Grocery legislation decreases competition, not the reverse

Dr Eric Crampton
31 January, 2023

There’s a special kind of mental contortion that seems required in politics. A politician has to be able to hold mutually inconsistent beliefs in their head and not notice that they don’t really work well together.

The government seems to believe that grocers care about profits and are immensely profitable, but that international grocers like Aldi, Lidl, Tesco, and all the rest, are made of different stuff than the local incumbents. Otherwise, why would international grocers not be entering to eat our incumbents’ lunches?

It’s always possible that New Zealand’s size and remote location are part of the problem. But zoning, consenting, and Overseas Investment Approval processes make it close to impossible for a new player to enter the New Zealand market at scale. Zoning makes it hard to find places where new supermarkets might be allowed; consenting can add years of delay before anything is opened; and, the Overseas Investment Office adds its own layer of complexity and uncertainty.

This week, Select Committee is going over the Grocery Industry Competition Bill.

After a Commerce Commission market study highlighting the barriers facing international entrants if they wanted to open here, one might have hoped that Parliament would be making it easier for new players to enter the New Zealand market. Regulation and legislation make it hard for them to enter, so why not make it easy?

Instead, the Bill ignores existing barriers to entry while introducing a new one.

Under the proposed legislation, the Minister of Commerce will be able to require grocers to supply their competitors with products at government-regulated prices.

The measure is bad enough on its own, even without considering the new barrier to entry it creates by imposing a new risk on potential entrants.

Setting regulated prices for retail supply will be horribly fraught. These aren’t undifferentiated bits running through a Telecom cabinet. They’re hundreds of thousands of different stocking units, some perishable, and with varying degrees of freshness and quality.

Imposed regulated prices would also hit a lot of complex, emergent, contracted – and potentially pro-competitive – pricing arrangements. A supply deal between a supplier and a supermarket isn’t just going to be a number of cans at a price per can. Supermarkets will sometimes charge fees for positioning on shelves – and the economic literature shows that those kinds of arrangements can be efficient. Or complex deals around promotion and featuring in sale fliers. All of those arrangements would be affected by compulsory supply requirements at regulated prices.

The Bill then pushes us into competition policy territory already explored in the US under the Robinson-Patman Act in the 1930s. That Act regulated volume discounts that suppliers might provide to the new retail supermarkets that were then emerging, with the intention of protecting small retailers. But it wound up affecting hundreds of thousands of pricing decisions per year, including, in Robert Bork’s account in his classic text on competition policy, “quantity discounts, promotional discounts, discounts to recognise the purchaser’s assumptions of tasks that would otherwise fall on the seller, discounts because of the purchaser’s stage in the distribution chain, promotional allowances, [and] advertising allowances…”.

The Act wound up falling into disuse as it was impracticable and seemed to have increased prices to consumers. One 2014 summary in the Journal of Law & Economics called it “Antitrust’s least glorious hour.” Repeating mistakes made elsewhere would seem an error.

Requiring a designated supermarket to supply its competitors at regulated prices will wind up affecting all of those same decisions.

It isn’t surprising that the Commerce Commission report provided some blunt warnings. It noted the regime would not be feasible without working through difficult issues, and that even if it were feasible, “careful cost-benefit analysis would be desirable….” Otherwise, it risked introducing “significant additional costs.”

The Bill as drafted requires none of that. Instead, the Minister can simply decree that a supermarket is subject to supply requirements if the Minister considers it to be in the public interest.

Just look at the process as written. If the Minister wants to make a designation, it’s simple. Ask the Commerce Commission to provide a recommendation about whether it should happen. Receive the recommendation under Section 24(1)(a). Have regard to it under 24(1)(b). If the Commission recommended against designating, no matter. Under 24(1)(d) the Minister can make any decision the Minister considers is in the public interest; the Minister must simply have regard to the Commission’s recommendation. Done.

The process laid out in Section 24 of the legislation is deeply flawed.

But now think about it from a barriers-to-entry perspective.

Suppose you were the agent for Aldi, or Lidl, or Tesco, and you were considering the New Zealand market. The government claims that the local supermarkets are extraordinarily profitable. Why not enter?

You’d need to find a set of sites where council zoning would allow supermarkets. Some of those sites are being freed up as the supermarkets void old covenants, in part with government prodding, but restrictive planning laws mean you’ll still be lucky to be able to assemble sites.

Worse, the proposed Natural and Built Environment Bill outright forbids considering competition as a benefit in planning. If someone wanted to submit in favour of a zoning change to let you build a supermarket, citing the benefits of that competition for consumers, the planners would be required to disregard those benefits. 

You’ll have to get OIO approval, which could be tough if you planned on getting a residential property rezoned or if you’re adjacent to anything sensitive.

And you’d face consenting lags of months to years. Where do you put your warehouses and how do you set your distribution if some of your retail stores are held up in consenting processes for months, but others are held up for years, and you can’t tell which will be which?

Suppose you decided that entering the New Zealand market was still a viable proposition. Your international supply chains are incredibly efficient, you can get better groceries to New Zealand consumers at lower prices than the incumbents can access. You’ll clean up. Right?

If you do, the Minister could require you to provide all of your competitors with access to your hard-built international supply chains – at prices set by the government’s regulator.

If you built your new supermarket network from scratch, the Minister could require you to start supplying your competitors after you had been operating here as a grocer for five years. Some of your outlets might not yet have even received resource consent.

And if you bought even a single existing grocery outlet when setting up your network, the Minister could make the designation immediately.

A potential entrant would be well advised to run screaming from the place. It’s too risky.

That kind of risk is a barrier to entry. Parliament should be easing those barriers, not making them worse.

Setting these kinds of requirements on foreign-owned grocers could also cause trade headaches. Australia could seek consultations under the Australia-New Zealand Closer Economic Relations agreement if the regime were imposed on Australian-owned Woolworths, or through other pathways. If it were imposed on Costco, the Americans could well bring it up if the US were ever to join CPTPP.

In some areas, that game is worth the candle. But for a regulatory regime that seems more likely to increase grocery prices than to reduce them?

When Parliament has a constrained legislative timetable, it really should focus on areas where it’s more likely to do good than harm.

If this government really believes that the grocery business is incredibly profitable, why not just open the gates a little so that foreign grocers can try their luck? It’s a safer bet than the mess that’s in the Grocery Industry Competition Bill.

Dr Eric Crampton is Chief Economist with The New Zealand Initiative. He discussed the Initiative’s submission to the Select Committee on Monday.

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