Submission: Issues raised at the Consultation Conference on the Commission’s Market study into the retail grocery sector draft report

Dr Eric Crampton
19 November, 2021

The Initiative undertakes research that contributes to the development of sound public policies in New Zealand and the creation of a competitive, open and dynamic economy and a free, prosperous, fair and cohesive society.

The Initiative’s members include two New Zealand supermarket operators, Woolworths New Zealand and Foodstuffs North Island. However, the views expressed in this submission are the views of the authors, not those of our members.

In summary, we submit:

  • The Commission’s Market Study process affords it a unique opportunity to address the root causes of any potential failures in competition. It is not limited to more traditional narrow questions. The Commission should make the most of this opportunity and set a precedent for future inquiries.
  • The Commission’s focus on divestment options, structural or operational separation, and facilitation of new entry through subsidisation risks wasting a very real and unique opportunity to address regulatory and legislative barriers to entry in the grocery market. It risks being accused of protecting specific potential competitors rather than encouraging competition.

  • Where legislative barriers to entry are material, solutions focused on divestment, separation, or subsidisation of potential competitors will do far less good than the Commission may intend. Indeed, they may do no good at all or result in serious harm to consumers. Note that KiwiBuild failed because it did not address underlying problems of restrictive zoning and difficulties in infrastructure financing. Divestment would simply create a third competitor to join the existing two large supermarkets, with no new potential for further entry. If the Commission views the current environment as a duopoly, turning it into an oligopoly of three players may be rather less helpful than abolishing legislated barriers to entry to ensure the grocery market is workable competitive.

  • The Commission should disregard rent-seeking pleadings from would-be competitors for subsidisation or for forced transfers of stores from existing supermarkets. The Commission should take the opportunity to delve deeply into legislative and regulatory barriers to entry and tell the Government what changes need to be made to Overseas Investment regimes and zoning and land use planning to enable real competitive entry. On the back of those changes, the Commission should actively solicit entry by large international grocery retailers who may have written off New Zealand as being far from worth the regulatory hassles – by informing them that New Zealand is now open for business.

  • We believe further investigation is warranted into the materiality of zoning and consenting constraints, infrastructure supply, and the Overseas Investment Office. We strongly suggest working with Councils and the OIO here, and asking Aldi why they decided not to enter the New Zealand market six years ago.

  • As we noted in our initial submission, the Commission should focus, in the first instance, on easing barriers to entry so that the threat of entry and the potential for actual entry might provide stronger market discipline. In the short term, this requires:

    1. The voiding of any title encumbrances that have an anticompetitive effect; and
    2. Urging the Overseas Investment Office to view any entry into grocery retail as being presumptively in the national interest and subject to automatic approval.

In the longer term, this requires:

  1. Including competition as an aim in council spatial planning by including it in the Spatial Planning Act, currently in development;
  2. Setting a role for the Commerce Commission in providing input into spatial planning processes regarding the pro- or anti-competitive effects of proposed spatial plans. Ideally, the Commission would be able to veto spatial plans that have an anticompetitive effect.

This would require the Commission to look closely at and be involved in the current Resource Management Act reform process. It would have beneficial effects far beyond this current supermarket inquiry. The underlying barriers may be a source of weak competition in areas beyond grocery retail. Setting a market study process that seriously investigates regulatory and policy barriers to entry is important. Often, the agencies responsible for those regulatory or policy areas will never have considered the detrimental effects of their regimes on competition.

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