Supermarkets under the spotlight.
The Commerce Commission this week released a hard-hitting draft report on competition in the retail grocery sector, with supermarkets not coming out of it well.
The Commission found problems and they’re mainly with the structure of the market. In competitive terms the major retailers, Woolworths NZ and Foodstuffs, are a duopoly with other grocery retailers able to have only a limited impact on competition. This is because they find it hard to compete with the majors on price and product range in order to satisfy widespread consumer demand for a main shop at a single store.
The draft report found that major retailers are enjoying persistently high profits and charging high prices when compared internationally, with only modest levels of innovation. The major retailers appear to avoid competing strongly with each other, while competitors wanting to enter the market or wanting to expand face significant challenges. Complexity of major retailers’ pricing strategies, promotions, and loyalty programmes can confuse consumers and make it harder for them to make informed purchasing decisions.
The problem is not just for consumers. The draft report found that many suppliers have few alternatives but to supply the major retailers, allowing them to exercise buyer power to push excess risks, costs, and uncertainty onto suppliers. This includes the threat of delisting their products from supermarket shelves if a supplier doesn’t agree with the retailer. Food & Grocery Council’s Katherine Rich highlighted some of these practices in a LinkedIn article, reported here.
The Commission wants an increase in the number of retailers competing for the consumer’s main shop. It’s recommending a number of actions, such as:
- Increase wholesale access to a wide range of groceries at competitive prices;
- Free up sites for retail supermarkets;
- Directly stimulate retail competition (e.g., facilitating a new entrant and/or requiring existing majors to sell some of their stores to a third party);
- Introduce a mandatory Supplier Code of Conduct;
- Clearer pricing and promotional practices; and
- Increased transparency for loyalty programme terms and conditions.
It’s right to see attention on supermarkets, both in terms of their duopoly market power (i.e., dominance as sellers to consumers) and their duopsony market power (as buyers of produce from suppliers).
Plenty of farmers and growers complain about supermarket prices as they buy their food from the big supermarkets, just like people in cities. And many of those who supply supermarkets know first-hand just how tough it can be.
In 2019 Federated Farmers and Horticulture NZ asked economic research company NZIER to do a report for us on retail food prices. It confirmed that farmers and growers are not the ones creaming it.
Overall, only about 20% of the retail price gets back to farmers and growers, with that share being stable over the period 2008-2019. For dairy products the 2019 farmer share was 19%, while for meat it was a bit higher at 31%. For other food products the shares are grains 22%, fruit 10%, vegetables 16%, and eggs 2%.
The next step is public submissions, due on 26 August, with a consultation conference to be held from 21-24 September and further comments by 7 October. A final report is due on 23 November.
Business confidence slips.
ANZ’s latest Business Outlook Survey has seen a slip in business confidence amid strong cost and price pressures.
Overall, a net 3.8% of respondents expect general economic conditions to worsen over next 12 months, a 3.2 point drop on June’s -0.6%. For agriculture a net 45.5% expect conditions to worsen, by far the most negative sector, and it had a massive 41.7 point drop.
Businesses’ own activity expectations also lost ground with a net 26.3% of respondents expecting their activity to increase, down 5.3 points. In contrast to their slump in economic confidence, farmers felt a bit more confident about their own activity, with a net 18.2% expecting it to increase, up 2.8 points.
ANZ observed that cost pressures continued to rise, with a net 88.2% expecting their costs to increase, up 2 points. Pricing intentions remain extremely high, with a net 61.3% expecting to increase prices, although down 1.5 points. Inflation expectations continued to lift, rising from 2.4% to 2.7% over the month and with later-in-the month respondents even higher at 3.3% (mirroring the actual current inflation rate).
Next week we’ll be releasing the results from our July 2021 New Season Farm Confidence Survey.
Exports up in June.
June saw big increases for most primary sector exports, helping boost overall goods exports.
Statistics NZ’s monthly Overseas Merchandise Trade statistics showed goods exports were worth $5.95 billion in June 2021, up 17.1% on June 2020. Movements in key export commodities follow:
- Milk powder, butter, and cheese up 31.3% to $1.61 billion.
- Meat and edible offal up 12.5% to $813 million.
- Logs, wood, and wood articles up 23.0% to $561 million.
- Fruit up 33.1% to $618 million.
- Preparations of milk, cereals, flour, and starch (largely infant formula) down 22.7% to $151 million.
- Wine down 9.3% to $123 million.
In addition, exports of eggs, honey, and other edible animal products were up 0.1% to $47 million; live animals up 100.9% to $48 million; and wool up 58.1% to $30 million.
Meanwhile, goods imports were worth $5.69 billion in June 2021, up 23.5% compared to June 2020. There was strong growth for the major import commodities, but especially vehicles, parts, and accessories (up 166.0%) and petroleum (up 52.8%). However, it should be noted that June 2020 was a weak month for many imports due to COVID-19.
The net result was a monthly goods trade surplus of $261 million. This was down from a $473 million surplus for June 2020, but more comparable with June 2019’s surplus of $330 million.
For the year ended June 2021, goods exports were worth $60.41 billion, up 0.3% compared to the year ended June 2020. Looking at the key export commodities:
- Milk powder, butter, and cheese down 5.2% to $15.73 billion.
- Meat and edible offal down 3.9% to $7.99 billion.
- Logs, wood, and wood articles up 23.7% to $5.35 billion.
- Fruit up 5.4% to $3.89 billion.
- Preparations of milk, cereals, flour, and starch down 9.0% to $2.21 billion.
- Wine down 2.8% to $1.87 billion.
In addition, exports of eggs, honey, and other edible animal products were up 14.0% to $518 million; live animals up 63.6% to $531 million; but wool was down 8.5% to $397 million.
Goods imports for the year ended June 2021 were worth $60.66 billion, down 1.1% compared to the year ended June 2020. The biggest drop was for petroleum products, down 30.8%.
On an annual basis, the net result was a goods trade deficit of $252 million. This was down from a $62 million deficit for the year ended May 2021, but it was much less than the $1.13 billion deficit for the year ended June 2020.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 29 July) show most of the country’s soils being about average for this time of year. The main exception is coastal Central Hawkes Bay, where soils remain significantly drier than usual, with parts of Marlborough and Canterbury significantly wetter.
Exchange Rates
The NZ Dollar was a little weaker this week, down 0.2% against the Trade Weighted Index. It was down against all other our major trading partner currencies, except the Chinese Renminbi.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week the yield for the 90 Day Bank Bill was up 1 points to 0.47% but the 10 year Government Bond yield was down 9 points to 1.51%.
The Reserve Bank will next review monetary policy settings (including the OCR) on Wednesday 18 August.
| This Week (29/7/21) | Last Week (22/7/21) | Last Month (29/6/21) | Last Year (29/7/20) | |
| OCR | 0.25% | 0.25% | 0.25% | 0.25% |
| 90 Day Bank Bill | 0.47% | 0.46% | 0.34% | 0.30% |
| 10 Year Government Bond | 1.51% | 1.60% | 1.79% | 0.81% |
Source: Reserve Bank of NZ