket industry on behalf of consumers, such a crusade against predatory pricing would blow Christopher Luxon’s current bleating about the “cost of living crisis” right out of the water. But that would require a less risk averse Labour government.

That aside, there’s a more fundamental problem. This country’s recent history makes it hard for people to accept that monopoly power – or duopoly, or cartel power - is a serious problem within our economy. We’ve bought so hard into the free market gospel that it seems very difficult to accept the notion that governments need to regulate markets on a regular basis to ensure they remain free. We prefer to think that markets self-regulate. Well, they don’t. Left to their own devices, they converge and concentrate into quasi-monopolies. We’re too small a country for anything else to happen.

That’s been an evident theme in our recent history. In banking, electricity pricing, the telecommunications sector and the supermarket industry, the hallowed “free market” forces never really did have a dog’s chance of functioning adequately in a country as small as New Zealand. Markets simply converged. What we got landed with were cartels, duopolies and near-monopolies. Which has meant that the consumer continues to be screwed. Because why bother with carrying out expensive investment and innovation – as Telecom declined to do in the 1990s – when you can just harvest the money from captive markets?

At the time, we heard a lot about David Lange’s claim that this country was like a Polish shipyard before the 1980s reforms. Yet the free market reforms – and the unimpeded market convergence that quickly ensued – set back innovation here in the likes of telecommunications for the best part of two decades. At one point, Telecom went to court to stop consumers from taking their old phone number with them if they changed phone companies. Number portability used to be impossible for years during the 1990s. Very Polish shipyard.

But I digress. The point is, we don’t have any of the history that say, the US has had in the evils of market convergence. To the free market ayatollahs of the fourth Labour government, the whole idea of using anti-trust legislation to restrain monopoly/duopoly power was heretical and blasphemous. The workings of the free hand of the market were a wondrous thing, best left unimpeded. The legacy of that weak recognition of the necessity for antitrust action remains with us today. Our corporates still think – or prefer to think – that markets are self-correcting. Arguably, this backdrop forms a very big part of why the Commerce Commission – and the government – has been so timid at crunch, when it comes to doing what’s necessary to break the power of the supermarket chains. Quite literally, consumers are all still paying the price at the checkout for that approach.

Footnote One: The US history with anti-trust action dates back to the court-enforced breakup of John D . Rockefeller’s Standard Oil company in 1910. Then came the break-up of the A T & T phone company into seven parts in the 1970s, and the successful US court action taken against Microsoft in the late 1990s. There are periodic rumblings about the courts taking on Google, Facebook and Amazon on the same basis.

Footnote Two: Like shopping around to make limited savings on the electricity bill, the changes cited in the final report are cosmetic. More use of unit pricing, a new good conduct rulebook, a new industry watchdog and changes to land zoning will do very little to protect consumers from predatory pricing now, or in future. Magical thinking about land classification will not inspire a gallant third player to gallop into the supermarket industry and lo, usher in fair and meaningful price competition across the land. In reality, most rational investors would baulk at the unchanged costs of entry, and at the ease with which the incumbents could stymie their best efforts – and they’d sensibly choose to put their money elsewhere.

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