Time to intervene in supermarket duopoly

Dr Lydia Cheung

This article is republished from Stuff and written by Dr Lydia Cheung, AUT Senior Lecturer of Economics. Read the original article.

The Commerce Commission’s just-released draft report on the competitiveness of New Zealand’s retail grocery sector concludes that competition is not working well.

As evidence, the report cites high prices, persistently high profits, low innovation, and few new entrants.

The report cites the lack of an independent wholesale sector and the lack of suitable sites as the main reasons for the absence of a major competitor to the current duopoly of Foodstuffs and Woolworths NZ.

Other factors that hamper competition between the existing chains include consumers’ confusion over promotions and the effectiveness of loyalty programmes.

A major concern in the sector is the high degree of “vertical integration” between retailers and wholesalers. A competitive market for wholesale grocery supply does not exist because the two dominant players each have their own wholesaler, and these wholesalers do not often trade with competing or independent retailers.

_{KAREN COLTMAN/STUFF}

The Commerce Commission just-released draft report concludes that competition is not working well.

So, if a new firm wants to challenge the market and offer a full range of groceries, it will have to co-ordinate many suppliers.

This approach has proven so daunting that no local firm has attempted it in decades.

Even for an international chain with established wholesale relationships, the need to find and secure suitable sites with no restrictive or exclusivity covenants feels like mission impossible.

My AUT research shows the positive effect of competition for consumers. For example, in New Zealand, towns and cities with multiple newspaper titles from competing publishers have lower advertising rates than those with newspaper titles from only one publisher.

Even if the biggest entry barriers are cleared, a new entrant is never a guarantee. That’s because nobody ever knows if there is a business ready and waiting to come in.

Regardless, the commission must do all it can to promote new entries into our competition landscape.

When the major entry barriers are removed, potential entrants might have creative solutions to successfully establish themselves in our market.

Consumers, too, have a role to play to encourage economic competition. They can shop around for the lowest prices, best quality, widest selection, and the latest innovations.

The best way for consumers to walk the competition talk is with their wallets.

The commission, too, can encourage consumers to shop around. It could, for example, facilitate the development of an online price comparison tool, in a similar spirit to the “What’s My Number” campaign by the Electricity Authority, to bring more transparency to our supermarkets’ pricing strategies.

In the absence of an entry, breakup, or regime change, honing consumers’ price sensitivity may be the next best thing to exert competitive pressure on the existing duopoly.

An online price comparison tool might also attract more competition from online-only supermarkets. In fact, it might be the most feasible option, given the existing restrictions on locations, for an international chain to enter in an online-only format.

Were online competition to grow, the greatest challenge for the online entrant would be to figure out how to ensure the timely delivery of groceries at scale.

If successful, such an innovation would surely benefit consumers and put pressure on both of New Zealand’s supermarket incumbents.

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• Read profile of Lydia Cheung
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