Just how bad is the supermarket duopoly for New Zealand?

For years, New Zealand’s grocery market has been dominated by just two players: Foodstuffs and Woolworths. Today, Foodstuffs owns New World, Pak’n Save, 4Square and Gilmours, and Woolworths owns Woolworths and SuperValue. Together they hold 88% of the entire food and produce market outside Auckland and 71% within it. It began when the Commerce Commission allowed Big Fresh to be acquired by Woolworths in 1990, effectively handing these two chains the market they now exploit.

Successive governments have cried foul over the profit gouging New Zealand (NZ) consumers are enduring at the hands of Foodstuffs and Woolworths. And while they have set up various investigations that proved the gouging is real, they have done nothing about it.

Kiwis are overcharged, while they pocket $365m

I suspect successive Ministers may not appreciate the full impact on NZ. It is not purely the consumers being overcharged to the tune of $365m per year (that is the super profit the duopoly earn over and above the profit they would earn in a competitive market) — there are several other impacts that forge deeply into so many parts of the NZ economy.

Normally, competing market forces would bring the participants into line. But when you have such a dominant duopoly, there is no pressure on them to truly compete and the numbers prove it. They also use off-market strategies to prevent new players entering the market, such as holding options over land that would support a new entrant.

They treat the NZ consumer as an uninformed player by practising ‘high low’ pricing, which the Government should have outlawed years ago. High low is when the supermarket increases the price of something one week, and then the next week states what a great saving it is when they reduce the price back to what it was previously. The Commerce Commission found this occurred most prominently in the New World chain, with one third of products on a high low pricing basis.

The duopoly issue goes back in time to when Big Fresh was established around 1990. At that point you had Big Fresh, Woolworths and Foodstuffs all competing for the NZ weekly shop. For reasons known only to the Commerce Commission, they allowed Big Fresh to be acquired by Woolworths, resulting in the duopoly we have now. The Government allowed the duopoly to come into existence, so they have the responsibility to break it up.

Globally, we pay more than most

The average net profit margin of supermarkets in the OECD is 1.2%. In New Zealand it is 8.5%. The average weekly shop of two adults and one child is $238. If the profit margin was the OECD average that would be around $20 less per week (or $1,000 per year per household). The grocery expenditure per capita in New Zealand is the fifth highest in the OECD.

By the way, we are a two adults one child household and our weekly spend is closer to $300 and we don’t pay for red meat, so that $238 seems very low!

It’s not just the price impact. Although that is bad enough, there are other serious issues.

It’s affecting who supplies and what they supply

It’s not just the supermarkets that aren’t competing, it’s also the suppliers. 10% of grocery suppliers account for 90% of wholesale grocery purchases by Foodstuffs and Woolworths.

But a large reason for this concentration is there are only two buyers. And they want to have the same products on the shelves in every store from Kaitaia to Invercargill. So unless you have huge scale, you aren’t even on the list of potential suppliers.

Small emerging food producers get squeezed out before they can even get started And because new suppliers know this, they just don’t try. That kind of buying power doesn’t just shape who supplies — it shapes what they supply.

That need for standardised products in every store also impacts on the quality of food available. For me, the prime example is fruit. It is picked so green, long before it is even close to ripeness, that consumers are turning away. It has to be picked green for the long transport routes from growers to every store across the country. But the consumer is left with no choice but to choose green, almost inedible fruit, or not put fruit on the shopping list.

When was the last time you had a pear where the juice ran down your chin, or a plum that had a firm skin but was sweet on the inside? The last pears I bought were so green you could have used them more like a cricket ball than eaten them.

I know this firsthand. I own an avocado orchard — 600 trees, around 300,000 avocados a year — and the reality of selling to a two-buyer market is exactly as grim as it sounds.

One chain offers the grower almost zero — considerably less than the cost to pick the fruit, let alone cover growing costs. The other is slightly fairer, but in a good year you might only break even. Neither gives the grower any power to push back. Every time I hear the stickman advertisement I cringe, thinking about how many growers and producers were broken so they could maintain those margins.

What happens when local producers disappear?

Covid proved just how important food security is. As the two chains strive to maintain or improve their excessive super profits, they force NZ producers to cease production. Recent cases include tomatoes, stone fruit and grain growers, just to name three off the top of my head. The chains have the buying power to force overseas suppliers to discount the price, resulting in NZ growers or packhouses closing.

There will be another Covid-type event. Will the NZ consumer be comfortable not being able to buy bread and other staples because the two chains have forced the NZ producers to close?

Not for the people

I was fortunate to be on the Tourism Industry Association Trust for just over 10 years. That industry understood something important: it operates on a social licence. Without the goodwill and acceptance of the public, it simply could not function. That awareness shaped how the industry conducted itself.

The two supermarket chains have lost all sight of this. A business that provides something as fundamental as food to an entire nation carries a public obligation — whether it acknowledges that or not. And right now, they are not meeting it. If you tell someone in public you own a supermarket, that’s worse than saying you work for the IRD. Such is the contempt the public feel towards the two chains.

If the public had a third choice, they would undoubtedly take it. Costco in Auckland has already proven that.

The Government caused this. Now they need to fix it.

These are not radical ideas. Given the scale of the problem, they are the minimum of what is required.

In my humble opinion, there are a number of things the Commerce Commission and the Minister could do, including:

• Force land options held by either chain to lapse if not used within 18 months, and a prevention for rolling these over.
• Foodstuffs be forced to divest Gilmours and either New World or Pak’n Save within two years. Woolworths not to be allowed to purchase either.
• Woolworths to be forced to divest SuperValue within two years. Foodstuffs not to be allowed to purchase.
• The Commerce Commission to outlaw high low pricing, with substantial fines for breaches.

The two chains will fight tooth and nail to prevent the above. But their unfair trade practices have made these measures — which would normally appear draconian — seem reasonable and moderate. If one party had the above as policy, they would get my vote. What we need now is a government with the backbone to act. New Zealanders deserve a fair deal on something as basic as feeding their families. It is long past time they got one.

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the opinions of all staff at Gilligan Sheppard. We recognise that New Zealand’s supermarket operators play a vital role in feeding communities across the country and that many individuals working within these businesses do so with genuine care and dedication. However, we believe the pricing and competitive concerns raised here are worth examining openly, and we welcome a range of perspectives on this issue.