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The Cost Of Food

The Cost Of Food

Hon Heather Roy, ACT Deputy Leader 
Saturday, November 8 2009

Food prices came under scrutiny this week after a New South Wales Associate Professor, having analysed figures from the Organisation for Economic Co-Operation and Development (OECD), said that grocery prices in Australia and New Zealand had risen 41 percent and 42.5 percent respectively since the start of 2000.

According to Professor Zumbo - an Australian commentator on competition, consumer and franchising law - New Zealand's food prices have increased faster than every other major industrialised nation except Korea, with Australia next in line.  He puts this down to a lack of competition given that both the Australian and New Zealand supermarket sectors are dominated by two major players: Foodstuffs and Progressive Enterprises here in New Zealand, and Coles and Woolworths across the Tasman.

Consumer NZ supported Professor Zumbo's claims, concluding - along with many others - that New Zealand's supermarket duopoly was responsible for the grocery prices rising.  Competition is the tool that will bring lower prices and, while more players in the market would be welcome, I can't give any reassurance that profits are sufficient to make it worthwhile for another major player to enter the market.  The Warehouse has, in recent years, tried to expand into grocery lines.  It has experience in discount retailing, and considerable public loyalty, but its foray into groceries was reported to be unsuccessful.

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It is easy to look at one set of figures and come to a conclusion, but the full picture is important.  Professor Zumbo based his findings on OECD figures but there was no accompanying discussion by media commentators, opposition MPs or the public about the rate of inflation over that period or other economic factors affecting individual countries that were being compared.

It is also a fact that the cost of food items regularly fluctuates, affecting the people's decisions people when purchasing goods.  For example: the price of cheddar cheese peaked in September 2008, with the cheapest available 1kg block costing an average $11.19.  By August 2009 the price had dropped 25.1 percent to $8.38.  Although cheaper now than a year ago, average cheddar cheese prices are still 23.7 percent higher than in August 2006.  Meanwhile, the price of milk peaked in August 2008: the cheapest available 2L bottle of standard milk cost $3.36 but, a year later, cost $3.19 - 4.8 percent less than the year before, but 7.7 percent higher than August 2006.  The price that producers of goods charge is also a significant factor but this too has eluded the debate.

These price rises and decreases occur under the influence of a range of factors, such as the price of fuel and weather conditions.  Increased fuel costs mean increased transportation costs, which are then passed on to the consumer.  Weather, with changing seasons or situations such as drought or floods, plays havoc with the supply of fresh fruit and vegetables.  Where there is high demand and limited supply for these items, prices will inevitably rise.  Statistics New Zealand's Food Price Index shows that, in the three years to June 2009, food prices underwent a 20.8 percent price rise - a proportion of which can be attributed to increased cost of fresh fruit and vegetables.

It should also be noted that any analysis of a country's food prices must take into account the consumers' purchasing trends.  In New Zealand there is an increasing trend toward the purchase of organic, GE-free and free range products - items that are often significantly more expensive to purchase.  These prices add to the average cost of the general food price range.

Last year an Australian Competition and Consumer Commission (ACCC) grocery inquiry considered food price movements in Australia compared with those in a number of other countries, including New Zealand.  According to the ACCC from 2002-07 Australian food prices increased around 20.3 percent compared to 7.7 percent here even though our overall consumer price inflation was similar.

The ACCC found that a range of factors significantly contributed to the increases in food prices in Australia.  These included drought, natural disasters, and the international commodities boom.  When there are better economic gains to be made by selling produce overseas, local buyers must bid higher for those items.  The ACCC's view was that any possible weakening in the level of competition in retailing is unlikely to have been a significant contributor to food price inflation in Australia.

Taking this into account, it appears unlikely that the food price rises New Zealand has experienced are the result of collusion by our two supermarket chains.  This is further supported by the fact that the Commerce Commission - charged with monitoring the sector and ensuring that price fixing does not occur - is not investigating the supermarket sector.

Complaints of duopoly behaviour fall on deaf ears for those New Zealanders living in areas where there is no competition.  Residents of towns such as Wanaka, where there is a monopoly situation with just one supermarket and frustratingly high grocery prices, tell me they would be delighted to have a situation where both supermarket chains have stores.  They would relish choice, and prices would be lower through competition.  In some cases it would seem that local bodies have refused consent to a second supermarket and this inevitably allows the only player in town to charge what they like.

So what can consumers do to lower their weekly grocery bill?  Many people already shop around.  The large advertisements in newspapers every day, and flyers in mailboxes, make this easy.  Supermarkets now routinely engage in loss-leading product-selling tactics to compete for customers who can, and do, take advantage of this and frequently buy different items from different stores.  Speciality stores such as butchers and farmers markets are also alternatives which provide consumers with choice that saves them money.

There have of course been calls for 'Government to do something' - if anyone seriously thinks government should interfere in, or enter, the supermarket trade they should look around for any example of government running a business well.  There isn't one.

Lest We Forget
This week was one of commemoration, remembrance and celebration as the world celebrated two events that changed the course of world history - the 20th anniversary of the collapse of the Berlin Wall, and the 91st anniversary of Armistice Day.

November 11 1918, was the day WWI hostilities ceased on the Western Front and which is generally accepted as the official end of the 'Great War' - a conflict to which New Zealand sent 103,000 troops to serve overseas.  An estimated 18,500 were killed and 20,000 wounded.  WWI is particularly significant for Australia and New Zealand, marking the birth of the proud ANZAC tradition that has become an integral part of our national history, pride, thinking and identity.

Almost 71 years later to the day, on November 9 1989, there was more cause for celebration as the East German Government told its citizens they could visit West Germany and West Berlin for the first time since the Berlin Wall was erected in 1961.

Dubbed the 'Anti-Fascist Protection Wall' by the Communist East German authorities and the 'Wall of Shame' by their Western counterparts, the 'Berliner Mauer' was a symbol of the Iron Curtain separating Western Europe and the Eastern Bloc.  Of the 5,000 people who tried to cross it and escape from East to West, around 100 and 200 were killed or died.

Following the East German Government's 1989 announcement crowds of East Germans crossed the wall, joined by West Germans on the other side as a celebratory atmosphere prevailed.  The following weeks saw the wall chipped away by the public, heavy machinery was later used to dismantle the rest, and the re-unification of Germany had begun along with the re-introduction of democracy to Eastern Europe.



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