On Breaking Up The Supermarket Duopoly

Someone better tell Mark Mitchell, because the two big supermarket gangs – the New World Crips and the Countdown Bloods – seem to be operating with flagrant disregard for the revised version of section 36 of the Commerce Act 1986. Arguably, their market dominance and related business practices are bad for consumers, and bad for competition. Good decent Kiwi shoppers are having to buy the essentials at exorbitant prices because… There aren’t enough regulatory cops on the supermarket beat that are willing and able to stop them.

It's the young people I worry about. Kids are on the tills wearing those black T-shirts patched with the curly green Countdown logo and they’re ringing up huge annual profits for the Mr Bigs of the supermarket trade. What kind of message is this sending to our young people? You could hardly blame them for concluding that capitalism is about ripping off people to the max, just because you can. It's time we parked our trolleys and joined the fight against checkout rip-offs. We have nothing to lose but our loyalty cards.

Seriously though, how do the supermarkets get away with it? Everyone seems to know that they’re in breach of our competition law. The Commerce Commission said as much in its draft report on the industry. Yet the “solutions'' currently on offer seem to be aimed at curbing only the worst of the behavioural excesses. There seems to be no political appetite for tackling the structural root causes.

For example: Nicola Willis, our soon-to-be Finance Minister says that she wants to see more competition, in the shape of a third operator no less! Yet just like the outgoing government, she appears reluctant to address the duopoly’s entrenched market power. Yet, as Tex Edwards of 2 Degrees has pointed out it is the concentrated market power of the supermarket incumbents that is the main deterrent for any budding new entrant. Meaning: when you have a duopoly controlling circa 95% of the market, then (a) fiddling around with land covenants for these theoretical new entrants to build their fairy castles upon and (b) making sure that there is consistent price labeling on the shelves seems a bit beside the point. Ultimately, such issues are more like distractions than solutions. Because no sane new entrant would risk hundreds of millions of dollars to try and enter a market that’s so hard-wired against genuine competition.

1986, and since

You’d think New Zealand would know better. In the 1980s and 1990s, we let state monopolies (e.g. Telecom) transition into being private neo-monopolies and then watched these companies (e.g. Telecom) milk that market advantage. Lo and behold, we saw them maximise short-term shareholder returns rather than invest adequately in new technology, in innovation and in labour force upskilling, all of which went backwards under private ownership. As you’d expect.

Why would you expect private ownership, left un-regulated, to be inherently less innovative, and thus less competitive? Because again and again, history as told us so. In the US, the home of capitalism, regulators broke up John D. Rockfeller’s Standard Oil market dominance in 1910, and they also broke up the giant AT&T telco and turned it into several competing Baby Bells in the 1970s and 1980s. These same pre-emptive “anti-trust” regulatory actions are now being launched against Amazon, and against some of the tech giants.

America has always seen the need for government intervention and regulation to keep markets free and competitive. Otherwise, markets will succumb to their natural trajectory, which is to culminate in concentrations of market power that will inevitably lead to predatory price fixing and other toxic behaviours that will smother true competition (e.g. Supie) in its cradle. If that has been true of a huge economy like the US... Then similar regulatory interventions seem even more essential in a tiny market like New Zealand, which has never been big enough to safely support the free market experiments to which it has been subjected.

A looming obstacle to this country ever putting effective competition law into practice is that we now have a Prime Minister elect in Christopher Luxon who has recently been touting his business expertise in “mergers and acquisitions” as being a key part of his credentials for higher office. Yet mergers and acquisitions are ways of increasing the market concentration among existing players, and those advocating mergers have always tended to regard Commerce Commission regulations (against anti-competitive takeovers) as being the enemy of commerce. Even worse, the leader of the Act Party seems to regard neo-monopolies and virtual cartels as a sign of market acumen and a just reward for sound business management. The incoming government looks like being the new BFF of entrenched market dominance.

Chicago School Days

How on earth did New Zealand talk itself into worshipping so fervently at the altar of the free market when, as mentioned, our economy (and our corporate sector) are both obviously too small to allow for the free play of market forces?

Surely, back in the mid 1980s, when vital state assets were being sold off to well-connected insiders, someone like Geoffrey Palmer – with his knowledge of US competition law – should have foreseen the need for strong anti-trust safeguards to be put in place here? No such luck. Almost entirely, our competition law protections exist only on paper. Labour and National alike have been very reluctant to use the powers and noble intentions that exist within the Commerce Act. For their part, the courts have largely acquiesced, being understandably unwilling to intrude into the policy debates seen to belong in Parliament’s domain.

It is significant that, despite subsequent amendments, the enduring bones of our Commerce Act were formed back in 1986, when New Zealand was at the peak of its infatuation with the alleged wisdoms of the market. As Otago University expert on competition law Edward Willis indicates, the Chicago School economic theories dominant at the time believed that market concentration was a self-correcting problem that did not require a political or legal remedy.

“When the Commerce Act was written in 1986,” Willis says, “the dominant intellectual framework [held] that market power wasn’t really an issue because markets would re-arrange... While our legislation is drafted in ways that are certainly broader than the Chicago School way of thinking, it was initially implemented in ways that tended to reflect that. So there was an indifference towards market power.”.

In fact, market concentration was seen to be something of a sign of virtue. “Big businesses were big businesses because the market had arranged this as an efficient way to do things. That line of thinking completely overlooks the point that you rightfully make, that we had a lot of state monopolies turning into private sector monopolies.” These businesses, Willis says, had not won a huge market share by growing up from a startup and out-performing their rivals, as happened, say, in the US. “There was a flaw in the [prevailing] line of thinking.”

New Zealand has been stuck with the consequences ever since. As Willis says “it has been a long and difficult road back” from the credulous belief that market forces would self-correct, and

avoid their tendency to congeal into cartels, duopolies and neo-monopolies. For their part, the courts have been reluctant to intervene in the policy debates about the socially and economically desirable structure of market sectors.

So, at best, the past two decades have been spent in tinkering with the behaviours of the market incumbents – but without embarking on structural change in the supermarket sector, in the banking sector, or anywhere else.

Footnote One: Early days yet... Grocery Commissioner Piere Van Heerden is still fresh, and it is still unclear how he will choose to exercise the considerable powers he has been given. Judging by his press release this week though, and by this RNZ interview Van Heerden may not be likely to cause the supermarket duopoly to lose much sleep:

RNZ Presenter: We've spoken earlier this morning to Tex Edwards of 2 Degrees about monopoly issues. He seems to think [this requires] actual structural issues that go beyond the behavioural issues that your [three priority changes] would look at.... So what are your chances, realistically?

Van Heerden: Well I’m tasked to make sure that the Grocery Industry Competition Act is implemented effectively. I know Tex has got views, and those are things that the new government will have to take a look at.

Meaning: the Grocery Commissioner apparently sees his role as being to foster better behaviour by the existing duopoly while leaving the new government “to take a look at” addressing the existing structural settings. (In the same interview, van Heerden describes what he’s doing as “tweaks”).

Footnote Two: In this week’s press release, Van Heerden described the three main priorities he aims to address:

• Pricing integrity – misleading or inaccurate pricing by retailers;
• Supplier behaviour – undesirable behaviour from some influential suppliers; and
• Level playing field – barriers to entry and expansion by alternative players.

At some future point, you’d have to think that “barriers to entry and expansion by alternative players” would have to address the elephant in the room – the existing extent of market dominance that is, in itself, a significant anti-competitive barrier to entry. Edward Willis agrees that the behavioural issues tend to be the Commissioner’s current focus. “That would be fine in my view... if these behavioural concerns [were being seen to] arise out of bad market structure. That would have made sense to me. But that [press release] was far too superficial and a marketing exercise rather than an approach to the functions [that are] in play here.”

Right. So the Grocery Commissioner seems to be saying that he was prepared to leave matters like market dominance to the politicians, rather than try to paddle in those waters himself? That reluctance, Willis replies, “has some validity to it. But I don’t think he can sort of throw his hands up and say ‘it's not my bag’.” You have to be very articulate about what you think your function is, and where the line is. Because you have been empowered with a bunch of powers and a whole lot of discretion, to try and fix the problem.”

Therefore, Willis concludes, “You can’t throw your hands up... That might be the right thing to do, but you have to tell people why it's the right thing to do and get their buy-in. You can’t just say ‘it's not my thing’. You have to tell people why it's the right thing.”

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