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Brief Counsel

The cost of the weekly shop: can anything be done?

14 December 2009

It was news that was hard to miss.  The cost of groceries in New Zealand has risen 42.5% over the last ten years, giving us some of the most expensive food in the OECD.  Only South Korea has experienced higher price rises.  And, as always, the questions are who’s to blame and what can be done?

Who’s to blame? 

A popular explanation – both here and in Australia where food inflation, at 41.3%, is only a smidgeon below ours - is the lack of adequate competition between the supermarket chains. 

But the ACCC considers that is only a small factor in the mix:

In the ACCC’s assessment, at most, roughly one-twentieth of the increases in food prices over the last five years could be directly attributable to the increase in the gross margins achieved by the major grocery players1.

Similarly here, we suggest that supermarket competition is swamped by the impact on global commodity markets of such influences as the use of food crops for biofuel production, increased fuel costs, weather effects such as the drought in Australia and – on the demand side - a growing middle class in rising economies such as China and India. 

What can be done? 

To the extent that global commodity markets largely determine local prices, there is a limit to what can be done.  Influencing subsidy levels for ethanol, for example, is well beyond the control of local competition law regulators.  There has, however, been significant regulatory activity across a range of jurisdictions (refer to the box below).

Soaring food prices through 2007 and 2008 coincided with inquiries by a number of competition regulators, including in the UK and Australia, on the growing domination of grocery retailing by a few large players.

UK

The UK Competition Commission concluded in 2008 after a two year investigation2 that, while competition in grocery retailing was generally satisfactory, there was scope to make entry to the market easier and to improve the balance in the bargaining position between suppliers and retailers.  

The UK Commission has since recommended to the government that a competition test be used in planning decisions to prevent further concentration in grocery retailing3.  It has also published a Groceries Code of Practice and called for an industry Ombudsman to oversee the code.

Oz 

Although a Grocery Inquiry in 2008 by the ACCC did not find anything fundamentally wrong with the structure of the Australian market, the ACCC has been keen to promote consideration of competition issues at the local planning authority level.  The Federal Government is now encouraging local governments to review their planning laws.

In September the ACCC also, as part of an industry-wide investigation, reached agreement with Coles and Woolworths that they phase out restrictions in shopping centre leases to block entry to competing supermarkets.  Over 700 leases are affected by this "major breakthrough" according to ACCC Chairman Graeme Samuel4.

But an attempt by the ACCC to stimulate supermarket competition by setting up an online price website called GROCERYchoice failed when the Federal Government withdrew support for it days before it was launched.5

Reform prospects here

Given our second placing in the food inflation stakes, the New Zealand grocery market might be seen as ripe for some intervention - if that were the way the Commerce Commission operates.  But it’s not.

The Commission clearly has concerns about the grocery retail sector.  It challenged both the Progressive/Woolworths merger in 2001 (ultimately without success) and more recent attempts by Woolworths and Foodstuffs to take over The Warehouse with its new Extra grocery offering.  Doubtless, it would also like to challenge the present supermarket duopoly.

But without a merger to vet, the Commission has no basis for attacking the existing industry structure - unless it copies the ACCC’s assault on shopping centre leases.  To recommend price regulation, the Commission must first show there is little or no competition in the market and this is not true of grocery retail. 

Nor can entry by a third player be relied on.  ALDI has been making waves in Australia for 10 years but has not yet set up shop here, and The Warehouse’s attempt to compete in groceries was short-lived.

Instead, the agent for change is likely to be the 1 October amendments to the Resource Management Act (RMA).  Among the changes is a stronger prohibition on planning authorities taking account of any impact on trade competition in their decision making.  More significantly, a competitor found to have used the RMA to prevent competition will be exposed to a sobering cost and damages regime6.

On the costs front, the competitor is potentially liable for all costs and expenses incurred by its rival and by the Environment Court.   On the damages front, the competitor is exposed to a damages claim by its rival for loss flowing from the competitor’s conduct.

Given that the market is dominated by Progressives and Foodstuffs, making it harder for them to engage in patch protection could make a real difference to retail competition and could mean that decade-long battles – like that over the Pak ‘N Save at Wairau Park - may be a thing of the past.

Jurisdiction

Regulatory activity

New Zealand

  • CC challenges the acquisition of The Warehouse by Foodstuffs or Woolworths.
  • Changes to the RMA to prevent competitors using planning laws to limit competition.

Australia

  • ACCC issues Groceries Report in 2008.
  • 17 September 2009 ACCC agrees with Woolworths and Coles that restrictive shopping mall leases be phased out.
  • Federal Government now working with local governments to free up planning laws.
  • ACT government loosens planning laws 2009 to encourage entry and restricts ability of Woolworths and Coles to build/buy more stores in ACT.

UK

UK Competition Commission has recommended:

  • A ‘Competition Test’ to promote and encourage entry and expansion in highly concentrated local areas.
  • An industry Ombudsmen to oversee a Grocery Supply Code of Practice and arbitrate on disputes between retailers and suppliers.

Ireland

  • Abolition in 2006 of Grocery Order banning retailers from pricing below cost.
  • Irish Competition Agency expresses concern in 2008 about concentrated markets and recommends changes to planning laws to increase competition.
  • In 2009 the ICA finds that while grocery prices have fallen in the recession, lack of retail competition has limited price adjustments.7

Norway

  • Norwegian Competition Authority intervenes in 2007 to stop the exchange amongst retailers of weekly prices.  Reporting is now less detailed and less frequent.
  • In 2009 NCA expresses concern about concentration in retailing and warns it will challenge takeovers.

 

USA
  • FTC unsuccessfully challenges the Wholefoods and Wild Oats organic foods merger in 2007/2008.

Footnotes

  1. Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008, http://www.accc.gov.au/content/item.phtml?itemId=838251&nodeId=ada0fb93c16b68d5a78ac665943b688d&fn=Grocery%20inquiry%20report,%20overview.pdf
  2. The supply of groceries in the UK market investigation, 2008,  http://www.competition-commission.org.uk/rep_pub/reports/2008/fulltext/538.pdf.
  3. UK Competition Commission, CC renews competition test recommendation, 2/10/09, (http://www.competition-commission.org.uk/press_rel/2009/oct/pdf/46-09.pdf)
  4. In the wake of the ACCC's victory in getting supermarkets to give up the restrictive lease provisions in shopping centres, the ACT government is going one step further.  It plans to ban Woolworths, Coles and IGC from setting up new supermarkets in certain sites in the ACT.  The idea seems to be to prevent growth of the incumbents (WW has 51% and Coles 21%) so that operators such as Superbarn and ALDI can grow.  But the proposal has not gained the support of the ACCC which suggests it is not consistent with open markets:  http://www.ausfoodnews.com.au/2009/11/02/accc-queries-act-supermarket-policy.html
  5. “Federal Government, ACCC slammed over handling of GroceryChoice website”, a Senate Inquiry found that the website was not well thought out and involved a waste of tax payers’ money ( http://www.ausfoodnews.com.au/2009/11/19/federal-government-accc-slammed-for-grocerychoice-website.html)
  6. Competitors will still have some rights of objection where they are directly affected by an adverse effect on the environment and they are not motivated by trade competition.
  7. Irish Competition Authority, Retail-related Import and Distribution Study, May 2009, http://www.tca.ie/NewsPublications/NewsReleases/NewsReleases.aspx?selected_item=244

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