By Nick Clark, Federated Farmers Manager General Policy
With the Commerce Commission’s market study into the retail grocery sector drawing to its conclusion, Federated Farmers is calling for a fairer deal for suppliers.
As a representative of food producers (and consumers), Federated Farmers is keen to ensure that the retail grocery sector is competitive.
It’s concerning but perhaps not surprising that the Commission has found problems with how the market is operating. The market study’s draft report finds that the major retailers are enjoying persistently high profits and charging high prices when compared internationally, with only modest levels of innovation. It says 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 problems are 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 widely reported LinkedIn article.
In 2019 Federated Farmers and Horticulture NZ asked economic research company NZIER to produce a report for us on retail food prices. Overall, only 20% of the retail price gets back to farmers and growers, with that share being stable over the period 2008-2019.
Therefore, the Commission has rightly put the spotlight 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).
While retailers’ strong competitive position over suppliers would be expected to result in cost savings for consumers, the draft report found that high profits enjoyed by retailers and relatively high prices for groceries compared internationally suggests the ‘pass through’ is not always happening as well as it should.
The draft report also found that retailers’ strong position means they can limit suppliers’ ability or incentive to provide competitive supply terms to other retailers; transfer costs and risks to suppliers, despite retailers being better placed to manage them; and reduce transparency and certainty over terms of supply. These can disincentivise suppliers to innovate and invest, having negative implications for production, capacity, product quality, and new product offerings. This should be of great concern not just to suppliers but also for consumers and even for retailers.
Turning to solutions, the Fair Trading Amendment Bill’s provisions on business-to-business unfair contracts and prohibition of unconscionable conduct should be helpful for suppliers. But we would also support consideration of further actions to address power imbalances.
Two key options were put forward in the draft report. The first is a code of conduct regulating the relationship between grocery retailers and their suppliers and the second is enabling collective bargaining on behalf of suppliers.
Both options are worthy of consideration. It will be important that they’re designed and implemented so they’re effective in improving the negotiating position between suppliers and retailers while not having unintended consequences, like high compliance costs or the prevention of innovative arrangements. We support work being done on them.
Finally, although the market study is not a review of the grocery sector’s response to the COVID-19 pandemic, we think the Commission should consider the effect of Government regulatory and policy decisions on the market power of supermarkets vs small competitors. A prime example is the Government’s COVID-19 alert level framework that’s provided preferential treatment to supermarkets to the detriment of smaller competitors (such as butchers and greengrocers) which has harmed the ongoing financial viability of small retail suppliers and those that supply them.
The Commission is now considering submissions and it’s required to report back to the Government by 23 November.