ISBN no. 978-1-869459-91-8
Project no. 21.01/ PRJ0044573
PUBLIC version

Market study into the retail grocery sector
Final report

Date: 8 March 2022

Karakia
Nau mai e ngā hua
o te waoo te ngakinao te wai taio te wai māori
Nā TāneNā Rongo
Nā Tangaroa
Nā Maru
Ko Ranginui e tū iho nei
Ko Papatūānuku e takoto nei
Tuturu awhiti whakamaua
Kia tina! Hui e! TĀIKI E!

Greetings to the gifts bestowed upon us
from the sacred forestsfrom the cultivated gardensfrom the sea
from the fresh waters
The gifts from Tānefrom Rongo
from Tangaroa
from Maru
I acknowledge Ranginui who is above,
Papatuanuku who lies beneathLet this be my commitment to all!
Draw together! Affirm!

This karakia is commonly used to acknowledge the different sources of ‘kai’. In the context of thisreport, it acknowledges the sources of ‘kai’ that have been shared as part of the consultation
process with the implication that this study is the ‘hua’ or fruit borne out of this process

He Whakataukī
Nāu te rourou, nāku te rourou, ka ora ai te iwi
with your food basket and mine we will sustain the people

This whakataukī describes the process and intention of this report in that it speaks to thebringing together of our many food baskets to contribute to the well-being of our people.

He mihiE ngā mana, e ngā reo, e ngā rau Rangatira mā, tēnei te Komihana Tauhokohoko e mihi ana
ki a koutou.
E ngā mate o te motu, he mihi aroha nui ki a koutou haere, haere, haere atu rā.
E te motu, mauri ora.
Greetings to all who have contributed to this report, the Commerce Commission
acknowledges you and thanks you for your contribution.
The Commerce Commission also acknowledges the impact that COVID-19 is having on thenation, particularly acknowledging those who have passed beyond the veil.
Tēnā tātou katoa.

7

Contents
GLOSSARY ................................................................................................................................ 10
CHAPTER 1 INTRODUCTION AND PURPOSE ........................................................................... 13
INTRODUCTION ........................................................................................................................... 13
THE MINISTER ISSUED THE TERMS OF REFERENCE FOR A RETAIL GROCERY MARKET STUDY ... 13
SCOPE OF OUR STUDY ................................................................................................................. 14
OUR FRAMEWORK FOR ANALYSING COMPETITION ................................................................... 14
OUR PROCESS .............................................................................................................................. 20
NEXT STEPS .................................................................................................................................. 24
CHAPTER 2 MARKET CHARACTERISTICS AND SECTOR BACKGROUND...................................... 25
PURPOSE AND STRUCTURE ......................................................................................................... 25
GROCERY CONSUMERS ............................................................................................................... 25
GROCERY RETAILERS ................................................................................................................... 26
MAJOR GROCERY RETAILERS’ OFFERINGS .................................................................................. 31
PRICING AND PROMOTIONAL PRACTICES ................................................................................... 34
GROCERY SUPPLY CHAIN ............................................................................................................. 36
OTHER SECTOR OBSERVATIONS .................................................................................................. 39
CHAPTER 3 MARKET OUTCOMES IN THE RETAIL GROCERY SECTOR ........................................ 44
INTRODUCTION ........................................................................................................................... 45
PROFITABILITY OF GROCERY RETAILERS IN NEW ZEALAND ........................................................ 45
PRICE OUTCOMES ....................................................................................................................... 64
INNOVATION AND INVESTMENT................................................................................................. 80
CHAPTER 4 THE NATURE OF COMPETITION IN THE RETAIL GROCERY SECTOR ......................... 99
INTRODUCTION ......................................................................................................................... 100
OUR APPROACH TO ANALYSING THE NATURE OF COMPETITION IN GROCERY RETAILING ..... 101
THE DRIVERS OF STORE CHOICE AND CONSUMER SHOPPING BEHAVIOUR IN NEW ZEALAND 104
THE DIMENSIONS OF COMPETITION IN RETAIL GROCERY MARKETS ....................................... 116
THE NATURE OF LOCAL, REGIONAL AND NATIONAL COMPETITION IN GROCERY RETAILING . 126
REGIONAL VARIATIONS IN THE GROCERY STORE OPTIONS AVAILABLE TO CONSUMERS ........ 135
CHAPTER 5 COMPETITION AT THE RETAIL LEVEL .................................................................. 146
INTRODUCTION ......................................................................................................................... 147
HOW INTENSE IS COMPETITION AT THE RETAIL LEVEL? ........................................................... 149
WHAT IS THE EXTENT OF COMPETITION BETWEEN OTHER GROCERY RETAILERS AND THE
MAJOR GROCERY RETAILERS? ................................................................................................... 153
WHAT IS THE EXTENT OF COMPETITION BETWEEN THE MAJOR GROCERY RETAILERS?.......... 171
ARE GROCERY RETAILERS ACCOMMODATING EACH OTHER’S BEHAVIOUR? ........................... 182
HOW DOES THE STRUCTURE OF LOCAL GROCERY MARKETS AFFECT PRICE COMPETITIONBETWEEN THE MAJOR GROCERY RETAILERS?........................................................................... 183
CHAPTER 6 CONDITIONS OF ENTRY AND EXPANSION........................................................... 189
INTRODUCTION ......................................................................................................................... 190
OUR APPROACH TO ANALYSING CONDITIONS OF ENTRY AND EXPANSION............................. 191
RECENT ENTRY AND PROSPECT OF IMMINENT ENTRY ............................................................. 194
IMPACT OF NEW ZEALAND’S SIZE AND GEOGRAPHY ON ENTRY AND EXPANSION .................. 195
SITE AVAILABILITY AND DEVELOPMENT.................................................................................... 200
COST ADVANTAGES AVAILABLE TO THE MAJOR GROCERY RETAILERS..................................... 223
WHOLESALE ACCESS TO GROCERY PRODUCTS ......................................................................... 228
CONDUCT BY SUPPLIERS AND RETAILERS WHICH COULD POTENTIALLY AFFECT PRODUCTSOURCING ................................................................................................................................. 248
ACCESS TO CAPITAL ................................................................................................................... 257
ALCOHOL LICENSING LAWS ....................................................................................................... 260

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LOYALTY PROGRAMMES ........................................................................................................... 261
CHAPTER 7 CONSUMER-FACING ISSUES ............................................................................... 266
INTRODUCTION ......................................................................................................................... 267
OUR APPROACH TO ANALYSING CONSUMER-FACING ISSUES.................................................. 269
PROMOTIONAL MECHANISMS AND PRACTICES MAY AFFECT CONSUMERS’ ABILITY TO
COMPARE OFFERINGS AND PERCEPTIONS OF VALUE .............................................................. 278
PRICE COMPARISON WEBSITES MAY ASSIST CONSUMER DECISION MAKING ......................... 293
UNIT PRICING CAN LEAD TO MORE INFORMED DECISIONS AND DRIVE COMPETITION .......... 294
LOYALTY PROGRAMMES MAY AFFECT CONSUMER DECISION MAKING AND REDUCE PRICECOMPETITION ........................................................................................................................... 298
LOYALTY PROGRAMMES MAY RAISE PERCEIVED SWITCHING COSTS FOR SOMECONSUMERS.............................................................................................................................. 310
LOYALTY PROGRAMMES MAY FACILITATE A FORM OF PRICE DISCRIMINATION ..................... 315
OTHER ISSUES WITHIN THE RETAIL GROCERY SECTOR RAISED BY CONSUMERS ..................... 317
CHAPTER 8 ACQUISITION OF GROCERIES BY RETAILERS ....................................................... 324
INTRODUCTION ......................................................................................................................... 325
OUR APPROACH TO ANALYSING THE ACQUISITION OF GROCERIES BY RETAILERS .................. 327
DO GROCERY RETAILERS HAVE BUYER POWER IN THE ACQUISITION OF GROCERIES? ............ 337
ARE RETAILERS EXERCISING BUYER POWER AND WHAT IS THE EFFECT?................................. 346
WHAT EFFECT ARE PRIVATE LABEL PRODUCTS HAVING ON COMPETITION BETWEENRETAILERS AND SUPPLIERS? ...................................................................................................... 365
CHAPTER 9 RECOMMENDATIONS TO ENHANCE COMPETITION ............................................ 378
OUR APPROACH ........................................................................................................................ 379
OVERVIEW OF OUR RECOMMENDATIONS ............................................................................... 380
RECOMMENDATIONS TO IMPROVE CONDITIONS FOR ENTRY AND EXPANSION ..................... 382
RECOMMENDATIONS TO IMPROVE COMPETITION FOR THE ACQUISITION OF GROCERIES .... 412
RECOMMENDATIONS TO IMPROVE THE ABILITY OF CONSUMERS TO MAKE INFORMEDDECISIONS ................................................................................................................................. 427
OPTIONS TO DIRECTLY IMPROVE RETAIL COMPETITION IN GROCERY MARKETS .................... 436
INSTITUTIONAL ARRANGEMENTS ............................................................................................. 439
MONITORING AND REVIEW ...................................................................................................... 443
ATTACHMENT A ADDITIONAL MAPS OF GROCERY STORES ................................................... 445
ATTACHMENT B OUR ASSESSMENT OF WACC AND ROACE PROFITABILITY............................ 451
INTRODUCTION ......................................................................................................................... 451
OUR ESTIMATION OF NORMAL LEVELS OF PROFITABILITY FOR GROCERY RETAILING IN NEWZEALAND.................................................................................................................................... 451
OUR ASSESSMENT OF THE ROACE FOR THE MAJOR GROCERY RETAILERS............................... 468
ATTACHMENT C INTERNATIONAL PRICE COMPARISON ........................................................ 479
INTRODUCTION ......................................................................................................................... 479
DATASETS USED TO COMPARE GROCERY PRICES ..................................................................... 479
METHODS USED IN INTERPRETING DATASETS.......................................................................... 485
FURTHER ANALYSIS AND SENSITIVITY TESTING ........................................................................ 493
ATTACHMENT D PROMOTIONS AND PRICING DATA ANALYSIS ............................................. 501
INTRODUCTION ......................................................................................................................... 501
DESCRIPTION OF DATA PROVIDED ............................................................................................ 501
INITIAL DATA CLEANING ............................................................................................................ 503
DATA LIMITATIONS.................................................................................................................... 504
ANALYSIS OF PROMOTIONS ...................................................................................................... 505
ANALYSIS OF PRICING BEHAVIOUR ........................................................................................... 514
ATTACHMENT E CONSUMER SURVEY .................................................................................. 524
INTRODUCTION ......................................................................................................................... 524

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ABOUT OUR CONSUMER SURVEY ............................................................................................. 524
HOW WE DESIGNED AND CONDUCTED THIS SURVEY .............................................................. 525
HOW WE HAVE USED THE RESULTS OF THIS SURVEY ............................................................... 530
SOME LIMITATIONS TO OUR CONSUMER SURVEY ................................................................... 531
COMPARISON OF SURVEY RESULTS WITH OTHER DATASETS ................................................... 534
HOW WE CONDUCTED THE QUANTITATIVE ANALYSIS OF THIS SURVEY .................................. 539
SUMMARY OF OUR ANALYSIS OF SHOPPING BEHAVIOUR ....................................................... 545
HOW RESPONDENTS TOLD US THEY GET TO THEIR MAIN STORE ............................................ 554
WHY RESPONDENTS CHOOSE TO SHOP AT THEIR MAIN STORE ............................................... 557
HOW RESPONDENTS COMPARE AND CHOOSE GROCERY PRODUCTS ...................................... 563
WHAT RESPONDENTS TOLD US ABOUT HOW THEY USE GROCERY LOYALTY PROGRAMMES . 567
WHAT RESPONDENTS TOLD US ABOUT THEIR EXPERIENCES SHOPPING FOR GROCERIES ...... 574
QUESTION SCRIPT FOR OUR CONSUMER SURVEY .................................................................... 582
ATTACHMENT F SUPPLIER SURVEY ...................................................................................... 590
INTRODUCTION ......................................................................................................................... 590
HOW WE DESIGNED AND CONDUCTED OUR SUPPLIER SURVEY .............................................. 590
OUR APPROACH TO CONFIDENTIALITY OF SUPPLIERS’ INFORMATION.................................... 591
WHO RESPONDED TO OUR SUPPLIER SURVEY.......................................................................... 592
HOW WE HAVE USED THE RESULTS OF OUR SUPPLIER SURVEY............................................... 594
QUESTION SCRIPT FOR OUR SUPPLIER SURVEY ........................................................................ 595
ATTACHMENT G STORE DENSITY ANALYSIS .......................................................................... 606
INTRODUCTION ......................................................................................................................... 606
FINDINGS OF OUR ANALYSIS ..................................................................................................... 606

10Glossary
ACCC

Australian Competition and Consumer Commission.

Delisting or delist

Where a grocery retailer:•

removes a supplier’s product(s) from the range of products it
stocks across its store(s); or•

reduces the distribution of a supplier’s product(s) across its
store(s), and that reduction has or is likely to have a material
effect on the supplier.

Dry groceries

Product group consisting of non-perishable food products andcertain non-food products. These are most grocery items excluding
fresh, perishable products such as baked items, dairy, deli, meat,frozen foods, and fresh fruit and vegetables. Examples of dry
groceries include biscuits, toilet paper, pasta, rice, dishwashingdetergent and canned products.

Groceries or
products

A range of food and drinks, including meat, fruit and vegetables,
canned goods, dairy products, and a range of other householdproducts, like toilet paper, cleaning products, pet food, alcohol andtobacco. These products can usually all be purchased at asupermarket, and many are available through other shops as well.

Grocery retailers

Businesses which sell grocery products directly to final consumers in
New Zealand. Examples include:•

Major grocery retailers (eg, Foodstuffs North Island Limited(Foodstuffs NI), Foodstuffs South Island Limited (Foodstuffs
SI), Woolworths NZ Limited (Woolworths NZ));•

Other grocery retailers, which include:o International food stores (eg, Tai Ping, Japan Mart,
Yogijis Food Mart);o Other supermarkets (eg, Farro Fresh, Moore Wilson’s,
Bin Inn);o Single-category or specialist grocery retailers (eg,greengrocers, butchers, bakeries, liquor stores, petstores, pharmacies);o General merchandisers (eg, The Warehouse, Kmart,
TheMarket);o Convenience stores (eg, dairies, petrol stations,Night ‘n Day);o Meal kit providers (eg, Hello Fresh, My Food Bag);o Food box operators (eg, Foodbox, Ooooby);o Online-only supermarkets (eg, The Honest Grocer,
Supie);o Specialist online retailers (eg, Hypermeat).

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Grocery
wholesalers

Intermediaries who acquire products from suppliers and on-sell
products to grocery retailers. Examples include fresh produce
wholesalers/distributors (eg, T&G Fresh, MG Marketing, Fresh
Direct), and foodservice wholesalers where they supply grocery
retailers (eg, Trents, Gilmours and Bidfood).

International foodstoresStores specialising in grocery products from or relating to the cuisineof a particular country or region.

Main shop

A shop typically happening weekly or at another regular interval
based on the convenience of using one grocery store to get allnecessities in one place.

Major grocery
retailers

Grocery retailers that operate a large number of supermarkets. The
major grocery retailers are Woolworths NZ, Foodstuffs NI, andFoodstuffs SI.
•

Woolworths NZ’s retail banners are Countdown, FreshChoice
and SuperValue.

•

Foodstuffs NI’s retail banners are PAK’nSAVE, New World,and Four Square.

•

Foodstuffs SI’s retail banners are PAK’nSAVE, New World,
Four Square, Raeward Fresh, and On the Spot.

MBIE

Ministry of Business, Innovation and Employment.

NBA

Natural and Built Environments Act, which is intended to replace theResource Management Act as the primary statute regulating land
use in the new resource management system.

NPF

National Planning Framework, which is intended to be the key
source of national direction in the new resource management
system.

NZFGCNew Zealand Food and Grocery Council (NZFGC) is an industry
association that represents the manufacturers and suppliers of food,beverage, and grocery brands in New Zealand.

PQRS

Price, quality, range and service.

Private label

Also known as home brands, own brands, store brands or genericproducts. These are products that are manufactured for sale under aretailer’s brand.

Product categories

Groups of products sold by grocery retailers that are of a similar
type. For example, product categories may include fruit andvegetables, bread and cereals, and non-alcoholic beverages.

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RMA

Resource Management Act 1991, which is the current statute that
regulates land use in New Zealand.

Secondary shop

A visit to one or more store(s), other than the store the main shop is
carried out at, to shop for specific products.

SPA

Strategic Planning Act, which is intended to require the developmentof long-term Regional Spatial Strategies to help coordinate andintegrate decision making under the new resource management
system.

Specialist grocery
retailers

Retailers of grocery items in particular product categories, forexample, meat (butchers) or fresh fruit and vegetables(greengrocers).

Supermarkets

Large grocery retailers selling a wide variety of foods (such as dry
groceries, fresh produce), household goods, non-alcoholic
beverages, and usually some alcoholic beverages.

Top-up shop

A quick shop for a small number of items that can be conducted fora range of reasons at one of a range of retailers.

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Chapter 1

Introduction and purpose

Introduction
1.1

This report sets out the findings of the New Zealand Commerce Commission(Commission) market study into the retail grocery sector (our study) and ourrecommendations for change. In preparing this report, we have considered
submissions and evidence from a wide range of parties.

The Minister issued the terms of reference for a retail grocery market study
1.2

On 17 November 2020, the Hon Dr David Clark, Minister of Commerce andConsumer Affairs (Minister), published a notice under section 51(1) of theCommerce Act 1986 (the Act) requiring the Commission to undertake a study into
any factors that may affect competition for the supply or acquisition of groceries byretailers in New Zealand.

1.3

We must carry out our study in accordance with the terms of reference issued by
the Minister. However, we may also consider any ancillary matters that are related
to, but not explicitly covered by, the terms of reference.1

1.4

On 24 September 2021 the Minister extended the date for provision of our final
report on our study, and reissued the terms of reference to reflect the new date.

1.5

The updated terms of reference for our study are set out in the box below.2

Notice Amending the Public Release Date for the Final Report for the Competition Study into the
Retail Grocery Sector
I, Dr David Clark, Minister of Commerce and Consumer Affairs, pursuant to section 51 of Part 3A of
the Commerce Act 1986, require the Commerce Commission to carry out a competition study into
any factors that may affect competition for the supply or acquisition of groceries by retailers in New
Zealand. Matters to be considered in the study must include, but are not restricted to:
1.
2.
3.
4.
5.

the structure of the grocery industry at the wholesale and retail levels;the nature of competition at the wholesale and retail levels of the grocery industry;
the pricing practices of the major grocery retailers;
the grocery procurement practices of the major grocery retailers; andthe price, quality, product range and service offerings for retail customers.

The Commerce Commission should now make its final report for this study publicly available by
8 March 2022.
Dated this 24th day of September 2021.

1
2

Section 51A(4)(b) of the Act.
New Zealand Gazette “Notice Amending the Public Release Date for the Final Report for theCompetition Study into the Retail Grocery Sector” (24 September 2021)
https://gazette.govt.nz/notice/id/2021-go4155?year=2021.

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1.6

The high level of concentration in the sector, potential competition concerns andthe prices consumers pay for their groceries were cited by the Minister in 2020 asreasons for asking us to undertake this study.3, 4

Scope of our study
1.7

Our study focuses on the retail supply of groceries to New Zealand consumers. This
includes meat, fruit and vegetables, canned goods, dairy products, and a range ofother household products like toilet paper, cleaning products and pet food. Our
study also includes alcohol and tobacco where these are sold by grocery
retailers.5, 6, 7

Our framework for analysing competition
Competition that works well for consumers
1.8

3

4

5

6

7

8

Our study considers whether competition is working well for grocery consumers. Its
purpose is to identify and assess factors that may affect competition for the supply
or acquisition of groceries by retailers in New Zealand, and to make any
recommendations that we consider may improve competition.8

Cabinet paper “Initiating a Commerce Commission market study into supermarkets”(13 November 2020) at [4], available at: https://www.mbie.govt.nz/dmsdocument/12272-initiating-acommerce-commission-market-study-into-supermarkets-proactiverelease-pdf; Hon Dr David Clark“Supermarkets announced as Government’s second market study” (17 November 2020)
https://www.beehive.govt.nz/release/supermarkets-announced-government%E2%80%99s-secondmarket-study.
Paragraph 18.1 of the Cabinet paper referenced above noted several indicators which may suggest
there are lower levels of competition than would be expected in a workably competitive market:
unequal bargaining power which may allow supermarkets to push prices unreasonably low for
suppliers which could impede innovation and quality; research indicating most of the competition
measures for supermarkets, grocery stores, and specialist food retailers have tended to trend
downwards over time; the discounting practices of some supermarkets had been called into question
by a Consumer NZ study, a practice which they indicated may mislead consumers; and concerns about
the availability of suitable land for potential competitors to enter markets due to strategic landacquisitions by supermarkets.
We consulted on the scope of the category of ‘groceries’ we should consider for our study and somesubmitters suggested that our study scope should include alcohol and tobacco, which we initiallyexcluded, for example: Consumer NZ “Submission on retail grocery market study preliminary issues
paper” (4 February 2021) at 1; The Warehouse Group “Submission on retail grocery market study
preliminary issues paper” (4 February 2021) at 2; Foodstuffs NI “Submission on retail grocery market
study preliminary issues paper” (4 February 2021) at 8.
Alcohol and tobacco can usually be purchased at a supermarket, and consumers seeking to purchasethem as part of their shopping basket might not consider shopping at grocery retailers that do not sellthem. Our study has therefore included certain kinds of alcohol and tobacco where these are sold bygrocery retailers.
Under s 58 of the Sale and Supply of Alcohol Act 2012, the holder of an off-licence issued for premisesthat are or form part of a supermarket or grocery shop and premises that can be reached from asupermarket or grocery shop without leaving it, can sell beer, mead, wine that is no more than 15%
ethanol by volumes measured at 20 degrees Celsius.
Sections 48, 51A and 51B of the Act and our terms of reference.

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1.9

Our study does not enquire into compliance with the provisions of the Act relating
to anticompetitive conduct or mergers. Therefore, a conclusion that particular
conduct affects competition, and may be the subject of a recommendation, is not aconclusion that it breaches provisions of the Act. We retain the ability to separately
investigate anticompetitive conduct if information collected during our study, or
outside of it, gives us reason to believe that anticompetitive conduct may beoccurring. Similarly, we may separately investigate conduct which we consider
could breach the Fair Trading Act 1986 (FTA).

1.10

Our study is focused on understanding competition in the grocery sector. It does
not look at other factors which are unrelated to competition in the sector, such as
the impact of Goods and Services Tax (GST) on grocery prices, or policy mattersrelating to healthy eating, alcohol consumption or environmental issues. In
addition, we have heard that, while accessibility to healthy food is a priority formany consumers, some are struggling to afford food, with food insecurity
disproportionately affecting Māori and Pacific consumers, as well as those withdisabilities or lower incomes.9 We have not enquired into any specific effects ofcompetition on consumers facing hardship, but we acknowledge the potential forthese groups to feel some of these effects more acutely. We have also not enquired
into any broader physical and mental health implications of food insecurity in New
Zealand.

1.11

The overriding aim of our study is the same as the purpose of the Act itself: topromote competition in markets for the long-term benefit of consumers within
New Zealand.10

910

For example: Health Coalition Aotearoa “Submission on Market study into grocery sector draft report”(2 September 2021) at 1-2; Christians Against Poverty “Submission on Market study into grocery
sector draft report” (26 August 2021) at 1; Auckland Regional Public Health Service “Submission onMarket study into grocery sector draft report” (2 September 2021) at [4]; FinCap “Submission onMarket study into grocery sector draft report” (25 August 2021); Kore Hiakai Zero Hunger Collective“Submission on Market study into grocery sector draft report” (26 August 2021) at [3]; National
Council of Women “Submission on Market study into grocery sector draft report” (23 August 2021) at[5]-[6]; The Salvation Army Te Ope Whakaora “Submission on Market study into grocery sector draft
report” (26 August 2021) at [11].
Section 1A of the Act. This was emphasised by the Transport and Infrastructure Select Committee in
its report-back to Parliament on the draft market studies legislation – Commerce Amendment Bill2018 (45-2) (select committee report) at 1, available at:https://www.parliament.nz/en/pb/sc/reports/document/SCR_80263/commerceamendment-bill.

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1.12

Competition is defined in the Act as meaning “workable or effective competition”.11
It does not mean the theoretical concept of perfect competition. The Court has
noted that there is no consensus on precise conditions that define workablecompetition, rather:12… workable competition is a practical description of the state of an industry where
government intervention to make the market work better is not justified because thesocially desirable outcomes generated by competition already exist to a satisfactory
degree.
A workably competitive market is one that provides outcomes that are reasonably
close to those found in strongly competitive markets…
The degree of rivalry is critical. In a workably competitive market no firm hassignificant market power and consequently prices are not too much or for too longsignificantly above costs…
In our view, what matters is that workably competitive markets have a tendency
towards generating certain outcomes…
…the tendencies in workably competitive markets will be towards the outcomesproduced in strongly competitive markets.

1.13

We have developed Market Studies Guidelines to assist stakeholders to understandour approach to a market study.13 Our Market Studies Guidelines describe
characteristics of competitive markets that are working well and those that may beobserved in markets that are not working well. They also describe market featuresthat could affect competition and that are relevant to our study.14 In summary,when markets work well for the long-term benefit of consumers, firms compete to
win customers based on factors such as price, quality, choice, and service.

Our study is not a review of the grocery sector’s response to the COVID-19 pandemic
1.14

11
12

13
14

We are aware that the COVID-19 pandemic has had a major impact on manybusinesses operating in New Zealand. In the New Zealand grocery industry, atvarious times over the past two years there may have been:
1.14.1

short-term effects on prices, choice and availability of groceries; and1.14.2collaboration between supermarkets to stabilise supply and protect
consumers’ access to groceries.

Section 3(1) of the Act.
Wellington International Airport Ltd and Others v Commerce Commission [2013] NZHC 3289 at[13]-[15], [18] and [22], available at:https://forms.justice.govt.nz/search/Documents/pdf/jdo/53/alfresco/service/api/node/content/work
space/SpacesStore/1c117dea-b8ba-491e-ba1d-d4cd30dbe522/1c117dea-b8ba-491e-ba1dd4cd30dbe522.pdf.
Referred to as Competition Studies in Part 3A of the Act.
Commerce Commission “Market Studies Guidelines” (19 November 2020) at [12]-[20].

17

1.15

However, this study does not analyse or comment upon the grocery sector’s
response to the COVID-19 pandemic, its effects on competition, nor its effects on
affordability of, or access to, food.

1.16

Rather, we are undertaking a wider assessment of competition in the sector. As
part of this assessment, we have considered whether any issues that have emerged
during the pandemic are likely to affect competition over a longer period.

Our approach to assessing competition in this market
1.17

Our task is to study the factors that may affect competition for the supply or
acquisition of groceries by retailers in New Zealand, consider whether competition
is working well for consumers, and to make any recommendations that we consider
may improve competition.

1.18

As noted above, our Market Studies Guidelines describe the characteristics or
expected outcomes of competitive markets that are working well, and market
features that could affect competition.

1.19

To inform our assessment of whether competition is working well, we haveconsidered a range of observable market outcomes and the nature of competition.

1.20

In relation to observable market outcomes, we have focused on commonly
understood indicators of whether competition is working well or not. This includes
the profitability of grocery retailers and the prices they charge to consumers, andalso includes the extent of innovation that they engage in, as well as the quality,
range and services that are offered to consumers.

1.21

We have considered whether these observed market outcomes are consistent withwhat we would expect in a workably competitive market, and if not, the extent towhich they depart from what we would expect. In forming expectations of what wewould expect in a workably competitive market, we consider a range ofbenchmarks including observations from other markets.

1.22

We have also looked at the nature of competition in the retail and wholesale
grocery sectors, including market features such as the industry structure, theconditions under which entry and expansion can occur, and the behaviour ofmarket participants.

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1.23

We have considered the extent to which both market outcomes and the nature ofcompetition that we observe, individually and collectively, may be affecting
competition. Both are relevant to our assessment of competition and our final
recommendations. We present a series of recommendations for improvements tothe factors affecting competition that, in turn, we would expect to produce betterlong-term market outcomes for consumers, including the right prices, quality, range
and service. Where possible, we have made high-level judgements about the likely
scale of the costs and benefits of these measures. However, we consider thatformal cost-benefit analysis falls outside the scope of our study. Policy makers may
undertake that analysis while developing or giving effect to any Government
decision about recommendations that it may wish to take forward after considering
our final report.

1.24

In Chapter 2 we begin with a broad description of the characteristics of the New
Zealand grocery sector to provide an overview of the sector we have considered.
We introduce the key sector participants, focussing on providing details about theoperations of the major grocery retailers. We provide an overview of several key
features of the market, including other grocery retailers, the grocery supply chain,and other sector observations. This provides context for the discussion that follows
later in the report.

1.25

In Chapter 3 we set out our observations on market outcomes in the retail grocery
sector and our view on what these indicators can tell us about whether
competition is working well or not. We explain our profitability assessment for the
major grocery retailers, and compare New Zealand grocery prices with those seen
overseas. We also discuss the innovation that we have observed among grocery
retailers. Our conclusions in relation to these matters contribute to our overall
assessment of whether competition is working well for consumers.

1.26

In Chapter 4 we draw on evidence gathered during our study to identify thedimensions upon which competition is occurring in the retail grocery market. We
describe consumer product and shopping preferences, and how retailers offering
groceries operate nationally and locally in different regions in New Zealand.

1.27

We build on this in Chapter 5 by further considering the intensity of competition
along the dimensions of competition identified in Chapter 4. We draw someconclusions about the intensity of competition in retail grocery markets in New
Zealand and identify features of the market that might be contributing to (ordetracting from) the effectiveness of competition.

1.28

In Chapter 6 we consider longer-run competitive dynamics by assessing the abilityof retailers to enter the sector and expand their operations, an important aspect
impacting the effectiveness of competition. We draw conclusions in relation to awide range of factors, including the nature of the sector and relevant regulations,the conduct of current retailers, and the availability of wholesale access to grocery
products.

19

1.29

In Chapter 7 we consider how the major grocery retailers’ pricing and promotional
practices and loyalty programmes affect consumers’ ability to seek out the best
deals based on their preferences, and in turn stimulate competition among the
major grocery retailers.

1.30

In Chapter 8 we discuss how competition is working for the acquisition of groceries
by retailers from suppliers and growers. We discuss the relative bargaining position
between retailers and their suppliers and the extent to which retailers may havebuyer power over their suppliers. We then discuss the grocery procurement
practices of the major grocery retailers and draw conclusions about the potential
impact these procurement practices may have on competition.

1.31

In Chapter 9 we outline our recommendations to improve competition and produce
better long-term market outcomes for consumers in terms of price, quality, range
and service. Some recommendations are directed at the retail grocery industry,
while many would require Government intervention.

1.32

We have included additional information in the attachments to our report:

1.33

1.32.1

Attachment A: Additional maps of grocery retail stores includes maps
additional to those included in our report showing supermarket locations
in New Zealand.

1.32.2

Attachment B: Our assessment of retail grocery profitability provides
details about how we have assessed profitability within the retail grocery
sector, the analysis we have undertaken and our findings from thisanalysis.

1.32.3

Attachment C: International price comparison provides details about theanalysis we have conducted to compare the prices of groceries in
New Zealand with prices internationally.

1.32.4

Attachment D: Promotions and pricing data analysis provides details of
our analysis of pricing and promotion data that has been provided by the
major grocery retailers.

1.32.5

Attachment E: Consumer survey provides further information about ourconsumer survey.

1.32.6

Attachment F: Supplier survey provides further information about our
supplier survey.

1.32.7

Attachment G: Store density analysis provides details about the analysis
we have conducted to compare store density in New Zealand withinternational comparators.

We also commissioned separate research which was published alongside our draft
report (see paragraphs 1.44 to 1.45 below).

20

Our process
Papers we published
1.34

On 19 November 2020, we released our statement of process, outlining the process
we intended to follow over the course of our study.15

1.35

On 10 December 2020, we released our preliminary issues paper, seeking
responses from interested parties on the preliminary issues we intended to explore
during our study.16 We received 13 submissions on our preliminary issues paper –public versions of submissions are published on our website.

1.36

On 26 March 2021, we sought comments on submissions on our preliminary issues
paper. We received comments from five parties – public versions of thesecomments are also published on our website.

1.37

On 29 July 2021, we released our draft report, seeking responses from interested
parties on our draft findings.17 We received over 80 submissions on our draft report– public versions of submissions are published on our website.

Information collection
1.38

The grocery sector services a diverse range of consumers, with different wants,needs, and demographics. We have therefore sought to collect information anddocuments from a wide range of sources and to meet with a wide range ofparties.18 These parties include industry participants, grocery industry
representatives, government agencies, and a range of consumer groups withdiffering perspectives on the sector. We have met with 89 parties in total.

1.39

We thank all these parties for the information they have provided, and for their
ongoing engagement in our study. In particular, we appreciate the input we havereceived from the major grocery retailers, as we are aware our study has imposed
an additional burden in a high-intensity period for them during New Zealand’s
ever-evolving COVID-19 pandemic response.

15

16

17
18

Commerce Commission “Market Study into the Retail Grocery Sector – Statement of Process”(19 November 2020) at 3.
Commerce Commission “Market study into the retail grocery sector – Preliminary issues paper”(10 December 2020).
Commerce Commission “Market study into the retail grocery sector – Draft report” (29 July 2021).
We have issued some compulsory information notices under s 98 of the Act as well as being provided
with information voluntarily by interested parties and sources.

21

1.40

On 4 March 2021, we asked consumers and suppliers of grocery retailers tocomplete surveys to help build a detailed picture of how competition is working atdifferent levels of the grocery sector.19, 20 We received 12,269 responses to ourconsumer survey, and 126 responses to our supplier survey. The feedback we
received was both valuable and important for informing our study and has
contributed to the conclusions set out in this report.

1.41

From 21 October to 2 November 2021 we conducted a consultation conference tohear the further views of stakeholders. Over 100 parties attended our conferenceeach day, and we received over 40 post-conference submissions.

1.42

We also consulted with a range of Māori partners and stakeholders following the
publication of our draft report. As discussed below, this included private hui and anumber of written submissions.

1.43

As a consequence of COVID-19 pandemic public health measures, including
restrictions at Alert Levels 3 and 4 in the latter part of 2021, a significant proportionof our consultation took place online, including our consultation conference andhui. While we would have preferred to meet in person, these discussions provided
valuable information and were useful for testing and better understanding
stakeholders’ views.

Expert advice and reports
1.44

We have also engaged experts to advise us in a number of areas:
1.44.119

20

21

We engaged Ipsos to undertake qualitative research to inform ourunderstanding of consumers’ behaviour when they shop for groceries.21

Commerce Commission “Market study into the grocery sector – Consumer fact sheet”(25 March 2021), available at:https://comcom.govt.nz/__data/assets/pdf_file/0029/236918/Consumer-fact-sheet-closed.pdf.
Commerce Commission “Market study into the grocery sector – Supplier fact sheet” (25 March 2021),
available at: https://comcom.govt.nz/__data/assets/pdf_file/0030/236919/Supplier-fact-sheetclosed.pdf.
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) (Ipsos report), available at:https://comcom.govt.nz/__data/assets/pdf_file/0020/260381/Ipsos-Consumer-behaviour-andpreferences-in-the-NZ-retail-grocery-sector-Consumer-study-report-July-2021.pdf.

22

1.45

1.44.2

We engaged Frontier Economics to provide quantitative analysis to
examine how local grocery market structures affect outcomes for
consumers in New Zealand.22

1.44.3We engaged the New Zealand Institute for Business Research (NZIBR) at
The University of Waikato through the Waikato Experimental Economics
Lab (WEEL) to undertake experimental economics research into
consumer decision making under complexity.23

1.44.4

We engaged Professor Philip Gendall, an experienced survey designer, toprovide advice on the design of our consumer survey.

Where these experts provided us with reports, we published these on our website
alongside our draft report.

How we engaged with Māori
1.46

As an Independent Crown Entity, we are committed to supporting future-focused
Māori-Crown relationships, through taking a good-faith, collaborative approach toengaging with Māori on our work.24 To achieve this, we are building ourunderstanding of our role as a treaty partner under Te Tiriti o Waitangi and doing
work to better understand Te Ao Māori and what this means for our work.25

1.47

Our commitment extends to engaging with Māori to acknowledge and strengthen
our relationship with Māori, and to better understand, and reflect, Māori
perspectives in our work. We acknowledge that effective engagement with Māori is
key to realising the potential of this partnership, which will enable us to produce
better quality outcomes for Māori.26

22

23

24

25

26

Frontier Economics “Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission” (15 July 2021) (Frontier report), available at:https://comcom.govt.nz/__data/assets/pdf_file/0021/260382/Frontier-Economics-Econometricanalysis-of-the-NZ-retail-grocery-sector-Report-for-the-Commerce-Commission-15-July-2021.pdf;
Frontier Economics "Response to HoustonKemp Report" (9 November 2021), available at:https://comcom.govt.nz/__data/assets/pdf_file/0038/269849/Frontier-Economics-Response-toHoustonKemp-Report.pdf; Frontier Economics “Memo re HoustonKemp comments of3 December 2021” (23 December 2021), available at: https://comcom.govt.nz/about-us/ourrole/competition-studies/market-study-into-retail-grocery-sector?target=documents.
The University of Waikato “Consumer Decision-Making Under Complexity” (May 2021) (WEEL report),
available at: https://comcom.govt.nz/__data/assets/pdf_file/0023/260375/The-University-ofWaikato-Consumer-decision-making-under-complexity-May-2021.pdf.
Hon. Grant Robertson “Enduring Letter of Expectations to Statutory Crown Entities”(15 October 2019), available at: https://www.publicservice.govt.nz/assets/SSC-Site-Assets/Systemand-Agency-Performance/Enduring-Letter-of-Expectations-to-statutory-Crown-entities-2019.pdf.
The Treaty of Waitangi/Te Tiriti o Waitangi is regarded as a founding document of government in
New Zealand and is one of the major sources of New Zealand’s constitution.
Te Arawhiti “Guidelines for engagement with Māori” (1 October 2018) at 2, available at:https://www.tearawhiti.govt.nz/assets/Maori-Crown-Relations-Roopu/6b46d994f8/EngagementGuidelines-1-Oct-18.pdf.

23

1.48

We are committed to genuine engagement with Māori and acknowledge
rangatiratanga and the status of Māori as Treaty partners. We also acknowledge
the important role mātauranga Māori has in finding solutions to challenges we face
as a nation.

1.49

Prior to the publication of our draft report, we had not heard specific perspectives
from Māori on the retail grocery sector, from market participants or other parties,
nor did we have a specific engagement plan for consulting with Māori. Following
the release of our draft report this gap in our engagement became apparent.

1.50

To address this, we sought comment on our draft report from Māori. The purposeof this was to ensure Māori perspectives would be captured in the Market Studies
process and be taken into consideration when we issued our final report. Throughthis engagement, we heard from Māori partners and stakeholders on our draft
findings and options for recommendations through hui, written submissions, andother written comments.

1.51

On 1 December 2021 we held an initial day-long hui, inviting a range of Māori
partners and stakeholders to share their insights on in the grocery sector. A range
of individuals and organisations attended the hui from iwi and iwi-run businesses,
urban Māori organisations, Māori advocacy organisations and Māori businessowners, including some Māori supermarket owners.

1.52

We also participated in smaller hui, where these were requested. In addition,
contributors were able to provide written submissions. Throughout thisconsultation with Māori, we received 18 written submissions, which are publishedon our website.

1.53

Hearing from Māori about their perspectives on the grocery sector has enabled us
to better understand Māori perspectives, concerns, and aspirations regarding thegrocery sector. However, we acknowledge that the comments we heard, and thesubmissions we received, do not represent the views of all Māori.

1.54

We also acknowledge the diversity in views and perspectives from those we didhear from. Hearing a range of Māori voices necessarily means there was a varietyof perspectives expressed.

Confidential information shared with us
1.55

We have endeavoured to make our report as accessible to readers as possible.
However, some information within this report must out of necessity be redacted
from view, as is indicated by the use of square brackets like this: [ ].

1.56

Much of the information we have collected in the course of our study is considered
confidential or commercially sensitive by the supplying party.

1.57

It is important that interested parties and others providing us with relevant
information continue to feel confident participating in our study and supplying uswith information that we can use to develop our views.

24

1.58

Accordingly, when deciding whether information provided to us is commerciallysensitive and/or confidential or can be published, we consult with the party who
has provided it and balance these considerations against our obligations to adhere
to the principles of natural justice in the course of our study, operate astransparently as practicable, and comply with our legal obligations under the
Official Information Act 1982 (OIA).

1.59

If we receive a request for any information referred to or collected in connection
with this report, we will consider whether to make the information available inaccordance with the OIA.

1.60

Our Market Studies Guidelines contain further information about how we protect
confidential information provided to us during our study and how we respond to
OIA requests related to our study.27

Next steps
1.61

Our report sets out the findings of our study, and recommendations we have madeto both industry, and to the Minister, to improve competition.

1.62

The Minister is required to respond to our final report within a reasonable timeafter it is made publicly available.28

27
28

Commerce Commission “Market Studies Guidelines” (19 November 2020).
Section 51E of the Act.

25

Chapter 2

Market characteristics and sector backgroundPurpose and structure
2.1This chapter provides a broad description of the characteristics of the New Zealandgrocery sector. It introduces the key sector participants, focussing on providing
details about the operations of the major grocery retailers, and provides an
overview of other grocery retailers, the grocery supply chain, and otherobservations about the sector.

2.2

The chapter provides context for chapters later in this report, where we develop
our discussion of these characteristics as part of our assessment of whether
competition is working well within the retail grocery sector.

2.3This chapter discusses the following:
2.3.1

grocery consumers;

2.3.2

grocery retailers;

2.3.3

major grocery retailers’ offerings;

2.3.4

pricing and promotional practices;

2.3.5

grocery supply chain; and2.3.6

other sector observations.

Grocery consumers
2.4

Groceries are an essential purchase for all New Zealanders. In the year to
September 2021, more than $22 billion was spent at supermarkets and grocery
stores.29 In the year to June 2019, food was the second largest expenditure item for
New Zealand households, with households spending an average of $234 a week on
it.30

2.5

New Zealanders are a diverse group with different wants, needs, anddemographics. Results from our consumer survey and Ipsos report suggest thatconvenience and price are the key considerations that inform choice of grocery
store for most consumers.31, 32

29

30

31
32

Statistics NZ “Retail trade survey: September 2021 quarter” (23 November 2021) at Table 1, excludes
GST, available at: https://www.stats.govt.nz/assets/Uploads/Retail-trade-survey/Retail-trade-surveySeptember-2021-quarter/Download-data/retail-trade-survey-september-2021-quarter.xlsx.
Statistics NZ “Household Expenditure Statistics: Year ended June 2019”, includes GST, available at:https://www.stats.govt.nz/information-releases/household-expenditure-statistics-year-ended-june2019. Note this includes spend on restaurant and ready-to-eat food, and excludes alcoholic beverages
and tobacco.
Paragraph E5 in Attachment E.
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 8.

26

2.6

Consumers value the convenience of a wide range of groceries at a single location.
A sufficiently wide range that accommodates one-stop shopping is therefore an
important element of convenience, as well as the location and accessibility of agrocery store. Other elements of convenience include opening hours and access tocar parks.

2.7

Our consultation with Māori indicated the ability to access competitive prices and awide range of goods are important for many Māori, hapū and iwi in both urban andrural areas. However, location, accessibility and connectivity are also factors which
may affect where and how some Māori, particularly those in rural areas, are able toshop for groceries.

2.8

Consumers undertake different types of shopping trips (or shopping missions) topurchase groceries, including a ‘main shop’ and other ‘secondary’ and ‘top-up
shops’.33 Consumer shopping behaviour and drivers of store choice vary according
to the type of shopping mission a consumer is engaged in. However, grocery storesthat offer one-stop shopping at convenient locations cater to a wide range ofdifferent shopping missions and drivers of store choice.

2.9

Consumer shopping missions and the dimensions upon which competition takes
place in the retail grocery sector to satisfy them are discussed further in Chapter 4
and Chapter 5.

Grocery retailers
2.10

There are many different types of grocery retailers operating across New Zealand.
In addition to the three major grocery retailers there is a range of other grocery
retailers, which includes specialist grocery retailers and international food stores.
Major grocery retailers typically offer consumers the opportunity to shop for a wide
range of grocery needs. Other grocery retailers provide a narrower range ofofferings.

2.11

The three major grocery retailers operate retail banners with nationwide reach.
They are Woolworths New Zealand Limited (Woolworths NZ),
Foodstuffs North Island Limited (Foodstuffs NI), and Foodstuffs South Island Limited(Foodstuffs SI). The two Foodstuffs co-operatives do not compete in the samegeographic market, so there are two major grocery retailers operating stores undernational brands on each island – Woolworths NZ and one of the Foodstuffs
co-operatives.

2.12

Other grocery retailers are typically located in urban areas and have a smaller
number of stores, although this varies by retailer.

33

A ‘main shop’ is a shop typically happening weekly or at another regular internal based on theconvenience of using one grocery store to get all necessities in one place; a ‘secondary shop’ is a visit
to one or more store(s), other than the store the main shop is carried out at, to shop for specificproducts; and a ‘top-up shop’ is a quick shop for a small number of items that can be conducted for arange of reasons at one of a range of retailers.

27

Woolworths NZ
2.13

Progressive Enterprises Limited (Progressive Enterprises) acquired a former
Woolworths New Zealand entity in 2002, merging Woolworths, Big Fresh,
Foodtown, Countdown, Price Chopper, SuperValue and FreshChoice brands into
one entity.34 Woolworths Group Limited (Woolworths Australia) acquired
Progressive Enterprises in 2005 and later renamed it.35

2.14

Initially, Big Fresh and many Price Chopper stores were converted to Countdown or
Woolworths stores. In 2009, Progressive Enterprises announced it would also
convert Woolworths and Foodtown stores to Countdown supermarkets over a fiveyear period.36

2.15

Progressive Enterprises changed its name to Woolworths NZ in June 2018.37 Its
retail banners are shown in Figure 2.1 below.
Figure 2.1

2.16

34

35

36

37
38
39

Woolworths NZ’s retail banners

Woolworths NZ operates and supplies more than 180 Countdown storesthroughout New Zealand. Woolworths NZ also owns Wholesale Distributors
Limited, which is the franchisor to 71 locally owned and operated SuperValue andFreshChoice stores.38 In 2019, it estimated that three million customers wereserved at its Countdown stores every week.39

Commerce Commission “Decision No. 438, Application for clearance involving: Progressive Enterprises
Limited and Woolworths (NZ) Limited” (13 July 2001), available at:https://comcom.govt.nz/__data/assets/pdf_file/0020/73073/438.pdf; Commerce Commission“Decision No. 448, Application for clearance involving: Progressive Enterprises Limited and
Woolworths (NZ) Limited” (14 December 2001), available at:https://comcom.govt.nz/__data/assets/pdf_file/0016/73123/448.pdf.
Progressive Enterprises Limited changed its name to Woolworths New Zealand Limited in June 2018.
Countdown “Our history” https://www.countdown.co.nz/about-us/our-history.
NZ Herald “Foodtown, Woolworths brands on way out” (21 September 2009)https://www.nzherald.co.nz/nz/foodtown-woolworths-brands-on-wayout/ZARV4ZK5IYP7N3WXHVAKPO5IHQ/.
Countdown “Our history” https://www.countdown.co.nz/about-us/our-history.
Information provided by major grocery retailers, as at 31 December 2020, [].
Luke Kirkness “How do we shop for groceries? Supermarkets' highest stocked items shine light on how
we spend” (February 2020) New Zealand Herald
https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12304565.

28

Foodstuffs NI and Foodstuffs SI
2.17

The first Foodstuffs co-operative was formed in Auckland in 1922. Foodstuffs SI and
two regional co-operatives in the North Island were formed as a result of various
mergers of grocers over time. Foodstuffs NI was formed in 2013 as a result of themerger of Foodstuffs (Wellington) Ltd (Foodstuffs Wellington) and Foodstuffs(Auckland) Limited (Foodstuffs Auckland). Today Foodstuffs SI and Foodstuffs NI
operate as separate co-operatives serving the South Island and North Island
respectively.

2.18

Foodstuffs (N.Z.) Limited (Foodstuffs NZ), is a non-trading entity. It represents “thetwo co-operatives' interests on issues of national or grocery-specific importance”.40
It owns the retail banner brands for all Foodstuffs stores and provides other sharedservices to both co-operatives. Its shares are owned by Foodstuffs NI andFoodstuffs SI. Foodstuffs NI and Foodstuffs SI also own Foodstuffs Own Brands
Limited and a number of other entities. Foodstuffs Own Brands Limited manages
private label products.

2.19

Retail stores are owner-operated franchises which are supplied by Foodstuffs
co-operatives. Owner-operators own shares in, and provide funding to, theirco-operative. Models for this funding differ across the two Foodstuffs
co-operatives.

2.20

The Foodstuffs co-operatives own the land and buildings on which many stores arelocated, as well as supply chain infrastructure and IT assets. They also provide otherservices to their owner-operator members, including wholesale purchasing,
warehousing and distribution of groceries, and they undertake marketing, IT, and arange of other support functions.41

2.21

More than 300 retail stores operate in the North Island under the New World,
PAK’nSAVE and Four Square retail banners, and more than 100 in theSouth Island.42 Five Raeward Fresh and 85 On the Spot retail stores also operate in
the South Island.43

40
41

42

43

Foodstuffs NI “Who we are” https://www.foodstuffs.co.nz/about-foodstuffs/who-we-are/.
This includes merchandising services including product sourcing, ranging and promotional planning,retail execution support, management of marketing, IT and digital systems development, developing
and renting properties for owned retail stores, transactional shared services, HR and legal support.
As at 31 December 2020. Foodstuffs NI supplies 101 New World, one Fresh Collective by New World,
43 PAK’nSAVE, one PAK’nSAVE mini and 167 Four Square stores. Information provided by Foodstuffs
NI. Foodstuffs SI supplies 42 New World, 12 PAK‘nSAVE and 62 Four Square stores. Information
provided by Foodstuffs SI, [].
Foodstuffs also has other retail and wholesale brands, including Gilmours, Trents, Fresh Collective,
Henry’s and Liquorland: Foodstuffs SI “Foodstuffs South Island Annual Report 2021” (2021) at 11,
available at: https://www.foodstuffs-si.co.nz/-/media/Project/Sitecore/Corporate/Corporate-SouthIsland/Who-we-are/Annual-Reports/FOOD-J004626---2021-AnnualReport_Short_Form_5_JUL_Final_Spreads_DIGITAL.pdf.

29

2.22

Foodstuffs’ retail banners are shown in Figure 2.2 below.
Figure 2.2

2.23

Foodstuffs’ retail banners

Foodstuffs NI stores serve an average of 2.7 million customers every week throughits physical stores or online shopping.44 Foodstuffs SI’s stores serve over 600,000
customers each week.45

Other grocery retailers
2.24

2.25

44
45

Other grocery retailers operating in New Zealand include retailers operating in thefollowing categories:
2.24.1international food stores (eg, Tai Ping, Japan Mart, Yogiji’s Food Mart);

2.24.2other supermarkets (eg, Farro Fresh, Moore Wilson's, Bin Inn);

2.24.3

single-category or specialist grocery stores (eg, greengrocers, butchers,
bakeries, liquor stores, pet stores, pharmacies);

2.24.4

general merchandisers (eg, The Warehouse, Kmart, TheMarket);2.24.5convenience stores (eg, dairies, petrol stations, Night 'n Day);

2.24.6

meal kit providers (eg, Hello Fresh, My Food Bag);

2.24.7

food box operators (eg, Foodbox and Ooooby);

2.24.8

online-only supermarkets (eg, The Honest Grocer, Supie); and2.24.9specialist online retailers (eg, Hypermeat).

They provide a range of different retail grocery offers, many of which are focusedon specific shopping missions, product categories, or consumer groups.

Foodstuffs NI “Our purpose” https://www.foodstuffs.co.nz/who-we-are/our-purpose.
Foodstuffs SI “Foodstuffs South Island Annual Report” (2019) at 2, available at:https://www.foodstuffs-si.co.nz/-/media/Project/Sitecore/Corporate/Corporate-South-Island/Whowe-are/Annual-Reports/FSSI_AR_2019_Web.pdf.

30

2.26

They also include a number of new entrants. Chemist Warehouse entered as asingle-category retailer in 2017.46 Meal kit providers, food box operators, onlineonly supermarkets, and specialist online retailers have also entered with new retailgrocery services.47

There has been no large-scale retailer entry to the sector in the last decade
2.27

While the range of retail grocery offerings has expanded in recent years, nolarge-scale retail grocers with an offering comparable to PAK’nSAVE, Countdown or
New World have entered the sector in the last decade.

2.28

The Warehouse launched its Warehouse Extra hypermarket format in 2006 andplanned a chain of hypermarkets, which included grocery offerings. The company
abandoned plans to continue with the format in 2008 and stores were converted
back to the standard general merchandise stores.

2.29

Costco has confirmed that it intends to open one store in Auckland in 2022, and it
appears that that it is actively looking for store sites in Christchurch andWellington.48 However the development of additional stores may depend on the
success of its Auckland store.49

2.30

Further discussion of entry and expansion in the retail grocery sector is provided in
Chapter 6.

Māori historically played a strong role as food producers and providers
2.31

46

47

48

49

50

Our consultation with Māori indicated that Māori do not currently have aprominent role in the retailing of groceries. This differs from their role historically,
where Māori, particularly hapū and iwi, were involved not only as food producers,
but were also involved throughout all facets of the food supply chain, including as
traders.50

Chemist Warehouse “Game changer: All Blacks great teams up with Chemist Warehouse”
https://www.chemistwarehouse.co.nz/CWH/media/Documents/Chemist-Warehosue-Release.pdf.
For example: Hello Fresh “We save you serious money” https://www.hellofresh.co.nz/; My Food Bag“Your answer to “What’s for dinner?”” https://www.myfoodbag.co.nz/; Woop “Delicious Homemadedinners should take time. Just not yours” https://woop.co.nz/; Foodbox “Fresh, Seasonal, Local”
https://foodbox.co.nz/; Ooooby “Local and organic food made easy and fair”
https://www.ooooby.org/; The Honest Grocer “The Honest Grocer” https://thehonestgrocer.co.nz/;
Supie “Supie” https://supie.co.nz/; Hyper Meat “Hyper Meat” https://hypermeat.co.nz/.
Melanie Carroll “Costco delays its New Zealand launch, but is actively looking for additional sites”(29 October 2020) Stuff https://www.stuff.co.nz/business/industries/123230944/costco-delays-itsnew-zealand-launch-but-is-actively-looking-for-additional-sites;[]; Woolworths NZ "Post conference submission on Market
study into grocery sector" (24 November 2021) at [24.4.1].
RadioNZ “Costco experience opens in NZ mid-August” (9 February 2022)
https://www.rnz.co.nz/national/programmes/first-up/audio/2018829795/costco-experience-opensin-nz-mid-august.
For example, National Māori Authority “Post conference submission on Market study into grocery
sector” (November 2021) at 3.

31

2.32

Many Māori, hapū, and iwi have an aspiration to play a larger role in the retail partof the grocery sector. This aspiration is driven not only by the desire to produce andsell kai and see themselves reflected in all aspects of the grocery sector, but, for
hapū and iwi, also the desire to embody mana motuhake and enable tino
rangatiratanga. Central to this aspiration is the ability to determine what, and how,
kai is provided to Māori, and other New Zealanders, in accordance with Māori
values, tikanga and reo.51

2.33

Throughout our engagement with Māori we also heard about the importance of kai
and its intrinsic link to wellbeing. For example, some contributors noted that "theprovision of affordable, safe, nutritious kai is fundamental to whanau, communityand national health and wellbeing". We heard that outcomes in the grocery sector
intersect with a wider range of social factors which continue to impact Māori
wellbeing, including health, education, community, employment and theenvironment.

Major grocery retailers’ offerings
2.34

While they uniquely offer the convenience of one-stop shopping no matter the
shopping mission, the major grocery retailers choose to emphasise different
aspects of the retail grocery offer. The relative distribution of their stores varies
across New Zealand.

The major retail grocery banners
2.35

51

52
53
54
55

Foodstuffs SI states its mission is to feed the South Island and to proudly serve local
communities.52 Foodstuffs NI indicated that to make sure New Zealanders get thebest out of life, it aims to be one of the most customer driven retailers in theworld.53 Their three main retail banners provide differentiated retail offerings:
2.35.1

PAK’nSAVE stores are the largest of the Foodstuffs groups’ stores and arelocated generally in larger towns and cities. PAK’nSAVE’s policy is toprovide New Zealand’s lowest food prices and to “look for ways to keep
costs down in order to pass those savings on” to consumers.54

2.35.2

Although New World stores are typically smaller, they are also located inhigh traffic areas. New World prides itself on its friendly staff and quality
service.55

For example, Ngahiwi Tomoana (Ngāti Kahungunu Iwi Incorporated) “Post conference submission onMarket study into grocery sector” (24 November 2021) at 2.
Foodstuffs SI “Homepage” https://www.foodstuffs-si.co.nz/.
Foodstuffs NI “Who we are” https://www.foodstuffs.co.nz/who-we-are/our-purpose.
Foodstuffs SI “Our store brands” https://www.foodstuffs-si.co.nz/our-brands/our-store-brands.
Foodstuffs SI “Our store brands” https://www.foodstuffs-si.co.nz/our-brands/our-store-brands.

32

2.36

2.35.3“Four Square stores range from small neighbourhood shops in larger
towns and cities, perfect for picking up last-minute ingredients for dinner
or dessert, to larger grocery stores in rural and provincial regions thatserve their communities’ everyday shopping needs”. Their product range
varies depending on store size and location. The Four Square retailbanner is positioned as “one of New Zealand’s iconic brands”.56

2.35.4

Raeward Fresh offers customers “quality fresh fruit and vegetables, a fullbutchery range, and all [their] grocery essentials”.57

2.35.5On the Spot are either stand-alone stores or attached to fuel stations:“No matter where we are located, On the Spot stores cater to youreveryday needs”.58

Woolworths NZ states that its goal is to provide the best possible convenience,value, range and quality to the Kiwis it serves each week.59 Its three retail banners
also provide differentiated offerings:
2.36.1Countdown stores are generally the largest stores, and operate in hightraffic areas. Countdown positions itself as “New Zealand’s leading
supermarket brand” and says it is committed to providing its “customers
with choice, value and convenience, so they’ll enjoy the best overall
shopping experience”.60

2.36.2

FreshChoice and SuperValue stores are generally smaller thanCountdown stores. Their product range varies depending on store sizeand location. They aim to provide “locals quick and friendly service witha range that has everything you want and is just what you need”.61

Major grocery retailer store locations across New Zealand2.37

Figure 2.3 shows the locations of Woolworths NZ and Foodstuffs stores across theSouth Island of New Zealand. A further map of store locations across theNorth Island is provided in Attachment A. Chapter 4 provides further information
on how major grocery retailers operate nationally and locally in different regions.

2.38

Larger supermarkets (such as Countdown, PAK’nSAVE and New World) appear tobe typically located near larger populations, while smaller supermarkets (such as
Four Square) appear more likely to be located in more remote areas. Most larger
towns have a mix of larger supermarkets, as well as some smaller supermarkets.
Many smaller and regional towns only have one supermarket.

56
57
58
59
60
61

Foodstuffs NI “Our store brands” https://www.foodstuffs.co.nz/our-brands/our-store-brands.
Foodstuffs SI “Our store brands” https://www.foodstuffs-si.co.nz/our-brands/our-store-brands.
Foodstuffs SI “Our brands” https://www.foodstuffs-si.co.nz/our-brands.
Woolworths NZ “Home page” https://www.woolworthsnz.co.nz/.
Countdown “Our company” https://www.countdown.co.nz/about-us/our-company.
FreshChoice “About FreshChoice Supermarkets” https://www.freshchoice.co.nz/about/; SuperValue“About SuperValue Supermarkets” https://www.supervalue.co.nz/about/.

33

Figure 2.3

Major grocery retailer store locations in the South Island

Source: Commission analysis of information provided by major grocery retailers, as at
December 2020.62

62

[

]; [

].

34

2.39

Figure 2.4 shows locations of major grocery retailer stores by retail banner in
Auckland. Attachment A provides further maps of Wellington and Christchurch.
Figure 2.4

Major grocery retailer store locations in Auckland by retail banner

Source: Commission analysis of information provided by major grocery retailers, as at
December 2020.63

2.40

This Auckland map shows relatively more Countdown supermarkets than
PAK’nSAVE and New World supermarkets. Maps of Wellington and Christchurch
included in Attachment A show relatively more PAK’nSAVE and New World
supermarkets than Countdown supermarkets.

2.41

Chapter 4 provides further discussion on the regional variations in grocery store
options available to consumers.

Pricing and promotional practices
2.42

63

Grocery retailers commonly use a range of discounting mechanisms to encourage
consumers to shop at their stores and purchase certain products. It is also common
for New Zealand grocery consumers to be members of loyalty programmes.

[

]; [

].

35

Promotional pricing is a feature of the New Zealand retail grocery sector
2.43

Promotional mechanisms used by major grocery retailers range from specials or
short-term discounts, to multi-buys, loyalty programme member-only discounts,
and everyday low prices (EDLP) where pricing strategy is based on offering a “low”
price on certain products for an extended period. Any one store typically runs anumber of these kinds of promotions at any one time, and quite frequently morethan one offer can apply in relation to a single product.

2.44

A significant proportion of groceries in New Zealand are purchased on thesepromotions. Between around one and two thirds of total revenue earned by major
grocery retailers in 2019 was from sales of products on promotion.64 Promotions
are relatively common for product categories such as alcohol, dairy, meat, frozen
products, and general grocery.

2.45

Nielsen also reported that almost $6 in every $10 spent on groceries was spent on
products sold on promotion in 2017. As shown in Figure 2.5, the proportion ofgroceries bought on promotion in New Zealand was ahead of other developed
markets around the world.
Figure 2.5

Percentage of grocery products sold on promotion

Source: Nielsen Scantrack and Nielsen Homescan.65

64
65

Table D2 in Attachment D.
Commerce Commission “Market study into the retail grocery sector – Preliminary issues paper”(10 December 2020) at Figure 4.

36

2.46

Chapter 7 discusses major grocery retailers’ pricing and discounting practices,
including their frequency and the number offered, and the potential effects on
consumer decision making and competition.

2.47

Promotions can be funded by suppliers, when a supplier will contribute todiscounts offered on their products (referred to as promotional funding or tradeand marketing spend). We understand that discounts or rebates associated with
supplier promotional funding can lead to a material reduction in the effective priceretailers pay their suppliers for goods. We have been told that supplier-controlled
promotional funding is a global dynamic and more pronounced with large
multinational suppliers.

2.48

Chapter 8 describes the mechanics of promotional funding.

Loyalty programmes are offered by all major grocery retailers
2.49

Both New World and Countdown offer loyalty programmes and most grocery
consumers in New Zealand are members of at least one.

2.50

Key features of loyalty programmes include:
2.50.1access to member-only discounts: instant discounts provided to loyalty
programme members;

2.50.2

accumulated rewards: fuel, food or other travel rewards such as Flybuys
and Airpoints earned by loyalty programme members; and2.50.3

personalised offers: rewards or benefits that are more targeted at
individual consumers.

2.51

Through these programmes, retailers can gather consumer data, including on
consumers’ preferences and purchasing behaviour. This data can be used to informbusiness decision making, for example, in relation to product ranges, and to offer amore personalised consumer experience.

2.52

Chapter 7 discusses the nature of loyalty programmes offered by the major grocery
retailers and their potential effect on consumer decision making and competition.
Chapter 6 discusses the extent to which loyalty programmes may provide aconstraint on entry and expansion in the retail grocery sector.

Grocery supply chain
2.53

The grocery supply chain broadly consists of suppliers, wholesalers, and grocery
retailers. Suppliers may be growers of fresh produce, farmers, manufacturers orprocessors. Grocery or produce wholesalers are intermediaries who acquire
products from suppliers and on-sell them to grocery retailers. Retailers sell directly
to consumers and may acquire products either from a wholesaler or directly from a
supplier.

37

2.54

New Zealand’s major grocery retailers’ operations are vertically integrated,meaning that they have integrated wholesale functions, but largely only to service
their own retail businesses and their franchisees. They own and operate central
distribution centres which supply their retail stores throughout the country.
Suppliers either deliver products to the major grocery retailers’ distribution centres
or directly to their retail stores.

2.55

Figure 2.6 shows a simplified version of the supply chain for grocery products toretail consumers in New Zealand. The grocery supply chain is likely to be more
complicated in practice, as it includes different supply chains for different types of
products.

Figure 2.6

High-level summary of the supply chain for the NZ retail grocery sector* For the purposes of this study, we are interested in wholesalers which supply retail grocery stores.
We are aware that some foodservice wholesalers sell to some grocery retailers. We have therefore
included them in Figure 2.6 even though this is not the focus of their business.

Wholesale access to grocery products
2.56

Wholesale access to a full range of grocery products and associated services atcompetitive prices in New Zealand appears to be limited.

38

2.57

However, there are some wholesale options for:2.57.1single product categories such as fresh produce (eg, T&G Fresh, Fresh
Direct, MG Marketing), meat (eg, JR Wholesale Meats, Wholesale Meats
Direct), and some categories such as bread and milk where a large
supplier will perform a wholesale function through a “direct store
delivery” model;66, 67 and2.57.2international products (eg, Tai Ping, Wang Mart, MZ Holdings).

2.58

Retailers have also indicated that they are able to acquire some groceries fromwholesalers of imported products. This appears to largely be the case forinternational products (eg, Indian, Chinese, Korean)68 and some categories ofglobally branded products (eg, confectioneries).69 However, we note that importing
does not grant access to locally branded products.

2.59

Separate wholesalers also exist to supply to restaurants and other foodservice
retailers (foodservice wholesalers). Two of these are part of the Foodstuffs group.
Trents is owned by Foodstuffs SI and Gilmours store owners are part of theFoodstuffs NI group. Although their businesses focus on foodservice, they also
supply some convenience stores and other grocery retailers.70, 71 There are also
other independent foodservice wholesalers such as Bidfood and Service Foods.

2.60

Chapter 6 provides further analysis of the grocery supply chain and wholesale
supply.

Māori play a significant role as food producers
2.61

66

67

68

69

70

71
72

Despite a current lack of prominence as retailers, Māori have a strong role in thegrocery sector as growers and primary producers. In New Zealand, Māori own:72
2.61.1

50% of the fishing quota;

2.61.2

30% of lamb production;

T&G Fresh “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 6; United Fresh “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 17; Woolworths NZ “Submission on retail grocery market study preliminary
issues paper” (4 February 2021) at 53.
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [5.5] footnote 63.
[
]; [
];
[
].
[
[
[

];
].
]; [

].

[
].
Chapman Tripp “Te Ao Māori – Trends and insights” (Pipiri 2017) at 5, available at:https://chapmantripp.com/media/j1slpr3f/te-ao-maori-2017-english.pdf.

39

2.62

2.61.330% of sheep and beef production;

2.61.4

10% of dairy production; and2.61.5

10% of kiwifruit.

The National Māori Authority submitted that given the significant proportion of
Māori ownership of assets in the primary sector, Māori growers and primary
producers provide for a reasonable percentage of consumers’ weekly shoppingbasket through primary production.73

Other sector observations
2.63

This section sets out other observations on the grocery sector. We have looked at
the growth of the sector over the last 10 years, the impact of the COVID-19
pandemic and growth in online grocery sales.

Size of the grocery sector
2.64

73

The sector appears to have grown in line with growth in the New Zealand
population, as seen in Figure 2.7 below.

National Māori Authority "Post conference submission on Market study into grocery sector"(30 November 2021) at 4.

40

Figure 2.7

Total number of major grocery retailer stores

700

5

600
4

3

400

Millions

500

300
2
200
1
100

0

0
2010

2011

2012

2013

2014

2015

Total stores

2016

2017

2018

2019

2020

NZ Population

Source: Commission analysis of information provided by major grocery retailers. 74

2.65

There has been an increase in the total number of stores of the major grocery
retailers in the last 10 years. This has stabilised from 2017. The flattening off from2017 appears to reflect a number of Four Square stores exiting the Four Squareretail banner, and others that have closed.75

2.66

The average annual growth rate of the number of stores for the period 2010 to2020 is 1.6%, while the average annual population growth over the same period
has been 1.7%.

2.67

Figure 2.8 demonstrates an increase in supermarket and grocery store sales overthe last 10 years. The average annual growth rate of retail sales for the period 2011
to 2020 is 1.7%.

74

[

75

Chapter 6; [

].
].

41

Figure 2.8

Supermarket and grocery store industry sales

20
5

18
16

4

12
3
10

8

Million$2010 billion

14

2

6
4

1

2
0

0
2011

2012

2013

2014

2015

Retail grocery sales

2016

2017

2018

2019

2020

NZ Population

Source: Statistics NZ “Retail trade survey” Supermarket and grocery stores sales (operating income),
deflated at September 2010 quarter prices.76

Impact of the COVID-19 pandemic on the retail grocery sector
2.68

As an essential service, supermarkets were able to operate during
Government-mandated lockdown periods (including the Alert Level 4 lockdown
periods from 25 March 2020, and 17 August 2021).

2.69

Many other grocery retailers, such as greengrocers and butchers, were significantly
disrupted during those periods, including not being able to open, and being subject
to other restrictions on trade. Some retailers that were not able to open have sincechanged their business models or ceased trading. However, some businesses who
had not previously sold groceries to retail consumers began selling online during
lockdowns.77 The introduction of the Traffic Light system is more permissive,
allowing a wider range of retail operations.

76
77

Statistics NZ “Infoshare” http://infoshare.stats.govt.nz.
For example: Bidfood https://www.bidfood.co.nz/; Service Foods https://www.servicefoods.co.nz/;
Trade Me https://www.stuff.co.nz/business/121373859/coronavirus-trade-me-launches-fresh-foodboxes; Mighty Ape https://mightymart.co.nz/.

42

2.70

Night ’n Day (which operated during Alert Level 4 lockdowns) has noted that its
wholesale supply arrangement with Woolworths NZ was impacted during the 2021
Alert Level 4 lockdown, and many of its stores were not supplied during the
lockdown period.78 In Woolworths NZ’s view, the Night ‘n Day example highlights
the challenges of dealing with third parties in emergencies, such as while
responding to the COVID-19 pandemic, and that it is important to understand thecontext in relation to that supply relationship.79, 80

2.71

Concerns have been raised about price gouging. For example, during the Alert
Level 4 lockdowns:
2.71.1

there was significant media coverage regarding price rises for several
grocery products;81

2.71.2

MBIE set up an online Price Watch service for consumers to reportconcerns about price increases for essential goods and services; and2.71.3

consumers complained that some stores may have temporarily stopped
offering promotional discounts.

2.72

Many consumers changed their behaviour through the lockdown period, forexample, by making larger, less frequent purchases, or by purchasing groceries
online.82 It is unclear whether this trend will continue in future, with the change toa Traffic Light system which is more permissive for retailers, and in an evolving
pandemic, including with the emergence of Omicron.

2.73

While many non-supermarkets likely lost sales during the COVID-19 pandemic (andin particular during the Alert Level 4 lockdown periods), sales appear to haverecovered for many following lockdowns. Sales of some niche products also appear
to have increased over the period as a consequence of disposable incomes not
being spent on international travel.83 Some changes in consumer behaviour
influenced by the pandemic are likely to persist while others may be moretransitory in nature.

2.74

However, this study does not analyse or comment upon the grocery sector’s
response to the COVID-19 pandemic, or its effects on competition.

78
79
80

81

82
83

Transcript of Grocery Market Study Conference – Day 6 (1 November 2021) at 36 (lines 14-23).
Transcript of Grocery Market Study Conference – Day 6 (1 November 2021) at 37 (lines 12-14).
Woolworths NZ "Post conference submission on Market study into grocery sector"(24 November 2021) at [25.3].
For example: Cherie Howie “Price Gouging complaints pour in to Government’s ‘price watch’ inbox”(3 April 2020) https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12322407; Susan
Edmunds “'Four inquiries a day' about potential price gouging during lockdown: MBIE”(26 August 2021) https://www.stuff.co.nz/business/300392282/four-inquiries-a-day-about-potentialprice-gouging-during-lockdown-mbie.
For example: [
].
[
].

43

2.75

Rather, we have undertaken a wider assessment of competition in the sector. As
part of this assessment, we have considered whether any issues that have emerged
during the pandemic are likely to affect competition over a longer period.

Online trends
2.76

The majority of New Zealand consumers purchase groceries by visiting a retailstore. However, there has been an increase in online sales, including an increase
fuelled by the COVID-19 pandemic.

2.77

NZ Post indicated that online sales of specialty food, groceries and liquor increasedby 47% to $1.3 billion between 2019 and 2020, against an overall sector sales
increase of 10%. At the same time, the total number of online consumers increased
significantly, rising by 54% to 1.09 million. Customers also carried out 41% more
online transactions in 2020 and online basket size increased by 5%.84

2.78

Woolworths NZ has indicated Countdown’s online penetration continues to grow,having increased from 3% total sales in FY2014 to over 13%.85

2.79

Foodstuffs NI launched online shopping for its New World stores in 2017, offering
delivery and click and collect, and has since added click and collect to its PAK’nSAVE
stores.86 Foodstuffs SI has very recently launched an online offering, which will berolled out to all New World (click and collect and delivery) and PAK’nSAVE (click andcollect only) by the end of 2022.87

2.80

Other grocery retailers have launched online offerings, with a number being
launched during or shortly after the COVID-19 pandemic Alert Level 4 lockdown inMarch 2020.88

2.81

Chapter 3 provides further information about innovation and investment in online
shopping services.

84

85

86

87

88

NZ Post “The Full Download: 2021 New Zealand eCommerce Review” (2021) at 59, available at:https://thefulldownload.co.nz/sites/default/files/2021-05/NZPost_TheFullDownload_2021.pdf.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 18; Woolworths NZ "Post conference submission on Market study into grocery
sector" (24 November 2021) at [15.5.6]; [].
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[165.1]-[165.2].
Karen Coltman “Foodstuffs steps up its South Island online shopping service” (21 July 2021)
https://www.stuff.co.nz/business/125796178/foodstuffs-steps-up-its-south-island-online-shoppingservice.
[
]; [
];
[
]; Woolworths NZ “Submission on Market study into grocery sector
draft report” (10 September 2021) at [28.6.1]; Foodstuffs NI "Post conference submission on Market
study into grocery sector" (3 December 2021) at [72.1]-[72.10].

44

Chapter 3

Market outcomes in the retail grocery sector

Summary of findings•

Our analysis indicates that the major grocery retailers achieved higher levels of
profitability than we would expect in a workably competitive market for at least the five
years prior to the COVID-19 pandemic. We have assessed three profitability measures:
return on average capital employed (ROACE), profit expectations in business cases for
new investments, and profit to sales margins.

•

Our ROACE estimates for the major grocery retailers, averaged across 2015 to 2019, are
12.8% for Foodstuffs SI, 12.7% for Woolworths NZ, and 13.1% for Foodstuffs NI. This iswell above our estimate of a normal return for grocery retailing in New Zealand of 5.5%.

•

Business cases for incremental investments in new and refurbished supermarkets were
examined as a cross-check of this analysis. We examined the returns that the major
grocery retailers expected to make on investments in new and refurbished stores,
contained in a selection of business cases produced between 2014 and 2019. The
information which was of evidential value shows average expected returns from theseparticular investment projects well above the hurdle rate which is our workablecompetition benchmark. It is not, however, possible for us to draw any inference
regarding the overall profitability of a major grocery retailer’s business from ourassessment of those business cases.

•

The three major grocery retailers’ profit to sales margins are broadly consistent withthose of a sample of overseas grocery retailers. However, we have not given significant
weight to this observation, as to reach a robust conclusion from a direct comparison
would require a detailed examination of each overseas retailer’s business and operating
context.

•

While it is difficult to compare grocery prices internationally, it appears that New Zealandprices are relatively high by international standards based on comparisons using a rangeof data sources and a mix of market exchange rates and purchasing power parity (PPP)
exchange rates.

•

We have observed innovation in a range of areas including in customers’ in-store
experiences, in the distribution of grocery products, new products and online sales.
However, our view is that the scale and pace of innovation in the New Zealand retailgrocery sector appears lower than might be expected in a workably competitive market.
○
The major grocery retailers appear to be largely adopters of other retailers’ or
suppliers’ innovations, rather than generating their own innovations.
○
Their buyer power can also weaken suppliers’ incentives to invest in new products.
○
In addition, the benefits of supply chain efficiencies may not be shared with
consumers to the same extent as would be likely if competition was stronger.
○
Some of the major grocery retailers have been slow to introduce online sales
channels.

•

None of these observed market outcomes is, on its own, a conclusive indicator thatcompetition is not effective. However, viewed in the round, they suggest thatcompetition is not working as well for consumers as it could.

45

Introduction
3.1

This chapter sets out our observations on market outcomes in the retail grocery
sector and our view on what these indicators can tell us about whether
competition is working well.

3.2

We focus on a range of observable outcomes that are indicative of whether
competition is working well. This includes the profitability of grocery retailers andthe prices they charge to consumers, but also includes the extent of investment
and innovation that they engage in.

3.3

Looking across these observations we consider whether they are consistent withwhat we would expect in a workably competitive market and, if not, the extent towhich they depart from what we would expect. In forming expectations of what wewould expect in a workably competitive market, we consider a range ofbenchmarks including observations from other markets, such as those overseas orin other industries.

3.4

In a workably competitive market we would expect to see:

3.5

3.4.1

levels of profitability which are not persistently above normal returns;

3.4.2

prices which are lower in the long run than those in markets wherecompetition is not working effectively; and3.4.3

firms which are innovating and investing in research and development todrive competitive advantage and further profitability by creating more
efficient or attractive offerings for consumers.

The remainder of this chapter discusses:
3.5.1

profitability of grocery retailers in New Zealand;

3.5.2

price outcomes; and3.5.3

innovation and investment.

Profitability of grocery retailers in New Zealand
3.6

Although there are limited measures of economic profit available, our analysis
indicates that the major grocery retailers have been able to achieve higher levels of
profitability than we would expect in a workably competitive market for at least thefive years prior to the COVID-19 pandemic.

3.7

For the period between 2015 and 2019 we have calculated average ROACE
estimates of 12.8% for Foodstuffs SI, 12.7% for Woolworths NZ and 13.1% for
Foodstuffs NI. These ROACE estimates are well above our estimate of a normal rateof return for grocery retailing in New Zealand of 5.5%.

46

3.8

Our ROACE analysis has been improved in response to submissions, and throughinformation that we had requested from Foodstuffs NI and Foodstuffs SI which was
not available at the time of our draft report. For example:
3.8.1

Following receipt of the data requested, our ROACE estimates for
Foodstuffs NI and Foodstuffs SI are now calculated on a ‘whole ofbusiness’ basis. Whole of business ROACE estimates are for the entiretyof Foodstuffs NI and Foodstuffs SI’s businesses, including the centralisedfunctions provided by the co-operatives and ownership of property used
for retail stores.

3.8.2

For Woolworths NZ we have now included right of use assets reflecting
the value of its leased property.

3.9

We have examined the returns that the major grocery retailers expected to makeon a selection of incremental investments in new and refurbished stores, containedin business cases produced between 2014 and 2019. The information which was ofevidential value shows average expected returns from these particular investment
projects well above the hurdle rate which is our workable competition benchmark.
It is not, however, possible for us to draw any inference regarding the overallprofitability of a major grocery retailer’s business from our assessment of thosebusiness cases.

3.10

We also compared the major grocery retailers’ ROACE and profit margins with
27 overseas grocery retailers. It is difficult to draw robust conclusions regardingwhether the major grocery retailers’ profitability is consistent with workablecompetition based on this analysis.

3.11

Data availability has restricted the range of profitability measures we have beenable to consider in our study. For various reasons we have not been able to apply
the range of profitability measures used in our retail fuel market study.

3.12

Our assessment of profitability is set out below, under the following headings:
3.12.1

persistently high profitability may indicate that competition is notworking well;

3.12.2

we have used three measures to assess profitability;

3.12.3we have estimated a normal rate of return for grocery retailing based on
Weighted Average Cost of Capital (WACC);

3.12.4

ROACE estimates for the major grocery retailers’ are well above our
WACC estimate;

3.12.5

we have compared ROACE estimates for the major grocery retailers withoverseas retailers;

3.12.6

there is an alternative view regarding valuation of lease assets;

47

3.13

3.12.7business cases show high returns for some projects; and3.12.8

it is difficult to draw robust conclusions from comparing profit to sales(profit margins).

Attachment B provides more details about how we have assessed profitability
within the retail grocery sector.

Persistently high profitability may indicate that competition is not working well
3.14

In a workably competitive market we would not expect to see levels of profitability
which are persistently above a normal return.

3.15

Levels of profit above normal returns that are temporary or particular to somefirms can occur in a workably competitive market. Profits are a reward tobusinesses which can achieve lower costs than their rivals or attract additionalcustomers by improving their offers.

3.16

High levels of profitability provide a signal for new entry or expansion in a market.
When entry or expansion occurs, output increases and prices should subsequently
fall, so that profit returns to normal levels. If high profitability is persistent in acompetitive market, it will generally be confined to a subset of firms that havesome form of enduring competitive advantage such as relatively lower costs.

3.17

However, if all firms in a sector are persistently earning above a normal return, thissuggests that competition is not working well for consumers. In a workablycompetitive market, we would expect that over time, firms would tend to earnnormal rates of return and prices would reflect efficient costs.

3.18

Conversely, the absence of profitability persistently above normal levels is notnecessarily evidence that competition is working effectively. Profitability can still beat or around normal levels without workable competition. This could be due toinefficiency and a lack of innovation by market participants, caused by the lack ofcompetition.

We have used three measures to assess profitability
3.19

We have assessed profitability between 2015 to 2019. We have excluded 2020
onwards to avoid the effects of the COVID-19 pandemic. For example, given
supermarkets were allowed to keep trading during lockdown (while many otherretailers were not), the period from 2020 onwards might not be representative ofunderlying performance and profitability.

3.20

Our analysis has focused on the major grocery retailers: Woolworths NZ, Foodstuffs
NI and Foodstuffs SI. We have analysed the Foodstuffs co-operatives individually as
this reflects their business structure. Woolworths NZ and the Foodstuffs cooperatives operate under different business models. This has meant our approachhas differed slightly by company.

48

3.21

We have used three approaches when assessing the profitability of the grocery
retailers in New Zealand:
3.21.1

our primary profitability measure is ROACE;

3.21.2

we have examined forward-looking expectations of anticipatedprofitability contained in business cases for investments in new andrefurbished stores; and3.21.3we have also examined profit margins that the major grocery retailers
have earned over time.

3.22

We have compared each of these profitability measures against relevantbenchmarks to assess the level of profitability and its persistence over time.

3.23

Data availability has restricted the range of profitability measures we have beenable to consider in our study. We have not been able to apply the range of
profitability measures used in our retail fuel market study, primarily due to the lackof available information. For example:

3.24

3.23.1none of the major grocery retailers in New Zealand are separately
publicly listed, which has prevented us from using the Tobin’s Q measurein our assessment;89

3.23.2

we have not had access to high frequency data on margins, over a longtime period, as we did in the retail fuel market study; and3.23.3we have also not been able to source data to perform an internal rate of
return (IRR) or a truncated internal rate of return (TIRR) from thefinancial data provided by the major grocery retailers.

Limitations of our profitability analysis are discussed further below.

Return on average capital employed
3.25

89

ROACE derives an annual return based on the amount of earnings a company has
made in a financial year relative to the value of the assets that were employed inthat year to generate those earnings. The specific ROACE formula we have used inthis study is shown in Figure 3.1 below. This is broadly the same formula that wasused in our retail fuel market study.

Although Woolworths Group Limited is publicly listed in Australia, Woolworths NZ is only acomponent of this business.

49

Figure 3.1

Our ROACE formula

3.26

The value of assets employed in the ROACE measure should reflect the market
value (or opportunity cost) of the assets, or the amount of capital being employed.
Given we are estimating profitability for grocery retailers, any assets and earnings
that relate to non-grocery activities were excluded.

3.27

Assets should ideally be valued at their depreciated replacement cost. However,this is not always straightforward, particularly for some intangible assets likebrands and organisational capital, which reflect things such as customer contracts,
supplier relationships, a trained workforce and transport contracts.

3.28

While this means there are some limitations of the ROACE measure, it isnonetheless useful in measuring profitability. In particular, ROACE is a good andwell-known measure of economic profit. Economic profit is a better measure of
profitability for competition analysis than accounting profit. This is because it
focuses on the economic costs of the resources used in the business and can becompared to the opportunity cost of investing those resources elsewhere. The
Competition and Markets Authority (CMA) and the Australian Competition andConsumer Commission (ACCC) also use various forms of return on capital in theirown market studies (for example, the CMA Funeral Study and ACCC Cattle and Beef
Study).90

3.29

A summary of our approach to measuring ROACE for Woolworths NZ and the two
Foodstuffs co-operatives is provided below. This includes how we have dealt withthe difficulties associated with ROACE and issues that have been raised insubmissions. Further detail is included in Attachment B.

90

Competition & Markets Authority “Funerals Market Investigation – Final report – Appendix S:
Profitability of funeral directors” (18 December 2020), available at:https://assets.publishing.service.gov.uk/media/5fdb2461e90e071be1015708/Appendix_S__Profitability_of_funeral_directors_18.12.20.pdf; Australian Competition & Consumer Commission“Cattle and beef market study – Final report” (March 2017) at 29, available at:https://www.accc.gov.au/system/files/ACCC%20Cattle%20and%20beef%20market%20studyFinal%20
report.pdf.

50

Approach to calculating ROACE for Woolworths NZ
3.30

When calculating ROACE for Woolworths NZ, we have included estimated values ofcapitalised leases and the associated interest expenses. Woolworths NZ leases
most of the land and buildings used for its retail stores. This approach is based on
one of the economic functions of a lease being to provide an alternative to debt
when financing the acquisition of an asset, “the lease…relieves the firm of having tofinance the asset from other sources”.91 Including right of use assets for leases incapital employed is consistent with standard financial practice. Recent changes tointernational accounting standards mean the value of these assets is now available
in financial accounts.

3.31

Woolworths and its advisors, in their submissions on our draft report, argued forthis approach to be adopted.

3.32

We have adjusted Woolworths NZ’s asset base upwards to reflect our estimates of
the current market value of land and buildings it owns. This is to capture the actual
amount of capital that is being employed by the company and its opportunity cost.
We have removed development properties from Woolworths NZ’s assets employedbecause these assets are not being used for grocery retailing.

3.33

We have excluded the intangible asset relating to goodwill from Woolworths NZ’s
asset base.92 We have removed goodwill because it is not an asset that is employedin generating earnings – rather, it reflects future expected earnings. Therefore,
including goodwill may capture the expectation of excessive profits in the future.

3.34

We have also excluded two non-grocery subsidiaries Woolworths NZ owned during
the 2015 to 2019 period when calculating ROACE, given our analysis is focused on
the profitability of grocery retailing.

3.35

We have included the book value of intangible assets relating to brands in
Woolworths NZ’s assets employed. In our draft report we excluded this intangible
asset because of its similarities to goodwill and we tested the sensitivity of ourresults to this exclusion. Submissions made by Woolworths NZ and their economic
advisors proposed that brands should be included in the assets employed.93 We
have concluded that this asset has a value that should be recognised whenestimating ROACE.94

91

92

93

94

Stewart C Myers, David A Dill and Alberto J Bautista “Valuation of financial lease contracts” The
Journal of Finance Vol XXXI , No 3, June 1976, 799-819 at 800.
Woolworths NZ submitted that it did not agree with our exclusion of goodwill assets from its asset
base, Woolworths NZ “Submission on Market study into grocery sector draft report”(10 September 2021) at [27.7.8].
Woolworths NZ "Post conference submission on Market study into grocery sector"(24 November 2021) at [5.4.8]; Woolworths NZ “Submission on Market study into grocery sector draft
report” (10 September 2021) at [27.7.5].
We have included brands at book value in the asset base, which reflects the price a party was willingto pay for the asset. This approach aligns our estimation of the ROACE for the sample of overseas
grocery retailers, which include the value of acquired brands in the asset employed. It is also
consistent with the approach in our retail fuel market study.

51

Approach to calculating ROACE for the Foodstuffs co-operatives
3.36

Our ROACE estimates for Foodstuffs NI and Foodstuffs SI are based on a ‘whole ofbusiness’ approach. The whole of business ROACE for each co-operative is a
consolidation of its retail stores, and includes the centralised functions provided by
the co-operatives. Most of the land and buildings used for their retail stores is
owned by the co-operatives.

3.37

Applying a whole of business approach is a change from our draft report. Ourestimates in our draft report focused on the profitability of Foodstuffs NI andFoodstuffs SI’s retail stores, noting that the land and buildings used for retail storesis leased by individual owner-operators from the co-operatives. In our draft report,
our focus was on the individually owned and operated companies that directly
engage in grocery retailing.

3.38

Based on submissions and new information provided, we have now assessed the
profitability of the two Foodstuffs co-operatives on a whole of business basis.
Foodstuffs NI and Foodstuffs SI submitted that each co-operative and its retailbusinesses are fully integrated in terms of their operations, and trying to assess
profitability for the individual parts of the group was artificial as it does not reflect
the reality of their business.95

3.39

At the time of our draft report, we did not have a complete picture of the
co-operatives’ land and buildings, including the market value of these investments
and any gain in value these investments have earned. This made estimating
profitability on a whole of business basis problematic, given their significant
investments in property.

3.40

Following consultation on our draft report we now have information from both ofFoodstuffs NI and Foodstuffs SI which estimates the market value of their property
investments. We have also used this information to estimate the annualised capitalgains that both co-operatives have earned over 2015 to 2019.

Profit expectations for new investments
3.41

Our second profitability measure is the returns that the major grocery retailers
expected to earn from proposed new investments, and the level of financial returnthat they require for new business cases to be approved.

3.42

Consistent with our approach to ROACE, we examined the forecast profitability ofthe two Foodstuffs co-operatives based on the whole of business approach, rather
than focussing on the profitability of the retail businesses (as we did in our draft
report).

95

Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021) at[21]; Foodstuffs NI “Submission on Market study into grocery sector draft report”(10 September 2021) at [25].

52Profit margins
3.43

Our third profitability measure is profit margins of the three major grocery
retailers. Profit margins measure profit as a percentage of annual sales revenue.

3.44

We have used three measures of profit margin: gross profit (GP) margin, earnings
before interest, tax, depreciation, amortisation and rent (EBITDAR) margin, and net
profit after tax (NPAT) margin. We have assessed trends in profit margins overtime, and relative to a sample of international grocery retailers.

We have estimated a normal rate of return for grocery retailing based on WACC
3.45

We have benchmarked ROACE and profit expectations for new investments against
our estimate of a normal rate of return for firms in the New Zealand retail grocery
sector.

3.46

Our estimate of a normal rate of return is the estimated WACC. WACC is the
expected financial return that investors require for an investment given theriskiness of that investment. We consider that the WACC is the best available
benchmark of returns expected under workable competition.96 ROACE iscomparable to a post-tax WACC.

96

We note submissions from major grocery retailers on this point. Foodstuffs NI submitted that seeking
to benchmark ROACE against WACC is prone to error and is consequently not a sound basis forcomparison and that Foodstuffs NI’s profit margins are consistent with the international sample,
Foodstuffs NI “Submission on Market Study into grocery sector draft report” (10 September 2021) at[52] and [64]. Peter Harris submitted for Woolworths that “firms under conditions of perfectcompetition might expect to see their returns on capital competed down to a level just above WACC.
But the Commission by its own standard in the Study recognises that perfect competition is not theappropriate standard. Workable competition, where returns are going to be materially higher than a
WACC, is that standard”, Woolworths NZ “Post conference submission on Market study into grocery
sector: Attachment 1 - Peter Harris AO - Views on the Commerce Commission Draft Market Study
Report on Grocery Retailing in New Zealand” (25 November 2021) at [9]-[21]. WACC measures thecost of capital of an efficient firm; while we agree that there can be deviations from the normal
returns an efficient firm could expect we nonetheless consider it the most suitable benchmark. As
indicated by the court in Wellington International Airport Ltd and Others v Commerce Commission,“workably competitive markets have a tendency towards generating certain outcomes. These
outcomes include the earning by firms of normal rates of return, and the existence of prices thatreflect such normal rates of return, after covering the firms’ efficient costs”, Wellington International
Airport Ltd and Others v Commerce Commission [2013] NZHC 3289 at [18]-[22].

53

3.47

Our central estimate of post-tax WACC for firms in the New Zealand retail grocery
sector for the time period between 2015 and 2019 is 5.5%. As a sensitivity, we also
estimated WACC based on the views of various submissions on behalf of the major
grocery retailers on inputs to the WACC, various commercial research, and our own
previous work on WACC inputs.97 In our view, this gives a higher estimate ofpost-tax WACC of 6.6%.

3.48

WACC is estimated using certain input parameters. Some of these inputs have been
estimated using a sample of 27 overseas grocery retailers. These retailers are froma variety of OECD countries, including the United Kingdom, the United States,
Canada, Israel, and Turkey. The sample of overseas grocery retailers is described ingreater detail in Attachment B.

3.49

We have reviewed our WACC estimate in response to submissions. A number ofsubmissions on our draft report challenged our estimate of the parameter values
and our overall WACC. The main adjustments we have made to our WACC estimate
are:

97

98

3.49.1

We have removed three companies from the sample of overseas grocery
retailers, in response to submissions from Foodstuffs and Woolworths
NZ.98 This increased our central asset beta estimate to 0.47.

3.49.2

We have also adopted an asset beta of 0.6 for our higher WACC estimate(compared to 0.5 in our draft report). Reasonableness checks we haveundertaken, alongside the other evidence before us, suggest using thishigher asset beta for our higher WACC estimate is appropriate.

Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA
Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at 75-91; CommerceCommission “Input Methodologies review decisions: Topic Paper 4: Cost of capital issues”(20 December 2016) at [590]-[595.7], available at:https://comcom.govt.nz/__data/assets/pdf_file/0021/60537/Input-methodologies-review-decisionsTopic-paper-4-Cost-of-capital-issues-20-December-2016.pdf; Commerce Commission “Fibre input
methodologies: Main final decisions – reasons paper” (13 October 2020) at [6.896]-[6.899], available
at: https://comcom.govt.nz/__data/assets/pdf_file/0022/226507/Fibre-Input-Methodologies-Mainfinal-decisions-reasons-paper-13-October-2020.pdf; Professor Aswath Damodaran “Data Archives”
Damodaran Online
https://pages.stern.nyu.edu/~adamodar/New_Home_Page/dataarchived.html#discrate; Grant
Samuel “Independent Expert Report in Coles Group Limited: Scheme Booklet Supplement”(21 September 2007), available at:https://www.asx.com.au/asxpdf/20071001/pdf/314w5y3fgt938l.pdf.
Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix A - Incenta
Review of grocery retailing: Comment on the Commerce Commission’s analysis of profitability”(10 September 2021) at [86], [95] and [96]; Woolworths NZ “Submission on Market study into grocery
sector draft report: Attachment 1 - NERA - Grocery Market Study: Review of the NZCC Draft Report”(10 September 2021) at iii.

54

3.50

In addition, we have updated leverage to 17% when calculating both our WACC
estimates. This is the average leverage of the overseas comparator sample. We had
previously included a leverage figure of 30% for our higher WACC estimate in ourdraft report. However, our estimate of cost of capital uses a zero debt beta. Using
the average leverage of the comparator sample set for both our estimates of WACC
avoids the anomaly of WACC increasing with leverage.99

3.51

We have also removed debt issuance costs from our WACC estimate. We had
included debt issuance costs in our WACC estimate for our draft report. However,estimated firm-level profits are net of debt issuance costs, so including them in
WACC would double count these costs. Consequently, we have excluded this for
our final report. This is consistent with our approach in the retail fuel market study.

3.52

As a result of these changes, our central WACC estimate has increased from 5.3% to5.5% since our draft report, and our higher estimate has increased from 6.1% to6.6%. Attachment B provides further details on how we estimated WACC, including
evidence supporting that our estimates are commercially realistic.

ROACE estimates for the major grocery retailers are well above our WACC estimate
3.53

99

For the period between 2015 and 2019 we have calculated average ROACE
estimates of 12.8% for Foodstuffs SI, 12.7% for Woolworths NZ, and 13.1% for
Foodstuffs NI. These ROACE estimates are well above our WACC estimate for New
Zealand grocery retailers. This is illustrated in Figure 3.2.

Commerce Commission “Input Methodologies (Electricity Distribution and Gas Pipeline Services)
Reasons Paper” (22 December 2010) at Appendix H, available at:https://comcom.govt.nz/__data/assets/pdf_file/0019/62704/EDB-GPB-Input-MethodologiesReasons-Paper-Dec-2010.pdf.

55

Figure 3.2

Average ROACE for each major grocery retailer in New Zealand compared to
WACC (2015-2019)

Source: Commerce Commission profitability analysis.100

3.54

We have estimated the excess returns earned by the major grocery retailers indollar terms, based on the ROACE and WACC estimates above. The average ROACE
for the major grocery retailers is 12.9%. If the average ROACE was 5.5% (our central
estimate of WACC), the major grocery retailers’ profits would reduce byapproximately $430m per year.101

3.55

We have also examined ROACE for the three major grocery retailers for each year
between 2015 to 2019. This is illustrated in Figure 3.3 below. Overall these ROACE
estimates are relatively stable, showing no clear upwards or downwards trend.
There are no clear indications that the ROACE estimates for the major grocery
retailers exceeding WACC is temporary.

100
101

[
].
If the major grocery retailers’ average ROACE was 6.6% (our higher WACC estimate), their profits
would reduce by approximately $365m per year.

56

Annual ROACE for each major grocery retailer in New Zealand (2015-2019)

18%
16%
14%
12%

10%
8%

6%
4%

2%
0%
2015
Woolworths NZ

2016

2017

Foodstuffs North Island

2018

2019

Foodstuffs South Island

Source: Commerce Commission profitability analysis.102

3.56

102
103

104

Our ROACE estimates are lower than those in our draft report, due toimprovements in our calculations in response to submissions, additional
information we have received, and refinements to the scope of the grocery
businesses we have assessed.103 The ROACE estimates for the major grocery
retailers contained in our draft report ranged from 21.6% and 23.8%, when
averaged across 2015 to 2019. The most material changes were moving to a wholeof business approach for Foodstuffs NI and Foodstuffs SI, and including right of use
assets associated with leases for Woolworths NZ.104[].
See paragraphs 3.30 to 3.40 above for further discussion of our approach to estimating ROACE for
Woolworths NZ and the Foodstuffs co-operatives.
Updated ‘retail’ ROACE estimates for Foodstuffs, focusing on the overall profitability of retail stores,
are 21.9% for Foodstuffs NI and 21.7% for Foodstuffs SI. These retail estimates reflect the updates wehave made between the draft and final reports, except the change to reporting ROACE for Foodstuffs
on whole of business basis. They do not include the capitalisation of leases as a right of use asset.

57

We have compared ROACE estimates for the major grocery retailers with overseas
retailers
3.57

We compared the average ROACE for the three major grocery retailers with theaverage ROACE observed for a sample of overseas grocery retailers over the sametime period.105 As shown in Figure 3.4 below, the average ROACE for the threemajor grocery retailers is slightly higher than, but similar to, the average ROACE for
the overseas comparator companies.

Figure 3.4

Average ROACE for the major grocery retailers in New Zealand comparedwith overseas grocery retailers (2015-2019)

Source: Commerce Commission profitability analysis.106

3.58

105

106

However, it is difficult to draw firm conclusions regarding whether the major
grocery retailers’ ROACE is consistent with workable competition by comparing
with overseas grocery retailers.

The formula used for calculating the ROACE for our sample of international grocery retailers is thesame that we used for calculating the ROACE for the New Zealand grocery retailers. It removes
goodwill from the assets employed. The overseas companies used in our sample are the same used indetermining our estimate of WACC, which is described in Attachment B.
[
].

58

3.59

To do so would require a close examination of the overseas grocery retailers’businesses and the competitive context in which each of them operates. For
example, the extent to which the overseas grocery retailers are operating inworkably competitive markets is unclear.

3.60

There is large variation in ROACE observed for the overseas retailers. The 5-year
average ROACE for the overseas sample does range from 2.7% to 36.9%.107
Submissions also noted that the results from the overseas sample showedsignificant variability and volatility.108 This could reflect differences in competitive
constraints, and other economic and operating differences.

3.61

ROACE estimates depend crucially on asset values and we have not adjusted theinternational comparator ROACE estimates to be consistent with our New Zealandanalysis, including assessing the market value of property or adding right of use
assets associated with leases. For example, if right of use assets for leased property
are not included, ROACE is likely to be higher.109 However, adjusting the asset
values retrospectively would require detailed specific enquiry into each company toassess the individual adjustment required.

There is an alternative view regarding valuation of lease assets
3.62

Unlike the position outlined in the section above, our draft report did not add thevalue of capitalised leases to retailers’ asset values when calculating returns andestimating the profitability of the grocery retailers.

3.63

If we had persisted with the approach used in our draft report, we would havesought to adopt economic valuation concepts such as depreciated replacement
cost (DRC) or market value. Under this approach the initial value of any lease asset,
based on DRC, would be the sum of the search, negotiation and contracting costs,
because these activities provide benefits over the life of the lease. While we do nothave data regarding these costs for the major grocery retailers, the resulting value
would inevitably be small relative to the total value of all future lease payments.

3.64

The reasons for preferring the approach in our draft report might include that it
would:

107
108

109

3.64.1

help separate out the economic profits available to grocery retailers andproperty investors; and3.64.2more accurately signal the economic profit available to a capitalconstrained entrant.

[].
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [27.5.3].
We note that Woolworths NZ ROACE, averaged across 2015 to 2019, reduced from 21.0% to 12.7%
when right of use assets for leases were included.

59

3.65

The overall effect of the approach in our draft report was to decrease the value ofthe grocery retailers’ assets employed. This would increase retailers’ ROACE
estimates from those quoted in Figure 3.2 and Figure 3.3. In the case of
Woolworths NZ, the change would be to levels cited in Footnote 109, given thesignificant role that leases play in its business model. For Foodstuffs NI andFoodstuffs SI, if their ROACE has been measured on a whole of business basis, theincrease would be much more modest.

Business cases show high returns for some projects
3.66

Analysis of business cases for new investment projects can provide insight into theforward-looking profit a company expects to earn from new investments. We also
used this form of analysis in the retail fuel market study.

3.67

It is common for firms to set profit targets for new investment capital at a “hurdle
rate” which is higher than their WACC. We would expect this in workablycompetitive markets and note that hurdle rates apply to extra capital invested, not
the ROACE across the firm as a whole. For our business case analysis we usedinternal hurdle rates above the WACC as the benchmark.

3.68

The major grocery retailers provided us with information on 116 new investment
projects, less than half of which included internal modelling from which we could
assess profit expectations. In our view, most of this information has no value as
evidence for this study.

3.69

The information that is of evidential value shows average expected returns fromthese particular investment projects well above the hurdle rate which is ourworkable competition benchmark.

3.70

We acknowledge Woolworths NZ’s submission that we have only assessed“growth” projects that relate to investments in new stores, that this only
represents some of its capital expenditure and that a large proportion of its
remaining ‘business as usual’ spending on maintaining and upgrading existing
investments does not generate returns itself.110 This is a limitation of our businesscase analysis – we have not examined the significant amount of investment that
relates to ‘business as usual’ spending on maintaining and upgrading existing
investments.

110

Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [27.10].

60

3.71

Each of the major grocery retailers operates an integrated business which includes
not simply the retailing outlets but also distribution centres and head officesystems. It can therefore be expected to have a range of investment projects withvarying levels of expected returns depending on the nature and risk of the projects
being undertaken. Consequently, it is not possible for us to draw any inference
regarding the overall profitability of a major grocery retailer’s business from theassessment of those business cases we have analysed.

It is difficult to draw firm conclusions from comparing profit margins with overseas
grocery retailers
3.72

We have examined the profit margins of the three major grocery retailers. This
enabled us to observe trends over time and to compare profit margins with asample of 27 overseas grocery retailers. These are the same comparator companies
that we used when developing our WACC estimate.

3.73

Profit margins are assessed using accounting measures of profit as a percentage ofthe annual sales turnover. Three profit margins were assessed:

3.74

3.73.1

EBITDAR margin: EBITDAR is the profit a company has made before theinterest expenses on debt, the tax on its profit, depreciation,amortisation, and rent have been paid. The EBITDAR margin is the total
EBITDAR divided by total sales for a financial year.

3.73.2NPAT margin: NPAT is a company’s profit after all costs, including
taxation have been paid. The NPAT margin is the total NPAT divided bytotal sales for a financial year.

3.73.3

GP margin: GP margin is the gross profit a company makes after
deducting the costs associated with purchasing its products and making
them ready for sale. In other words, it is the total sales revenue thecompany receives, less the total cost of the goods sold. The GP margin is
the total GP divided by total sales for a financial year.

Our analysis shows that profit margins for New Zealand’s major grocery retailers
are broadly consistent with the sample of overseas grocery retailers. While in someinstances the profit margins for the major New Zealand grocery retailers are higher
than the average overseas comparators, there is large variation amongst theoverseas sample.

61

3.75

However, it is difficult to draw firm conclusions regarding whether the major
grocery retailers’ profit margins are consistent with workable competition bycomparing with overseas grocery retailers. Similar concerns to our international
comparisons of ROACE (see paragraph 3.58 above) also apply to profit margins. In
particular:
3.75.1

it is difficult to ensure a robust comparison of profit margins with New
Zealand’s major grocery retailers, given challenges in understanding theoverseas grocery retailers’ businesses and the competitive context inwhich each of them operates; and3.75.2

there is large variation in profit margins observed for the overseas
retailers.

3.76

There are some additional caveats around the comparability of profit margins
between businesses in different countries, including differences that arise fromdifferent tax regimes, whether the stores own or lease their land and buildings, andthe relative scale of their typical operations.

3.77

We have made several changes to our analysis of profit margins in response tosubmissions on our draft report. These include:
3.77.1

Using the EBITDAR margins instead of EBIT margins. This is in response to
the submission from Incenta (for Foodstuffs NI and Foodstuffs SI), which
presented an example showing how different profit margins could be
affected by ownership versus renting of assets.111 Incenta noted that the
GP Margin and the NPAT margin are not impacted by this effect.

3.77.2

We have converted profit margins for Foodstuffs NI and Foodstuffs SI toa whole of business basis, consistent with our approach to ROACE. Ourdraft report presented profit margins for the Foodstuffs co-operatives
based on retail stores. Foodstuffs NI and Foodstuffs SI submitted thatprofit margins should be developed based on the whole of businessapproach.

3.78

Figure 3.5 below shows the EBITDAR margin for the three major grocery retailers
from 2015 to 2019, compared to the sample of international grocery retailers.
Woolworths NZ and Foodstuffs NI’s EBITDAR margins are slightly above theoverseas sample average, while Foodstuffs SI is broadly similar.

3.79With the exception of one data point, the major grocery retailers’ EBITDAR margins
fall within the interquartile range of the overseas sample. This is illustrated in
Figure 3.5.

111

Foodstuffs SI “Submission on Market study into grocery sector draft report: Appendix A - Incenta Review of grocery retailing: Comment on the Commerce Commission’s analysis of profitability”(10 September 2021) at 13 (Table 2); Foodstuffs NI “Submission on Market study into grocery sector
draft report: Appendix A - Incenta - Review of grocery retailing: Comment on the CommerceCommission’s analysis of profitability” (10 September 2021) at 13 (Table 2).

62

Figure 3.5

EBITDAR margin for the major grocery retailers relative to overseas grocery
retailers (2015 to 2019)

10%
9%
8%

7%
6%
5%
4%
3%
2%
1%
0%

2015
Woolworths NZ
Overseas Sample

2016

2017
Foodstuffs North Island
Lower Quartile

2018
2019
Foodstuffs South Island
Upper Quartile

Source: Commerce Commission profitability analysis.112

3.80

112

Figure 3.6 below compares the major grocery retailers’ NPAT margins to theoverseas sample. This shows that Foodstuffs NI, Foodstuffs SI and Woolworths NZ
generally have higher NPAT profit margins than the international sample. However,most of these NPAT margins are still within the interquartile range of the overseas
sample.

[

].

63

Figure 3.6

NPAT margin for the major grocery retailers relative to overseas grocery
retailers (2015 to 2019)

6%

5%

4%

3%

2%

1%

0%

2015
Woolworths NZ
Overseas Sample

2016

2017
Foodstuffs North Island
Lower Quartile

2018

2019
Foodstuffs South Island
Upper Quartile

Source: Commerce Commission profitability analysis.113

3.81

Figure 3.7 below shows the GP margin for the three major grocery retailers from2015 to 2019, compared to the sample of overseas grocery retailers. Each of the
major grocery retailers’ GP margins are below the average of the overseas sample.

3.82

In response to Woolworths NZ’s submission, we have removed the UK grocery
retailers from the overseas sample for GP margins, because their accounting
standards around reporting of gross profit differs materially from the othercountries in the sample.114

113
114

[
].
Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix A - Incenta Review of grocery retailing: Comment on the Commerce Commission’s analysis of profitability”(10 September 2021) at [131].

64

Figure 3.7

GP margin for the major grocery retailers relative to overseas grocery
retailers (2015 to 2019)

30%

25%

20%

15%
2015

Woolworths NZ
Overseas Sample

2016

2017

Foodstuffs North Island
Lower Quartile

2018

2019

Foodstuffs South Island
Upper Quartile

Source: Commerce Commission profitability analysis.115

Price outcomes
3.83

When competition in a market is not working well, firms have weakened incentives
to compete on price, and in the long run we would expect prices to be higher thanin a market where competition is working effectively.

3.84

Even in competitive markets, prices are likely to be impacted by a range of factors
in addition to the level of competition. These include factors such as input costs
and scale economies.

3.85

In the terms of reference, the Minister asked us to consider price outcomes in ourmarket study.116 Some participants in our consumer research perceived the overall
price of groceries in New Zealand to be high.117 Complaints made to theCommission include complaints that grocery prices in New Zealand are
unreasonably high, including in comparison with overseas.118

115
116

117

118

[
].
New Zealand Gazette “Notice Amending the Public Release Date for the Final Report for theCompetition Study into the Retail Grocery Sector” (24 September 2021).
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 13.
Paragraph 7.210.2.

65

3.86

To test whether these perceptions are accurate we considered international pricecomparisons provided to us by participants in our study and conducted our own
analysis. Our analysis suggests that New Zealand’s grocery prices are relatively highby international standards. A number of datasets that we have considered showthat New Zealand ranks highly in terms of the prices of grocery products andconsumer expenditure on groceries.

3.87

When we compare New Zealand to a smaller subset of potentially morecomparable countries, New Zealand still ranks highly (although is not the highest).

International price comparisons
3.88

Given the link between prices and competition, we sought to understand how New
Zealand’s grocery prices compare with other countries.

3.89

There are several methodological challenges to overcome when comparing prices
in different countries. Some of these were discussed in submissions on our draft
report from the grocery retailers and third parties, particularly the exchange ratethat should be used to convert international prices to a common currency tofacilitate comparisons. We have taken these submissions into account in finalising
our analysis and summarise the findings below. Attachment C provides further
information about our approach to comparing international grocery prices.

3.90

Our analysis of OECD, International Comparisons Program (ICP), Numbeo, and US
Department of Agriculture (USDA) datasets using a blended approach to converting
exchange rates suggests that New Zealand grocery prices are high relative to someoverseas countries.119

3.91

Out of OECD countries, New Zealand ranked 5th highest in terms of grocery prices,
as well as 4th highest in terms of grocery expenditures in the OECD and ICP datasets
respectively. We consider these datasets to be the most reliable datasets of grocery
prices due to their use of official data sources. New Zealand therefore ranked
within the top five most expensive grocery markets out of all 38 OECD countries in
2017.

3.92

While this data is several years old, we are not aware of any reason why the
rankings would have changed significantly in that time.

119

The blended approach uses a combination of market exchange rates and purchasing power parity toconvert international grocery prices.

66

Our approach to making international price comparisons
3.93

3.94

120

In our retail fuel market study we noted several factors may complicate pricecomparisons.120
3.93.1

The choice of currency conversion method can potentially distortcomparisons. Annual average exchange rates were used in our retail fuelmarket study to control for this rather than PPP.

3.93.2

Factors other than competition are likely to affect prices relative to othercountries. Examples of these for New Zealand may include ourgeographic isolation, biosecurity regulations, labour and distribution
costs.

3.93.3Differences in methodologies used to collect prices for national datasets,
may decrease the accuracy of results.

3.93.4

Taxation on products, may differ across countries.

Further, grocery products are not homogeneous. Lack of homogeneity makes
international comparison of grocery prices more difficult because:
3.94.1

prices of potentially thousands of heterogeneous products need to be
combined into a single average price for that country;

3.94.2variation of quality and range of goods across grocery products may
mean that apparently similar price levels mask substantially different
outcomes for consumers;

3.94.3

consumer preferences and availability of different products in different
countries likely further decreases the comparability of prices, as different
countries may be consuming different goods; and3.94.4

taxation rates may differ between different grocery products, making
comparisons more complex.

Commerce Commission “Market Study into the retail fuel sector – Final report” (5 December 2019) at
121, available at: https://comcom.govt.nz/__data/assets/pdf_file/0028/193915/Retail-fuel-marketstudy-Final-report-5-December-2019.PDF.

67

3.95

Recognising the many factors that can influence price, NERA Economic Consulting(NERA, on behalf of Woolworths) and HoustonKemp (on behalf of Foodstuffs NI
and Foodstuffs SI) told us that it is difficult to use price to assess the level ofcompetition in the supply of groceries.121 We agree that there are difficulties inboth the measurement of price differences and the interpretation of the results but
remain of the view that prices are relevant to our overall assessment ofcompetition.

3.96

Acknowledging the difficulties outlined above, we have focused our analysis on any
insights that could be gained from existing international datasets of grocery prices.
These are presented as price-level indices for grocery items. We also considered
existing datasets of per capita expenditure on groceries.

3.97

Price-level indices, which are averages of the prices paid by consumers, can becompared to other countries. Expenditures are the amount that an average
consumer would spend on a range of products over a given year. When prices arehigher, we would expect that consumer expenditure would also be higher.

3.98

When comparing prices between countries, prices need to be converted into acommon unit as different countries use different currencies. Prices can beconverted either using the market exchange rate, or by using PPP.

3.99

3.98.1

The market exchange rate is the rate of conversion between currencies
that is offered on the foreign exchange market. This rate is used toconvert currencies involving transactions overseas, as it reflects theactual prices paid by importers and exporters for foreign goods.

3.98.2

PPP is a widely-used rate for converting currencies that aims to remove
the effect of price differences between countries. This means that when
prices are converted using PPP, the same amount of currency in one
country would be able to purchase, on average, the same amount ofgoods in all other countries. PPP is often used when comparing therelative size of economies because it compares all currencies in terms of
the amount of goods that an economy can purchase.

NERA and HoustonKemp submitted that using PPP for price conversion purposes ismore appropriate than using market exchange rates because:
3.99.1

121

122

grocery retailing, and costs associated with retailing such as labour, arenon-tradable;122

Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [115]; Foodstuffs NI“Submission on Market study into grocery sector draft report: Appendix C - HoustonKemp International comparisons of grocery prices” (10 September 2021) at [33]-[35].
Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [124a];Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix C HoustonKemp - International comparisons of grocery prices” (10 September 2021) at [57a].

68

3.99.2grocery expenditure accounts for 8% of Gross Domestic Product (GDP),
which is a relatively small component of GDP which implies that grocery
expenditure will not have an undue effect on PPP;123 and3.99.3the Commerce Commission used PPP rates to convert prices for otherprice comparison exercises for retail mobile telecommunications
services.124

3.100

We agree with NERA and HoustonKemp that the grocery retailing component ofprice is non-tradable and therefore PPP is the appropriate rate to convert thegrocery retailing component of grocery prices. However, we are of the view thatgrocery products are tradable and therefore the market exchange rate is theappropriate rate to convert that component of grocery prices.

3.101

Accordingly, we have used a “blended approach” to convert international prices to
a common unit. This approach converts each grocery price component (tradable
and non-tradable) using the appropriate rate (market exchange rate and PPP
respectively). Further details on our methodology are included in Attachment C.

Datasets we considered for this analysis
3.102

3.103

123

124

125

126
127

128

We used four datasets for our analysis. These are those produced by:
3.102.1

the OECD – price and expenditure statistics;125

3.102.2

the ICP – price and expenditure statistics;126

3.102.3

Numbeo – price statistics;127 and3.102.4

the USDA – expenditure statistics.128

These datasets include a range of products sold at supermarkets, but somedatasets exclude some categories of products such as personal health or cleaningproducts. Further details on the product lists included in datasets is provided in
Attachment C.

Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [124b];
Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix C HoustonKemp - International comparisons of grocery prices” (10 September 2021) at [57b].
Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [130].
OECD.Stat “2017 PPP Benchmark results” (2020)
https://stats.oecd.org/Index.aspx?DataSetCode=PPP2017.
World Bank “Databank | ICP 2017” (2020) https://databank.worldbank.org/source/icp-2017.
Numbeo “Groceries Index by Country 2017” (2017) https://www.numbeo.com/cost-ofliving/rankings_by_country.jsp?title=2017&displayColumn=3.
USDA “Data on expenditures on food and alcoholic beverages in selected countries: 2013-2018”(2019) https://www.ers.usda.gov/media/10271/2013-2018-food-spending_update-april-2019.xls.

69

3.104

We consider that the OECD and ICP datasets are likely to be the most reliable
sources for price comparisons because they are created with price data collectedfrom stores by national statistical organisations over a long period of time. In
contrast, data contained in other datasets are not collected by national statisticalorganisations and may include crowd-sourced price data. The OECD and ICP
datasets also provide extensive documentation detailing their process for collecting
prices. Further detail on why we consider the OECD and ICP to be the most reliable
sources is included in Attachment C.

3.105

The most recent pricing datasets from the OECD and ICP are available for 2017, andfrom Numbeo for 2021. The latest expenditure datasets that include New Zealand
are available for 2019 from the OECD dataset, 2018 for the USDA dataset, and 2017
for the ICP dataset.

3.106

Our approach was to compare prices and expenditures for the most recent year
where all datasets were available. We then tested our pricing analysis against more
recently available datasets.

3.107

We also considered the analysis NERA conducted on grocery prices.129 NERA used adataset created by the Economist Intelligence Unit (EIU) that had data from as
recently as 2020, while the most recent data included in the datasets we used is for2017. We understand the EIU data is collected by twice-yearly price surveys.130
NERA used this dataset to compare grocery prices for the cities of Wellington and
Auckland with cities overseas.

3.108

We have considered NERA’s submissions on the suitability of this dataset andremain of the view that this dataset is not as suitable for the purposes ofcomparing New Zealand’s grocery prices with overseas countries as the OECD and
ICP datasets. In particular, we have seen only limited documentation about how
the dataset is compiled and how key variables such as stores and cities are defined.
In addition the dataset is limited to two New Zealand cities. We discuss the reasonsfor our view further in Attachment C.131, 132

New Zealand’s grocery prices rank highly among OECD countries
3.109

129

130

131

132

When using the blended approach to grocery price conversions New Zealandgenerally ranks highly among OECD countries in terms of prices of grocery items
using each of the OECD, ICP and Numbeo datasets.

Woolworths NZ “Submission on retail grocery market study preliminary issues paper: Attachment 1 NERA Economic Consulting, Grocery price benchmarking” (4 February 2021).
Woolworths NZ “Submission on retail grocery market study preliminary issues paper: Attachment 1 NERA Economic Consulting, Grocery price benchmarking” (4 February 2021) at [5].
Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [137].
Woolworths NZ "Post conference submission on Market study into grocery sector: Attachment 5 NERA - Grocery Market Study: Post-conference report” (25 November 2021) at Appendix C.

70

3.110

Price levels for food and beverages (alcoholic and non-alcoholic) for OECD countries
using the ICP and OECD datasets for 2017 are shown in Figure 3.8, as a percentage
difference compared to New Zealand’s price level.

3.111

We also examined price levels shown by the Numbeo dataset, between 2016 and2020, which is shown in Attachment C.

3.112

Although relative price levels differ between the ICP, OECD, and Numbeo, all threedatasets appear to be generally consistent in whether or not OECD countries havemore or less expensive grocery prices than New Zealand.
Percentage difference in food, beverages (alcoholic and non-alcoholic) andtobacco prices compared to New Zealand (NZ = 0, blended approach, 2017)

Source: Commission analysis of ICP and OECD datasets.133

3.113

133

The ICP and OECD datasets indicate that New Zealand was the fifth most expensive
grocery market in the OECD in 2017. In Figure 3.11, when alcohol and tobacco are
excluded, New Zealand’s ranking from the ICP dataset is seventh. This suggests thatwhile alcohol and tobacco prices may be relatively high in New Zealand, this is not asignificant factor in New Zealand’s overall high ranking.

[

].

71

3.114

In the Numbeo dataset between 2016 and 2020, New Zealand ranked between
sixth and 12th highest out of OECD countries included. This provides some evidence
that New Zealand’s grocery price rankings have not changed significantly since2017. These rankings can be found in Attachment C.

New Zealand’s expenditure per capita on groceries also ranks highly among OECD countries
3.115

New Zealand also ranked highly among OECD countries in terms of expenditures ongrocery items using each of the OECD, ICP and USDA datasets. Regardless of thedataset used, New Zealand’s expenditure per capita on grocery products was atleast the fifth highest in the OECD in 2017.

3.116

Figure 3.9 below shows per capita spending on food, beverages, and tobacco in2017 for the OECD, ICP, and USDA datasets.
Per capita expenditures on food, beverages (alcoholic and non-alcoholic)and tobacco (blended approach $, 2017)

Source: Commission analysis of ICP, OECD and USDA datasets.134

3.117

134

Our findings on expenditure are consistent with our findings using price-level
datasets. New Zealand’s relatively high per capita spending on food potentiallyindicates that prices in New Zealand are high relative to other countries.

World Bank “Databank | ICP 2017” (2020) https://databank.worldbank.org/source/icp-2017;
[
].

72

3.118

In Attachment C, we show that New Zealand’s grocery expenditures relative toother countries remains relatively high even when looking at more recent datasets.

3.119

We also compared average grocery expenditure as a proportion of income in OECD
countries using an OECD dataset on grocery expenditures and Net National Income
data obtained from OECD.135 Our analysis suggests that on average, New
Zealanders spend a relatively large share of their income on groceries comparedwith consumers in some other OECD countries.

3.120

Figure 3.10 shows that, on average, New Zealanders spent the highest proportionof income on groceries out of OECD countries in 2017.

3.121

We obtain similar results when conducting additional sensitivity analysis using a
range of income measures and other datasets. Attachment C provides further
information on the sensitivity analysis we have done to compare average grocery
expenditure as a proportion of income between different countries.
Share of Net National Income per capita spent on food, beverages (alcoholicand non-alcoholic) and tobacco (OECD, 2017)

Source: Commission analysis of OECD datasets.136

135

136

In response to submission from Woolworths NZ “Submission on Market study into grocery sector
draft report: Attachment 1 - NERA - Grocery Market Study: Review of the NZCC Draft Report”(10 September 2021) at [138]-[139].
OECD.Stat “2017 PPP Benchmark results” (2020)
https://stats.oecd.org/Index.aspx?DataSetCode=PPP2017; [].

73

New Zealand’s grocery prices remain comparatively high when alcohol and tobacco areremoved
3.122

NERA told us that alcohol and tobacco should be excluded from comparisonsbecause they are highly taxed, and not sold at supermarkets in other countries. 137
However, our analysis shows that New Zealand grocery prices and expenditure arestill relatively high in comparison to other OECD countries, even when alcohol andtobacco are removed.

3.123

We considered this effect in both the ICP and OECD datasets, and found that theremoval of alcohol and tobacco had similar effects in both datasets. We present
data from the ICP dataset in Figure 3.11 and Figure 3.12 below, and from the OECDdataset in Attachment C.

3.124

When alcohol and tobacco are removed from comparisons, New Zealand has theseventh most expensive grocery prices in the OECD, in both the OECD and ICP
datasets. New Zealand also spends the third and fifth most on groceries in theOECD when alcohol and tobacco are removed, in the OECD and ICP datasets
respectively.

3.125

Figure 3.11 below shows a price level for groceries calculated with and without
alcohol and tobacco using the ICP dataset. This graph compares the price level offood and non-alcoholic beverages with the price level for food, beverages (alcoholicand non-alcoholic), and tobacco for 2017.

3.126

Figure 3.12 below shows per capita grocery expenditures, calculated with andwithout alcohol and tobacco using the ICP dataset. This graph shows the division ofgrocery expenditure between those two categories for 2017.

3.127

When tobacco is removed, New Zealand’s grocery prices become relatively higher.
We also note that since 2017, there have been changes to New Zealand’s taxes on
tobacco, which may mean that the relative price levels that include tobacco could
have changed since 2017.138

137

138

Woolworths NZ "Submission on Market study into grocery sector draft report: Attachment 1 - NERA Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [118].
Office of the Associate Minister of Health “Cabinet Paper - 1 January 2020 Tobacco Excise Tax
Increase”, available at: https://www.health.govt.nz/system/files/documents/informationrelease/cabinet-paper-1-january-2020-tobacco-excise-tax-increase-redacted.pdf.

74

Percentage difference in grocery prices, inclusive and exclusive of alcohol(NZ = 0, blended approach, 2017)

Source: Commission analysis of ICP dataset.139

139

[

].

75

Per capita grocery expenditures, inclusive and exclusive of alcohol andtobacco (blended approach, 2017)

Source: Commission analysis of ICP dataset.140

3.128

Figure 3.12 suggests that the relatively high grocery prices in New Zealand areunlikely to be driven by higher alcohol and tobacco prices. Further detail can befound in Attachment C.

Comparison to a subset of countries likely to be more similar to New Zealand
3.129

NERA and HoustonKemp told us that even if grocery prices in New Zealand are
high, other factors aside from competition may explain why that is the case.141, 142
3.129.1

140
141

142

143

HoustonKemp told us that even if major grocery retailers made zeroprofits, prices would still be high in New Zealand by international
standards.143[].
Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [115].
Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix C HoustonKemp - International comparisons of grocery prices” (10 September 2021) at Section 2.2.
Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix C HoustonKemp - International comparisons of grocery prices” (10 September 2021) at [71]-[84].

76

3.129.2

NERA told us that New Zealand’s overall price level is high, so otherfactors may explain why grocery prices are perceived to be high whencompared internationally.144

3.130

We agree that there are many factors that can affect grocery prices, such as acountry’s scale and size.

3.131

However, prices can also be high in markets that are not workably competitive,
whether or not profits are also high. For example, firms in markets that are notworkably competitive may have a reduced incentive to find ways to lower cost,
resulting in prices being high without earning excess profits.

3.132

Our view is that it is not possible to determine exactly how much of the pricedifferences we observe can be attributed to inter-country differences incompetition or any other factors. However, to gain further insight we compared
New Zealand prices to a smaller subset of countries that we considered likely to be
most comparable to New Zealand in terms of scale and size.

3.133

We selected comparators by looking for OECD countries that, on the face of it,
could face similar demand and supply factors to New Zealand. The countries weselected were:

3.134

144

3.133.1

Australia;

3.133.2

Finland;3.133.3

Iceland;3.133.4

Ireland; and3.133.5

Israel.

Figure 3.13 below shows a comparison of New Zealand prices with this smaller setof countries using the ICP dataset for 2017. New Zealand prices are still higher than
the average for this smaller comparator group, although the result varies
depending on whether alcohol and tobacco are included.

Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at 32.

77

Comparing price levels across different categories(NZ=100, tax inclusive, 2017)145

Source: Commission analysis of ICP dataset.146

3.135

Overall, Figure 3.13 shows that Iceland is the only country out of our set ofcomparators with more expensive grocery prices than New Zealand in all
categories. Israel has more expensive grocery prices than New Zealand when
tobacco, or alcohol and tobacco, are removed. Moreover, New Zealand has more
expensive grocery prices than Australia, Finland, and Ireland, regardless of which
categories are excluded.

3.136

More detail of the process we used to select comparators can be found in
Attachment C.

NERA/Woolworths NZ analysis of grocery prices
3.137

NERA submitted analysis that compared grocery prices internationally. Instead ofcreating an average price like the agencies compiling the other datasets, NERA uses
a ranking system at the grocery product level, then presents the distribution ofgrocery price ranks.147

3.138

Figure 3.14 and Figure 3.15 below show the analysis that was presented in the
NERA report.148 These figures show the distribution of product price rankings foreach city as a box and whisker plot. They are sorted by the median ranking ofproduct prices that a city receives.

145
146
147

148

“ALL” refers to: food, beverages (alcoholic and non-alcoholic), and tobacco.
[].
Woolworths NZ “Submission on retail grocery market study preliminary issues paper: Attachment 1 NERA Economic Consulting, Grocery price benchmarking” (4 February 2021) at [15].
Woolworths NZ “Submission on retail grocery market study preliminary issues paper: Attachment 1 NERA Economic Consulting, Grocery price benchmarking” (4 February 2021) at [5.3] and [5.6].

78

3.139

Figure 3.14 shows that Auckland has a relatively inexpensive grocery market incomparison to cities that the EIU considers to be “metro” cities, while Figure 3.15
shows the same for Wellington, in comparison to cities that the EIU considers to be“non-metro” cities.
Distribution of average product price ranks in PPP for available OECD cities
By cities with prices collected in the metro area, 2020

Source: NERA report on grocery price benchmarking.149

Distribution of average product price ranks in PPP for available OECD cities
By cities with prices collected in the non-metro area, 2020

Source: NERA report on grocery price benchmarking. 150

149

150

Woolworths NZ “Submission on retail grocery market study preliminary issues paper: Attachment 1 NERA Economic Consulting, Grocery price benchmarking” (4 February 2021) at Figure 5.3.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper: Attachment 1 NERA Economic Consulting, Grocery price benchmarking” (4 February 2021) at Figure 5.6.

79

3.140

NERA considered it most appropriate to use a PPP to convert prices into a common
currency. However, as discussed in paragraphs 3.97 to 3.101, we consider that theblended approach is the most appropriate method of conversion into a common
unit.151

3.141

Furthermore, it is unclear whether the ranking mechanism used by NERA isappropriate for making pricing comparisons. The ranking mechanism may limit the
influence of very cheap or expensive goods that might be a large share of
expenditure, meaning that the median ranking of prices may not represent
consumer experiences at grocery stores.

3.142

NERA told us that its use of a ranking mechanism is appropriate because it does notconsider a fixed basket of goods, but rather considers the range of items as thisavoids the need for defining a typical basket of goods purchased by consumers in
New Zealand.

3.143

We note that the significant overlap of all box and whisker charts in Figure 3.14 andFigure 3.15 shows that almost all cities rank as the most expensive for somegrocery products and the least expensive for others. This means that using the
distribution of prices for the purposes of doing international comparisons will leadto a conclusion that prices are neither high nor low in all cities surveyed.152

3.144

We consider that NERA’s analysis is not informative of the price ranking of any
particular city included in the EIU dataset.

3.145

Our view is therefore that limited weight can be placed on the analysis in the NERA
report when considering how New Zealand grocery prices compare internationally,
due to the dataset not being produced by National Statistic Agencies, the use of
PPP as opposed to a blended approach and its use of a ranking mechanism. We
discuss this further in Attachment C.

Other observations on grocery prices
3.146

Some stakeholders and participants in our consumer research told us about theirown perceptions and anecdotal observations on grocery prices.

3.147

Some participants in our consumer research perceived the overall price of groceries
in New Zealand to be high.153, 154 For example, comparisons were made by someparticipants to lower prices being available in other countries they have lived in,such as Australia and the UK. Further, some participants told us that they thought alack of competition was the reason for prices being high.155

151

152

153

154
155

Woolworths NZ “Submission on retail grocery market study preliminary issues paper: Attachment 1 NERA Economic Consulting, Grocery price benchmarking” (4 February 2021) at [12].
Woolworths NZ “Submission on retail grocery market study preliminary issues paper: Attachment 1 NERA Economic Consulting, Grocery price benchmarking” (4 February 2021) at [135].
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 13.
Paragraph E170.
Paragraph E188.

80

3.148

Complaints made to the Commission include complaints that grocery prices are
unreasonably high. Complainants allege that some products are significantly more
expensive in New Zealand than they are overseas or that they are sold at “too high”
a profit.156

3.149

We agree with Peter Harris AO (on behalf of Woolworths NZ) that perceptions andanecdotal observations should not be used to decide the contested question ofwhether or not prices are higher than we would expect in a workably competitivemarket. 157 They do not provide evidence that prices are in fact higher than wemight expect in a workably competitive market. However, they do provide us witha view of consumers’ confidence that a market is well-functioning.

3.150

We also received the following submissions from stakeholders comparing New
Zealand’s grocery prices internationally:
3.150.1

Consumer NZ based its finding of high prices on a price comparison of 20
identical “Homebrand” and “Woolworths Select” products sold in both
New Zealand and Australia.158 It is unlikely that we can infer an overall
price difference for groceries from this comparison; and3.150.2

Coriolis told us that there is a price difference between New Zealand andthe US of approximately 2-6% that is driven by competition factors(“duopoly premium” and “lack of retail format diversity”).159 However,
we agree with Woolworths NZ160 that the usefulness of this analysis islimited due to a lack of supporting evidence for the data, quantification
and underlying assumptions used to compare grocery prices between
New Zealand and the US.

Innovation and investment
3.151

156
157

158

159

160

The scale and scope of innovation and investment in a sector gives insights into the
dynamics of the competitive process and the extent to which there are incentives
to supply the products and services that consumers want, when they want themand at the lowest possible cost.

Paragraph 7.210.2.
Woolworths NZ "Post conference submission on Market study into grocery sector: Attachment 1 Peter Harris AO - Views on the Commerce Commission Draft Market Study Report on Grocery
Retailing in New Zealand” (25 November 2021) at [2]-[5].
Consumer NZ “Submission on the retail grocery market study preliminary issues paper”(4 February 2021) at [25]-[28].
Coriolis Ltd "Post conference submission on Market study into grocery sector" (18 November 2021) at
Exhibit 06.
Woolworths NZ "Post conference submission on Market study into grocery sector: Attachment 5 NERA - Grocery Market Study: Post-conference report” (25 November 2021) at Appendix D.

81

3.152

In a workably competitive market, we would expect to see firms investing andinnovating in the expectation of earning additional profits by meeting consumer
demands both now, and in the future. In turn, we would also expect high margins
and profits derived from innovation and investment to attract new entry andexpansion and then be competed down to competitive levels.

3.153

While the relationship between innovation and competition is complex, in general
we would expect workable competition to provide strong incentives for innovationand investment.161 However, differences in market structure, the characteristics ofinnovations, and the dynamics of research and development processes all affectthe theoretical relationship between competition and incentives to innovate.162 For
example, in some circumstances, oligopolistic markets can deliver high innovation
rates to the benefit of consumers.163 However, in general, competition encourages
innovation by fostering entrepreneurship and ‘outside of the box thinking’. 164

3.154

Globally, innovation in food retailing has been rapidly advancing in recent years.
Technological advancements are changing the way many grocery retailers operate,
while fast-moving trends related to consumer behaviour, product preference andspending motivations are leading to greater investment by grocery retailers in aneffort to maintain and grow market share.165

161

162

163

164

165

Hexis Quadrant "Post conference submission on Market study into grocery sector" (1 December 2021)
at 55.
We note that studies considering whether more competition results in greater investment by firms ininnovation have presented mixed results. In some cases, the literature suggests a positive relationship(more competition, more innovation), a negative relationship (more competition, less innovation) oran inverse U-shaped relationship (low innovation levels if high/low competition, high innovation levels
if medium competition). For example: Philippe Aghion, Reda Cherif and Fuad Hasanov ”Competition,
Innovation and Inclusive Growth” (19 March 2021) IMF Working Paper WP21/80, available at:https://www.imf.org/en/Publications/WP/Issues/2021/03/19/Competition-Innovation-and-InclusiveGrowth-50269; Øystein Moen Tord Tvedten & Andreas Wold | Len Tiu Wright (Reviewing editor)“Exploring the relationship between competition and innovation in Norwegian SMEs” (2018) Cogent
Business & Management, 5:1, available at:https://www.tandfonline.com/doi/full/10.1080/23311975.2018.1564167.
NZ Initiative "Submission on Market study into grocery sector draft report" (26 August 2021) at[2.12]-[2.13].
Hexis Quadrant "Post conference submission on Market study into grocery sector" (1 December 2021)
at 55.
For example: Mike Troy, Abby Kleckler and Lynn Petrak “2020 Grocery Innovation Outlook”(1 February 2020) Progressive Grocer https://progressivegrocer.com/2020-grocery-innovationoutlook; Tricia McKinnon “The Future of Retail: 9 Ways Alibaba is Redefining Retail Stores”
Indigo9Digital https://www.indigo9digital.com/blog/futureofretailalibaba.

82

3.155

Innovation appears relevant to competition in the retail grocery sector, bothinternationally and in New Zealand. For example, the major grocery retailers
submitted that they frequently monitor each other’s innovations, alongside priceand other non-price competition measures such as product range and customer
satisfaction levels.166

3.156

As we discuss below, it is difficult to find suitable benchmarks to assess the scaleand scope of innovation in the New Zealand retail grocery sector. Nevertheless, thepace and scale of innovation in the New Zealand retail grocery sector appears to beless than we might expect in a workably competitive market. While there isinnovation in the grocery sector, including by the major grocery retailers, it isprimarily focused on range and service, rather than price. Further, the scale andpace of innovation we have observed appears insufficient to help explain the levelof profit enjoyed by the major retailers between 2015 and 2019 (see above).

3.157

This section discusses investment and innovation by grocery retailers in New
Zealand under the following topics:

3.158

3.157.1

innovations aimed at improving consumers’ in-store shopping
experience;

3.157.2

investments aimed at creating efficiencies through the supply chain;

3.157.3

innovations in new products, including private label brands; and3.157.4

digital and technological advances and their effect on competition.

We then set out our conclusions on what this level of innovation tells us about how
competition is working in the retail grocery sector.

Innovations aimed at improving consumers’ in-store shopping experience
3.159

Demand for groceries is differentiated, and consumer preferences can vary byshopping mission. While consumers appear to care most about convenience(including range, location and store familiarity) and price, factors such as quality
and service are also important.

3.160

In a workably competitive market, we would expect firms to compete to satisfy thisdiverse range of preferences. Innovation aimed at differentiation can be beneficial
to consumers, particularly where there are many firms competing. However, inconcentrated markets, the benefits of differentiation can tend to accrue toretailers, rather than consumers, because it may enable retailers to limit their levelof direct competition with other retailers.

166

For example: Foodstuffs SI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 17; Foodstuffs NI “Submission on retail grocery market study preliminary issues
paper” (4 February 2021) at 26; Woolworths NZ “Submission on retail grocery market study
preliminary issues paper” (4 February 2021) at 61.

83

3.161

The major grocery retailers have invested in innovation that is intended to improve
consumers’ in-store shopping experiences. 167 For example, Foodstuffs NI’s
PAK’nSAVE stores in the lower North Island offer SHOP’nGO which allows
consumers to scan their groceries off the shelf with a hand-held barcode
scanner.168 Foodstuffs SI has also introduced SHOP’nGO to its PAK’nSAVE storesand some New World stores for Sticky Club members.169 Woolworths NZ offers acontactless “Scan & Go” service at six stores.170 Foodstuffs NI has recently trialled
Zoom trolleys in a number of locations and plans to roll these trolleys out in New
World stores from 2022.171 In addition, Woolworths NZ offers drive through optionsat 19 Countdown stores and is rolling out eLockers.

3.162

The majors have also invested in new store formats. Both Woolworths NZ andFoodstuffs NI have opened new smaller Metro format stores in recent years thatmainly cater for increased consumer demand for convenient shopping
locations.172, 173, 174 Woolworths NZ stated that it also has a pipeline of store
renewals planned.175

167

168

169

170

171

172

173

174

175

For example: Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 4; Foodstuffs NI “Submission on retail grocery market study preliminary issues
paper” (4 February 2021) at 2-3; Foodstuffs NI “Submission on Market study into grocery sector draft
report” (10 September 2021) at 38-41; Foodstuffs SI “Submission on Market study into grocery sector
draft report” (10 September 2021) at 34-35; Transcript of Grocery Market Study Conference – Day 4(27 October 2021) at 17-18 (lines 27-41 and 1-10).
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[138].
Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021) at
35.
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at 112.
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at
38.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 24.
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at [13.3].
We note that the 2019 pricing data we received from the major grocery retailers show that[], Frontier Economics “Econometric analysis of the New Zealand Retail Grocery Sector – Reportfor the Commerce Commission” (15 July 2021) at 24 and 38.
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at 115.

84

3.163

The in-store innovations discussed above can be expected to benefit consumers
who value them. However, our consumer research shows that some consumers
would prefer innovations that enhance price competition rather than product andservice differentiation. Food discounter business model innovations such as offeredby Aldi overseas (see paragraph 5.146.2) have not occurred in New Zealand. Food
discounters, such as Aldi, aim to offer low prices on a very narrow assortment of
mostly private label goods.176 Foodstuffs NI submitted that PAK’nSAVE is a pricefocused supermarket.177 However, PAK’nSAVE offers a wider range of SKUs, and alarger proportion of branded products, than Aldi.

3.164

Given price is known to be a key driver of store choice for many consumers, thisindicates there may not be strong incentives for retailers to innovate and invest to
win consumers on this dimension.

3.165

As discussed further in Chapter 4, the pattern and impact of retail offerdifferentiation on consumers will depend on the extent of competition between
grocery stores across the full retail offer.

Investments aimed at creating efficiencies through the supply chain
3.166

In a workably competitive market, innovations and investments that improve
efficiency in the supply chain, and other logistical aspects, can be beneficial toconsumers. This is because, when competition is working well, firms are
incentivised to share the benefits of these investments, such as reduced costs, with
consumers in the form of lower prices.

3.167

In recent years the major grocery retailers have invested in improving supply chain
and distribution networks to reduce costs and enhance the efficiency and resilienceof the grocery supply chain in New Zealand. However, when viewed in the context
of other market observations, such as the levels profitability and pricing discussed
above, consumers do not appear to be benefitting from these cost-saving
investments as much as might be expected if competition was stronger.

3.168

In addition to its investments in eStores Woolworths NZ has also made thefollowing investments in recent years to improve supply chain efficiencies:178
3.168.1

176

177

178

developing a new purpose-built 38,000 sqm lower North Island
distribution centre;

For example, in the US, a typical Aldi offers about 1,500 SKUs, with approximately 90% of these being
private label products, Sanford Stein “Aldi, Right Moves - The German Grocer Sending Shock Waves
Throughout Walmart and Kroger” Forbes (25 October 2019)https://www.forbes.com/sites/sanfordstein/2019/10/25/aldi-right-movesthe-german-grocer-sendingshock-waves-throughout-walmart-and-kroger/?sh=562af70c1bf7.
Foodstuffs NI "Post conference submission on Market study into grocery sector" (3 December 2021)
at 52.
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at 114-115.

85

3.168.2

partnering with Hilton Food Group to establish a new $100 million meat
processing plant in Auckland;

3.168.3

partnering with Americold to establish a $65 million investment by
Americold in expanding its temperature-controlled warehousing facility
in Auckland; and3.168.4

developing a new 20,000 sqm produce distribution centre in Auckland tohelp service all of Countdown’s North Island stores with fresh fruit andvegetables direct from local growers.

3.169

At the retail level of the supply chain, Woolworths NZ’s new stores include manysustainability features intended to reduce emissions and save water, paper andenergy.179

3.170

In 2015 Foodstuffs SI opened a new ambient distribution centre in Christchurch,
adding an additional 31,587 sqm to the existing 14,000 sqm warehouse. It has also
invested in:180

3.171

3.170.1

a temperature-controlled distribution centre in Hornby Christchurch;

3.170.2

Cross Dock which enables the same day arrival in the distribution centre
and distribution of products to store; and3.170.3

advances in Repack picking systems which improves the ability to
distribute small numbers of many products across the retail store
network.

Foodstuffs NI has:
3.171.1

179

180

181

182

Recently invested more than $100 million to build a 77,500 sqm central
distribution centre in Auckland that stocks groceries for over 150 of its
stores.181 Foodstuffs NI considers this distribution centre to be ‘state of
the art’.182

Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at 115.
Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021) at
39.
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at
46.
Foodstuffs NI "Post conference submission on Market study into grocery sector" (3 December 2021)
at 52.

86

3.171.2

3.172

Implemented the Blue Yonder Warehouse Management System in all of
its distribution centres, as well as the Blue Yonder Transport
Management System. It has indicated that these investments improve
the accuracy at Foodstuffs NI’s distribution centres, provide real time
visibility of deliveries to stores and improve the availability of products instore to consumers.

Further investments were also made to improve the resilience of grocery supply
chains in New Zealand for the benefit of New Zealanders during the COVID-19
pandemic.183 This enabled grocery retailers to continue to supply essential grocery
items to New Zealanders despite the significant increase in demand at the time.

Innovations in new products, including private label brands
3.173

In a workably competitive market, we would expect retailers to be responsive tochanging consumer demands, and to compete by innovating to adjust their productrange to meet these changing demands. However, retailers’ ability to adjust theirproduct offering depends somewhat on the level of competition between suppliers.
If competition between suppliers is not working well, suppliers may not have theability or incentives to introduce new and innovative products.

3.174

Competition among suppliers is likely to vary across product categories and manyof the factors affecting competition at the supplier level are beyond retailers’control. However, grocery retailers can impact suppliers’ incentives to innovate,
given they are often the primary way for suppliers to access customers, throughtheir decisions about which products to range, including specialty and private label
products.

3.175

Foodstuffs SI and Foodstuffs NI submitted that they engage in material productinnovations.184 They pointed to the number of products ranged across theirbanners and the number of new products introduced in 2020, which suggests new
products accounted for around 10% of total products ranged in that year. 185

183

184

185

For example, Woolworths NZ “Submission on Market study into grocery sector draft report”(10 September 2021) at [2.4.4.3].
Foodstuffs NI "Post conference submission on Market study into grocery sector" (3 December 2021)
at 43; Foodstuffs SI "Post conference submission on Market study into grocery sector"(3 December 2021) at 38.
Foodstuffs NI ranges 81,812 different products across its retail banners and Gilmours and in 2020
introduced 9014 new products across its store, Foodstuffs NI "Post conference submission on Market
study into grocery sector" (3 December 2021) at 43); Foodstuffs SI ranged 82,473 different products
across its retail banners and Trents and introduced approx. 8,800 products into store in 2020,
Foodstuffs SI "Post conference submission on Market study into grocery sector" (3 December 2021) at
38.

87

3.176

Foodstuffs SI and Foodstuffs NI also pointed to several examples of investments
they had made by changing their product range.186 These included increasing theavailability of healthy/organic product offerings, responding to offerings from meal
kit providers, health and wellbeing products, ethnic products, personal careproducts, gourmet products and ready meals.187

3.177

There are differences in views about the effect of retailers’ private label productson the incentive to invest in product innovations. NZFGC considered that the major
grocery retailers’ control over the channels to markets means that for many
product categories private labels will support a strong negotiating position forretailers and reduce suppliers’ incentives to invest and innovate.188 Castalia argued
that in concentrated retail markets, an imbalance in negotiating position enables
retailers to take advantage of research and development by label brands anddiscriminate in favour of their private labels. According to Castalia, this type of
behaviour discourages supplier entry, investment and innovation to the detrimentof consumers.189 Supie also noted that the current imbalance in negotiating
position between major grocery retailers and suppliers stifles suppliers’
innovation.190

3.178

In contrast, Woolworths NZ submits that New Zealand suppliers are highly
innovative and that its private label products make a positive contribution to thisinnovation.191 Further, its private label range often leads innovations that drivecompetitive responses from branded suppliers.192

3.179

Both Foodstuffs SI and Foodstuffs NI consider that private label products arethemselves innovative. They note that private label brands were first developed in
response to suppliers of commoditised products having a strong negotiating
position. As private label brands have gained greater acceptance, supermarkets
including Foodstuffs SI and Foodstuffs NI have extended the model to items thatare less commoditised (for example, Pams Finest).193

186

187

188
189

190

191

192

193

Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at
43-44; Foodstuffs SI “Submission on Market study into grocery sector draft report”(10 September 2021) at 38.
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at
43; Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021)
at 38.
NZFGC “Submission on Market study into grocery sector draft report” (26 August 2021) at [6.38].
NZFGC “Submission on Market study into grocery sector draft report: Attachment - Castalia - Private
Labels, Buyer Power and Remedies in the NZ Grocery Sector” (26 August 2021) at 9.
Supie "Post conference submission on Market study into grocery sector" (23 November 2021) at[2.1.2].
Woolworths NZ "Post conference submission on Market study into grocery sector"(24 November 2021) at 43 and 54.
Woolworths NZ "Post conference submission on Market study into grocery sector"(24 November 2021) at 43-45. This submission also includes a list of Woolworths NZ’s private label
innovations.
Foodstuffs SI "Post conference submission on Market study into grocery sector" (3 December 2021) at
44; Foodstuffs NI "Post conference submission on Market study into grocery sector"(3 December 2021) at 64.

88

3.180

In contrast, HoustonKemp considered the effect of private label brands oninnovation is likely to be limited. According to HoustonKemp, private label brands
are more common in homogeneous products that require limited innovation, suchas flour and milk. In contrast, private label products are less prevalent in categories
with high innovation.194

3.181

Chapter 8 of this report discusses in more detail how, where there are imbalancesin negotiating positions in favour of the retailer, suppliers’ may face reduced ability
and incentives to invest in innovative new products. Chapter 9 discusses
recommendations to address imbalances in negotiating position.

3.182

We also discuss private labels in more detail in Chapter 8. We find that consumers
can benefit from lower prices and greater choice offered by private label products,
but that private labels can also distort competition between suppliers. The overall
long-term impact of private labels on outcomes for New Zealand consumers is
unclear but we consider that some aspects could dampen competition between
suppliers.

Digital and technological advances and their effect on competition
3.183

194

195

196

197

Some New Zealanders are increasingly opting to do their grocery shopping online
rather than in store, taking advantage of the convenience and time saving aspectsof online shopping.195 This trend is supported and enabled by increased consumer
confidence in conducting transactions over the internet and better internet
connectivity across large parts of the country.196 However, limited availability of
online services can reduce options for consumers in some areas.197 The COVID-19
pandemic may have also accelerated the demand for online grocery services.

Foodstuffs NI "Post conference submission on Market study into grocery sector: Attachment 4 HoustonKemp - Private label products in retail grocery markets” (3 December 2021) at 10.
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 25.
For example: Ibis World “Online Shopping in New Zealand“ (4 November 2021)
https://www.ibisworld.com/nz/industry/online-shopping/1905/; Reseller “Fibre dominates NZ
broadband for first time as fixed wireless sows” (12 March 2020)
https://www.reseller.co.nz/article/671791/fibre-dominates-nz-broadband-first-time-fixed-wirelessslows/.
For example, Ngati Porou Holding Company Ltd “Post conference submission on Market study into
the grocery sector” (23 November 2021) at 1.

89

3.184

Woolworths NZ processed its first e-commerce orders in the 1990s.198 Click andcollect is available nationwide across Countdown stores and delivery is available to99% of the population.199 To accommodate the growth of its digital sales channels
Countdown opened New Zealand’s first ever purpose-built and permanent e-store
in Auckland in April 2020. The 8,800 sqm store includes a partially-automated micro
fulfilment unit and operates 24 hours a day, seven days a week. It currently has thecapacity to fulfil more than 7,500 online orders a week.200, 201 Countdown has also
recently opened two additional dedicated eStores in Wellington andChristchurch.202, 203

3.185

Online ordering options are available at selected SuperValue and FreshChoice
stores nationally.204

3.186

Foodstuffs NI’s New World stores launched click and collect and online deliveries in
2017, more than 20 years after online grocery shopping was first launched in othercountries and also by Countdown in New Zealand.205

3.187

Foodstuffs NI’s PAK’nSAVE customers only have a click and collect option, with nooptions for home delivery, while Foodstuffs NI’s Four Square stores currently do
not offer any online purchasing options. Foodstuffs NI intends to launch online
shopping at Four Squares, although it has prioritised rollout at New World and
PAK’nSAVE.206

198

199

200

201

202

203

204
205

206

Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at 110.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 19.
This unit means personal shoppers can easily access packaged goods without having to walk up anddown store aisles as it picks and moves the most popular grocery items to personal shoppers on aconveyor belt meaning to enhance efficiency and timeliness of orders, Woolworths NZ “Submission
on retail grocery market study preliminary issues paper” (4 February 2021) at 37.
Woolworths Group “2020 Annual Report” (2020) at [31], available at:https://www.woolworthsgroup.com.au/icms_docs/195794_annual-report-2020.pdf.
Countdown “Wellington’s first eStore opens to cater for online shopping demand”(29 September 2020) https://www.countdown.co.nz/news-and-mediareleases/2020/september/wellington-s-first-estore-opens-to-cater-for-online-shopping-demand.
Countdown “Countdown delivers the latest online shopping tech to Christchurch shoppers”(29 March 2021) https://www.countdown.co.nz/news-and-media-releases/2021/march/countdowndelivers-the-latest-online-shopping-tech-to-christchurch-shoppers.
SuperValue https://www.supervalue.co.nz/; FreshChoice https://www.freshchoice.co.nz/.
Anne Gibson “First glimpse of New World online shopping” (18 July 2017) NZ Herald
https://www.nzherald.co.nz/business/first-glimpse-of-new-world-onlineshopping/27KFC5DA7WWFHVYSCKYZST4AYY/; Foodstuffs NI “Submission on Market study into
grocery sector draft report” (10 September 2021) at 46.
PAK’nSAVE “Click & Collect is now available at 38 PAK’nSAVE stores in the North Island”
https://www.paknsave.co.nz/shop/online-shopping; https://www.foursquare.co.nz/; Foodstuffs NI“Submission on Market study into grocery sector draft report” (10 September 2021) at 46.

90

3.188

Foodstuffs SI began rolling out online shopping options in July 2021. This process is
continuing across its New World and PAK’nSAVE retail banners on a town-by-townbasis.207 Click and collect is being made available in both New World and
PAK’nSAVE. However, delivery is only available from New World.208

3.189

Specific technological innovations cited by the major grocery retailers to improve
the online shopping experience for consumers in New Zealand include:
3.189.1

investment in putting in place the necessary processes and infrastructure
to support online retailing;209

3.189.2

offering targeted promotions and offers to individual consumers (seeChapter 7); and3.189.3

smartphone apps such as myCountdown and the New World app to
make it easier for consumers to place online orders, browse weekly
mailers and personalised specials and create shopping lists.

3.190

Technological advancements and the overall growth of online retailing in New
Zealand have also supported recent new entry by meal kit providers andonline-only grocery retailers such as The Honest Grocer and Supie. Other
supermarkets and specialist grocery retailers such as Farro Fresh, Fruit World and
The Mad Butcher have also recently launched online purchasing and delivery
options for consumers in Auckland. However, many other grocery retailers in areas
outside Auckland currently have no online presence.

3.191

The COVID-19 pandemic has contributed significantly towards speeding up thegrowth of online shopping in New Zealand (and elsewhere), including online retailgrocery shopping. Some estimates show that the COVID-19 pandemic may havepushed retailers about six years ahead from where they would likely have beenabsent the pandemic in terms of growth in online sales.210

207

208

209

210

Tong Van “Foodstuffs South Island launches online shopping – town by town” (7 July 2021) Inside
Retail https://insideretail.co.nz/2021/07/07/foodstuffs-south-island-launches-online-shopping-townby-town/.
Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021) at
39.
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 14.
Debrin Foxcroft “Online shopping emerges as the big winner in the first six months of 2020”(5 August 2020) Stuff https://www.stuff.co.nz/business/122349826/online-shopping-emerges-as-thebig-winner-in-the-first-six-months-of-2020.

91

3.192

Woolworths NZ has indicated its online penetration increased from 3% total sales
in FY2014 to over 13% in the current financial year to date.211 More specifically,
demand for Countdown’s online shopping grew by 74% between April and June
2020, accounting for 11% of total sales during this period.212

3.193

Foodstuffs NI saw an acceleration in online shopping as a result of the COVID-19
pandemic and expects this to continue.213

3.194

Figure 3.16 below shows online grocery sales as a percentage of total grocery sales
in New Zealand compared to selected other countries in 2020.

Figure 3.16

Online grocery sales as a percentage of total grocery sales in selected
countries (2020)

India
Argentina
Germany
Italy
Spain
USA
New ZealandAustralia
SwedenJapan
FranceUK
TaiwanSouth Korea
China

0.3%
1.0%
2.1%
3.2%
3.5%
4.1%
5.7%
5.9%
6.4%
8.1%
8.3%
11.4%
11.4%
24.4%
25.0%

Source: Kantar Worldpanel; NZ Post; Statistics NZ; IRI Australia.214

211

212

213

214

Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 18; and Woolworths NZ "Post conference submission on Market study into
grocery sector" (24 November 2021) at [15.5.6].
Countdown “Wellington’s first eStore opens to cater for online shopping demand”(29 September 2020) https://www.countdown.co.nz/news-and-mediareleases/2020/september/wellington-s-first-estore-opens-to-cater-for-online-shopping-demand.
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 18.
[
].

92

3.195

Despite growth in online grocery sales, New Zealand has a comparably low level of
online sales penetration. This is despite there not being any evidence to suggestthat New Zealand has differing preferences for online grocery services than othercountries. Although Countdown has relatively high levels of online sales
penetration as an individual retail grocery banner, New Zealand’s overall online
grocery sales as a percentage of total sales was only around 5.7% of total grocery
sales in 2020. This places New Zealand ninth out of the 15 countries shown in
Figure 3.16. This is comparable to Australia and ahead of countries such as the USA,
Germany, Spain and Italy.215 However, New Zealand’s online sales are low incomparison with other countries such as the UK, Japan and South Korea.

3.196

We acknowledge that the online sales figures for 2020 in Figure 3.16 may havebeen affected by differences in national responses to the COVID-19 pandemic, inparticular the scale and length of lockdowns.216 However, Foodstuffs NI considered
it is impossible to separate the impacts of the pandemic from the overall trend in
consumer behaviour.217

3.197

Woolworths NZ does not consider Figure 3.16 shows a fair or “like-for-like”
comparison but it uses these data to claim that when population density is taken
into account New Zealand’s online penetration is close to world leading.218 We
agree that higher population densities are likely to increase the viability and uptakeof online retailing. However, our view is the rate of urbanisation more accurately
controls for this viability, as it accounts for countries which have large areas ofuninhabited land such as New Zealand.219, 220 A high rate of urban density indicatesa large proportion of a country’s population is concentrated in urban areas where aretailer may more easily be able to spread delivery costs over a large customer
base.

3.198

When the online sales figures in Figure 3.16 are adjusted for urbanisation, therankings in Figure 3.16 remain largely unchanged.221 Regardless, the key issue forour study is the likely effect of online sales on competition in New Zealand’s retailgrocery sector in the foreseeable future, rather than the current level of online
sales.

215

216

217

218

219

220
221

Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at 108.
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at 109.
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 18.
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at 108.
For example, The World Bank estimated 86.7% of New Zealand’s population in 2020 lived in urban
areas, The World Bank “Urban population (% of total population – New Zealand”
https://data.worldbank.org/indicator/SP.URB.TOTL.IN.ZS?locations=NZ; Other analysis using
Statistics NZ and LINZ data estimate 78.2% of New Zealand is uninhabited, The Map Kiwi “Nobody
Lives Here: Uninhabited Areas of New Zealand” (December 2017)https://www.andrewdc.co.nz/project/nobody-lives-here-uninhabited-areas-of-new-zealand/.
The urban population as a percentage of total population.
[
].

93

Online grocery shopping may complement, rather than replace, in-store shopping
3.199

Online sales are currently a relatively small share of total grocery sales and there is
uncertainty whether increases in online sales observed during the COVID-19
pandemic will continue. There is, however, general agreement that online sales willcontinue to grow.

3.200

However, it may be that strong future growth in online grocery sales could meanthat the competitive advantages of a physical retail network could become lessimportant.222

3.201

We consider it is unlikely that consumer shopping behaviour will shift to such an
extent in the foreseeable future that most competitors no longer benefit from aphysical presence. Instead, online grocery shopping might complement in-store
shopping rather than be a substitute for many consumers.223 This means, while wehave observed innovation in this area from many online-only retailers, these
innovations may be limited in their ability to compete directly with retailers with astrong physical presence.

3.202

One reason for this may be due to consumer preferences: convenience is a key
driver of online shopping but there are potential ‘inconveniencies’ such as being
unable to select the produce they prefer.224 This may cause some consumers tocontinue to prefer shopping in a bricks-and-mortar store. Similarly, we heard many
Māori prefer kanohi ki te kanohi (face-to-face) engagement, as this provides theability to see and inspect their food before purchasing.225

3.203

There may also be supply-side factors which limit the growth of online retailers. We
note that most current online sales are made by the major grocery retailers or byother retailers with a physical presence. Online-only retailers are currently a small
share of grocery sales. This may, in part, be because grocery retailers with aphysical presence appear to be more easily able to respond to these innovations byleveraging existing business capabilities.

222

223
224

225

Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 18.
NZFGC "Post conference submission on Market study into grocery sector" (25 November 2021) at 15.
NZFGC “Post conference submission on Market study into grocery sector” (25 November 2021) at 15;
McKinsey & Company “Digital disruption at the grocery store” (14 February 2020)
https://www.mckinsey.com/industries/retail/our-insights/digital-disruption-at-the-grocery-store.
Ngati Porou Holding Company Ltd "Post conference submission on Market study into grocery sector"(23 November 2021) at 5.

94

3.204

Scale is a requirement for a successful online-only grocery retail channel to be able
to obtain competitive prices from suppliers and to cover fixed operating costs,
technology and development costs, marketing and infrastructure costs.226 For
example, online-only grocery retailer Supie does not view itself as having sufficientscale to be an effective competitor.227 It is unclear whether these retailers will
succeed in building scale and the timeframe within which this might happen.
However, this is unlikely to happen in the foreseeable future even with very rapid
growth.228

3.205

Further, the major grocery retailers are likely to constrain the prospects of entry
and expansion of online-only retailers. Given their existing cost structures, they arelikely to face fewer costs when attempting to grow an online retailing service toscale and/or be able to do so quicker than an online-only competitor.

3.206

The major grocery retailers can also use their physical scale to cover some of thecosts of online fulfilment and delivery, enabling them to get more value from their
existing assets rather than making new investments.229 They are also likely able toleverage parts of their existing business when expanding into online retail. This may
include existing infrastructure, such as distribution centres and IT systems, as well
existing supplier relationships and marketing strategies.230 Incumbents’ brandequity can also give them an advantage over new entrants.231

3.207

Additionally, retailers with national networks of physical stores may be able to use
these to provide localised distribution services. This can enable these retailers toquickly scale their online offerings to respond to potential entry or expansion ofother online retailers. Large retailers are also using ‘dark stores’ that have no retaildisplay but are used as aggregators for order picking.232

3.208

NZFGC considered that the growth of online grocery sales has enhanced rather
than constrained the power of the two major grocery retailers by providing analternative to the physical in-store checkout. NZFGC also considered that online
shopping has made it more difficult for smaller retailers to compete with larger
retailers.233

226
227

228

229

230
231

232
233

Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 4 (lines 37-40).
Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 5 (lines 1-6); NZFGC"Post conference submission on Market study into grocery sector" (25 November 2021) at 15.
Supie observed that what it turns over in 6 months, Woolworths turns over in an hour, Transcript ofGrocery Market Study Conference – Day 5 (28 October 2021) at 5 (lines 1-2).
McKinsey & Company “Digital disruption at the grocery store” (14 February 2020)
https://www.mckinsey.com/industries/retail/our-insights/digital-disruption-at-the-grocery-store.
[].
McKinsey & Company “Digital disruption at the grocery store” (14 February 2020)
https://www.mckinsey.com/industries/retail/our-insights/digital-disruption-at-the-grocery-store.
NZFGC “Submission on Market study into grocery sector draft report” (26 August 2021) at 16.
NZFGC “Submission on Market study into grocery sector draft report” (26 August 2021) at 16.

95

Benchmarking the scale and pace of innovation
3.209

We acknowledge the significant investments in innovation in the retail grocery
sector that have been discussed above. Many of these benefit consumers.234
However, our view is the scale and pace of innovation in New Zealand would likely
be greater if competition was working better.

3.210

The scale and pace of innovation is important because it impacts the prices, choice
and options available to consumers over the longer term. Where competition is
weak, retailers may have little incentive to innovate.

3.211

Some submitters argued investments in the supply chain are more important thaninvestments in consumer-focused innovation because the former are more likely to
be enduring and deliver net benefits to the economy through productivity
improvements, reliability and product quality.235 We agree that an efficient supply
chain is a vital contributor to productivity and resilience. However, cost-reducing
innovations do not tend to benefit consumers unless strong retail competition
forces firms to pass on a share of these benefits.

3.212

We also consider that the retail grocery sector has a key role in responding toenduring changes in consumer preferences, particularly for healthy and sustainablegrocery products. Timely access to such products provides a range of benefits not
only to the customers who consume them, but the broader economy. We note thatthe grocery sector is supply driven with retailers controlling consumers’ access to
products.236 These features may mean that New Zealanders are not getting accessto products they have a preference for in a timely manner.

3.213

The range and extent of innovations in the New Zealand retail grocery sector may
suggest the scale, scope and pace of investment and innovation in the sector isappropriate. Nevertheless, the evidence is contradictory:
3.213.1

234
235

236

237

238

Woolworths NZ told us that in many respects it is an international leader
in innovation and the New Zealand retail grocery sector is highly
innovative.237, 238

Transcript of Grocery Market Study Conference – Day 4 (27 October 2021) at 21 (lines 32-34).
Woolworths NZ "Post conference submission on Market study into grocery sector: Attachment 1 Peter Harris AO - Views on the Commerce Commission Draft Market Study Report on Grocery
Retailing in New Zealand” (25 November 2021) at 27.
McKinsey & Company “Digital disruption at the grocery store” (14 February 2020)
https://www.mckinsey.com/industries/retail/our-insights/digital-disruption-at-the-grocery-store.
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at 108.
Woolworths NZ "Post conference submission on Market study into grocery sector"(24 November 2021) at 7.

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3.213.2

Foodstuffs SI and Foodstuffs NI told us that, given the small size of the
New Zealand economy and population, it is inevitable that innovation
will not progress at the same pace and scale as much larger countries.239
New Zealand’s relatively low average household disposable income also
affects the innovation that customers demand.240 Nevertheless,Foodstuffs SI and Foodstuffs NI say the pace and scale of innovation isappropriate for the New Zealand market.241

3.213.3

NZFGC considered that the pace and scale of innovation seems slow in
New Zealand.242 Supie told us that the major retailers are slow to invest
and innovate towards new food systems that positively impact theenvironment.243 Northelia,244 Monopoly Watch245 and another party we
spoke to246 also considered that innovation is low.

3.214

It is difficult to find suitable benchmarks to assess the scale and scope of innovationin the New Zealand retail grocery sector.

3.215

In our draft report we compared innovation in New Zealand with several overseas
countries. Foodstuffs NI and Foodstuffs SI cautioned against comparing innovationin the retail grocery sector with innovations overseas even though both closely
monitor overseas innovations at Board level and consider the right time tointroduce these to New Zealand.247, 248 Foodstuffs NI argued that, given the smaller
size of the economy and population in New Zealand, it is unrealistic to expect the
major grocery retailers to keep pace with overseas innovations.249 In contrast,
Woolworths NZ told us that it has already implemented many of the internationalinnovations listed in our draft report.250

239

240

241

242
243

244

245
246
247

248
249

250

Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021) at
9; Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021)
at 8.
Foodstuffs NI "Post conference submission on Market study into grocery sector" (3 December 2021)
at 50; Foodstuffs SI "Post conference submission on Market study into grocery sector"(3 December 2021) at 36.
Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021) at
34; Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021)
at 37.
NZFGC “Submission on Market study into grocery sector draft report” (26 August 2021) at 11.
Supie "Post conference submission on Market study into grocery sector" (23 November 2021) at[2.1.3].
Northelia "Post conference submission on Market study into grocery sector" (29 November 2021) at
6.
Transcript of Grocery Market Study Conference – Day 4 (27 October 2021) at 20 (lines 37-38).
[].
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at
37 and 41; Foodstuffs SI “Submission on Market study into grocery sector draft report”(10 September 2021) at 34.
Transcript of Grocery Market Study Conference – Day 4 (27 October 2021) at 16 (lines 11-19).
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at
41.
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at 111.

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3.216

Foodstuffs NI says that innovation can be benchmarked by considering whether it
acts on competitive pressure to innovate.251 Use of this benchmark, however, raises
the question of whether that competitive pressure is sufficient. We address this in
Chapter 4 and Chapter 5.

3.217

Woolworths NZ considered there is a broad range of indicators of innovation in the
New Zealand retail grocery sector.252 Some of these indicators are potentially
useful to describe innovation in the sector. However, without a suitablecomparator the question remains as to whether the scale and scope of innovation
is appropriate.

3.218

Although we have not been able to identify a conclusive benchmark, the scale andpace of innovation in the New Zealand retail grocery sector appears to be lower
than might be expected in a workably competitive market.

3.219

We accept that there may be some delay in introducing overseas innovations to
New Zealand. However, we have not seen any evidence to indicate New Zealand’s
relatively small size is a major reason for this. Woolworths NZ is part of a large
multinational company that is able to leverage off innovations in Australia.253

3.220

There are also a number of other grocery retailers who have developed innovative
offerings to respond to changing consumer preferences. For example, new entry by
meal kit providers and online-only supermarkets has expanded the convenience
options available to consumers. There have also been investments by other grocery
retailers to provide a more diversified product range, such as increasing theavailability of healthy/organic products to cater for dietary preferences andproviding prepared meal options for consumers.

3.221

The major grocery retailers seem able to respond to and match product and format
innovations by other grocery retailers and leverage their position into adjacentsectors.254 However, it is harder for other grocery retailers who lack scale andscope, to match the major grocery retailers’ innovations.255 This could mean thatthe majors’ innovations help to protect and extend their market share even when
faced with innovative rivals.256

251

252

253
254
255

256

Foodstuffs NI "Post conference submission on Market study into grocery sector" (3 December 2021)
at 51.
Woolworths NZ "Post conference submission on Market study into grocery sector"(24 November 2021) at 27.
Transcript of Grocery Market Study Conference – Day 4 (27 October 2021) at 15 (lines 37-40).
NZFGC "Post conference submission on Market study into grocery sector" (25 November 2021) at 18.
[].
Hexis Quadrant “Post conference submission on Market study into grocery sector” (1 December 2021)
at 47; NZFGC “Post conference submission on Market study into grocery sector” (25 November 2021)
at 18.

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3.222

We acknowledge the major grocery retailers’ investments through the supply chain
and the benefits they bring to consumers. However, strong competition is required
to incentivise the retailers to share the benefits of these investments with
consumers. In the absence of workable competition, these investments may
instead entrench the competitive cost advantages the majors enjoy over theirsmaller rivals.257

3.223

We consider that, if competition between the majors was working well, innovative
firms that meet consumers’ needs would be rewarded with temporarily higher
profitability in the short term as rivals compete to catch up. However, although theevidence suggests that the majors’ pace of innovation differs, their pricing andprofitability has been similar over the periods we analysed.

3.224

Notwithstanding the recent growth in online sales and the investments made bygrocery retailers to enable these, we consider the pace of online innovation isslower than we would expect in a workably competitive market. Significant
differences in the major grocery retailers’ timeframes for introducing such asignificant innovation as online shopping, particularly Foodstuffs SI’s slow rate ofadoption, appear inconsistent with what we might expect in a well-functioning,
competitive market.

3.225

Woolworths NZ attributes this slow adoption to Foodstuffs’ co-operative/individualstore owner model rather than a lack of competition.258 However, NZFGC argued
this is instead driven by the major grocery retailers’ ability to withhold innovations
that may increase competition by reducing switching costs, such as online
shopping.259 Our view is that the slow adoption of online shopping by someretailers suggests that small online-only retailers, or other larger retailers offering
online shopping, do not pose a significant competitive threat to incentivise thisinnovation.

257

258

259

For example, Transcript of Grocery Market Study Conference – Day 4 (27 October 2021) at 20(lines 25-26).
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at 110.
NZFGC “Post conference submission on Market study into grocery sector” (25 November 2021) at 34.

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Chapter 4

The nature of competition in the retail grocery
sectorSummary of findings•

Consumers engage in a range of different shopping missions, including: a main shop – ashop typically happening weekly or at another regular interval based on theconvenience of using one grocery store to get all necessities in one place; a secondary
shop – a visit to one or more store(s), other than the store the main shop is carried out
at, to shop for specific products; and/or a top-up shop – a quick shop for a small
number of items, often across a range of other grocery retailers.

•

We find that most New Zealanders use one of the major grocery retailers for most of
their shopping missions. While consumers choose where to shop based on a range offactors which can vary by type of shopping mission, convenience (including
location/ease of access, product range and store familiarity) and price are key drivers ofstore choice.

•

Grocery retailers compete across the price, quality, range, and service spectrum tocater to these consumer needs. However, other grocery retailers tend to differentiate
their retail grocery offer primarily on non-price dimensions and tend to compete mostly
for smaller, secondary or top-up shopping missions.

•

The major grocery retailers have broadly similar retail grocery offers and are eachother’s closest competitors for consumers’ grocery spend. Other grocery retailers do
not provide a material constraint. Some estimates of market share suggest the major
grocery retailers have a combined estimated share of more than 90% for consumers’
main shop, and more than 80% for top-up shops.
The major grocery retailers are therefore uniquely placed to offer a wide range ofgroceries at locations which consumers can easily access (both in store and online), at
prices which are generally lower than other grocery retailers. This offers theconvenience of one-stop shopping no matter the shopping mission.

••

There are local markets as well as wider regional and national markets in the retailgrocery sector. However, competition for specific shopping missions mostly occurs inlocal markets because consumers are generally unwilling to travel far to purchasegroceries. Consumers in rural locations tend to travel further than those in urban areas.

•

The local nature of grocery retailing means that the options available to consumers, interms of product range and the variety of grocery retailers, varies depending on where
they live. There are fewer choices outside Auckland, including the other major urban
areas such as Wellington and Christchurch. Rural consumers often have even fewer
choices.

•

The local nature of competition may also mean that prices are higher in areas where
there are few competing retailers. However, decisions on pricing, promotion andacquisition of products by the major grocery retailers mostly take place at a national orregional (or co-operative) level. This may provide some protection from higher prices
for consumers in local markets where competition is weak. Despite this, analysis ofregional price differences shows that prices in the rest of New Zealand are higher
relative to those in Auckland.

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Introduction
4.1

In this chapter we draw on evidence gathered during our study to identify thedimensions upon which competition is occurring in the retail grocery market. We
describe consumer product and shopping preferences, including the drivers ofstore choice in New Zealand, and this helps us to identify the dimensions uponwhich grocery retailers compete with one another and the grocery retailers thatcompete most closely. We also provide estimates of the approximate geographic
size of different local markets and consider the regional variations in the options
available to consumers. We use this discussion as a basis to more closely examine
the intensity of competition between different grocery retailers in Chapter 5.

4.2

We find that the major grocery retailers are uniquely placed to best meet consumer
preferences by offering a wide range of groceries at locations which consumers caneasily access (both in store and online), at prices which are generally lower thanother grocery retailers. They offer the convenience of one-stop shopping no matterthe shopping mission. Other grocery retailers are unable to compete effectively
with this retail offer for consumers’ grocery spend. Although the major grocery
retailers face some competition from other grocery retailers in some local markets
for different types of shopping missions, their closest competitors are usually othermajor grocery retailer banners with broadly similar retail grocery offers.

4.3

We have used different methods to estimate the approximate geographic size of
local markets in urban and rural areas. Overall, we have found that rural consumers
tend to drive further than urban consumers for grocery shopping purposes. We alsofind that the approximate geographic sizes of local markets vary between different
types of shopping missions and grocery stores.

4.4

There are regional variations in the product range and variety of grocery retailers
available to consumers. There are fewer choices outside Auckland, including in theother major urban areas such as Wellington and Christchurch. Rural consumers
typically have more limited options than urban consumers. Some Māori living in
isolated, rural areas also face specific challenges regarding accessibility andaffordability of kai and a lack of choice.

4.5

This chapter has five main sections:
4.5.1

our approach to analysing the nature of competition in grocery retailing;

4.5.2

drivers of store choice and consumer shopping behaviour in
New Zealand;

4.5.3

the dimensions of competition in retail grocery markets;

4.5.4

the nature of local, regional and national competition in grocery
retailing; and4.5.5

regional variations in the grocery store options available to consumers.

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Our approach to analysing the nature of competition in grocery retailing
4.6

This section summarises some key characteristics of grocery consumers andgrocery retailers that inform our assessment of the nature of competition in the
New Zealand retail grocery sector. We further assess the intensity of competition
between different types of grocery retailers in Chapter 5.

4.7

We explain that:
4.7.1

consumers engage in different types of shopping missions and they are
motivated by a range of preferences when shopping for groceries, withconvenience (including location/ease of access, product range and store
familiarity) and price being the key considerations that inform the choiceof grocery store for most consumers;

4.7.2

grocery retailers compete on various combinations of price, quality,
range and service (PQRS) to attract consumers to shop with them.
However, the major grocery retailers are uniquely placed to offer a wide
range of groceries at locations (both in store and online) which
consumers can easily access at prices which are generally lower thanother grocery retailers. They offer the convenience of one-stop shoppingno matter the shopping mission; and4.7.3

grocery retailers typically compete for consumers within small local areas
but there are some regional and national dimensions to competition.

Consumers engage in different types of shopping missions and they are motivated by arange of preferences when shopping for groceries
4.8

A commonly used concept to describe a particular type of shopping trip is a
shopping mission. It is generally defined by the motivational factors that drive
consumers to shop, the context in which they shop, and the shopping behaviours
that drive their purchasing decisions.260

4.9

The concept of a shopping mission is used extensively by the major grocery
retailers in New Zealand to describe the purpose of a particular shopping trip, as
well as for market share monitoring and strategic decision-making purposes.261

260

261

For example, Category Management Knowledge Group “Understanding Different Shopper Trip
Missions” (2015) https://cdn2.hubspot.net/hub/269713/file-252232072pdf/Understanding_Different_Shopper_Trip_Missions_(Advanced_Shopper_Understanding_OnLine_C
ourse).pdf.
For example: [
];
[
]; [
].

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4.10

Our consumer research assisted us to identify three main categories of shopping
missions for the purposes of our study:262
4.10.1a main shop: a shop typically happening weekly or at another regularinterval based on the convenience of using one grocery store to get allnecessities in one place;

4.10.2

a secondary shop: a visit to one or more store(s), other than the store
the main shop is carried out at, to shop for specific products; and4.10.3a top-up shop: a quick shop for a small number of items that can be
conducted for a range of reasons at one of a range of grocery retailers.

4.11

The major grocery retailers define and monitor several other categories of grocery
shopping missions in addition to those we have identified for the purposes of ourstudy. These range from short, often impromptu missions that have the purpose ofpurchasing an immediate, high need grocery item, to large-scale shopping
missions.263 However, we consider that all these missions fall into one of the threemain categories of shopping missions we have identified for the purposes of ourstudy.

4.12

We agree with many submitters that different types of consumer shopping
missions play an important role in understanding the nature of competition ingrocery retailing.264 They provide a useful framework for analysing consumer
shopping behaviour and drivers of store choice which may vary to some degreeaccording to the type of shopping mission a consumer is engaged in. We analyse
the consumer preferences revealed in our study research. This in turn helps us toconsider the extent to which a consumer might be willing to switch some or all
their grocery spend to a different type of grocery retailer, and therefore the extent
of competition between the major grocery retailers, and between the major
grocery retailers and other grocery retailers in New Zealand.265

262

263

264

265

Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 15.
For example, dunnhumby’s analysis of shopping missions conducted at PAK’nSAVE and New World on
behalf of Foodstuffs NI grouped micro missions together to analyse [ ] different shopping missions,
including the ‘casual top up mission’, the ‘cooking from scratch mission’, the ‘quick and easy meals
mission’, and the ‘family breakfast mission’, Foodstuffs NI “Submission on Market study into grocery
sector draft report” (10 September 2021) at [185]-[187.2].
For example, Woolworths NZ described each consumer (or household) completing a range of
shopping missions within any given week or month and a diverse range of factors that can drive each
shopping mission, Woolworths NZ “Submission on retail grocery market study preliminary issues
paper” (4 February 2021) at 59.
For example: Foodstuffs NI “Submission on Market study into grocery sector draft report”(10 September 2021) at [175] and [241.1]-[241.4]; Foodstuffs SI “Submission on Market study into
grocery sector draft report” (10 September 2021) at [13.3]; Woolworths NZ “Submission on Market
study into grocery sector draft report” (10 September 2021) at [28.2].

103

4.13

Our consumer research shows that whenever consumers shop for groceries, theirchoice of grocery store is informed by a wide variety of factors, including locationand ease of access, prices, familiarity with the store, and product range.266, 267
Consumers therefore have a diverse range of preferences for how and where they
shop for grocery products. For most consumers convenience and price are the key
considerations that inform their choice of grocery store.

4.14

While consumer preferences and a shopping missions approach provide usefulpoints of reference, we also consider that analysis of broader grocery spend
provides useful insight into the nature of competition between grocery retailers forall shopping missions. We discuss this further below from paragraph 4.40.

Grocery retailers compete on various combinations of PQRS
4.15

In Chapter 2 we identified that there are many grocery retailers operating across
New Zealand, including supermarkets, international food stores, specialist grocery
retailers, meal kit providers and online-only supermarkets. In this chapter weconsider how they cater to the diverse range of consumer preferences that wehave identified, and this assists us to consider the extent of competition between
them.

4.16

The combined set of products and services offered to consumers by grocery
retailers to cater to this diverse range of consumer needs is known as the retailgrocery offer.

4.17

Grocery retailers differentiate the retail grocery offer across the spectrum of PQRS.
Individual grocery retailers or retail banners use a particular combination of PQRS
to attract and retain customers.

4.18

For example, grocery retailers compete for consumers’ grocery spend bydifferentiating their retail grocery offer in a number of ways, including:

266

267

4.18.1the prices of products, including regular and one-off promotions;4.18.2

loyalty programmes and non-price promotions (see Chapter 7);

4.18.3

the quality of products;

4.18.4the range of available products;

4.18.5location;

4.18.6accessibility including ease of access and opening hours; andThe major grocery retailers expressed some general concerns regarding the reliability and limitationsof our consumer research. We respond to these concerns in Attachment E.
Paragraphs E118 to E121 in Attachment E; Ipsos “Consumer behaviour and preferences in the
New Zealand retail grocery sector – Consumer study report” (July 2021) at 8.

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4.18.7
4.19

the quality of service and the shopping experience (eg, store layout,
number and accessibility of staff to consumers, etc.).

Some of these aspects of the retail grocery offer, such as price and quality ofservice can be adjusted relatively easily by most grocery retailers. However, otheraspects valued by some consumers, such as store size, parking facilities and store
layout, are less easily changed. Store location is perhaps the aspect of the retailgrocery offer which is most difficult to adjust.

Grocery retailers typically compete for consumers located within small local areas but
there are some regional and national dimensions to competition
4.20

In this chapter we also consider the extent to which competition is taking place
within identified local, regional, or national geographical areas.

4.21

Grocery retailers compete for specific shopping missions in local markets where
consumers live and work. This is because, as we discuss further in this chapter,convenience of location is one of the key drivers of store choice for consumers.

4.22

Consumers are generally willing to travel limited distances to purchase groceries.
However, the distance that consumers are willing to travel may vary between
different types of grocery retailers and shopping missions. This is consistent with
our findings in previous merger decisions in the retail grocery sector.268 We discuss
this further below from paragraph 4.113.

4.23

There are some national and regional dimensions to competition between the
major grocery retailers, such as pricing and the centralised acquisition of products,
and we examine below the extent to which these impact on the nature andintensity of competition between grocery retailers at a local level.

4.24

Some specialist grocery retailers and other supermarkets also have a wider nationalor regional presence through franchise agreements with individual store owners(eg, Fruit World, The Mad Butcher and Bin Inn).

The drivers of store choice and consumer shopping behaviour in New Zealand
4.25

268

We describe consumer product and shopping preferences, including the drivers ofstore choice in New Zealand, and this helps us to identify the dimensions uponwhich grocery retailers compete with one another.

For example: Commerce Commission “Decision Nos. 606 & 607, Determination pursuant to theCommerce Act 1986 in the matter of applications for clearance of business acquisitions involving:
Foodstuffs (Auckland) Limited, Foodstuffs (Wellington) Co-operative Society Limited, and Foodstuffs
South Island Limited; and (separately) Woolworths Limited and The Warehouse Group Limited”(8 June 2007) at [E18], available at:https://comcom.govt.nz/__data/assets/pdf_file/0030/75279/PUBLIC-VERSION-Decision-606-and607.pdf; Commerce Commission “Decision No. 438, Application for clearance involving: Progressive
Enterprises Limited and Woolworths (New Zealand) Limited” (13 July 2001) at [66]-[69].

105

4.26

The factors that motivate and influence consumers to choose where they purchasetheir groceries are known as the drivers of store choice. The evidence shows that
there are multiple drivers of store choice in New Zealand and that these vary bydemographics, type of shopping mission and geography.

4.27

Some of the key drivers of store choice include factors such as price, location andease of access, product range and quality, and consumer perceptions of, andfamiliarity with, particular grocery stores. Some key drivers of store choice may becommon across shopping missions and some may be more important for some
shopping missions than others.

4.28

Grocery retailers seek to align their offers with drivers of store choice. This isbecause consumers are more likely to switch to a store with a similar retail grocery
offer if there is a deterioration in their current retail grocery offer, for example, anincrease in price or a decrease in service or range availability.

Most consumers like to do at least one large shop each week
4.29

To better understand the shopping patterns of consumers we gathered informationfrom respondents to our consumer survey on the frequency and typical size of their
shopping trips each week.269

4.30

72% of respondents to our consumer survey tend to do at least one or two larger
shops each week, and about half of those supplement these with a few smaller topup shops. A further 12% of respondents usually do less than one shop a week,
indicating that around 84% of respondents do a main shop. The remaining 16% ofrespondents rely on several smaller shops each week (see Figure 4.1).270

269

270

In March 2021 we conducted an online consumer survey hosted on our website. The aim of thesurvey was to help identify themes relevant to our study and better understand consumer behaviour,
including how consumers decide where to shop and what to buy. Our consumer survey was available
to the public from 4 March to 25 March 2021. During this time, we received 12,269 responses. The
analysis of our consumer survey is provided in Attachment E.
These answers were in response to question four of our survey: “Which of the following best
describes how you usually shop for groceries each week?”

106

4.31

Respondents were provided with a definition of the kind of groceries they shouldtake into account when completing the survey.271 While the spending size of a large
shop is likely to vary between respondents (eg, a “large shop” may be larger for a
multi-generational household than an individual living alone, or on a lower
income), we expect that respondents would consistently have considered a “large
shop” relative to their own weekly spend, rather than an objectively large shop
relative to all households.272

4.32

We consider the question about different shopping missions provides more reliableinsights on the prevalence of a main shop than attempting to derive this fromspending estimates.273 While analysis of spending data is useful to gain anunderstanding of average basket sizes, it is limited in its ability to answer questions
about the prevalence of certain shopping missions given the inability to ascertain
the purpose of a shopping trip based on spending alone. Kore Hiakai Zero Hunger
Collective also cautioned against assuming, as the major grocery retailers did in
their calculation of the average spend on a shop, that an amount spent under $100
is not a weekly shop.274

271

272

273

274

HoustonKemp submitted that some respondents may have narrowly interpreted the meaning of“groceries”, Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix B HoustonKemp - Empirical evidence of grocery sector competition” (10 September 2021) at [68(a)]. A
similar concern was also raised by Woolworths NZ, Woolworths NZ “Post conference submission onMarket study into grocery sector – Appendix Two” (24 November 2021) at [1.6]. However, weconsider it unlikely a material number of respondents misinterpreted the meaning of “groceries” asrespondents were provided an overview of what was meant by “groceries” at the beginning of therelevant survey section.
HoustonKemp is of the view that we should not rely on the analysis shown at Figure 4.1 because thesurvey question is ambiguous, and therefore the results provide limited insights into the size andfrequency of shopping trips, Foodstuffs NI “Submission on Market study into grocery sector draft
report: Appendix B - HoustonKemp - Empirical evidence of grocery sector competition”(10 September 2021) at [67] and [70]. Its concerns mainly stem from the use of the phrases “large
shop” and “groceries”. Specifically, it is of the view that the phrase “large shop” is subjective and mayvary by respondent (eg, one respondent may consider $50 to be a large shop, for another this may be$200).
Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix B HoustonKemp - Empirical evidence of grocery sector competition” (10 September 2021) at [71] and[74]-[77].
The submission also argued that the data used by the major grocery retailers cannot be used to assess
the income of the shopper and what portion of their income they are spending on their shop. They
are of the view that the aggregate figures used by the major grocery retailers may therefore mask the
differences in proportion of food expenditure in relation to income across different income groups.
The submission also noted that average basket expenditures may be skewed by a shopper who shops
every day to buy their lunch alongside a shopper who shops once a fortnight after payday, Kore Hiakai
Zero Hunger Collective “Post conference submission on Market study into grocery sector”(23 November 2021) at [2]-[3].

107Figure 4.1

Percentage of respondents who engage in different types of
shopping missions

Source: Commerce Commission analysis of responses to our consumer survey.275

4.33

Foodstuffs SI suggested that because of the COVID-19 pandemic, consumers tend
to make less frequent grocery shopping trips and stock up in bulk on more items.276
It is unclear whether this trend will continue in future.

4.34

In contrast, the major grocery retailers also suggest that the relevance of the main
shop to New Zealanders continues to decline and that the main shop is no longer
prevalent among New Zealand consumers.277

4.35

Woolworths NZ told us that “non-main shop” shopping missions are a critical andincreasing area of grocery market competition. Data submitted by Woolworths NZshows that over the past three years, expenditure on main shops has fallen from
67% to 56%, while main shopping missions as a percentage of total grocery
shopping missions have fallen from 42% to 35%.278

275
276

277

278

[
].
Foodstuffs SI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 10.
For example: Foodstuffs NI “Submission on Market study into grocery sector draft report”(10 September 2021) at [178]; Foodstuffs SI “Submission on Market study into grocery sector draft
report” (10 September 2021) at [161]-[163]; Woolworths NZ “Submission on Market study into
grocery sector draft report” (10 September 2021) at [28.4.1].
To support its view Woolworths NZ provided us with data on average basket sizes of Countdown
shopper. This analysis showed that the average Countdown shopper’s checkout basket is [ ](including GST) and approximately [ ] items, with the average Onecard holder shopping [ ] times per
week, Woolworths NZ “Submission on Market study into grocery sector draft report”(10 September 2021) at [28.4.2]-[28.4.3.4].

108

4.36

This is consistent with Foodstuffs NI’s submission that expenditure on the main
shop as a proportion of total grocery spend by consumers is declining and that the
average basket size would be significantly higher if the main shop was dominant. 279

4.37

Not all stakeholders agree on the usefulness of the shopping mission approach tounderstanding the nature of competition between grocery retailers. For example,
the NZFGC told us that no evidence has been provided by the major grocery
retailers on substitutability of other shopping missions for the main shop and thatno evidence has been provided of any material competitive constraints from theseshopping missions over a meaningful timeframe.280

4.38

Our consumer research implies that the main shop is still an important driver ofstore choice for most New Zealanders, although a number of consumers do morethan one large shop or multiple smaller shops each week.

4.39

We accept that there could be a declining trend and/or overall decline in consumer
preference for main shops over time, and that a range of shopping missions isundertaken by consumers. However, irrespective of whether there is a declining
main shop or not, we consider that other evidence of expressed consumer
preferences and overall spend with the major grocery retailers are insightful. Theysuggest regardless of the shopping mission, most consumers tend to use a major
grocery retailer for grocery shopping purposes. We discuss this further below.

279

280

Foodstuffs NI’s sales data demonstrates that most baskets are less than [ ] in value, missions otherthan the main shop make up approximately [ ] of baskets (or shopping trips), and missions other thanthe main shop make up approximately [ ] of sales, Foodstuffs NI “Submission on Market study into
grocery sector draft report” (10 September 2021) at [181]-[184].
NZFGC “Post conference submission on Market study into grocery sector” (25 November 2021) at[2.10].

109

Most consumers use one of the major grocery retailers as their main store
4.40

The Ipsos study found that consumers are more likely to visit a store if they knowthat the store has the products they need and a greater range of options available
for those products.281 Range is therefore an important driver of store choice andprovides an element of convenience. It can also provide some grocery retailers witha competitive advantage for consumers’ grocery spend over other grocery retailers
with a smaller range of products.282 The availability of a wide range of products
reduces the time and costs of shopping, whether shopping in store or online. 283 Thisis the case regardless the size of the shopping mission since a consumer visiting a
grocery retailer offering a wide range of products can feel confident that everything
they need is likely to be available in one location no matter the size of the shop
they undertake.

4.41

Participants in the Ipsos study suggested that there is a core group of consumers
that prefers shopping at a one-stop shop to avoid having to visit multiple locations
to purchase the groceries they need from different grocery retailers. This implies
that participants prefer not to have to visit more stores when they know they
otherwise would, and that they also do not want to take the risk of having to do so.
The major grocery retailers were typically viewed as most convenient forpurchasing a full grocery basket in one location and were overall considered lessexpensive for many product categories when compared to other grocery
retailers.284

4.42

As well as submitting that the significance of the main shop is declining, the major
grocery retailers are of the view that the traditional retail grocery channels are
becoming less important as the main shop is declining.285

281

282

283

284

285

Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 8.
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 2.
An additional attraction for consumers who use supermarkets is that it allows consumers to purchasegroceries at a much lower total transaction cost than would be the case if the same groceries werepurchased at a range of specialist stores. Transaction costs include payment fees, transportation
costs, search costs and the value the consumer places on their time when shopping for groceries,
Commerce Commission “Decision Nos. 606 & 607, Determination pursuant to the Commerce Act 1986
in the matter of applications for clearance of business acquisitions involving: Foodstuffs (Auckland)
Limited, Foodstuffs (Wellington) Co-operative Society Limited, and Foodstuffs South Island Limited;and (separately) Woolworths Limited and The Warehouse Group Limited” (8 June 2007) at [122].
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 8 and 21.
For example, Woolworths NZ told us that there is a significant and growing range of retailers andother suppliers of food and grocery products in New Zealand that compete directly and successfully
with “traditional supermarket” grocery retailers, Woolworths NZ “Submission on retail grocery market
study preliminary issues paper” (4 February 2021) at 28.

110

4.43

They are also of the view that there is a wide range of options for consumers acrossdiscrete product categories and shopping missions, and that full-service grocery
retailers face material competitive constraint across all product categories.286

4.44

We acknowledge that there is a range of grocery retailers catering to a range ofconsumer preferences with a diverse range of grocery retail offers, and that they
provide some competition to the major grocery retailers. However, even if themain shop were of declining importance to consumers, the evidence from ourconsumer research and market share estimates (discussed below) show not onlythat Ipsos research participants viewed the major grocery retailers as mostconvenient and less expensive, but also that consumers buy the majority of theirgroceries at a major grocery retailer.

4.45

Figure 4.2 below shows that 95% of respondents to our consumer survey reported
one of the major grocery retailers as their main store.287
Figure 4.2

Main store choice by respondents to our consumer survey (%)

Source: Commerce Commission analysis of responses to our consumer survey.288

286

287
288

For example, Foodstuffs NI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 2-3.
‘Main store’ was defined as ‘the store you spend most at, or do most of your grocery shopping with’.
[
].

111

4.46

Our consumer survey shows respondents reported visiting an average of 2.4
different stores in a typical week.289 However, while the respondents visit morethan one store in a typical week, they do not appear to split their spending evenly
across the stores they shop at. Instead, one store tends to account for a large
proportion of their weekly spend.

4.47

For example, the survey indicated respondents spend between two and three times
as much at a PAK’nSAVE, Countdown or New World than at other grocery retailers(eg, an ethnic supermarket or specialist grocer), if they reported shopping at thesestores in a typical week.290

4.48

In addition, the different stores visited are often a combination of banners ownedby the major grocery retailers. Approximately 60% of respondents reported
shopping at only the major grocery retailers in a typical week.291 The other 40%
reported shopping at a mix of the major grocery retailers and other stores (lessthan 0.5% of respondents shopped at only other grocery retailers).

4.49

This is consistent with the findings of the Ipsos study, which found participants
typically preferred to shop at one store for most of their groceries, supplementing
this with secondary and top-up shops to take advantage of specific characteristics
of other retailers (eg, quality).292

4.50

While there is mixed evidence that the significance of the main shop may bedeclining over time, our consumer research suggests that most consumers prefer tobuy groceries at one of the major grocery retailer banners no matter what their
shopping mission. Based on our consumer research, we consider that this isbecause consumers value location, price, range and store familiarity when deciding
where to shop.

Market shares also illustrate a preference for shopping with the major grocery retailers
4.51

A preference for shopping with a major grocery retailer no matter the shopping
mission is also evident from analysis of market share.

4.52

Market share estimates show that the major grocery retailers have a significant
overall combined share of the total consumer spend on grocery products across all
different types of shopping missions.

289

290

291
292

For example, approximately one quarter of respondents reported typically only visiting one store per
week, with just over a third visiting two stores, and the remainder visiting three or more stores, Figure
E10 in Attachment E.
Paragraphs E98 to E104 in Attachment E. Our survey results also show that respondents spend
approximately two to three times as much on meal kits as they do at other grocery retailers. However,a very small proportion of respondents shop with a meal kit provider in a typical week.
Paragraph E97 and Figure E13 in Attachment E.
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 7.

112

4.53

We acknowledge that these estimates may vary between different local markets
depending on alternative options available to consumers for grocery shopping.
However, we are of the view that this provides evidence that the major grocery
retailers still appear to have some key advantages over other grocery retailers
when competing for all shopping missions.

4.54

Internal market share estimates of the major grocery retailers across different
types of shopping missions by retail banner show that the major grocery retailers
have a combined estimated share of more than 90% for consumers’ main shop.293

4.55

Additional internal market share estimates of different types of shopping missions
by retail banner show that the major grocery retailers have a combined estimatedshare of more than 80% for top-up shops and other types of smaller shopping
missions.294

4.56

Our own market share estimates confirm that the major grocery retailers have arelatively large and stable market share of total consumer grocery spend across all
different types of shopping missions (see Chapter 5).

4.57

The implications our findings have for the strength of competition between the
major grocery retailers and other grocery retailers is discussed in more detail in
Chapter 5.

Convenience and low prices are key drivers of store choice
4.58

Grocery retailers choose to emphasise different dimensions of the retail grocery
offer to cater to the diverse drivers of store choice and consumer preferences. They
extensively research how their retail grocery offer matches consumers’ needs sothat they can try to meet the needs of all consumers and every different type of
shopping mission.295

4.59

Our consumer research shows that although there are many different drivers ofstore choice in New Zealand, convenience (including location/ease of access, range
and store familiarity) and price are the most important drivers of store choice.
Many respondents said they value attributes such as easy parking, convenient
opening times and good specials. However, very few respondents consider any ofthese to be the single most important reason they shop at their main store. We
discuss our findings further below.

293
294
295

[
[
For example: [
[

].
].
]; [

];
].

113

Convenience is the most important driver of store choice
4.60

The major grocery retailers submitted that service differentiation is very importantfor consumers and that store choice is increasingly driven by convenience, such as
location, store layout and “ready-to-eat” options.296

4.61

We consider that this is consistent with our consumer research which indicates thatmost consumers prefer to shop at a major grocery retailer, no matter their
shopping mission.

4.62

A consumer preference for convenience was raised in both our consumer researchand by grocery retailers. In our view, it can be used as shorthand for a range of
convenient features sought by consumers and offered by grocery retailers such asease of access or location, a wide range of products or familiarity with the store.

4.63

Foodstuffs NI told us that convenience as defined by customers individually sits astheir first driver of store choice and that price (or value) would be their second
driver of store choice.297 In their view, some consumers value location as a matterof convenience, but for others size of store and ease of shop are sought after
aspects of convenience. Availability of product or the consumer’s individual
perception of the level of service they receive in any retail grocery offer also
contribute to what a consumer will define as convenience.298, 299

4.64This is consistent with Woolworths NZ’s view that there are many different
convenience factors that a consumer may consider in deciding where to shop,
including location of store, availability of parking, cleanliness, layout of store andwebsite and in-store shopping experience. They also indicated that product range
and quality is an important factor that consumers consider when choosing whereto shop.300

4.65

We asked our survey respondents about factors affecting their choice of store andwhich was the most important. The results are illustrated by Figure 4.3 below. The
total bar shows the proportion of respondents who selected the attribute as one of
the reasons for their main store choice. The smaller, darker segment of the bar isthe proportion of respondents who considered an attribute to be the single mostimportant reasons for their choice of main store. For example, while about 30% of
respondents considered “good quality products” one reason for their choice ofmain store, only about 6% considered it to be the most important reason.

296

297
298

299
300

For example: Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 23; Foodstuffs NI “Submission on retail grocery market study preliminary issues
paper” (4 February 2021) at 2-3.
Transcript of Grocery Market Study Conference – Day 1 (21 October 2021) at 26 (lines 35-38).
Based on our consumer research we consider that ease of shop can be used as shorthand for a rangeof service features sought by consumers and offered by grocery retailers such as store familiarity,
quality of service, parking availability and pleasantness of the shopping experience.
Transcript of Grocery Market Study Conference – Day 1 (21 October 2021) at 27 (lines 1-4).
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 58.

114

Figure 4.3

Drivers of store choice in New Zealand

Source: Commerce Commission analysis of responses to our consumer survey.301

4.66

Figure 4.3 above shows that “convenient/easy to get to” is the most common
driver of main store choice, with one in five respondents selecting it as their key
driver. We agree with HoustonKemp (on behalf of Foodstuffs) that this should most
likely be taken to mean the “ease of location” (as opposed to the convenience of“purchasing all products in one location”).302 Other options (eg, “wide choice of
products”) more readily characterise the convenience of purchasing all products in
one location or from a wide range of products.

4.67

However, Figure 4.3 also highlights many other convenience-related factors which
are key drivers for some consumers. These include familiarity with the store, or
having a loyalty card. Our analysis shows that 40% of respondents selected aconvenience-related factor as their single most important driver of store choice,while 75% of respondents selected at least one convenience-related factor as oneof their drivers of store choice.303

301
302

303

[
].
Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix B HoustonKemp - Empirical evidence of grocery sector competition” (10 September 2021) at [96]-[98].
21% of respondents selected “convenient/easy to get to” as their main driver of store choice, whilst
11% and 8% of respondents selected “familiarity of the store/service” and “wide choice of products”
as their main driver of store choice respectively.

115

4.68

The Ipsos study found that shopping routines and store selection by participants
was mainly driven by a sense of convenience, ie, proximity and a need for routine
and familiarity. The study also found that specific store choice can also be
influenced by a range of secondary factors, including store atmosphere, quality andvalue, and the range of products available.304 This finding is consistent with ouranalysis of the responses to our consumer survey.

4.69

We consider that the major grocery retailers are uniquely positioned to cater toconsumer demands for convenient locations with a wide range of products. We
discuss this further below from paragraph 4.104.

Price is also a very important driver of store choice
4.70

The responses to our consumer survey show that many consumers also consider
price to be an important consideration when choosing where to shop and that it is
the second most important driver of store choice. We discuss our findings further
below.

4.71

HoustonKemp submitted that only a small proportion of respondents selected “lowprices overall” as either a driver, or key driver, of main store choice, indicating low
prices may not be an important factor for most consumers.305 This is largely
attributable to consumers selecting a diverse range of drivers in response to thesurvey question.

4.72

Despite this, price-related factors do appear to be key drivers of main store choice
for many consumers. For example, Figure 4.3 shows almost a third of respondents
selected “low prices overall”, “good value for money” or “good specials” as theirsingle most important driver of store choice. Our analysis shows that 31% of
respondents selected a price-related factor as their single most important driver ofstore choice, while 50% of respondents selected at least one price-related factor as
one of their drivers of store choice.306

Drivers of store choice may differ between individual consumers and between shopping
missions
4.73

304

305

306

307

Drivers of store choice are likely to vary by demographics too. For example, we
heard that access to fresh, healthy and safe kai is a driver for many Māori, and thatmany Māori prefer kanohi ki te kanohi (face-to-face) engagement, which provides
the ability to see their food before purchasing.307

Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 8-9.
Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix B HoustonKemp - Empirical evidence of grocery sector competition” (10 September 2021) at [91]-[95].
17% of respondents selected “low prices overall” as their main driver of store choice, whilst 11% and
3% of respondents selected “good value for money” and “good specials” as their main driver of store
choice respectively.
Ngati Porou Holding Company Ltd “Post conference submission on Market study into grocery sector”(23 November 2021) at 55.

116

4.74

Drivers of store choice may differ between individual consumers and between
shopping missions. However, we consider that our consumer research and theexperience of grocery retailers consistently indicates that consumers place thehighest value on convenience, including a store location that can easily be accessedand expected product range and availability.

4.75

Our findings also show that following convenience, price is the second most often
selected as the most important driver of store choice for consumers. This meansthat consumers value competition on price between grocery retailers. Also, someconsumers may choose their grocery store(s) based on a combination of price andconvenience-related factors.

4.76

Size of store and consumers’ perception of the level of service they receive in any
retail offer are also material drivers of store choice. Some consumers may also
consider a combination of these factors when choosing their grocery store(s).

The dimensions of competition in retail grocery markets
4.77

Having drawn some conclusions from our work relating to consumer preferences,
this section of the chapter discusses the dimensions upon which grocery retailers
are competing to meet those preferences. This enables us to draw conclusions
about who is competing with whom. In Chapter 5 we look at the intensity ofcompetition between major grocery retailers and other grocery retailers, andbetween the major grocery retailers themselves.

4.78

As discussed in Chapter 2, there are many different types of grocery retailers
operating across New Zealand, including supermarkets, international food stores,
specialist grocery retailers, meal kit providers and online-only supermarkets. We
have described that demand for groceries is highly differentiated. Grocery retailers
differentiate their offering to meet this demand in different ways to attract andretain different types of consumers, for example, by the combined price and qualityof service, or by breadth of product range.

4.79

Grocery retailers with similar product offerings on both price and non-pricedimensions of the retail grocery offer will be each other’s closest competitors. We
consider that most New Zealanders use one of the major grocery retailers for mostof their shopping missions because for any particular shopping mission,
convenience (including location/ease of access, range and store familiarity) andprice are key drivers of store choice. The major grocery retailers are uniquelyplaced to offer the convenience of one-stop shopping for a wide range of groceries
at convenient locations (both in store and online) which consumers can easily
access, and at prices which are generally lower than other grocery retailers. We
discuss this further below.

117

The major grocery retailers have broadly similar retail grocery offers and are each other’s
closest competitors but choose to emphasise different elements of price and non-pricecompetition
4.80

The major grocery retailers tend to compete across the full spectrum. This allows
them to compete for many different combinations of consumer preferences and to
make their retail grocery offer attractive to consumers on many different types of
shopping missions.308 The major grocery retailers have broadly similar retail grocery
offers and are each other’s closest competitors.

4.81

In contrast, other grocery retailers tend to compete with the major grocery
retailers only over some aspects of the retail grocery offer. This competition tends
to mostly occur in some local markets for secondary or top-up shopping missions.
We discuss this further below from paragraph 4.86.

4.82

The major grocery retailers regularly monitor both price and non-price dimensionsof competition of each other’s competing retail banners on an ongoing andfrequent basis.309 We have also seen evidence that they adjust and improve theirretail grocery offers in response to changes in the retail grocery offering of othermajor grocery retailer banners.310

4.83

We have seen a number of examples of frequent adjustments to the competitive
strategies of the major grocery retailers in response to changes in each other’sretail grocery offer. Some of the more common examples include:

308

309

310

311
312

4.83.1monitoring of price levels for specific products with the aim ofmaintaining specified price differentials between the major grocery
retailer banners;311

4.83.2

adjustments in product range to compete for specific demographics inlocal markets;312

For example: [
[

];
]; [

].

For example, Foodstuffs NI told us that it monitors Countdown’s prices to ensure that its prices arecompetitive, Foodstuffs NI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 26.
The competitive parameters monitored on a frequent basis include[], for example: [
];
[
]; [
].

For example, [For example, [

].
].

118

4.83.3strategies around ensuring that stock availability and range improves sothat consumers will avoid supplementing their shop at anothercompeting grocery retailer;313

4.83.4

improving online delivery services and shopping experience throughimprovements in the ease of website navigation and timeliness ofdeliveries.314

4.84

We consider the major grocery retailers are each other’s closest competitors.
However, they also attempt to position themselves differently in the market bydifferentiating their retail grocery offer from one another on both price andnon-price dimensions of competition.315 For example, PAK’nSAVE has a different
business proposition that aims to ensure it is positioned to offer New Zealand’s
lowest food prices and to make its retail grocery offer attractive enough forconsumers to accept the trade-off in terms of quality, range and service that comeswith the ability to compete strongly on price.316

4.85

We discuss the impact of differentiation by the major grocery retailers on theintensity of competition in the retail grocery market further in Chapter 5.

Other grocery retailers tend to strategically differentiate their retail grocery offers from the
major grocery retailers
4.86

313
314
315

316
317

318

Other grocery retailers told us that they tend to focus on the non-price dimensionsof the retail grocery offer, such as product range and quality, as they are generally
unable to compete strongly on price with the major grocery retailers. Some
examples of differentiation on non-price dimensions of the retail grocery offer byother grocery retailers include:
4.86.1some specialist grocery retailers told us that they differentiate theirretail grocery offering from the major grocery retailers by stocking a
different range of fresh produce and meat products;317

4.86.2we were told that some convenience stores change their product range
to cater for take-away food options and consumers on impulsive
shopping missions;318 andFor example, [].
For example, [].
Of the three major grocery retailer banners, it appears that[].
Transcript of Grocery Market Study Conference – Day 1 (21 October 2021) at 27 (lines 5-17).
[
]; [
[
[

];
].

].

119

4.86.3some other supermarkets told us that they create a unique shopping
experience for consumers by stocking a different range of fresh foods
and imported goods in comparison to the product range available at the
major grocery retailers.319

4.87

Foodstuffs NI and Foodstuffs SI emphasised non-price dimensions of competition in
the retail grocery sector and that multi-dimensional competition is good for
consumers.320, 321

4.88

We agree that multi-dimensional competition may benefit consumers and thatcompetition on non-price elements of the retail grocery offer is important when
considering the nature of competition in the retail grocery sector. This is consistent
with the findings of our consumer research that consumers commonly value a
range of factors in addition to price when deciding where to do their grocery
shopping.

4.89

However, as discussed above, we expect competition to be more intense between
grocery retailers with similar combinations of price and non-price elements ofcompetition. The limited price competition between the major grocery retailers
and other grocery retailers (see from paragraph 4.98 below) lessens the constraint
they place on the major grocery retailers, thereby reducing the overall strength ofcompetition in the retail grocery market. It also limits the ability of other grocery
retailers to compete for a full set of shopping missions and for the same consumer
spend.

4.90

We discuss the extent to which the differentiated retail grocery offer by othergrocery retailers impacts intensity of competition in the retail grocery market
further in Chapter 5.

The major grocery retailers have a wider product range than other grocery retailers
4.91

Notwithstanding the differentiating factors between different types of grocery
stores, we discuss below two aspects of the retail grocery offer that appeal to theconsumer preference for convenience that we have identified. These are:4.91.1store size which influences both floor area and available product range;
and

4.91.2the identity/brand of the store operator which influences store
familiarity and consumer perceptions of a retail banner and its retailgrocery offer.

319

[

320

Foodstuffs NI “Post conference submission on market study into grocery sector” (3 December 2021)
at [67]-[68].
Foodstuffs SI “Post conference submission on market study into grocery sector” (3 December 2021) at
[43].

321

]; [

].

120

4.92

The major grocery retailers generally have larger stores and tend to stock asignificantly wider grocery product range than other types of grocery retailers, bothin terms of the number of different products stocked as well as the number ofdifferent brands within each product category. As discussed from paragraphs 4.60
to 4.69 above, many consumers value product range and size when choosing whereto shop. Consumers are therefore more likely to view competing grocery retailers
with similar size and product range as alternatives to each other.

4.93

The breadth and depth of product range stocked at most major grocery retailers
means that consumers are more likely to find the range of products that they wantto purchase at a major grocery retailer rather than having to visit numerous grocery
retailers to purchase the same basket of products. This implies that consumers canhave confidence that they will be able to get the grocery products they need at amajor grocery retailer. As we discuss further from paragraph 4.104 below, theconvenience associated with stocking a wide range of products at one location(both in store or online) at prices that are generally lower than other grocery
retailers, result in a competitive advantage for the major grocery retailers
regardless of the purpose of a consumer’s shopping mission.

4.94

Consumers who value store size and product range are also less likely to view
online-only supermarkets as alternatives to the major grocery retailers. For
example, Supie told us as that as an online-only supermarket with limited access tomany products that consumers demand due to exclusive supply arrangements
between the major grocery retailers and suppliers, they struggle to compete withthe major grocery retailers for consumers’ main shop.322

4.95

We considered the variation in store size across New Zealand to help assess thelikely competition between grocery retailers to meet consumer demand for a rangeof groceries. Data provided by the major grocery retailers and some other grocery
retailers shows that the average store size of the major grocery retailers is
significantly bigger than the average store size of most other grocery retailers, withthe exception of the Four Square, Raeward Fresh and SuperValue retail banners forsome categories of retailers (see Figure 4.4).323

322
323

Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 39 (lines 20-23).
Although our list of other retailers is not comprehensive, we consider it gives a reasonable
comparison of the average store size and number of products stocked at major grocery retailer storesand other grocery retailers.

121

Figure 4.4

Average net retail area of major grocery retailers and other grocery retailersin (square metres)

Source: Commerce Commission analysis of data provided by industry participants.324

4.96

324
325

We acknowledge that store size may not be a perfect approximation of productrange and the number of Stock Keeping Units (SKUs) available at a grocery store.
However, our analysis of store size and SKU data provided to us by the major
grocery retailers and some other grocery retailers, show that there is a strong
positive correlation between store size and product range (see Figure 4.5 below).325
This means that consumers with a preference for range can have confidence that alarger store will stock a wider selection of products, and that they will be more
likely to be able to purchase the grocery products they need in one location, no
matter the shopping mission.

[].
A correlation between variables indicates that as one variable changes in value, the other variable
tends to change in a specific direction. Correlation coefficients I measure the strength and direction of
the relationship between two variables. The value of r is always between +1 and -1. The r value forour analysis of the relationship between net store size and product range is 0.84. It is generally
accepted that a positive r value of greater than +0.70 is indicative of a strong positive linear
relationship between two variables.

122

4.97

Further analysis of the information provided by grocery retailers on the average
number of SKUs stocked by each retail banner also shows that, on average, othergrocery retailers stock between 38% to 85% fewer SKUs than New World,Countdown and PAK’nSAVE.326 Consumers with a preference for size and range are
therefore more likely to view major grocery retailers as closer alternatives thanother grocery retailers which have fewer SKUs.
Figure 4.5

Net retail area and product range (2019, square metres)

Source: Commerce Commission analysis of data provided by industry participants.327

There is limited price competition between the major grocery retailers and other grocery
retailers
4.98

326
327

Our consumer research shows that price is an important driver of store choice formany consumers in addition to factors of convenience such as range, location andshopping experience. We have therefore considered the extent to which different
types of grocery retailers compete on price. This is because consumers with apreference for lower prices are more likely to view grocery retailers that compete
effectively on price as alternatives to grocery retailers that tend to focus more on
non-price aspects of competition.

[
[

].
].

123

4.99

As discussed above, other grocery retailers told us that they tend to focus on the
non-price dimensions of the retail grocery offer, such as product range and quality
rather than attempting to compete strongly on price. This is mainly because theycannot match the major grocery retailers’ cost and scale advantages (see Chapter
6) and therefore cannot compete directly with the major grocery retailers on priceacross the full range of products stocked at the major grocery retailer banners.328

4.100

For example, Night ‘n Day told us that other grocery retailers are unable tocompete on price with the major grocery retailers due to a lack of cost-effective
wholesale supply. They are also of the view that the entry of the major grocery
retailers into the small top-up space with small store formats means that they canleverage their overall buying power throughout the supply chain to charge lower
prices at these stores. This further limits the ability of other grocery retailers suchas convenience stores to compete effectively with the major grocery retailers for
consumers’ demand for convenience.329

4.101

Other grocery retailers also told us that they are mostly unable to compete withthe major grocery retailers on price due to a lack of wholesale access to a wide
range of grocery products at competitive prices and a range of other factors,
including:330

328

329
330

331

332

4.101.1

other conditions of entry and expansion that prevents these retailers
from competing effectively with the major grocery retailers, such asaccess to suitable sites for the development of bricks-and-mortar stores(see Chapter 6);331 and4.101.2

limited geographic and network coverage that reduces their ability tocompete with the national and regional (or island-wide) pricing andacquisition strategies of the major grocery retailers (see from paragraph4.136 below).332

For example: Transcript of Grocery Market Study Conference – Day 1 (21 October 2021) at 23(lines 21-25); Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 4-5 (lines
34-6).
Transcript of Grocery Market Study Conference – Day 1 (21 October 2021) at 23 (lines 15-29).
For example: Supie “Post conference submission on Market study into grocery sector”(23 November 2021) at [3.1]; Transcript of Grocery Market Study Conference – Day 1(21 October 2021) at 23 (lines 18-20).
For example: [];[]; The Warehouse Group “Submission on retailgrocery market study preliminary issues paper” (4 February 2021) at 4.
For example, [

].

124

4.102

We note that in instances where other grocery retailers do compete with the major
grocery retailers on price, they tend to focus on particular products or subsets ofconsumers, such as those products stocked at international food stores or
consumers who are willing to buy bulk goods.333

4.103

We therefore consider that there is limited price competition between the major
grocery retailers and other grocery retailers. This means that consumers with apreference for lower prices can have confidence that they will be able to access awide range of products at the major grocery retailers at prices which are generally
lower than other grocery retailers.

The major grocery retailers uniquely meet consumer preferences for a wide range of
products at lower prices in a single location
4.104

We consider that the major grocery retailers are uniquely placed to offer a wide
range of groceries at locations which consumers can easily access (both in store
and online), at prices which are generally lower than other grocery retailers. This
offers the convenience of one-stop shopping no matter the shopping mission.
Other grocery retailers do not provide a material constraint on them.

4.105

We agree with the major grocery retailers that differentiation by different types ofgrocery retailers across price and non-price dimensions of competition is beneficial
to consumers because it meets diverse consumer demand. This means that no two
grocery retailers will be the same as retail grocery offers are differentiated indifferent ways. The more similar retail grocery offers are, the more closely they arelikely to compete for the benefit of consumers.

4.106

However, while differentiation may be beneficial to consumers because it meetsdiverse consumer demand, it can also work against consumers in the long run bymaking the retailers sufficiently differentiated that they are not competing strongly
with one another, or, in the extreme, at all. We consider that the differentiatedretail grocery offers of other grocery retailers are not sufficiently attractive tocompete closely with the major grocery retailers for consumers’ grocery spend.

4.107

There are differing views on the importance of the ability of the major grocery
retailers to offer the convenience of a one-stop shop where consumers can buy awide range of products in one location, either online or in a bricks-and-mortar
store.

333

[
[

];
].

125

4.108

Foodstuffs NI told us that it recognises that the range advantage of major grocery
retailers to offer the convenience of a main shop in a single location differentiates
them from other grocery retailers. However, they are also of the view that the
major grocery retailers can be seen as being at a competitive disadvantage given
the convenience offered by other grocery retailers which is often more importanton smaller shopping missions.334

4.109

Foodstuffs NI and Foodstuffs SI also told us that they cannot tell which kind of
mission any shopper is on and that even if they did know, they would still have to
set the same prices for all shoppers.335, 336 They are of the view that this benefits
consumers irrespective of the shopping mission a consumer is engaged in.

4.110

However, the NZFGC is of the view that the constraint imposed by other grocery
retailers is limited because they lack the portfolio of products offered by the major
grocery retailers at the same prices, and they also cannot provide sufficientvolume.337

4.111

We acknowledge that the major grocery retailers are unable to price discriminate
between consumers on different types of shopping missions. However, we are of
the view that their ability to stock a wide range of products at generally lower
prices to meet the needs of all types of shopping missions provides them with aunique competitive advantage when competing for consumers’ grocery spend
across all types of shopping missions, including the main shop and other non-main
shops. This is because consumers can have confidence that they are likely to beable to get all the products they need in one place at prices which are generally
lower than offered by other grocery retailers no matter the size of the shopping
mission.

4.112

The availability of a wide range of products reduces the time and transaction costsof shopping, whether shopping in store or online. It provides the major grocery
retailers with a competitive advantage over other grocery retailers whencompeting for different types of shopping missions, as other grocery retailers tend
to have a significantly smaller product range and may have less convenient store
locations. Consumers can therefore be confident of getting all the products theyneed in one place at a major grocery retailer store no matter the shopping mission,at prices which are generally lower than other grocery retailers.

334

335

336

337

Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[176].
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[241.4].
Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021) at[211.4].
NZFGC “Submission on Market study into grocery sector draft report” (26 August 2021) at [3.2].

126

The nature of local, regional and national competition in grocery retailing
4.113

An important driver of store choice for many consumers is convenient store
location. In this section of the chapter we analyse the geographic scope ofcompetition between grocery retailers to meet this preference. This enables us todraw some conclusions regarding the extent to which different types of grocery
retailers compete for consumers’ grocery spend in local markets where they live
and work.

4.114

Our research shows that consumers are generally willing to travel limited distances
to purchase groceries. However, several important aspects of the retail grocery
offer, such as pricing and product acquisition, are set uniformly across the retailbanners of the major grocery retailers at a national or regional level. This meansthat there are also some regional and national dynamics to competition in the retailgrocery market that influence the intensity of competition between grocery
retailers.

4.115

As noted in the UK Competition Commission’s market investigation into the supplyof groceries, the fact that many grocery retailers set a substantial proportion of
their retail grocery offer nationally or regionally on a uniform basis across all theirstores does not mean that the intensity of competition in local markets for grocery
retailing is not important. The intensity of competition in local markets could
influence the retail grocery offer in two main ways:

4.116

338

4.115.1

through affecting those dimensions of the retail grocery offer that are
adjusted locally at the store level; and4.115.2

through affecting the overall level at which nationally uniform
dimensions of the retail grocery offer are set.338

We have therefore also considered the extent to which other grocery retailers withlimited geographic coverage are able to compete with the major grocery retailers inlocal markets for consumers’ grocery spend across different types of shopping
missions.

UK Competition Commission “The supply of groceries in the UK market investigation” (30 April 2008)at [6.33], available at:https://webarchive.nationalarchives.gov.uk/20140402194746/http://www.competitioncommission.org.uk/our-work/directory-of-all-inquiries/groceries-market-investigation-andremittal/final-report-and-appendices-glossary-inquiry.

127

The approximate geographic sizes of local markets vary between different types ofretailers and shopping missions
4.117

Research suggests that the importance of distance decreases according to howmuch the consumer feels they will achieve, or plans to achieve, by visiting aparticular store.339 In particular, the importance of distance depends both on how
much a consumer intends to spend at a particular store and how unique theplanned shopping mission or experience is.

4.118

This means that a consumer who plans to spend a large percentage of theirhousehold budget in a particular store is likely to be less influenced by the distanceto the store than a consumer who plans to spend only a small percentage of theirhousehold budget at the same store.340 Consumers are therefore likely to be willingto travel further to shop at their main store than they would be willing to travel for
top-up shopping purposes.

4.119

This is consistent with submissions from Foodstuffs NI and Woolworths NZ that
consumers are likely to be willing to travel further to larger stores. Specifically,
Foodstuffs NI told us that the distance any particular consumer will drive to a store
depends on a range of factors, including the nature of the shopping mission and thesize and type of store, as consumers ordinarily drive further to larger stores such as
PAK’nSAVE.341 Woolworths NZ also told us that Costco is seen as a “destination
shop” and that they have seen analysis from Australia suggesting that Costco stores
have in-person catchment areas of approximately 25 km.342

4.120

Feedback from other grocery retailers confirms that they tend to compete for
consumers located within relatively small local areas, which is consistent with ourview that consumers mainly use these retailers for the purposes of smaller or
top-up shopping missions. For example, some of these retailers have indicated thatthey consider catchment areas to range from just a few blocks from the location of
the store to approximately 10 minutes’ driving distance.343

4.121

However, depending on the alternative options available to consumers in local
markets and/or regions, they may be willing to travel further to stores that could
be regarded as destination stores (eg, international food stores).

339

340

341

342

343

Hansen et al. “How the Measurement of Store Choice Behaviour Moderates the Relationship between
Distance and Store Choice Behaviour” (2013) at 3-4, available at:https://core.ac.uk/download/pdf/50684972.pdf.
NZFGC “Submission on retail grocery market study preliminary issues paper” (4 February 2021) at[117].
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 24.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 27.
For example: [
];
[
].

128

The approximate geographic size of local markets varies depending on urban or rural store
locations
4.122

There is not a one sized estimation of the approximate geographic size of local
markets that applies to all local areas across New Zealand. It is difficult to precisely
estimate a delineation of the size of geographic markets as it varies according tolocal factors such as topography and the distribution of the population relative tothe stores in the area. In some local markets competition may therefore occur overa shorter or longer distance than our estimates indicate. This is consistent with
Woolworths NZ’s view that there is no clear-cut answer as to how far consumers
will travel for groceries, given the diverse range of factors that can drive each
shopping mission.344

4.123

We have estimated the approximate geographic size of local markets separately for
urban and rural areas. This is because there are regional variations in the options
available to consumers, both in terms of product range and the diversity of grocery
stores.

4.124

Rural consumers tend to drive further than urban consumers for grocery shopping
purposes. For example, we heard many rural Māori shop about once a month, due
to large distances required to travel to the nearest supermarket.345 We discuss
regional variations in the options available to consumers below from paragraph4.152.

4.125

This is consistent with Foodstuffs SI’s submission that the distance that consumers
are willing to travel to purchase groceries is catchment dependent based on thenature and unique attributes of the community. In their view a catchment area
would generally be up to a 15 km radius. However, for a rural store its catchment
area will depend on the store’s location and its proximity to surrounding urban
areas.346

344

345

346

Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 59.
Food is therefore often purchased frozen as there is a need to buy in bulk due to the large distances
required to travel and infrequent shopping trips. This means there can be limited access to fresh foodfor many rural Māori, [].
Foodstuffs SI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 15.

129

4.126

In previous investigations we used a five km radius around each grocery store as astarting point to estimate the approximate geographic size of local markets.347
However, for the purposes of our study we used drive time to estimate theapproximate geographic size of local markets in urban and rural areas.348

4.127

Our analysis of the responses to our consumer survey shows that, on average,
respondents in medium (eg, Te Awamutu), large (eg, Rotorua) and major(eg, Auckland) urban areas travel less than 10 minutes to their main store.
Consumers located in small urban (eg, Gore) and rural areas (eg, Haast) tend totravel longer to their main store, with consumers in rural areas travelling close to
20 minutes on average to their main store (see Figure 4.6). This is not an
unexpected finding. As noted above, consumers living in rural areas are more likely
to make less frequent and longer journeys to stock up on products in bulk.349
Figure 4.6

Estimated average drive time to main store

Source: Commerce Commission analysis of responses to our consumer survey.350

347

348

349

350

For example: Commerce Commission “Decision Nos. 606 & 607, Determination pursuant to theCommerce Act 1986 in the matter of applications for clearance of business acquisitions involving:
Foodstuffs (Auckland) Limited, Foodstuffs (Wellington) Co-operative Society Limited, and Foodstuffs
South Island Limited; and (separately) Woolworths Limited and The Warehouse Group Limited”(8 June 2007) at [E18]; Commerce Commission “Decision No. 438, Application for clearance involving:
Progressive Enterprises Limited and Woolworths (NZ) Limited” (13 July 2001) at [66]-[69].
This is because distance-based measures may not always provide an accurate picture of how
consumers can access a particular site and the alternative options available to them in the area close
to where they live or work.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 59.
[
].

130

4.128

Our analysis also shows that more than 60% of urban respondents travel less than
10 minutes to their main store. However, in comparison less than 20% of rural
respondents indicated that they travel less than 10 minutes to their main store,
while approximately 30% of rural respondents stated that they travel more than
25 minutes to their main store (see Figure 4.7).

Figure 4.7

How long it usually takes respondents to travel to their main store

Source: Commerce Commission analysis of responses to our consumer survey.351

4.129

Most of the participants in the Ipsos study reported that they travel less than 7 km
for grocery shopping purposes and that they did not need to travel far to accessalternative stores. However, rural participants reported often having to travel
further (up to 40 minutes) for their main shop and therefore needed to plan larger
shops more carefully.352 This finding is consistent with our analysis of the responses
to our consumer survey.

4.130

Business cases of the major grocery retailers also confirm that urban catchment
areas tend to be smaller than for those of stores located in rural areas.

351
352

[
].
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 26-27.

131

4.131

Estimates by the major grocery retailers of urban catchment areas for Countdown
and New World stores range from 1 km to 10 km.353 PAK’nSAVE stores tend to havea slightly wider catchment area of up to 15 km.354 This is consistent with Foodstuffs
NI’s submission that consumers are generally willing to drive further to larger
stores and PAK’nSAVE.355

4.132

However, estimates of catchment areas for Countdown and New World stores inrural locations tend to be wider than those in urban areas, generally ranging
between 3 km and 40 km.356

4.133

Frontier Economics used two different measures of competition in local markets toestimate the approximate geographic size of local markets in urban and rural areas
for the major grocery retailers.357 The results of the first method using a weighted
market share approach indicate that the approximate geographic size of local
markets in rural areas vary between 5 to 20 minutes’ drive time. Estimations of theapproximate geographic size of local markets in urban areas range between 10 to
20 minutes’ drive time.358

4.134

The second method uses a dummy variable for proximity of each store to the major
grocery retailers as the measure of competition. Using this method, the results
indicate that the approximate geographic size of local markets in both urban andrural areas vary between 5 to 20 minutes’ drive time.359

4.135

Further analysis conducted by Frontier Economics to examine how the structure of
local grocery markets affects prices suggests that local market concentration
appears to have little or no effect on price competition between grocery retailers.
We discuss this further in Chapter 5.

There are some regional and national dimensions to competition in the retail grocery
sector
4.136

353

354
355

356

357

358

359

Although consumers typically choose between grocery retailers in their local area,
there are also some regional and national dimensions to competition in the retailgrocery sector.

For example: [
];
[
].
[
].
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 24.
For example: [];[].
Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 28.
Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 28-29.
Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 30-31.

132

4.137

Decisions on pricing, promotion and acquisition of products by the major grocery
retailers mostly take place at a national or regional (co-operative) level, whereas
decisions on product range and other non-price elements of the retail grocery offer
are more likely to be made at an individual store level in local markets.

Pricing and promotion decisions by the major grocery retailers mostly take place at anational or regional (co-operative) level
4.138

Most of the strategies relating to pricing and discounting of products are made at anational (Woolworths NZ) or at a co-operative level (Foodstuffs SI andFoodstuffs NI). This means that over time the national and island-level componentof competition is likely to be a bigger driver of prices charged at major grocery
retailers’ stores than competition in individual local markets. This implies that the
major grocery retailers are constrained mostly on price by each other.

4.139

If national or regional prices are set with reference to strong competition inparticular local areas, this may benefit consumers in markets where there is lesscompetition which would otherwise result in them facing higher prices. However, if
competition at the national level is not strong, there is a risk that all consumers
may end up paying more than they likely would have in a workably competitivemarket.360

4.140

Woolworths NZ operates a national business model for its Countdown stores. Thismeans that pricing in Countdown stores is almost entirely consistent nationwide.361
The most significant product categories where this is not the case are fresh
products where different supply conditions and/or commercial models mean that
there are price differences predominantly between the North Island andSouth Island.362 Woolworths NZ also told us that its national pricing propositiondelivers a number of efficiencies, such as the ability to advertise on television.363

360

361

362

363

The greater the proportion of stores a grocery retailer has with high levels of local market share, thegreater its ability and incentive to raise prices or reduce levels of service, range and/or quality
independently of other operators at both a national and local level. There may also be strategic
reasons why grocery retailers may choose to set a uniform retail grocery offer. For example, it
improves price transparency and makes it easier to monitor the competitive offering of rivals.
Woolworths NZ “Submission on the retail grocery market study preliminary issues paper”(4 February 2021) at 6.
According to Woolworths NZ the effects of its consistent nationwide pricing at Countdown stores isthat overall, [ ] of products have the same shelf price at all Countdown stores across New Zealand.
Despite regional variations in fresh produce prices, [ ] of these products have the same shelf pricenationwide. For packaged goods, [ ] of products have the same standard shelf price nationally andmore than [ ] of promotional prices are the same nationwide, Woolworths NZ “Submission on theretail grocery market study preliminary issues paper” (4 February 2021) at 6.
Transcript of Grocery Market Study Conference – Day 1 (21 October 2021) at 21 (lines 30-32).

133

4.141

Foodstuffs NI is of the view that that its island-wide pricing policy is
pro-competitive as it allows consumers in remote regions with fewer competitors
to benefit from competition in areas where there are more competitors.364 They
also told us that its pricing policies at a co-operative level aim to provide moreconsistent value to consumers across core and staple items. In addition, Foodstuffs
NI noted that pricing and promotions for fresh products, including produce andmeat, operate to a different dynamic than other product categories due to theirseasonality, certainty of supply and short shelf life.365

4.142

Both Foodstuffs NI and Foodstuffs SI also told us that they collaborate on mattersthat require national consistency with the shared ownership and use of national
brands, such as a national televised New World price promotion.366 There also
appears to be some scope for pricing at Foodstuffs NI and Foodstuffs SI stores tovary on a store-by-store basis.367

The acquisition and distribution of products by the major grocery retailers is mostly
coordinated at a national or co-operative level
4.143

Scale economies achieved in the acquisition of groceries at a national or
co-operative level can benefit consumers if they lead to lower prices. However, it
may also increase barriers to entry at a local market level, thereby affecting
consumers at both a local, regional and national level (see Chapter 6).

4.144

Woolworths NZ told us that its national business model leads to ease of doing
business with its suppliers (with product decisions based on data from across all its
stores) and enables them to achieve efficiencies in their transport network andcentralised marketing activities.368

364
365

366

367

Transcript of Grocery Market Study Conference – Day 1 (21 October 2021) at 32 (lines 6-11).
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 34.
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 22; Foodstuffs SI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 14.
Foodstuffs NI “Submission on the retail grocery market study preliminary issues paper”(4 February 2021) at 22; Foodstuffs SI “Submission on the retail grocery market study preliminary
issues paper” (4 February 2021) at 14. Foodstuffs NI told us that
[
].

368

Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 7.

134

4.145

Foodstuffs NI submitted that a significant proportion of its products are supplied
directly to grocery retailers and do not go through Foodstuffs NI’s central
distribution centres.369

4.146

However, Foodstuffs NI is currently implementing a new centralised buying model
for its New World and Four Square stores (see Chapter 8). There are consequently
some co-operative level dimensions to competition for the procurement of
products by Foodstuffs NI.

There is some scope for the major grocery retailers to adjust product range and otherdimensions of competition at a local store level
4.147

As discussed above, most of the competition on pricing and the procurement of
products by the major grocery retailers takes place at a national or island level.
However, there is some discretion at a local store level for owner-operators andstore managers to adjust their product range and other non-price dimensions ofcompetition, such as opening hours in response to local competition.

4.148

With regards to product range, Woolworths NZ told us that they have invested in
tailoring their range and product offerings to local consumer tastes throughdeveloping new products as demand evolves (for example, increasing investment inready-to-go meals and dedicated health food aisles).370

4.149

Both Foodstuffs NI and Foodstuffs SI also told us that there is scope for a member
to tailor their product range, including to local consumer preferences and market
conditions.371

4.150

Specifically, Foodstuffs NI’s service offerings differ across the North Island as aresult of one or a combination of the following:372

369

370

371

372

4.150.1

differences in local market conditions including customer needs,
demographics and competition from other suppliers of retail grocery
items;

4.150.2

the presence of different Foodstuffs NI retail banners within different
catchment areas;

Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 11. Foodstuffs NI told us that direct to store represents approximately [ ] by value of all products
shipped and is mostly to [] stores.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 12-13.
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 22; Foodstuffs SI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 14.
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 22-24. Foodstuffs NI also told us that
[
].

135

4.151

4.150.3

differences arising due to particular arrangements or pricing changes
requested by suppliers affecting different regions;4.150.4

the nature of relevant products such as fruit or vegetables; and4.150.5

other differences arising due to the independent owner/operator model
run by each co-operative.

Foodstuffs SI’s service offerings are determined at both the co-operative and at astore level by each member, within the framework established by theirmembership agreement. Specifically, there is scope for Foodstuffs SI stores to tailor
their local service offerings in response to local market conditions based on thenature of demand from consumers. For example, opening hours are determined byeach operator in consultation with Foodstuffs SI.373

Regional variations in the grocery store options available to consumers
4.152

In this section we discuss the analysis we undertook to assess regional variations
across New Zealand in prices and the variety of grocery store options available toconsumers. We also discuss the nature of regional and national dimensions tocompetition in the retail grocery sector.

4.153

Our analysis of the location of major grocery retail banners and other grocery
retailers shows that there are regional differences in the diversity of retail grocery
options available to consumers.

4.154

The greatest number of retail grocery options appears to be in the Auckland region,
where there are several other grocery retailers operating in addition to the major
grocery retailers. There are increasingly fewer options through the rest of thecountry, with consumers in rural areas having the least number of grocery shopping
options available (see Figure 4.8 to Figure 4.10 below and Attachment A).

4.155

Analysis done by Frontier Economics also shows that prices are lowest in Auckland
relative to the rest of New Zealand.374

Consumers in rural areas tend to have less choice than those located in urban areas
4.156

373

374

The geographic location of stores in different local markets and/or regions of itself
does not provide us with any information of the extent and intensity of competition
between the major grocery retailers and other grocery retailers. However, thelocations of grocery stores provide a useful overview of the different retail grocery
options available to consumers. Limited grocery store choice may lead to poorer
retail grocery offers in the form of higher prices and/or lower quality and service.

Foodstuffs SI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 14.
Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 18-20.

136

4.157

Some Māori contributors suggested there are parts of New Zealand, particularly
rural areas, where there are limited existing grocery retail options for consumers.

4.158

Specifically, we heard some Māori living in isolated, rural areas face specificchallenges regarding accessibility and affordability of kai and a lack of choice. 375
Some Māori in rural and remote areas also have limited digital connectivity andonline food delivery options available to them.376

4.159

Our analysis in Figure 4.8 to Figure 4.10 below confirms that consumers in rural
areas typically have fewer options available to them compared to urban
consumers. Consumers in the Auckland region also appear to have comparatively
greater variety in grocery shopping options available to them than consumers
located in other urban areas or rural areas.377

4.160

We have not attempted to show the locations of every store across New Zealandthat might sell one or more grocery products. Rather, our analysis includes thelocations of categories of grocery retailers that have larger stores and sell a wider
range of products (such as international food stores and other supermarkets), as
they are most likely to provide some alternatives to the major grocery retailers for
consumers’ grocery spend.

375

376

377

We also heard that, for lower income groups such as Ngati Porou, perceived issues of lack ofcompetition and increased food prices exacerbate disparities in living standards, Ngati Porou Holding
Company Ltd “Post conference submission on Market study into grocery sector” (23 November 2021)
at 5.
For example, Ngati Porou told us that having a single supplier (Foodstuffs) on the East Coast of theNorth Island (which is Ngati Porou’s rohe) limits the ability of consumers to comparatively shop which
has a direct impact on the health and wellbeing of the community. There are also limited digitalconnectivity and online delivery options available to the East Coast community which further impacts
consumer choice in this area. It is an approximate three-hour drive to the nearest supermarket in
Gisborne to obtain lower prices or more grocery shopping options, Ngati Porou Holding Company Ltd“Post conference submission on Market study into grocery sector” (23 November 2021) at 1, 4 and 5.
See Attachment A for additional maps of other regions across New Zealand.

137

Figure 4.8

Grocery store locations in Auckland

Source: Commerce Commission analysis of information provided by grocery retailers. 378

378

[

]; [

].

138

Figure 4.9

Grocery store locations in the central South Island

Source: Commerce Commission analysis information provided by grocery retailers.379

379

[

]; [

].

139

Figure 4.10

Grocery store locations in the central North Island

Source: Commerce Commission analysis of information provided by grocery retailers. 380

4.161

As discussed earlier, we consider that the major grocery retailers are each other’s
closest competitors and that other grocery retailers are generally unable tocompete strongly with them to satisfy consumer preferences for convenience andprice. We have therefore further analysed the variation in retail grocery options
available to consumers in local markets by also considering the locations of every
Foodstuffs banner without a competing Woolworths NZ banner in the same local
market, and every Woolworths NZ store without a Foodstuffs store nearby in the
North and South Island (see Figures 4.11 and 4.12 below).

4.162

Using location data provided to us by the major grocery retailers and our findingson the average drive time in urban and rural areas (see Figures 4.6 and 4.7 above)
we identified individual stores without a competing major grocery retailer bannerin proximity of the store’s location. Our analysis confirms that there appears to belimited retail grocery options for consumers that have a preference for one-stop
shopping at the major grocery retailers in some local markets. This is particularly
evident in more remote areas of New Zealand.

380

[

]; [

].

140

Figure 4.11

Local areas with no competing major grocery retailer banner (North Island)

Source: Commerce Commission analysis of information provided by grocery retailers. 381

381

[

]; [

].

141

Figure 4.12

Local areas with no competing major grocery retailer banner (South Island)

Source: Commerce Commission analysis of information provided by grocery retailers. 382

382

[

]; [

].

142

There appears to be an uneven distribution of retail choice in Wellington
4.163

In addition to the evidence of uneven distribution of retail choice between urban
and rural areas we have also considered whether there is any evidence ofgeographic disparities in retail choice within major urban areas of New Zealand.383

4.164

We analysed the distribution of major grocery retail choice in major urban areas
across New Zealand using store location data provided to us by the major grocery
retailers. We have found that there is a relatively equal distribution of major
grocery retailer stores in Christchurch and Auckland. However, our analysis showsthat there is an uneven distribution of major grocery retail stores in Wellington (seeFigure 4.12 above).
Figure 4.13

Distribution of major grocery retailer stores in major urban areas

100%

Percentage of major grocery retailer stores

90%
80%
70%
60%

50%
40%
30%
20%
10%
0%
AucklandWellington
Foodstuffs

Christchurch

Woolworths NZ

Source: Commerce Commission analysis of information provided by grocery retailers. 384

4.165

383

384

The major grocery retailers told us that uneven store distribution is historical andthat they have plans for future expansion in cities where they have historicallyoperated fewer stores.

Based on analysis of a small sample of the grocery shopping options typically available to consumers
in Auckland and Wellington respectively, Ernie Newman concluded that there is evidence of adisparity in regional market share between the major grocery retailers. His analysis shows that
Woolworths NZ enjoy around three quarters of the Auckland market and Foodstuffs NI two thirds of
Wellington, Ernie Newman “Submission on Market study into grocery sector draft report”(26 August 2021) at 4-5.
[
].

143

4.166

Specifically, Woolworths NZ told us that they have fewer Countdown stores in
Wellington than Foodstuffs NI has PAK’nSAVE and New World stores, largely as a
product of history. For 91 years the Foodstuffs Wellington Co-operative had
Wellington as the home of its head office, whereas Woolworths NZ and its
predecessors have historically been Auckland and Christchurch based entities.385

4.167

Woolworths NZ also told us that they have actively been looking to increase theirpresence in the Wellington area. This has resulted in the opening of six new
Countdown stores in the Wellington region and the Grenada e-store in the last ten
years, compared to Foodstuffs NI having opened two New World stores in the
Wellington region during that time.386

4.168

This is consistent with Foodstuffs NI’s view that the history of previous company
structures and mergers of brands have led to a relatively more uneven distributionof major grocery retailer choice in Auckland and Wellington as compared toChristchurch. Foodstuffs NI also told us that they have plans to fill current gaps in
the regional presence of Foodstuffs NI branded stores where possible.387

There is some evidence of small regional price differences between the major grocery
retailers
4.169

In general, we would expect to see variation in prices between different regions
due to differences in factors such as transport costs and market structures.

4.170

However, pricing and promotion decisions by the major grocery retailers mostly
take place at a national or regional level (see paragraphs 4.138 to 4.142). Thismeans that there is no significant variation in pricing within the major grocery retailbanners in different local markets and/or regions.388

4.171

Frontier Economics analysed regional differences in prices charged by the major
grocery retailers across New Zealand.

4.172

In Table 4.1 we show the most relevant of Frontier Economics’ findings which theycall “Method 2”. It shows average regional prices for consumers relative to
Auckland and price variation across all the major grocery retail banners.

385

386

387
388

Woolworths NZ “Post conference submission on Market study into grocery sector”(24 November 2021) at [23.2].
Woolworths NZ “Post conference submission on Market study into grocery sector”(24 November 2021) at [23.3]-[23.4]. Woolworths NZ also told us that they have plans to open several([ ]) new Countdown stores in Wellington in the next four years and that their efforts to build theirpresence in the Wellington region have contributed to Woolworths NZ having a higher level of online
grocery sales as a proportion of total sales in the Wellington region [ ] as compared to Auckland[ ] for the year ending October 2021.
Transcript of Grocery Market Study Conference – Day 1 (21 October 2021) at 42 (lines 18-27).
Analysis by Frontier Economics shows that except for [], pricing at the stores of the other major
grocery retail banners typically lie within [ ] percent of each other, Frontier Economics "Econometricanalysis of the New Zealand Retail Grocery Sector – Report for the Commerce Commission" (15 July2021) at 24.

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4.173

Store price indices were estimated by comparing all stores to a base store. After
this store-revenue weighted averages of the price indices of the stores in eachregion were calculated. The weighting ensures that the results also reflect how
much money consumers spend in each store and retail banner in each region.
Table 4.1

Regional price differences relative to Auckland
Region

Method 2
National index

Upper North Island

Central and Lower
North Island

South Island

Auckland

0.0%

Bay of Plenty

0.5%Northland

3.0%

Waikato1.7%

Gisborne

1.2%

Hawke’s Bay

1.4%

Manawatū-Whanganui

2.1%

Taranaki

2.2%

Wellington

1.4%

Canterbury

1.7%

Marlborough

1.9%

Nelson

2.8%

Otago

3.3%

Southland

3.1%

Tasman1.9%West Coast

4.8%

Source: Table 9, Frontier report.389

4.174

389

390

The results from Method 2 in Table 4.1 above shows prices in the rest of New
Zealand are higher relative to Auckland. The West Coast is the most expensive
when compared with other regions relative to Auckland when using the national
index to account for differences in the availability of major grocery retail banners in
different regions.390

Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 20.
Analysis by Frontier Economics indicates that [] stores tend to be the [] stores for
products other than tobacco and that rural areas tend [], Frontier Economics"Econometric analysis of the New Zealand Retail Grocery Sector – Report for the CommerceCommission" (15 July 2021) at 19.

145

4.175

Overall, the results show that regional price variation appears to be due to thepresence or absence of particular major grocery retail banners in different places,
rather than different prices within a banner.

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Chapter 5Competition at the retail level

Summary of findings•

Although other grocery retailers provide some competition to the major grocery
retailers for some shopping missions and in some local markets, they are generally
unable to provide strong competition to satisfy consumers’ preferences for one-stop
shopping in a single location. Neither do retail offerings like meal kits provide acomplete substitute for supermarket shopping, either alone, or when combined withretail offerings by other grocery retailers.

•

New small-scale entry is viable. However, new entry by other grocery retailers appears
to have limited impact on the major grocery retailers. Under current market
circumstances it is unlikely that existing and anticipated future competition by othergrocery retailers will provide strong competition to the major grocery retailers.

•

There is some competition between the major grocery retailers on both price and nonprice dimensions of competition of the retail grocery offer. However, some features of
the retail grocery market such as the relative stability of market shares and demand forgroceries weaken the major grocery retailers’ incentives to engage in stronger
competition than is currently evident. Analysis also shows that local market
concentration has little or no effect on price competition between the major grocery
retailers. We therefore consider that the intensity of competition between the major
grocery retailers is muted and does not reflect workable competition.

•

Our study did not disclose any evidence that the major grocery retailers areaccommodating each other’s strategies. We have also not identified a mechanism, suchas leader-follower behaviour, that may facilitate accommodating behaviour. However,some features of the retail grocery sector suggest it is vulnerable to tacit coordination,such as common relationships with the same suppliers. Measures to improve
competition are likely to reduce the potential for accommodating behaviour.

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Introduction
5.1

In this chapter we build on our findings in Chapter 4 by further considering theextent of current and anticipated future competition between the major grocery
retailers and other grocery retailers. We describe the intensity of competition inretail grocery markets in New Zealand, the structure of the retail grocery market
and identify features of the market that might be contributing to (or detractingfrom) the effectiveness of competition.

5.2

We find that in the current market circumstances, existing and anticipated futurecompetition by other grocery retailers is unlikely to provide strong competition to
the major grocery retailers to satisfy consumers’ preferences for one-stop shoppingin a single location (both in store or online).

5.3

We also find that there is some competition between the major grocery retailers on
both price and non-price dimensions of the retail grocery offer. They compete
across the entire PQRS spectrum for consumers on all types of shopping missions
and are each other’s closest competitors. However, the intensity of competition ismuted and we do not consider that it reflects workable competition. This isbecause there are features of the market that reduce the incentive for the major
grocery retailers to compete more intensely with each other, particularly thefollowing:
5.3.1

The major grocery retailers’ decision making is interdependent and theytake each other’s likely responses into account when formulating theirown competitive strategies.

5.3.2

The retail grocery sector is highly concentrated, and the market shares ofthe major grocery retailers have been relatively high and stable overtime. The demand for groceries is also relatively stable and predictable,with trend growth largely reflecting population growth. This means thatthe major grocery retailers have a good understanding of each other’scompetitive strategy and the likely response of their main competitor tochanges in their own strategy. In addition, there is a high degree oftransparency which enables the major grocery retailers to quickly detect
and respond to any changes in their rival’s competitive strategy.

5.3.3

There is evidence of cross-shopping between grocery retailers andevidence that many consumers participate in more than one retailgrocery loyalty programme. These factors may make any gains fromswitching by price sensitive consumers in response to stronger
competition difficult to sustain as those consumers may choose to switch
back if a retailer responds.

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5.3.4

Some consumers find it hard to make the best purchasing decisions forthem in store, particularly when retailers use complex and/or multiple
pricing and promotional mechanisms, and when loyalty programmes
have complex rewards structures and terms and conditions. These
complexities have the potential to limit consumers’ ability andwillingness to access, assess and act on information when choosing
between grocery retailers (see Chapter 7).

5.3.5

Under current market circumstances there is limited scope for thecompetitive stability to be disrupted by new entry or expansion ofexisting grocery retailers. It also seems unlikely that changes in demand
for groceries would be sufficient to strengthen the incentives to compete
given the essential nature of grocery purchases.

5.4

These features combine to weaken the major grocery retailers’ incentives toengage in stronger competition than is currently evident because any gains in sales
and market share from stronger price competition are likely to be relatively
short-lived. In addition, stronger price competition risks turning into a price war
given the speed with which price reductions can be detected and matched. While
benefitting consumers for their duration, price wars are likely to decrease retailmargins in the short term and unlikely to significantly increase sales and individual
retailer’s market shares over the longer term.

5.5

We expect that competition would be more intense at the retail level if there weremore large-scale grocery retailers competing across the entire PQRS spectrum for
consumers who value one-stop shopping. More intense competition at the retaillevel would also strengthen competition between grocery suppliers by creating
additional opportunities to access customers.

5.6This chapter has four main sections:
5.6.1

how intense is competition at the retail level?

5.6.2

what is the extent of competition between other grocery retailers andthe major grocery retailers?

5.6.3

what is the extent of competition between the major grocery retailers?

5.6.4

how does the structure of local grocery markets affect price competition
between the major grocery retailers?

149

How intense is competition at the retail level?
5.7

The major grocery retailers consider that the retail grocery sector in New Zealand isintensely competitive and a wide range of different types of grocery retailers
provide a strong competitive constraint to the traditional supermarket, especiallyfor smaller shopping missions.391

5.8

We consider the extent of competition between the major grocery retailers andother grocery retailers, and between the major grocery retailers themselves, inlater sections of this chapter.

5.9

In this section we consider cross-shopping by consumers across different grocery
retailers and reductions in real grocery prices over time.

Evidence of cross-shopping by consumers across different types of grocery retailers does
not imply that there is effective competition for consumers’ grocery spend
5.10

The major grocery retailers told us that cross-shopping across a variety of different
types of grocery retailers provides evidence of intense competition in the retailgrocery market.392

5.11

For example, Woolworths NZ told us that more than half of New Zealanders will
shop at specialist grocery retailers and non-supermarkets in a given month.393
Additional analysis provided to us by Woolworths NZ also shows that someconsumers will visit other food and grocery retailers on the same shopping trip.394

5.12

Evidence of consumer cross-shopping is insightful for purposes of assessing theextent to which consumers consider different types of grocery retail banners asalternatives to each other. It may also be evidence of price competition between
grocery retailers if it could be shown that consumers choose the store with thelowest prices for the products they want to buy on a particular shopping mission.

391

392

393

394

Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 11-28; Foodstuffs NI “Submission on retail grocery market study preliminary
issues paper” (4 February 2021) at 1; Foodstuffs SI “Submission on retail grocery market study
preliminary issues paper” (4 February 2021) at 4-5.
For example: Foodstuffs NI “Post conference submission on Market study into grocery sector”(3 December 2021) at [34.5]; Foodstuffs SI “Post conference submission on Market study into grocery
sector” (3 December 2021) at [25.5]; Woolworths NZ “Post conference submission on Market study
into grocery sector” (24 November 2021) at [3.6.6].
Woolworths NZ provided evidence based on [] to show that [ ] of New Zealanders will
shop at other grocery retailers in a given month, Woolworths NZ “Submission on Market study into
grocery sector draft report” (10 September 2021) at [29.2.1].
Analysis [] found that consumers spent [ ] on food and grocery products at other grocery
retailers within 30 minutes either side of a shopping trip to Countdown, where the average shoppingbasket at Countdown is itself [ ], Woolworths NZ “Submission on Market study into grocery sector
draft report” (10 September 2021) at [29.2.2].

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5.13

In contrast, evidence of cross-shopping may reflect consumers satisfying different
needs at different types of grocery retailers or through different channels of sale.
This is consistent with the findings of the Ipsos study which found someparticipants typically preferred to shop at one store for most of their groceries,
supplementing this with secondary or top-up shops to take advantage of specificcharacteristics of other grocery retailers.395

5.14

We consider the utility of the evidence of cross-shopping provided by the major
grocery retailers is limited when drawing conclusions about the intensity ofcompetition in the retail grocery market because:
5.14.1The evidence does not distinguish between cross-shopping in response
to competition between grocery retailers and cross-shopping done forother reasons. We have not seen evidence that cross-shopping reflects
consumers’ responses to strong competition rather than other factors
such as convenient location.

5.14.2

Some of the evidence provided is aggregated statistics about the
proportion of customers that cross-shop, rather than spending patterns.
This does not tell us how significant cross-shopping is for competition.

5.14.3

There are limitations to some of the analysis of cross-shopping that limit
the usefulness of its findings.396

5.15

The differentiated nature of the retail grocery market means that competition will
be more intense between grocery retailers that compete to attract and retain thesame group of consumers with similar preferences for PQRS combinations. This isbecause they face a greater risk that a material portion of consumers will switch
their grocery spend to other grocery retailers in response to an increase in price (ordeterioration in other non-price dimensions of competition) of their respective
retail grocery offers relative to those of other grocery retailers (see Chapter 4).

5.16

However, the evidence of cross-shopping provided to us does not provide any
further insights into the typical proportional allocation by consumers of their total
grocery spend between different types of grocery retailers, or how this allocation is
likely to change in the event of a material change in the quality of the retail grocery
offer of competing grocery retailers.

395

396

Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 8-9.
For example,
[

].

151

5.17

Further, the evidence does not provide any insights into the extent of overlap
between the types of products typically purchased by consumers at a major grocery
retailer banner and other grocery retailers on the same shopping trip. We are
therefore unable to reach any conclusions as to whether the products typicallypurchased on the same shopping trip reflect complementary purchases by
consumers of grocery products that are, for example, not available at one type ofgrocery retailer, or if the products are substitutable and compete directly with eachother for consumers’ grocery spend.

5.18

The cross-shopping evidence provided to us is not strongly indicative of intense
retail competition in the grocery sector. Some of it could support an opposing view.
For example, some evidence suggests that promotions do not drive choice ofsupermarket for many customers.397 This may mean that many customers
cross-shop for reasons other than the intensity of competition between grocery
retailers.

Evidence of a decline in real grocery prices over time is not informative of theeffectiveness of competition in the retail grocery market
5.19

397
398

399

400

In addition to the cross-shopping evidence discussed above, Woolworths NZ is alsoof the view that evidence of a decline in real grocery food prices over the last
decade shows that the market is workably competitive.398 Woolworths NZ told usthat food inflation (excluding restaurant and ready-to-eat meals) in New Zealandhas grown on average by less than general inflation.399 Furthermore, retail priceinflation at Countdown has been restricted to 0.7% per annum, which is below
Consumer Price Index (CPI) inflation of 1.6% per annum and increases in
Woolworths NZ’s input costs of 1.7% to 3.7% per annum.400[].
Woolworths NZ analysed trends in real grocery prices over time by considering whether retail grocery
food prices have decreased in real terms (that is, grown more slowly than CPI and input costs) overthe last decade, Woolworths NZ “Submission on Market study into grocery sector draft report”(10 September 2021) at [2.1.2.1].
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 3.
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [2.1.2].

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5.20

We have assessed these claims using data obtained from Woolworths NZ and CPI
and Food Price Index (FPI) data from Statistics New Zealand.401 Our analysis
confirms that for the most part, CPI inflation was above inflation in FPI and FPI(excluding restaurants) between 2010 Q2 and 2020 Q2.402

5.21

However, in our view changes in relative food prices over time compared with the
CPI do not necessarily provide insight into the level of competition in the retailgrocery sector. There are two main reasons for this:

401

402

403

404

5.21.1

Changes in nominal retail food prices are determined by a combinationof the retailers’ wholesale purchase costs and the services provided by
the retailer. The wholesale cost makes up around two thirds of the retailprice. Changes in wholesale costs will largely reflect changes in demandand supply conditions in the relevant food production market. For
example, Statistics New Zealand reported that annual food prices
increased by 4.5% in December 2021 driven largely by increases in theprices of tomatoes, yoghurt, standard two-litre milk and fresh eggs.403
Grocery retailers have limited ability to influence prices in foodproduction markets although as we discuss in Chapter 8, their buyer
power may influence the extent to which wholesale cost increases are
passed through to retailers’ cost of goods sold.

5.21.2

Similarly, changes in the nominal prices of other goods and services
measured by the CPI will also be largely determined by demand andsupply conditions in their relevant markets and may increase at a fasterrate than food prices. In this regard, annual inflation in the year to
December 2021 was 5.9% driven predominantly by increases in prices for‘household and utilities’ by 7.6% and transport by 15%.404

The CPI is a weighted average measure of prices of 11 groups of goods and services purchased byconsumers. The FPI measures the ‘food’ group and makes up 18.72% of the CPI. This is the second
largest group behind ‘Household and household utilities’ which has a weighting of 28% of the CPI.
That group includes housing rental and new house construction costs, Statistics NZ "DataInfo+:
Consumer Price Index" (September 2010)https://datainfoplus.stats.govt.nz/Item/nz.govt.stats/8b0860b8-cf63-4f12-a5788eed8ba69ac3?&_ga=2.114807552.687459114.16452581351553157585.1637115933&_gac=1.185940571.1643233625.Cj0KCQiA_8OPBhDtARIsAKQu0gbSjH6fsB3
FgGcpbkzqEn4dIzHh8vILRzD899Aob_7BauzpXQGPpcEaAuTVEALw_wcB#/nz.govt.stats/24daf577e941-4a5c-9ba1-f43c5afb5e1e/1#.
We note our analysis shows that FPI inflation was significantly higher than CPI inflation in the period
immediately preceding the selected timeframe of Woolworths NZ (October 2006 to June 2010),[].
Statistics NZ “Annual food price increase the highest in a decade” (20 January 2022), available at:https://www.stats.govt.nz/news/annual-food-price-increase-the-highest-in-a-decade.
Statistics NZ “Consumer Price Index: December 2021 quarter” (27 January 2022), available at:https://www.stats.govt.nz/information-releases/consumers-price-index-december-2021-quarter.

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5.22

Woolworths NZ also considered that if competition was not working well in theretail grocery sector, then increased input costs (variable costs that impact on
marginal costs and hence price) would have been not only passed through toconsumers, but more than passed through. However, Woolworths NZ told us it has
not passed on all its variable cost increases through to consumers because ofeffective competition in the retail grocery market that has led to increased
efficiencies.405

5.23

Consistent with Woolworths NZ’s experience, we would generally expect to see lessthan full pass through of cost increases, except in limited specific circumstances. 406
Therefore, we do not consider evidence of Woolworths NZ not passing through all
its variable cost increases to consumers to be informative of the effectiveness or
intensity of competition in the retail grocery sector.

5.24

We are therefore of the view that the evidence provided by Woolworths NZ on the
decline of real grocery prices over time and pass-through rates is not informative of
the effectiveness of competition in the retail grocery sector.

What is the extent of competition between other grocery retailers and the
major grocery retailers?
5.25

405

406

407

We received a range of perspectives on the extent to which other grocery retailers
compete with the major grocery retailers. The major grocery retailers consider thata wide range of different types of grocery retailers provide a strong competitive
constraint to the traditional supermarket, especially for smaller shopping
missions.407

Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [2.1.2].
The degree of cost pass-through in a competitive market depends on the slope and shape of thedemand and marginal cost (supply curves). In a perfectly competitive market, we would expect any
increases to marginal cost to be passed through one-to-one. In a competitive market we would not
expect to observe any pass-through rates greater than 100% except where the marginal cost curve isdownward sloping, which seems unlikely to be the case for groceries in New Zealand. Where firms
have market power (and face a downward sloping marginal revenue curve), then depending on what
the marginal cost curve looks like it is not unexpected for pass-through of increases in marginal cost to
be less than one-to-one. In addition to the shape of the marginal cost curve, this result also depends
on whether the increase to marginal cost is constant or changes depending on quantity, CommerceCommission “Market Study into the retail fuel sector – Final report” (5 December 2019) at [E38]-[E48].
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 11-28; Foodstuffs NI “Submission on retail grocery market study preliminary
issues paper” (4 February 2021) at 1; Foodstuffs SI “Submission on retail grocery market study
preliminary issues paper” (4 February 2021) at 4-5.

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5.26

In contrast, the NZFGC and Consumer NZ both consider the constraint provided byother grocery retailers to be limited.408 T&G Fresh also told us that supermarkets
hold considerable market share compared to other grocery retailers who may be
more specialised and offer limited products.409

5.27

In the sections below we complement some of our conclusions in Chapter 4 andassess the current and anticipated future competition between the major grocery
retailers and other grocery retailers for consumers’ grocery spend. We also
consider whether there is any evidence that the major grocery retailers adjust theirprices or other non-price dimensions of their retail grocery offer in response tocompetition by other grocery retailers.

5.28

Other grocery retailers provide limited competition to the major grocery retailers insome instances and in some locations. However, there is limited incentive for the
major grocery retailers to adjust their retail grocery offering in response tocompetition from other grocery retailers on a consistent basis. We conclude that
this is because there is a low risk that a material portion of consumers will switch
their grocery spend to other grocery retailers in response to an increase in price (ordeterioration in other non-price aspects of competition) of their respective retailgrocery offers relative to those of other grocery retailers.

5.29

We further explain the constraint from other retailers in the following sections.

Different types of grocery retailers may exercise asymmetric competitive constraints oneach other
5.30

Asymmetric competition describes the extent to which firms are unevenly incompetition with each other. For example, larger grocery stores may constrain theretail grocery offer of smaller stores while the reverse may not be true.

5.31

As discussed in Chapter 4, the major grocery retailers are uniquely placed to offer awide range of groceries at locations which consumers can easily access (both instore and online), at prices which are generally lower than other grocery retailers.
Other grocery retailers are generally unable to offer the convenience of one-stop
shopping which means they are constrained by supermarkets with a wide productrange, access to products at more competitive prices and greater geographic
coverage. However, the evidence shows that the constraint imposed by most othergrocery retailers on the major grocery retailers is generally limited. We therefore
consider that there are asymmetric competitive constraints between other grocery
retailers and the major grocery retailers.

408

409

NZFGC “Submission on retail grocery market study preliminary issues paper” (4 February 2021) at 20;
Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 4.
T&G Fresh “Submission on retail grocery market study preliminary issues paper” (4 February 2021) at
3.

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5.32

We have seen some evidence of price monitoring by the major grocery retailers ofprices charged at some other grocery retailers and adjustments to their prices forsome products as a result. For example, Foodstuffs NI told us that some individually
owned stores monitor prices charged by the Mad Butcher and have lowered prices
in response to that competition.410

5.33

However, we have seen little evidence to suggest that such price comparisons aredone on an ongoing and consistent basis across a wide range of product categories
by the major grocery retailers or that these comparisons affect the major grocery
retailers’ national pricing decisions. Indeed, Foodstuffs NI noted that pricecompetition with other retailers occurs mainly at store level, rather than the
co-operative level.411 This supports our view that there is limited price competition
between other grocery retailers and the major grocery retailers (see Chapter 4).

5.34

In contrast, most other grocery retailers told us they frequently monitor prices ofsimilar products stocked at the major grocery retail banners located in close
proximity to their own stores and that they make price adjustments accordingly toensure that their prices of commonly stocked products are competitive.412

5.35

We also note that in instances where some categories of other grocery retailers
compete with the major grocery retailers on price they tend to focus on particular
products or subsets of consumers, such as those products stocked at international
food stores or consumers who are willing to buy bulk goods.413

5.36

Frontier Economics assessed the extent to which other grocery retailers located inclose proximity to the major grocery retailers have any effect on the prices set by
the major grocery retailers banners. They found that there is little evidence that
other grocery retailers have an effect on the prices set by the major grocery
retailers.414

5.37

Frontier Economics also assessed the impact that entry by two new Farro Freshstores in Auckland had on pricing of the major grocery retailers. They found a lackof evidence that the opening of two new Farro Fresh stores constrained the pricingof the major grocery retailers.415

410

411

412

413

414

415

Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[261.2].
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[261.2].
For example: [
];
[
]; [
].

[
];
[
].
Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 30-31.
Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 37.

156

5.38

We consider the finding of Frontier Economics that local market concentration
appears to have little or no effect on price competition between grocery retailers,also appears to confirm that the aggregated effect of competition by other grocery
retailers in local markets is not sufficient to increase the intensity of pricecompetition at either a local, regional or national level.

5.39

We have also seen some evidence of the major grocery retailers adjusting theirproduct range and service offerings in some local markets to compete with the likes
of meal kit providers, international food stores or other supermarkets such as Farro
Fresh.416 However, it is difficult for other grocery retailers who lack scale and scope
to have a similar competitive response to innovations and adjustments of therespective retail grocery offers of the major grocery retailers (see Chapter 3).

5.40

Nevertheless, we agree with the submission by Foodstuffs SI that a retailer with abroader offering, albeit with one or two omissions such as fresh vegetables/dairy,
offers more general competition to the major grocery retailers. This is particularly
so for those consumers whose mission is not a main shop. This means thatcompetition between the major grocery retailers and other grocery retailers is
likely to be closer where consumers are engaged in shops other than a main
shop.417

5.41

Woolworths NZ also told us that it competes closely with Chemist Warehouseacross multiple categories, including health and beauty, baby, household cleaningand pharmaceutical needs and that its entry has had an impact on Woolworths
NZ’s sales.418

5.42

We acknowledge that the major grocery retailers face some competition from
Chemist Warehouse across these product categories. However, the productoffering of Chemist Warehouse only overlaps with a small percentage of thoseoffered by the major grocery retailers. It does not offer any dry groceries or fresh
produce. We are therefore of the view that the extent of competition between the
major grocery retailers and Chemist Warehouse is limited.

5.43

Similarly, the major grocery retailers consider that they face increasing competition
from The Warehouse Group and its e-commerce platform provider, TheMarket, forsome product categories. For example, Foodstuffs NI told us that they face strong
competition from The Warehouse Group on a national basis for particular grocery
items such as personal care products, confectionery, baby products, pet food, drygroceries and household products.419

416

417

418

419

For example: Foodstuffs NI “Post conference submission on Market study into grocery sector”(3 December 2021) at [28]; Woolworths NZ “Submission on Market study into grocery sector draft
report” (10 September 2021) at [29.3.1.4].
Foodstuffs SI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 14-15.
Woolworths NZ “Submission on Market study into grocery sector draft report (10 September 2021) at[30.8.2].
Foodstuffs NI “Post conference submission on Market study into grocery sector” (3 December 2021)
at [25] & [145.1].

157

5.44

We agree that the major grocery retailers may face some competition from The
Warehouse across these product categories. However, we consider that the current
grocery product offering of The Warehouse Group is limited. For example, it does
not offer any fresh produce or chilled goods in most of their stores. The Warehouse
Group also told us that while they offer customers a range of ambient grocery
products, it does not currently have the necessary scale and capability to be
regarded as an effective constraint on the major grocery retailers.420 This meansthat they are unlikely to provide consumers with an effective alternative to the
one-stop shopping option provided by the major grocery retailers that caters to adiverse range of consumer preferences across all shopping missions (see Chapter
4).

5.45

The Dairy and Business Owners Group emphasised the role of dairies, convenience
stores and service stations in providing groceries to consumers.421 We acknowledge
that these retailers may provide an alternative to the major grocery retailers forsome consumers on smaller shopping missions. However, we have seen little
evidence to suggest that the major grocery retailers adjust their prices or othernon-price dimensions of their retail grocery offer in response to competition bydairies, convenience stores or service stations.

Meal kit providers and food box operators provide an additional convenience option for
consumers
5.46

Increased demand from consumers for convenience in the form of home delivery
options has led to significant growth of meal kit providers and food box operators
in New Zealand in recent years, albeit from a low base. The COVID-19 pandemic has
also contributed to growth in the number of consumers using these services.

420

The Warehouse Group “Comments on submissions on preliminary issues paper” (12 April 2021) at 1.
We estimate that The Warehouse Group currently account for less than [ ] of the total retail grocery
market. This is based on data provided to us by The Warehouse Group showing that it had total
grocery sales of approximately [] and data from Statistics NZ on the total size of the retailgrocery sector ($22 billion): []; Statistics NZ“Retail Trade Survey: December 2020 quarter” (21 February 2021) at Table 1, excluding GST.

421

Dairy and Business Owners Group “Submission on Market study into grocery sector draft report”(25 August 2021) at 1.

158

5.47

The major grocery retailers consider that meal kit providers such as My Food Bagand HelloFresh operate as direct competitors to traditional grocery retailers by
reducing the need for main shops.422 The major grocery retailers have expanded
their ready-to-eat and quick-to-prepare in-store offerings in response to thecompetition provided by meal kit providers. For example, Woolworths NZ told usthat there is an increasing offering of convenience initiatives and “ready-to-eat”
options within large-format grocery stores, and they have implemented otherinitiatives such as layout changes to bring read-to-eat food closer to the front of thestore.423

5.48

Woolworths NZ also told us that the expansion of My Food Bag from being a meal
kit supplier to supplying a range of grocery products as on online grocery retailer isevidence of increased competition in the retail grocery sector through new entry
and expansion.424 However, the additional range of grocery products stocked by My
Food Bag is significantly smaller than those of the major grocery retailers andcomplementary to the meal kits provided. We consider them unlikely to provide
strong competition for many shopping missions and for consumers’ total grocery
spend in the foreseeable future.

5.49

However, the NZFGC and Consumer NZ suggest that meal kits are unlikely to placea significant competitive constraint on the major grocery retailers, as they tend tobe targeted at a specific consumer segment, which would generally include lessprice sensitive consumers.425, 426

5.50

A meal kit provider told us that although they compete to some extent with the
major grocery retailers on food consumption expenditure, their direct competitors
are other meal kit providers.427 Similarly, a food box operator told us that although
they view anyone selling similar products as a competitor (including the major
grocery retailers), their closest competitors for the same wallet spend are meal kit
providers and other food box operators.428

422

423

424

425
426

427
428

For example: Foodstuffs SI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 6; Woolworths NZ “Submission on retail grocery market study preliminary issues
paper” (4 February 2021) at 2-3. Woolworths NZ told us that there has been a significant uptake ofmeal kit providers and that this channel is estimated to be worth over [] and growing at morethan [ ] per annum in New Zealand.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 23.
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [30.2.3].
NZFGC “Submission on retail grocery market study preliminary issues paper” (4 February 2021) at 21.
Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 4.
[
].
[
].

159

5.51

Some participants in the Ipsos study mentioned exploring alternatives such as foodboxes and meal kit deliveries. However, while many participants noted having trieda meal kit or food box delivery service in the past, only a handful were regularusers. A lot of the uptake of food boxes and meal kits reported by participants
related to aggressive pricing promotions, variety, choice and convenientsolutions.429

5.52

Further, the overall financial commitment required to regularly subscribe to meal
kit providers and food boxes and the fact that they do not fully remove the needfor some grocery shopping, means that participants in the Ipsos study were lesslikely to switch all their spending to meal kits or adopt these as a long-term
alternative.430

5.53

The overall benefits of these services for participants were time saved on mealplanning and preparation, as well as new variety and portion control. However,many found meal kits to be more costly than a typical grocery order and often time
consuming to prepare. Those who had used them felt that it had not stopped themfrom doing a regular grocery shop, as other meals and non-food grocery items stillneed to be purchased.431

5.54

Meal kits provide an additional convenience option for consumers and as suchthere is a degree of competition between meal kit providers, food box operatorsand the major grocery retailers for some shopping missions by consumers thatvalue convenience and the other benefits of those services that are discussed
above.

5.55

Meal kit providers tend to provide a differentiated service to that offered toconsumers by the major grocery retailers. This means that meal kits are generally
not considered a complete substitute for supermarket shopping as consumers stillneed to do a regular grocery shop for essential items. To the extent that meal kits
replace some items that would otherwise be purchased from a grocery retailer, weagree with Foodstuffs NI that if a customer chooses to purchase a meal kit then thesize and value of the basket of goods they need to purchase from a supermarket
will be smaller.432

429

430

431

432

Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 40.
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 40.
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 40. We note that participants in the Ipsos study indicated that meal kits
and food boxes were seen to have more competition than grocery retailers due to the number ofavailable brands and the aggressive promotional behaviour. Participants felt that price and choice wasavailable in this segment of the market as it was viewed as less ‘structured’ than the supermarkets.
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[252].

160

5.56

However, as discussed in Chapter 3, it appears that the major grocery retailers havebeen able to fairly easily respond to innovations from meal kit providers, forexample, by increasing the availability of ready meals at major grocery retailer
stores.433 This increases consumers’ choices of convenient meal options but also
makes it easier for consumers who value one-stop shopping to combine a ‘quick
and easy meals’ shopping mission at a major grocery retailer with other missions to
obtain the benefits of one-stop shopping rather than choosing to purchase from ameal kit provider.

5.57

In addition, meal kit providers and food box operators may not provide a viable
alternative option for all consumers, particularly for those who are more pricesensitive.

5.58

Finally, although meal kit providers have grown significantly in recent years, their
combined share of the total retail grocery market remains small.434 As discussed in
Chapter 3, the slow growth of online grocery sales in New Zealand implies thatonline competitors such as meal kit providers are unlikely to provide significantly
more competition to the major grocery retailers in the foreseeable future.

The combined market shares of the major grocery retailers is persistently high andrelatively stable over time
5.59

In this section we provide estimates of market shares and concentration in theretail grocery sector. Although we have not formally defined a market as part of ourstudy, we refer to these estimations as market shares for purposes of our analysis.

5.60

The relationship between the concentration or structure of the market andintensity of competition is somewhat ambiguous. For example, greater
concentration might indicate a decline in competition, but might also demonstratethat competition is effective and that more efficient firms have been able to gain
market share.435

5.61

The ease of entry and expansion is relevant to understanding the information thatcan be gleaned from analysing market shares and concentration. If it is relatively
easy for competitors to enter and expand then we would generally have fewer
concerns about the intensity of competition even in highly concentrated markets.

433

434

435

Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[275].
We estimate that meal kit providers currently account for less than [ ] of the total retail grocery
market. This is based on the submission from Woolworths NZ that the channel accounts forapproximately [] and data from Statistics NZ on the total size of the retail grocery sector ($22billion), Statistics NZ “Retail Trade Survey: December 2020 quarter” (21 February 2021) at Table 1,
excluding GST.
OECD “Summary of Discussion of the Hearing on Market Concentration (2018)”
DAF/COMP/M(2018)1/ANN6/FINAL (12 November 2019) at 2, available at:https://one.oecd.org/document/DAF/COMP/M(2018)1/ANN6/FINAL/en/pdf.

161

5.62

It is also important to consider concentration over a longer period in conjunction
with market shares and other evidence on market structure. For example, while
higher concentration levels in a market might simply reflect more efficient firms
outperforming the others, we might also expect to see those other firms and newentrants competing to catch up and displace those efficient firms.436 High market
shares held over a long period of time can therefore be an indicator of market
power and weak competition.437

5.63

We agree with the major grocery retailers that evidence of high concentration andmarket shares alone is not conclusive of a lack of competition in the retail grocery
market.438 However, our analysis of concentration and market shares provides
useful insights into the strength of competition. Furthermore, our market shareanalysis is just one factor we assess in this study. We also consider other relevant
factors to assess the extent of competition between grocery retailers such as thenature of competition for consumer demand (see Chapter 4), the intensity ofexisting and future competition (see from paragraph 5.92 below), and conditions ofentry and expansion (see Chapter 6).

5.64

We also acknowledge submissions from the major grocery retailers that some ofthe estimates we discuss below, particularly those in Table 5.1 below, and ourother market share estimates more broadly, are an overestimation of theirrespective market shares, mainly because of data limitations.439 However, weconsider that the broad definition used by Statistics New Zealand for the purposesof estimating the total size of the retail grocery market means that it is unlikely that
our estimates in Table 5.1 below are an overestimation of the individual andcombined market shares of the major grocery retailers.

5.65

We are mindful of the data and methodological limitations associated with market
share and concentration estimates in general. For that reason, we used two
different sources of information and different methodologies to test whether theviews we form about market shares and concentration are robust to changes indata source and methodology.

436

437
438

439

Absent any other factors such as demand or supply shocks that may result in greater variation ofmarket shares.
We note that high market shares by and of itself do not necessarily mean a firm has market power.
Foodstuffs NI “Post conference submission on Market study into grocery sector” (3 December 2021)
at [12]-[13]; Foodstuffs SI “Post conference submission on Market study into grocery sector”(3 December 2021) at [14]-[15]; Woolworths NZ “Post conference submission on Market study into
grocery sector” (24 November 2021) at [24.2].
Woolworths NZ “Post conference submission on Market study into grocery sector”(24 November 2021) at [24.3 and 24.3.1]. Woolworths NZ also told us that the use of[]: Woolworths NZ “Post conference
submission on Market study into grocery sector” (24 November 2021) at [24.3.1]; Foodstuffs NI “Postconference submission on Market study into grocery sector” (3 December 2021) at [292(c)(i)].

162

5.66

We have used the following sources of information to estimate market shares ofgrocery retailers in New Zealand:
5.66.1evidence provided by the major grocery retailers relating to theirestimates of market shares; and5.66.2our own estimates based on data from Statistics New Zealand.

Market share estimates used by the major grocery retailers for strategic decision-making
purposes show that their combined shares are high
5.67

The major grocery retailers each monitor and estimate market shares to informtheir strategic decision making. This monitoring includes their own retail banners
and competing major grocery retail banners on a frequent and consistent basis.440

5.68

The stores included in the major grocery retailers’ estimates of market sharesprovide evidence of the extent to which they consider other grocery retailers ascompetitors. We note a few instances where the major grocery retailers include
other grocery retailers in their monitoring. However, monitoring mainly focuses on
the other major grocery retailer.

5.69

There are some differences between the way major grocery retailers estimate
market shares. Some of the main differences include the number and types ofgrocery retailers included in these estimates; the geographic areas covered inmarket share estimates; the time periods that market shares are estimated andreported over, and the underlying source of data.

5.70

We reviewed a sample of market share estimates provided by the major grocery
retailers to analyse shares for the period January 2015 to January 2020 at both anational and regional level.441

440

441

For example: [
[

];
]; [

].

We did not include market share estimates in our sample after January 2020 to ensure that ouranalysis is not affected by impact of the COVID-19 pandemic.

163

5.71

Table 5.1 shows our estimates of the minimum estimated combined market shares
separately for each of the major grocery retailers in the North Island, South Island
and at the national level based on the information the major grocery retailers
provided to us. The estimates shown in Table 5.1 come from a range of data
sources, relate to different points in time and are measured over different periodsof time. In addition, we do not have full visibility of the methodologies used by the
major grocery retailers to estimate their respective market shares. There are also
some inconsistencies with regards to the other grocery retailers included in theirrespective estimations.442 Given these differences, we present market shareestimates using a 10% range.

5.72

The estimates in Table 5.1 suggest that the market shares of each of the major
grocery retailers have been fairly stable on an annual basis from January 2015 toJanuary 2020 and that the two firm concentration ratio, as measured by their
combined market shares, has been persistently very high over that time.443

442

There are some instances where[], for]. There are also some instances

example, [where[], for example, [

443

].

The two firm concentration ratio is calculated as the market share percentage held by the two largest
firms in a market. The concentration ratio ranges from 0% to 100%. Although concentration ratios are
not determinative of the ability of a business to exercise market power, they provide a usefulindication of level of concentration in a market which can be useful in determining whether aparticular market structure is likely to raise competition concerns. A general rule of thumb is that an
oligopoly exists when the top firms in the market account for more than 60% of total market sales.
For the retail grocery sector, the two firm concentration ratio is consistently more than 70%.

164

Table 5.1

Minimum combined market shares of the major grocery retailers (January
2015 to January 2020, Moving Annual Total)444
National
Jan 2015

Foodstuffs[]

Jan 2016[]

Jan 2017[]

Jan 2018

Jan 2019

Jan 2020

[

]

[

]

[

]

[

]

[

]

[

]

Woolworths NZ

[ ]

[ ]

[ ]

Minimum combined market shares

n/a

n/a

n/a

90-100%80-90%

80-90%Jan 2017

Jan 2018

Jan 2019

Jan 2020

North Island
Jan 2015

Jan 2016

Foodstuffs NI

[

]

[

]

[

]

[

]

[

]

[

]

Woolworths NZ

[

]

[

]

[

]

[

]

[

]

[

]

Minimum combined market shares

80-90%

80-90%

80-90%

80-90%

80-90%

80-90%Jan 2017

Jan 2018

Jan 2019

Jan 2020

South Island
Jan 2015

Jan 2016

Foodstuffs SI

[

]

[

]

[

]

[

]

[

]

[

]

Woolworths NZ

[

]

[

]

[

]

[

]

[

]

[

]

Minimum combined market shares

80-90%

80-90%

80-90%

80-90%

80-90%

Source: Market share estimates based on information provided by the major grocery retailers.

5.73

444

445

446

80-90%
445

In the few instances we have seen of the major grocery retailers including othergrocery retailers in their own estimates of market shares, their combined estimatedmarket share ranges between 75% and 95%.446

The minimum combined market shares is the sum of the lowest estimates of each individual major
grocery retailer’s estimates of market share for each relevant time period. Given the differences in
estimation methodologies used by the major grocery retailers we use a 10% range in Table 5.1 toestimate the combined market share of the major grocery retailers.
The analysis in Table 5.1 is based on a sample of market share estimates provided by the major
grocery retailers for the period January 2015 to January 2020 at both a national and regional level,[].
Estimates by [] for the North Island show that the major grocery retailers have a combined
estimated market share ranging between [], [];Different estimates by [] indicate that the major grocery retailers have a combined estimatedmarket share ranging from [] at a national level, [
].

165

5.74

The estimates in Table 5.1 are based on information provided to us by the major
grocery retailers that they use consistently for the purposes of tracking their own
performance against that of competing retail banners and for other strategic
decision-making purposes. However, as noted above, we are aware of thelimitations of our estimates. For this reason we sought to test whether othersources of information about market shares and concentration suggest similar
results as those based on our analysis of the major grocery retailers’ own data. Ourestimates of market shares using Statistics New Zealand are broadly consistent with
the internal market share estimates of the major grocery retailers. We discuss thisfurther below.

Market share estimates using Statistics New Zealand data confirm that the combined sharesof the major grocery retailers are high5.75

We tested the major grocery retailers’ estimates of market shares at the national
level against our own estimates based on sales revenue data provided by the major
grocery retailers and information obtained from Statistics New Zealand (see Figure
5.1 below).

Figure 5.1

Market share estimates using sales revenue and Statistics New Zealand data

Source: Commerce Commission analysis of sales revenue provided by industry participants andStatistics New Zealand data.447

447

[

].

166

5.76

We note that our market share estimates in Figure 5.1 are slightly lower than theestimates based on the major grocery retailers’ data (see Table 5.1). This is because
Statistics New Zealand includes a wider range of smaller competitors in theircalculations of the total size of the retail grocery sector than those included in theestimations of the major grocery retailers.448

5.77

The major grocery retailers are of the view that the Statistics New Zealand data is
not a reliable estimate of the total size of the market, primarily because they say it
does not include the full range of other grocery retailers that they compete with.449

5.78

However, we consider that the Statistics New Zealand data provides the mostaccurate estimate of the total size of the retail grocery sector available to us, as it
includes all other types of grocery retailers that are most likely to provide somecompetition to the major grocery retailers for the bulk of consumers’ grocery
spend. It is unlikely that the exclusion of some specialist retailers, such as Chemist
Warehouse which compete with the major grocery retailers on a limited productrange, from the Statistics New Zealand estimates of the total size of the retailgrocery market would make a material difference to a market share andconcentration analysis using those estimates.

Different market estimates all show that market shares are relatively stable over time
5.79

Despite the different ways market shares can be measured, the individual sharesand combined market shares of the major grocery retailers appear to be high andrelatively stable over time. We found that most annual estimates of combined
shares ranged from 80% to 90% and the lowest estimates of their combined market
share were from 70% to 80%.

5.80

Our analysis based on annual data suggests that there is some variation in the
combined market shares of the major grocery retailers over time of between three
to six percent which may suggest some competition between them and othergrocery retailers.450

448

449

450

We note that the data obtained from Statistics NZs Retail Trade Survey includes other supermarkets,convenience stores and international food stores, but excludes specialist grocery retailers.
Woolworths NZ “Post conference submission on Market study into grocery sector”(24 November 2021) at [24.3.3]; Foodstuffs NI “Post conference submission on Market study into
grocery sector” (3 December 2021) at [16.3]; Foodstuffs SI “Post conference submission on Market
study into grocery sector” (3 December 2021) at [12].
Foodstuffs NI “Post conference submission on Market study into grocery sector” (3 December 2021)
at [38.1].

167

5.81

We agree with submissions that annual aggregate figures can mask variations inmarket shares on a weekly or local market basis.451 For example, Foodstuffs NI told
us that at a regional level, market shares fluctuate weekly for each banner.452 Thesevariations likely reflect the degree of competition between the various grocery
retailers and cross-shopping observed in the sector. However, we do not observe
this cross-shopping behaviour resulting in significant movements in longer-term
market shares.

5.82

We consider that what matters for our assessment of competition in this sector is
the relative stability of market shares and concentration over time as this can be anindicator of market power and weak competition.453

5.83

If there was effective competition in the retail grocery market, we would expect tosee greater disruption by other grocery retailers when competing with the major
grocery retailers for consumers’ grocery spend over a sustained and longer period.

5.84

In this regard, there is broad consistency across all the different estimations
discussed above. We are of the view that this provides further evidence that othergrocery retailers do not compete strongly with the major grocery retailers. For
example, the recent entry and expansion by other grocery retailers (eg, meal kit
providers) does not appear to have had a material impact on the sales and market
share of the major grocery retailers.

5.85

Although there is some evidence of variation in the combined market shares of the
major grocery retailers over time, we consider that evidence of relatively high andstable individual and combined shares provides further support for our conclusionthat competition between the major grocery retailers is muted and not reflective ofworkable competition. We discuss the extent of competition between the major
grocery retailers below from paragraph 5.101.

5.86

The major grocery retailers do not consider that evidence of stable market sharesnecessarily provides evidence that the market is not competitive.454 For example,
Woolworths NZ says that it cannot be correct to assume that new entry andexpansion by the likes of online-only supermarkets, other supermarkets,convenience stores and meal kit providers can occur without impacting the sales
and market share of the major grocery retailers.

451

452

453

454

Foodstuffs NI “Post conference submission on Market study into grocery sector” (3 December 2021)
at [38.2].
Foodstuffs NI also told us that, for example, for PAK’nSAVE in Auckland it is not uncommon for market
share to [], with some weekly changes [], Foodstuffs NI “Postconference submission on Market study into grocery sector” (3 December 2021) at [39].
Competition and Markets Authority “Merger Assessment Guidelines” (18 March 2021) at [4.12(a)],available at:https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1051823/MAGs_for_publication_2021_--_.pdf.
Woolworths NZ “Post conference submission on Market study into grocery sector”(24 November 2021) at [24.5].

168

5.87

We agree that the entry and expansion of other grocery retailers is likely to havesome impact on the sales and market shares of the major grocery retailers.
However, the fact that this is not reflected in material changes in market shares
over time indicates that many consumers continue to do the bulk of their grocery
shopping at the major grocery retailers despite the wider set of choices available tomany of them.

5.88

This may be because, as HoustonKemp submitted (on behalf of Foodstuffs)
competition is effective between the major grocery retailers.455 However, over the
longer term we would expect to see firms, including new entrants and othergrocery retailers who might currently lack sufficient scale to be competitive,competing to lower their cost bases and win market share from each other. As wediscuss in Chapter 6, it is difficult for new entrants and other grocery retailers toachieve sufficient scale to compete effectively with the major grocery retailers, andthus to win significant and growing share from them. Similarly, although we haveseen evidence of investment in supply chain innovation by the major grocery
retailers (see Chapter 3), the lack of movement in market shares over the longer
term suggests a lack of dynamism in competition and that consumers are notbenefitting from these investments to the extent possible.

5.89

It seems more plausible that the stable individual and combined market shares weobserve over time are indicative of weak competition at the retail level rather thaneffective competition between the major grocery retailers themselves and between
the major grocery retailers and other grocery retailers.

5.90

Demand for groceries is subject to shifts in taste and market shocks such as the
COVID-19 pandemic. However, overall market demand is relatively stable andpredictable, because grocery purchases are necessary and frequent. Trend growth
is related to population growth. In the absence of the threat of disruption by new
entry or expansion, stable demand in a concentrated market such as this will leadto stable market shares because grocery retailers have weaker incentives tocompete vigorously on price and risk triggering a price war.

5.91

We therefore consider that market share analysis provides further support for ourview that the major grocery retailers have a unique competitive advantage incompeting for consumers’ grocery spend across all different types of shopping
missions (see Chapter 4).

There appears to be little scope for increased competition from new entry and expansionof existing other grocery retailers
5.92

455

Given our view that other grocery retailers currently provide limited competition to
the major grocery retailers, we have considered the extent to which competition is
likely to be strengthened by new entry and expansion by existing retailers.

Foodstuffs NI “Post conference submission on Market study into grocery sector – Attachment 2”(3 December 2021) at [32].

169

5.93

There are differing views on the future competitive environment in the retailgrocery market. The major grocery retailers told us that new entry and expansion
by the likes of Costco, Chemist Warehouse, The Warehouse, Geezy Go, Circle K,
Supie, The Honest Grocer and meal kit providers will increase competition in theforeseeable future across different types of shopping missions.456

5.94

In contrast, the NZFGC is of the view that there is no evidence that there would be
any material competition from new entry or expansion over a meaningful
timeframe. It also told us that grocery shopping should not be conflated with allother types of food consumption and that evidence of new entry provided by the
major grocery retailers should be considered proportionately to their ability toconstrain the major grocery retailers.457

5.95

We agree with the major grocery retailers that it is correct to adopt a
forward-looking approach when assessing the scope for increased competition
from new entry or expansion by existing grocery retailers. However, we consider
there is limited scope for new entry and expansion by other grocery retailers tocompete more effectively with the major grocery retailers in the foreseeable
future. We discuss our reasons below.

5.96

There have been a few smaller scale entrants (or entrants with differentiatedproduct offerings) into the sector, such as meal kit providers (eg, Hello Fresh andMy Food Bag), online-only supermarkets (eg, Supie and The Honest Grocer), othersupermarkets (eg, Farro Fresh) and convenience stores (eg, Circle K). However, as
discussed above, other grocery retailers do not impose a material competitive
constraint on the major grocery retailers. Small-scale entry, while viable, istherefore likely to have limited effect on the competitive behaviour of the major
grocery retailers. Further. As discussed in Chapter 6, the inability of the smallerscale entrants to access a range of competitively priced groceries constrains theirability to expand to a scale to compete more effectively with the major grocery
retailers.

5.97

We also consider it is unlikely that consumer shopping behaviour will shift to suchan extent in the foreseeable future that most competitors no longer benefit from aphysical presence. Our reasons for this are discussed more fully in Chapter 3.
Instead, online grocery shopping might complement in-store shopping rather thanbe a substitute for many consumers. There are also supply-side synergies between
physical and online grocery retailing.

456

457

For example: Foodstuffs NI “Post conference submission on Market study into grocery sector”(3 December 2021) at [69]-[73]; Foodstuffs SI “Post conference submission on Market study into
grocery sector” (3 December 2021) at [48-51]; Woolworths NZ “Post conference submission onMarket study into grocery sector” (24 November 2021) at [24]; Woolworths NZ “Submission onMarket study into grocery sector draft report (10 September 2021) at [30.8.2].
NZFGC “Post conference submission on Market Study into grocery sector” (25 November 2021) at[2.11]-[2.12] and [3.5].

170

5.98

It is impossible to accurately predict the likely success of the specific examples
provided by the major grocery retailers of planned future entry and expansion.
However, based on the characteristics of the entrants we do not consider thatplanned new entry and expansion is likely to materially impact the major grocery
retailers and significantly improve competition for consumers’ grocery spend acrossall types of shopping missions. For example:
5.98.1

458

Costco: We accept that Costco is likely to compete with the major
grocery retailers to some extent particularly in certain catchment
areas.458 For example, Foodstuffs NI considered that Costco will offer
lower prices when it opens in New Zealand.459 However, its planned
entry involves a limited store network at this stage. Costco has
confirmed that it intends to open one store in Auckland in 2022,460 and it
appears that it is actively looking for store sites in Christchurch andWellington.461 This limited network may limit the competitive effect of its
entry beyond those catchment areas. Further, Costco provides adifferentiated offering from the major grocery retailers which may be
more likely to appeal to consumers with a certain level of disposable
income as it charges a membership fee and offers a relatively limited
selection of grocery products, typically in larger package sizes.462

Foodstuffs NI told us that[], Foodstuffs NI “Post conference submission on Market study into
grocery sector” (3 December 2021) at [26]. We have also seen other evidence suggesting that the
major grocery retailers expect to face increased competition from Costco’s entry, for example:
[
];
[
].

459

460

461

462

Foodstuffs NI “Post conference submission on Market study into grocery sector” (3 December 2021)
at [147.2].
Stuff “Costco delays its New Zealand launch, but is actively looking for additional sites”(29 October 2020), available at: https://www.stuff.co.nz/business/industries/123230944/costcodelays-its-new-zealand-launch-but-is-actively-looking-for-additional-sites;[]; Woolworths NZ “Post conference submission on Market
study into grocery sector” (24 November 2021) at [24.4.1].
We understand that the development of additional stores in Wellington and Christchurch may dependon the success of entry of its Auckland store, Radio NZ “Costco experience opens in NZ mid-August”(9 February 2022), available at: https:/www.rnz.co.nz/national/programmes/firstup/audio/2018829795/costco-experience-opens-in-nz-mid-august.
[
].

171

5.98.2

Geezy Go: Geezy Go is an online grocery retailer that currently operates
in five countries, including the US, UK, India, Australia and New Zealand.
In November 2021 it announced its intention to open a network of dark
stores in the Auckland region. It also has plans to enter the Wellington
market. Its model relies on providing deliveries to consumers via e-bikefrom its dark stores within a 5km radius.463 However, its typically limited
product range of 2,000 SKUs and limited geographic coverage meansthat it is unlikely to provide effective competition to the major grocery
retailers for consumers’ grocery spend in the foreseeable future.

5.98.3Circle K: Circle K is a convenience store format with more than 14,000
outlets worldwide. It entered New Zealand in 2018 with four stores
located in the Auckland region.464 In September 2021 it announced plans
to convert more than 100, or 3% of, existing convenience stores across
New Zealand to the Circle K brand and store fit-out.465 We acknowledge
that the expansion of Circle K across New Zealand may provide
consumers with an additional convenience option for some smaller
shopping missions. However, the typically limited product range offeredby convenience stores such as Circle K and Night ‘n Day is unlikely toprovide effective competition to the major grocery retailers for
consumers’ entire grocery spend.

5.99

Therefore, absent some unforeseen entry to the market of a new entrant with asimilar retail grocery offer to the major grocery retailers, we are of the view thatthe differentiated product offerings and generally limited geographic coverage andproduct range of new entrants in the retail grocery market means that they are
unlikely to provide more effective competition for consumers’ grocery spend in
most local markets.

5.100

Entry by new competitors and expansion by existing fringe competitors undercurrent policy settings is unlikely to significantly increase competition to satisfy
consumers’ demand for one-stop shopping options in the foreseeable future.

What is the extent of competition between the major grocery retailers?
5.101

463

464
465

In this section we assess the intensity of competition between the major grocery
retailers.

Monique Steele “Online grocer Geezy Go readies 20-minute delivery for NZ” (1 November 2021) Food
Ticker https://www.foodticker.co.nz/online-grocer-geezy-go-to-bring-20-minute-delivery-to-nz/.
Circle K https://circlek.co.nz/.
Scoop “PRG set to open 100+ Circle K stores & EV service stations in NZ” (30 September 2021),
available at: https://www.scoop.co.nz/stories/BU2109/S00760/prg-set-to-open-100-circle-k-storesev-service-stations-in-nz.htm.

172

5.102

Given our conclusion that other grocery retailers do not impose a material
competitive constraint on the major grocery retailers, the strength of competition
between the major grocery retailers is a key driver of the prices, quality and rangeof grocery products available to New Zealand consumers. In competition terms werefer to this type of market structure as a duopoly with a fringe of other grocery
retailers.466

5.103

We received differing perspectives on the intensity of competition between the
major grocery retailers. For example, Foodstuffs NI and Foodstuffs SI told us that
Woolworths NZ is a very significant competitive constraint as illustrated by the
degree of cross-shopping between the two major grocery retailers.467, 468 This isconsistent with Woolworths NZ’s view that New Zealand has intense pricecompetition and that the major grocery retailers compete head-to-head on a rangeof price and non-price dimensions of the retail grocery offer.469

5.104

However, the NZFGC is of the view that competition between the major grocery
retailers is not effective, and product and service differentiation may provide a way
for them to avoid price competition.470 This is consistent with Consumer NZ’s viewthat there is limited competition between the major grocery retailers.471

5.105

There is evidence of competition between the major grocery retailers on both priceand non-price dimensions. The strength of this competition varies on a national,
regional and local basis (see Chapter 4).

5.106

However, we consider that the intensity of this competition is muted by several
features which combine to reduce the incentives for the major grocery retailers tocompete more effectively with each other.

The major grocery retailers are each other’s closest competitors
5.107

466

467

468

469

470
471

As discussed in Chapter 4, the two major grocery retailers provide similar retailgrocery offers and are each other’s closest competitors for consumers’ grocery
spend. This is confirmed by evidence we have seen of strategic considerations by
the major grocery retailers, the Ipsos study and our consumer survey (seeAttachment E). We discuss each of these below.

Whilst there are two separate Foodstuffs co-operatives, there are two major grocery retailers
operating stores under national brands on each island.
Foodstuffs NI “Post conference submission on Market study into grocery sector” (3 December 2021)
at [33].
Foodstuffs SI “Post conference submission on Market study into grocery sector” (3 December 2021) at[24].
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [29.3].
NZFGC “Submission on Market study into the grocery sector draft report” (26 August 2021) at [3.14].
Consumer NZ “Post conference submission on Market study into grocery sector” (18 November 2021)
at 2.

173

What can we tell about the closeness of competition between the major grocery retailers
from our consumer research?
5.108

Our consumer survey contributes to our understanding of the closeness ofcompetition between the major grocery retailers as it reveals consumers’ views on
the degree of substitutability between them.

5.109

Specifically, we asked respondents what their main store was, and where theywould shop if their main store(s) closed for the foreseeable future.472 The purposeof these questions was to test which stores respondents viewed as the closest
substitutes to their main store.473

5.110

In Chapter 4 we noted that 95% of survey respondents reported one of the major
grocery retailers as their main stores (see Figure 4.2). Figure 5.2 below shows thatover 77% of respondents would switch to another of the major grocery retailers’
stores if they reported their main store as Countdown, New World or PAK’nSAVE.
This indicates that the consumers who responded to our consumer survey generally
viewed the major grocery retailers stores as a closer alternative to their main store
than other grocery retailers’ stores.

Figure 5.2

Types of stores that respondents would visit if their main store(s) closed474

Source: Commerce Commission analysis of responses to our consumer survey.475

472
473

474

475

‘Main store’ was defined as ‘the store you spend most at, or do most of your grocery shopping with’.
We gave respondents the option to choose up to 12 types of stores, modified to account for theirmain store. See paragraphs E123 to E136 in Attachment E for further discussion on this question in
our consumer survey.
We asked respondents which stores would visit if their main store closed for the foreseeable future.
Figure E24 in Attachment E shows where respondents would shop by store type. The same size ranges
from 3,700 for New World customers to 4,775 for Countdown customers.
[
].

174

5.111

We cannot necessarily infer that the major grocery retailers are each other’s closest
competitors from the survey analysis alone. If actually confronted by their main
store closing, some consumers may behave differently than what they told us.

5.112

In addition, our survey asked where respondents would shop if their main store
closed for the foreseeable future, but it did not ask respondents how they would
respond to a change in the retail grocery offering. This is relevant as consumers’
responses to a change in offering may influence how closely the major grocery
retailers may compete.

5.113

We have also considered additional evidence from the Ipsos study about consumer
perception regarding the closeness of competition between the major grocery
retailers. Consistent with the findings of our consumer survey, participants
indicated that the major grocery retailers are regarded as the most popular
destination for grocery shopping. They were typically viewed as most convenient
for purchasing a full grocery basket in one location and overall considered lessexpensive for many product categories when compared to other grocery
retailers.476 This implies that consumers view the major grocery retailers as eachother’s closest competitors for purposes of one-stop shopping.

The major grocery retailers closely monitor each other’s retail grocery offers
5.114

We have seen evidence that the major grocery retailers frequently monitor eachother’s retail grocery offers and adjust their competitive strategies in response tothis monitoring.477 Monitoring is particularly focused on Known or Key Value Items(KVIs). These are the products that consumers tend to focus on to form theirperceptions of the competitiveness of a competitor’s retail offer. The frequency ofmonitoring provides further evidence to support our view that grocery retailers
with broadly similar retail grocery offers are each other’s closest competitors (seeChapter 4).

5.115

Some of the more common examples we have seen of adjustments to competitive
strategies of the major grocery retailers in response to monitoring of changes ineach other’s retail grocery offer include:
5.115.1

476

477

478

adjustments in product range to compete for specific demographics inlocal markets;478

Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 8 and 21.
The competitive parameters monitored on a frequent basis include[], for example: [
];
[
]; [
].

For example, [

].

175

5.115.2

improving online delivery services through improvements in the ease of
website navigation and timeliness of deliveries;479 and5.115.3

strategies around ensuring that stock availability and range improves sothat consumers are less likely to supplement their shop at anothercompeting grocery retailer.480

5.116

We have also seen evidence that even in instances where market share monitoringby the major grocery retailers includes those of other grocery retailers, thecombined estimated market share of other grocery retailers is persistently low (seefrom paragraphs 5.59 to 5.91 above). This is consistent with our view that the
major grocery retailers do not compete closely with other grocery retailers and thatthey are each other’s closest competitors.

5.117

We discuss the implications of this monitoring activity for the intensity ofcompetition between the major grocery retailers later in this section.

The major grocery retailers appear to strategically differentiate their retail grocery offersfrom each other5.118

We have seen some evidence suggesting that the major grocery retailers attempt
to position themselves differently in the retail grocery market by differentiating
their retail grocery offer from one another on both price and non-price dimensionsof the retail grocery offer. For example, PAK’nSAVE has a different businessproposition that aims to ensure it is positioned to offer New Zealand’s lowest foodprices and to make its retail grocery offer attractive enough for consumers toaccept the trade-off in terms of quality, range and service that comes with theability to compete strongly on price.481

5.119

The major grocery retailers are of the view that differentiation reflects healthy
competition, and that multi-dimensional competition is good for consumers. For
example, Foodstuffs NI and Foodstuffs SI consider that differentiation between the
major grocery retail banners does not imply that they are segmenting the market
between them, but rather suggests that the major grocery retailers are competingwith each other to attract customers.482 However, we have seen information thatsuggests there is very little cross-shopping that involves only shopping at both of
New World and PAK’nSAVE.483 This suggests to us that Foodstuffs has positioned its
banners to both minimise direct competition between them and enable them tocompete more effectively with Woolworths NZ banners, as it would appear rational
for it to do.

479
480
481
482

483

For example, [].
For example, [].
Transcript of Grocery Market Study Conference – Day 1 (21 October 2021) at 27 (lines 5-17).
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[301]; Foodstuffs SI “Submission on Market study into grocery sector draft report”(10 September 2021) at [273].
For example, [
].

176

5.120

Woolworths NZ also told us that the extent to which grocery retailers in New
Zealand seek to differentiate their product and service offering through competingon aspects such as innovation, shopping experience, product range and service
levels is evidence of the intensely competitive nature of the retail grocery sector in
New Zealand.484

5.121

As we have discussed in Chapter 4, consumers have diverse and different
preferences. For example, some might prefer lower prices and less differentiation
on product range and quality. However, other consumers might prefer convenienceand service differentiation over lower prices. To the extent that differentiation
caters to these diverse preferences it is likely to provide some benefits to
consumers. We consider that the impact of retail grocery offer differentiation on
the magnitude of benefits to consumers will depend on the extent of competition
between grocery stores who compete across the PQRS spectrum. This is because
competitors who target a particular segment of the PQRS spectrum have weaker
incentives to compete strongly, particularly on price, with competitors who target adifferent segment.

5.122

Consumer perceptions of differentiation by the major grocery retailer banners may
affect the intensity of price competition between the major grocery retailers. This isbecause the perception consumers have of a retail banner and its retail grocery
offer may influence purchasing and switching behaviour.

5.123

For example, some participants in the Ipsos study were of the view that each of the
major grocery retailers had chosen to focus on different parts of the market andthat they did not directly compete on their main brand promises or for the same
demographics. Participants also described a trade-off between quality, range ofavailable products and the in-store experience between the major grocery retailer
banners.485

5.124

We agree with the major grocery retailers that competition on non-price elementsof the retail grocery offer such as product range, convenience and service levels is
an important feature of the retail grocery market.486 This is consistent with thefindings of our consumer survey (see Figure 4.3).

5.125

However, for many consumers price is also an important driver of store choice. We
have therefore also considered the extent of price competition between the major
grocery retailers. We discuss this further below.

484

485

486

Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [29.3.2.2].
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 33.
For example, Woolworths NZ “Submission on Market study into grocery sector draft report”(10 September 2021) at [29.3.2.1].

177

Competition between the major grocery retailers is muted in some geographic markets
5.126

As discussed in Chapter 4, decisions on pricing, promotion and acquisition of
products by the major grocery retailers mostly take place at a national or regional(co-operative) level. However, decisions on product range and other non-priceelements of the retail grocery offer may be made at an individual store level in local
markets (see paragraphs 4.138 to 4.151).

5.127

Our analysis of regional variations in grocery options available to consumers showsthat there are limited options for consumers that have a preference for one-stop
shopping in some local markets, particularly in more remote areas of New Zealand(see Figure 4.11 and Figure 4.12). We have also found that there is an uneven
distribution of major grocery retail stores in Wellington (see paragraphs 4.163 to
4.168).

5.128

We consider that in local markets or regions where one of the major grocery
retailers does not face competition from the other, the intensity of competition on
those dimensions of the retail grocery offer that are adjusted locally at the store
level will be muted and not reflective of workable competition. In addition, weakcompetition in local markets may also affect the overall level at which nationallyuniform dimensions of the retail grocery offer are set.487

Promotional price competition between the major grocery retailers is a feature of theretail grocery sector
5.129

The major grocery retailers offer a similar product range, including many of thesame proprietary brands and have similar pricing strategies that typically involvesome combination of everyday low pricing (EDLP) and high-low pricing strategies
whereby the prices of some products are temporarily discounted from their usual
shelf price. Retail pricing promotions are a major feature of the New Zealand retailgrocery sector and a key part of price competition between the major grocery
retailers. We discuss the nature of pricing promotions in more detail in Chapter 7
and in Attachment D.

5.130

Retailers’ promotional strategies involve negotiations with suppliers as to the
products to promote, and the timing and size of the discount from the usual shelf
price. The wholesale price that suppliers agree with grocery retailers consists of thegeneral purchasing terms and the suppliers’ trade and marketing spend. The latteris the money that suppliers spend with a retailer to market, promote and discounttheir products.488

487

488

UK Competition Commission “The supply of groceries in the UK market investigation” (30 April 2008)at [6.33], available at:https://webarchive.nationalarchives.gov.uk/20140402194746/http://www.competitioncommission.org.uk/our-work/directory-of-all-inquiries/groceries-market-investigation-andremittal/final-report-and-appendices-glossary-inquiry.
Foodstuffs NI “Post conference submission on Market study into grocery sector” (3 December 2021)
at [242].

178

5.131

We understand from our confidential discussions with a range of suppliers that theamount of promotional funding offered by a supplier to a retailer varies. We also
understand that sometimes a retailer contributes funds to promotions, but that
suppliers’ generally fund the majority, if not all.489 Suppliers are willing to offer
trade and marketing spend to some retailers because they expect that this will
generate additional sales at the expense of competing products and brands.
Therefore, some of the retail promotional activity we observe is driven bycompetition between suppliers rather than strong competition between retailers.

5.132

We have also seen some evidence that promotional clashes are avoided for someproducts (see Attachment D). The timing of promotions run by each of the major
grocery retailers for some products therefore tends to be staggered. We consider
that this mutes the intensity of competition between the major grocery retailers in
relation to the promotion and sale of those products.

5.133

Promotional price competition between the major grocery retailers appears to belimited and temporary in nature, depending on the length of time that a particular
product is being promoted. Periodic price competition on a few items benefits
some consumers who prefer that product and are able to time their purchases tocoincide with the discount period. However, some consumers that tend to makeless frequent grocery shopping trips, such as those in rural areas, may not always
be able to time their purchases to coincide with the discount period.

5.134

In addition, we explain further in Chapter 7 our view that the array of promotional
mechanisms and their complexity and frequent use may make it harder for
consumers to accurately assess the value of competing offers or to develop
accurate perceptions of value over time. Where this is the case, the competitive
benefit of any promotional price competition would be weakened.

Non-promotional price competition between the major grocery retailers appears limited
to a subset of grocery products
5.135

489
490

The evidence suggests that apart from the major grocery retailers’ promotional
activities, price competition between the major grocery retailers is mostly limited
to a subset of grocery items. These are referred to as KVIs. A KVI is a grocery item(or group of items) that drives the value and price perception of a grocery retailer
by consumers.490[].
For example, Competera “KVIs in Retail: How Business Use Them To Boost Sales” (1 June 2020)
https://competera.net/resources/articles/kvi-pricing.

179

5.136

For many consumers, price is a key component of where they choose to shop.
However, comparing prices across grocery retailers is difficult, especially comparing
the prices of all the grocery products stocked at a supermarket. Price sensitive
consumers therefore tend to compare the prices of products based on the prices ofa few items that they purchase frequently and know the price for. These products
tend to be high volume and low margin products that are frequently purchased bymany consumers, such as a 454g tin of baked beans.491

5.137

Non-promotional price competition between the major grocery retailers is
primarily focused on these products. Evidence we have seen confirms that pricemonitoring by the major grocery retailers and price competition in response tolower prices offered by the other major grocery retailer seems to focus on KVIs.492

5.138

Table 5.2 contains information about KVIs for a selection of stores in each banner
during 2019. The number of KVIs for each banner and store appears to vary but
generally appears to be a relatively low proportion of the number of SKUs in astore. The proportion of store revenue represented by KVIs also appears to varyacross banners and stores but is reasonably high relative to the number of KVIs (ie,in general, KVIs are high revenue items).
Table 5.2

Characteristics of Key Value Items, 2019
Number of
distinct
SKUs

Proportion of
SKUs that are
KVIs

Proportion of
store revenue
covered by
KVIs

Highest KVI Lowest KVIBannersales ranksales rank
[
FSNI
[ ]
[ ]
[ ]
[ ]
[ ]
]
[
FSNI
[ ]
[ ]
[ ]
[ ]
[ ]
]
[
FSSI
[ ]
[ ]
[ ]
[ ]
[ ]
]
[
FSSI
[ ]
[ ]
[ ]
[ ]
[ ]
]
[
[
[
Woolworths
[ ]
[
]
[
]
]
]
]
Source: Commerce Commission analysis of information on KVIs provided by the major grocery retailers 493
Chain

5.139

491
492

493
494
495

We have also seen some evidence that the major grocery retailers monitor pricelevels for KVIs with the aim of maintaining specified price differentials between the
different major grocery retail banners.494, 495
Robert Hamlin “Submission on Market study into grocery sector draft report” (26 August 2021) at 3.
For example, Foodstuffs NI told us that[], Foodstuffs NI “Post conference submission on Market study into grocery sector” (3 December2021) at [34.2(d)(i)].
[
].
[
].
For example: [
]; [
].

180

The major grocery retailers have weak incentives to engage in stronger price competition
5.140

Foodstuffs NI and Foodstuffs SI told us that monitoring the prices of Woolworths
NZ with a view to achieving a price differential is not a way of avoiding competition.
They consider it is consistent with competition and would be a strong sign of a lackof competition if they did not monitor Woolworths NZ’s prices.496

5.141

We acknowledge that the major grocery retailers’ pricing strategies are common
across many retail sectors and are not of themselves indicative of weakcompetition. We would also expect that unless competition is entirely absent
competitors would be monitoring and responding to each other’s competitive
offers. In this regard price monitoring and competition through the active
management of price differentials on KVIs may benefit consumers that buy theitems that are discounted in response to rivals’ lower prices, including those whovalue aspects of competition other than price and is not necessarily evidence of
weak competition.

5.142

However, we consider that the major grocery retailers’ active monitoring andability to quickly respond to each other’s price competition weakens the incentives
for the major grocery retailers to deviate from their competitive strategies which
are well known and understood by each other.

5.143

These strategies are interdependent and formed on the basis of considering howeach other is likely to respond to a particular strategy. Given the high degree ofmonitoring and transparency in the retail grocery market, we consider it would berational for a major grocery retailer to expect its closest competitor to rapidly
observe and respond to any significant deviations from the established competitive
strategy and for the rival competitor to respond as expected to avoid a loss of sales
and market share.

5.144

There is likely to be little benefit to a grocery retailer from engaging in stronger
price competition across a broader range of products as any gains are likely to be
short-lived, particularly given the tendency for many consumers to cross-shop
between stores. Instead, stronger price competition risks turning into a price war,
which while benefitting consumers through its duration, lowers retail margins inthe short term with limited gains in sales and profitability over the longer term. 497

5.145

We therefore consider that while there is evidence of price competition between
the major grocery retailers, the intensity of competition is muted by the lack of
incentive to compete more strongly on price which arises as a consequence of thelikelihood of immediate response.

496

497

Foodstuffs NI “Post conference submission on Market study into grocery sector” (3 December 2021)
at [34.2(b)]; Foodstuffs SI “Post conference submission on Market study into grocery sector”(3 December 2021) at [25.2(b)].
Robert Hamlin “Submission on Market study into grocery sector draft report” (26 August 2021) at 3;
McKinsey & Company “Pricing in retail: Setting strategy” (1 April 2015)
https://www.mckinsey.com/industries/retail/our-insights/pricing-in-retail-setting-strategy.

181

5.146

This view is supported by evidence about the degree of the anticipated effect on
price competition of disruption caused by successful entry into the retail grocery
sector of a scale sufficient to compete closely with the major grocery retailers insome local markets.498 For example:
5.146.1

Northelia, a potential large-scale new entrant, anticipates entry would be
met with a “vigorous” reaction from incumbents with prices and margin
falling;499 and5.146.2

Foodstuffs NI told us that it expects that future competition may include
new entrants that compete across the full range with a disruptive or
different model to Foodstuffs NI’s, including Aldi.500 We note that Aldi’s
business model focuses on the supply of a limited range of mainly private
label products at low prices.

5.147

Overall, we consider there is some competition between the major grocery
retailers on both price and non-price dimensions of the retail grocery offer. Pricecompetition focuses mainly on promotional pricing which is often funded bysuppliers.

5.148

However, the intensity of competition between them is muted and we consider
that it does not reflect workable competition. This is because a combination ofmarket features reduces the incentive for the major grocery retailers to compete
more intensely with each other (particularly on price). In particular:
5.148.1

The major grocery retailers are each other’s closest competitors andhave similar competitive strategies which are well known.

5.148.2

They closely monitor each other, and the high degree of transparency
means they can quickly detect and respond to any changes in theirclosest rival’s competitive strategy. This limits the gains that might bemade from more intense competition, particularly price competition.

5.148.3

The market is relatively stable. The retail grocery sector is highly
concentrated and the market shares of the major grocery retailers havebeen relatively high and stable over time. Other grocery retailers facedifficulties entering and expanding. The demand for groceries is also
relatively stable and predictable, largely reflecting population growth.
These features limit the scope for significant disruption to the major
grocery retailers’ existing competitive strategies.

498

[
];
[
].
499
500

Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 7 (lines 26-27).
Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 10 (line 5).

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Are grocery retailers accommodating each other’s behaviour?
5.149

We consider that the major grocery retailers’ weak incentives to engage in stronger
price competition that we discussed above are in part a consequence of their
duopolistic interdependence and the general stability in the sector. These features
mean that there does not necessarily need to be direct or indirect communication
between them for weak competition to result. Instead, it has evolved over timefrom a reduction in uncertainty about how the other will likely react and respond tochanges in competitive strategy by one of them.

5.150

We also assessed whether there is evidence of direct or indirect communication
between grocery retailers that may allow them to coordinate their actions toachieve and sustain higher than competitive prices and profits. This is calledaccommodating behaviour.

5.151

Our merger guidelines explain the range of factors that are likely to makeaccommodating behaviour more or less likely in a particular market.501 Somefeatures of the retail grocery sector make it vulnerable to accommodating
behaviour although we acknowledge that there are other features that makeaccommodating behaviour less likely.502

5.152

We received differing perspectives on the extent to which there may be
accommodating behaviour between grocery retailers in New Zealand. The major
grocery retailers consider that accommodating behaviour is neither occurring nor
likely to occur in the retail grocery sector.503 However, the NZFGC and Consumer NZ
both consider the risk of accommodating behaviour to be a concern.504

5.153

Explicit coordination may be harmful and breach cartel laws. We have not seen
evidence in this study of cartel conduct in the retail grocery sector that may breach
the Commerce Act.

5.154

We considered whether certain conduct we observed may amount toaccommodating behaviour which does not breach the Act but could impact
competition. We did not find evidence of accommodating behaviour in the retailgrocery sector. Nevertheless, we consider that it is vulnerable to such behaviour
and measures to improve competition are likely to reduce the potential foraccommodating behaviour.

501
502

503

504

Commerce Commission “Mergers and acquisitions guidelines” (July 2019) at [3.89].
We discussed features of the retail grocery market that may make it vulnerable to accommodating
behaviour in more detail in our draft report, Commerce Commission “Market study into the retailgrocery sector” (29 July 2021) at [5.141]-[5.149].
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 25-26; Foodstuffs SI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 17; Woolworths NZ “Submission on retail grocery market study preliminary
issues paper” (4 February 2021) at 60-61.
NZFGC “Submission on Market study into grocery sector draft report” (26 August 2021) at [3.18];
Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 4-6.

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5.155

We found no evidence of leader-follower behaviour in the retail grocery sector. We
analysed pricing data provided by the major grocery retailers to assess whether
there is any evidence of leader-follower type pricing behaviour. We found no clear
pattern of high correlations of price changes across any of the geographic clusters
used for the purposes of analysing price correlations across stores (see Attachment
D).

5.156

We considered whether communications between the major grocery retailers andcommon suppliers may be used to avoid promotional clashes. We have not seen
evidence of any direct communications between any grocery retailers throughcommon suppliers with the aim of influencing each other’s retail grocery offers. We
are also not aware of any evidence that the major grocery retailers have advancecommunication on the promotional schedules of competitors. However, we haveseen some evidence of grocery retailers seeking information from suppliers about
the prices, discounts and promotions of their rivals.505 We have also seen someevidence that promotional clashes are avoided for some products (Attachment D).

5.157

We also assessed whether the maintenance of price differentials between retailbanners may have similar effects as market sharing arrangements. We have seen
evidence that the major grocery retailers are actively managing price differentials
between their respective retail banners for specific product categories. However,
we have seen no evidence of any direct communication between the major grocery
retailers to maintain these price differentials between their respective retailbanners.

5.158

Finally, we considered whether national pricing may facilitate coordinated conduct.
HoustonKemp told us that national (or uniform) pricing does not necessarily
facilitate coordinated conduct for several reasons.506 We agree but note that
increased price transparency through uniform pricing is a feature of the retailgrocery market that may potentially make it vulnerable to accommodating
behaviour through increased visibility of each other’s retail grocery offerings.

How does the structure of local grocery markets affect price competition
between the major grocery retailers?
5.159

505

506

In this section we discuss the quantitative analysis conducted by Frontier
Economics to examine how the structure of local grocery markets affect pricecompetition between the major grocery retailers.

For example: [
[

];
]; [

].

Foodstuffs NI “Post conference submission on Market study into grocery sector – Attachment 2”(3 December 2021) at [233]-[278].

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5.160

Overall, the analysis by Frontier Economics suggests that local market
concentration appears to have little or no effect on price competition between the
major grocery retailers. There is also no material effect on prices of new entry, exit
or rebranding on prices in local markets. This is consistent with our finding thatprice competition between the major grocery retailers is muted and does notreflect workable competition. We discuss the analysis further below.

Local market concentration appears to have little or no effect on price competition
between the major grocery retailers
5.161

Frontier Economics tested whether there is a relationship between concentrationand prices in local grocery markets. These tests were conducted by comparing theway in which variations in concentration across local grocery markets are related tovariations in prices.507 They also controlled for various other factors that may
influence variations in prices, such as retail banner and demographics.508

5.162

For the purposes of conducting the tests Frontier Economics defined separate
geographic markets around each of the 694 stores in the sample (the focal stores).
The market for each focal store included all those stores which exercise a constraint
on the prices, range or quality of service of the focal store.509 We used the resultsof this estimation of the approximate geographic size of local grocery markets inour discussion of local geographic markets in Chapter 4.

5.163

Two different methods were used to measure market concentration levels for eachof the 694 focal stores. The first measure was the focal store’s share of local market
revenue of the major grocery retailer group to which the focal store belongs, wherethese shares were weighted to account for the distance of competing stores to the
focal store. The second measure was the proximity of the closest store of each of
the six major grocery retail banners to the focal store.510

507

508

509

510

Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 17.
Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 25-26.
The focal store is defined as the store around which a market is defined in each local grocery market.
An underlying assumption of this analysis that the constraint of a competitor is likely to be greatest
for stores located close to the focal store and that the constraint decreases for stores located further
from the focal store, Frontier Economics “Econometric analysis of the New Zealand Retail Grocery
Sector – Report for the Commerce Commission” (15 July 2021) at 21.
Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 23-24.

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5.164

Separate tests were conducted for each of the different major grocery retailbanners. The results of the tests vary somewhat, depending on the measure ofmarket concentration. In models with weighted revenue share as the concentration
variable, Frontier Economics found that increased concentration in local markets
tends to be associated with higher prices in the cases of Four Square, New Worldand SuperValue.511 However, no consistent effects were found for the other major
grocery retail banners.

5.165

In models using proximity to the major grocery retail banners as the concentration
measure, Frontier Economics found that Four Square stores tend to have lower
prices when a FreshChoice or SuperValue store is located nearby. Countdown,
FreshChoice and SuperValue stores tends to have lower prices when a New World
store is located nearby, by around 1%. However, no consistent effects were found
for the other major grocery retail banners.512

5.166

The results also show that proximity of the focal store to other stores of the same
major grocery retailer tends to increase prices for certain pairs of stores, but not forothers. In particular, prices at Four Square stores tend to be higher if a PAK’nSAVE
store is nearby. Similarly, prices at SuperValue stores tend to be higher when aCountdown or FreshChoice store is nearby.513

5.167

Overall, the analysis by Frontier Economics suggests that local market
concentration appears to have little or no effect on price competition between the
major grocery retailers. This is consistent with our finding that price competition
between the major grocery retailers is muted and does not reflect workablecompetition.

5.168

We discuss HoustonKemp’s view that this finding could equally lead to alternative
conclusions from paragraph 5.177 below.

There is no material effect of new entry, exit or rebranding on prices in local markets
5.169

In general, we would expect grocery prices to increase in a local market if a retailer
that was previously a strong competitor exits that market (an exit event) and forgrocery prices to fall if a retailer that is expected to be a strong competitor enters a
local market (an entry event). The expected impact of a rebranding of an existing
store is less clear and might depend on the specific brand change that occurred.

5.170

Frontier Economics used a sample of 32 events when stores entered, exited,changed location or rebranded during the period 1 April 2016 to 31 March 2019 toassess whether these events had an economically significant impact on the prices
charged by competing stores within the same local markets.

511

512

513

Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 29-30.
Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 31-33.
Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 33.

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5.171

The sample included 14 entry events, six exit events, six store replacement events,
three store rebranding events and three store consolidation or temporary closure
events. Although the analysis mostly focused on events associated with the
PAK’nSAVE, New World and Countdown retail banners, two of the events related to
new store openings by Farro Fresh in Auckland.

5.172

The impacts of these entry, exit or rebranding events on prices in the relevant local
market were assessed by looking at the prices of neighbouring major grocery
retailers for the 12 months prior to and following the event.514 Frontier Economics
used prices of control stores in neighbouring markets to account for the possibility
that prices of competing stores may have changed around the time of the event forreasons other than the event, such as cost increases or general inflation.515

5.173

Frontier Economics found that there was no systematic relationship between theentry, exit or rebranding of a store and the prices charged by a close competitor
store in the 12 months after the event.516 This is consistent with their finding that
local market concentration levels appear to have little or no effect on pricecompetition between most of the major grocery retail banners.

The Frontier Economics analysis is not necessarily reflective of effective price competition
in local and national grocery markets
5.174

514

515

516

517

HoustonKemp consider that the conclusions drawn from Frontier Economics’
analysis that local market concentration levels and new entry, exit or rebranded
entry appear to have little or no effect on prices at the local level is equallyconsistent with alternative conclusions that there is intense price competition at anational level between the major grocery retailers and that local and national
grocery markets are subject to effective competition.517

Frontier Economics acknowledged that its analysis may not pick up all the competitive effects of entry
because the analysis is limited to a period of time. All studies have limitations, and we consider itlikely that, to the extent that entry affects price competition, at least some of this effect would beobserved in the period studied, Frontier Economics “Econometric analysis of the New Zealand Retail
Grocery Sector – Report for the Commerce Commission” (15 July 2021) at 34.
Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 35.
Frontier Economics "Econometric analysis of the New Zealand Retail Grocery Sector – Report for theCommerce Commission" (15 July 2021) at 7.
Foodstuffs NI "Post conference submission on Market study into grocery sector: Attachment 4 HoustonKemp - Empirical evidence of grocery sector competition – further analysis”(3 December 2021) at [99].

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5.175

In relation to the possibility that local and national grocery markets are subject toeffective competition, we note that competition in local markets can come either
from rivalry among established competitors or from new entrants. The Frontier
Economics analysis examined the effect on prices of each of these forms ofcompetition and found that there was very little systematic effect. This does not
imply that there is no effective competition at the national level. However, theanalysis found no evidence of effective price competition at a local level.518

5.176

Further, if the aggregation of competitive constraints in local markets is sufficient
to constrain the major grocery retailers, we would expect to see this reflected in
the way in which prices are set nationally (or island-wide). The finding that local
market concentration appears to have little or no effect on price competition
appears to confirm that the major grocery retailers face no meaningful pricecompetition from other grocery retailers that have a presence in some local
markets.

5.177

As acknowledged by HoustonKemp, Frontier Economics did not assess the intensityof price competition at a national level between the major grocery retailers.519 It istherefore not possible to use the findings of this analysis to reach a conclusion
about the strength of price competition between the major grocery retailers at anational (or island-wide) level.

5.178

Given that other grocery retailers generally have limited geographic coverage andtend to compete for consumers’ grocery spend in local markets, we have sought toassess how the structure of local grocery markets affect price competition in theretail grocery sector. The major grocery retailers also told us that price competition
in local markets is considered and reflected in the way that prices are set at anational (or island-wide) level.520 However, the Frontier Economics analysis foundlittle or no evidence that increased local market concentration levels influence
prices charged by the major grocery retailers.

5.179

On the contrary, the evidence of muted local market price competition between
the major grocery retailers would suggest there is correspondingly weak pricecompetition at a national level. We also note that HoustonKemp has not provided
any alternative evidence or analysis to support its view that there is intense pricecompetition at the national level.

518

519

520

Frontier Economics “Memo re HoustonKemp comments of 3 December 2021” (23 December 2021) at
3.
Foodstuffs NI "Post conference submission on Market study into grocery sector: Attachment 4 HoustonKemp - Empirical evidence of grocery sector competition – further analysis”(3 December 2021) at [112].
For example: Foodstuffs NI “Submission on Market study into grocery sector draft report”(10 September 2021) at [261.2].

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5.180

HoustonKemp also made further comments regarding the methodology used by
Frontier Economics in its assessment of how local grocery market structures affectprice competition between the major grocery retailers. It is of the view that theapproach taken by Frontier Economics contains several limitations that makes itchallenging to interpret the results with confidence.521

5.181

We acknowledge that there are some limitations to the Frontier Economics
analysis.522 For example, due to the different business models of the major grocery
retailers and other data limitations it was unable to test the effect of local grocery
market structures on gross margins which may be expected to provide greater
insights on the impact of local grocery market structure on non-price elements ofcompetition.523

5.182

However, we note that Frontier Economics did test for the effect of non-pricecompetition elements of the retail grocery offer by including variables such as store
size and staffing levels in its analysis, and found that neither variable seems to havean impact on the cross-section regressions consistent with them reflecting thequality offering of supermarkets.524

5.183

Based on the responses of Frontier Economics to HoustonKemp’s comments on its
approach we consider that the analysis is sufficiently robust to provide some useful
insights on the impact of local grocery market structures on price competition
between the major grocery retailers. In particular:

521

522

523

524

525

5.183.1

Consistent with submissions by the major grocery retailers, in general we
expect that national (or island-wide) prices will be set with reference tolocal market conditions.525

5.183.2

However, the finding of Frontier Economics that local market
concentration appears to have little or no effect on price competition
between the major grocery retailers shows that local prices are notresponsive to competition.

Foodstuffs NI "Post conference submission on Market study into grocery sector: Attachment 4 HoustonKemp - Empirical evidence of grocery sector competition – further analysis”(3 December 2021) at [96] and [163].
Frontier Economics “Response to HoustonKemp report” (9 November 2021); Frontier Economics“Memo re HoustonKemp comments of 3 December 2021” (23 December 2021).
Frontier Economics “Memo re HoustonKemp comments of 3 December 2021” (23 December 2021) at
1-2.
Frontier Economics “Memo re HoustonKemp comments of 3 December 2021” (23 December 2021) at
2.
For example: Transcript of Grocery Market Study Conference – Day 1 (21 October 2021) at 32(lines 7-11); Transcript of Grocery Market Study Conference – Day 1 (21 October 2021) at 34(lines 13-25).

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Chapter 6

Conditions of entry and expansion

Summary of our findings•

In recent years there has been a number of smaller scale or niche entrants into themarket, which have improved choices for consumers. These entrants include
online-only retailers Supie and The Honest Grocer and the emergence of meal kit
providers. Costco is also due to open an Auckland store in August 2022.

•

However, it appears unlikely under current market conditions that any new grocery
retailers (or existing grocery retailers seeking to expand) will be able to achieve thescale and geographic coverage required to compete effectively with the major grocery
retailers.

•

Scale is an important factor when considering conditions of entry and expansion.
Large-scale entry to the retail grocery sector may be made difficult by New Zealand’ssize and population profile, which may restrict the number of places a supermarket canbe profitably operated.

•

There is a lack of suitable sites for development of retail grocery stores. Planning laws
and their implementation by territorial local authorities can affect the availability ofland. There is uncertainty as to whether the positive effects of trade competition can beconsidered in planning processes.

•

The availability of land for grocery store development is also aggravated by the major
grocery retailers placing restrictive covenants on land and exclusivity covenants inleases that prevent rival supermarkets from developing stores.

•

There is a lack of wholesale access to a full range of groceries for resale at competitive
prices. A grocery retailer cannot provide a widespread, full range, competitively priced
offering without first obtaining groceries on reasonable terms from either a range ofsuppliers or a grocery wholesaler.

•

Without wholesale supply, smaller independent grocery retailers and smaller new
entrants are unlikely to be able to buy a sufficient range of products (particularly dry
groceries) cheaply enough to compete with the major grocery retailers for a wide rangeof shopping missions. Wholesale supply could also provide a stepping-stone for new
entrants as they are able to grow and develop their own direct relationships with
suppliers. However, larger retailers would likely have sufficient volumes and scale toreceive competitive pricing by purchasing directly from suppliers.

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Introduction
6.1

In this chapter we consider longer-run competitive dynamics by assessing theability of retailers to enter the sector and expand their operations. We draw
conclusions in relation to a wide range of factors, including the nature of the sector
and relevant regulations, and the conduct of current grocery retailers.

6.2

As the Court stated in Re Queensland Co-op Milling Association Limited:526
Of all these elements of market structure, no doubt the most important is (2), thecondition of entry. For it is the ease with which firms may enter which establishes thepossibilities of market concentration over time; and it is the threat of the entry of a
new firm or a new plant into a market which operates as the ultimate regulator ofcompetitive conduct.

6.3

If entry and expansion costs are low enough, then the threat of entry by new firms,
and the potential for existing firms to readily expand, can significantly constrain the
behaviour of existing firms, even when they do not face significant constraint fromexisting competitors. Conditions of entry and expansion can therefore limit boththe number of competitors in a market and the threat of further competition.

6.4

If entry and expansion are difficult or prohibited, then less competitive offerings
are more likely to persist in the longer term, to the detriment of New Zealandconsumers.

6.5

Our study has identified that a number of factors are likely to be preventing or
slowing entry and expansion into the grocery sector.

6.6

The remaining sections in this chapter cover:

526

6.6.1

our approach to analysing conditions of entry and expansion;

6.6.2

recent entry and prospect of imminent entry;

6.6.3

impact of New Zealand’s size and geography on entry and expansion;

6.6.4

site availability and development;

6.6.5

cost advantages available to the major grocery retailers;

6.6.6

wholesale access to grocery products;

6.6.7

conduct by suppliers and retailers which could potentially affect productsourcing;

6.6.8

access to capital;

Re Queensland Co-Op Milling Association Limited and Defiance Holdings Limited (QCMA) (1976) ATPR
40-012 at [246].

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6.6.9

alcohol licensing laws; and6.6.10loyalty programmes.

Our approach to analysing conditions of entry and expansion
6.7

This section sets out the framework for our discussion of conditions of entry andexpansion in the rest of the chapter.

The starting point for our discussion of entry and expansion conditions
6.8

We considered the conditions of entry and expansion by grocery retailers into the
New Zealand grocery sector in 2007 when Foodstuffs (Foodstuffs Auckland,
Foodstuffs Wellington, and Foodstuffs SI) and Woolworths NZ each separately
applied for clearance to acquire The Warehouse Group.527 Our decision to decline
clearance was appealed to the Courts.

6.9

In the subsequent appeal, Commerce Commission v Woolworths Limited And Ors,
the Court of Appeal stated:528[the Commission] also concluded, uncontroversially, that there were high barriers toentry into the relevant markets (for reasons associated with access to suitable sites,
requirements for resource consents and economies of scale) and that there is no likely
new entrant into the relevant markets other than the Warehouse.

6.10

It also stated that:529
We consider that the Commission was right to give weight to the theoretical concerns
raised by a 3:2 merger in markets such as these, characterised by high barriers toentry. …Other potential entrants are not obvious and barriers to entry are high.

6.11

We have not relied on this previous finding in our assessments of entry andexpansion conditions for our study, instead seeking to understand the range ofentry and expansion conditions relevant to the sector today. However, as set out indetail below, we note that many of our findings are consistent with those foundpreviously.

What we mean by conditions of entry and expansion
6.12

527

528
529

We do not use the term ‘barriers to entry’ in this report but instead use the term
‘conditions of entry and expansion’, which is related to, but broader than, theeconomic concept of ‘barriers to entry’.

Commerce Commission “Decision Nos. 606 & 607, Determination pursuant to the Commerce Act 1986
in the matter of applications for clearance of business acquisitions involving: Foodstuffs (Auckland)
Limited, Foodstuffs (Wellington) Co-operative Society Limited, and Foodstuffs South Island Limited;and (separately) Woolworths Limited and The Warehouse Group Limited” (8 June 2007).
Commerce Commission v Woolworths Limited & Ors [2008] NZCA 276, at [166].
Commerce Commission v Woolworths Limited & Ors [2008] NZCA 276, at [200].

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6.13

6.14

530
531

532

There are two key reasons for this:6.13.1

A market study is a study of “any factors that may affect competition forthe supply or acquisition of goods or services”.530 Its scope is broad.

6.13.2

It is consistent with the approach adopted by the Courts in
Commerce Commission v New Zealand Bus and Air New Zealand v
Commerce Commission. In those cases, the Courts emphasised that thequestion of whether conditions in a market qualify as a barrier to entry,
however defined, is less important than considering whether thoseconditions have the potential to prevent, impede or slow entry andexpansion.531

Conditions of entry and expansion can take a variety of forms, but generally fallwithin three categories.532 While we do not explicitly use these categories to frame
our discussion throughout this chapter, we briefly outline them below as they
provide a helpful starting point for this discussion:
6.14.1

Structural conditions are associated with the technologies, resources orinputs a firm would need to enter or expand. This may include factors
such as the significance of economies of scale, scope or density. For
example, the geographic location and relatively small size of the New
Zealand market could potentially limit the scope for entry and expansion
if there are significant economies of scale, scope and/or density.

6.14.2

Regulatory conditions include resource management or other planning
consent requirements, licensing requirements for a business or product,
and regulations governing standards and quality. For example, theresource consent process for obtaining permission to build grocery
stores could affect the ability for grocery retailers, either existing or new,
to open new stores.

6.14.3Strategic conditions arise where incumbent firms take actions todiscourage prospective entrants or expansion. For example, existingretailers may seek to restrict potential competitors’ access to suitableland for grocery retailing.

Section 48 of the Act.
Commerce Commission v New Zealand Bus Ltd (2006) 11 TCLR 679 (HC) at [147]-[155], citing Dennis
Carlton “Why Barriers To Entry are Barriers to Understanding” (2004) 94 American Economics Review
466; Air New Zealand v Commerce Commission (No 6) (2004) 11 TCLR 347 (HC) at [102]. This approach
was confirmed by the Court of Appeal in New Zealand Bus Ltd v Commerce Commission [2007] NZCA
502 at [252].
Commerce Commission “Mergers and acquisitions Guidelines” (July 2019) at [3.109]-[3.111].

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Conditions of entry and expansion and different business types
Assessing conditions of entry and expansion at different levels of the supply chain
6.15

The terms of reference directs us to any factors that may affect competition for the
supply or acquisition of groceries by retailers including a focus on ‘the structure of
the grocery industry at the wholesale and retail levels’. In this chapter we consider
the conditions for entry and expansion at the retail level (or the conditions relevant
to changing the structure of the industry at the retail level). In considering this we
also consider the relevance of the wholesale level of the sector.

6.16

Access to competitively priced products (by which we mean access – whether
directly from suppliers or via a wholesaler – at prices which enable other grocery
retailers to compete effectively with the major grocery retailers) is a key factor for
retail entry and expansion. Factors preventing wholesale competition may
therefore have a flow-on impact of reducing the viability of retail entry. This
chapter therefore also includes a discussion of wholesale conditions of entry andexpansion.

Assessing conditions of entry and expansion for different business models
6.17

As discussed in Chapter 2, there are a range of retailers operating in the grocery
sector. Some conditions of entry and expansion we discuss in this chapter may
impact grocery retailers consistently regardless of their business model. Other
conditions of entry and expansion may impact grocery retailers to differing degrees
or not at all.

6.18

As discussed in Chapter 4, many consumers appear to have a preference for
shopping at major grocery retailers’ stores, irrespective of the type of shopping
mission they are engaged in.

6.19

We have considered the conditions of entry and expansion into the retail grocery
sector broadly, recognising that there are diverse customer preferences andtherefore a range of offerings provided by grocery retailers. We have particularly
focused on entry and expansion conditions relating to the ability of new entrants orexisting firms to compete effectively with the major grocery retailers. In our view
this ability is critical to increasing the level of competition.

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6.20

Coriolis told us that historically there has been no organic entry (ie, excluding
acquisition of existing stores) into established grocery markets which areadequately serviced by existing supermarkets operating in the traditional
supermarket format.533 However, they also considered that new entrants could
successfully enter using other formats. This was defined relatively broadly andincluded a number of retailers offering a full range of grocery products such as Aldi
(a limited-assortment store) and Costco (a wholesale club).534 This appears
consistent with our view that if factors hindering entry and expansion are
addressed, there would likely be room for entry by grocery retailers (potentially inalternative formats) which may have the ability to compete effectively with the
major grocery retailers. It is also consistent with taking a future-focused view ofcompetition in the sector. We have therefore focused our assessment on entry andexpansion conditions across a wide range of potential retail formats in the retailgrocery sector.

Recent entry and prospect of imminent entry
6.21

In this section, we consider the extent to which recent entry and expansion into thegrocery sector and the prospect of future entry and expansion are likely toconstrain incumbent firms.

6.22

Woolworths NZ considered the entry of a variety of new and expanding entrants
adopting a variety of different business models demonstrates that there are nomaterial barriers to entry or expansion by retail grocery competitors.535 Similarly,
Foodstuffs NI’s view is that there are no material barriers to entry and expansion
for different shopping missions other than barriers imposed by planning law, as
illustrated by recent or upcoming instances of entry and expansion (eg, Supie, My
Food Bag, Circle K, Geezy Go, Briscoes).536

6.23

We are aware that there continues to be some entry and expansion by grocery
retailers (see paragraph 5.92 for further details), and acknowledge that recent
entry has and may further increase the choices offered to consumers.
6.23.1

533

534

535

536

However, as discussed in paragraph 5.98, we do not consider that they
will significantly increase the effectiveness of competition or impose
significant competitive constraints on the major grocery retailers.

Coriolis “Post conference submission on Market study into grocery sector” (18 November 2021) at[56].
Coriolis “Post conference submission on Market study into grocery sector” (18 November 2021) at[60].
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 62.
Foodstuffs NI “Post conference submission on Market study into grocery sector” (3 December 2021)
at [133-136].

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6.24

6.23.2The conditions of entry and expansion we discuss in this chapter are ofvarying relevance to different business models. For example, as
discussed in paragraph 6.54, factors reducing site availability are lesslikely to be relevant to an online-only retailer like Supie or My Food Bag.
The ability of some retailers to enter and/or expand in the grocery sector
using differentiated business models does not necessarily mean thatthese factors do not restrict or hinder entry and expansion by otherretailers. For example, factors reducing site availability are still likely tobe highly relevant to bricks-and-mortar retailers.

6.23.3We also note that entry or expansion by a retailer does not necessarily
indicate that they are able to compete effectively, or that they are nolonger impacted by the factors discussed in this chapter. For example,
Supie has indicated that its inability to source some grocery products orbrands at competitive prices due to a lack of scale hinders its ability tocompete effectively with the major grocery retailers.537

There have not been any instances of entry into the retail grocery sector by aretailer capable of significantly constraining the major grocery retailers in the last
decade. We are also not aware of any specific plans for entry and expansion into
the retail grocery sector by a retailer capable of significantly constraining the major
grocery retailers.538

Impact of New Zealand’s size and geography on entry and expansion
6.25

Development of new stores in the retail grocery sector requires capital expenditure(eg, land costs, building costs, store fit-out) from a prospective new entrant or
expanding firm. In order for entry and expansion to be viable, there needs to be acustomer base of sufficient size to enable new stores to earn enough return tojustify investment.

6.26

Population density is therefore likely to be relevant to entry and expansion as it
affects the size of customer bases which stores would have access to in theircatchment area. Areas with high population density would be more likely to give aprospective store access to a suitably sized customer base. Low population density
may be a factor impacting the viability of entry and expansion as it reduces thelikelihood that the customer base in a catchment area would be of a sufficient size
to justify investment in a new store.

537

Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 26 (lines 19-23).

538

[
]; [

].

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6.27

This is supported by stakeholders (including Foodstuffs SI) generally indicating
through submissions and statements at meetings that New Zealand’s small
population and/or low population density are factors which reduce potential
returns on investment for a grocery store (noting Foodstuffs SI indicated this wasparticularly the case for a full-service supermarket) and/or make it difficult toachieve sufficient scale to compete effectively.539

6.28

By contrast, Foodstuffs NI submitted that:540
6.28.1New Zealand’s size and geography is materially less relevant to entry andexpansion than has previously been the case given the range ofcompeting businesses (such as online-only supermarkets) withsignificantly different factors affecting entry and expansion; and6.28.2

size and population density may affect the absolute operation costs but
this is different to the prospects of entry, which are more likely to beaffected by the proportion of the market that needs to be captured toachieve minimum efficient scale.

6.29

While we agree population size and density may affect different business models
differently, we consider that it is still highly relevant to entry and expansion by
supermarkets.

6.30

We also consider that population density is relevant to a potential entrant’s ability
to achieve minimum efficient scale.541 As population density generally affects thesize of the customer base for an individual store, it is likely to be a factor
influencing a potential entrant’s ability to set up viable stores with sufficiently large
customer bases to justify the investment into store development. The ability of apotential entrant to capture a sufficient proportion of the total market through acollection of these individual stores will in turn impact its ability to achieve
minimum efficient scale.

539

540

541

Foodstuffs SI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 18; Consumer NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at [34]; NZFGC “Submission on retail grocery market study preliminary issues
paper” (4 February 2021) at [138]-[141];[];[]; Retail NZ “Submission on Market study into grocery sector draft report” (26August 2021) at 2.
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 28.
Minimum efficient scale is the level of output that minimises average cost, relative to the size ofdemand. HR Varian “Intermediate Microeconomics: A modern approach” 6th ed, W.W. Norton &Company, New York (2003) at 432.

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6.31

Woolworths NZ submitted that it considers the New Zealand market is small andgeographically dispersed, but the entry of large international retailers (eg, Costco,
Chemist Warehouse, Ikea, Sephora, Zara, H&M, Mecca, Nick Scali and Tiffany & Co.)in recent years indicates that New Zealand is increasingly considered for entry andexpansion, and entries which have occurred demonstrates there are no material
barriers to further retailers coming.542 Foodstuffs NI and Foodstuffs SI similarly
noted that New Zealand’s size and geography have not deterred Costco and other‘Big Box’ retailers from entering the New Zealand market.543

6.32

We do not consider entry by most of these multinational retailers (except Costco)
to be necessarily relevant to entry by grocery retailers as they operate in different
sectors and would likely face different sets of conditions of entry and expansion.
We do not consider Costco’s entry demonstrates that current conditions are
conducive to the scale of entry or expansion that would be sufficient to constrain
the major grocery retailers for the reasons discussed in Chapter 5.

6.33

New Zealand has low population density on average although regional density
varies. New Zealand’s population density of 19 people per square kilometre in 2018
is low compared with the average for OECD members (38) and the world average(58).544 However, New Zealand has high rates of urbanisation at around 87%,
compared with the OECD average of 81% and the world average of 56%.545

6.34This suggests that while there are large areas which are sparsely populated(suggesting potential customer bases are generally likely to be smaller), much of
New Zealand’s population is clustered into relatively small areas (which suggests
customer bases in these areas may be relatively larger). Large-scale entry andexpansion may be made more difficult if New Zealand’s population profile restricts
the number of places a supermarket can be profitably operated. However, it may
be easier to enter or expand in urban areas containing larger population clusters.

6.35

In any event, population density is more likely to impact on grocery retailers todifferent extents depending on their business model. Population density may be amore significant factor for entry and expansion by retailers operating larger storesor a potential large-scale supermarket entrant, and for retailers selling relatively
niche products. However, it may be less significant for retailers operating smaller
stores and online-only supermarkets.

542

543

544

545

Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 62.
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[321]; Foodstuffs SI “Submission on Market study into grocery sector draft report”(10 September 2021) at [291].
The World Bank “Population density (people per sq. km of land area) – New Zealand”
https://data.worldbank.org/indicator/EN.POP.DNST?locations=NZ&most_recent_value_desc=false.
The World Bank “Urbanisation (% of population living in urban areas) – New Zealand”
https://data.worldbank.org/indicator/SP.URB.TOTL.IN.ZS?locations=NZ&most_recent_value_desc=tru
e.

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Store density
6.36

Store density may also be a factor potentially affecting entry and expansion as it islikely to be more difficult to enter a saturated market where the maximum numberof competitors that an area can support has already been reached. However, evenin saturated markets, the competitive process may mean that successful firms canstill enter and replace existing firms.

6.37

We have been provided with analysis which indicates that New Zealand’s
supermarket density does not appear out of line with other OECD countries.546 We
also analysed supermarket density in New Zealand in order to understand theextent to which demand is likely to be served by existing supermarkets. Our
methodology and more detailed findings are set out in Attachment G.

6.38

Our analysis indicates that relative to the 19 European countries considered, New
Zealand has the lowest total number of supermarkets (Small supermarkets, Large
supermarkets and Hypermarkets) per million people at 88 but the sixth-equal
highest number of Hypermarkets per million people at 25.547

6.39

The extent to which there is a sufficiently large customer base in New Zealand to
facilitate entry and expansion will depend on the offsetting effects of our relatively
higher number of Hypermarkets, and relatively smaller total number ofsupermarkets.

6.40

It is difficult to tell what the overall impact of these two contrasting factors is on
the size of New Zealand’s contestable customer base. However, New Zealand’s
overall supermarket density does not appear to be out of line when compared with
European countries. We cannot conclude that the market is saturated, and there
may be opportunities for entry and expansion, particularly in areas of expected
population growth.

6.41

We would expect supermarket density to largely impact on entry and expansion by
supermarket operators (eg, the major grocery retailers and potential large-scale
supermarket entrants). Other grocery retailers generally differentiate theirofferings from the major grocery retailers rather than competing directly, whichmeans that high supermarket density may not be a significant factor impacting on
their entry and expansion.

546

[
].

547

As defined in Nielsen “Nielsen Grocery Universe 2017” (2017), available at:https://www/nielsen.com/wp-content/uploads/sites/3/2019/04/nielsen-grocery-universe-2017.pdf.

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Potential feasibility
6.42

Our view is that the New Zealand market could sustainably accommodate at least
one more large-scale rival. Two main observations support this view.

6.43

First, New Zealand previously had another large-scale grocery retailer, before
Progressive Enterprises’ acquisition of the former Woolworths New Zealand entity
in 2002.

6.44

Second, entry at a scale sufficient to compete effectively with large supermarket
chains appears to have been possible in other countries with similar demographic
and geographic characteristics to New Zealand. For example, Finland has been able
to sustainably support the entry and expansion of a third large grocery retailer(Lidl) over a 20-year period.548

6.45

As noted above, Coriolis submitted that organic entry by traditional supermarkets is
impossible. Based on observations from other markets, Coriolis noted that once thetransition from many small grocery stores to larger supermarkets has occurred, no
new entrant has succeeded in entering with traditional supermarkets.549 However,Coriolis uses a narrow definition of traditional supermarkets which excludes store
formats such as ‘super warehouses’ (for example, PAK’nSAVE), ‘limited-assortment
stores’ (for example, Aldi) and ‘wholesale clubs’ (for example, Costco).

6.46

Our assessment of the potential for large-scale entry and expansion is based on awider range of potential store formats. Coriolis acknowledges that new entrants
can succeed with alternative formats.

6.47

We agree with submissions from the major grocery retailers that entry at a scale toeffectively compete with them is viable. While we consider there are currently
constraints on such competition emerging, our view is that these could be resolved,
rather than these being the inevitable consequence of scale economies combinedwith New Zealand’s population and geography.

6.48

We acknowledge that additional large-scale entry could impact the revenues andcosts of existing grocery retailers. However, we consider it unlikely that large-scale
entry would fundamentally undermine the viability of any of the existing major
grocery retailers.

548

549

Lidl entered the Finnish retail grocery market in 2002. As of 2020 it was the third largest retailer, with
9.5% market share (up from 6.7% in 2012), J. Clausnitzer “Grocery retailers in Finland – statistics &facts” (16 September 2021) https://www.statista.com/topics/4230/grocery-retailers-in-finland/.
Coriolis Ltd "Post conference submission on Market study into grocery sector" (18 November 2021) at[51]-[53].

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Site availability and development
6.49

A wide range of stakeholders indicated via submissions and comments at meetings
that site availability is a significant factor impacting on entry and expansion, and/orthat conduct (eg, land banking, restrictive covenants) by incumbent firms may
reduce site availability.550

6.50

In this section we begin by introducing the requirements for a site to be suitable forgrocery store development, before discussing factors which may impact on site
availability or development. They include:

6.51

6.50.1planning regulations;6.50.2

restrictive covenants and exclusivity covenants in leases; and6.50.3land banking.

The impact of some of these factors on entry and expansion conditions for aretailer is likely to vary depending on the retailer’s business model.

Site requirements
6.52

There is a minimum set of requirements for a site to be considered viable forsupermarket development.

6.53

In general, a site for a supermarket would be expected to:
6.53.1meet certain size requirements, which may vary depending on factors
such as:551
6.53.1.1

retail banner (eg, PAK’nSAVE stores tend to be larger thanFour Square stores);6.53.1.2

format (eg, a Countdown large-format supermarket would
tend to be larger than a Countdown Metro store); and

550

[
];
[
]; TheWarehouse Group “Submission on retail grocery market study preliminary issues paper” (4 February2021) at 4 – mentions limited access to supply of suitable sites, and that certain property leases
contain restrictive covenants; Consumer NZ “Submission on retail grocery market study preliminary
issues paper” (4 February 2021) at [37] – mentions land banking to prevent potential rivals fromestablishing a presence; NZFGC “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at [135] – mentions land banking as a well-established strategic barrier to entry andexpansion.

551

[
[

]; [
].

];

201

6.53.1.3

6.54

sales potential (larger stores generate higher overhead costs
and require larger populations with more sales potential);

6.53.2have a suitable degree of access (eg, located on or close to a main roadto allow consumers and delivery trucks easy access);

6.53.3have a high level of exposure to passing traffic and pedestrians and beeasy for consumers to find, particularly for Metro stores which are
typically located in areas with high pedestrian counts and good public
transport;

6.53.4have sufficient land area to provide carparking for consumers, which is ofgreater importance to larger format supermarkets than smaller Metro
stores (which sometimes do not offer carparking);

6.53.5comply with planning regulations (eg, zoning requirements as defined in
the Local Council’s District Plan and resource consent applications as
required); and6.53.6have truck loading areas to allow products to be delivered and received
into the store.

Site requirements are likely to vary significantly depending on a grocery retailer’sbusiness model.
6.54.1Grocery retailers with online-only business models (eg, meal kit
providers, online-only supermarkets) would likely have different land
requirements. While they might require physical warehouses or packing
centres for the purposes of their operations, they would likely have
many more options than bricks-and-mortar retailers when choosing
locations.552

6.54.2Other grocery retailers (eg, other supermarkets, international foodstores) have site requirements which may be similar in some ways tothose required by the major grocery retailers. For example, easy accessfor consumers and exposure to passing traffic and pedestrians would still
be important requirements. However, there may also be somedifferences depending on the grocery retailer in question, such as
potentially requiring smaller floor areas or not requiring dedicatedcarparking.

552

[
].

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6.54.3

Costco operates using a different concept from supermarkets and would
likely have different land requirements, notably requiring significantly
larger sites. For example, Costco’s Auckland store, which is underconstruction, will be about 14,000 sqm. This is significantly larger thansupermarkets currently run by the major grocery retailers.553 In addition,
as mentioned in Woolworths NZ’s submission, Costco is widely regarded
as being a shopping destination for its members.554 It may therefore
have differing site location requirements as it might expect consumers
within a larger catchment area to visit its stores, which would lessen therequirements for its stores to have exposure to passing traffic andpedestrians and potentially create a need for a larger carparking area.555

Site availability
6.55

Suitable sites are a key requirement for successful entry and expansion ofsupermarkets. Entry or expansion on a regional or national basis would require
access to numerous suitable sites. The ease of locating and acquiring suitable sites
at a price which is viable for store development, are likely to be key factors
affecting entry and expansion of supermarkets (particularly in urban areas).

6.56

Foodstuffs NI and Foodstuffs SI agreed that site availability is a factor impacting onentry and expansion by supermarkets but indicated their view that it should not begiven inappropriate prominence in our analysis and recommendations.556

6.57

Land for suitable sites may not be physically available due to geography or existing
patterns of urban development. Beyond this, we have identified two key conditionsof entry and expansion which may impact site availability or development:
6.57.1

553

554

555

556

issues relating to planning regulations for supermarket development;

Anuja Nadkarni and Debrin Foxcroft “Costco is coming to New Zealand, changing the way we shop”(11 June 2019) Stuff https://www.stuff.co.nz/business/113355280/costco-is-coming-to-new-zealand.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 27 – Woolworths NZ also mentions it has seen analysis suggesting that Costco
stores have in-person catchments of about 25 km;[].
Anuja Nadkarni and Debrin Foxcroft “Costco is coming to New Zealand, changing the way we shop”(11 June 2019) Stuff https://www.stuff.co.nz/business/113355280/costco-is-coming-to-new-zealand –suggests Costco will have about 800 car parks. For reference, PAK’nSAVE Papakura has 265 carparking spaces, PAK’nSAVE Papakura https://www.paknsave.co.nz/upper-northisland/auckland/papakura.
Foodstuffs NI “Submission on Market study into grocery sector draft report” (15 September 2021) at
78; Foodstuffs SI “Submission on Market study into grocery sector draft report” (15 September 2021)
at 66.

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6.57.2

6.58

conduct by the major grocery retailers which may affect the availabilityof store sites, including:
6.57.2.1

lodging of restrictive covenants (including encumbrances)
restricting supermarket development;

6.57.2.2

exclusivity covenants in leases which prevent competingsupermarkets or other retail grocery businesses from being
set up (this largely appears to take place in relation to mallsor shopping centres); and6.57.2.3

buying land and holding it for future use without any specificplans for its development (land banking).

We have not assessed the individual impact of each land banked or covenanted site
on competition, or considered the availability of alternatives in each area where
there is a land banked or covenanted site. We have instead analysed the impact
each type of conduct is likely to have on the availability of sites more generally.

Planning regulations
6.59

6.60

557

In addition to site availability, another key element required for store development
is compliance with relevant planning regulations. This may include tasks such as:
6.59.1complying with zoning requirements within a District Plan;

6.59.2determining whether a proposed store development requires consent;
and6.59.3where required, applying for a resource consent and engaging with thesubsequent process.

Submissions on our draft report (including by the major grocery retailers) weregenerally supportive of addressing the potential impact of planning regulations onsite availability.557

For example: NZ Initiative “Submission on Market study into grocery sector draft report”(26 August 2021) at 7-8; Te Waihanga – New Zealand Infrastructure Commission “Submission onMarket study into grocery sector draft report” (26 August 2021) at 3. Also see the major grocery
retailers’ submissions on this point: Foodstuffs NI “Submission on Market study into grocery sector
draft report” (10 September 2021) at 90; Foodstuffs SI “Submission on Market study into grocery
sector draft report” (10 September 2021) at 82; Woolworths NZ “Submission on Market study into
grocery sector draft report” (10 September 2021) at 38.

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Key features of planning regulation
6.61

New Zealand’s planning laws are currently contained principally in the Resource
Management Act 1991 (RMA). The Government recently undertook a full review of
the RMA,558 and intends to undertake significant reform.559

6.62

We do not intend to discuss current planning regulation in detail as it is notnecessary to do so for the purposes of this chapter, and in light of the upcoming
reform. However, some key features of current planning regulation are outlined
below.

558

559

560

561
562

6.62.1

Under District Plans (set by City and District Councils) and Regional Plans(set by Regional Councils), activities are assigned to a category which
affects whether resource consents will be required, and the conditions
imposed. Examples include permitted activities which are allowed tooccur without a resource consent, and controlled activities which requirea resource consent.

6.62.2The RMA provides scope for parties to oppose their competitors’
resource consent applications for anticompetitive reasons, such as toprevent or delay competitive entry.560 In an attempt to limit this:6.62.2.1

Section 104(3)(a) states that a consent authority must nothave regard to trade competition or its effects when
considering a resource consent application.561 There areother equivalent provisions relating to the development of
instruments such as District Plans.

6.62.2.2

Part 11A limits the ability for trade competitors to participate
in objection and appeal processes, unless they are directly
affected by an adverse effect of the activity on theenvironment. It also discourages the covert use of third
parties by trade competitors.562

Ministry for the Environment “New Directions for Resource Management in New Zealand”(June 2020) https://www.mfe.govt.nz/publications/rma/new-directions-resource-management-newzealand.
Hon David Parker “RMA to be repealed and replaced” (10 February 2021)
https://www.beehive.govt.nz/release/rma-be-repealed-and-replaced.
Ministry for the Environment “Resource Management Amendment Act 2009 – Fact Sheet 2: Trade
Competition, Representation at Proceedings and Environment Courts Costs” (October 2009), available
at: https://environment.govt.nz/assets/Publications/Files/Resource-management-amendment-act2009-Fact-Sheet-2.pdf.
Resource Management Act 1991, s 104(3)(a).
Resource Management Act 1991, Part 11A.

205

Relevance of planning regulation to our study
6.63

Planning regulations have the potential to impede or slow the ability of retailers todevelop new stores if they create additional costs or significant delays in the store
development process. We note that overseas market studies have found thatplanning regulation can impede entry, including by acting as a barrier to theestablishment of new supermarkets, or by increasing the cost or time associatedwith development of a new retail outlet.563

6.64

Based on information we have received regarding recent resource consent
applications by the major grocery retailers, we observe that some applications havetaken multiple years, and that there appears to have been significant cost involved
with pursuing applications for resource consent in some instances.564

6.65

Aspects of the current planning process have the potential to impede or slow entry
and expansion. Examples of the ways in which this may occur include:563

6.65.1

Council zoning policies may significantly limit the number of sites
available for the purposes of grocery retail development.565

6.65.2

Relatedly, parties may seek to influence plans (eg, District Plans) in a waythat restricts development of a new supermarket, or may attempt toslow down attempts to liberalise existing restrictions. Changing thecategory that supermarket activity falls into will significantly change thedifficulty involved in obtaining resource consent. Appeals against planchanges take time, and plans generally remain idle while under appeal.

UK Competition Commission “The supply of groceries in the UK market investigation” (30 April 2008)at [29]-[31]; Irish Competition Authority “Grocery Monitor Report No. 3: The Retail Planning System as
Applied to the Grocery Sector: 2001 to 2007” (July 2008) at viii.

564

[

];
[
];
[
].

565

Comments by NZ Initiative, Transcript of Grocery Market Study conference – Day 5 (28 October 2021)
at 20 (lines 7-14); Te Waihanga – New Zealand Infrastructure Commission “Submission on Market
study into grocery sector draft report” (26 August 2021) at 3; Foodstuffs NI “Submission on Market
study into grocery sector draft report” (10 September 2021) at 78; Foodstuffs SI “Submission onMarket study into grocery sector draft report” (10 September 2021) at 66; Woolworths NZ“Submission on Market study into grocery sector draft report” (10 September 2021) at 38.

206

6.65.3

Notification decisions, in relation to plan changes and resource consents,
may be challenged by judicial review, and later appealed. This can delay
resolution and result in the relevant plan change or consent being set
aside, and may result in firms being unwilling to invest pending
resolution of the challenge.

6.65.4

Notified consent processes will involve submissions or hearings which
can slow down or influence the grant of consent.566 This may result in a
declined consent, or a consent with conditions that render asupermarket operation less successful or even unviable.

6.65.5The timing of large-scale entry could be significantly affected byinconsistency of approach across the country. The lack of consistency
between District Plans means each site will need to be considered
independently, and if consent is required it will be subject to the relevant
local rules. Even where the District Plans are similar, there can besignificant differences between consent processing times across local
authorities.

6.66

We note that, in the past, the major grocery retailers have, in some instances,
opposed each other’s resource consent applications under the RMA. In at least
some cases, these disputes have created significant impediments or delays in thestore development process.

6.67

This point is illustrated by the Wairau Road PAK’nSAVE resource consent
application, where resource consent disputes (including appeals to theEnvironment Court and High Court) raised by Progressive Enterprises delayed
opening of the store for approximately 20 years. This was despite the likely benefits
to consumers which would result from the opening of the store, as illustrated by
the Environment Court finding that there was “a clear consensus among all the
economist witnesses that the introduction of a strong competitor into the North
Shore supermarket market would be a good thing for customers, even if its
competitors would not welcome it”.567

566

567

Notified consent processes allow potentially affected parties and members of the public to give
feedback on resource consent applications that affect them. For further information see Wellington
City Council “Notified resource consents” https://wellington.govt.nz/property-rates-andbuilding/building-and-resource-consents/resource-consents/applying-for-a-resourceconsent/notified-resource-consents.
Progressive Enterprises Limited v North Shore City Council [2008] NZEnvC 311 at [71], available at:
http://www.nzlii.org/cgibin/sinodisp/nz/cases/NZEnvC/2008/311.html?query=progressive%20enterprises%202008.

207

6.68

The RMA was amended in 2009 to limit trade competitors’ use of the objection
process under the RMA (as described in paragraph 6.62.2). The Environment Court,
in a subsequent resource consent dispute between the major grocery retailers(General Distributors Ltd v Foodstuffs Properties (Wellington) Ltd), noted that inmaking the amendments to the Act, Parliament was motivated by:568…the frustration of seeing developments (not least supermarket developments) being
bogged down in seemingly endless RMA litigation that, in the end, was motivated by nothing
more than the wish to stifle the opening of a rival store in a given location.

6.69

These amendments have limited the circumstances under which supermarket
operators can oppose store developments by their competitors under the RMA. 569
However, there may still be barriers (in terms of time and cost) created by the
resource consent process in relation to supermarket development.

6.70

For example, as we understand it, the principle that the Courts have generally
applied is that while they may not have regard to the direct effects of tradecompetition, it is legitimate to take into account flow-on ’retail distribution effects’such as a downturn in business in an existing shopping centre from approving a
resource consent. The Supreme Court has stated that relevant effects may be taken
into account when they are “significant”. This does not mean that an adverse effectmust threaten the viability of existing centres in order to be considered. Rather,when deciding whether or not to grant a resource consent, decision-makers may –in effect – choose to decline a consent if it would lead to a significant downturn ineconomic activity in existing retail or commercial centres.570

568

569

570

General Distributors Ltd v Foodstuffs Properties (Wellington) Ltd [2011] NZEnvC 212 at [11], available
at: http://www.nzlii.org/cgibin/sinodisp/nz/cases/NZEnvC/2011/212.html?query=title(general%20distributors%20and%20foodst
uffs%20).
Relevant commentary: Brookfields Lawyers “Smoke Settles on Supermarket Wars” (12 August 2011)https://www.brookfields.co.nz/publications/environmental-resource-mangement/214-smoke-settleson-supermarket-wars; Simpson Grierson “End of the supermarket circus” (15 September 2011)https://www.lexology.com/library/detail.aspx?g=8cea536f-2c61-44bf-b994-884503391398.
Westfield (New Zealand) Limited v North Short City Council [2005] NZSC 17 at [119]-[120]. This
interpretation appears to continue to have been applied despite amendments to the Resource
Management Act in 2009 to clarify that decision-makers may not have regard to not just tradecompetition, but also the effects of trade competition. For example: Property Economics “New World
Dominion Road Retail Impact Assessment” (March 2021) at 24, available at:https://www.epa.govt.nz/assets/Uploads/Documents/Fast-track-consenting/DominionRd/Application-documents/App_21_Retail_Impact_Assessment.pdf; Auckland Council “Section 32
report on the Proposed Auckland Unitary Plan: Appendix 3.4.1 – Case law – centres and commercial
activity” (2013) at 139, available at:https://www.aucklandcouncil.govt.nz/plans-projects-policies-reports-bylaws/our-plansstrategies/unitary-plan/history-unitary-plan/documentssection32reportproposedaup/appendix-3-41.pdf.

208

The role of competition under the current resource consent process
6.71

It is difficult to determine the extent to which competition and consumer choice isin practice taken into account under the RMA at present. A review of applications
filed and decisions made in relation to proposed supermarket developments will
necessarily involve a degree of selection bias. Nevertheless, the evidence before us
suggests that the benefits of competition and consumer choice appear to be raisedby parties in some cases, but not all. Where competition is discussed in relation to a
proposed supermarket development, it appears to be mentioned as part of abroader assessment of the “positive effects” which are likely to arise as a result of a
resource consent application, and it is difficult to determine how much weight, if
any, it was given. Competition does appear to have been taken into account bydecision-makers in some cases. Equally, in some cases it has been raised by theapplicant but not taken into account by the decision maker.

6.72

The lack of consistency may in part be due a lack of clarity over the effect of section
104(3)(a) of the RMA, and other equivalent provisions. On the face of it, theseprovisions limit consideration of both negative and positive effects of tradecompetition. However, the Courts have also stated that these provisions can beread as allowing the positive impacts of competition to be considered.571

6.73

We consider that the benefits of competition and consumer choice are not being
considered in a consistent or systematic manner in the determination of
applications or consistently incorporated into the plans and processes that
underpin individual applications. We acknowledge that we have only reviewed alimited sample of resource consent applications and decisions in relation tosupermarket developments. It is possible that a wider review might reveal greater
consistency of treatment than we have identified.

6.74

In summary, we are aware that there are a wide range of factors which are
generally considered as part of the decision-making process for a resource consent
application. However, our view is that decision-makers do not consistently take into
account the benefits to consumers that arise from increased actual or potential
competition (in part due to statutory barriers), and in some cases are taking into
account what the Courts have determined to be negative flow-on effects fromcompetition.

571

Bunnings Ltd v Queenstown Lakes District Council [2018] NZEnvC 135 at [35]-[36].

209

Restrictive covenants and exclusivity covenants in leases
6.75

The major grocery retailers lodge covenants on land which prevent or restrict
supermarket or other food retail store development (restrictive covenants).572 Theprevalence with which this conduct occurs varies amongst the major grocery
retailers.

6.76

Submissions on our draft report (including by the major grocery retailers) weregenerally supportive of improving site availability by addressing restrictive
covenants and exclusivity covenants in leases.573

572

573

574

575

6.76.1

Comments by the major grocery retailers at the conference indicatedthat they did not find these covenants to be a significant constraint on
their ability to acquire sites.574

6.76.2

Woolworths NZ noted that the ACCC considered actions taken to address
exclusivity covenants in leases in Australia has had a positive impact oncompetition.575

As part of our retail fuel market study, we observed that when fuel companies close retail sites, theysometimes place “restrictive covenants” on the land to prevent its future use by another fuel retailer,
Commerce Commission “Market study into the retail fuel sector – Final report” (5 December 2019) at[X109]-[X110]. The UK Competition Commission’s groceries market investigation also identified
restrictive covenants and exclusivity arrangements in leases as potential barriers to entry,
UK Competition Commission “The supply of groceries in the UK market investigation” (30 April 2008)
at [7.121].
For example, submissions by Monopoly Watch, NZFGC, and The Warehouse Group supported
addressing restrictive covenants and/or exclusivity covenants in leases: Monopoly Watch “Submission
on Market study into grocery sector draft report” (26 August 2021) at 5; The Warehouse Group “Postconference submission on Market study into grocery sector” (23 November 2021) at 1; NZFGC“Submission on Market study into grocery sector draft report” (26 August 2021) at 21-22. Also see
major grocery retailers' submissions on this point: Foodstuffs NI “Submission on Market study into
grocery sector draft report” (10 September 2021) at 90; Foodstuffs SI “Submission on Market study
into grocery sector draft report” (10 September 2021) at 82-83; Woolworths NZ “Submission onMarket study into grocery sector draft report” (10 September 2021) at 35-37.
Comments by Woolworths NZ, Transcript of Grocery Market Study Conference – Day 5(28 October 2021) at 18 (lines 8-11); comments by Foodstuffs NI, Transcript of Grocery Market Study
Conference – Day 5 (28 October 2021) at 19 (lines 4-10); comments by Foodstuffs SI, Transcript ofGrocery Market Study Conference – Day 5 (28 October 2021) at 19 (lines 12-13).
Woolworths NZ noted that the ACCC had commented that releasing exclusivity covenants in leases
increased the number of shopping centres with more than one supermarket, and that Aldi grew from170 stores at the time to 590 this year, Transcript of Grocery Market Study Conference – Day 5(28 October 2021) at 22 (lines 25-36).

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6.77

We have identified more than 90 restrictive covenants entered into by the major
grocery retailers, the majority of which are still active.576 At least 60 instances ofthese restrictive covenants were either not time-limited or had terms of 20 years or
more.577 These covenants have been lodged across the country, with the majority
in Wellington, Auckland, or Christchurch.578

6.78

A restrictive covenant is attached to or runs with the land. This means that thecovenants restricting supermarket developments that we have identified wouldbind any third parties who subsequently acquire (or lease) that land. Examples of
how and when restrictive covenants can be lodged include:
6.78.1on sale of land by a grocery retailer to a third party; or

6.78.2where a site is acquired by a grocery retailer from a third party, and inconsideration for that purchase the vendor agrees to register a covenantagainst other land in the area that the vendor is retaining.

6.79

We are also aware that major grocery retailers enter into leases which containcovenants restricting the development of rival supermarket and/or other retailgrocery businesses (eg, butcheries, bakeries, fruit and vegetable stores) on adjacentor proximate premises.579 These exclusivity covenants in leases appear to largely
take place in relation to shopping centres or malls. The prevalence with which thisconduct occurs varies amongst the major grocery retailers.

6.80

We have identified over 100 exclusivity covenants in leases entered into by the
major grocery retailers, the majority of which are still active.580 At least 90
instances of these exclusivity covenants in leases had potential terms of 20 years ormore (after taking into account rights of renewal).581 These exclusivity covenants inleases have been lodged across the country, with the majority in major urban areas(eg, Auckland, Wellington and Christchurch).582

576

577
578
579

580

581
582

[
]. These figures include restrictive covenants
which may have expired as they could have impacted on entry and expansion for the period of time
when they were active.
[
].
[
].
Exclusive leases have also been discussed in overseas market studies, notably by the ACCC and South
African Competition Commission. The ACCC found that in the vast majority of leases in larger
metropolitan centres, there appears to be little justification for exclusivity clauses other than toprevent competitive entry, ACCC “Report of the ACCC inquiry into the competitiveness of retail prices
for standard groceries – July 2008” (20 July 2008) at XVIII; The South African Competition Commission
found that long-term exclusive leases in shopping centres have the effect of raising barriers to entry
for small and independent retailers, Competition Commission: South Africa “The Grocery RetailMarket Inquiry (Final Report, non-confidential)” (25 November 2019) at [40].
[]. These figures include exclusivity
covenants in leases which may have expired as they could have impacted on entry and expansion forthe period of time when they were active.
[
].
[
].

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6.81

Exclusivity covenants in leases are contained in lease agreements between the
major grocery retailers and landlords. In general, they would not be binding on
subsequent tenants or landlords, unless a subsequent tenant assumes possession
as a consequence of an assignment of an existing lease during its term (rather thanentry into a new lease).

Relevance of restrictive covenants and exclusivity covenants in leases
6.82

The lodging of restrictive covenants and exclusivity covenants in leases on sites thatmight otherwise be suitable for retail grocery development (including expansion ofexisting stores) is likely to be a significant factor preventing or slowing entry andexpansion. This is particularly the case where there are no other suitable sites, oronly less suitable sites in the vicinity. These arrangements also have the potential tobreach sections 27 and 28 of the Act, which is discussed from paragraph 6.97
below.

6.83

Restrictive covenants and exclusivity covenants in leases may allow incumbent
firms to benefit from reduced competition and receive higher sales and profits thanthey would otherwise be able to. We have observed instances where:
6.83.1

a major grocery retailer noted the existence of covenants restricting
supermarket entry when assessing potential opportunities for entry;583
and6.83.2

Foodstuffs NI commenced proceedings in the High Court against
Woolworths NZ over a restrictive covenant which would prevent
Foodstuffs NI from operating a PAK’nSAVE on a site. Comments from
Foodstuffs NI’s GM Membership & Property in a media article indicatedwhile Woolworths NZ’s view was that the restrictive covenant prohibiteda supermarket operating on the site, Foodstuffs NI considered therestrictive covenant to be anticompetitive and not legally enforceable.584
Subsequent comments indicated Foodstuffs NI wanted to “ensure
customers benefit from substantially increased and vigorouscompetition, better prices, more choice and a brand new PAK’nSAVE”.585

583

[

].

584

585

FMCG Business “Battle at Highland Park” (August 2019) https://www.fmcgbusiness.co.nz/battle-athighland-park/.
FMCG Business “Battle at Highland Park” (August 2019) https://www.fmcgbusiness.co.nz/battle-athighland-park/;
[
].

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6.84

A restrictive covenant reduces the scope of activities which can be conducted on apiece of land. In some instances, restrictive covenants may significantly reduce thevalue of the land in relation to which they are lodged.586 This indicates that retailers
may expect the benefits of lodging restrictive covenants (eg, increased sales and/or
profits as a result of reduced competition) to outweigh any foregone asset value
incurred as a result.

6.85

However, the extent to which a restrictive covenant or exclusivity covenant in alease reduces competition will vary depending on factors such as:

6.86

6.85.1the duration of the restrictive covenant or exclusivity covenant, as alengthy duration or the absence of an expiry date results in a greater
restriction on site availability; and6.85.2the availability of other suitable sites in the area, as placing restrictive
covenants or exclusivity covenants in leases over sites when there are
few or no alternatives in the area is likely to be more restrictive ofcompetition.

Restrictive covenants and exclusivity covenants in leases are particularly likely to
impede entry and expansion where:

6.87

6.86.1they are used in areas where there is a shortage of land appropriate forretail grocery use;

6.86.2

they prevent former retail grocery sites from being used for that
purpose, since these are likely to have a proven customer base; and/or

6.86.3they prevent undeveloped land in major urban areas and their fringes
from being developed into a retail grocery site, but would permit otherretail uses.

In addition, we note that these arrangements have a cumulative effect. As more
restrictive covenants and lease covenants are lodged over time, the total numberof sites subject to restrictive covenants and exclusivity covenants in leases is likely
to increase. This is particularly the case where the covenants have significant
durations or no expiry dates. As such, the impact which restrictive covenants andexclusivity covenants in leases have on entry and expansion may continue to growover time.

586

[

];
[
].

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6.88

The lodging of a restrictive covenant or exclusivity covenant in a lease is alsosignificantly less costly than land banking as:
6.88.1it either means not having to incur the cost of acquiring land (exclusivity
covenants in leases), or being able to recover at least some of thepurchase price (by selling it after lodging a restrictive covenant); and6.88.2it allows parties to avoid incurring costs associated with holding land foran extended period of time.

Lack of a pro-competitive rationale for restrictive covenants and exclusivity covenants inleases6.89

Restrictive covenants and exclusivity covenants in leases on sites which would haveotherwise been suitable for grocery retailing (including expansion of existing stores)
have the effect of reducing the availability of suitable sites for grocery store
development, and thus make it more difficult for a competing grocery retailer toenter or expand. While these effects are the same regardless of the grocery
retailer’s purpose for holding that land, if a pro-competitive purpose can bearticulated for the conduct, this may be relevant to our framing ofrecommendations relating to the conduct.587

6.90

We consider that the claimed benefits for many of the restrictive covenants or
exclusivity covenants in leases we have observed are unlikely to outweigh thecompetitive harm flowing from the restrictions they place on site availability (andby extension, the impact they have on entry and expansion). The explanations wehave received do not sufficiently explain why covenants of this nature arecommercially legitimate such that their restrictive effect on competition should bejustified. Rather, we are aware that this conduct may, at least in some instances, beintended to prevent entry and expansion in an area.

587

For example, we note that the restrictive covenants we observed as part of our retail fuel market
study may have been placed on former retail sites by fuel stations to prevent potential disputes fromoccurring if a re-used site was found to have contaminated the land. This rationale does not appear to
be relevant to the operation of supermarkets.

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6.91

For instance, we understand that a restrictive covenant may often be registeredagainst the title before it is sold, limiting future operation of a food or retail grocery
business at the site.588 We consider this illustrates that restrictive covenants may
be lodged for the purposes of preventing competitive entry (and a corresponding
reduction in an incumbent firm’s store revenues and profits).

6.92

We understand that:
6.92.1a rationale for lodging restrictive covenants can be to prevent
competitive entry into an area where the incumbent firm has no directsupermarket competition in the area;589 and

588

[
];
[
];
[
];
[
].

589

[

].

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6.92.2

6.93

sites are sometimes acquired for the purposes of restricting thedevelopment of a competitor’s store and subsequently sold after a
restrictive covenant was lodged.590

Covenants can be put in place because grocery store development on theremaining land or elsewhere in the shopping centre would reduce sales and thefinancial viability of the acquiring retailer’s own store development, which is thecommercial basis upon which any rent or purchase price would commonly be
set.591 The potential for covenants to allow retailers to recoup development costs
in relation to new developments was mentioned in a submission on our draft
report.592
6.93.1

These arrangements, by reducing site availability, prevent or lessen thelikelihood of competitive entry into an area. This in turn has the potential
to reduce the level of competition faced by the incumbent firm, allowing
them to receive higher revenues (in the form of increased sales) thanthey would likely have achieved in a more competitive market with thethreat of entry.

590

[

];
[

].

591

[

592

Ernie Newman “Submission on Market study into grocery sector draft report” (26 August 2021) at 8.

]; [

].

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6.93.2

6.94

593

594

595

596

These increased revenues may subsequently be shared with theassociated land owner or landlord in the form of higher rent payable or ahigher purchase price for land intended to be used for store
development. However, we consider this unlikely to be pro-competitive
as it comes at the expense of consumers in the area who might haveotherwise received the benefits of increased competition (eg, lower
prices) absent the restrictive covenant or exclusivity covenant in thelease. In essence, we consider this may be the equivalent of the twoparties sharing the benefits of reduced competition.

The ACCC’s study into the grocery sector mentioned that in some circumstances, apossible rationale for offering a period of exclusivity would be to attract asupermarket as an anchor tenant to a shopping centre or complex which might nothave otherwise been built.593 We note that this was raised as a rationale(particularly in relation to exclusivity covenants in leases) both in submissions on
our draft report and during the conference.594
6.94.1The extent to which this rationale applies in a New Zealand context is
unclear as we have not assessed each restrictive covenant and exclusivity
covenant in a lease on an individual basis. However, the ACCC also notedthat while guaranteeing a period of exclusivity may be justified in somecircumstances, restrictive provisions in supermarket leases appear to be
employed simply to maximise the profitability of a supermarket by
restricting its exposure to competition in many cases.595 We note thatthe undertakings accepted by the ACCC in relation to exclusivity
covenants in leases only included a period of exclusivity for stores that
had already commenced trading, not future stores.596

6.94.2

As discussed in paragraphs 6.77 and 6.80, most of the restrictive
covenants and exclusivity covenants in leases we have observed haverelatively lengthy durations (or potential durations) of more than
20 years. Our view is that the anchor tenant rationale is unlikely to justify
exclusivity for such extensive periods.

ACCC “Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries –July 2008” (20 July 2008) at [XVIII].
Comments by Foodstuffs SI, Transcript of Grocery Market Study Conference – Day 5(28 October 2021) at 19 (lines 17-26); NZ Initiative “Submission on Market study into grocery sector
draft report” (26 August 2021) at [3.21].
ACCC “Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries –July 2008” (20 July 2008) at 189.
ACCC “Supermarket agreement opens way for more competition” (18 September 2009), available at:https://www.accc.gov.au/media-release/supermarket-agreement-opens-way-for-more-competition.
Undertakings from grocery retailers in Australia were accepted by the ACCC following its enquiry
report which identified concerns that restrictive provisions in lease agreements in respect ofsupermarket space could restrict the ability of supermarket operators to establish supermarkets in
shopping centres, for example, Woolworths Limited “Undertaking to the Australian Competition andConsumer Commission given for the purposes of section 87B by Woolworths Limited”(17 September 2009) at [15], available at: https://www.accc.gov.au/system/files/publicregisters/undertaking/893470-1-Undertaking.PDF.

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6.95

6.96

A further rationale for restrictive covenants described in paragraph 6.77 may be toprotect goodwill associated with existing retail banners.597 For example, a grocery
retailer which sells its former site may be concerned that goodwill relating to its
retail banner or the location of its former store might be appropriated by acompeting retailer. Goodwill could be generated where consumers develop a habitof shopping for groceries at a particular location. A grocery retailer could
potentially appropriate location-related goodwill by developing a grocery store at acompetitor’s former store site.
6.95.1

However, the major grocery retailers have relatively distinct store
brandings (including colours and logos) for each of their retail banners,
and we consider it unlikely that competing retailers could capture
significant brand-related goodwill when a store changes retail banner(eg, if a Countdown is turned into a New World).

6.95.2In any event, we consider that any concerns relating to the protection of
goodwill would not extend beyond the short term. However, as
discussed in paragraph 6.94.2, most restrictive covenants have relatively
lengthy durations.

In summary, restrictive covenants and exclusivity covenants in leases in relation tosites which would otherwise be suitable for grocery store development impact on
entry and expansion conditions as they reduce site availability. Our view is that therationales provided for many of the restrictive covenants and exclusivity covenantsin leases do not sufficiently explain why they are commercially legitimate such that
their restrictive effect on competition should be justified.

Restrictive covenants and exclusivity covenants in leases under the Commerce Act
6.97

While the restrictive covenants and exclusivity covenants in leases we haveidentified are relevant to our study due to their potential to prevent or slow entry
and expansion, they may also be relevant to us in our role as an enforcement
agency.

6.98

Section 27 and 28 of the Commerce Act already apply to exclusivity clauses inleases and restrictive covenants, respectively. Restrictive covenants and exclusivity
covenants in leases may breach sections 27 and/or 28 of the Act:6.98.1597
598

section 27 prohibits the entering into or giving effect to a contract,
arrangement or understanding containing a provision which has the
purpose, effect, or likely effect of substantially lessening competition in amarket; and/or598[
Commerce Act 1986, s 27.

].

218

6.98.2

6.99

section 28 prohibits the requiring or giving of, or enforcing, a covenantthat has the purpose, effect or likely effect of substantially lessening
competition in a market. Such covenants are unenforceable.599

Independent of this study, we have been reviewing whether there are any historicor ongoing matters raised in the context of the use of restrictive covenants andexclusive covenants in leases that might be at risk of breaching these provisions of
the Commerce Act. We will continue to consider whether all or some of thesematters warrant prioritisation for further investigation. We discuss this further in
Chapter 9.600

Land banking
6.100

We are aware that the major grocery retailers identify, acquire, and hold land(including suitable store sites) without specific plans for using that land for theiroperations within a set timeframe (also known as land banking).601 Land banking
was mentioned by stakeholders in submissions on our preliminary issues paper as
being a factor which may impact on entry and expansion.602

6.101

Our starting point when assessing the effect of land banking on the conditions forcompetition is that it has the potential to impede entry and expansion by restricting
the ability of competing retailers to access a key input in the form of suitablesites.603 The extent to which land banking impacts on the ability of a new entrant orexisting firm to find a suitable site would depend largely on factors such as thenumber of alternative sites available and the length of time which land is held for(the longer the period between the acquisition and development of a site, thegreater the impact it has on entry and expansion).

599
600

601
602

603

Commerce Act 1986, s 28.
Commerce Commission “Enforcement Response Guidelines” (October 2013)https://comcom.govt.nz/__data/assets/pdf_file/0030/62589/Enforcement-Response-GuidelinesOctober-2013.pdf.
[].
Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at [37] – mentions land banking to prevent potential rivals from establishing a presence; NZFGC“Submission on retail grocery market study preliminary issues paper” (4 February 2021) at [135] –mentions land banking as a well-established strategic barrier to entry and expansion.
The UK Competition Commission’s groceries market investigation also discussed land banking as apotential barrier to entry or expansion, UK Competition Commission “The supply of groceries in the
UK market investigation” (30 April 2008) at [7.69].

219

6.102

Over the period of time we have examined, we have identified over 200 sites held(owned or leased) or previously held by the major grocery retailers which either
were not used or have ceased being used for supermarket development. Thesesites appear to be located across the country, with the majority in major urban
areas (eg, Auckland and Christchurch).604 At least 30 of these sites have been heldor were previously held by the major grocery retailers for more than 20 years. 605
This provides an indication that there are a number of sites which may have beenland banked (and the corresponding impact of any land banking which may havetaken place).

6.103

The acquisition and holding of land is often necessary for grocery retailers for arange of reasons such as planned supermarket development, planned warehousedevelopment, carparking or developing a property portfolio for investment
purposes (ie, aggregating a number of contiguous titles as they become available).

6.104

Information we have gathered indicates that the major grocery retailers tend to
take a long-term approach towards store development, which includes identifying
and acquiring suitable sites or sites which may become suitable for future
supermarket development (eg, based on forecast or anticipated population growth
and residential expansion well in advance on a prospective basis) as they become
available.606

6.105

However, grocery retailers may also have other reasons for acquiring and holding
potential retail grocery sites – including to prevent use of that land by competing
grocery retailers. Where land is acquired and held without being utilised, this canhave an effect on entry and expansion conditions by reducing the availability ofsuitable sites.

604
605
606

[
].
[
].
Foodstuffs NI commented “We don’t land bank, if that’s a term that means we hold assets for thesake of holding out others, we strategically buy land well ahead for the reasons that I’ve described,
and we need to do that to ensure that we can provide supermarkets for our customers in the futurecause it takes a long time”, Transcript of Grocery Market Study Conference – Day 5 (28 October 2021)
at 23 (lines 13-16);
[
];
[
].

220

6.106

In general, as discussed at paragraph 6.91, the preferred strategy from the major
grocery retailers appears to be to use restrictive covenants or exclusivity covenantsin leases to impede store development by competitors. We have seen relatively
few instances of the major grocery retailers buying and holding land for significant
lengths of time primarily for this purpose.607 These sites generally appear to be soldonce their purpose is fulfilled (potentially after lodging a restrictive covenant).608

607

[
];
[
];
[
].

608

[

];
[
];
[

].

221

6.107

There appears to have been instances when the potential for a competitor topurchase or acquire a site is taken into consideration when making decisions
regarding the purchase of land.609 However, in the decisions we have reviewed, thiswas usually one of a number of factors considered in the decision-making process
as opposed to being the primary driver.

6.108

We note that land banking is likely to be relatively costly as it would involve paying
the purchase price for land and any subsequent costs associated with holding theland for extended periods of time (including the capital servicing costs).610

Land banking under the Commerce Act
6.109

While we have discussed land banking as a factor relevant to our study due to its
potential to prevent or slow entry and expansion, it may also be relevant to us in
our role as an enforcement agency.

6.110

Land banking may, in some circumstances, contravene section 47 of the Commerce
Act,611 which relates to anticompetitive acquisitions, or otherwise section 27,612
which relates to anticompetitive agreements.

6.111

Independent of this study, we have been reviewing whether there are any historicor ongoing matters raised in the context of the acquisition of land that might be atrisk of breaching these sections of the Commerce Act. We will continue to consider
whether all or some of these matters warrant prioritisation for further
investigation.613

609

[
];
[
];
[
].

610

[
611
612
613

].
Commerce Act 1986, s 47.
Commerce Act 1986, s 27.
Commerce Commission "Enforcement Response Guidelines" (October 2013)https://comcom.govt.nz/__data/assets/pdf_file/0030/62589/Enforcement-Response-GuidelinesOctober-2013.pdf.

222

Position on restrictive covenants, exclusivity covenants in leases, and land banking
6.112

In summary, while land banking, restrictive covenants and exclusivity covenants inleases in relation to sites which would otherwise be suitable for grocery store
development create similar reductions in site availability, our view is that restrictive
covenants and exclusivity covenants in leases are currently more likely to be moreof a concern.
6.112.1

While there are a number of legitimate and potentially pro-competitive
commercial reasons for grocery retailers to acquire and hold land (forexample, future development of their own stores), we do not consider
there to be similar significant pro-competitive rationales in relation to
many restrictive covenants or exclusivity covenants in leases, particularly
those with relatively lengthy durations.

6.112.2

Where parties intend to restrict a competitor’s ability to enter or expand,they would appear more likely to do so using restrictive covenants andexclusivity covenants in leases than land banking given the costs
associated with acquiring and holding land for extended periods of time.

6.112.3

However, we note that if restrictive covenants and exclusivity covenantsin leases were no longer options for restricting entry and expansion bycompetitors, there might be a subsequent increase in the use of landbanking for these purposes.614

Relative significance of different factors impacting on site availability
6.113

614

615

616

NZ Initiative commented in its submissions and at the conference that restrictive
zoning policies are the primary reason for limited availability of sites for grocery
retail development.615 Its view is that restrictive covenants and exclusivity
covenants in leases only impact site availability due to restrictive zoning limiting thenumber of sites which can be developed into supermarkets. In accordance with thisview, the NZ Initiative has also suggested doing additional mapping work to better
understand the relative impact of current zoning policies on site availability. 616

NZFGC has also made similar comments on this point, Transcript of Grocery Market Study Conference– Day 5 (28 October 2021) at 19 (lines 35-37).
Comments by NZ Initiative, Transcript of Grocery Market Study Conference – Day 5 (28 October 2021)
at 20 (lines 7-14). Foodstuffs NI and Woolworths NZ also endorsed this view: Foodstuffs NI “Postconference submission on Market study into grocery sector” (3 December 2021) at [214];
Woolworths NZ “Submission on Market study into grocery sector draft report” (24 November 2021) at
38.
The NZ Initiative suggested assessing the actual number of sites that could become supermarkets inexisting council plans, and the proportion of those sites that are not already encumbered bycovenants restricting against their use in grocery retail, Transcript of Grocery Market Study
Conference – Day 5 (28 October 2021) at 20 (lines 15-20).

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6.114

We agree that zoning policies are likely to fundamentally impact on site availability
for supermarket development. We have not conducted additional mapping as we
do not think it will significantly impact our view that there is likely room to provide
a more permissive path towards the enablement of retail grocery store
development.

Cost advantages available to the major grocery retailers
6.115

The major grocery retailers have significant cost advantages over other grocery
retailers and new entrants. They are able to:6.115.1

generate cost efficiencies through vertically-integrated wholesale anddistribution;617

6.115.2

access economies of scale by spreading their fixed costs across large
volumes or numbers of stores, achieving lower costs per unit;

6.115.3

receive lower product prices due to:6.115.3.1 purchasing terms (including volume discounts);618 and6.115.3.2 supplier promotional funding (also known as trade ormarketing terms);619 and

617

[

618

619

]. An article by Betancourt and Malanoski suggested that“supermarkets exhibit constant marginal costs with respect to the quantity of output or turnover andsubstantially declining marginal costs with respect to (distribution) services, which implies substantial
multiproduct economies of scale”, Betancourt, R., and M. Malanoski “An Estimable Model ofSupermarket Behavior: Prices, Distribution Services and Some Effects of Competition” Empirica 26(1999):55-73, at 1, available at: http://econweb.umd.edu/~betancourt/distribution/estimable.pdf.
This refers to the price paid for products, less volume discounts and supply chain related services
offered by the retailer: Foodstuffs NI “Post conference submission on Market study into grocery
sector” (3 December 2021) at 78; Foodstuffs SI “Post conference submission on Market study into
grocery sector” (3 December 2021) at 47.
This refers to the amounts that suppliers pay retailers to market, promote and discount theirproducts: Foodstuffs NI “Post conference submission on Market study into grocery sector”(3 December 2021) at 78; Foodstuffs SI “Post conference submission on Market study into grocery
sector” (3 December 2021) at 47. The major grocery retailers have indicated that this is a significant
factor impacting the net cost price which they receive for products. For example, Woolworths NZ
indicated promotional funding lowers the effective cost it pays for goods by an average of [ ] of a
supplier’s upfront cost (and often much more for larger multinationals), Woolworths NZ “Postconference submission on Market study into grocery sector” (24 November 2021) at 81.
[
].

224

6.115.4

receive lower fees (eg, merchant service fees).620

6.116

Submitters and conference participants generally agreed that factors such asvertical integration and economies of scale deliver significant benefits to grocery
retailers and allow them to compete more effectively.621

6.117

Comments by the major grocery retailers indicated their view that scale advantages
are not required to compete effectively, and that there is no minimum scalerequired for entry.622 They mentioned that retailers can overcome the costadvantages discussed above by:
6.117.1

using global economies of scale (eg, Costco, Aldi);623

6.117.2

using differentiated business models (eg, online only, smaller retail sites)
to drive lower costs;624

6.117.3

focussing on different aspects of PQRS (eg, product differentiation);625

620

[
].
621

622

623

624

625

Woolworths NZ mentioned that its scale and vertical integration deliver significant efficiency benefits.
It also noted that its business model is highly sensitive to scale, with unit costs likely to go up if its
scale is impacted by our recommendations, Transcript of Grocery Market Study Conference – Day 5(28 October 2021) at 8 (lines 6-17); Foodstuffs NI noted that volume results in price advantages, andthat economies of scale and volume discounts are common features of retail sectors, Transcript ofGrocery Market Study Conference – Day 5 (28 October 2021) at 10 (lines 21-24); A number ofsubmissions commented on the benefits of vertical integration in grocery retailing and/or theprevalence of vertically integrated overseas grocery retailers, for example: Woolworths NZ“Submission on Market study into grocery sector draft report” (10 September 2021) at 43-44;
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at
99; Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021)
at 81; The Warehouse Group “Post conference submission on Market study into grocery sector”(23 November 2021) at 2; Northelia “Post conference submission on Market study into grocery
sector” (29 November 2021) at 8.
Woolworths NZ indicated that there is no minimum scale or pre-requisite model required for entry byan effective competitor, and that it faces competition on a range of different dimensions, Transcriptof Grocery Market Study Conference – Day 5 (28 October 2021) at 8 (lines 1-6); Foodstuffs NI andFoodstuffs SI indicated that there is no minimum scale required for entry and that retailers do notneed access to scale or efficiencies to compete on price, Foodstuffs NI "Post conference submission
on Market study into grocery sector" (3 December 2021) at [145]-[147]; Foodstuffs SI “Postconference submission on Market study into grocery sector" (3 December 2021) at [123]-[125].
Comments regarding global scale: comments by Woolworths NZ, Transcript of Grocery Market Study
Conference – Day 5 (28 October 2021) at 9 (lines 1-2); Foodstuffs NI “Submission on Market study into
grocery sector draft report” (10 September 2021) at [327]; Foodstuffs SI “Submission on Market study
into grocery sector draft report” (10 September 2021) at [296].
Comments regarding differentiated business models: see Foodstuffs NI "Post conference submission
on Market study into grocery sector" (3 December 2021) at [147.2]; Foodstuffs SI “Post conference
submission on Market study into grocery sector" (3 December 2021) at [124].
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[326]. Foodstuffs SI “Submission on Market study into grocery sector draft report”(10 September 2021) at [296].

225

6.117.4

entering at a small scale and subsequently scaling up;626

6.117.5

using joint buying groups to access volume discounts.627

6.118

Scale is a factor which provides the major grocery retailers with cost advantages
over other retailers and entrants. This is consistent with comments from the major
grocery retailers which highlight the importance of scale in driving unit costs down
for their businesses.628 New entrants and retailers would therefore need to find away to overcome the inherent cost disadvantages they face in order to compete
effectively on price with the major grocery retailers.

6.119

We have been told that scale is a requirement for an online-only grocery retailchannel to be successful.629 We acknowledge that some of the methods suggested
in paragraph 6.117 may assist retailers when entering or expanding in the retailgrocery sector (either by allowing them to access the benefits of scale or mitigating
the impact of cost disadvantages associated with lack of scale). However, we view
them as ways of attempting to overcome the inherent cost disadvantages faced byretailers and entrants which lack scale, rather than demonstrating that scale is not
required for effective entry and/or competition.

6.120

Even if retailers were to enter or expand using these methods (which, as discussed
in Chapter 5, they have), our view remains that access to scale is a factor impacting
on entry and expansion.
6.120.1

626

627

628

629

Inability to access scale benefits which are available to the major grocery
retailers is inherently a factor limiting the effectiveness of competition(particularly price competition but also competition in the range ofgoods available and the provision of a convenient one-stop shopping
experience) in the sector. As discussed in paragraph 5.98, we consider
that observed and imminent entry and expansion is unlikely to present asignificant competitive constraint on the major grocery retailers.

Comments by Woolworths NZ, Transcript of Grocery Market Study Conference – Day 5(28 October 2021) at 8 (lines 31-33).
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [18]; Foodstuffs NI "Post conference submission on Market study into grocery sector"(3 December 2021) at [147.3].
Woolworths mentioned that its scale and vertical integration deliver significant efficiency benefits. It
also noted that its business model is highly sensitive to scale, with unit costs likely to go up if its scale
is impacted by our recommendations, Transcript of Grocery Market Study Conference – Day 5(28 October 2021) at 8 (lines 6-17); Foodstuffs NI noted that volume results in price advantages, andthat economies of scale and volume discounts are common features of retail sectors, Transcript ofGrocery Market Study Conference – Day 5 (28 October 2021) at 10 (lines 21-24).
Comments by Supie, Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 4(lines 34-40).

226

6.120.2

We also note that the effectiveness of these proposed methods ofovercoming scale disadvantages is unclear. For example, Supie (online
only) and Night ‘n Day (smaller retail sites) use differentiated businessmodels, but still have difficulty accessing competitively priced supply of
products due to lack of scale.630

6.121

Our view remains that cost disadvantages generated by the inability of otherretailers and entrants to access economies of scale are currently and are likely tocontinue to remain a significant factor impacting on entry and expansion.

6.122

The ability of the major grocery retailers to generate cost efficiencies for thereasons listed in paragraph 6.115 does not inherently raise competition issues.
Economies of scale, volume discounts and vertical integration are all common
features of a number of other retail sectors and overseas grocery markets. They
generate significant efficiency benefits which ultimately benefit consumers if they
are passed on in the form of lower prices.

6.123

However, incumbent firms’ access to these cost efficiencies mean that they arelikely to have cost advantages over new entrants that are not vertically integrated
or operating at scale.

6.124

This is likely to make it difficult for new entrants and other grocery retailers toenter, expand, and compete effectively on price, even while operating at a small
scale. This will also reduce their ability to gain market share by growing theircustomer base, and will, in turn, reduce their ability to achieve economies of scaleor receive lower prices from buying in bulk and/or negotiating competitive supplierpromotional funding terms. Statements by existing retailers indicate that this has
impacted on their ability to compete.631

630

631

Night ‘n Day indicated that it is currently unable to obtain competitive prices for grocery products,
Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 26 (lines 9-12); Supie
indicated that it has limited access to competitive pricing from suppliers due to a lack of scale,Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 26 (lines 40-41).
Supie mentioned that scale (to receive competitive pricing and to lower per unit costs) is required tocompete effectively with the major grocery retailers, and that it does not currently have sufficientscale to be an effective competitor, Transcript of Grocery Market Study Conference – Day 5(28 October 2021) at 4 (line 35) to 5 (line 4). Night ‘n Day indicated that the significant difference inscale between the major grocery retailers and other grocery retailers is an issue, Transcript of GroceryMarket Study Conference – Day 5 (28 October 2021) at 5 (lines 37-40).

227

6.125

While we have observed that other grocery retailers are able to compete with the
major grocery retailers on price in relation to some products, they are unable to doso for the full range of groceries (as discussed in Chapter 4). This is likely because
they:
6.125.1

may receive less competitive prices from suppliers due to their lower
volumes and apparent inability to access comparable promotional
funding terms;632

6.125.2

do not enjoy economies of scale and scope in wholesaling, warehousing
and distribution;633 and6.125.3

are unable to spread their fixed costs across significant retail volumes as
the major grocery retailers do.

6.126

As a result, other grocery retailers generally differentiate their offering using
non-price factors such as product range (as discussed in Chapter 4). This indicatesthat the cost efficiencies which major grocery retailers are able to access are likely
to restrict the extent to which there can be effective large-scale entry, expansion
and competition for consumer spend across all shopping missions.

6.127

In summary, the major grocery retailers’ significant cost advantages resulting fromfactors such as economies of scale are in our view likely to be limiting effective
entry and expansion and hence direct competition with the major grocery retailers.
However, the scale factor would be less important if entrants were able to access afull range of competitively priced groceries. This is discussed in greater detail in thefollowing section.

632

[
];
[
];
[
].

633

[
[
[
[

];
];
];
].

228

Wholesale access to grocery products
6.128

A grocery retailer cannot provide a widespread, full range, competitively priced
offering without first obtaining groceries on reasonable terms from either a rangeof suppliers or a grocery wholesaler.634 This section explores the extent to whichwholesale access to grocery products – as one mechanism of obtaining
competitively priced offerings – is impacting on the conditions of entry andexpansion.

6.129

It is not uncommon in overseas grocery markets for large incumbent firms to bevertically integrated in terms of performing both retail and wholesale functions.

6.130

However, a key feature of some overseas grocery markets is the presence ofsignificant grocery wholesalers (eg, C&S Wholesale Grocers in the US, Bestway in
the UK). Wholesaling provides the ability to purchase in bulk and negotiate lower
prices by aggregating volumes from smaller grocery retailers, and can also generatecost efficiencies by organising centralised storage (eg, at their own warehouses)and distribution to retail stores.

6.131

Coriolis argued that, worldwide, there are no “independent wholesalers” left apartfrom Metcash (which is changing its business model), where “independent
wholesaler” is defined as a separately owned, non-aligned, stand-alone “broadline”
wholesaler of a full range of everyday groceries at competitive prices enabling any
and all independent stores to compete with chain store operators in their region.
We do not consider this statement inconsistent with our observation that there iswholesale available in other jurisdictions as those wholesalers may not meet someelements of the Coriolis definition of an “independent wholesaler” (eg, they may
not be independently owned).635

6.132

Grocery retailers who purchase from competitive grocery wholesale markets
therefore have the potential to receive lower prices than they would likely be able
to negotiate from suppliers directly,636 in addition to reducing transaction costs.

634

635

636

In this context “competitively priced” refers to prices which enable other grocery retailers to compete
effectively with the major grocery retailers.
Coriolis "Post conference submission on Market study into grocery sector" (18 November 2021) at[42-44].
We note that whether or not this potential is realised may depend on the extent to which there iseffective competition between grocery wholesalers. A single large independent wholesaler ofgroceries may not be incentivised to charge competitive prices to its customers.

229

Availability of wholesale in New Zealand
6.133

Current wholesale options for a full range of groceries at competitive prices andassociated services in New Zealand are limited. This was generally supported bysubmitters and participants at the conference.637

6.134

We are aware that wholesale options exist for sourcing some product categories in
New Zealand such as fresh produce (eg, T&G Fresh and MG Marketing) andmeat.638
6.134.1

637

638

639

We also note retailers have indicated that they are able to acquire somegroceries from wholesalers of imported products (eg, AB International,
Acorn Group, Tai Ping, Asian Savour). This appears to largely be the casefor international products (eg, Indian, Chinese, Korean) and somecategories of globally branded products (eg, confectioneries).639
However, we note that importing may not provide access to locallybranded products, including some core brand products which consumers
expect to see in a supermarket.

Night ‘n Day indicated that retailers do not have access to cost-effective purchasing due to a lack of
independent wholesale, Transcript of Grocery Market Study Conference – Day 1 (21 October 2021) at
23 (lines 17-21); Supie indicated that current wholesale offerings are not viable in terms of cost,
range, and consistency of supply, Transcript of Grocery Market Study Conference – Day 5(28 October 2021) at 26 (lines 19-23); Monopoly Watch "Post conference submission on Market study
into grocery sector" (29 November 2021) at 10; Hexis Quadrant "Post conference submission onMarket study into grocery sector" (1 December 2021) at 37; NZFGC "Post conference submission onMarket study into grocery sector" (25 November 2021) at [2.3].
See Beef + Lamb NZ’s website for examples of meat suppliers and wholesalers
https://www.beeflambnz.co.nz/suppliers.
[
];
[
].

230

6.134.2

There are some larger suppliers which can essentially perform awholesale function in some product categories (eg, bread and milk)
through a “direct store delivery” model.640 While directly purchasingfrom suppliers may be an option in relation to some product categories,
information provided by other grocery retailers indicates that purchasing
directly from suppliers may not be a viable option in many instances. As
the major grocery retailers purchase large volumes directly, they
commonly receive volume discounts and promotional funding terms
which other grocery retailers are unable to match.641 Some suppliers also
impose volume requirements (such as requiring minimum order
quantities) which render it difficult for other grocery retailers or new
entrants to purchase directly.642

6.134.3

While the major grocery retailers own and operate firms which perform
wholesale functions, receiving wholesale supply of a full range ofgroceries from these firms does not appear to be a viable option for
most other grocery retailers.643
6.134.3.1 Wholesale Distributors Limited, which is owned by
Woolworths NZ, does not wholesale to New Zealand grocery
retailers other than those associated with Woolworths NZ(eg, FreshChoice and SuperValue stores).644

640

641

The potential for retailers to receive supply of products directly from suppliers was emphasised by the
major grocery retailers in submissions following our draft report: Woolworths NZ “Submission onMarket study into grocery sector draft report” (10 September 2021) at [5.5]; Foodstuffs NI “Postconference submission on Market study into grocery sector” (3 December 2021) at [221].
Above n 632.

642

[
643

644

].
Night ‘n Day indicated that wholesale supply by the major grocery retailers has the potential to givethem insights into a competing retailer’s business, and further enhances their buying power with
suppliers, Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 6 (lines 4-19).
[
].

231

6.134.3.2 Trents (which is owned by Foodstuffs SI) and Gilmours (whichis part of Foodstuffs NI) are primarily foodservice
wholesalers. Trents supplies some products to dairies, andGilmours also supplies some products to grocery retailers(primarily convenience stores, petrol stations, and dairies).645
However, information provided indicates that they have a
different offer from supermarkets, and that supermarkets
such as PAK’nSAVE is often a better product sourcing option
for other grocery retailers (eg, convenience stores) in terms
of price or product availability.646
6.134.3.3 Information we have received indicates that prices charged
by Gilmours and Trents for some products are, in someinstances, higher than the prices charged at supermarkets forthe same products (Night ‘n Day indicated at the conference
that the price difference was approximately 43%).647
6.134.4

645

646

TheMarket has been cited by the major grocery retailers as being a
potential option for grocery wholesale. Information provided by The
Warehouse Group indicates that TheMarket does not directly sellgroceries. Rather, it is largely an e-commerce platform which allows
merchants to list their products and sell to consumers.648 TheMarket
does not appear to be a significant source of supply of groceries.649

[
[

];
].

[
[

];

].

647

Comments by Night ‘n Day, Transcript of Grocery Market Study Conference – Day 1 (21 October 2021)
at 24 (lines 9-13); Foodstuffs NI indicated the price differential can be attributed to factors such as
Gilmours benefiting from volume discounts but not trade and marketing spend, and needing to add
services (for example, delivery, account management), Transcript of Grocery Market Study
Conference – Day 5 (28 October 2021) at 29 (lines 27-33); Cathie Gould “Post conference submission
on Market study into grocery sector” (23 November 2021) at 2;
[
];
[
].

648
649

The Warehouse Group “Comments on submissions on preliminary issues paper” (12 April 2021).
The Warehouse Group “Comments on submissions on preliminary issues paper” (12 April 2021). The
Warehouse noted that less than 0.6% of products offered on TheMarket are grocery related.

232

6.134.5

6.135

We are aware that Night ‘n Day currently receives supply of somegrocery products from Woolworths NZ. This indicates that smaller
retailers may be able to enter into commercial negotiations with the
major grocery retailers to get access to a wide range of products.650
However, we understand that Woolworths NZ’s assets and grocery
supply chain are not currently set up for large-scale third-party wholesale
supply, and that significant system and process overhaul and investment
would be required to provide this.651

Major grocery retailers display a large degree of vertical integration, which (while
likely an efficient outcome for the major grocery retailers) contributes to the lack ofavailability of competitively priced wholesale options for other retailers seeking
access to a full range of grocery products and brands in New Zealand. We haveobserved that other supermarkets negotiate with and purchase directly from large
numbers of suppliers and arrange distribution to their stores, which may include
the operation of their own warehouses and distribution centres.652

650

Comments by Night ‘n Day, Transcript of Grocery Market Study Conference – Day 6(1 November 2021) at 36 (lines 14-15).
[
].

651

Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [5.3].
[
].

652

[
[
[

];
];
].

233

6.136

As discussed in paragraph 6.134.2, other grocery retailers have consistently
indicated that they generally receive less competitive prices than the major grocery
retailers when purchasing from suppliers directly due to differences in scale. 653 We
are aware that in at least some instances, wholesale prices offered by suppliers toconvenience stores and dairies may be higher than prices displayed in retailsupermarkets.654 The presence of volume requirements (eg, minimum order
quantities) may prevent some retailers or new entrants from purchasing from some
suppliers entirely.655

Potential for increased wholesale availability in future
6.137

Woolworths NZ, Foodstuffs NI and Foodstuffs SI submitted that there could beother avenues for accessing wholesale services in the market such as current
foodservice wholesalers that could pivot to supplying groceries.656 Woolworths also
submitted that potential or future international entrants (Costco and Metcash)
could potentially perform a wholesale function. However, we do not consider these
are likely to be viable options for wholesale supply of a full range of groceries.

Foodservice wholesalers as a grocery wholesale option
6.138

Foodservice wholesalers which are owned by, or are part of, the major grocery
retailers (Gilmours and Trents) supply some groceries to some grocery retailers(primarily convenience stores, petrol stations and dairies). However, as discussed atparagraph 6.134.3, they may not be a viable source of wholesale for a full range ofgroceries.

6.139

Woolworths NZ noted that the investment requirements (eg, distribution centre,
logistics and transport) would be the same for a grocery and foodservice
wholesaler, and that both Bidfood and Service Foods have made suchinvestments.657

653

Night ‘n Day indicated that it is currently unable to obtain competitive prices for grocery products,
Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 26 (lines 9-12); Supie
indicated that it has limited access to competitive pricing from suppliers due to a lack of scale,Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 26 (lines 40-41);
above n 632.

654

[
];
[
].
655
656

657

Above n 642.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 63; Foodstuffs NI “Submission on retail grocery market study preliminary issues
paper” (4 February 2021) at 28-29; Foodstuffs SI “Submission on retail grocery market study
preliminary issues paper” (4 February 2021) at 18-19.
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [31.3].

234

6.140

While foodservice wholesalers (eg, Bidfood, Service Foods, Trents and Gilmours)
may have the infrastructure required to wholesale grocery products, they operate
in a different market from grocery wholesalers, and do not appear to be a viable
source of a full range of groceries. Key reasons for this include:
6.140.1

many of their products are sold in formats that are suitable forfoodservice but not retail grocery (eg, in bulk as opposed to
packaged);658 and6.140.2

their likely inability to obtain competitive prices from suppliers if they
were to purchase groceries suited to retail grocery sale due to low
purchase volumes.659

6.141

In addition, as discussed at paragraph 6.170, it is our view that the level ofconcentration in the retail grocery sector could present challenges for potential
grocery wholesale entrants by significantly limiting their potential customer base.

6.142

We are not aware of any foodservice wholesalers which supply groceries to grocery
stores on a significant scale.660 In addition, we have not seen evidence of any
specific plans by independent foodservice wholesalers to expand into selling more
groceries.661

Potential or future international entrants as a grocery wholesale option
6.143

Woolworths NZ submitted that Costco’s entry into New Zealand will provide
another significant cash-and-carry option for retailers, and that Metcash alreadyhas a sizeable presence in New Zealand via its liquor business (Tasman Liquor,
Bottle-O), which would provide a basis on which to expand in New Zealand.662

6.144

We have not received any information or evidence regarding specific plans forentry by a potential wholesale entrant (eg, Metcash) offering a full range of grocery
products and brands into the New Zealand grocery sector.663

658

659

[
[
[

];
].
].

660

[
];
[
].
661

662

663

[
[
[

];
];
].

Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 63.
[
].

235

6.145

664

We anticipate that Costco’s prices may be significantly lower than those currently
charged by the major grocery retailers, raising the possibility that it could be awholesale option for grocery retailers.664 However, there are some key limitations
to Costco as a wholesale option for grocery retailers.
6.145.1

Costco purchases large quantities of branded products (eg, one brand ofa type of product) in order to achieve higher volumes and negotiate forlower prices.665 This means that it is unlikely to stock a wide variety ofbrands available for purchase at wholesale by grocery retailers. The
larger package sizes of its products may also be unsuitable for sale byother grocery retailers.

6.145.2

Woolworths indicated that it did not agree Costco’s pack sizes or range
would restrict its viability as a potential wholesale supply option to
grocery retailers, mentioning that Costco is still estimated to have morethan 3700 SKUs.666 We understand that these 3700 SKUs include all
product categories stocked by Costco, including non-grocery products(eg, whitegoods).667 As such, the number of grocery SKUs stocked at
Costco is likely to be significantly lower than 3700. We also understandthat the number of grocery product SKUs stocked by Costco issignificantly lower than the number of SKUs typically offered at asupermarket, and Costco is unlikely to have a wide variety of brands forgrocery wholesale purposes.668

6.145.3

Costco’s focus is on providing its members with quality goods andservices at the lowest possible price. Its aim is to provide good value toits customers, which involves a constantly rotating product range.669 Thismeans that Costco does not carry a core range of products outside of key
commodities such as flour. While Costco may be a viable option forfoodservice customers, the lack of certainty involved in its product range
may also make it difficult for a grocery retailer to consistently source afull range of products.

[
[

];
].

665

[

666

Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [31.5.1].
Costco Wholesale 2020 Annual Report, available at: https://investor.costco.com/staticfiles/7ef7bed6-c48f-4687-9c82-eb104b4823a5.
Costco Boolaroo Economic Impact Assessment on behalf of Costco Wholesale Australia Pty Ltd(10 November 2020) at 10, available at:https://apps.planningportal.nsw.gov.au/prweb/PRRestService/DocMgmt/v1/PublicDocuments/DATAWORKATTACH-FILE%20PEC-DPE-EP-WORK%20PPSHCC-53!20201117T004625.536%20GMT.

667

668

].

669

[
].

236

6.145.4

Costco has confirmed that it intends to open one store in Auckland, andit appears that it is actively looking for store sites in Christchurch andWellington.670 However the development of additional stores may
depend on the success of its Auckland store.671 Unless it expands its
store network further, Costco may not be a significant wholesale option
for many grocery retailers due to the locational constraints involved with
only having one store (or a potential three stores).
6.145.4.1 Similar to its views on Costco as a retail competitor,
Woolworths NZ indicated that Costco’s viability as a grocery
wholesaler would not be restricted by its small number ofstores, due to the large catchment areas of its stores.
6.145.4.2 Woolworths NZ noted that Costco offers delivery for businesscustomers within 20 km from one of its stores in Australia.672
If Costco was to make a similar offering from its planned store
in Auckland, this would likely reduce the impact of thelocational constraints for some retailers located in Auckland.
However, this would not materially impact the wholesale
availability constraints we have identified for retailers inother regions.

670

671

672

Melanie Carroll Stuff “Costco delays its New Zealand launch, but is actively looking for additionalsites” (29 October 2020) https://www.stuff.co.nz/business/industries/123230944/costco-delays-itsnew-zealand-launch-but-is-actively-looking-for-additional-sites;[]; Woolworths NZ "Post conference submission on Market
study into grocery sector" (24 November 2021) at [24.4.1].
RadioNZ “Costco experience opens in NZ mid-August” (9 February 2022)
https://www.rnz.co.nz/national/programmes/first-up/audio/2018829795/costco-experience-opensin-nz-mid-august.
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [31.5.2].

237

6.146

Woolworths NZ noted that economic analysis prepared on behalf of Costco
indicated that Costco’s estimated sales-to-business customers are generally in theorder of 30% of total sales in Australia.673 However, the analysis indicated that the
30% of total sales was attributable to eight different categories of “businesscustomers”, including independent restaurants and take-away food outlets,
professional businesses (doctors, lawyers, consultants etc), and hotels andmotels.674 As “small supermarkets and convenience stores” was only one of theeight categories of business customers, sales to grocery retail customers are likely
to be significantly lower than 30% of total sales.

6.147

We are not aware of any factors which are likely to significantly change the current
lack of competitively priced wholesale for a full range of grocery products andbrands in the New Zealand grocery sector.

Impact of wholesale availability on different types of retailers
6.148

The lack of wholesale options for a full range of groceries is likely to havesignificantly different impacts on entry and expansion for different types ofretailers.

6.149

The major grocery retailers told us that lack of wholesale access to grocery
products is not a significant impediment to entry and expansion. They indicatedthat new entry and expansion is likely to be from vertically-integrated retailers
which are unlikely to use a wholesaler, as demonstrated by recent or planned entry
and expansion into the grocery sector by:675

673

674

675

6.149.1

larger retailers (eg, Costco, The Warehouse);

6.149.2

meal kit providers (eg, Hello Fresh, My Food bag); and6.149.3

other retailers (eg, Farro Fresh).

Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [31.4.1]. Costco Boolaroo Economic Impact Assessment on behalf of Costco Wholesale Australia Pty
Ltd (10 November 2020), at 11, available at:https://apps.planningportal.nsw.gov.au/prweb/PRRestService/DocMgmt/v1/PublicDocuments/DATAWORKATTACH-FILE%20PEC-DPE-EP-WORK%20PPSHCC-53!20201117T004625.536%20GMT.
Costco Boolaroo Economic Impact Assessment on behalf of Costco Wholesale Australia Pty Ltd(10 November 2020), at 10-11, available at:https://apps.planningportal.nsw.gov.au/prweb/PRRestService/DocMgmt/v1/PublicDocuments/DATAWORKATTACH-FILE%20PEC-DPE-EP-WORK%20PPSHCC-53!20201117T004625.536%20GMT.
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [31.1]; Foodstuffs NI “Submission on Market study into grocery sector draft report”(10 September 2021) at [400]; Foodstuffs SI “Submission on Market study into grocery sector draft
report” (10 September 2021) at [335].

238

6.150

They also indicated that based on our analysis, meaningful competition is more
likely to come from entry and expansion of globally vertically-integrated retailers(eg, Costco, Aldi) than retailers which are likely to use wholesale access (eg,convenience stores and dairies).676

6.151

Some of the retailers specified by the major grocery retailers operate in categories
where wholesale is available (eg, meal kit providers). Others appear largely unable
to receive competitive prices for supply of grocery products and thus differentiate
their offerings on other dimensions of competition.

6.152

We agree that larger retailers which might seek to enter or expand in the retailgrocery market in the future – such as Aldi, Costco and The Warehouse – areunlikely to use wholesale in the long term (or, for some, at all) as they would likely
have sufficient volumes and scale to receive competitive pricing by purchasing
directly from suppliers. However, retailers will often expand their offering (eg,number of stores or range of available products) over time after entering. Access towholesale grocery products may help retailers obtain a competitively priced supplyof grocery products in the short-to-medium term, until they achieve a level of scale
which allows them to receive competitive prices directly from suppliers.677

6.153

While wholesale supply is unlikely to be sought or used over the long term byexisting or aspiring large retailers, wholesale supply may be viewed as an attractive
long-term mechanism for existing small independent retailers and small new
entrants to obtain the full range of competitively priced grocery products needed
for them to provide a competitive offering comparable to the major grocery
retailers.

6.154

Small independent retailers do not have access to competitively priced wholesale ina number of product categories, and would have to negotiate directly with a rangeof suppliers for the purchase of their products.678 They would likely receive lesscompetitive prices than major grocery retailers unless they are able to purchasesignificant volumes, in addition to incurring significant transaction costs.679

676

677

678
679

Woolworths NZ "Post conference submission on Market study into grocery sector"(24 November 2021) at [29.1.5]; Foodstuffs NI “Submission on Market study into grocery sector draft
report” (10 September 2021) at [401.2]; Foodstuffs SI “Submission on Market study into grocery
sector draft report” (10 September 2021) at [336.2].
For example, Northelia suggested that wholesale could assist new entrants during the transitional
period while they build new distribution centres, Northelia “Submission on Market study into grocery
sector draft report” (26 August 2021) at 3. The Warehouse Group also noted that potential large-scale
entrants may seek access to wholesale supply to expedite market entry, but are less likely to use
wholesalers in the medium to long term as they are likely to purchase directly from suppliers once
they have built sufficient scale, The Warehouse Group “Submission on Market study into grocery
sector draft report” (26 August 2021) at 2.
Above n 652.
For example, Supie has indicated that it has limited access to competitive pricing from suppliers due
to a lack of scale, Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 26(lines 40-41);
[
].

239

6.155

We also note that some product categories have larger suppliers which sell core
brand products which consumers would expect to see as part of a supermarket
offering. However, as discussed at paragraph 6.134.2, other grocery retailers haveindicated that they are largely unable to match the prices which the major grocery
retailers receive for products from larger suppliers due to differences in volume.
We have received information indicating that an inability to purchase core brandproducts for a product category at competitive prices may in turn make it difficult
for retailers and new entrants to compete effectively within that product category
even if they are able to source alternative brands.680 As such, inability to accessparticular core brands of products at competitive prices may also hinder a retailer’sability to compete effectively with the major grocery retailers.

6.156

As discussed at paragraphs 6.134 and 6.134.1, there appears to be viable wholesale
options for some grocery product categories (eg, fresh produce, meat, international
products). As such, grocery retailers which largely sell products falling within theseproduct categories, such as international food stores, meal kit providers and somespecialist grocery retailers, appear to have access to wholesale options for the
purposes of their customer offering. These businesses are less likely to have theirentry and expansion impacted by the factors discussed in this section. It seems
plausible that access to wholesalers catering to their needs has facilitated the entryof these differentiated grocery retailers.

6.157

Despite the lack of access to wholesale supply, some small grocery retailers, such as
convenience stores or dairies, generally appear to be able to offer a viable businessproposition at present. However, their inability to obtain a full range of groceries atcompetitive prices (as illustrated by some dairies purchasing products fromsupermarkets at retail prices for resale at their own stores) may impact on theprevalence of such retailers, and likely significantly inhibits their ability to expand
and compete directly with the major grocery retailers on price, and necessitatescompetition on the basis of non-price aspects of PQRS (such as convenience).681

Relevance of wholesale options for a full range of groceries
6.158

We consider that access to competitively priced groceries (whether directly fromsuppliers, or via a wholesaler) is a significant factor affecting the conditions forentry or expansion on a scale sufficient to challenge the major grocery retailers.

680

[
].
681

[
];
[
].

240

6.159

We therefore consider that a lack of wholesale availability for a full range ofgroceries is likely to have a material – albeit limited – impact on the conditions ofentry and expansion in the New Zealand retail grocery sector. In particular, as
discussed above, it is likely to hinder the entry and expansion of small independent
retailers. It may also hinder the entry or expansion of some existing or aspiring
large retailers, which are unlikely to make use of wholesale supply in the long term,
but may make use of it in the short-to-medium term (so as to, amongst otherpossible reasons, reduce capital risk of up-front investments) until they achievesufficient scale in the grocery sector.

6.160

In the absence of comprehensive wholesale supply options, other grocery retailers
and new entrants may:
6.160.1

face high per-unit transaction costs in dealing with a wide range ofsuppliers, given their lack of scale;

6.160.2

be unable to access as wide a range of products as the major grocery
retailers, either due to the transaction costs described above, or because
suppliers do not want to deal with them because of their small scale;

6.160.3

pay a higher per-unit cost for the goods they obtain from suppliers thanthe major grocery retailers, due to their lack of scale; and/or

6.160.4

in some cases, find purchasing goods directly from the major grocery
retailers’ retail stores to be their best option, given the issues describedabove.

Reasons for lack of entry and expansion in the grocery wholesale market
6.161

Demand for wholesale groceries from a sufficiently large customer base of retailers
is a key requirement for viable entry at the wholesale level. Insufficient demand
would limit the volumes that a wholesaler would be able to aggregate fromretailers, in turn limiting their ability to negotiate lower prices from suppliers.

Impact of supplier concentration on demand for wholesale
6.162

682

Foodstuffs NI and Foodstuffs SI submitted that there is not a separate wholesalelevel in the market for the full range of groceries. They submitted that this isbecause concentration at the supplier level across multiple product categories
means that the number of suppliers that a grocery retailer has to deal with is small,and supplier relationships can be effectively managed by grocery retailers without
the need for a comprehensive wholesale functional level of the market.682

Foodstuffs SI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 18-19; Foodstuffs NI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 28-30.

241

6.163

If these submissions are accurate, entry into the grocery wholesale market may beunlikely even if volumes from non-major grocery retailers would otherwise be
sufficient for entry to be viable.

6.164

However, we generally do not consider there is significant concentration at a
supplier level for most groceries.

6.165

683
684
685

6.164.1

We have observed that other supermarkets tend to purchase products
directly from a large number of suppliers.683

6.164.2

Information provided by major grocery retailers also indicates that theyeach purchased from over a thousand suppliers in the 2020 financial
year.684 In addition, the major grocery retailers also appear to deal with
20 or more suppliers in relation to more than 60% of productcategories.685 This suggests that a majority of product categories do notappear to be significantly concentrated.

6.164.3

There may be a degree of concentration in some product categories,
particularly where there are a few core brands of products that
consumers would expect to see as part of a supermarket offering.
However, while the major grocery retailers are able to purchase directlyfrom suppliers of these core brand products at competitive prices, othergrocery retailers appear largely unable to receive competitive prices
from larger suppliers due to lack of scale (as discussed at paragraph6.134.2). This is supported by our observation that other grocery
retailers tend to differentiate their customer offerings (including brandssold) from the major grocery retailers.

We have observed that both major grocery retailers and other supermarkets tend
to purchase from a large number of suppliers, and there does not appear to be asignificant degree of supplier concentration in most product categories. Even in
product categories where there might be some supplier concentration, othergrocery retailers find it difficult to achieve competitive prices. It therefore appears
unlikely that there would be a lack of demand for wholesale resulting from supplierconcentration.

Above n 652.
[
[

].
].

242

Impact of vertical integration by small grocery retailers on demand for wholesale
6.166

686

687

The evidence appears to show that many grocery retailers tend to purchase someproducts directly from a wide range of suppliers. However, this is not necessarily
indicative of a lack of demand for wholesale of a full range of groceries. Rather, it ispossible that small grocery retailers purchase directly from suppliers out ofnecessity given their lack of alternative options. Based on comments made byparticipants at the conference and in submissions, there is likely to be somedemand for wholesale of a full range of grocery products and brands as well as
associated services (eg, distribution and warehousing), both on a short-term andlonger-term basis.686
6.166.1

As discussed at paragraph 6.126, other grocery retailers (including othersupermarkets) have indicated they tend to differentiate their customer
offerings from the major grocery retailers. One key reason for this is thatdifferences in volumes mean that they are unable to receive competitive
prices for the same products or brands. The availability of wholesale
options for a full range of groceries may grant them access to morecompetitive prices for some products than they would be able tonegotiate purely with their own volumes. Chapter 4 discusses how othergrocery retailers largely compete on non-price dimensions.

6.166.2

We also note that other grocery retailers that negotiate and makeindividual distribution arrangements with a large number of individual
suppliers likely incur additional transactions costs, which could be
mitigated to some extent if they had access to centralised distribution
services.687

For example, Night ‘n Day, Supie, and Northelia have indicated that they are likely to form part of thecustomer base for a wholesaler: Transcript of Grocery Market Study Conference – Day 1(21 October 2021) at 23 (lines 15-25); Transcript of Grocery Market Study Conference – Day 5(28 October 2021) at 5 (lines 17-27); Northelia "Post conference submission on Market study into
grocery sector" (29 November 2021) at 11-12.
Above n 633.

243

6.166.3

6.167

Convenience stores and dairies currently do not have a cost-effective
avenue for sourcing a wide range of groceries, which restricts their ability
to move into selling more groceries.688 They would likely be part of aretail customer base for new wholesale service providers selling a fullrange of groceries at competitive prices.

As part of their business model, even with the presence of a wholesale option,some grocery retailers may choose to purchase products directly from smaller
suppliers.689 However, these retailers may nevertheless seek wholesale supply as amechanism for purchasing a wider range of products while still sourcing someproducts directly from smaller suppliers as they are currently doing.

Impact of vertical integration by major grocery retailers on demand for wholesale
6.168

A key factor reducing retailer demand for a full range of wholesale groceries is thefact that the major grocery retailers are unlikely to form part of a potential
wholesale entrant’s customer base. As the major grocery retailers have sufficiently
large volumes to negotiate competitive prices from suppliers and gain efficiencies
by internalising their wholesale and distribution functions, it is unlikely that theywould form part of the contestable customer base for a potential wholesale
entrant selling a full range of groceries.

6.169

The customer base which a potential wholesale entrant selling a full range ofgroceries could potentially service is therefore likely to be limited to grocery
retailers challenging the major grocery retailers.

688

[
];
[
];
[
].

689

[
[

];
].

244

6.170

6.171

690

691

Market share estimates based on existing sales provided in Chapter 4 provide anindication of a potential customer base. However, it appears unlikely that demand
from grocery retailers (excluding the vertically-integrated major grocery retailers)
would form a sufficiently large customer base now or in the future to sustain entry
by an independent wholesaler offering a full range of groceries.
6.170.1

Based on discussions at the conference and in submissions, we are awareof some retailers or potential entrants (eg, Night ‘n Day, Northelia, andSupie) which could form part of the customer base for a grocery
wholesaler.690

6.170.2

However, as discussed in paragraph 6.131 above, there appear to be few
international examples of fully independent wholesalers.

6.170.3

In addition, it is our view that the level of concentration in the retailgrocery sector may well present challenges for potential wholesale
entrants by significantly limiting their potential customer base.
Submitters and conference participants generally agreed with thisview.691

As previously discussed, a lack of wholesale options for a full range of groceries
may in turn limit other grocery retailers’ or potential retail entrants’ abilities tosource products at competitive prices. This may have a compounding “chicken andegg” effect, in that constraints on the number and scale of independent retailers
may limit the viability of entry of an independent wholesaler and the lack of
independent wholesale supply may limit the number and scale of independent
retailers.

Transcript of Grocery Market Study Conference – Day 1 (21 October 2021) at 23 (lines 15-25);
Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 5 (lines 17-27); Northelia"Post conference submission on Market study into grocery sector" (29 November 2021) at 11-12.
For example: Foodstuffs NI “Submission on Market study into grocery sector draft report”(10 September 2021) at [412]; Foodstuffs SI “Submission on Market study into grocery sector draft
report” (10 September 2021) at [347]; comments by Supie, Transcript of Grocery Market Study
Conference – Day 5 (28 October 2021) at 27 (lines 5-8);
[
];
[
].

245

6.172

These factors may make it more difficult for parties to enter the New Zealand retailgrocery sector at either the wholesale or retail levels. Rather, it may be the casethat any potential new entrant looking to compete with the major grocery retailers
at present might need to enter two markets simultaneously (retail and wholesale),thus achieving vertical integration in order to be viable. This would presumably
involve additional costs (eg, start-up capital) and risk, and may be a factor impedingor slowing entry and expansion into the market by making it more difficult to enteror expand on a scale sufficient to challenge the major grocery retailers.692

6.173

As discussed at paragraph 6.24, we are not aware of specific plans for future entry
or expansion into the retail grocery sector by a retailer capable of significantly
constraining the major grocery retailers. As such, we do not have sufficient
information to assess what might be required for a potential supermarket entrant
to achieve the necessary scale required for effective entry at both the retail andwholesale levels.

6.174

However, we understand that Aldi’s method of entry typically involves entering at
both the retail and wholesale levels by building a number of stores (withapproximately 10 stores being cited as a benchmark figure) as well as distribution
centres to service them.693 While this may not be directly applicable to the New
Zealand market, we consider that it still provides a useful indicator of the scale
which may be required for successful entry.

6.175

Comments by Northelia/Monopoly Watch at the conference indicated their viewthat the minimum scale required for a supermarket entrant to be viable would beapproximately 15% market share (at around $3.5 billion) with about 150 stores. 694
However, we have not been provided with the analysis underpinning these figures.

6.176

As illustrated by paragraph 6.171, the likely need to enter at both the wholesale
and retail levels means a significant amount of investment would likely be required
for a supermarket operator to achieve sufficient scale in the New Zealand grocery
sector to challenge the major grocery retailers.

692

For example, comments by Supie – Transcript of Grocery Market Study Conference – Day 5 (28October 2021) at 14 (lines 8-26); Supie "Post conference submission on Market study into grocery
sector" (23 November 2021) at [3.1]-[3.3.3].

693

[
];
[
694

].

Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 7 (lines 4-14).

246

Access to supply chain infrastructure
6.177

The Warehouse Group identified access to end-to-end supply chain infrastructure(including multi-temperature distribution, fulfilment capabilities and a transport
fleet) as a potential factor restricting or hindering entry and expansion bylarge-scale entrants. Its view was that access to supply chain infrastructure would
be more helpful to facilitate entry by larger grocery retailers (which are likely topurchase directly from suppliers in the longer term) than access to wholesale ofgrocery products (which would be more helpful to smaller retailers).695

6.178

There appears to be a number of third-party providers of logistics services, both forambient and temperature-controlled products.696 We also understand that the
major grocery retailers use services provided by third-party logistics providers,
indicating that they are likely to be viable options for a grocery retailer to use. 697
While partnering with a third-party logistics provider may require a retailer tocommit to a certain degree of investment, this appears unlikely to be a significant
factor impeding or restricting entry and expansion by retailers which are entering
at scale.

695

696

697

The Warehouse Group “Submission on Market study into grocery sector draft report”(26 August 2021) at 2.
For example: Halls’ Transport and Americold, which provide logistics services in relation totemperature-controlled products: https://halls.co.nz/about-the-company;
https://www.americold.co.nz/home/services/; Woolworths NZ "Post conference submission onMarket study into grocery sector" (24 November 2021) at [28.3]-[28.5]; comments by Foodstuffs NI,
Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 12 (lines 33-40);
comments by Foodstuffs SI, Transcript of Grocery Market Study Conference – Day 5 (28 October 2021)
at 13 (lines 4-5 and 15-16);[].
Woolworths NZ uses third-party options extensively throughout its supply chain – it has transport andlogistics contracts with third parties and uses Americold as service provider for chilled, Transcript ofGrocery Market Study Conference – Day 5 (28 October 2021) at 13 (lines 20-25); comments by
Foodstuffs NI, Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 12(lines 32-33); Foodstuffs SI indicated that more than 40% of the transport it uses is from third-party
providers (although a majority of this is for ambient products), Transcript of Grocery Market Study
Conference – Day 5 (28 October 2021) at 13 (lines 5-13).

247

6.179

6.180

In addition to the availability of third-party logistics providers, we also note that:
6.179.1

A significant proportion of products sold by the major grocery retailers
are delivered directly to store by suppliers (which also use third-party
providers).698 This indicates that retailers purchasing directly fromsuppliers would presumably also have the option of receiving direct tostore delivery for some products.

6.179.2

Supie was able to vertically integrate by building its own supply chain,
which suggests that building supply chain infrastructure may be an
option for some businesses.699 However, the extent to which this would
apply to a bricks-and-mortar retailer is unclear given that Supie is an
online-only retailer with a differentiated business model and supply
chain requirements (eg, distribution to physical stores would not be
required).700

6.179.3

We understand that some of Woolworths NZ’s distribution centres are
owned by third-party investors and leased to Woolworths NZ.701 Thismay be another option for retailers to build their own supply chain
infrastructure without requiring significant up-front capital investment.

To the extent that a lack of access to supply chain infrastructure may be a condition
preventing or hindering entry or expansion by smaller retailers which lack scale touse the options discussed above, these functions may be able to be fulfilled by awholesaler.

Summary of our views on wholesale access to grocery products
6.181

698

699

700

701

We consider that improved wholesale access to grocery products would likely
result in a material improvement in competition and outcomes for consumers.

Foodstuffs NI indicated that only about a quarter of its products went through its own supply chain
infrastructure, with the rest being delivered directly by suppliers to store using their own
infrastructure or third-party providers, Transcript of Grocery Market Study Conference – Day 5(28 October 2021) at 12 (lines 19-29); Foodstuffs SI indicated that 49% of its products go direct tostore from suppliers, Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 13(lines 6-9); Woolworths NZ indicated that [ ] of its total sales (by value) are delivered by suppliers
direct to store, and [ ] of Wholesale Distributors Limited’s franchisee total sales (by value) consist of
products delivered direct to store by suppliers, Woolworths NZ "Post conference submission onMarket study into grocery sector" (24 November 2021) at [28.3].
Comments by Supie, Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 5(lines 17-27).
Comments by Supie, Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 27(lines 9-14).
Woolworths NZ "Post conference submission on Market study into grocery sector"(24 November 2021) at [28.6]-[28.11].

248

6.182

In summary:
6.182.1

There is currently a lack of competitively priced wholesale options for a
full range of groceries. While existing or potential large-scale retailers areunlikely to make use of wholesale supply in the long term (or in somecases, at all), the lack of wholesale supply nevertheless places aconstraint on the ability of other grocery retailers to enter or expand.

6.182.2

The lack of access to wholesale means that, often by necessity, othergrocery retailers must purchase directly from suppliers or in some cases
from the retail stores of the major grocery retailers. This limits theirability to obtain goods at competitive prices and may increasetransaction costs.

6.182.3

The impact of a lack of wholesale options on other grocery retailers’ability to enter or expand may have a compounding “chicken and egg”
effect, in that constraints on the number and scale of independent
retailers may limit the viability of entry of an independent wholesaler
and the lack of independent wholesale supply may limit the number andscale of independent retailers.

6.182.4

Potential supermarket entrants may therefore have to enter at both theretail and wholesale levels simultaneously in order to achieve sufficientscale to effectively challenge the major grocery retailers, which would
likely require significant investment and carry increased risk.

Conduct by suppliers and retailers which could potentially affect productsourcing
6.183

In this section, we discuss conduct which was raised by stakeholders in submissions
and subsequent meetings which in our view may potentially affect the ability of
new entrants or existing firms to source products at competitive prices.

6.184

This conduct primarily falls into two categories:
6.184.1

suppliers refusing to supply retailers; and6.184.2

supply arrangements affecting the basis on which suppliers can supply toother parties.

249

Refusal to supply
6.185

The NZFGC has raised concerns about established grocery retailers seeking to limit
entry and expansion by other grocery retailers, by pressuring suppliers. It
submitted that:702…pressure on suppliers has been aimed at limiting the access to products by the
online provider, The Honest Grocer. After agreeing to supply The Honest Grocer andsupplying the new player, many suppliers have withdrawn products due to genuine
fear that they risk other parts of their business

6.186

This pressure could occur either directly or indirectly (eg, a supplier making thedecision not to supply a new entrant to preserve their relationship with existingretailers).703 We have also heard that the level of concentration in the retail grocery
sector (as discussed in Chapter 4) is likely to be a contributing factor as suppliers
are likely to be reluctant to jeopardise their existing relationships with the major
grocery retailers, for example, by supplying a new entrant on favourable terms.704

6.187

We are aware of examples of some suppliers indicating that they are only willing to
supply if a grocery retailer does not undercut the retail prices set by other grocery
retailers of the supplier’s products.705

702

703

704

6.187.1

We are also aware of several examples of suppliers allegedly refusing to
supply grocery retailers where they are concerned that the retail prices
being offered are too low.706

6.187.2

We have received information which appears to suggest that in somecases the refusal to supply occurred after concerns were raised byanother grocery retailer the supplier trades with.707

NZFGC “Submission on retail grocery market study preliminary issues paper” (4 February 2021) at[134].
Comments by NZFGC, Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 28(lines 3-11); Transcript of Grocery Market Study Conference – Day 7 (2 November 2021) at 13(lines 17-23).
[
].

705

[
].
706

[

];

707

[
];
[
].

250

6.188

We are aware that some suppliers may decline to supply potential entrants (orchoose to supply potential entrants on terms that are less favourable) even without
direct pressure, due to concern about the possible response from major grocery
retailers.708

6.189

Refusal by suppliers to supply other retailers, or choosing to supply other retailers
only on less favourable terms, has the potential to impact entry and expansion by
reducing the ability of new entrants and grocery retailers to source products while
competing effectively.

6.190

We note that refusal to supply due to low retail pricing could also potentiallybreach sections 37 and 38 of the Act, which prohibit the practice of resale pricemaintenance.709 They could also breach section 36 of the Act, to the extent that arefusal to supply reflects the influence of a major grocery retailer with substantial
market power.710

6.191

We have not enquired further into the types of conduct described above at thisstage. However, independent of this study, we intend to open an investigation into
compliance with the Commerce Act in respect of certain conduct that we havebecome aware of during the course of this study.711

Contractual terms and understandings affecting supply to other parties
6.192

A submission raised exclusive buying and contractual provisions affecting prices
suppliers can charge to other grocery retailers as possible examples of major
grocery retailers using buyer power to exclude competition, which suggests they
could impact on entry and expansion.712

708

Supie mentioned that suppliers are nervous supplying to a new entrant for the risk of being cut by one
or both of the major grocery retailers, and that it has had to provide suppliers with assurances that it
would not undercut the major grocery retailers’ retail prices, Transcript of Grocery Market Study
Conference – Day 7 (2 November 2021) at 24 (lines 22-26);
[
].

709

Commerce Act 1986, ss 37 and 38.
Commerce Act 1986, s 36.
Commerce Commission "Enforcement Response Guidelines" (October 2013)https://comcom.govt.nz/__data/assets/pdf_file/0030/62589/Enforcement-Response-GuidelinesOctober-2013.pdf.
NZFGC “Submission on retail grocery market study preliminary issues paper” (4 February 2021) at
[15].

710
711

712

251

6.193

We are aware of clauses in supply agreements which may affect the ability ofsuppliers to supply other parties.713 Examples include:

6.194

713

6.193.1

best price clauses, or most favoured nation (MFN) clauses, which ensure
a particular buyer obtains products from a supplier on terms that are atleast as good as (or, in some cases, better than) those provided to otherbuyers;714 and

6.193.2

clauses specifying that a supplier is to supply products or certain brands
of products exclusively to a particular grocery retailer.715

The clauses described in paragraph 6.193 may potentially impact on entry andexpansion if they limit other grocery retailers’ ability to receive supply of products,
or purchase products at prices which will enable them to compete effectively in theretail market (noting that other grocery retailers can still be competitive if they canbe supplied at the same price). The extent to which this conduct impacts on entry
and expansion would depend on factors such as:
6.194.1

term durations;

6.194.2

the importance of the products or brands which are subject to theseclauses (ie, whether the products are core brand products which
consumers would expect to see in a supermarket);716 and

6.194.3

the extent to which there are alternative suppliers or products available
in the market.

The prevalence with which this conduct occurs varies amongst the major grocery retailers.

714

[
].
715

[
];
[
716

Paragraph 6.155.

].

252

6.195

717

718

We understand that these clauses may be mutually negotiated for pro-competitive
reasons, and that suppliers may sometimes offer them to retailers as part of thenegotiation process.717 There may also be efficiency benefits associated with bestprice and exclusivity clauses.
6.195.1

Suppliers may receive benefits in exchange for agreeing to such clauses(eg, volume or exclusivity commitments).718

6.195.2

Best price clauses may reduce transaction costs between parties byreducing the need for renegotiations whenever prices fluctuate overtime (eg, due to seasonal changes in availability or quality).719, 720

6.195.3

They may also be used if a buyer has made relationship-specificinvestments into a product and wants to avoid other buyers free-riding
on them.

Comments by NZFGC, Transcript of Grocery Market Study Conference – Day 7 (2 November 2021) at
14 (lines 29-37); comments by Woolworths NZ, Transcript of Grocery Market Study Conference –Day 7 (2 November 2021) at 16 (lines 1-6); comments by Foodstuffs NI, Transcript of Grocery Market
Study Conference – Day 7 (2 November 2021) at 19 (lines 30-33); comments by Foodstuffs SI,
Transcript of Grocery Market Study Conference – Day 7 (2 November 2021) at 20 (lines 27-30).
Comments by Foodstuffs NI, Transcript of Grocery Market Study Conference – Day 7(2 November 2021) at 19 (lines 8-12);
[

].

719

[

].

720

[
].

253

6.196

721

722

723

We consider that the clauses described in paragraph 6.193 have the potential toimpact on the conditions of entry and expansion. However, at present, they appear
unlikely to have a significant impact on entry and expansion in the retail grocery
sector.
6.196.1

The best price clauses do not appear to be very common, and parties
have not generally indicated that they significantly restrict the availabilityof supply to grocery retailers or the price at which grocery retailers canpurchase products from suppliers.721

6.196.2

Information provided by the major grocery retailers similarly indicatedthat exclusive supply arrangements do not appear to be widespread.722

6.196.3

However, we note that comments made by a Supie at the conferenceindicated that exclusive supply arrangements had a significant impact on
its ability to stock a full range of products.723

Woolworths NZ indicated that it had removed best price clauses from its standard terms as it did not
see a need for them, Transcript of Grocery Market Study Conference – Day 7 (2 November 2021) at 15(lines 16-21); Foodstuffs NI indicated that it very rarely uses best price clauses (they are not containedin its standard terms or conditions), and that they are usually exchanged for a volume commitment,
Transcript of Grocery Market Study Conference – Day 7 (2 November 2021) at 19 (lines 8-17);
Foodstuffs SI indicated that it very rarely uses best price clauses, noting that it currently has two
agreements containing such clauses; Foodstuffs NI indicated that it very rarely used best price clauses(they are not contained in its standard terms or conditions), and that they were usually exchanged for
a volume commitment, Transcript of Grocery Market Study Conference – Day 7 (2 November 2021) at
20 (lines 22-24); [].
Woolworths NZ indicated that it only had a small number of exclusive supply arrangements, and thatthey would normally involve some kind of co-investment, Transcript of Grocery Market Study
Conference – Day 7 (2 November 2021) at 16 (lines 9-13); Foodstuffs NI indicated that it very rarely
uses exclusivity arrangements (they are not contained in its standard terms or conditions), and thatthey are usually used in partnership type arrangements given they have the potential to benefit bothparties, Transcript of Grocery Market Study Conference – Day 7 (2 November 2021) at 19(lines 30-38); [
];
[
];
[
].
Supie indicated that it was unable to access a large number of products because of the major grocery
retailers’ exclusive supply arrangements, which made it difficult to stock a full range of brands andcompete for the main shop, Transcript of Grocery Market Study Conference – Day 5(28 October 2021) at 39 (lines 20-23); Supie also indicated that based on its experience, products
and/or pack sizes being subject to exclusivity with the major grocery retailers was relatively common,
Transcript of Grocery Market Study Conference – Day 7 (2 November 2021) at 24 (lines 19-21);
[
].

254

6.197

6.198

724

725

726

727
728

729

Foodstuffs NI submitted that it does not seek to anti-competitively limit the terms
on which suppliers may supply other retailers. Foodstuffs NI said that best price or
exclusivity clauses are rare, mutually agreed with suppliers, and comply withsection 27 of the Act.724
6.197.1

Foodstuffs NI and Foodstuffs SI told us that they very rarely use bestprice clauses, but where they do, this is with large supply contracts toensure they remain competitive over time.725

6.197.2

Foodstuffs SI said that it forms strategic relationships with suppliers toprovide exclusive arrangements around controlled label branded
products. Foodstuffs SI will work with a supplier to maximise anopportunity by committing to a volume forecast and a new productdevelopment program.726

6.197.3

Foodstuffs NI uses exclusivity agreements for partnership arrangements,
and noted that suppliers also seek exclusivity agreements with
Foodstuffs NI as a retailer.727

Woolworths NZ told us it has not attempted to enforce best price provisions, andhas removed these from its standard terms because it does not see a need forthem.728 It does not have many exclusive supply contracts, and only considers themappropriate when there is a legitimate business purpose such as co-investment
with a supplier.729

Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[323] and [355].
For example, best price clauses are offered in exchange for a volume commitment in a market withfluctuating prices, Transcript of Grocery Market Study Conference – Day 7 (2 November 2021) at 19(lines 6-21); Foodstuffs NI "Post conference submission on Market study into grocery sector"(3 December 2021) at [150.1]; Foodstuffs SI "Post conference submission on Market study into
grocery sector" (3 December 2021) at [128.1].
Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021) at[319]-[320].
Transcript of Grocery Market Study Conference – Day 7 (2 November 2021) at 19 (lines 30-33).
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [15.1].
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [14.1]-[14.2]; Transcript of Grocery Market Study Conference – Day 7 (2 November 2021) at 15(lines 37-40) and 16 (lines 9-13).

255

6.199

Our view of these clauses (as discussed in paragraph 6.196) was based on our
understanding of how they are currently used in the retail grocery sector, andshould not be taken as a general endorsement of the use of such clauses, either in
relation to the retail grocery sector or more generally.
6.199.1

If the circumstances surrounding the usage of these clauses weredifferent (eg, if they were to be used in a more widespread manner),they would likely have a more significant impact on entry and expansion.
In light of Supie’s comments at the conference, it is possible that
exclusive supply arrangements could be more widespread than we had
previously considered.

6.199.2

While some major grocery retailers have indicated they rarely use
exclusive supply arrangements, there is also a risk that their incentives
could change (and that the use of these arrangements could become
more common) if entry or expansion in the wholesale or retail grocery
markets was likely.

6.200

Section 27 of the Act (as outlined in paragraph 6.98.1) would potentially apply toagreements of this nature if they were to have the purpose, effect or likely effect of
substantially lessening competition in a market.

6.201

In the course of this study, we have not identified agreements of a nature or scalethat are sufficient to justify opening an investigation into whether this conduct islikely to be in breach of the Act. Independent of this study, if we identify any
agreements that we consider may breach the Act in the future, we may consider
appropriate action utilising our Commerce Act compliance and enforcement
functions and powers at that time.730

Other forms of strategic behaviour
6.202

Submitters and conference participants have told us about other conduct by the
major grocery retailers which may constitute strategic behaviour. For example, we
are aware that:
6.202.1

730

731

732

Night ‘n Day previously had access to wholesale supply throughFoodstuffs SI until its membership was revoked731 (although Woolworths
NZ submitted that it is important to understand the context in relation tothat supply relationship);732 andCommerce Commission "Enforcement Response Guidelines" (October 2013)https://comcom.govt.nz/__data/assets/pdf_file/0030/62589/Enforcement-Response-GuidelinesOctober-2013.pdf.
Comments from Night ‘n Day, Transcript of Grocery Market Study Conference – Day 5(28 October 2021) at 9 (lines 10-25).
Woolworths NZ "Post conference submission on Market study into grocery sector"(24 November 2021) at [25.3];
[
].

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6.202.2

the major grocery retailers partially acquired (and attempted to fullyacquire) The Warehouse Group when it attempted to enter the grocery
market through the Warehouse Extra.733

6.203

In addition, Northelia told us that a large new entrant might expect a variety ofstrategic responses from the major incumbents, including likely pricing
reductions.734 Northelia’s expectations are consistent with other evidence we haveseen during this study.735

6.204

We note that, notwithstanding the lack of evidence of smaller scale entry andexpansion impacting on the pricing behaviour of the major grocery retailers (seeChapter 5), we would generally expect incumbents to respond to new entry by asignificant new entrant by lowering their prices. This is usually pro-competitive andof long-term benefit of consumers. However, we note that if potential entrants
expect a significant pricing or other responses from incumbents that lower the
expected profitability of entry, these expectations can themselves deter entry.736

6.205

Unlike the other forms of strategic behaviour discussed in this chapter, much of thisconduct appears to be historical, and we do not have evidence of it occurring on asystemic basis. It is also subject to a number of the Commerce Act’s provisions
relating to anticompetitive conduct:
6.205.1

733

734

As previously discussed, section 27 of the Act prohibits provisions incontracts, arrangements, or understandings which have the purpose,
effect or likely effect of substantially lessening competition in a market.

Commerce Commission “Commission declines applications from Foodstuffs and Woolworths toacquire The Warehouse” (8 May 2007) https://comcom.govt.nz/news-and-media/mediareleases/archive/commission-declines-applications-from-foodstuffs-and-woolworths-to-acquire-thewarehouse; Radio NZ “Foodstuffs selling stake in Warehouse Group” (21 May 2021)
https://www.rnz.co.nz/news/business/443067/foodstuffs-selling-stake-in-warehouse-group; Stuff“Foodstuffs keeps mum on Warehouse stake” (5 March 2015)
https://www.stuff.co.nz/business/industries/66987021/foodstuffs-keeps-mum-on-warehouse-stake.
Northelia "Post conference submission on Market study into grocery sector" (29 November 2021) at
22-23.

735

[
];
[
736

].

See Motta M, “Competition Policy Theory and Practice” Cambridge University Press (2004) for a
discussion of entry deterring strategies.

257

6.206

6.205.2

Section 36 of the Act currently prohibits parties with a substantial degreeof market power from taking advantage of that market power for a
proscribed anticompetitive purpose. The Commerce Amendment Bill,
which is currently going through Parliament, is intended to strengthen
this prohibition.737

6.205.3

Section 47 of the Act prohibits the acquisition of assets or shares of abusiness where the acquisition would have the effect or likely effect of
substantially lessening competition in a market.

Except where noted above, in the course of this study, we have not identified any
recent or systemic acquisitions or other conduct of a nature or scale that are
sufficient to justify opening an investigation into whether this conduct is likely to be
in breach of the Act. Independent of this study, if we identify any anticompetitive
acquisitions or other strategic conduct in the future, we may consider appropriate
action utilising our Commerce Act compliance and enforcement functions andpowers at that time.738

Access to capital
6.207

Some submissions on our draft report raised lack of access to domestic capital as afactor impacting on entry and expansion in the retail grocery sector.739

6.208

However, we note that some recent or potential entrants appear to have been able
to raise some domestic capital for entry and expansion.740 For example:
6.208.1

737

738

739

740

741

Northelia’s submission indicates that under certain conditions it would
be able to mobilise a capital base in excess of $1 billion for potential
entry into the sector.741

New Zealand Parliament “Bill aims to limit misuse of market power” (1 April 2021)
https://www.parliament.nz/en/get-involved/topics/all-current-topics/bill-aims-to-limit-misuse-ofmarket-power/.
Commerce Commission “Enforcement Response Guidelines” (October 2013)https://comcom.govt.nz/__data/assets/pdf_file/0030/62589/Enforcement-Response-GuidelinesOctober-2013.pdf.
Supie “Submission on Market study into grocery sector draft report” (26 August 2021) at 1-2; Kore
Hiakai “Submission on Market study into grocery sector draft report” (26 August 2021) at 4.
Woolworths NZ discusses other examples of new entrants successfully raising capital forentry/expansion, including My Food Bag and Geezy Go, Woolworths NZ “Post conference submission
on Market study into grocery sector” (24 November 2021) at 78.
Northelia “Submission on Market study into grocery sector draft report” (26 August 2021) at 2.

258

6.209

6.208.2

Supie recently managed to raise $2.5 million in seed funding andindicated that it would be looking at a funding round the following year
for a significant amount (expected to be more than $10 million) to fundits national expansion.742, 743

6.208.3

Ngāti Kahungunu Iwi Incorporated noted that iwi Māori have reached apoint of having resources (both asset and liquid) to be able to invest in
ventures such as grocery retailing.744

While these examples indicate that it may be possible to access capital for entry
and expansion into the sector, this does not necessarily mean that there are low
barriers to doing so. We note that some submitters indicated that difficulties
associated with access to capital were partially due to investor nervousness aroundthe strategic behaviour which the major grocery retailers could employ to block or
restrict a new entrant.745 As such, some of our recommendations which areintended to address this behaviour (eg, see paragraph 9.130) may in turn improvethe conditions for access to capital to some extent.

Access to overseas capital
6.210

742

743

744

745

746

Other submissions also mentioned the Overseas Investment Act 2005 potentiallymaking it more difficult for overseas retailers to enter (eg, by making it moredifficult for them to acquire suitable sites) using overseas capital.746

Bridget O’Connell “Supie bags $2.5m seed funding, series A slated for 2022” (4 November 2021)
https://www.foodticker.co.nz/supie-bags-2-5m-seed-funding-series-a-slated-for-2022/.
Supie indicated that it would require access to more than $115 million in capital to achieve scale andprovide access to consumers nationwide, Transcript of Grocery Market Study Conference – Day 5(28 October 2021) at 14 (lines 22-24).
Ngāti Kahungunu Iwi Incorporated “Post conference submission on Market study into grocery sector”(24 November 2021) at [5].
Comments by Supie, Transcript of Grocery Market Study Conference – Day 5 (28 October 2021) at 14(lines 11-15); Comments by Northelia, Transcript of Grocery Market Study Conference – Day 5(28 October 2021) at 14 (lines 33-38).
NZ Initiative “Submission on Market study into grocery sector draft report” (26 August 2021) at 9;
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at
78; Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021)
at 66; Woolworths NZ “Submission on Market study into grocery sector draft report”(10 September 2021) at 39.

259

6.211

The Overseas Investment Act requires a transaction to go through a consenting
process if it will result in overseas investment in sensitive land or significant
business assets.747 This process may create disadvantages (eg, in the form of
additional costs, delays and/or uncertainty in site acquisition) for overseas entities
looking to invest in or enter the New Zealand retail grocery sector.748

6.212

We understand that changes to the Overseas Investment Act in recent years haveaddressed many of the concerns that stakeholders have had with the regime in thepast. For example, recent changes have:6.212.1

removed many lower-risk transactions from requiring consent;

6.212.2

streamlined the consent process for a majority of the transactions thatstill require consent, including by introducing statutory decision-making
timeframes, and clarifying how the tests regarding the benefit ofinvestment to New Zealand work; and6.212.3

provided streamlined pathways which make it easier for investors to get
consent for non-residential use of residential land.

6.213

Nevertheless, some barriers to overseas investment in retail grocery stores appear
to remain. For example, the New Zealand Initiative has noted that the purchase orlease of land bordering on reserves and streams, land with any residential zoning,
and land adjoining a marine or coastal area or a lake can require consent from theOverseas Investment Office.749 Woolworths NZ has noted that approval could be
required in relation to developing new distribution facilities in non-urban areas, orwhen acquiring residential land to build a new store or extend an existing store.750

6.214

In addition, where consent is still required, there is a potential for incumbents tomake submissions opposing applications for consent by their competitors, or
judicially review decisions of the Overseas Investment Office where it grants
consent. We understand that Foodstuffs has engaged in such action in the past.751

747
748

749

750

751

Overseas Investment Act 2005.
Woolworths NZ noted that the requirement to obtain OIO consent impedes the speed at which anoverseas retailer can enter or expand, may place overseas owned retailers at a competitive
disadvantage in acquiring sites where there is competition for the land, and is expensive,
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at 39. See also NZ Initiative “Submission on Market study into grocery sector draft report”(26 August 2021) at 9.
NZ Initiative "Post conference submission on Market study into grocery sector" (19 November 2021)
at [2.10].
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [17.2].
Foodstuffs (Auckland) Ltd v Progressive Enterprises Ltd and Foodland Associated Ltd and Denstree
Corporation Ltd and Dairy Farm Ltd and The Overseas Investment Commission and the AttorneyGeneral [2002] NZHC M680-SW02; Foodstuffs (Wellington) Co-operative v Progressive Enterprises Ltd
and Foodland Associated Ltd [2002] NZHC M929/SW02; Foodstuffs (South Island) Ltd v Progressive
Enterprises Ltd and Foodland Associated Ltd and Denstree Corporation Ltd and Dairy Farm Ltd and The
Overseas Investment Commission and the Attorney-General [2002] NZHC M929-SD02.

260

6.215

While the Overseas Investment Act process may impact on entry and expansion in
the grocery sector, we note that there are a range of policy considerations
underpinning the Overseas Investment Act, and it is for policymakers to determine
the weight competition should be given as part of the Overseas Investment Act
regime relative to other factors.

Alcohol licensing laws
6.216

Some retailers have raised the potential for current alcohol licensing laws to be afactor impacting on their ability to enter and expand in the retail grocery sector.752

6.217

Alcohol licensing laws were amended in 2012 with the introduction of the Sale andSupply of Alcohol Act 2012. The object of the Act is that the sale, supply, andconsumption of alcohol should be undertaken safely and responsibly, and the harmcaused by the excessive or inappropriate consumption of alcohol should be
minimised.753 The Act made a number of changes to reduce the availability ofalcohol, including specifying that small retailers such as dairies or convenience
stores cannot sell alcohol.754 In particular, the Act largely limits the issuance of‘off-licences’ to sell alcohol in a retail context to specialised liquor stores,
supermarkets with a floor area of at least 1000 square metres, or grocery stores.
Grocery stores are defined under the Act and associated regulations as:755

6.218

6.217.1

having the characteristics commonly associated with a grocery store; and6.217.2

selling food products (excluding ready-to-eat, snack food, and drinks soldin a container with a capacity of 1 litre or less) and other household
items; and6.217.3

having the sale of food products (as defined above) as the business’largest single category of revenue.

As noted in Chapter 4, consumers value having a wide range of products in one
place. Consumers seeking to purchase alcohol as part of their shopping basket
might not consider shopping at grocery retailers that do not sell alcohol.

752

Dairy and Business Owners Group “Submission on Market study into grocery sector draft report”(26 August 2021) at 5-6; Comments by Night ‘n Day, Transcript of Grocery Market Study Conference –Day 1 (21 October 2021) at 24 (lines 1-7); The Warehouse Group “Post conference submission onMarket study into grocery sector” (23 November 2021) at 2;
[
]; [
].

753

Sale and Supply of Alcohol Act 2012, s 4.
Ministry of Justice “Alcohol Reform 2010: Regulatory Impact Statement”
https://www.justice.govt.nz/assets/Documents/Publications/Regulatory-Impact-Statement-2010Alcohol-Reform.pdf;
Ministry of Justice “Regulatory Impact Statement: Regulatory Regime for the new Alcohol Law”
https://www.justice.govt.nz/assets/Documents/Publications/RIS-Regulations.pdf.
Sale and Supply of Alcohol Act 2012, sections 32 and 33; Sale and Supply of Alcohol Regulations 2013,
ss 6 and 7.

754

755

261

6.219

We acknowledge that there are public policy reasons for restricting the types ofbusinesses which are licensed to sell alcohol, most notably to restrict theprevalence of alcohol-related harm. Nevertheless, the alcohol licensing laws
described above may make it difficult for some existing or prospective retailers tooffer a full range of products that consumers wish to buy. This includes dairies andconvenience stores, as well as other existing retailers seeking to expand into
grocery products (unless food products make up their largest single category ofrevenue). A more level playing field that aligns restrictions at an appropriate levelmay improve their ability to compete effectively with the major grocery retailers
for the provision of a main shop or a top-up shop.756

Loyalty programmes
6.220

Both Countdown and New World operate their own loyalty programmes(Countdown offers Onecard and New World offers Clubcard). Further details
regarding specific features of these loyalty programmes are discussed in Chapter 7.

6.221

Loyalty programmes can offer benefits to consumers in the form of discounted
prices and/or accumulated rewards through their loyalty programme.

6.222

However, they can also reduce price transparency and make it more difficult for
consumers to make informed purchasing decisions (discussed further in Chapter 7)
and create conditions that impede or slow entry and expansion. There are twomain ways in which the latter can occur:

6.223

756

6.222.1

providing loyalty programme operators with an extensive amount ofconsumer data to inform business decisions and allow for personalised
offers to be made which attract and retain customers in a way that is notpossible for grocery retailers without access to similar consumer data;
and6.222.2‘locking in’ consumers by increasing the costs to them of shopping
elsewhere and making them less likely to use other grocery retailers,
making it more difficult for other grocery retailers or new entrants to
attract customers and capture market share.

We consider that these potential impacts are unlikely to vary significantly based ona grocery retailer’s business model.

Comments by Night ‘n Day, Transcript of Grocery Market Study Conference – Day 1 (21 October 2021)
at 23 (lines 13-40) to 24 (lines 1-26);
[
];
[
].

262

6.224

However, a lack of access to consumer data gathered using loyalty programmes islikely to have a more significant impact on new entrants than existing grocery
retailers looking to expand.
6.224.1

New entrants would likely find consumer data collected via loyalty
programmes to be helpful for setting and adjusting their customer
offering, but would be unable to collect this data without first entering
the market.

6.224.2

On the other hand, existing grocery retailers either operate loyalty
programmes by which they can collect consumer data, or have theoption of starting their own loyalty programme to collect data from their
existing customer base.

6.225

In addition, we explain in Chapter 7 that the major grocery retailers’ loyalty
programmes could adversely affect consumers, for example, by making it harder tomake well-informed decisions, reducing retail competition and leading to different
prices for different groups of consumers.757

6.226

While some have differing views,758 we generally have not heard during the courseof our study that loyalty programmes are a significant factor impacting on entry
and expansion.

Access to data
6.227

757

758

Access to consumer data may be helpful to firms looking to enter and expand in theretail grocery sector as it would assist them to set and adjust their customer
offerings, but they would be unable to collect this data without first entering themarket. Meanwhile, existing competitors would have an advantage in attracting
and retaining customers because of their established loyalty programmes andaccess to the data that they generate. We do not currently see this as a significant
impediment to retail entry.

Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at [72]-[87]; NZFGC “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at [207]-[223].
The NZFGC submitted that the major grocery retailers can access consumer data which they use to
tailor their offerings and increase profitability, while entrants do not have access to this data. The
NZFGC’s submission also mentioned that loyalty programmes make it less likely or harder for
consumers to switch to another major grocery retailer (ie, increase switching costs). See NZFGC“Submission on retail grocery market study preliminary issues paper” (4 February 2021) at [135] and[208]. See also Monopoly Watch “Post conference submission on Market study into grocery sector”(29 November 2021) at 4.

263

6.228

The major grocery retailers collect data from consumers through their loyalty
programmes.759 This data can be analysed and used to inform business decisions
such as product ranging or pricing decisions, which may give them a competitive
advantage over new entrants or other grocery retailers without access to similar
data. As such, there is potential for this access to consumer information generated
by the collection of loyalty programme data to be a factor affecting entry andexpansion. In addition, data may also be used to give grocery retailers with loyalty
programmes a unique ability to target advertising to consumers, and this could be
used to defend their market position from the threat of entry or expansion.

6.229

By its nature, loyalty programme data can only be collected after a grocery retailer
enters the market and begins to build a customer base, and it would not be
available to potential entrants. This in turn has the potential to impact on theirability to provide a competitive offering to consumers at start up and following.

6.230

However, we note that a number of other grocery retailers such as othersupermarkets and international food stores also have their own loyalty
programmes (eg, Farro Fresh, Moore Wilson’s, Jadan and Huckleberry). This tends
to indicate that it is possible for grocery retailers to collect consumer data to someextent using their own loyalty programmes after successful entry. They can use thisto inform their business decisions and make personalised offers to consumers.
Moreover, it is possible to source aggregated scanner data from Nielsen which
would provide an initial basis for ranging decisions.

6.231

In addition, we have observed that in some circumstances grocery retailers do nothave the ability to analyse or use the data collected using their loyalty programmes
for the purposes of making business decisions.760 This suggests that while loyalty
programme data may be a helpful tool for a grocery retailer, it may not be a key
requirement for a grocery retailer to operate.

6.232

While there is potential for access to data to impede entry and expansion for acompeting grocery retailer, given this range of use of loyalty programmes andconsumer data at present, we do not consider that the different abilities to accessloyalty programme data is a key factor impeding entry and expansion.

759

760

For example: Foodstuffs SI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 24-25; Woolworths NZ “Submission on retail grocery market study preliminary
issues paper” (4 February 2021) at 74.
[
].

264

Loyalty programmes ‘locking in’ consumers
6.233

Loyalty programmes may impede entry and expansion to the extent that
consumers that are reluctant to change grocery retailer, are effectively “locked in”
to a particular grocery retailer. Potential competitors may conclude it is notpossible to capture viable market share and/or capturing market share is moredifficult because customers are reluctant to shop elsewhere where they do notreceive and/or accumulate the benefits offered by a loyalty programme.761 The
loyalty programmes offered by New World and Countdown do not require
exclusive membership by consumers. Consumers can and do participate in multiple
programmes.

6.234

Nevertheless, loyalty programmes operated by the major grocery retailers may
have the effect of incentivising some consumers to shop with a particular retailbanner and increase their reluctance to shop with others, particularly consumers
who value accumulated rewards. This is because those consumers may be lessinclined to switch their spend to another grocery retailer if they may risk delaying
the reward or losing accumulated points. A competing retailer may need to offer an
additional benefit to compensate a consumer who feels they are forfeiting abenefit with their existing grocery retailer or loyalty programme by shopping withthe competing retailer. We discuss the potential effects of accumulated rewards inmore detail in Chapter 7.

6.235

Our view is that loyalty programmes are unlikely to have a material constraint onentry or expansion as a consequence of lock-in effects because:761

6.235.1

Consumers have a diverse range of preferences and there are multiple
factors influencing store choice. As discussed in Chapter 4, price andconvenience appear to be key drivers of choice for many consumers.
While loyalty programmes may drive store choice for some consumers, it
is not a key driver of store choice.

6.235.2

This appears to be consistent with the observation that, as noted above,
consumers can and do participate in more than one loyalty programme.
Consumers are able to join multiple programmes and enjoy many of thebenefits of each so they do not appear particularly committed to one
loyalty programme and one grocery retailer each.

We note that the ACCC considered that retailers use loyalty programmes to influence consumer
behaviour by, for example, encouraging consumers to make repeat or additional purchases (and by
default, spend less with their competitors) and introducing resistance to competing offers. ACCC
“Customer loyalty schemes – Final report” (December 2019) at 17 and 90, available at:https://www.accc.gov.au/system/files/Customer%20Loyalty%20Schemes%20%20Final%20Report%20-%20December%202019.PDF.

265

6.236

762

763

764

765

6.235.3

Some consumers value accumulated rewards and may therefore be
more inclined to exclusively shop with one grocery retailer in order toaccumulate points. However, many consumers value member-only
discounts instead which provide an immediate reward at the time ofeach transaction. Our consumer survey, the Ipsos research, and research
conducted by the major grocery retailers (see Chapter 7 for further
detail) consistently indicates that many consumers sign up to grocery
loyalty programmes primarily to gain access to the member-only
discounts.762 These consumers are less likely to experience perceived
lock-in effects from loyalty programmes or be as disincentivised to shop
around as those who value accumulated rewards and risk losing progress
towards those rewards if they switch to an alternative retailer.763

6.235.4

The minimum spend required to earn accumulated food rewards
through Onecard or Clubcard can be relatively high, compared with therate of reward.764 We therefore consider it unlikely that accumulated
food rewards would significantly raise costs for consumers to switch
retailers in the longer term. However, there may be short-term effects
for consumers that value these rewards when they are closer to the
expiry date of already accumulated points.765

Our view is that Clubcard and Onecard are unlikely to significantly impede entry or
expansion by making it more difficult to attract consumers. However, the potential
effects of these programmes may change as these programmes and the use of
consumer data develops, for example, in relation to personalised offers. We discuss
this potential, and the basis for our conclusions in more detail in Chapter 7.

This may be because they appear more tangible and consumers receive instant gratification, forexample, Matilda Dorotic et al., “Loyalty Programmes: Current Knowledge and Research Directions”(2011) 14 International Journal of Management Reviews 217 at 226.
ACCC “Customer loyalty schemes – Final report” (December 2019) at 93, available at:https://www.accc.gov.au/system/files/Customer%20Loyalty%20Schemes%20%20Final%20Report%20-%20December%202019.PDF.
As discussed in Chapter 7, the minimum spend requirement for a Onecard e-voucher, or New World
Dollars via a Clubcard, is relatively high. The minimum spend requirement for Flybuys or Airpoints via
a Club Card is much lower.
New World Dollars expire after 24 months, and Onecard points and e-vouchers expire after one year.

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Chapter 7

Consumer-facing issues

Summary of findings•

Promotions and loyalty programmes can provide value to consumers and drivecompetition between the major grocery retailers. When consumers can makemeaningful comparisons between offers, they can make informed choices between
them and develop more accurate perceptions of value over time, to help them choose
where they would like to shop. This incentivises retailers to improve their offers to
attract consumers from one another. Conversely, if it is difficult for consumers tocompare offers, they may make less-informed purchasing decisions which can reduce
price competition.

•

The major grocery retailers use an array of different promotional mechanisms. Theircomplexity and frequent use, particularly when used in combination with one another,
may make it harder for consumers to accurately assess the value of competing offers or
to develop accurate perceptions of value over time, even when there are genuinesavings on offer and the information provided is clear.

•

This may make consumers less likely to shop around between products and between
grocery retailers, affecting the quality of information retailers receive about consumer
preferences and impacting competition.

•

Use of unit pricing can assist consumer decision making and competition. However,these benefits are less likely to be achieved when unit pricing is inconsistently or
unclearly displayed.

•

Consumer understanding of loyalty programmes appears low. This is particularly in
relation to how accumulated rewards are earned and redeemed, and how consumer
data is collected and used by the major grocery retailers. This can make it difficult for
consumers to assess the value of these programmes to them and make well-informed
decisions about their participation. This can make consumers less responsive to pricecompetition, reduce the major grocery retailers’ incentives to engage in pricecompetition and inhibit competition for consumers with certain privacy or data use
preferences.

•

Loyalty programmes may also cause some consumers, particularly those that value
accumulated rewards, to focus on earning rewards through a particular loyalty
programme and be less inclined to shop around.

•

Personalised or targeted promotional offers for loyalty programme members canfacilitate price discrimination which may raise competition concerns as it becomes moresophisticated.

267

Introduction
7.1

This chapter considers how the major grocery retailers’ pricing and promotional
practices, and loyalty programmes, affect consumers’ ability to seek out the best
deals based on their preferences, and in turn stimulate competition among the
major grocery retailers.

7.2

Consumers play an important role in ensuring competition is effective. Markets
work better when consumers are confident market participants. Consumers haveconfidence when they have access to accurate information that helps them makeinformed purchasing decisions and when they can assess whether businesses are
trading fairly.766

7.3

When consumers can make meaningful comparisons between offers, firms are
more likely to be incentivised to improve their offerings or reduce prices to attract
consumers from one another.767 Conversely, if it is difficult for consumers tocompare offers, this could lead to less-informed purchasing decisions which can
reduce price competition. In addition, this may lead to retailers receiving poor
information on actual consumer preferences, making it more difficult to respond to
consumer demand.

7.4

The major grocery retailers told us that consumers have access to a large amountof information to enable comparisons including advertising and in-store priceinformation.768 However, Consumer NZ raised concerns that the major grocery
retailers’ pricing and promotional practices are a major barrier to informed
consumer choice including because they are confusing.769 These submissions are
not necessarily in conflict with each other: both could be correct. This chapter
considers the impact of these practices on competition.

766

Commerce Commission “Statement of Intent – Our Approach for 2020-2024” (30 July 2020), available
at: https://comcom.govt.nz/__data/assets/pdf_file/0014/222305/Statement-of-Intent-20202024.PDF
at 13.
Competition Markets Authority “Consumer protection: enforcement guidance” (17 August 2016)
CMA58 at 2.2, available at: https://www.gov.uk/government/publications/consumer-protectionenforcement-guidance-cma58.
For example: Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 68-69; Foodstuffs NI “Submission on retail grocery market study preliminary
issues paper” (4 February 2021) at 32; Foodstuffs SI “Submission on retail grocery market study
preliminary issues paper” (4 February 2021) at 22.
Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at [45].

767

768

769

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7.5

Our consumer survey has helped us to better understand consumer behaviour andprovided us with consumers’ views on how they decide where to shop and what tobuy. Our promotional pricing analysis, qualitative research and experimental
economic research have also informed our understanding of how consumers shop
for groceries. In addition, submitters provided us with a range of helpful
information relating to retail conduct and consumer decision making. We discuss
the insights we gained through these sources of information in more detail later inthis section.

7.6

We have found that some consumers find it hard to make purchasing decisions instore, particularly when retailers use complex and/or multiple pricing andpromotional mechanisms, and when loyalty programmes have complex rewards
structures and terms and conditions. These complexities have the potential to limit
consumers’ ability and willingness to access, assess and act on information whenchoosing between grocery retailers.

7.7This chapter focuses on the effects of these practices on in-store decision making.
However, these practices may also impact the accuracy of consumers’ perceptionsof the overall price and value of the major grocery retailers which can influence
where consumers choose to shop.

7.8

In addition to the effects on competition we discuss in this chapter, some practices
discussed may also raise issues relevant to consumer experience which are beyond
our terms of reference for this study. These include issues in relation to:
7.8.1

whether the promotional mechanisms and pricing strategies used by the
major grocery retailers are in some cases misleading;

7.8.2

the potential for consumer data collection and use practices to raise
privacy concerns; and7.8.3

whether the terms and conditions governing the major grocery retailers’
loyalty programmes are fair to consumers.

7.9

We provide comments on these issues at the end of this chapter.

7.10

The remainder of this chapter discusses:
7.10.1

our approach to analysing consumer-facing issues;

7.10.2

how pricing and promotional practices used by the major grocery
retailers can affect consumer behaviour, and the effect this has oncompetition;

7.10.3

whether and how price comparison services can facilitate competition byhelping consumers decide what to buy and decide where to shop;

7.10.4

whether and how unit pricing can help to facilitate informed decision
making by consumers;

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7.10.5our analysis of potential competition concerns arising out of loyalty
programmes, particularly in relation to consumer understanding of how
these programmes work, effects on consumer willingness to shop
around, and how they may facilitate price discrimination; and7.10.6other issues within the retail grocery sector arising during the course of
our study which fall outside the scope of our study and we will consider
further independent of our findings and recommendations.

Our approach to analysing consumer-facing issues
7.11

This section sets out some key concepts and background information relevant toour analysis of issues facing grocery consumers in the rest of this chapter. It
explains:
7.11.1the importance to competition of ensuring consumers are well-informed;

7.11.2the pricing and promotional practices that we have considered;

7.11.3the nature of the loyalty programmes offered by the major grocery
retailers including the different types of benefits offered to consumers;
and7.11.4the information we have relied upon for the purposes of our analysis.

Well-informed and confident consumers are a key driver of competition
7.12

Consumer confidence in the integrity of pricing and promotional activity is a key
driver of competition.770 Promotions are an important marketing tool for retailers,and discounting strategies are common in New Zealand retail markets. They candrive competition among retailers and value for consumers.

7.13

Markets work better when consumers can easily compare offers and choose theproducts and the provider that best meets their needs. Consumers who shop
around incentivise retailers to meet these needs by offering new products andservices, and/or by reducing prices.771

770

771

Commerce Commission “Misleading pricing: An open letter to New Zealand retailers” (11 May 2017),
available at: https://comcom.govt.nz/__data/assets/pdf_file/0019/90073/Misleading-pricing-Anopen-letter-to-New-Zealand-retailers-11-May-2017.pdf; Competition Markets Authority “Pricing
Practices in the Groceries Market – Response to a super-complaint made by Which? on 21 April 2015”(16 July 2015) at [1.9], available at: https://www.gov.uk/cma-cases/groceries-pricing-supercomplaint.
Competition Markets Authority “Consumer protection: enforcement guidance” (17 August 2016)
CMA58 at [2.2], available at: https://www.gov.uk/government/publications/consumer-protectionenforcement-guidance-cma58; Christine Riefa, Harriet Gamper and Paolo Siciliani “Consumer Theories
of Harm: An Economic Approach to Consumer Law Enforcement and Policy Making” (Hart Publishing,2019) at 142.

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7.14

Competition is therefore facilitated by consumers having:
7.14.1

ready access to the information they need to compare offers byalternative providers;

7.14.2the ability to easily assess this information; and7.14.3the ability and willingness to act on this information (ie, use theinformation to inform decisions).

7.15

This also enables consumers to accurately signal their preferences to retailers.
When retailers have accurate information about what consumers want, they are
better placed to compete for consumers by providing the mix of price, range,
quality and service they value. Consumers have a diverse range of preferences that
influence where they choose to shop and what products to buy once in store. 772 As
discussed in Chapter 4, there are multiple drivers of store choice and these vary,
including by demographic and shopping mission. Key drivers of store choice include
non-price factors such as location and ease of access, familiarity with the store,
product range and product quality. Consumers may therefore use different types of
information to help make these decisions.

7.16

Nevertheless, price-related factors contribute to store choice and consumer
decisions relating to what products to buy. Price comparisons can give consumers
helpful information to develop perceptions of value and can promote competition
among retailers.

7.17

This chapter primarily focuses on pricing information available to consumers, byconsidering pricing and promotional mechanisms used by the major grocery
retailers in store and related issues such as consumer awareness of rewards
structures and the terms and conditions of loyalty programmes. These issues all
impact the ease with which consumers can assess the best deals based on theirpreferences and form a broader view of where they want to shop.

Pricing and promotional mechanisms considered in this chapter
7.18

772

Price is consistently cited as one of the key drivers of store choice for many
consumers.

See paragraphs 4.58 to 4.76. This is also evidenced in documents provided by major grocery retailers,for example: [
]; [
].

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7.19

Two thirds of the respondents to our consumer survey report “always” or “usually”
comparing prices between similar products when shopping for groceries.773 Some
consumers report using an internal reference point of value, rather than relying on
external information. Internal reference points could include a general perceptionthat private label products are cheaper than branded products, or that multi-buy
offers provide good value.774 However, many consumers report using external
information such as unit prices and promotional price tickets to guide their decision
making.775 We have seen evidence that these factors, including promotions,discounts, and loyalty programmes affect consumers’ perceptions of price andvalue.776

7.20This chapter considers the effect of pricing and promotional activity on consumers’ability to make product choices in store that best reflect their preferences and todevelop accurate perceptions of value, and the potential effects on competition
between the major grocery retailers. These include:
7.20.1

promotional mechanisms, such as the use of reference prices whenadvertising products on special and other general promotional claims
about value, including everyday low pricing (EDLP);

7.20.2

non-promotional pricing information such as unit prices;

7.20.3loyalty programmes; and7.20.4one-off, non-price promotions such as collectibles and give-aways.

773

See Figure E26. This is consistent with: Ipsos “Consumer behaviour and preferences in the New
Zealand retail grocery sector – Consumer study report” (July 2021) at 44; Internal research provided
by the major grocery retailers, for example, [].

774

Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 16. See also, for example: BDRC Continental “Grocery Pricing – Qualitative
Research Report” (12 June 2015) prepared for the Competition Markets Authority, at 4, available at:https://assets.publishing.service.gov.uk/media/55a68c41ed915d151b000005/Annex_F__Grocery_Pricing_Qualitative_Research_Report__Prepared_by_BDRC_Continental_for_the_CMA__1
2_June_2015.pdf; Nadine Sonnenberg and Daleen Van der Merwe “An exploratory investigation into
the role of shelf-edge signage in urban grocery consumers’ decision-making behaviour” (July 2006),
available at:https://www.researchgate.net/publication/266260370_An_exploratory_investigation_into_the_role_of_shelf-edge_signage_in_urban_grocery_consumers'_decision-making_behaviour.
For example, a piece of research commissioned by [ ] found that about [ ] of consumers regularly
look for ticketing devices when shopping []. Respondents toour consumer survey reported a high rate of checking unit price, see Figure E26.

775

776

For example: [
[

];
].

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Pricing and promotional mechanisms
7.21

Grocery retailers commonly use a range of discounting mechanisms to encourage
consumers to shop at their store and purchase certain products. Using these
discount representations to advertise a product generally conveys to consumers
that they can purchase the products at a lower price which is not usually available
to them.777

7.22

In this chapter, we consider the major grocery retailers’ use of pricing andpromotional mechanisms and the information provided to consumers. We consider
whether these mechanisms impact consumer decision making and value
perceptions, and the potential effects on competition.

7.23

We refer to the pricing and promotional mechanisms that we have observed arecommonly used by grocery retailers as follows. Examples of the visual tickets used
to highlight prices are included in Table 7.1 below.

777

7.23.1

Specials: short-term discounts that do not require the consumer to meet
any certain requirements to redeem the offer (for example, they do nothave to swipe a loyalty card, or purchase a certain number of units).
Retailers may signal that a discount is being offered by displaying a ticket
referring to “Special” or “Saver” or “Extra Low”. In some cases, but notall, retailers may also display a reference price to indicate the product isbeing sold at a price lower than its usual price. For example, “Was $5,
now $3.50”. This practice can also be referred to as “was-now” pricing or“reference” pricing.

7.23.2Multi-buys: offers where consumers receive a discount if they purchasea certain number of units of a product (or a selection of products). For
example, “buy two, get one free”, “2 for $5” or “any 3 for $8”. These
offers can often be complemented by representations such as “Save$2.00” or “Special”. This practice may also be known as a volume offer orvolume discount.

7.23.3

Member-only discounts: price discounts which are only available toconsumers who swipe the relevant loyalty programme card. If theconsumer is not a member, or does not swipe their card, they arecharged a different, typically higher, price. For example, “Club Deals” areonly available to New World shoppers who swipe their Clubcard whencompleting their purchase. Similarly, “Club Prices” are only available toCountdown shoppers who swipe their Onecard.

Commerce Commission “Pricing fact sheet”, available at: https://comcom.govt.nz/consumers/dealingwith-typical-situations/buying-goods-and-services/pricing.

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7.23.4

EDLP: a pricing strategy based on offering a “low” price on certain
products for an extended period, as opposed to cycling between
discounted and non-discounted prices. Products which are offered at an
EDLP may also be subject to a shorter-term discount. The major grocery
retailers typically promote EDLP offerings through advertising anddisplaying tickets such as “Great Price” (Countdown) or “Everyday Value”(New World).

7.23.5

Unit pricing: the practice of displaying the price for a product withreference to standard units of measurement (for example, per litre or
per kilogram).
Figure 7.1

Example of unit priceSource: ACCC, Grocery unit prices.778

7.24

Where the retail banner offers an online service, we understand the same tickets
are used, though different promotions may be available (ie, “online-only”
promotions may be offered).

7.25

It appears common for other grocery retailers to offer specials and, like the major
grocery retailers, to dedicate webpages or sections for browsing discounted
products.779 Some smaller grocery retailers also appear to offer member-only
discounts. However, these appear to be less prevalent than among the major
grocery retailers.780

778
779

780

ACCC “Grocery unit prices” https://www.accc.gov.au/consumers/groceries/grocery-unit-prices.
For example: Panda Mart “Specials”, available at: https://www.pandamart.co.nz/specials; Farro“Specials”, available at: https://shoponline.farro.co.nz/collections/specials; Commonsense Organics“Specials”, available at: https://commonsenseorganics.co.nz/shop-online/specials/.
For example: Farro Fresh “Friends of Farro”, available at: https://www.farro.co.nz/friends-of-farro/;
Japan Mart “Join Japan Mart Club Card today”, available at: https://club.japanmart.co.nz/customer/.

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Table 7.1

Examples of promotional tickets used by the major grocery retailers

Mechanism

PAK’nSAVECountdown

New World

EDLP781Specials (includingreference prices) andmulti-buys782

Member-only discount(including member-only
multi-buys)783

Source: Commission analysis of information provided by major grocery retailers. 784

One-off promotions
7.26

Grocery retailers also sometimes offer “one-off” non-price promotions to all
consumers such as competition entry or collectibles campaigns. Examples of theseinclude New World’s “KitchenAid” and “SMEG Knives” promotions andCountdown’s “Bricks” and “Disney Words” promotions. The mechanics of thesepromotions vary. Some may offer consumers tokens when certain spend thresholds
are met, and a certain number of tokens can be redeemed on a gift, such as a
SMEG knife. Others may offer consumers a gift for spending a certain amount on
selected products.

7.27

We refer to these non-price promotions as “one-off promotions” in this chapter.

781

For Woolworths NZ, the average duration of a Great Price offering is currently on average [],[]. For New World stores, the target duration of an
Everyday Value offering is approximately [
], [
];
[
].

782

Individual New World stores in the North Island may also offer ‘Store Savers’.
New World stores in the North Island also display a yellow ‘Club Deal’ ticket.
[
]; [
[
].

783
784

];

275

Relevant loyalty programmes structures and benefits
7.28

We have also considered potential competitive effects of loyalty programmes, as
another dimension of competition.

7.29

Clubcard (New World) and Onecard (Countdown) are both coalition programmes,
because rewards can be earned with partners such as Flybuys or AA Smartfuel, andmember benefit programmes.785 Most of the programmes offered by other smaller
retailers are stand-alone, member benefit programmes as rewards are generally
earned and redeemed on products and services offered by those retailers. 786

7.30

Both Clubcard and Onecard offer member-only discounts, accumulated rewards
and personalised offers as described below, as well as entry into competitions.
Clubcard holders must register their Clubcard to gain access to any of the benefitsof that programme. Onecard holders do not need to register their Onecard to gain
access to member-only discounts, they can simply swipe their card at the point ofsale, but they need to register to be eligible for the other benefits.787

7.31

785

786

787

7.30.1Club Deals and Club Prices: consistent with our earlier definition, we
refer to Club Deals (Clubcard) and Club Prices (Onecard) as“member-only discounts” throughout this report. These discounts are
instant discounts provided to Clubcard members and Onecard holders.

7.30.2

Accumulated rewards: we refer to “accumulated rewards” to mean fuel,food (eg, vouchers to use in store or online) or other travel rewards suchas Flybuys and Airpoints earned via Clubcard and Onecard. This includes“New World Dollars” and Countdown “e-vouchers”.

7.30.3

Personalised offers: personalised offers are rewards or benefits that are
more targeted at individual consumers. Both Countdown and New World
currently provide targeted offers to some registered Onecard members
and Clubcard members respectively.

We discuss loyalty programmes from paragraph 7.120 of this chapter.

Coalition points-based programmes generally involve a variety of partners within one programme somembers can earn and redeem points with each partner.
Stand-alone points-based programmes generally offer members the ability to earn points when they
buy the product or service offered by the programme operator. Member-benefit programmes offer
members access to discounts and other benefits such as competition entry or personalised rewards.
This means consumers can gain access to member-only discounts via Onecard without registering thecard with Woolworths NZ and providing certain information such as their name and contact details.
Transaction information will still be provided.

276

Our survey, qualitative research and experimental economics helped to build ourunderstanding of the issues facing consumers
7.32

As noted earlier, our consumer survey of New Zealand grocery consumers helped
us identify themes relevant to our study and to better understand consumer
behaviour. We particularly sought consumers’ views on how they decide where toshop and what to buy, and why consumers join loyalty programmes. We received
12,269 responses to our consumer survey across a wide range of demographics.
Further information on our consumer survey is contained in Attachment E.

7.33

The qualitative research Ipsos conducted also helped to inform our understandingof consumers’ behaviour when they shop for groceries. Ipsos recruited consumers
to participate in this research from across the country. They participated by
preparing a “grocery diary” and attending an interview or a focus group. The
research is not intended to represent the views of all New Zealanders but provides
deeper insights into a range of perspectives. The report summarising the findings ofthis research were published alongside our draft report.788

7.34

Additionally, the experimental economic research conducted by WEEL at the
University of Waikato assisted our understanding of consumer decision making
under complexity. This research tested how complexity around promotional
mechanisms affects consumer decision making, using laboratory experiment datafrom 180 participants. Its research also considered whether displaying unit pricing
could mitigate some of these effects, if there are any. The findings of this researchwere published alongside our draft report.789

7.35

WEEL conducted this research under controlled laboratory conditions using
experimental methods, which are common practice in the field of behavioural
economics. There are many benefits of the experimental economic method,
including credibility, observability, and replicability.

7.36

The findings of the WEEL research have provided valuable insights into the impact
of promotional mechanisms of varying complexity on consumer decision making in
the New Zealand retail grocery environment.

788

789

Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021).
The University of Waikato “Consumer Decision-Making Under Complexity” (May 2021).

277

7.37

7.38

790

791

792

It is possible consumers may be more likely to be affected by complexity in a retailgrocery context than a controlled lab environment, in which case the scale of theeffects found by WEEL would tend to understate the real-world effects:
7.37.1

In a retail grocery environment, consumers may have less cognitive
capacity to compare products and offers due to time pressures and other
distractions. For example, grocery stores have a range of stimuli, notpresent in a lab environment, which may split focus and attention (suchas smells, sounds, signage, and other shoppers).790

7.37.2The experimental setting controlled for non-price preferences (ie,participants were indifferent between the “products”). Grocery products
have a range of characteristics (for example, flavour, brand, nutrition)
which consumers may also consider when selecting products.

7.37.3

Participants were required to make 20 product selection decisions, split
across four stages. Although this appears higher than an average grocerybasket, a grocery shopping trip likely requires many other decisions notpresent in the experiment (such as where to shop and which categories
to purchase from).791 Where more, or more complex, decisions are
required to be made, this can cause consumers to exert less effort inmaking each decision, increasing their reliance on decision-making
shortcuts.792

We also conducted a range of analysis on pricing and promotion data provided by
the major grocery retailers. Relevant to this chapter, this work explored thepromotional pricing practices of these retailers, including the prevalence ofpromotions within and between the PAK’nSAVE, New World, Countdown andFour Square, the frequency of promotions, and comparisons between promotionaland non-promotional prices. Attachment D summarises the relevant findings of thisanalysis.

New Zealand grocery retailers utilise a wide variety of in-store cues, merchandising and display
methods. For example: Christina Bava, Sara Jaeger and John Dawson “In-store influences on
consumers' grocery purchasing decisions: a qualitative investigation” (2009) 8(3) Journal of Customer
Behaviour 221 at 226, [].
The average units purchased per transaction appears to be in the region of 10 to 15. For example, theaverage units purchased per transaction from Countdown was [ ] for the year to 22 November 2020[]. Although we do not have data on average units for PAK’nSAVE and
New World transactions, spending data indicates this is comparable to Countdown
[
]; [
].
For example, Anastasia Pocheptsova, On Amir, R Dhar and R Baumeister “Deciding without Resources:
Resource Depletion and Choice in Context” (2009) 46(3) Journal of Marketing Research 344,
[
].

278

7.39

The analysis of promotional pricing is based on 12 months of pricing data from the
major grocery retailers over calendar year 2019. This period was chosen to ensure
any analysis would not be influenced by any impacts the COVID-19 pandemic hadon the grocery sector.

7.40

Media reports noted that many grocery retailers reduced the number of discounts
offered during the emergence of the COVID-19 pandemic in early 2020.793 We
therefore consider analysis conducted on 2020 data may not have provided an
accurate reflection of discounting practices in the sector.

Other sources of information we have relied upon
7.41

In addition to these sources of information, the major grocery retailers provided us
with a range of information regarding their pricing and promotional practices,
consumer research and loyalty programmes. We received a number of submissions
on these topics and we drew upon academic literature and studies conducted byoverseas agencies and organisations, including the ACCC and the OECD.

Promotional mechanisms and practices may affect consumers’ ability tocompare offerings and perceptions of value
7.42

Well-functioning markets build consumer confidence to participate in thosemarkets by providing consumers with access to information that helps them tomake informed decisions.794

7.43

Well-informed consumers may be better able to compare product offerings bothwithin store and between retailers and may develop a more accurate perception ofvalue that makes them more inclined to shop around between products andbetween retailers. This kind of consumer behaviour encourages retailers tocompete for consumers and creates value for consumers in the form of better
prices, range and quality of goods and services that competition can be expected to
produce.

7.44

The major grocery retailers told us that they provide information to assist
consumers with making informed decisions, including in relation to product shelf
prices, any promotional pricing, and, for some products, unit pricing.795

793

794

795

Stuff “Countdown to resume ‘specials’ and pay staff lockdown bonuses” (30 March 2020), available at:https://www.stuff.co.nz/business/120666733/supermarkets-coming-under-scrutiny-over-lockdownprices. Also see: Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 11: “[We] very temporarily suspended promotions and specials…to manage
extreme demand fluctuations, avoid running out of stock, and stabilise our supply chains”.
Commerce Commission “Statement of Intent – Our Approach for 2020-2024” (30 July 2020), available
at: https://comcom.govt.nz/__data/assets/pdf_file/0014/222305/Statement-of-Intent-20202024.PDF
at 13.
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 33-34; Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 68-69; Foodstuffs SI “Submission on retail grocery market study preliminary
issues paper” (4 February 2021) at 22-23; Woolworths NZ “Submission on retail grocery market study
preliminary issues paper” (4 February 2021) at 68.

279

7.45

However, others told us that the information provided can be confusing.796 This candecrease consumer confidence and make it harder for consumers to develop an
accurate perception of value, leading to less-informed purchasing decisions andpoor information being received by retailers which could reduce competition forthese consumers.

7.46

Each of the major grocery retailers compete for consumers by engaging inpromotional pricing as part of their pricing strategies (see Table 7.1). Foodstuffs SI
told us that there has been a historical consumer demand for products sold on
promotion, and it has responded to this demand by offering promotional pricing.797
Woolworths NZ made a similar submission, that “New Zealand consumers arehighly price conscious and love to purchase products on promotion.”798

7.47

Research conducted by the major grocery retailers indicates, for example, thatsome consumers want to see “eye-catching” specials, and many consumers reportlooking for promotions most or all the time when shopping.799 The Ipsos reportsimilarly found that promotions had broad appeal to a range of participating
consumers.800 Some submitters told us that some consumers rely on promotional
pricing, and are not able or willing to purchase products unless they are on
promotion.801

796

797

798

799

800

801

Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 9-10. Also see, National Council of Women New Zealand “Submission on Market study into grocery
sector draft report” (23 August 2021) at [11]; NZFGC “Post conference submission on Market study
into grocery sector” (25 November 2021) at [5.42]; Ian Jarratt “Submission on retail grocery market
study preliminary issues paper” (4 February 2021) at 6.
Foodstuffs SI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 23.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 71.
For example: [
];
[
]; [
];
[
].
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 9-10 and 43-44.
Comments by Kore Hiakai, Transcript of Grocery Market Study Conference – Day 2 (22 October 2021)
at 16 (lines 21-41).

280

7.48

Promotions have been frequently offered on a significant proportion of products
sold at New World, Countdown and PAK’nSAVE. In 2019, promotions (of any kind)
were relatively common for products in alcohol, dairy, meat, frozen products, andgeneral grocery categories.802 Many of these categories appear to generate highproportions of revenue for these retail banners.803

7.49

Where promotions are not misleading and offer genuine savings, they can provide
value to consumers in the form of cost savings and drive price competition.
Different discounting strategies may be used to influence consumer behaviour andencourage consumers to purchase the discounted product. These are common
techniques with sound commercial rationales. Discounts may be offered to manage
demand for products (for example, to shift products off the shelf), to retain
consumers, or attract consumers or certain types of consumers to a retailer andincrease market share.

7.50

However, even when discounts offer a genuine saving to consumers, the way
promotions are framed, and the frequency and prevalence of promotions, can add
complexity to consumer comparisons of offerings.804 Additionally, this can shiftconsumer attention away from the price paid and towards the magnitude, or otherfeatures, of the discount.

7.51

Some participants in the Ipsos research expressed feelings of frustration with thefrequency of specials and the inability to clearly discern whether a price represents
good value.805 Research provided by the major grocery retailers also indicates that
consumers want promotions to be clearer and easier to read.806

802

For example: paragraph D33 in Attachment D; [].
From October 2020 to January 2021 [ ] of New World sales in the North Island were from products
were on promotion: Foodstuffs NI “Submission on retail grocery market study preliminary issues
paper” (4 February 2021) (Confidential Version) at 36-37. This figure was [ ] for PAK’nSAVE North
Island and [ ] of sales for Four Square sales in the North Island. The proportion of products sold on
promotion at Countdown is [ ], Woolworths NZ “Submission on retail grocery market study
preliminary issues paper” (4 February 2021) (Confidential Version) at 68.

803

For example: [804

Also see, Consumer NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at [58]-[63].
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 10; also see, for example: Gorkan Ahmetoglu, Adrian Furnham and Patrick
Fagan “Pricing practices: A critical review of their effects on consumer perceptions and behaviour”(2014) Journal of Retailing and Consumer Services 21(5) at 696-707, available at:https://www.researchgate.net/publication/263049644_Pricing_practices_A_critical_review_of_their_
effects_on_consumer_perceptions_and_behaviour.
For example: [
];
[
].

805

806

]; [

].

281

7.52

In addition, participants in the WEEL research were least likely to make optimal
choices and tended to experience the greatest losses, when they were asked to
select the best option across multiple promotional mechanisms at the same time,or when faced with a more complex mechanism.807 We discuss this, and otherfindings from the WEEL research, in the next section of this chapter.

7.53

We have found that the major grocery retailers’ use of an array of different
promotional mechanisms, and their complexity and frequent use particularly in
combination with one another, makes it hard for consumers to accurately assess
the value of competing offers. This is unlikely to be mitigated by the major grocery
retailers’ current use of unit pricing, because of inconsistencies and other issues
with their unit pricing practices. We discuss these practices later in this chapter.

7.54

In these circumstances, consumers may find it harder to shop around and comparecompeting price offers or to develop accurate perceptions of value. This may
reduce the effectiveness of price competition in the longer term. This could also
affect the quality of information retailers receive about consumer preferences,
impacting their ability to respond to consumer demand. The same principles may
apply to smaller grocery retailers using the same or similar promotional
practices.808

7.55

The major grocery retailers have told us that they intend to increase their emphasis
on EDLP and decrease their use of short-term promotional pricing.809

7.56

807

808

809

810

7.55.1

Woolworths NZ submitted that this change has been driven by an effort
to simplify its pricing offer to consumers so they can make decisions thatbest meet their needs.

7.55.2

Foodstuffs SI submitted that this change reflects “growing trends”
among consumers for more consistent pricing.

Foodstuffs NI has also indicated it plans to reduce the number of different
promotional mechanisms used at its New World and PAK’nSAVE stores (with its
Four Square stores currently using only one mechanism).810

The University of Waikato “Consumer Decision-Making Under Complexity” (May 2021) at Table 6:
Stage 3 Experimental Results.
Common Sense Organics “Specials” https://commonsenseorganics.co.nz/shop-online/specials/;Tai Ping “Promotions” https://www.taiping.co.nz/; Farro Fresh “Specials”
https://shoponline.farro.co.nz/pages/specials. Some smaller retailers also offer discounts to loyalty
programme members.
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[381]; Foodstuffs SI “Submission on Market study into grocery sector draft report”(10 September 2021) at [378]; Woolworths NZ “Submission on Market study into grocery sector draft
report” (10 September 2021) at [9.1].
[].
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[382]. Foodstuffs SI has also indicated support for a reduction in the number of promotional
mechanisms and their use in combination: Foodstuffs SI “Submission on Market study into grocery
sector draft report” (10 September 2021) at [379].

282

Multiple and complex promotional mechanisms can make it harder for consumers tomake comparisons
7.57

As illustrated in Table 7.1 above, the major grocery retailers currently use a rangeof pricing and promotional mechanisms in store and online (where online shopping
is available). New World and Countdown each display at least four pricing tickets
and use a greater number of mechanisms (for example, the same ticket might beused for a multi-buy and a special or an EDLP offering might also be part of a multibuy). They also appear to sometimes use multiple tickets or representations toindicate a product is on promotion.811 For example, reference prices may be
accompanied by other representations such as “Save $2.00” or “Special”.

7.58

Consumer NZ considers that the major grocery retailers’ promotional pricing
practices make it difficult for consumers to assess the value of a “special”.812 It
raised concerns that this difficulty is compounded by the major grocery retailers’
use of different types of promotions, such as offering specials, EDLP andmember-only discounts.813

7.59

Consumer NZ’s view is consistent with research provided by the major grocery
retailers which indicated that the number of promotional labels could be causing
visual clutter and potentially confusing customers.814 Consumers with lower levelsof literacy may be particularly affected by the complexity of the number andlayering of various promotional mechanisms.815

7.60

The WEEL research tested how consumer purchasing decisions in a retail grocery
context are influenced by the existence of multiple promotional mechanisms, andwhether this leads to a reduction in consumer welfare compared to when
consumers are faced with fewer, or no promotional mechanisms. We
commissioned this research to help us to test any impact these mechanisms may
be having on consumer choice and competition.

811

812

813

814

815

[
[

]; [

];

].

Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at [60].
Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at [60]-[61]. Also see Transcript of Grocery Market Study Conference – Day 2 (22 October 2021) at 17(lines 7-19).
For example: [
];
[
]; [
].
Comments by Kore Hiakai, Transcript of Grocery Market Study Conference – Day 2 (22 October 2021)
at 16 (lines 6-11); The Salvation Army Te Ope Whakaroa “Submission on Market study into grocery
sector draft report” (23 August 2021) at [17].

283

7.61

The experiment was conducted in four stages, with each stage consisting ofmultiple decision rounds with varying mechanisms. In each decision round,participants were asked to decide how many (if any) units of the fictitious good(s)on offer they would like to buy. The aim in each decision round was to maximise
the value of the purchase.

7.62

To calculate the value of each purchase, WEEL assigned “buy back values” for the
goods which decreased with each additional unit purchased. Participants’ earnings
from each round were determined by the difference between the price they paid
for that unit and the “buy back value” of that unit.

7.63

The four stages of the experiment were:

7.64

816

7.63.1

Stage 1: One pricing mechanism at a time. Participants were presented
with only one mechanism at a time and asked to select the quantity ofunits which would provide them the most value.

7.63.2

Stage 2: Multiple pricing mechanisms but participants could only
purchase from one mechanism. Participants selected the quantity fromone mechanism which would provide them the most value.

7.63.3

Stage 3: Multiple pricing mechanisms and participants could purchasefrom any combination of mechanisms. Participants selected the
combination of mechanisms and quantities which would provide themthe most value.

7.63.4

Stage 4: Multiple pricing mechanisms with unit price. The same as Stage
3 but each product also displayed the unit price.

The mechanisms and tickets used in this experiment were modelled on thosecommonly used by the major grocery retailers, described earlier in this chapter,and incorporated both “simple” and “complex” mechanisms.816 For example:
7.64.1

One mechanism was a non-discounted price label “Good Value” andanother was a 20% discount labelled “Special”. These were considered“simple” mechanisms.

7.64.2More complex mechanisms were also tested, such as a multi-buy
labelled “Extra Saver” which offered a 25% discount if participantsbought five units or a “Club Discount” which offered a 15% discount if
participants “joined” the programme.

For a description of all mechanisms used, The University of Waikato “Consumer Decision-Making
Under Complexity” (May 2021) at Table 2: Pricing schemes.

284

7.65

The WEEL report found that the use of multiple promotional mechanisms caused
participants to make sub-optimal purchasing decisions.817 This means participants
were less likely to choose the offer providing the best value (ie, the pricing
mechanism and product quantity combination that offered the greatest benefit)
when faced with multiple pricing mechanisms, compared with when faced with
one, simple mechanism such as a “Special”.818

7.66

Depending on the range of mechanisms offered, participants were between 50%
and 90% less likely to make the optimal choice to meet their needs, compared towhen participants were presented with only one option with no discounting (ie, aproduct at full price with either no label or a “Good Value” label).819

7.67

The WEEL report also found that participants tended to experience greater losses
when they had to choose between a greater number of mechanisms in Stages 2
and 3, than in Stage 1.820 This means the difference between the value of the
choice the participant made, and the value of the optimal choice, tended to belarger than when making other less-complex decisions.

7.68

We consider these findings are relevant to the use of similar mechanisms andpractices in the retail grocery sector. The use of multiple promotional mechanisms
by the major grocery retailers may be making it harder for consumers to makepurchasing decisions that best reflect their preferences and meet their particularneeds. This is because:

817
818

819

820

821
822

7.68.1

participants faced real financial consequences in the experiment, as their
payment was dependent on their ability to choose the best outcome;821

7.68.2the schemes presented to participants in the experiment were designed
to replicate those commonly offered by the major grocery retailers;822
and7.68.3decision making in the retail context is likely to be more challenging thanthe conditions participants were presented with in a laboratoryenvironment (discussed above at paragraph 7.35).

The University of Waikato “Consumer Decision-Making Under Complexity” (May 2021) at iii and 16.
The University of Waikato “Consumer Decision-Making Under Complexity” (May 2021) at iii and 16.
The magnitude of this effect did not depend on how the “special” was framed ie, “was/now” or “save$x”.
This result controls for unobservable, and some observable, differences between participants, such as
their willingness to exert effort and their performance in the simplest task. The University of Waikato“Consumer Decision-Making Under Complexity” (May 2021) at Table 6: Stage 3 Experimental Results.
The University of Waikato “Consumer Decision-Making Under Complexity” (May 2021) at Table 6:
Stage 3 Experimental Results in comparison to Table 4: Stage 1 Experimental Results.
The University of Waikato “Consumer Decision-Making Under Complexity” (May 2021) at 2 and 6.
The University of Waikato “Consumer Decision-Making Under Complexity” (May 2021) at 6.

285

7.69

We have found that the use of complex and/or multiple promotional mechanisms
by the major grocery retailers may make it harder for consumers to compare prices
of products in store, even when there are genuine savings and the information
provided is clear. Similar observations were made in Consumer NZ’s submission andresearch provided by the major grocery retailers, as noted in paragraphs 7.57 and7.58. This means consumers may not be able to easily choose the best option forthem, which may feed inaccurate information on preferences back to retailers andreduce the effectiveness of price competition between grocery retailers in thelonger term.

Framing of promotions may distort consumer decision making
7.70

The way that a promotional mechanism is framed can also affect consumer
decision making. Our view is that the more complex the mechanism, the moredifficult it may be for consumers to reach an informed decision about the value that
it offers them. Nevertheless, as previously discussed, discounts can provide value toconsumers and drive price competition between the major grocery retailers.

7.71

While the use of any single discount mechanism does not necessarily impact
competition in a material way, the frequent and prevalent use of multiple and/or
complex mechanisms makes it harder for consumers to easily understand andevaluate price information, and to form accurate perceptions of price and value. It
may also cause consumers to be less inclined to shop around for products andretailers.823

7.72

Participants in the WEEL research were less likely to make the optimal purchasedecision (ie, purchase the correct number of units) when asked to select from acomplex discount mechanism, compared to when they were asked to select from a
simple mechanism.824 The effect on participants’ decision making depended on themechanism:825

823

824
825

7.72.1

Multi-buy: 85% less likely to make the optimal choice.

7.72.2

Buy 3, get 1 free: 59% less like to make the optimal choice.

7.72.3

Member-only discount: 46% less likely to make the optimal choice.

For example: Gorkan Ahmetoglu, Simon Fried, John Dawes, and Adrian Furnham “Pricing Practices:
Their Effects on Consumer Behaviour and Welfare – prepared for the Office of Fair Trading”(March 2010) at 20, available at:https://webarchive.nationalarchives.gov.uk/20140402172955/http://oft.gov.uk/shared_oft/business_leaflets/659703/Advertising-of-prices/Pricing-Practices.pdf; Gorkan Ahmetoglu, Adrian Furnham andPatrick Fagan “Pricing practices: A critical review of their effects on consumer perceptions andbehaviour” (2014) Journal of Retailing and Consumer Services 21(5) at 699, available at:https://www.researchgate.net/publication/263049644_Pricing_practices_A_critical_review_of_their_
effects_on_consumer_perceptions_and_behaviour.
The University of Waikato “Consumer Decision-Making Under Complexity” (May 2021) at 15.
The University of Waikato “Consumer Decision-Making Under Complexity” (May 2021) at Table 4:
Stage 1 Experimental Results.

286

7.73

In addition to participants being less likely to make the optimal choice, the WEEL
report found that participants tended to experience greater losses when faced witha single more complex mechanism. This means the difference between the value ofthe choice the participant made, and the value of the optimal choice, tended to belarger than when making less-complex decisions (such as choosing between fewer,or simpler, mechanisms).

7.74

For example, in Stage 1, when participants were presented with only the complex“5 for $x” multi-buy, and then asked to select the quantity that would provide them
the best value, they experienced a 16% greater loss compared to when they had toselect from a simpler mechanism.826

7.75

Participants’ losses were slightly less in Stage 3 when they were presented withmany mechanisms (including the complex multi-buy offer), but were able to selectfrom any of them.827 However, the proportion of participants who made theoptimal choice was similarly low in both Stage 1 and 3. WEEL considered this may
be because, when given the option, some participants chose to ignore the complex
mechanisms and instead focus on the simpler ones.828

7.76

In this section of this chapter, we describe the features of the commonly usedpromotional mechanisms that have the potential to benefit consumers, and thosethat may distort consumer decision making.

7.77

As we discuss in the final section of this chapter, we regularly receive complaints
from consumers about promotional mechanisms creating confusion or being
misleading. Whether or not complaints disclose any breach of the FTA, the fact thatcomplaints are made, and the volume of complaints, may indicate that someconsumers lack confidence in the major grocery retailers’ pricing practices and thismay decrease consumer sensitivity to price-based competition.829

Reference pricing
7.78

826

827

828
829
830

Research shows that some consumers find secondary cues, such as a reference
price, important for assessing the value of longer-term offers.830

In the case of the multi-buy, participants could purchase five units at a discount, or single units at thefull price. This may explain why participants faced losses even under one scheme, as the optimalquantity may have required purchasing a combination of the multi-buy and single units.
The University of Waikato “Consumer Decision-Making Under Complexity” (May 2021), Table 6: Stage
3 Experimental Results at 19.
The University of Waikato “Consumer Decision-Making Under Complexity” (May 2021) at 16.
We discuss our approach to the complaints we have received in paragraphs 7.201 to 7.205.
For example:
[
].

287

7.79

Accurate and clearly indicated reference prices that offer a genuine saving can bebeneficial for consumers trying to select the offer that best reflects theirpreferences.831 Reference prices can be an efficient way for retailers todemonstrate discount price offers that may be valued by consumers and help
reduce search costs associated with finding a good deal.832

7.80

However, even when they offer a genuine saving, reference prices may also
influence consumer perceptions of the value of the product and shift consumer
focus away from the actual price paid to the size of the discount or perceived
savings.833 For example, reference pricing can affect consumer perceptions of thelowest price available in the market and the potential savings they may gain bypurchasing the advertised product.834

7.81This may influence consumers to buy products they would not otherwise haveconsidered buying and/or be less inclined to shop around and compare prices. 835
This can limit their ability to develop a well-informed perception of value and theirawareness of alternative offers between retailers, influencing where they choose to
shop.

7.82

Some research indicates the effect of reference prices on consumer perceptions
appears to be larger with unfamiliar brands, and with expensive or infrequently
encountered products.836 It does not appear that familiarity with reference prices
over time reduces or mitigates the distortion of consumer decision making.837

831

832

833

834

835

836

837

Gorkan Ahmetoglu, Simon Fried, John Dawes, and Adrian Furnham “Pricing Practices: Their Effects on
Consumer Behaviour and Welfare – prepared for the Office of Fair Trading” (March 2010) at 20,
available at:https://webarchive.nationalarchives.gov.uk/20140402172955/http://oft.gov.uk/shared_oft/business_leaflets/659703/Advertising-of-prices/Pricing-Practices.pdf.
Office of Fair Trading “Advertising of Prices” (December 2010) at [4.3]-[4.4], available at:https://webarchive.nationalarchives.gov.uk/20140402173016/http://oft.gov.uk/shared_oft/marketstudies/AoP/OFT1291.pdf.
For example: Office of Fair Trading “Advertising of Prices” (December 2010) at [4.4], available at:https://webarchive.nationalarchives.gov.uk/20140402173016/http://oft.gov.uk/shared_oft/marketstudies/AoP/OFT1291.pdf.
Gorkan Ahmetoglu, Adrian Furnham and Patrick Fagan “Pricing practices: A critical review of theireffects on consumer perceptions and behaviour” (2014) Journal of Retailing and Consumer Services
21(5) at 696-707, available at:https://www.researchgate.net/publication/263049644_Pricing_practices_A_critical_review_of_their_
effects_on_consumer_perceptions_and_behaviour.
Office of Fair Trading “Advertising of Prices” (December 2010) at [4.4] and [4.9]-[4.22], available at:https://webarchive.nationalarchives.gov.uk/20140402173016/http://oft.gov.uk/shared_oft/marketstudies/AoP/OFT1291.pdf.
Biswas and Blair “Contextual effects of reference prices in retail advertisements” (1991) at 1-12;
Nottingham University Business School. “Research Into Misleading Price Comparisons: A report
prepared for the Office of Fair Trading” (June 2005).
Office of Fair Trading “Advertising of Prices” (December 2010) at [4.26] to [4.31], available at:https://webarchive.nationalarchives.gov.uk/20140402173016/http:/oft.gov.uk/shared_oft/marketstudies/AoP/OFT1291.pdf.

288

Multi-buy offers
7.83

Where multi-buy (or volume) offers are clear, there can be benefits to consumers
in the form of a lower per-unit price. Foodstuffs NI submitted that multi-buy offers
are an important mechanism to offer value to consumers, used across a range ofretailers throughout New Zealand.838 However, they are a more complex
promotional mechanism which may make it harder for consumers to assess thevalue of the promotion. Consumer NZ submitted that “confusing multi-buys are [a]barrier to product comparisons”.839

7.84

Multi-buy offers appear to be used relatively less frequently by the major grocery
retailers than other forms of promotions.840 However, as shown in Figure 7.2
below, in 2019 multi-buys offered slightly greater discounts than other promotions.
Across retail banners, the median discount ranges from around 10% to 30%
depending on the retail banner and type of promotion, compared to the weighted
average non-promotional price.

Figure 7.2
Median and 2.5th/97.5th percentiles of weighted average promotional prices
versus non-promotional prices across all retail banners, by promotion type

Source: Commission analysis of pricing and promotional data.841

838

839

840

841

Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[384].
Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at [55]. Health Coalition Aotearoa similarly submitted that “multiple product promotional
options…make it confusing for shoppers”, Health Coalition Aotearoa “Submission on Market study
into grocery sector draft report” (2 September 2021) at 3.
While their prevalence varied by retail banner, and by store, multi-buy offers were offered anywhere
between five and 25 times less often than simple discounts in any given week in 2019, see Figure D6.
Woolworths NZ has advised that in calendar year 2019, approximately [ ] SKUs on average were on
multi-buy in any single week, [
].
[

].

289

7.85

The major grocery retailers offer multi-buys to drive consumer engagement, attract
certain groups of customers that may be more inclined to purchase discounted
products and/or grow sales of a particular product.842 However, some evidenceshows that some consumers feel sceptical of multi-buy offers or they feel that they
had to purchase more than they need.843 This may harm consumer confidence.
Complex multi-buy offers may also:844

7.86

7.85.1

induce some consumers to buy more of a product than they would if it
was subject to a single-unit discount even if the level of the discount is
the same;

7.85.2

induce some consumers to switch towards the promoted product, evenwhen they do not purchase enough units to qualify for the offer and are
therefore not benefitting from the saving; and7.85.3signal to some consumers that there is a saving, even if consumers areunable to verify this.

As noted above, the WEEL research found that, out of all discounting mechanisms
tested, multi-buy offers (either “buy 3 get 1 free” or “5 for $x”) caused the greatest
loss in consumer welfare for participants, compared to when they were displayedwith only the simplest pricing display (ie, no discount).845 This is consistent with the
Ipsos report where some participants said that multi-buy offers can make it moredifficult to determine value.846

842

[

843

[
].
For example, Gorkan Ahmetoglu, Simon Fried, John Dawes, and Adrian Furnham “Pricing Practices:
Their Effects on Consumer Behaviour and Welfare – prepared for the Office of Fair Trading”(March 2010) at 30, available at:https://webarchive.nationalarchives.gov.uk/20140402172955/http://oft.gov.uk/shared_oft/business_leaflets/659703/Advertising-of-prices/Pricing-Practices.pdf. See also, Gorkan Ahmetoglu, Adrian
Furnham and Patrick Fagan “Pricing practices: A critical review of their effects on consumer
perceptions and behaviour” (2014) Journal of Retailing and Consumer Services 21(5) at 701, available
at:https://www.researchgate.net/publication/263049644_Pricing_practices_A_critical_review_of_their_
effects_on_consumer_perceptions_and_behaviour.
The University of Waikato “Consumer Decision-Making Under Complexity” (May 2021) at 15.
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 45. This is consistent with qualitative research conducted in the UK: BDRC
Continental “Grocery Pricing – Qualitative Research Report” (12 June 2015) prepared for theCompetition Markets Authority, at 23, available at:https://assets.publishing.service.gov.uk/media/55a68c41ed915d151b000005/Annex_F__Grocery_Pricing_Qualitative_Research_Report__Prepared_by_BDRC_Continental_for_the_CMA__1
2_June_2015.pdf: participants reported finding multi-buy offers confusing and made it harder tocompare the value of products.

844

845
846

]; [

].

290

Member-only discounts
7.87

When offering a member-only discount, both New World and Countdown display
the member-only and non-member/standard shelf price for products. However,Consumer NZ receives regular complaints from consumers who choose an item
expecting to receive a discount which they are not entitled to as a non-member.847

7.88

The Ipsos report noted that some participants disliked that the price shown on
in-store signage may be a members-only price and differ from the product pricethat they may be expected to pay. Some participants said this is ‘unfair’ and‘misleading’.848 We received approximately 20 comments in response to ourconsumer survey raising difficulties with ascertaining and comparing prices where amember-only discount was offered.849 Most of these comments related to New
World’s Club Deals.

7.89

Our pricing analysis for the calendar year 2019 found that Club Deals in New World
across the North Island and Club Prices in Countdown appeared to be less prevalentthan other types of promotions such as New World’s “Saver” and “Super Saver”
and Countdown’s “Super Saver”.850 That is, member-only discounts were applied toa lower proportion of SKUs than other types of promotions. In the South Island, theopposite was true: Club Deals were more common than other types of promotions.

7.90

Member-only discounts can increase complexity of decision making. Member-only
discount tickets present consumers with two prices – a shelf price and amember-only price – in addition to other information. Consumers must then use
this information to assess which price they will pay depending on whether they areentitled to receive the discount. Even when this information is available anddisplayed prominently, these discounts may make it more time consuming for
consumers to make product comparisons and selections.

7.91

Consumers may face further difficulties and ultimately mistake a member-only
discount for a regular promotion where:851

847

848

849
850
851

7.91.1the member-only price is prominently displayed, compared to the shelf
price which may be shown in smaller font; and/or

7.91.2the member-only price ticket is not easily distinguishable from otherpromotional tickets.

Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at [87].
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 43.
See paragraph E184 in Attachment E.
See Figure D3.
Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at [85]-[86]; NZFGC “Submission on Market study into grocery sector draft report” (26 August 2021) at[5.16]; comments by Consumer NZ, Transcript of Grocery Market Study Conference – Day 2(22 October 2021) at 6, lines 14-20.

291

Figure 7.3

Examples of member-only discounts in store

Source: Ipsos report.852

7.92

Some consumers may therefore mistakenly select a product that is subject to amember-only discount, assuming they will pay the discounted price even if they are
not eligible to receive the discount because they are not members of the relevant
loyalty programme or do not have their loyalty card with them to swipe at the
point of sale.

Everyday low price7.93

We have also seen that some consumers appear to have low awareness orunderstanding of the major grocery retailers’ EDLP mechanisms. In particular, someconsumers do not appear to understand that these mechanisms offer alonger-term low price.853 Instead, some consumers interpret these mechanisms aslimited or short-term promotions, which may influence consumer perceptions of
the value of the offer and consequent purchasing decisions.

It is unclear if one-off promotions are harming competition
7.94

852

One-off non-price promotions are an example of how the major grocery retailers
compete. They are generally designed to drive short-term increased spend (overthe promotion period) and encourage consumers to come back to their store more
frequently.854

Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 44.

853

[
].
854

[

]; [

].

292

7.95

The mechanics of these promotions can vary, along with the benefits offered toconsumers. For example:
7.95.1

New World’s (both North Island and South Island) week-long “Start
Fresh” free Sistema lunch box promotion whereby consumers could
receive a free Sistema lunch box when they spent $150 in a single
transaction on qualifying products.855

7.95.2

Countdown’s “Containers” 14-week promotion provided consumers an
opportunity to earn stamps by spending $20 which were redeemable oncontainers of different sizes.856

7.96

One-off promotions may, however, desensitise consumers to price competition byraising consumer switching costs. This is more likely for promotions structured likethe latter example above, where consumers earn a certain number of tokens toredeem a benefit. Like with loyalty programmes, discussed later in this chapter, a“points pressure mechanism” can encourage consumers to increase the frequency
and/or spend to obtain the benefit. The points pressure mechanism is a type of biasthat highlights consumer behaviour in reaction to goals whereby the closer
someone is to reaching a goal, the faster consumers move to try to achieve it.857
Switching to another retailer could mean consumers are delayed in reaching theirgoal or will not earn enough tokens before the promotion ends.

7.97

The major grocery retailers indicate that one-off promotions do drive at least
short-term sales growth and market share increases for the duration of thepromotion.858 Some consumers report they would be more likely to shop at a major
grocery retailer while it was running a one-off promotion, and some say they would
continue shopping at the relevant retailer after the promotion had ended.859

855

[

856

[
].
This can be seen often in loyalty programmes where firms offer, for example, bonus points when aconsumer is close to a threshold, as an incentive to increase spend. For example: Matilda Dorotic,
Tammo Bijmolt and Peter Verhoef “Loyalty Programmes: Current Knowledge and Research
Directions” (2011) International Journal of Management Reviews, Vol. 14, at 219, available at:https://www.researchgate.net/publication/229915137_Loyalty_Programmes_Current_Knowledge_an
d_Research_Directions/link/5a02c38c0f7e9b68874e170e/download.
For example: [
];
[
]; [
].

857

858

859

For example: [
[

]; [

].

];
]; [

].

293

7.98

Where the potential effects are transitory, one-off promotions may be unlikely toraise significant competition concerns. The scope for these effects on consumer
switching costs may be increased the longer the promotion runs, the more
frequently they are run and/or how valuable the potential reward is to consumers.

7.99

In addition, the frequent and prevalent use of one-off promotions, combined withthe other promotional mechanisms identified earlier, may add to the complexity of
consumer decision making, making it harder for consumers to develop accurate
perceptions of value.

Price comparison websites may assist consumer decision making
7.100

Price comparison websites aggregate product information from different retailers,
enabling consumers to digitally compare prices of alternative suppliers for thesame or substitutable products. In the grocery sector, this can include the ability tocreate virtual shopping baskets that compare prices of a total shopping basket,
rather than just individual products. Price comparison websites can promotecompetition by making it easier for consumers to make well-informed decisions
when choosing where to shop or what to buy.

7.101

There is currently one price comparison website for retail grocery in New Zealand:
FoodMe, but we understand that there are other services in development. FoodMe
does not appear to be widely used by consumers. Similar services are offered inAustralia, such as Frugl and GroceryGetter.

7.102

Whether price comparison websites promote competition is likely to depend on
the specifics of the market. Price comparison websites can reduce search costs for
consumers and provide a means for consumers to shop around more easily, which
provides stronger incentives for firms to improve their offerings. In some markets,
there is a risk that a price comparison website could facilitate coordination byincreasing price transparency for firms. However, we consider that the additionalrisk of coordination associated with the use of price comparison websites in theretail grocery sector is likely to be low. This is in part because a high degree of pricemonitoring is already undertaken by firms and pricing is already publicly available,
often online.

7.103

The wide range of products, the low ticket-value of most individual grocery items,
and the requirements of different shopping missions, can make price comparison
considerably more difficult than in markets with more homogenous and ‘big-ticket’
products, such as the comparison of retail electricity prices which is supported by
an existing price comparison website in New Zealand.

7.104

Nevertheless, there is some international evidence in the retail grocery sector thatprice disclosure and the use of price comparison websites can reduce prices for
consumers.860

860

For example, Ater, I., & Rigbi, O. “The Effects of Mandatory Disclosure of Supermarket Prices” (2017)
http://dx.doi.org/10.2139/ssrn.3046703.

294

Unit pricing can lead to more informed decisions and drive competition
7.105

Ready access to unit pricing can help consumers compare prices across products ofdiffering qualities to assist consumers assess their relative value, and more easilychoose the product that is best for them.861 This proposition appears to be broadly
agreed among submitters.862 When consumers are better able to compare offers,
they can develop more accurate perceptions of value over time, and retailers are
more likely to be incentivised to compete on price.

7.106

Research indicates that the display of unit pricing for products facilitates better
value comparisons beyond price, decreasing the time consumers take to makedecisions, and improving the accuracy of the results.863 It assists consumers by
improving the information available to them, particularly within a store, and canincrease price competition between products and between stores.864 Some
research has shown that over time unit pricing will result in cost savings for
consumers as the quality of price comparisons can improve.865

861

862

863

864

865

Competition Markets Authority “Pricing Practices in the Groceries Market, Response to a supercomplaint made by Which? On 21 April 2015” (16 July 2015) at 4, available at:https://www.gov.uk/cma-cases/groceries-pricing-super-complaint.
Tupe Solomon-Tanoa’I “Post conference submission on Market study into grocery sector”(26 November 2021) at 1; Ian Jarratt “Submission on retail grocery market study preliminary issues
paper” (4 February 2021) at 2; Woolworths NZ “Submission on Market study into grocery sector draft
report” (10 September 2021) at [8]; Foodstuffs NI “Submission on Market study into grocery sector
draft report” (10 September 2021) at [385]; Foodstuffs SI “Submission on Market study into grocery
sector draft report” (10 September 2021) at [381]; National Council of Women NZ “Submission onMarket study into grocery sector draft report” (23 August 2021) at [13]; Auckland Regional Public
Health Service “Submission on Market study into grocery sector draft report” (2 September 2021) at
4.
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 47-48; Dr Svetlana Bogomolova and Ian Jarratt “Unit pricing insupermarkets: review of past evidence from academic and industry studies” (18 October 2016)
prepared for Working Group of the International Standards Organisation Project Committee ISP/OC
294, at 10, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2853977.
For example, ACCC “Report of the ACCC inquiry into the competitiveness of retail prices for standard
groceries” (July 2008) at 450, available at:https://www.accc.gov.au/system/files/Grocery%20inquiry%20report%20-%20July%202008.pdf. Unit
pricing can also provide some assistance to consumers comparing prices between retailers.
For example, ACCC “Report of the ACCC inquiry into the competitiveness of retail prices for standard
groceries” (July 2008) at 449, available at:https://www.accc.gov.au/system/files/Grocery%20inquiry%20report%20-%20July%202008.pdf.

295

7.107

7.108

866

867

868

869

870
871

Unit pricing is not currently mandatory in New Zealand in any retail market but isused to an extent by the major grocery retailers. For example, Foodstuffs SI displays
unit pricing on all barcoded products to assist consumers with comparing productofferings, and Foodstuffs NI has increased its use of unit pricing for this reason.866
Woolworths NZ told us that its prices are transparent and accessible including
through the display of unit pricing for most products.867
7.107.1

Foodstuffs NI and Foodstuffs SI advised that New World and PAK’nSAVE
provide unit pricing for most products.868 Unit price is not always
displayed for products on promotion.869 We understand from Foodstuffs
NI that all products that normally display a unit price do so when on andoff promotion, except for products on multi-buy offer.870 Unit price is notprovided for, for example, tobacco products which are not displayed toconsumers, and products that are not sold by a standard measurementof weight or volume. We understand this approach is consistent acrossall New World and PAK’nSAVE stores and online (where applicable).

7.107.2

Countdown displays unit pricing for most of its packaged grocery andperishable products including for products on promotion.871 Countdown
does not provide unit pricing for “pre-priced” items such as gift cards,
tobacco, and products with no weight data. We understand thisapproach to unit pricing is consistent across all Countdown stores andonline.

Each major grocery retailer currently determines the appropriate unit ofmeasurement for their respective approach to unit pricing and it varies by product.
For example, herbs and spices may display the price per 10 grams and flour per
kilogram.

Foodstuffs SI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 23; Foodstuffs NI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 33-34.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 71.
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 33; Foodstuffs SI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 23; [];[].
Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at [52]-[54].
[].
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 71;
[
]; [
].

296

7.109

The major grocery retailers do not appear to collect information about how
consumers use unit pricing in the context of purchasing decisions. However, many
consumers have reported referring to unit pricing when assessing the value ofgrocery products. For example, over 30% of respondents to our consumer survey
reported always checking unit pricing when it is available, and over a further 30%
said they “usually” check the unit price.872

7.110

In addition, the WEEL research reported weak statistical evidence that display ofunit price may help to mitigate the effects of the use of multiple promotional
mechanisms on the optimality of consumer decision making (discussed earlier).873

Inconsistent use of unit pricing by the major grocery retailers may inhibit decision making
7.111

Although unit pricing is offered by the major grocery retailers for many products,
we have heard concerns regarding the consistency and clarity of the display of unit
price information.

7.112

There is less scope for consumers to realise the benefits of unit pricing, andincreased potential for confusion, if unit pricing is poorly or inconsistently
displayed.874 This was a theme in several submissions received in response to ourpreliminary issues paper and our draft report.

7.113

For example, Consumer NZ submitted:875
Product comparisons in store are complicated by several factors. Inconsistent unit
pricing is one of these. While both supermarket chains have voluntarily introduced
unit pricing, our surveys have found its display is variable.
[…] Where the unit price is displayed, its often shown in very small font, much smaller
than the retail price. Unless shoppers make an effort to look for the information, they
may not know it’s there.

872

873
874

875

See Figure E26; Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector– Consumer study report” (July 2021) at 47: many participants reported that they look at unit pricing
when shopping.
The University of Waikato “Consumer Decision-Making Under Complexity” (May 2021) at iii.
Competition Markets Authority “Pricing Practices in the Groceries Market, Response to a supercomplaint made by Which? On 21 April 2015” (16 July 2015) at 4, available at:https://www.gov.uk/cma-cases/groceries-pricing-super-complaint; Dr Svetlana Bogomolova and Ian
Jarratt “Unit pricing in supermarkets: review of past evidence from academic and industry studies”(18 October 2016) at 13-14, available at:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2853977.
Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at [51]-[52]. Also see Consumer NZ “Submission on Market study into grocery sector draft report”(26 August 2021) at 6; National Council of Women NZ “Submission on Market study into grocery
sector draft report” (23 August 2021) at [13]; Health Coalition Aotearoa “Submission on Market study
into grocery sector draft report” (2 September 2021) at 3; NZFGC “Submission on Market study into
grocery sector draft report” (26 August 2021) at [5.12].

297

7.114

Consumer NZ also identified differences in the units of measure used, and that unit
pricing is not always shown for products on promotion.876 For example, Consumer
NZ’s 2020 online supermarket price survey identified that New World does notprovide unit prices for Super Saver, Club Deal or multi-buy products online.877
These inconsistencies can further complicate product comparisons andassessments of value.

7.115

Another submission noted that it is not easy enough for consumers to compare
value for money because grocery retailers are not required to provide:878
7.115.1

the unit price for grocery products sold in fixed measure pre-packages;or7.115.2

unit pricing that meets certain standards of accuracy and consistency inthe units of measure used.

7.116

These submissions are consistent with the findings of the Ipsos report. Participants
expressed that they find unit pricing useful, but that it needs to be more consistentand more simply communicated by the retailers.879 Participants noted differencesin the units of measurement displayed across brands and reported frustration thatsome products did not display the unit price at all.880

7.117

Unlike in Australia, specific units of measurement are not prescribed by legislationor otherwise required to be used by retailers in New Zealand.881

7.118

Inconsistencies in the approach to unit pricing may limit the benefits consumers
can derive from it, and adversely affect consumers’ ability to make meaningfulcomparisons between products.882 The same may apply to comparisons between
retailers and the development of an informed perception of value which helps
consumers choose where they would like to shop.

7.119

Where unit pricing information is not consistently available or cannot easily beassessed and acted upon by consumers, they may be less able to make informed
decisions and less likely to shop around. This may reduce the major grocery
retailers’ incentives to engage in price-based competition.

876

877

878

879

880

881
882

Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at [52]-[54].
Consumer NZ “Supermarket price survey” (5 August 2020), available at:https://www.consumer.org.nz/articles/supermarket-price-survey.
Ian Jarratt “Submission on retail grocery market study preliminary issues paper” (4 February 2021) at
6.
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 10.
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 47-48.
Ian Jarratt “Submission on Market study into grocery sector draft report” (26 August 2021) at 5.
Competition Markets Authority “Pricing Practices in the Groceries Market, Response to a supercomplaint made by Which? On 21 April 2015” (16 July 2015) at 4, available at:https://www.gov.uk/cma-cases/groceries-pricing-super-complaint.

298

Loyalty programmes may affect consumer decision making and reduce pricecompetition
7.120

It is common for New Zealand grocery consumers to be members of one or moreloyalty programmes. A 2020 review of loyalty programmes by Consumer NZ foundthat Countdown’s Onecard programme had two million members; New World’s
Clubcard had 1.6 million.883 The majority of sales at both New World andCountdown are associated with the respective loyalty programmes.884

7.121

The primary purpose of loyalty programmes is to attract and retain consumers, andsome features have the potential to adversely affect competition, including by
reducing consumers’ willingness to shop around. Some consider that the major
grocery retailers’ loyalty programmes could adversely affect consumers in otherways, for example, by making it harder to make well-informed decisions, reducing
retail competition and leading to different prices for different groups ofconsumers.885

7.122

Through these programmes, retailers can gather consumer data, including on
consumers’ preferences and purchasing behaviour. This data can be used to
improve product ranges, and to offer a more personalised consumer experience,
which some consumers may value. This is consistent with the submissions by the
major grocery retailers.886

883

Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at [73] citing Consumer NZ “How much are loyalty schemes earning from your data?”(28 January 2020), available at: https://www.consumer.org.nz/articles/how-much-are-loyaltyschemes-earning-from-your-data. This appears to be consistent with information provided by the
major grocery retailers, though additional consumers may hold an unregistered Onecard (and canaccess member-only discounts). For example: [
];
[
].

884

For example, the latest figures provided by Woolworths from March 2021 recorded that [ ] of salesand [ ] of transactions occur with a Onecard []; Foodstuffs NZ
reported that in April 2018, Clubcard scan rates were over [ ] of sales for the South Island and around[ ] for the North Island [].

885

For example: Consumer NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at [72]-[87]; Consumer NZ “Submission on Market study into grocery sector draft
report” (26 August 2021) at 10; NZFGC “Submission on retail grocery market study preliminary issues
paper” (4 February 2021) at 52; NZFGC “Submission on Market study into grocery sector draft report”(26 August 2021) at [5.14]-[5.15].
For example: Foodstuffs SI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 24-25; Woolworths NZ “Submission on retail grocery market study preliminary
issues paper” (4 February 2021) at 72-74.

886

299

7.123

Loyalty programmes can also provide benefits to consumers such as loyalty
discounts and lower prices. Some consumers may also use loyalty programme
offers to shop around where they are members of multiple programmes within thesame sector.887

7.124

We have found that consumers do not have a good understanding of the terms andconditions applying to the loyalty programmes that they subscribe to. Even whensome information is made available to consumers, they may lack the necessarytime, or other resources, to adequately understand and assess the details.888 The
terms and conditions are complex and lengthy, and consumers may face
“information overload”.889 When faced with complex or a high volume of
information, consumers tend to pull out the certain details they consider mostimportant at the time they read it.

7.125

For example, over 60% of respondents to our consumer survey reported that theyeither skimmed the key parts or did not read any of the terms of conditions of theloyalty programme they use most often.890 Less than one in 10 respondents
reported reading all the terms and conditions.891

7.126

Some consumers may also face literacy and accessibility challenges and therefore
join the programmes to gain access to discounts without fully understanding theterms and conditions or how their data is used.892

7.127

Complex rewards structures can make it harder for consumers to understand how
discounts and rewards are earned, and to compare them with those offeredthrough other loyalty programmes and other promotional mechanisms. Like
confusion relating to promotional mechanisms, this can reduce price transparency,
make consumers less responsive to price-based competition, and reduce the major
grocery retailers’ incentives to engage in price competition.

887

888

889

890
891
892

ACCC “Customer loyalty schemes – Final report” (December 2019) at 104-105, available at:https://www.accc.gov.au/system/files/Customer%20Loyalty%20Schemes%20%20Final%20Report%20-%20December%202019.PDF.
For example, some consumers have reported infrequently engaging in tasks which were potentiallytime or resource intensive, such as reading New Zealand privacy laws or reading a business’ privacy
policy: [].
“Information overload” is a type of heuristic where consumers make a mental shortcut when facedwith complex information and limited time or capacity to process it. For example, OECD “Improving
online disclosures with behavioural insights: Towards better outcomes for consumers” (12 April 2018)at 20, available at: https://www.oecd-ilibrary.org/docserver/39026ff4en.pdf?expires=1624245521&id=id&accname=guest&checksum=6F0E09D5B6CC33E4F01B48607F1B7126.
Figure E32.
Figure E32.
Christians Against Poverty “Post conference submission on Market study into grocery sector”(23 November 2021) at 3.

300

7.128

The major grocery retailers compete to obtain consumer data through loyalty
programmes by offering incentives such as member-only discounts and rewards. As
discussed below, although some information about these practices is disclosed,
consumers are not always provided with clear and specific details. Consumers withcertain data and privacy preferences may therefore not make decisions that
accurately reflect their preferences if they do not clearly understand how their datacollected through the loyalty programme is used. This may inhibit competition for
consumers with strong privacy or data use preferences.

7.129

Loyalty programmes can also adversely impact competition if they deter consumers
from sufficiently shopping around so as to create barriers to entry or expansion forcompeting grocery retailers. However, as discussed in Chapter 6, loyalty
programmes do not appear to create a material constraint on entry or expansion.
In this chapter, we discuss the evidence supporting that conclusion in more detail.
We also describe how loyalty programmes may nevertheless reduce competition
between grocery retailers. The ACCC considered that retailers use loyalty
programmes to influence consumer behaviour by, for example, encouraging
consumers to make repeat or additional purchases (and by default, spend less with
their competitors) and introducing resistance to competing offers.893

7.130

In this section, we consider the nature of the loyalty programmes offered by the
major grocery retailers, including the different types of benefits offered toconsumers, their effect on consumer decision making, and therefore oncompetition. We focus on:

893

7.130.1

consumer understanding of the benefits offered through the relevant
loyalty programmes and the impact of consumer understanding on
informed decision making;7.130.2

consumer understanding of the extensive collection and use of consumer
data through these programmes, and potential effects of these practices
on competition;

7.130.3

whether Onecard and Clubcard may harm competition by making it lesslikely or harder for consumers to switch to another retailer; and7.130.4

the potential for loyalty programmes to facilitate price discrimination.

ACCC “Customer loyalty schemes – Final report” (December 2019) at 17 and 90, available at:https://www.accc.gov.au/system/files/Customer%20Loyalty%20Schemes%20%20Final%20Report%20-%20December%202019.PDF; Omar Duque “The Costs of Loyalty: on Loyalty
Rewards and Consumer Welfare” (2017) 8(2) Economic Analysis of Law Review 411 at 420-422,
available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3058504.

301

7.131

We are aware many other grocery retailers also operate their own loyalty
programmes. Some of these programmes have similar attributes to those discussed
in this chapter (for example, accumulated food rewards in the form of vouchers to
be used in store).894

7.132

However, given the larger scale of the major grocery retailers and the uptake of
their loyalty programmes, we have focused this part of our study on the potential
impact on competition of Clubcard and Onecard. We consider that these loyalty
programmes are more likely to influence competition. However, our findings may
apply more widely.

7.133

Loyalty programmes are not offered by Woolworths NZ at either FreshChoice or
SuperValue,895 or by Foodstuffs NI or Foodstuffs SI at Four Square, PAK’nSAVE,On the Spot, or Raeward Fresh.896

Consumers appear to have limited understanding of the rewards structures
7.134

894

895

896

897

Foodstuffs NI and Woolworths NZ both submitted in response to our preliminary
issues paper that their programmes are pro-competitive because they result in
discounts and lower prices for consumers.897 However, we have found that many
consumers do not have a good understanding of how loyalty programme rewards
are earned and redeemed.

For example, Farro Fresh offers “Friends of Farro”, available at: https://www.farro.co.nz/friends-offarro and Huckleberry offers “Huckleberry Loyalty”, available at:https://www.huckleberry.co.nz/pages/huckleberry-loyalty.
Some individual franchisees have engaged external parties to offer a loyalty programme on a storespecific basis. FreshChoice Picton was also part of a trial for the Onecard programme in early 2021,[].
Foodstuffs SI launched “Sticky Club” in PAK’nSAVE across the South Island in September 2017 andincluded a fuel rewards programme. Sticky Club is now solely used for customers to sign up to
SHOP’nGO services and has no rewards element, FMCG Business “PAK’nSAVE launches Sticky Club
rewards programme” (31 August 2017) https://www.fmcgbusiness.co.nz/paknsave-launches-stickyclub-rewardsprogramme/#:~:text=%E2%80%9CSticky%20Club%20is%20a%20special,other%20fuel%20deals%20in%2Dstore.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 72-74; Foodstuffs NI “Submission on retail grocery market study preliminary
issues paper” (4 February 2021) at 35.

302

7.135

Even when some information is made available to consumers, loyalty programmes,
particularly those with complex reward structures, can reduce price transparency
and make it harder for consumers to make meaningful comparisons withcompeting price-based offers.898 This may result in consumers engaging in lessfrequent and less-informed price comparisons, limiting consumers’ ability to signal
their preferences to retailers. It may also reduce price competition between the
major grocery retailers. We have previously discussed the importance tocompetition of consumers’ ability to make informed purchasing decisions (see, forexample, paragraphs 7.12 to 7.17 above).

7.136

It may be difficult to accurately assess or compare the value of the benefits offeredby loyalty programmes where:899

7.137

898

899

7.136.1

members earn different volumes of points from various partners such as
airlines and the value of the reward when those points are redeemed
will vary depending on the rewards selected;

7.136.2

members can earn both member-only discounts and accumulated
rewards with the retailer or with a partner (for example, an airline)
where competing retailers do not offer the same accumulated rewards;
and

7.136.3

non-monetary rewards are offered, for example, entry into
competitions.

Onecard and Clubcard contain elements of each of these scenarios. These
programmes offer points that accumulate over time and at certain spend
thresholds earn the consumer a reward either with the respective retailer or one ofthe partner firms, such as Flybuys or fuel rewards (see Table 7.2). The rate ofreward and the partner firms for each loyalty programme are different. Membersof these programmes can also gain benefits other than discounts or vouchers suchas entry into competitions and personalised offers.

ACCC “Customer Loyalty Schemes – Final report” (December 2019) at 104, available at:https://www.accc.gov.au/system/files/Customer%20Loyalty%20Schemes%20%20Final%20Report%20-%20December%202019.PDF; Loyalty & Reward Co “Australian Loyalty
Schemes: A Loyalty & Reward Co report for the ACCC” (June 2019) at 69, available at:https://www.accc.gov.au/system/files/Australian%20Loyalty%20Schemes%20%20A%20Loyalty%20and%20Reward%20Co%20report%20for%20the%20ACCC.PDF.
Loyalty & Reward Co “Australian Loyalty Schemes: a Loyalty & Reward Co report for the ACCC”(June 2019) at 104, available at:https://www.accc.gov.au/system/files/Australian%20Loyalty%20Schemes%20%20A%20Loyalty%20and%20Reward%20Co%20report%20for%20the%20ACCC.PDF; ACCC “Customer
Loyalty Schemes – Final report” (December 2019) at 96, available at:https://www.accc.gov.au/system/files/Customer%20Loyalty%20Schemes%20%20Final%20Report%20-%20December%202019.PDF; OECD “Policy Roundtables – Loyalty andFidelity Discounts and Rebates” (2002) DAFFE/COMP(2002)21 at 24 and 93, available at:https://www.oecd.org/daf/competition/abuse/2493106.pdf.

303

7.138

Like some one-off promotions, points-based loyalty programmes such as these may
cause consumers to overestimate or underestimate the true value of the reward,
which adds to the challenges of comparing prices. This is because points-based
programmes exploit size heuristics, and other heuristics such as anchoring, to makea reward appear of greater value than it is.900 Heuristics are mental shortcuts thatare used to evaluate situations or simplify information when consumers do nothave the time and/or capacity to evaluate all available information.901

7.139

Clubcard and Onecard both convey members’ ability to earn and progress towards
obtaining a reward through points earned, rather than the dollar spend required toearn a reward, or the dollar value of the reward. This may shift consumers’ focus
away from the monetary value of the reward, toward the number of points
accumulated, making it harder for consumers to accurately assess the value of the
rewards offered.902

7.140

For example, Onecard members earn 1 point for every $1 spent on qualifying
products when using their Onecard. Once a member has earned 2,000 points, theyreceive a $15 e-voucher. After spending $1,000, consumers may assess value by
referring to the points they have accumulated (ie, 1,000), rather than the dollar
value of the points they have earned (ie, $7.50).

7.141

As we discuss below, some consumers cite the ability to accumulate rewards as
being one of the reasons they signed up for a grocery loyalty programme.903 Other
consumers report being “obsessed” with earning rewards.904 However, consumers’
enthusiasm for loyalty programmes is not necessarily indicative of theirunderstanding of what they are signing up to, or the rewards they will earn andmay reflect an uninformed perception of value of the programme.

900

901

902

903
904

ACCC “Customer Loyalty Schemes – Final report” (December 2019) at 96-97, available at:https://www.accc.gov.au/system/files/Customer%20Loyalty%20Schemes%20%20Final%20Report%20-%20December%202019.PDF.
ACCC “Customer Loyalty Schemes – Final report” (December 2019) at 19, available at:https://www.accc.gov.au/system/files/Customer%20Loyalty%20Schemes%20%20Final%20Report%20-%20December%202019.PDF.
In other words, consumers may anchor their perceptions of the value of the reward on the highnumeric points value. Anchoring perceptions around a large numeric value can inflate perceptions ofvalue, and consumers may not be able to adjust their understanding easily or adequately, even when
additional information is provided. See, for example, ACCC “Customer Loyalty Schemes – Final report”(December 2019) at 19, available at:https://www.accc.gov.au/system/files/Customer%20Loyalty%20Schemes%20%20Final%20Report%20-%20December%202019.PDF.
At Figure E31.
[
].

304

7.142

The Ipsos report noted that participants generally found loyalty programmes
confusing. Some participants were unaware of the extent of the discount or valueof the points earned through grocery loyalty programmes.905 Although participants
were aware that, at some point, they may receive a benefit (for example, avoucher), there was limited understanding of how the benefit was earned.906 Many
also struggled to express a tangible benefit from participating in some of the
programmes, or to compare benefits across programmes.907

7.143

Complex rewards structures, such as points-based mechanisms, and a limited
understanding of how these programmes work, could shift consumers’ focus awayfrom retail prices and increase consumer sensitivity to rewards-based offers.908
Consumers that value these offers may therefore engage in less frequent price andquality comparisons, or find it more difficult to do so, including with competing
retailers that do not offer the same rewards. This can lead to less-informed
purchasing decisions which in turn affects competition.909

7.144

We have also observed that many consumers do not earn enough points to receive
accumulated rewards, and, if they do, some are never redeemed.910 Many
consumers therefore do not receive the accumulated benefits offered by these
programmes.

7.145

These findings are consistent with evidence provided by the major grocery retailers
that indicate that consumer understanding of how loyalty programmes work, andhow much they need to spend to get a reward, is generally low.911

905

906

907

908

909

910

911

Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 43-44.
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 43-44.
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 43-44.
ACCC “Customer Loyalty Schemes – Final report” (December 2019) at 96, available at:https://www.accc.gov.au/system/files/Customer%20Loyalty%20Schemes%20%20Final%20Report%20-%20December%202019.PDF.
ACCC “Customer Loyalty Schemes – Final report” (December 2019) at 96, available at:https://www.accc.gov.au/system/files/Customer%20Loyalty%20Schemes%20%20Final%20Report%20-%20December%202019.PDF.
For example, some research indicates that [ ] of points earned in a [] period expire before they
are converted to a reward, [ ] of members earn enough points in a [] period to receive a reward,
and some [ ] of the rewards earned are never redeemed:
[
]. [
].
For example: [
[
[

];
]; [

];
]; [

].

305

Some consumers appear to have limited understanding of data practices
7.146

The offering of a loyalty programme is a dimension of competition between the
major grocery retailers. Some consumers’ decisions about whether to participate ina loyalty programme may be influenced by their preferences regarding thecollection and use of their personal information. However, we have identified thateven when provided with some information, some consumers may not be aware ofor understand how the major grocery retailers collect consumer data and how thedata is used.912 This can make it harder for these consumers to make well-informed
decisions about their participation because the costs in doing so are not clear. 913

7.147

Although consumers are not charged a fee to participate in these programmes,
consumers pay by providing their data to the major grocery retailers. One of the
key functions of loyalty programmes for retailers is to collect consumer data.914 The
major grocery retailers collect large amounts of data from members of their loyalty
programmes including demographic information, transactions and purchasebehaviour, and other information provided by members such as contact details.915

912

913

914

915

See Figure E33; Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector– Consumer study report” (July 2021) at 44.
Consumer NZ submitted in support of this proposition: Consumer NZ “Submission on retail grocery
market study preliminary issues paper” (4 February 2021) at [82]; NZFGC also raised concerns about
the terms and conditions of loyalty programmes and their disclosure, particularly around data: NZFGC“Submission on retail grocery market study preliminary issues paper” (4 February 2021) at [221];
comments by Consumer NZ, Transcript of Grocery Market Study Conference – Day 2(22 October 2021) at 25 (lines 25-30).
For example: Foodstuffs SI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 24; Consumer NZ “Submission on retail grocery market study preliminary issues
paper” (4 February 2021) at [72]; Consumer NZ “Submission on Market study into grocery sector draft
report” (26 August 2021) at 8.
[]; []. This is consistent
with the submissions received from the major grocery retailers. For example, Woolworths NZ notedthat any data collected supports “customer-led and fact-based decisions in relation to ranging, store
layout, and other decisions to the significant benefit of customers and our business…” Woolworths NZ“Submission on retail grocery market study preliminary issues paper” (4 February 2021) at 74.

306

7.148

The privacy and data practices of these loyalty programmes are dimensions ofquality. If consumers are not aware of or do not understand these practices, themajor grocery retailers will not be incentivised to compete on these quality
dimensions. We also heard concerns from Consumer NZ that some consumers may
feel that they need to join the major grocery retailers’ loyalty programmes andshare their personal information and data in order to obtain groceries at a“reasonable price”.916

7.149

The information gathered through loyalty programmes is used to inform businessdecisions, for example, in relation to product ranges to and to provide a
personalised experience for consumers. For example, consumer data collected
through the loyalty programmes may be used to group or profile consumers andinform in-store or personalised promotional strategies.917 Some consumers may
value receiving more targeted, relevant, and personalised marketing or benefits
such as personalised promotional offers.

7.150This data, or insights derived from it, may also be provided to other parties, such as
suppliers (discussed below). Each major grocery retailer appears to be working to
expand their access to and use of consumer data.918

7.151

The major grocery retailers compete to gain this data by encouraging consumers tosign up to their loyalty programmes and then to swipe their membership card. This
competition can be seen, for example, in the use of incentives to swipe a loyalty
card such as offering member-only discounts and other rewards. Consumers
appear to have a diverse range of preferences in relation to how businesses use
their data. Consumers with certain data and privacy preferences may be more
receptive to these incentives than if they understood how their data is used.

916

917

918

For example: Consumer NZ “Submission on Market study into grocery sector draft report”(26 August 2021) at 8; comments by Consumer NZ, Transcript of Grocery Market Study Conference –Day 2 (22 October 2021) at 6 (lines 9-13) and 25 (lines 3-24 and 31-36). We note that Countdown
customers do not have to register their Onecard or provide information such as their name or contact
details to gain access to member-only discounts at Countdown stores. Transaction information will
still be provided. Customers do need to register their Onecard to receive personalised emails, offers,
and accumulate rewards points. New World customers are required to register their Clubcard andtherefore provide certain information to gain access to all of the member benefits advertised by
Foodstuffs NI and Foodstuffs SI.
For example: [
];
[
]; [
].

For example: [
[
[

];
];
].

307

7.152

Many New Zealanders report that they feel strongly about these practices.919 Some
consumers report that they do not want to sign up to loyalty programmes as they
do not want to give away their personal information.920 Approximately 18% of
respondents to our consumer survey who were not members of a loyalty
programme report they did not sign up because of concerns about datacollection.921

7.153

Others say they would not mind their behaviour being tracked if it means theyreceive personalised deals.922 Similarly, the Ipsos report found that someparticipants saw data collection as an opportunity to improve the personalisationof the overall shopping experience.923

7.154

We have, however, identified two practices engaged in by the major grocery
retailers that raise issues that may be important to some consumers, but which
consumers may not be aware of: the linking of loyalty memberships to payment
cards, and the provision of consumer data to third parties.

7.155

While there is some disclosure relating to these practices, consumers are notnecessarily provided with clear and specific details about how their data is used andtherefore the true cost of joining the programme may not be known or understood.
Nearly 35% of respondents to our consumer survey reported having nounderstanding of how their data is used by loyalty programmes, and over 25%
reporting knowing a “little” about it is used.924

7.156

This means some consumers may not be aware of what they are giving up or how
they are paying to participate in these programmes. Consumers with certain datacollection and privacy preferences may therefore not be able to easily makeinformed decisions that accurately reflect their preferences.925

919

920
921
922

923

924
925

For example, in a representative survey commissioned by the Privacy Commission in 2020,
respondents were most concerned about businesses sharing their personal information without theirpermission. Two thirds of respondents felt there should be more regulation regarding whatcompanies can do with their personal information. See Privacy Commission “Privacy concerns andsharing data” (April 2020) at 11 and 24, available at:https://privacy.org.nz/assets/DOCUMENTS/Privacy-concerns-and-sharing-data-OPC-reportApr-20.pdf.
[].
Figure E35.
[]. Similarly, case studies in other sectors suggest
competition between retailers on the terms of their privacy polices does not appear to drive
consumer usage of services. For example: Alex Marthews and Catherine Tucker “Privacy policy andcompetition” (December 2019) Economic Studies at Brookings, at 5, available at:https://www.brookings.edu/wp-content/uploads/2019/12/ES-12.04.19-Marthews-Tucker.pdf.
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 44.
Figure E33.
Consumer NZ “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at [82].

308

7.157

Our view is that these issues are not likely to be a main driver affecting competitionin the retail grocery market at the current time. However, these are important
issues for consumers that also have the potential to affect consumer decision
making and competition if consumers with privacy and data preferences are notable to make informed decisions about their participation in these programmes.
Competition for these consumers will be inhibited.

Some retailers may link payment cards to loyalty cards and track both
7.158

New World’s privacy policy states that Foodstuffs NI and Foodstuffs SI may, fromtime to time, collect payment card information that can be combined with otherpersonal information held by them.926

7.159This means that if a Clubcard member swipes their Clubcard and their payment
card (for example, a credit or EFTPOS card) in the same transaction, all future
New World, PAK’nSAVE and Four Square (in-store or online) purchases with thatpayment card can be linked to the consumer’s Clubcard data, regardless of whether
the Clubcard is swiped during the future transactions.927 This allows consumerpurchasing behaviour of Clubcard members to be tracked even if they do not scan
their Clubcard.928

7.160

The same applies to consumers who have registered to shop online.
Transactions using the same payment card online and subsequently online or instore at New World, PAK’nSAVE or Four Square can be linked to allow purchasebehaviour to be tracked.

7.161

Valuable consumer data can therefore be collected and used without those
consumers receiving any of the benefits associated with Clubcard (for example,
member-only discounts or Flybuys) for that transaction. We anticipate that it islikely that most consumers who read the policy would have difficulty understanding
the current wording or be unaware that this can be done.929

7.162

In its submission on our draft report, Foodstuffs NI said that it intends to make thispractice clearer to customers by communicating that, by signing up for a Clubcard
membership, members are authorising Foodstuffs NI to link their payment cards
with their loyalty account.930

926

927

New World “Privacy Policy” (14 June 2021), available at: https://www.newworld.co.nz/privacy-policy.
We note that the policy applies to data collected outside Clubcard. For example, personal informationthat is collected when consumers use New World’s online store or sign up to receive marketing
material. We understand this term was added to the privacy policy on 1 December 2020.
[
]; [
].

928

Foodstuffs NI has this capability and Foodstuffs SI is developing it, [929

Only 9% of respondents to our consumer survey said they read the loyalty programme’s terms andconditions in full, see Figure E32.
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[393.3].

930

].

309

7.163

However, the ACCC observed that, irrespective of disclosure, consumers areunlikely to know that their data is collected and used by supermarkets even where
they have chosen not to scan their loyalty card.931 Further, when consumers nolonger want to participate, they are unlikely to actively cancel their membership(due to the time and effort of doing so), yet grocery retailers will continue to collectinformation via payment cards. Retailers engaging in this practice would continue
to collect consumer data, while the consumer no longer gains the benefits of the
programme.

7.164

Even when a consumer does cancel their Clubcard membership, we understandthat Foodstuffs NI continues to collect payment card information for six months
after cancellation (provided the consumer uses the same payment card that was
linked to their Clubcard membership).932 The data is anonymised and used forstatistical or analytical purposes.

The major grocery retailers disclose consumer data and insights to third parties
7.165

The major grocery retailers also sell consumer insights derived from loyalty
programme data to third parties. These third parties include suppliers and partners,
such as Flybuys or AA Smartfuel, and research firms. We understand that personal
information about consumers (ie, information which might identify them) is notprovided.

7.166

These practices are referred to in the respective privacy policies of New World andCountdown.

931

932

933
934

7.166.1

New World’s privacy policy states that personal information, includingthat collected via Clubcard, may be disclosed to “any relevant third party
that offers good or services that [Foodstuffs] thinks may be of interest to[the consumer] (for example, fuel providers)” and “a third party outsideof New World who is contracted to us (or Foodstuffs) to provide aparticular service to you on our behalf” or to New World or
Foodstuffs.933

7.166.2

Countdown’s privacy policy states that “generally [it will] never disclose”
personal information to its suppliers, except to enable them to contact a
consumer if they have won a prize.934 However, anonymous andaggregated information is shared with “contractors, affiliates, business
partners and third parties”.

ACCC “Customer Loyalty Schemes – Final report” (December 2019) at 66, available at:https://www.accc.gov.au/system/files/Customer%20Loyalty%20Schemes%20%20Final%20Report%20-%20December%202019.PDF.
[].
New World “Privacy Policy” (14 June 2021) https://www.newworld.co.nz/privacy-policy.
Countdown “Privacy policy” (15 July 2019) https://www.countdown.co.nz/about-us/ourpolicies/privacy-statement.

310

7.167

These privacy policies lack clarity about who might be provided with consumer dataand on what basis. This makes it hard for consumers to understand how their data
will be used which can impact consumers’ ability to accurately assess the value ofthe loyalty programmes to them. As noted at paragraph 7.148, this can reduce
incentives for loyalty programme operators to compete on these dimensions.

Loyalty programmes may raise perceived switching costs for some consumers
7.168

Consumers have a range of preferences that contribute to store choice. This can
include price, convenience and promotional and loyalty offerings.935 Some
consumers say they will always go to a particular store or use a certain brandbecause of loyalty offers.936

7.169

Most respondents to our consumer survey said they participate in more than one
loyalty programme:

7.170

935

936
937
938

7.169.1

33% of respondents are members of two grocery loyalty programmes;

7.169.2

a further 21% are members of three; and7.169.3

a further 15% are members of four programmes.937

This is consistent with evidence provided by the major grocery retailers.938

Paragraphs E118 to E121 note convenience and low prices as the most common drivers of main store
choice for survey respondents. However, a small proportion of respondents also cite loyalty
programmes or good specials as the key reason for their choice of main store.
For example, [].
Figure E30.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 72-74; Foodstuffs NI “Submission on retail grocery market study preliminary
issues paper” (4 February 2021) at 35-36 and []. Also, for example,
[
];
[
].

311

7.171

However, we received submissions that loyalty programmes make it less likely or
harder for consumers to switch to another major grocery retailer (ie, increaseswitching costs), resulting in these consumers being effectively “locked in” to aretail banner.939 Consumer lock-in may reduce the effectiveness of pricecompetition and raise barriers to entry to the extent that it discourages or makes it
harder for consumers to make price comparisons between retailers.940

7.172

As explained in Chapter 6, we have found that loyalty programmes are not amaterial constraint on entry or expansion. We have consistently seen that
consumers have a diverse range of preferences and can and do participate inmultiple programmes. In addition, consumers appear to value loyalty programmes
most highly for the member-only discounts, and the rate of reward offered by
Clubcard and Onecard is relatively low, so long-term effects are unlikely tosignificantly affect competition.

7.173

Despite our conclusions in Chapter 6 regarding barriers to entry, it is possible thatsome consumers who particularly value the accumulation of points may experiencesome lock-in effects.941 We discuss this in more detail below. Consumers that value
these rewards may be less incentivised to make price comparisons (since they areencouraged to funnel spend towards one retailer) and become resistant tocompeting offers.

939

940

941

NZFGC “Submission on retail grocery market study preliminary issues paper” (4 February 2021) at[208]. Also see ACCC “Customer loyalty schemes – Final report” (December 2019) at 91, available at:https://www.accc.gov.au/system/files/Customer%20Loyalty%20Schemes%20%20Final%20Report%20-%20December%202019.PDF; Lars Meyer-Waarden and Christophe Benavent“Grocery Retail Loyalty Program Effects: Self Selection or Purchase Behaviour Change?” (2007) Journalof the Academy of Marketing Science, available at:https://www.researchgate.net/publication/227148922_Grocery_retail_loyalty_program_effects_Selfselection_or_purchase_behavior_change; OECD Policy Roundtables “Loyalty and Fidelity Discounts
and Rebates” (2002) DAFFE/COMP(2002)21 at 89, available at:https://www.oecd.org/daf/competition/abuse/2493106.pdf.
Loyalty programmes can deter entry where potential competitors conclude it will not be possible tocapture viable market share because consumers are “locked in” to incumbents or without access tothe data incumbents have gathered through their loyalty programmes. For further discussion on entry
and expansion and issues relating to access to this data, see Chapter 6.
For example: Omar Duque “The Costs of Loyalty: on Loyalty Rewards and Consumer Welfare” (2017)8(2) Economic Analysis of Law Review 411 at 414, available at:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3058504; ACCC “Customer loyalty schemes –Final report” (December 2019) at 93, available at:https://www.accc.gov.au/system/files/Customer%20Loyalty%20Schemes%20%20Final%20Report%20-%20December%202019.PDF.

312

Consumers that value accumulated rewards may be less inclined to shop around
7.174

Where rewards are based on thresholds of accumulated points, a points pressure
mechanism can encourage consumers to increase the frequency and/or amount ofspend to obtain the reward.942 Research suggests that the closer a consumer is toobtaining a reward, the more likely they are to remain loyal to and make additionalpurchases to reach it.943 Switching to another retailer could mean they will bedelayed in reaching their goal. Consumers may also risk losing the points they haveearned if points must be redeemed before a certain expiry date.944

7.175

There is a diverse range of consumer preferences relating to accumulated rewards
offered by loyalty programmes, such as fuel savings or food vouchers. Some
consumers say these rewards are unachievable or are not worth the spend
required.945 Other research indicates that some consumers consider they are“obsessed” with earning rewards points and some report using loyalty programmes
to save for expensive items such as flights (through earning Airpoints).946

7.176

41% of respondents to our consumer survey said collecting points to redeem
vouchers and rewards was one of the reasons they joined loyalty programme theyuse most often.947 Some participants in the Ipsos research reported monitoring
their points balances closely.948

7.177

These consumers who value accumulated rewards are more likely to perceive
higher switching costs and consider they are “locked in” to the retailer with which
they accumulate points.

942

943

944
945

946
947
948

For example, Matilda Dorotic, Tammo Bijmolt and Peter Verhoef “Loyalty Programmes: Current
Knowledge and Research Directions” (2011) International Journal of Management Reviews, Vol. 14, at
217, available at:https://www.researchgate.net/publication/229915137_Loyalty_Programmes_Current_Knowledge_an
d_Research_Directions/link/5a02c38c0f7e9b68874e170e/download.
Matilda Dorotic, Tammo Bijmolt and Peter Verhoef “Loyalty Programmes: Current Knowledge andResearch Directions” (2011) International Journal of Management Reviews, Vol. 14, at 219 and 225,
available at:https://www.researchgate.net/publication/229915137_Loyalty_Programmes_Current_Knowledge_an
d_Research_Directions/link/5a02c38c0f7e9b68874e170e/download. This is also known as a “suction
effect” on consumer behaviour, where consumers funnel purchases toward a single seller.
Airpoints Dollars currently expire after four years.
[
]; [
];
[
];
[
]. Similar sentiments were expressed by respondents to ourconsumer survey: see paragraph E185.
[ ] and [ ] respectively [].
At Figure E31.
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 44.

313

7.178

There is a minimum spend threshold to earn accumulated food or travel rewards
via Onecard and Clubcard, as set out in Table 7.2 below.
Table 7.2

Rewards earned through Onecard and Clubcard

Programme

NZD spend

PointsearnedConversion

Rate of reward

Countdown’s
Onecard949$1

12,000 points =$15 e-voucher

0.75% savings

New World’s Clubcard$25 (onqualifying
products)

0.185
Airpoints or
1 Flybuys
point

28 Flybuys points= $5 New World
Dollars

0.71% savings

Source: New World FAQs and Countdown Onecard Benefits.950

7.179

7.180

949

950

Alternatively, members can earn accumulated fuel discounts, depending on their
total spend:
7.179.1

Onecard members can choose AA Smartfuel rewards to save 3 cents per
litre if they spend $100 at Countdown in a week.

7.179.2

Clubcard members who choose to earn Flybuys when they shop at
New World earn 6 cents off per litre (up to 50 litres) at Z and Caltex fuelstations for every four Flybuys earned.

The minimum spend required to earn accumulated food rewards through Onecard
and Clubcard can be relatively high, compared with the rate of reward (less than
1% savings as shown in Table 7.2 above). We therefore consider it unlikely that
accumulated food rewards would significantly raise costs for consumers to switch
retailers in the longer term. However, there may be short-term effects for
consumers that value these rewards when they are closer to the expiry date ofalready accumulated points. New World Dollars expire after 24 months, andOnecard points and e-vouchers expire after one year.

Onecard members also get 6 cents off per litre at BP and participating G.A.S outlets when they spend$40 or more on fuel in a single transaction.
New World “FAQ About New World Dollars”
https://www.clubcard.co.nz/newworld/en/faq/newworlddollars; Countdown “Onecard benefits”,
available at: https://www.countdown.co.nz/onecard/onecard-benefits/onecard-food-rewards.

314

7.181

Consumers accruing Airpoints or Flybuys through Clubcard may be more reluctant
to shop at an alternative grocery retailer where equivalent spend may not similarly
earn these rewards.951 These points can contribute to purchases that are generallyhigh in value and infrequent in nature, such as flights with Air New Zealand.

7.182

We do not consider that this element of Clubcard is likely to significantly weaken
competition. Airpoints and Flybuys can be earned in many ways. These otheropportunities to earn these rewards should mitigate any potential reluctance toswitch grocery retailers. It is unclear whether these effects may differ for different
groups or consumers and/or whether the effects of these programmes will changeover time with technological developments.

Consumers that prefer member-only discounts are unlikely to face perceived higher
switching costs
7.183

Consumers that value member-only discounts over accumulated benefits are more
likely to consider they are free to switch their spend to another retailer andtherefore less likely than other groups of consumers to experience perceived
lock-in effects.

7.184

Our research and research conducted by the major grocery retailers indicates that
more consumers tend to participate in grocery loyalty programmes to gain accessto these member-only discounts, rather than accumulated rewards:

7.185

951

952

953

7.184.1

Over 50% of respondents to our consumer survey who participated in aloyalty programme said that the reason they joined Clubcard and/or
Onecard was to gain access to the Club Deals or Club Prices
respectively.952

7.184.2

Research shows that many consumers across the country are membersof loyalty programmes primarily to receive member-only discounts.953

Our view is that member-only discounts are unlikely to cause consumers to faceperceived higher switching costs.

These effects may be particularly strong for loss-averse consumers. Loss aversion refers to thetendency to prefer avoiding losses to acquiring equivalent gains based on a point of reference. For
example, if a person starts with $100 and loses that $100, the decrease in utility is greater than theincrease in utility if they had $0 and found another $100.
In addition: []; Ipsos “Consumer behaviour andpreferences in the New Zealand retail grocery sector – Consumer study report” (July 2021) at 44.
The Register “New Zealand loyalty program members want rewards quickly” (21 October 2019),
available at: https://theregister.co.nz/2019/10/21/new-zealand-loyalty-program-members-wantrewards-quickly/;
[
[
].

].

315

Loyalty programmes may facilitate a form of price discrimination
7.186

Some submitters suggested that both Clubcard and Onecard result in pricediscrimination against consumers who do not sign up, because only consumers who
do so can benefit from certain discounted prices.954 Members of these programmes
receive access to discounts and other promotions in exchange for providing theirdata to the major grocery retailers. Consumers that do not hold a loyalty card arecharged a higher price for the same product.

7.187

Consumers may choose not to sign up to a loyalty programme because theprogramme does not align with their privacy and data preferences. Other
consumers on lower incomes or with literacy or accessibility challenges may be lesslikely to belong to loyalty programmes.955 These groups therefore have reduced
access to certain discounts and promotions.

7.188

Price discrimination is not necessarily a competition concern. Some consumers may
benefit from increasingly personalised pricing and offers by receiving
recommendations and discounts they value. In addition, it is possible that in somecircumstances, retailers may have the opportunity to serve some consumers with alower willingness to pay, increasing output.

7.189

Price discrimination may adversely affect competition where retailers can identify
likely marginal consumers (ie, those likely to switch to another retailer) who swipe
their loyalty card and target them with specific discounts, while raising ormaintaining prices for other consumers who do not participate in the programmeor are less likely to switch in response to a price change. However, we have notseen information indicating that shelf prices are increasing in this way.

954

955

For example: Consumer NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at [75]; “Submission on Market study into grocery sector draft report”(26 August 2021) at 8; Christians Against Poverty “Post conference submission on Market study into
grocery sector” (23 November 2021) at 3; NZFGC “Submission on Market study into grocery sector
draft report (26 August 2021) at [5.14]; comments by Consumer NZ, Transcript of Grocery Market
Study Conference – Day 2 (22 October 2021) at 6 (lines 1-13) and at 25 (lines 31-36); comments by
Woolworths NZ, Transcript of Grocery Market Study Conference – Day 2 (22 October 2021) at 30(lines 1-15); comments by Foodstuffs NI, Transcript of Grocery Market Study Conference – Day 2(22 October 2021) at 31 (lines 32-39). Price discrimination involves charging different prices todifferent consumers for the same good or service based on the maximum price a consumer is willingto pay for that good or service (ie, their “willingness to pay”).
Health Coalition Aotearoa “Submission on Market study into grocery sector draft report”(2 September 2021) at 3; Christians Against Poverty “Post conference submission on Market study
into grocery sector” (23 November 2021) at 3.

316

7.190

Onecard and Clubcard currently facilitate two forms of discounting off the shelf
price: member-only discounts and personalised offers. We do not consider
member-only discounts are likely to cause competition concerns based on pricediscrimination in the grocery retailer sector. This is mainly because most shoppers
participate in the loyalty programme offered by their grocery retailer/s of choice
and therefore benefit from member-only discounts, and most sales are associatedwith loyalty cards.956

7.191

The major grocery retailers have also told us that they intend to decrease shortterm promotional pricing and increase their use of EDLP pricing strategies.957 This
may reduce the scope for price discrimination through these discounts.

Personalised offers can make price discrimination more effective
7.192

Personalised offers by the major grocery retailers may become more targeted andindividualised and may be offered instead of generic promotional pricing.958
Consumers can receive benefits in the form of lower prices and personalised
promotional offers, as well as a more relevant shopping experience. However, it ispossible the price gap between members (who pay a discounted price in exchange
for providing their data) and non-members (who pay the shelf price), may
increase.959

7.193

For example, without price discrimination, all consumers would be charged thesame price (say, $4). With price discrimination, individual members of the loyalty
programme would be charged $3 and other shoppers would be charged $5 for thesame product. This results in the “surplus” being transferred from the latter groupto the former in the form of a lower price. Whether the overall effect of thispractice is good for consumers depends in part on whether the $3 price would
cover the marginal cost of supply.960

956

As noted earlier, over one-half of transactions and over two-thirds of sales at both New World andCountdown are associated with a loyalty card, for example: [
];
[
]; [
];
[
].

957

Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at
381; Foodstuffs SI “Submission on Market study into grocery sector draft report”(10 September 2021)
at 378; Woolworths NZ “Submission on Market study into grocery sector draft report”(10 September 2021) at [9.1].
The same may apply to suppliers that gain access to the relevant consumer data.
Personalised pricing of this nature generally transfers the surplus of transactions (ie, any value gained
above the purchase price) from consumers who are willing to pay more for a product to consumers
who are willing to pay in different ways, including by sharing personal information, by charging thema lower price. For example: OECD “Discussion on Personalised Pricing in the Digital Era”
(27 April 2020) DAF/COMP/M(2018)2/ANN8/FINAL, available at:https://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP/M(2018)2/A
NN10/FINAL&docLanguage=En.
In this example, price discrimination enables more transactions to take place (as it allows the “$3”group of consumers to be served), which can result in an increase in aggregate consumer benefits.

958
959

960

317

7.194

This practice may be detrimental to consumers where it occurs in less competitivemarkets.961 This is because it can enable retailers to extract this “surplus” fromconsumers by charging each consumer a price which is higher, but not to the extent
that they do not buy it.962

7.195

As data is increasingly collected from consumers on individual preferences, thescope for retailers to extract all surplus from more consumers is increased.
However, we have not seen any information to indicate this practice is currently or
likely to be a competition concern.

Other issues within the retail grocery sector raised by consumers
7.196

Since the start of our study, consumers and consumer groups have raised anincreased number of complaints relating to potentially misleading promotional
pricing practices, pricing inaccuracies, unfair standard form contract terms andconditions of loyalty programmes, and privacy principles relating to data collection.

7.197

Increased complaint levels coincided with the launch of our market study, but alsowith our FTA prosecution of Kennedy’s Foodcentre (2003) Limited trading as
PAK’nSAVE Mangere for discrepancies between promotional pricing displayed or
advertised and the price charged at the till.963

961

962

963

OECD “Discussion on Personalised Pricing in the Digital Era” (27 April 2020)
DAF/COMP/M(2018)2/ANN8/FINAL at 3, available at:https://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP/M(2018)2/A
NN10/FINAL&docLanguage=En.
OECD “Discussion on Personalised Pricing in the Digital Era” (27 April 2020)
DAF/COMP/M(2018)2/ANN8/FINAL at 3, available at:https://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP/M(2018)2/A
NN10/FINAL&docLanguage=En.
Commerce Commission “PAK’nSAVE Mangere fined $78,000 for price discrepancies”(28 October 2021), available at: https://comcom.govt.nz/news-and-media/mediareleases/2020/paknsave-mangere-fined-$78,000-for-price-discrepancies.

318

Figure 7.4

Supermarket complaints received by the Commission by primary issue
November 2020 to January 2022

Source: Commission analysis based on complaints data, n=701.964

7.198

To the extent that these issues directly relate to whether competition in thegrocery sector is working effectively, we have considered them in this chapter. In
addition, we have analysed pricing practices over time to the extent they relate tocompetition. We have not drawn conclusions about whether information provided
to us discloses a breach of the FTA or a potential matter of interest to the Office of
the Privacy Commissioner under the Privacy Act 2020.

7.199

However, independent of this study, we have considered what further action may
be required in relation to the major grocery retailers’ pricing practices, utilising ourFair Trading compliance and enforcement functions and powers, including toengage further with the major grocery retailers about these concerns.965

964
965

[
].
Commerce Commission “Enforcement Response Guidelines” (October 2013), available at:https://comcom.govt.nz/__data/assets/pdf_file/0030/62589/Enforcement-Response-GuidelinesOctober-2013.pdf.

319

7.200

We set out below the nature of the complaints and information shared with us. We
emphasise that a complaint does not necessarily mean that any law has beenbreached, rather it relates to alleged conduct by the subject of the complaint and,as noted above, can provide an indication of the level of confidence that consumers
have in the retail grocery sector. This level of confidence can itself affectcompetition in the sector.

Potentially misleading promotional pricing practices
7.201

We regularly receive complaints from the public relating to our role in enforcing
competition and consumer law.966 We received 701 complaints about grocery
retailers for the fifteen-month period from 1 November 2020 to 31 January 2022.
This made up 7.9% of all FTA related complaints we received over the same
period.967

7.202

Of the complaints received, 181 related to supermarket promotions. These
complaints make allegations about promotional representations (including EDLP
mechanisms such as “great price” or “everyday low”) causing confusion, or that
promotions such as multi-buy offers provide little or no saving. Some consumers
have also complained that the use of a “special” price ticket is misleading as someproducts are almost always represented at a promotional price, so the offer could
not be considered “special”. Similar points were discussed by some respondents toour consumer survey, and in a complaint we received from Consumer NZ in
September 2020.968

7.203

In addition, our pricing analysis identified that, for the calendar year 2019, a small
proportion of products at each of the major grocery retailers appeared to be on
promotion for a significant part of the year. This is shown in Figure 7.5 which shows
between 2.6% and 12.4% of products offered by the major grocery retailers wereon promotion for at least three quarters of the year.969

966

967
968

969

A complaint does not necessarily mean that any law has been breached, rather it relates to alleged
conduct by the trader.
[].
See paragraph E172 in Attachment E; Consumer NZ alleged some grocery stores’ price promotions
were likely to breach the FTA, based on price tracking data for 22 products offered at Countdown,
New World and PAK’nSAVE stores collected between April and June 2020. For a summary of thecomplaint, see: Belinda Castles “Supermarket Price Survey” (5 August 2020) Consumer NZ
https://www.consumer.org.nz/articles/supermarket-price-survey. For further information on survey
results and complaints received by Consumer NZ, see comments by Consumer NZ, Transcript ofGrocery Market Study Conference – Day 2 (22 October 2021) at 5 (lines 15-20).
This figure shows all SKUs sold by the major grocery retailers in 2019 grouped by the proportion of theyear they were on promotion for. For example, the two bars at “>75% to 100%” show the proportionof SKUs which were on promotion for >75% to 100% of 2019. Two bars are shown for each group as,
given the limitations in the data, two methods were used to calculate these proportions, noted as the‘full year’ and ‘weeks sold’ methods. The true proportions are likely to lie somewhere between thebounds of each of these two bars.

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7.204

This analysis of promotions includes specials which display a reference price (suchas “Super Savers” and “Specials”), as well as other promotions such as memberonly discounts, multi-buys and other representations as to value such as
PAK’nSAVE’s “Extra Low” mechanism. However, this analysis does not include EDLP
mechanisms (ie, Countdown’s “Great Price”, New World’s “Everyday Value” andPAK’nSAVE’s “Everyday Low”).

Figure 7.5

Frequency of all types of promotions across all retail banners in 2019

Source: Commission analysis of pricing and promotional data.970

7.205

970
971

The proportion of products which were on promotion for more than half the year
appeared to be particularly high at PAK’nSAVE stores in the North Island.971 Figure
7.6 shows that at least a quarter of products at PAK’nSAVE stores in the
North Island were on promotion for more than half of 2019. This proportion was
also high for PAK’nSAVE stores in the South Island, where at least 17.8% of
products were on promotion for more than half of 2019.

[].
This analysis includes “Extra Low” promotions, which are not advertised using a reference price. We
have also observed that prices of products on “Extra Low” may still fluctuate while they are on
promotion.

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Figure 7.6

Proportion of products that were on promotions in more than 50% of storeweeks in 2019972

Source: Commission analysis of pricing and promotional data.973

7.206

If the reference price used in discount pricing promotions does not offer a genuinesaving, for example, if the claimed “usual” or “was” price is inaccurate, including
because products are rarely sold at the reference price, the pricing practice may be
misleading in breach of the FTA.974

7.207

The major grocery retailers have committed to increasing their emphasis on EDLP
and decrease their use of short-term promotional strategies. As a result, we do notcurrently intend to investigate whether any particular pricing and promotional
mechanisms or price display practices presently used by the major grocery retailers
may mislead consumers in breach of the FTA. Nevertheless, the Commission canconsider pricing and promotional practices at any time in the future if it considers it
appropriate.

Pricing inaccuracies
7.208

972

973
974

A number of complaints received relate to price inaccuracies. These complaints
describe instances where consumers paid a higher price at the till than they were
led to believe would be payable due to in-store or advertising representations. We
received 218 such complaints between 1 November 2020 and 31 January 2022. As
noted at paragraph E172.3, we also received approximately 200 responses to ourconsumer survey which discussed similar concerns.

As with Figure 7.5, the ranges in these graphs reflect the upper and lower bounds of the two
calculation methods used, due to limitations in the dataset. The true proportions likely lie withinthese ranges. These methods are described at paragraph D27.
[].
For further information on potentially misleading referencing pricing, see Commerce Commission“Pricing Guidance” https://comcom.govt.nz/consumers/dealing-with-typical-situations/buying-goodsand-services/pricing.

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7.209

A business that displays a price which is not the price charged to the consumer at
the point of sale may be misleading consumers about the price of the products they
buy in breach of the FTA. In 2020, the Commission concluded its successfulprosecution of PAK’nSAVE Mangere in relation to conduct of this nature.975 We
intend to engage with the major grocery retailers in relation to these complaints
and to encourage them to consider their systems and processes and seek
improvements to their compliance in this area. We will continue to consider theuse of other of our enforcement tools in appropriate cases if required.

Other complaints we have received about grocery retailers
7.210

975

976

977

In addition to the complaints about promotions discussed above, we also received
grocery complaints regarding the following themes:976
7.210.1

High prices: These complaints mention prices of products which they
believe to be unreasonably high, or that prices of product(s) had recently
been increased. Complainants allege that some products are significantly
more expensive in New Zealand than they are overseas or that they aresold at “too high” a profit. We received 115 such complaints between
1 November 2020 and 31 January 2022.977 We note that the Commission
does not regulate the level of prices, although it does investigate andtake enforcement action in relation to misrepresentations relating to theprices consumers pay in breach of the FTA, as discussed above.

7.210.2

Supermarket complaints increased through the COVID-19 pandemic
lockdowns in 2020, and again in 2021, including complaints about
alleged “price gouging” and low stock levels. During the initial lockdown,
MBIE established the ‘Price Watch’ website to enable consumers toreport any price increases they had noticed.

7.210.3

Characteristics or quality: These complaints concern the features ofsupermarket products or complaints about products not being of
acceptable quality. We received 50 such complaints between
1 November 2020 and 31 January 2022. Complaints of this nature cangive rise to breach of the Consumer Guarantees Act 1993 (CGA) and canbe actioned directly by consumers. The Commission does not pursue
potential breaches of the CGA on behalf of consumers.

Commerce Commission “PAK’nSAVE Mangere fined $78,000 for price discrepancies”(28 October 2021), available at: https://comcom.govt.nz/news-and-media/mediareleases/2020/paknsave-mangere-fined-$78,000-for-price-discrepancies.
Complaints to the Commission for the period 1 November 2020 – 31 January 2022, [Complaints regarding high prices are discussed further at Chapter 3.

].

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Specific consideration of additional FTA guidance
7.211

Woolworths NZ has submitted that the guidance issued by the Commission to assist
businesses to comply with the FTA when engaging in price promotions is too highlevel to be useful in practice.978 Woolworths NZ requested “clear, consistent, andspecific retail guidelines” to give direction on, amongst other things, the placement
and readability of information on shelf labels, and the period for which a priceneeds to be the “normal” price before it can be used as a reference price for a
promotion.

7.212

This issue was also discussed at our conference.979 Some stakeholders consideredthat further guidance or regulation on the use of price promotions may benecessary.980 However, others expressed caution, observing that overly prescriptive
guidance in this area could limit innovation and the extent to which retailers
compete through promotions.981

7.213

While compliance with the requirements of the FTA supports competition acrossthe economy, we consider that the question of appropriate guidance relating tocompliance with the FTA largely falls outside the scope of this study. The FTA
contains principles-based protections against misleading consumers, including
about the price of goods. Its interpretation is supported by case law which
continues to evolve in New Zealand and overseas. Nevertheless, as part of its
general functions in relation to making available guidance relating to businesses’
rights and obligations under the FTA,982 the Commission will continue to consider
the scope of guidance that may assist businesses engaged in price promotions inrelation to grocery products, and across the retail sector.

978

979

980

981

982

Woolworths NZ “Submission on the retail grocery market study draft report” (10 September 2021) at[9.3].
Transcript of Grocery Market Study Conference – Day 2 (22 October 2021) at 19 (lines 19-37) and 20(lines 1-42).
For example, see Transcript of Grocery Market Study Conference – Day 2 (22 October 2021) at 21(lines 26-39) and 22 (lines 1-3 and 17-27).
Transcript of Grocery Market Study Conference – Day 2 (22 October 2021) at 23 (lines 3-18 and 21-35)
and 27 (lines 33-35).
FTA, section 6.

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Chapter 8

Acquisition of groceries by retailers

Summary of findings••

Major grocery retailers are a key route to market for many suppliers. Most groceries in
New Zealand are sold through the major grocery retailers’ retail stores, so a supplier
having its products stocked by a major grocery retailer is an important way to drive
sales.
Many suppliers have limited alternative options available to sell their products otherthan to the major grocery retailers. With only two major grocery retailers in each island,
which between them have a high share of the retail grocery market, in many instances
there is only limited competition for the purchase of suppliers’ products. We observe
that, as a consequence, competition is not working well for many suppliers to the major
grocery retailers.

•

Many suppliers have limited ability to negotiate with the major grocery retailers. Some
suppliers – particularly large suppliers of well-known brands – will be in a relatively
strong bargaining position compared to other suppliers. However, suppliers are typicallysignificantly more dependent on retailers than the retailers are on suppliers. This leads
to a bargaining power imbalance in many cases.

•

We have heard examples which suggest that in some cases major grocery retailers areusing their strong negotiating position to:○ transfer costs and risks to suppliers, despite retailers being better placed to
manage them;○ reduce transparency and certainty over terms of supply; and○ limit suppliers’ ability or incentive to provide favourable supply terms to othergrocery retailers.

•

Suppliers’ incentives to innovate and invest are likely to be adversely affected by thisconduct in ways that ultimately harm consumers. For example, this could lead to
reduced production or capacity, lower product quality and fewer new product offerings
being available for New Zealand consumers. Other grocery retailers may face reduced
access to supply of groceries, affecting their ability to enter or expand. There is a risk ofprices rising in the future if some suppliers exit the market, reducing competition
between the remaining suppliers.

•

Consumers may benefit from private label products through lower prices and greater
choice. However, retailers of private label products can face conflicting incentives given
they are both customers and competitors of branded suppliers.

•

While private label products could increase consumer choice and lower prices in the
short term, there is a risk that growth of private labels could crowd out
supplier-branded products. This could lead to a loss of consumer choice and higher
prices over the longer term.

•

The risk of private label products adversely affecting outcomes for consumers is greater
when retail competition is relatively weak. For example, competition could be harmed
by retailers giving their private label products preferential shelf space or using suppliers’
intellectual property.

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Introduction
8.1

In this chapter we discuss how competition is working for the acquisition ofgroceries by retailers from suppliers and growers. We then discuss the grocery
procurement practices of the major grocery retailers. We draw conclusions about
the potential impact these procurement practices may have on competition.

8.2

The major grocery retailers have, both individually and combined, a high share of
the retail grocery market and are a key route to market for many suppliers. For
many suppliers, there are few, if any, other parties competing to buy their products
and the ability for most suppliers to transfer significant volumes to alternative sales
channels is limited. In these circumstances, there is limited competitive constraint
imposed on the demands which can be made by the major grocery retailers.
Retailers on the other hand can generally choose between a range of suppliers formost product categories.

8.3

We received differing comments on the relative bargaining power of the major
grocery retailers and suppliers in response to our preliminary issues paper and draft
report. Submissions from the NZFGC and Horticulture NZ raised concerns about
retailer conduct towards suppliers, highlighting suppliers’ lack of bargaining
power.983 Major grocery retailers, on the other hand, submitted that they value
their relationships with suppliers, and that many of their suppliers have significant
bargaining power.984

8.4

For the reasons described in paragraph 8.2 above, competition is not working wellfor many suppliers to the major grocery retailers and consequently, the major
grocery retailers are generally in a much stronger negotiating position than their
suppliers.

8.5

Imbalances in bargaining power between retailers and suppliers are likely to affectthe terms on which retailers acquire groceries. Suppliers may accept weaker terms
than if negotiating positions were more evenly balanced. This can reduce suppliers’
incentives to invest and innovate, ultimately affecting the range, quality and pricing
of products available to consumers.

983

984

NZFGC “Submission on retail grocery market study preliminary issues paper” (4 February 2021) at [9];NZFGC “Submission on Market study into grocery sector draft report” (26 August 2021) at[6.15]-[6.16]; Horticulture NZ “Submission on retail grocery market study preliminary issues paper”(9 February 2021) at 2; Vegetables NZ and Horticulture NZ “Submission on Market study into grocery
sector draft report” (26 August 2021) at [12].
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 40-46; Foodstuffs NI “Submission on retail grocery market study preliminary
issues paper” at 31-32; Foodstuffs NI “Submission on Market study into grocery sector draft report”(10 September 2021) at [333]-[341]; Foodstuffs SI “Submission on retail grocery market study
preliminary issues paper” (4 February 2021) at 21-22; Foodstuffs SI “Submission on Market study into
grocery sector draft report” (10 September 2021) at [330]-[311].

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8.6

We have considered the perceptions of retailers and suppliers regarding theirinteractions with each other when forming our views. While we have some direct
information about interactions between retailers and suppliers, many interactions
occur verbally rather than in writing. It can also be challenging to gather direct
evidence of how interactions between retailers and suppliers affect outcomes for
consumers.

8.7

We also acknowledge that this chapter primarily discusses supplier perspectives
conveyed to us by suppliers on condition of anonymity and through intermediaries
such as the NZFGC. Many suppliers expressed concerns about the protection ofcommercially sensitive information and fear of retribution for contributing to ourstudy, for example, in relation to ranging their products.985 Similar concerns wereraised with us in 2014 when we investigated the conduct of Progressive
Enterprises.

8.8

For all of these reasons, we have focused our discussion on some key themes
regarding interactions between retailers and suppliers, rather than focussing on
specific examples of conduct by particular retailers. Our objective in this chapter is
to share an overview of the experiences of supply relationships that suppliers
reported to us, and identify the prevalence of some reported experiences.986 We
then consider the potential impact that experiences of that nature may have on
competition.

8.9

On balance we are satisfied we have seen sufficient evidence to enable us to form
the views we have expressed in this chapter.987 However, confidentiality
constraints have limited our ability to set out details of all the evidence we havereceived, and in some instances we have needed to rely on our own perceptions,based upon the evidence we have received, of the nature of the interactions whichhave occurred between suppliers and retailers.

8.10

This chapter has four sections:

985

986

987

8.10.1

our approach to analysing the acquisition of groceries by retailers;

8.10.2do grocery retailers have buyer power in the acquisition of groceries?

Suppliers’ fear of retribution has been mentioned in media articles. For example: The Detail “Sneaky,
shady, shifty - supermarkets are under scrutiny” (30 November 2020) RNZ
https://www.rnz.co.nz/programmes/the-detail/story/2018774704/sneaky-shady-shiftysupermarkets-are-under-scrutiny; Kate MacNamara “Supermarket giant faces scrutiny amid risingtension with suppliers” (5 December 2020) NZ Herald https://www.nzherald.co.nz/business/shakyaisles-supermarket-giant-faces-scrutiny-amid-rising-tension-withsuppliers/SRCDD63DL6N43FROEAP45TXVAA/.
We acknowledge that suppliers interact with retailers at different levels (eg, from in-store staff toCEO), and that retailer conduct may vary across these levels.
Foodstuffs NI and Foodstuffs SI noted the limitations of the information available to us (asacknowledged in paragraphs 8.6 to 8.8 above) and stated that the work undertaken in preparing ourdraft report was not sufficient to support some of our conclusions, Foodstuffs NI “Submission onMarket study into grocery sector draft report” (10 September 2021) at [330]-[332]; Foodstuffs SI“Submission on Market study into grocery sector draft report” (10 September 2021) at [300]-[302].

327

8.10.3are retailers exercising buyer power and what is the effect?

8.10.4

what effect are private label products having on competition between
retailers and suppliers?

Our approach to analysing the acquisition of groceries by retailers
8.11This section describes the key concepts and information sources used whenanalysing the acquisition of groceries by retailers. Past studies and investigations
into interactions between grocery retailers and suppliers are also briefly
summarised. It notes that:
8.11.1

suppliers seek access to grocery retailers’ limited shelf space;

8.11.2bargaining power and buyer power are relevant concepts when
considering suppliers’ relationships with retailers;

8.11.3the impact of bargaining power imbalances on outcomes for consumers
depends on the circumstances;

8.11.4buyer power is a common issue considered in overseas grocery market
studies;

8.11.5

we previously investigated interactions between a major grocery retailer
and its suppliers in 2014; and8.11.6

we undertook a survey to build our understanding of the issues facing
suppliers.

Suppliers seek access to grocery retailers’ limited shelf space
8.12

Suppliers generally want to sell their products to as many customers as possible, soseek to have their products displayed in retail grocery stores. Given that mostgroceries are sold through retail stores, a supplier having its products ‘ranged’ by amajor grocery retailer is an important way to drive sales.988

8.13

However, shelf space in retail grocery stores is limited.989 Each store has a certain
floor area, which in turn limits the available shelf space for displaying grocery
products.

988

989

Our understanding is that most online grocery orders are filled by a local ‘bricks-and-mortar’ retailstore. Therefore, although this section refers to ‘shelf space’, the discussion is also relevant to mostonline grocery sales. There are some exceptions to this such as The Honest Grocer and Supie.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 40.

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8.14

8.15

Grocery retailers decide the range of products displayed in their stores to best
utilise this limited shelf space, to maximise their profits. Considerations when
deciding which products to stock may include:990
8.14.1

meeting customers’ needs;

8.14.2

sales growth;

8.14.3product substitutability;

8.14.4

availability of supply;

8.14.5operational ease;991 and8.14.6ensuring the retailer’s profit margin expectations are met.

Product ranging decisions can be made centrally at a retailers’ head office, or insome cases by individual stores.992 For example, Foodstuffs’ supplier website‘Foodstuffs exchange’ states:993
Ranging decisions are made both at our support centres and in our stores. Our core
range for each is recommended by the Category team in each region. They are
responsible for reviewing the product ranges and ensuring that we are stocking
products that our customers want. Local stores can also make ranging decisions which
may reflect their local producers, the niche that they wish to occupy, and customer
requests.

8.16

990

991

992

993

994

There are several key steps in the process of suppliers having their products
displayed in retail grocery stores. This process is summarised in Figure 8.1 below,
which is based on the supply process between major grocery retailers and suppliersin Australia. While there may be some variations for some retailers and suppliers incertain situations, this is generally consistent with what we have heard in the New
Zealand context.994[]; []; Foodstuffs NI“Submission on Market study into grocery sector draft report” (10 September 2021) at Appendix D[4.3]-[4.4].
For example, ensuring enough space is allocated to each product to simplify the process of stacking
the shelves (ie, enabling an entire case of each product to fit on the shelf).
Foodstuffs NI noted that it is carrying out range reviews in particular categories where there is a large
range of products in each category. This may reduce the ranging decisions available to individualstores, Foodstuffs NI “Post conference submission on Market study into grocery sector”(3 December 2021) at [130.2].
Foodstuffs Exchange “Product ranging” https://www.foodstuffs-exchange.co.nz/become-asupplier/product-ranging/#.
For example: Foodstuffs’ supplier website, Foodstuffs exchange https://suppliers.foodstuffs.co.nz/.
[
];
[
].

329

Figure 8.1

Typical supply process between major grocery retailer and supplier

Source: Independent review of the Food and Grocery Code of Conduct by Professor Graeme
Samuel995

8.17

A supplier may approach a retailer’s relevant Category Manager, or vice versa, toinitiate discussions.996 If agreement is reached, the supplier will typically enter intoa supply contract with the retailer, reflecting the retailer’s standard terms oftrade.997

8.18

The supply contract specifies the terms on which suppliers provide products togrocery retailers. For example, it may include details regarding:
8.18.1

995

996

997

payment or settlement terms;

Professor Graeme Samuel “Independent Review of the Food and Grocery Code of Conduct: Final
Report” (September 2018) at Figure 2.2, available at https://treasury.gov.au/sites/default/files/201903/Independent-review-of-the-Food-and-Grocery-Code-of-Conduct-Final-Report.pdf.
A category manager is a member of a retailer’s buying team that engages with suppliers in a particular
product category to negotiate trading terms and conditions.
[
];
[
];
[
].

330

8.19

8.18.2

whether products are to be delivered to a distribution centre or direct tostore; and8.18.3any discounts or rebates the supplier is to deduct off its ‘list price’.

The prices suppliers charge grocery retailers start at a list price, which several
discounts and rebates are typically deducted off. For example, we understand thata common approach for the structure of pricing that suppliers agree with the major
grocery retailers is:998
List priceLess fixed trading/purchasing terms (eg, warehouse allowance, business volume
rebates)
Less supplier promotional funding (ie, trade and marketing spend)

8.20

Promotional funding appears to be a significant factor affecting the prices at which
the major grocery retailers acquire products from suppliers in the New Zealandmarket. Promotional funding can be offered by suppliers to contribute to thefunding of retail promotions, specials and marketing campaigns.999 We understandthat discounts or rebates associated with supplier promotional funding can lead toa material reduction in the effective price retailers pay their suppliers for goods.1000

8.21

Retailers assess supplier performance regularly as part of the category review
process.1001 In a category review, a retailer will consider the mix of products it
stocks in the product category. Changes may be made to shelf-space allocation
based on the performance of existing products. Some products may be delisted tomake way for new or more profitable products.

998

999

Foodstuffs NI “Post conference submission on market study into the grocery sector”(3 December 2021) at [242].
Promotional funding (or trade and marketing spend) is an umbrella term used to describe a range ofsimilar practices such as discretionary rebates, marketing rebates, supplier funding scan-back, scandeals, co-op trade-spend, case deals, preferred deals, [
].

1000

For example, promotional funding lowers the effective cost Woolworths NZ pays for goods by anaverage of [ ] of the list price, Woolworths NZ “Post conference submission on Market study into
grocery sector” (24 November 2021) at [29.4];
[
].

1001

Foodstuffs NI stated “Shelf space is a finite resource in our stores, FSNI follows a constant range
review process to ensure we are offering a range that meets our customers’ needs”: Foodstuffs NI“Submission on Market study into grocery sector draft report” (10 September 2021) at Appendix D[4.1]-[4.2].
[
];
[
].

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Bargaining power and buyer power are relevant when considering suppliers’ relationships
with retailers
8.22

Retailers’ relationships with suppliers can generally be considered within two main
frameworks.1002
8.22.1Market framework. This is where there are many suppliers, andsuppliers charge all retailers a single market price for the product.

8.22.2Bargaining framework. This is where retailers have relatively fewer
suppliers in a product category, with prices and other terms being
negotiated bilaterally between retailers and suppliers.

8.23

Most retailer-supplier relationships within the grocery sector fit within a bargaining
framework. Grocery retailers and their suppliers typically enter into bilateral supply
agreements, which detail the specific terms on which products will be supplied.
Bargaining power and buyer power are key concepts within this bargaining
framework.

8.24

Bargaining power refers to the ability of parties in a negotiation to exert influence
over each other. The extent of any bargaining power imbalances between grocery
retailers and their suppliers will depend on the relative negotiating positions whenentering bilateral negotiations.

8.25

Outside options available to suppliers and retailers are a key factor in determining
their relative bargaining positions. An outside option is the best option that either
the seller or buyer can achieve if they walk away from the negotiations.1003

8.26

Buyer power occurs where retailers have a stronger bargaining position than
suppliers, allowing them to extract better terms (such as lower prices) than would
be expected in a competitive market. This could occur where a retailer has better
outside options than a supplier. In economic terms Noll (2005) describes buyer
power as:1004… the circumstance in which the demand side of a market is sufficiently concentrated
that buyers can exercise market power over sellers. A buyer has market power if thebuyer can force sellers to reduce price below the level that would emerge in acompetitive market.

1002

1003

1004

Paul W. Dobson and Ratula Chakraborty “Buyer Power in the U.K. Groceries Market” The Antitrust
Bulletin: Vol. 53, No. 2/Summer 2008 at 337, [].
ACCC “Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries”(July 2008) at 312, available at:https://www.accc.gov.au/system/files/Grocery%20inquiry%20report%20-%20July%202008.pdf.
Roger G. Noll “’Buyer power’ and economic policy” SIEPR Discussion Paper No. 04-08 (March 2005) at
589, available at:https://www.researchgate.net/publication/254130874_Buyer_Power_and_Economic_Policy.

332

8.27

While Noll’s definition focuses on the ability of a buyer to reduce prices below
those in a competitive market, prices are just one dimension of competition in amarket. A buyer’s ability to exercise market power over sellers in other ways is also
relevant. For example, this could include influencing the quality of goods or the
allocation of risk.

8.28

The relative bargaining power held by grocery retailers and their suppliers is likely
to be a key driver of the terms on which retailers acquire grocery products. Retailer
buyer power could mean that suppliers accept different terms than they would if
negotiating positions were more even.

The impact of bargaining power imbalances depends on the circumstances
8.29

Buyer power can be a driver of efficiency and good outcomes for consumers. If
there is an imbalance in bargaining power, grocery retailers may be able to obtainbetter purchasing terms (for example, lower prices) than if suppliers had
alternative means of selling their goods in New Zealand.

8.30

Consumers would benefit if these better wholesale purchasing terms lead to lower
retail prices and improved quality or variety. This relies on retailers flowing betterwholesale terms through to their retail offer, often referred to as ‘pass-through’ of
cost savings. The extent to which consumers benefit depends on the strength ofcompetition between grocery retailers.

8.31

There is also the potential for consumers to benefit if powerful buyers develop
long-term relationships with suppliers and invest jointly with them.1005

8.32

However, even with strong retail competition, it is possible that too much buyer
power in the hands of retailers could lead to worse outcomes for consumers.

1005

1006

8.32.1

Buyer power might suppress investment by suppliers in process andproduct innovation, if lower prices paid by retailers or the transfer ofexcessive risks reduce suppliers’ expected returns from this investment.
This could lead to reduced choice and quality for consumers.1006

8.32.2A retailer may seek to use its strong bargaining position to enter into
restrictive supply arrangements, which limit a supplier’s ability to sell its
products via other retailers. This could reduce retail competition,
ultimately leading to higher prices, less choice and lower product quality
for consumers.

ACCC “Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries”(July 2008) at 319, available at:https://www.accc.gov.au/system/files/Grocery%20inquiry%20report%20-%20July%202008.pdf.
Paul W. Dobson and Ratula Chakraborty “Buyer Power in the U.K. Groceries Market” The Antitrust
Bulletin: Vol. 53, No. 2/Summer 2008 at 344-345, [
].

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8.33

The more effective competition is at the retail level, the less likely it is that retailers
having significant buyer power will ultimately harm consumers. A more competitive
retail market will increase the likelihood of any benefits retailers obtain from buyer
power being passed through to consumers. Conversely, if retail competition isrelatively weak, buyer power might result in higher profitability for grocery retailers
and worse outcomes for suppliers and consumers.

8.34

In addition, the more competition there is at the retail level of the grocery market,
the less likely it is that retailers will have significant buyer power. This is because
more retailers operating in a market provides additional options for a supplier tosell its products to, improving its negotiating position.1007

Buyer power is a common issue considered in overseas grocery market studies
8.35

Retailer buyer power has previously been considered in overseas grocery market
studies. This issue has been highlighted in studies undertaken in the UK, Australia,
South Africa, Spain and Portugal.

8.36

The UK Competition Commission was concerned about the transfer of excessive
risk and unexpected costs by grocery retailers to their suppliers through various
supply chain practices. It noted that if unchecked, this will have an adverse effecton investment and innovation in the supply chain, and ultimately on consumers.1008

8.37

The ACCC noted in its 2008 grocery market inquiry that competition was not
sufficiently strong at the retail level to ensure that consumers always benefitted
from buyer power in the form of lower retail prices. However, it found that there
was little evidence to substantiate anecdotal allegations of buyer power being
exercised in an anticompetitive or unconscionable manner.1009

1007

This focuses on the balance of bargaining power between retailers and suppliers. Greater retailcompetition could also be expected to lead to lower retail prices, and therefore downwards pressureon wholesale prices.
UK Competition Commission “The supply of groceries in the UK market investigation” (30 April 2008)at [3], available at:https://webarchive.nationalarchives.gov.uk/20140402235418/http://www.competitioncommission.org.uk/assets/competitioncommission/docs/pdf/noninquiry/rep_pub/reports/2008/fulltext/538.pdf.
ACCC “Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries”(July 2008) at 325, available at:https://www.accc.gov.au/system/files/Grocery%20inquiry%20report%20-%20July%202008.pdf.

1008

1009

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8.38

In the ACCC’s subsequent perishable agriculture goods inquiry, it identified a rangeof potentially harmful practices associated with bargaining power imbalances andmarket failures. This included contract terms that inefficiently allocate risk andsupermarkets requiring cost offsets. The ACCC noted that while hard bargaining
between retailers and suppliers is an inherent aspect of commercial dealings, it hasconcerns where behaviours move beyond this to create potentially harmful impacts
on markets.1010

8.39

The South African Competition Commission noted that national retail chains haveused their buyer power to demand rebates to cover the costs of certain retailstore-level activities, such as merchandising, store openings and refurbishment,
advertising and promotion, access to shelf space and category management. These
rebates were not available to wholesalers and independent buying groups servicing
independent retailers, placing them at a material competitive disadvantage. 1011

8.40

The Spanish and Portuguese Competition Authorities also highlighted several areasof concerns regarding buyer power.

1010

1011

1012

1013

8.40.1The Spanish Competition Authority referred to: 1) unpredictablecommercial payments, 2) not putting contract terms and conditions inwriting, 3) requiring suppliers to provide excessive information regarding
new products, 4) MFN clauses, and 5) retailers demanding information
on suppliers’ interactions with other retailers.1012

8.40.2The Portuguese Competition Authority referred to: 1) the unilateral
imposition of terms and conditions, 2) discounts and related
mechanisms, 3) penalties and 4) payment terms.1013

ACCC “Perishable agricultural goods inquiry” (November 2020) at x and xiii, available at:https://www.accc.gov.au/system/files/Perishable%20Agricultural%20Goods%20Inquiry%20%20Final%20Report%20-%20December%202020.pdf.
South African Competition Commission “The grocery retail market inquiry” (25 November 2019) at[66], available at: http://www.compcom.co.za/wp-content/uploads/2019/12/GRMI-Non-ConfidentialReport.pdf.
Comisión Nacional de la Competencia “Report on the relations between manufacturers and retailers
in the food sector” (October 2011) at 133-134, available at:https://www.cnmc.es/sites/default/files/1186012_7.pdf.
Portuguese Competition Authority “Final Report on Commercial Relations Between the Large RetailGroups and their Suppliers (Abridged English Version)” (October 2010) at 6, available at:
http://www.concorrencia.pt/SiteCollectionDocuments/Estudos_e_Publicacoes/Outros/AdC_Relatorio_Final_Distribuicao_Fornecedores_Outubro_2010_en.pdf.

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8.41

Buyer power is likely to be greater in markets with fewer retailers, as suppliers havefewer options for selling their products. Given that suppliers generally have fewer
large retailers to sell to in New Zealand than the countries referred to above, it ispossible that New Zealand’s major grocery retailers possess greater buyer power
than in these overseas studies.1014

We investigated interactions between a grocery retailer and its suppliers in 2014
8.42

We previously considered interactions between Progressive Enterprises (now
Woolworths NZ) and its suppliers in a 2014 investigation. However, this was not in
the context of a market study. Rather, this investigation considered whether
Progressive Enterprises breached either the FTA or the FTA or the Commerce Act
through some of its business practices.

8.43

We investigated five matters, concluding in each case that the conduct was unlikely
to be unlawful. The five matters we investigated were whether Progressive
Enterprises:1015

1014

1015

8.43.1sought payments and/or improved performance from some suppliers tocompensate Progressive Enterprises for lack of profits in the previous
year under improper threat of commercial sanction;

8.43.2

dealt with suppliers in a misleading or deceptive manner by making
deductions from supplier invoices or seeking payments to which
Progressive Enterprises was not entitled under its contracts with
suppliers, or otherwise misrepresenting its entitlement to do so;

8.43.3sought or received information about the future pricing and promotional
intentions of its competitors, or otherwise engaged in conduct thatmight reduce competition with other retailers;

8.43.4

used improper threats of commercial sanction or took advantage of a
substantial degree of market power by refusing to accept wholesale
price increases; or

8.43.5favoured its transportation subsidiary over other transportation
providers to gain a competitive advantage.

As noted in paragraph 8.50, most estimates of the combined shares of supply for New Zealand’s
major grocery retailers are between 80% and 90%. In comparison, the combined market shares of thetwo largest retailers reported in the overseas studies were: 42% in the 2008 UK Competition
Commission study, 54% in the 2008 ACCC study, 65% in the 2020 ACCC perishable agricultural goods
study, 46% in the 2011 Spanish study, and 45% in the 2010 Portuguese study. The 2019 South African
study noted that the top 5 largest retailers had a combined market share of 64%.
[].
Commerce Commission “Progressive Enterprises Limited: investigation closure report”(20 November 2014) at [10], available at:https://comcom.govt.nz/__data/assets/pdf_file/0033/94767/Progressive-Enterprises-LimitedInvestigation-closure-report-20-November-2014.pdf.

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8.44

While our view was that Progressive Enterprises’ conduct was not likely to be
unlawful, we identified two areas where we reminded parties to take particularcare.1016
8.44.1

The first was that parties should avoid ambiguity in communications andwritten terms of trade (especially standard form documents). Precisionand clarity of meaning, purpose, and intention avoids ambiguity that canhave the potential to mislead.

8.44.2The second was exchanging information about future competitor
behaviour, or discussing supplier interactions with a competitor. Thesetypes of exchanges create an environment in which anticompetitive
agreements or conduct can easily emerge.

We undertook a survey to build our understanding of the issues facing suppliers
8.45

As part of our study, we undertook a survey of suppliers (our supplier survey) toseek their views on the New Zealand grocery market. We particularly sought views
on suppliers’ trading relationships with grocery retailers.

8.46

The survey enabled us to seek the views of a wide range of suppliers and identify
common themes. We received 126 responses to our supplier survey.1017 These
respondents:

8.47

8.46.1

supply across a wide range of grocery retailers, wholesalers and productcategories; and8.46.2vary significantly in size, as measured by the number of products (SKUs)
they supply and sales revenues in New Zealand.

Other key sources of information we have relied on when assessing the acquisitionof groceries by major grocery retailers are listed below.
8.47.1

1016

1017
1018

We held meetings with over 25 suppliers and supplier associations.1018
Meetings were held with a range of organisations we contacted to seek
views, and organisations which proactively contacted us. We also held
meetings with some respondents to our supplier survey to seek further
details regarding comments made.

Commerce Commission “Progressive Enterprises Limited: investigation closure report”(20 November 2014) at [29], available at:https://comcom.govt.nz/__data/assets/pdf_file/0033/94767/Progressive-Enterprises-LimitedInvestigation-closure-report-20-November-2014.pdf.
See Attachment F for further details regarding our supplier survey.
[
].

337

8.48

8.47.2

Information provided by retailers regarding their grocery procurement
practices in response to our information requests. This includes strategy
documents and copies of supply agreements between major grocery
retailers and their suppliers.

8.47.3

Information about interactions between retailers and suppliers provided
to us by industry participants.1019

8.47.4

Submissions on our preliminary issues paper, including surveys
undertaken by the NZFGC and Horticulture NZ.

8.47.5

Submissions on our draft report, including discussion at our consultation
conference and subsequent cross-submissions.

Further information on our supplier survey is contained in Attachment F.

Do grocery retailers have buyer power in the acquisition of groceries?
8.49

This section considers the relative bargaining power between New Zealand grocery
retailers and their suppliers, particularly whether retailers have market power in
the acquisition of groceries. It notes that:
8.49.1major grocery retailers are a key route to market for many suppliers;8.49.2some suppliers have stronger relative bargaining power than others;

8.49.3

suppliers generally have limited ability to negotiate with the major
grocery retailers; and8.49.4

there appears to be little recourse for suppliers who encounter
difficulties with retailers.

Major grocery retailers are a key route to market for many suppliers
8.50

1019

Suppliers are often dependent on major grocery retailers as their main route forselling their products to consumers. The majority of grocery products purchased by
New Zealand consumers are sold by the major grocery retailers. As discussed in
Chapter 5, most estimates of the combined shares of supply for the major grocery
retailers are between 70% and 90% for 2015 to 2019.

[

].

338

8.51

8.52

Many suppliers we heard from indicated that they are dependent on the major
grocery retailers for sales of their products.
8.51.1

Submissions on our draft report have highlighted the significant role that
Māori play in food production, noting however, that their involvement in
the governance and management of the grocery sector is low.1020

8.51.2

Although our supplier survey is not representative, suppliers’
dependence on the major grocery retailers was highlighted in the
responses we received.1021 This is consistent with what we heard inmeetings we held with suppliers.1022

Alternative sales channels are available for some suppliers. The alternative sales
channels may include:
8.52.1

specialist grocery stores;

8.52.2convenience stores;

8.52.3

meal kit providers;

8.52.4

foodservice wholesalers;

8.52.5exports to overseas markets; and8.52.6

direct to customer sales.

8.53

These alternative channels are likely to be more viable for some suppliers thanothers. For example, suppliers of snack foods and soft drinks may be able to sellsignificant volumes of their products through convenience stores.1023

1020

National Māori Authority “Post conference submission on Market study into grocery sector”(30 November 2021) at 4; Ngati Porou Holding Company Ltd “Post conference submission on Market
study into grocery sector” (23 November 2021) at 5.

1021

[
].
1022

1023

For example: [
[

];
].

Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 14.

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8.54

However, the ability for most suppliers to transfer significant volumes to alternative
sales channels or to diversify their customer base is limited by the structure of theretail grocery sector. Other grocery retailers typically have modest volumes
because they target specific customers rather than competing directly with the
major grocery retailers. They are also generally perceived by consumers to have
limited geographic coverage and be more expensive than the major grocery
retailers for some products.

8.55

Given that the majority of grocery products are sold by the major grocery retailers,
alternative channels are unlikely to generate sufficient sales for most suppliers tooperate profitably. In addition, there may be timing challenges if a supplier sought
to significantly grow its sales through alternative channels.1024

8.56

In our supplier survey and in meetings with some suppliers, we asked suppliers
what they would do if the major grocery retailers they supply were no longer ableor willing to stock their products. While some suppliers indicated that they would
look to develop alternative sales channels, the majority indicated that theirbusiness would be unsustainable, and they would be likely to exit the New Zealandmarket.1025

Some suppliers have stronger relative bargaining power than others
8.57

The major grocery retailers submitted that many suppliers have countervailingpower when dealing with retailers.1026

1024

[

1025
1026

].
[
].
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 33; Foodstuffs SI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 21; Woolworths NZ “Submission on retail grocery market study preliminary
issues paper” (4 February 2021) at 42-43; Woolworths NZ “Post conference submission on Market
study into grocery sector” (24 November 2021) at [18].

340

8.58

1027

1028

1029

1030

We agree that this is true for some suppliers, and more generally consider there
are a range of factors which can potentially affect a supplier’s bargaining position.
These include:1027
8.58.1

Ability to export: Suppliers who export a significant proportion of theirproducts are less dependent on New Zealand grocery retailers, which
may improve their negotiating position. Red meat is an example, where alarge proportion of production from New Zealand suppliers is sold into
overseas markets.1028

8.58.2Availability of other domestic sales channels: Suppliers of products witha significant proportion of sales through other domestic channels may
also be in a stronger position when negotiating with grocery retailers.
Examples of these alternative channels may include foodservice
wholesalers, convenience stores, or direct to customer sales (forexample, via a supplier’s own website).

8.58.3

Strength of a supplier’s brand: Suppliers of products carrying
well-known brands, which consumers consider to be ’must have’, may
have a stronger negotiating position. Retailers’ outside options may be
weaker, given the limited ability to substitute these brands with otherproducts.

8.58.4

Number of suppliers in a product category: Retailers will be more
dependent on certain suppliers in product categories where there arelimited alternative suppliers available.1029

8.58.5

Product perishability: Suppliers of some perishable products appear tobe particularly vulnerable when dealing with grocery retailers. Suppliersof highly perishable products have limited ability to delay or withhold
supply while seeking to negotiate better supply terms.1030

These are possible examples of factors which may affect retailers’ and suppliers’ relative bargaining
positions. In practice, the balance of bargaining power will depend on the specific circumstances
regarding the product or supplier in question.
88% of beef and veal and almost 95% of lamb and mutton is exported. Beef + Lamb NZ “Economic andsocial contribution of the New Zealand red meat industry - Overview” (June 2020) at 2, available at:https://www.mia.co.nz/assets/MIA-Publications/Economic-and-Social-Contribution-of-the-NZ-RedMeat-Industry-Overview.pdf;[].
Foodstuffs NI and Foodstuffs SI provided a list of product categories where there is high supplierconcentration. Foodstuffs NI “Submission on Market study into grocery sector draft report”(10 September 2021) at [338]; Foodstuffs SI “Submission on Market study into grocery sector draft
report” (10 September 2021) at [311].
ACCC “Perishable agricultural goods inquiry” (November 2020) at 55, available at:https://www.accc.gov.au/system/files/Perishable%20Agricultural%20Goods%20Inquiry%20%20Final%20Report%20-%20December%202020.pdf.

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8.59

The vulnerability of suppliers of perishable products was highlighted in somesubmissions. Horticulture NZ referred to the power differential between
supermarkets and growers suggesting that retailers earn higher margins on fresh
vegetables than other product categories.1031 T&G Fresh submitted that:1032
When fresh produce is grown, it must be sold quickly because of its perishability.
Unlike other industries, in fresh produce you can’t pause production because demandis low or pricing isn’t so good. You are at the mercy of mother nature, the market, andprices change daily due to supply and consumer demand.

8.60

Our view is that, for most suppliers, particularly smaller suppliers, there appears to
be an imbalance of bargaining power in favour of the major grocery retailers. We
understand that small suppliers play an important role in New Zealand’s evolving
food sector, introducing a high proportion of new products to shelves, anddeveloping and trialling product innovations.1033

8.61

Some suppliers – particularly large suppliers of well-known brands – will be in a
relatively strong bargaining position compared to other suppliers, and may accountfor a high proportion of sales in their product categories.1034 However, even large
suppliers with strong brands are dependent on supermarkets to access New
Zealand consumers.1035 In addition, category by category product ranging
negotiations between retailers and suppliers may dampen the bargaining power ofa large supplier providing products across many different categories.1036

1031

Horticulture NZ “Submission on retail grocery market study preliminary issues paper”(9 February 2021) at 2.
T&G Fresh “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 2.
Transcript of Grocery Market Study Conference – Day 3 (26 October 2021) at 44 (lines 19-23) and 19(lines 5-9); [].
Woolworths NZ noted [], Woolworths NZ“Submission on retail grocery market study preliminary issues paper” (4 February 2021) at 42-43;[]; Foodstuffs NI and Foodstuffs SI noted that 25%of total sales were attributable to 9 (FSNI) or 11 (FSSI) of NZs biggest suppliers: Foodstuffs NI“Submission on Market study into grocery sector draft report” (10 September 2021) at [337.1],
Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021) at[311].

1032

1033

1034

1035

Consumers International “The relationship between supermarkets and suppliers: What are theimplications for consumers?” (July 2012) at 3, [
].

1036

[

].

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8.62

We heard that Māori provide for a reasonable portion of New Zealand’s groceries
through their strong ownership in the primary sector. However, we also heard thestate of competition for the acquisition does not result in fair and equitableoutcomes for Māori suppliers. Māori contributors also expressed a desire for the
major grocery retailers’ policies to support and provide specific opportunities toMāori producers and suppliers, and adhere to the principles of Te Tiriti.1037

Suppliers generally have limited ability to negotiate with the major grocery retailers
8.63

Major grocery retailers have lots of suppliers, but the majority are small. For
example, Woolworths NZ noted that it partners with over 1,400 suppliers, withmore than 900 being small suppliers with retail sales in Countdown of less than
$1m per annum.1038

8.64

Foodstuffs NI and Foodstuffs SI combined have trading relationships with over
3,500 product suppliers.1039 Many of these are small suppliers. In the 13 weeks
ending 8 August 2021:

8.65

1037

1038

1039

1040

1041

1042

8.64.190% of Foodstuffs NI’s sales came from 228 suppliers (with an additional
1,644 suppliers making up the last 10% of sales);1040 and

8.64.2

90% of Foodstuffs SI’s sales came from 198 suppliers (with an additional
1,632 suppliers making up the last 10% of sales).1041

In many cases suppliers are likely to be more dependent on the major grocery
retailers than the retailers are on particular suppliers. As noted above, the strengthof relative bargaining positions depends on the value of each party’s outside
options.
8.65.1For suppliers with few outside options other than to supply to major
grocery retailers, the cost of walking away from negotiations with asupermarket is high – significant lost sales.

8.65.2

In contrast, the cost to a major grocery retailer of walking away fromnegotiations with most suppliers is relatively low unless there are noother suppliers of those products to deal with.1042

National Māori Authority “Post conference submission on Market study into grocery sector”(30 November 2021) at 4-6.
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 1 and 41.
Foodstuffs NI “Becoming a Supplier” https://supplierhelp.foodstuffs.co.nz/en/article/becoming-asupplier.
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[337.2]-[337.3].
Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021) at[311].
As discussed in paragraphs 8.57 to 8.60 above, some suppliers have stronger outside options thanothers.

343

8.66

As discussed in paragraphs 8.57 to 8.62 above, some suppliers will have stronger
relative bargaining power than others. For example, a major grocery retailer may
be less able to walk away from negotiations with suppliers of branded products
which consumers consider to be must have. However, as discussed in paragraph8.101 below, we consider that the major grocery retailers are generally in a muchstronger negotiating position than most of their suppliers, and there are examplesof the major grocery retailers using their strong negotiating positions in ways thatare likely to adversely affect suppliers’ incentives to innovate and invest.

8.67

Dobson and Chakraborty (2008) describe retailers’ and suppliers’ relative
dependence on each other as follows:1043…in terms of relative bargaining power, the leading retailers may find it
straightforward and inexpensive to switch suppliers (especially for commodity/
private-label goods, but more generally where shelf space can be reallocated acrossproduct categories without losing significant custom), and thus switching costs inthese circumstances may be expected to be relatively low as long as alternative
suppliers exist with sufficient capacity. In contrast, were a supplier to lose its contract
with one of the major retailers, it would normally be quite difficult in the short term
to replace that lost volume with other retailers (given that these retailers would be
unlikely to take on additional supplies significantly over and above their existing
contracts), meaning that its own switching costs could be relatively high.

8.68

Nevo and Van den Bergh (2017) refer to large retailers as a potential bottleneck
which can hinder suppliers’ access to consumers:1044
In modern retailing markets, large retailers may occupy a ‘bottleneck’ position thatallows them to control the interaction of brands. In upstream markets, where
manufacturers sell to retailers, the latter may use their superior bargaining position to
extract favourable contract terms from the former. In downstream markets, whereretailers sell to end-consumers, vertically integrated supermarkets may prioritize theirprivate labels to the detriment of branded goods. In extreme cases, powerful retailers
may refuse access to the ‘bottleneck’, thus hindering the access of brandmanufacturers to end-consumers.

8.69

1043

1044

1045
1046
1047

Suppliers’ lack of ability to negotiate with retailers was a key theme in responses toour supplier survey.1045 Examples of comments we received are listed below.
8.69.1“We have two choices 1) sell to them under their terms 2) don’t sell tothem at all”.1046

8.69.2“No ability to negotiate. We are price takers.”1047Paul W. Dobson and Ratula Chakraborty “Buyer Power in the U.K. Groceries Market” The Antitrust
Bulletin: Vol. 53, No. 2/Summer 2008 at 341-342.
Nevo, Hila and Van den Bergh, Roger “Private Labels: Challenges for Competition Law and Economics”
World Competition 40, no. 2 (2017) at 272, [
].
[
].
[
].
[
].

344

8.69.3“It’s pretty much sign this document, or don’t supply”.1048

8.69.4“Negotiations are one sided, as the retailers have all the power to either
delete or keep our products on shelf. It is a very competitive market andthe supplier who gives them the most, gains the most, even if productquality suffers.”1049

8.70

Small suppliers may be more likely to be disadvantaged in terms of the resources
and sophistication they can bring to negotiations with retailers. They may be more
likely to settle for less favourable terms than suppliers with more resources.

8.71

Suppliers who lack the ability to negotiate may effectively be offered ‘take it orleave it’ contracts or contract terms that enable retailers to extract almost all of thevalue of the trading relationship.1050 Suppliers have little option other than toaccept these terms or walk away.

8.72

The National Māori Authority considered the current structure of the grocery
market is not working well for Māori suppliers and producers of groceries. Itemphasised that the major grocery retailers’ use of buyer power in negotiations
with suppliers extends to all producers, not just Māori.1051

8.73

Māori contributors told us that, in some cases, they have withdrawn their products
from supply to the major grocery retailers due to narrow margins, increasing costs
and expectations of promotional funding.

There appears to be little recourse for suppliers who encounter difficulties with retailers
8.74

Suppliers who encounter difficulties when trading with the major grocery retailers
appear to have limited ability to resolve disputes. While the major grocery retailers
have charters containing principles for how they interact with suppliers, suppliers
have told us that these do not appear to be effective.1052

8.75

The major grocery retailers highlighted the supplier charters they have
implemented in submissions on our preliminary issues paper.1053 For example:

1048
1049

[
[

].
].

1050

[
1051

].
National Māori Authority “Post conference submission on Market study into grocery sector”(30 November 2021) at 6.

1052

[
1053

].
Foodstuffs NZ “Supplier Relationship Charter”, available at:https://suppliers.foodstuffs.co.nz/assets/documents/Supplier_relationship_charter.pdf; Woolworths
NZ “Woolworths New Zealand Supplier Charter”, available at:https://www.countdown.co.nz/media/9959/wwnz-supplier-charter-180618.pdf.

345

8.76

8.75.1

Woolworths NZ said that its supplier charter cements its “commitment
to working with our suppliers fairly, honestly, and transparently”;1054

8.75.2

Foodstuffs NI stated that it “values its supplier relationships, invests timeand endeavours to always act consistently with the Supplier Relationship
Charter”;1055 and8.75.3

Foodstuffs SI stated that it “values its supplier relationships and acts
consistently with the Supplier Relationship Charter”.1056

The NZFGC, on the other hand, submitted that the major grocery retailers’ suppliercharters are “largely symbolic”:1057
The supplier community does not view the charters as living documents providing
robust frameworks to deal with business relationships.
…
The charters are not seen to be honoured or carried out in practice. Suppliers do not
feel able to use them or have faith that even if they do it will result in a fair outcome.
For example, in the case of Foodstuffs suppliers are expected to contact the CEOs or
the Foodstuffs lawyer. This is a daunting prospect for particularly small suppliers whowill never have had the opportunity to meet them before and then be expected tomake contact about a complaint.

8.77

We understand that relatively few complaints are made under these charters. 1058
While this could be because suppliers encounter few issues when dealing withretailers, this seems unlikely given the wide range of concerns about retailer
conduct that we have heard from suppliers during our study.

1054

Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 41-42.
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 32.
Foodstuffs SI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 22.
NZFGC “Comments on submissions on preliminary issues paper” (12 April 2021) at [6.5]-[6.6].

1055

1056

1057
1058

[
];
[
];
[
]. Foodstuffs NI
acknowledged suppliers do not want to raise issues with Foodstuffs NI directly, Transcript of GroceryMarket Study Conference – Day 3 (26 October 2021) at 27 (lines 1-6).

346

8.78

Some suppliers may be reluctant to raise complaints or enforce their rights due tofear of retribution, where complaints are required to be made to directly to theretailer itself.1059 This is likely to reflect the lack of alternative options available tomany suppliers – losing a major grocery retailer as customer could have a material
impact on the viability of their businesses.
8.78.1

Under the Foodstuffs charter, complaints are to be raised with therelevant Category Manager, Business Category Manager, or usual
contact in the first instance. Complaints can be escalated to the General
Manager of Merchandise, then the relevant CEO, if unresolved.1060

8.78.2

Under the Woolworths NZ charter, the supplier is first required to try toresolve a dispute with the category team at Woolworths NZ. Unresolved
disputes can then be sent to the Managing Director.1061

8.78.3

Hexis Quadrant referred to a consistent theme of suppliers being
genuinely concerned for the repercussions from raising issues.1062

Are retailers exercising buyer power and what is the effect?
8.79This section considers whether New Zealand’s grocery retailers are exercising buyer
power, and if so, the effect this has on outcomes for consumers. It notes that:
8.79.1

we have heard examples of positive feedback from suppliers on retailers;

8.79.2

retailer behaviour varies by retail banner, store, and over time;

8.79.3

suppliers are concerned about the threat of having their products
delisted by retailers;

8.79.4

we have categorised potentially harmful conduct by retailers into threemain themes:
8.79.4.1

transfer of costs and risks from retailers to suppliers;8.79.4.2

lack of transparency and certainty over terms of supply;

8.79.4.3

retailers limiting suppliers’ ability or incentive to provide
favourable supply terms to other retailers; and

1059

[
1060

1061

1062

].
Foodstuffs NZ “Supplier Relationship Charter” at 3, available at:https://suppliers.foodstuffs.co.nz/assets/documents/Supplier_relationship_charter.pdf.
Woolworths NZ “Woolworths New Zealand Supplier Charter” at [5.3]-[5.4], available at:https://www.countdown.co.nz/media/9959/wwnz-supplier-charter-180618.pdf.
Transcript of Grocery Market Study Conference – Day 3 (26 October 2021) at 28 (lines 6-14).

347

8.79.5

there may be a slightly stronger tendency for pass-through of cost
increases to consumers (compared to cost decreases).

We have heard examples of positive feedback from suppliers about retailers
8.80

We heard many examples from suppliers of the major grocery retailers positively
affecting their businesses, and we acknowledge that many suppliers have good
relationships with the retailers they supply.1063 Examples of the themes we heard
include retailers:1064
8.80.1providing greater product exposure by supporting promotions anddisplays;8.80.2

ranging new products and supporting innovative ideas;

8.80.3

helping to grow supplier businesses through common strategies andjoint business plans; and8.80.4using insights from shopper data to identify customer demand and sales
patterns.1065

8.81

The major grocery retailers have noted that they value their supplier relationships,
referring to the time they invest in them.1066 Woolworths NZ referred to theirpositive relationships with small suppliers, and Foodstuffs SI noted that small
suppliers are a growing part of their business.1067

8.82

Another theme is that suppliers generally speak positively of their trading
relationships with smaller grocery retailers such as Farro Fresh, Moore Wilson’s andCommonsense Organics.1068 A supplier told us that this is because there is lesspower imbalance between suppliers and these smaller grocery retailers.1069

1063

1064
1065

1066

1067

1068

1069

For example: Pernod Ricard Winemakers “Submission on Market study into grocery sector draft
report” (25 August 2021), and Transcript of Grocery Market Study Conference – Day 7(2 November 2021) at 21 (lines 3-26).
[].
For example, a supplier noted that purchasing these data could enable it to help understandconsumer behaviour such as switching, []. Anothersupplier noted it had not purchased any of these insights as it is “really expensive”,[].
Foodstuffs NI “Submission on retail grocery market study preliminary issues paper” (4 February 2021)
at 32; Foodstuffs SI “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 22; Woolworths NZ “Submission on retail grocery market study preliminary
issues paper” (4 February 2021) at 40-46.
Transcript of Grocery Market Study Conference – Day 3 (26 October 2021) at 10 (lines 5-9) and 44(lines 19-23).
[
].
[

].

348

Retailer behaviour varies by retail banner, store, and over time
8.83

The majority of feedback we received from suppliers has focused on potentiallyharmful conduct undertaken by the major grocery retailers.1070 The range ofcomplaints we received varies by different retail banners and sometimes individualstores.

8.84

Retailer behaviour also changes over time. Certain companies may be the focus of
supplier complaints at any given time.

8.85

The 2021 Nielsen Retail Barometer survey, which measures supplier sentiment,
highlights changes in suppliers’ trading relationships with the major grocery
retailers over time. The percentage of survey respondents who rated their overall
trading relationship with each retailer as ‘good’ or ‘excellent’ is shown in Figure 8.2
below.1071
Figure 8.2

Overall trading relationship by retailer – Good and excellent

Source: Nielsen Retail Barometer 2021.1072

1070

We sought views on both positive and negative experiences suppliers have had with the retailers andwholesalers they supply. As noted in paragraphs 8.80 to 8.82, we also heard examples of positive
experiences; [
].

1071

This survey includes a 5-point scale of poor, below average, average, good and excellent.
[
].

1072

349

8.86

Of the respondents to the NZFGC’s members survey, nine in 10 relate commercial
dealing ‘challenges’ with Foodstuffs NI.1073 Foodstuffs NI is currently implementing
a new centralised buying model, which has raised concerns for many suppliers.1074
These changes may have been prominent in the minds of respondents. However,
we also acknowledge that some suppliers have positive relationships with
Foodstuffs NI.1075

8.87

Previously concerns had been raised about Countdown’s business practices when
dealing with some suppliers. These concerns were considered in our 2014
Progressive Enterprises investigation.1076

Suppliers are concerned about the threat of having their products delisted by retailers
8.88

Given many suppliers’ dependence on the major grocery retailers for sales of theirproducts, the possibility of having products delisted appears to be a major risk totheir businesses. The threat of delisting a supplier’s products is a possible way aretailer could use its bargaining power to encourage a supplier to agree to its
terms.

8.89

Retailers delisting products is not a problem in itself. It is reasonable for a retailer
to seek to delist poorly performing products or suppliers, where this is based on
genuine commercial reasons.1077 However, threats of delisting are potentially an
issue where they are used to encourage suppliers to agree to terms which could
reduce competition, either between retailers or suppliers.

8.90

Threats of delisting suppliers’ products appear to be very common. The NZFGC’s
survey of its members found that 82% of respondents have been threatened withdeletion for not agreeing to a retailer’s terms or margins.1078

1073

Blackmarket Research “Project: NZFGC, Hexis Quadrant: NZFGC members survey” (February 2021) atslide 15. 159 NZFGC members responded to the survey.
[
]; [
].

1074

1075

1076

1077

1078

Foodstuffs NI has acknowledged the concerns expressed by suppliers and current sentiment,
particularly arising from its centralised buying model. See Foodstuffs NI “Submission on Market study
into grocery sector draft report” (10 September 2021) at [334.1].
For example, 77% of exhibitors who completed an online survey after the 2021 Foodstuffs Expo
reported a positive relationship with Foodstuffs NI, [].
Commerce Commission “Progressive Enterprises Limited: investigation closure report”(20 November 2014), available at: https://comcom.govt.nz/__data/assets/pdf_file/0033/94767/
Progressive-Enterprises-Limited-Investigation-closure-report-20-November-2014.pdf. See paragraphs
8.42 to 8.44 above for further discussion.
For example, this could include failure to meet agreed quality or quantity requirements, failure tomeet agreed commercial sales or profitability targets, or persistent failure to agreed delivery
requirements.
Blackmarket Research “Project: NZFGC, Hexis Quadrant: NZFGC members survey” (February 2021), at
slides 23 and 35. We were not consulted in the design of this survey, given it was undertaken on
behalf of the NZFGC.

350

8.91

We have heard examples of suppliers allegedly being threatened with delisting of
their products by the major grocery retailers, or facing other consequences,where:1079

8.92

8.91.1a supplier is refusing to agree to changes to a supply contract proposedby a retailer;

8.91.2a supplier’s products are not meeting the retailer’s margin expectations;or8.91.3a supplier attempts to increase its prices.

We have been told that threats of delisting are often not expressed explicitly, but
suppliers can perceive certain comments as implied threats. Some examples oflanguage that suppliers have reported retailers using include:
8.92.1“you are risking your position in the category”;1080

8.92.2“you have a long tail of products that look vulnerable”;1081 or

8.92.3

please contact us so we can “guide you through the full implications”.1082

We have categorised potentially harmful conduct by retailers into three main themes
8.93

In this study we have grouped feedback received from suppliers into themes, rather
than focussing on specific examples of conduct by particular retailers. The
underlying balance of bargaining power between grocery retailers and suppliers,and how this ultimately affects consumers, is of greatest interest to us in this study.
As one interviewee commented, significant changes in a retailer’s behaviour
towards its suppliers are “just a leadership change away”.1083

8.94

We expect that retailers will negotiate hard to get the best deals they can fromtheir suppliers. This is normal commercial practice for a business seeking tomaximise its profits. It can also benefit consumers where better wholesalepurchasing terms are passed through to retail prices.

8.95

However, we have heard examples which suggest that in some cases the major
grocery retailers are using their strong negotiating position (including threats ofdelisting) to:1084
8.95.1

1079
1080
1081
1082
1083

1084

[
[
[
[
[

transfer retail costs and risks onto suppliers;

].
].
].
].
].

These themes, including the potential impact on outcomes for consumers, are described in moredetail in paragraphs 8.102 to 8.152 below.

351

8.96

8.95.2

reduce transparency and certainty over terms of supply; and8.95.3limit suppliers’ ability or incentive to provide favourable supply terms toother retailers.

Suppliers’ incentives to innovate and invest are likely to be adversely affected bythis conduct. Suppliers have highlighted the downwards pressure on their margins
through their negotiations with the major grocery retailers, due to their relatively
weak bargaining positions. For example, Horticulture NZ submitted:1085
The supermarket duopoly means growers have limited market opportunity for selling.
This, as has been shown by our study, results in growers being unable to maintaintheir margins in the face of increasing costs.

8.97

Consumers are ultimately likely to be harmed by this conduct, for example, throughlower-quality products and less choice. We have heard examples of:
8.97.1

reduced product quality, due to suppliers sourcing cheaper inputs whenfacing lower margins;1086

8.97.2

smaller pack sizes for products, due to suppliers seeking to reduce thecost per unit in response to margin pressure;1087

8.97.3less choice for consumers due to lower investment by suppliers inresearch and development for new products;1088

8.97.4factory closures leading to removal of products which were specific to
the New Zealand market;1089 and8.97.5products which were very popular among consumers in a productcategory being delisted because the supplier did not lower prices tomeet a retailer’s margin expectations.1090

8.98

Some of the examples we have heard about during our study may appear relatively
minor in isolation. However, our view is that when considered together, theysuggest the major grocery retailers are exercising buyer power in ways that arelikely to ultimately harm consumers.

1085

Horticulture NZ “Submission on retail grocery market study preliminary issues paper”(9 February 2021) at 2. Horticulture NZ also submitted that “the study should enquire into the margin
that growers are receiving to ascertain whether anticompetitive pressures from the existing system
are forcing unprofitable trading situations”. Our profitability analysis (as discussed in Chapter 3 andAttachment B) focuses on grocery retailers. It is difficult to assess supplier profitability given the large
number of suppliers and the wide range of products in the grocery sector.
[
].
[
].
[
].
[
].

1086
1087
1088
1089

1090

[

].

352

8.99

Many of the examples discussed below are similar to issues raised by the NZFGC in
its submission on our preliminary issues paper and draft report.1091 In response tothis submission, Foodstuffs NI noted that it was “surprised by the allegations in thesubmissions, particularly given … the range of forums designed to allow suppliers(including through the NZFGC on an anonymous basis) to raise the issues thesubmissions allege occur on a systemic basis”.1092 Additionally, Woolworths NZ
have noted the issues raised by the NZFGC have not been raised with Woolworths
NZ, and appear to be unsubstantiated.1093

8.100

It is possible that the discrepancy between the positions of the NZFGC and major
grocery retailers reflects suppliers’ reluctance to raise issues for fear of retribution(as discussed in paragraph 8.78 above).1094

8.101

Foodstuffs NI and Foodstuffs SI submitted that due to limitations of the information
available to us, the evidence we have relied on is not sufficient to draw theconclusion in paragraph 8.98 above.1095 However, suppliers have only been willing
to approach us on a confidential basis, which prevents sharing of specific details
with the major grocery retailers. While we acknowledge that some suppliers will bein stronger bargaining positions to others, we consider the information we havegathered during our study strongly suggests that:1096

1091

1092
1093

1094
1095

1096

8.101.1

the major grocery retailers are generally in a much stronger negotiating
position than most of their suppliers;8.101.2

there are examples of the major grocery retailers using their strong
negotiating positions in ways that are likely to adversely affect suppliers’
incentives to innovate and invest; and8.101.3

where suppliers are unable to provide competitive supply, or unable toinnovate, this will ultimately impact on consumers and may limit
competition.

NZFGC “Submission on retail grocery market study preliminary issues paper” (4 February 2021) at[174]; NZFGC “Submission on Market study into grocery sector draft report” (26 August 2021) at[6.15]-[6.16].
Foodstuffs NI “Comments on submissions on preliminary issues paper" (12 April 2021) at 8.
Woolworths NZ "Post conference submission on Market study into grocery sector"(24 November 2021) at [17.1].
Transcript of Grocery Market Study Conference – Day 3 (26 October 2021) at 28 (lines 6-14).
Foodstuffs NI "Post conference submission on Market study into grocery sector" (3 December 2021)
at [157]-[159]; Foodstuffs SI "Post conference submission on Market study into grocery sector"(3 December 2021) at [134]-[136].
As discussed in paragraphs 8.45 to 8.48 above, sources of information we have relied on include our
supplier survey, meetings with suppliers and supplier associations, information provided by retailers
regarding their grocery procurement practices in response to our information requests, information
about interactions between retailers and suppliers provided to us by industry participants,
submissions on our preliminary issues paper and draft report, discussion at our consultation
conference and subsequent cross-submissions.

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Transfer of costs and risks from retailers to suppliers
8.102

Appropriate risk allocation between parties is an important feature of wellfunctioning markets. It is normal for businesses to be exposed to risk. However, in aworkably competitive market, risks tend to be allocated to the party best placed to
manage them.1097

8.103

Suppliers bearing costs and risks that they are not best placed to manage may
adversely affect their ability to invest and innovate. This could lead to reduced
capacity, reduced product quality and fewer new product offerings by suppliers.1098
Ultimately consumers are likely to face reduced choice and lower-quality products.

8.104

Examples we have heard of the major grocery retailers appearing to inefficiently
transfer costs and risks onto suppliers include:
8.104.1

suppliers bearing a disproportionate share of the costs and risks of retailpromotional discounts (including overordering by retailers), given thebenefits are shared between suppliers and retailers;

8.104.2

retailers expecting suppliers to pay for merchandising;

8.104.3

retailers seeking payments from suppliers for damaged, unsaleable, or
lost stock that occurred while the retailers were in possession of the
products; and8.104.4

standard invoice settlement terms which include extended payment
terms for retailers.

Suppliers bear the costs and risks of retail promotional discounts, including overordering byretailers
8.105

1097

1098

Retailers and suppliers can both benefit from retail pricing promotions, because
discounted prices can be expected to increase sales volumes for products on
promotion.

Commerce Commission “Input Methodologies (Electricity Distribution and Gas Pipeline Services)
Reasons Paper” (22 December 2010) at [2.6.4] (bullet point 6).
UK Competition Commission “The supply of groceries in the UK market investigation” (30 April 2008)at [9.5], available at:https://webarchive.nationalarchives.gov.uk/20140402235418/http://www.competitioncommission.org.uk/assets/competitioncommission/docs/pdf/noninquiry/rep_pub/reports/2008/fulltext/538.pdf.

354

8.106

Suppliers often contribute to the funding of retail pricing promotions. Suppliers
have told us that when a retail pricing promotion is run, they can be expected tomaintain the retailer’s margin on the product.1099 However, we have also heard
examples where promotional discounts are partially funded by the retailer.1100

8.107

We have been told that promotional funding is offered by suppliers because it
enables suppliers to differentiate their brands and compete for market share.
Supplier-controlled promotional funding is a global dynamic and more pronouncedwith large multinational suppliers.1101

8.108

Supplier funding of promotions can operate in different ways. For example:

8.109

1099

8.108.1

There can be a buy-in period in advance of a promotion, where theretailer purchases stock at a reduced price from the supplier. The retailer
then drops its retail price during the promotional period.

8.108.2

Promotions can be run based on scanned volumes, where the suppliercompensates the retailer for the cost of the promotion based on theactual volume of sales scanned through the checkout during thepromotional period.

We have heard from suppliers that it is common for certain retailers to stockpile
products purchased from a supplier at a reduced price during the buy-in period.1102
This is referred to as ‘investment buying’ or ‘forward buying’. The retailer thenearns extra margin on sales of these products after the promotional period ends,
but the benefits to the supplier of increased sales volumes generated by thepromotion are no longer available.

For example: [
[

].

1100

[

]; [

1101

[
[
[

1102

[

];

].
];
];
].
].

355

8.110

Investment buying may enable retailers to offer lower prices outside ofpromotional periods. Foodstuffs NI and Foodstuffs SI noted that forward buying isused with the consent of the supplier, and that it enables their member stores tooffer value to customers over a longer period than the specific promotional
period.1103

8.111

Investment buying leads to significant fluctuations in volume, potentially creating
supply chain inefficiencies for both suppliers and retailers.1104 A supplier needs tocarefully manage its production facilities to ensure it is able to meet demand during
peaks in order volumes.1105 Retailers need to store products they investment buy,
reducing the space available for other products.

8.112

Investment buying also potentially leads to a lack of transparency over prices paid
to suppliers. We have heard of a retailer attempting to quantify the financial
benefit they receive from investment buying, and then claiming an additional
discount where they are not able to stock up.1106

1103

Foodstuffs NI submitted: “FSNI stores may forward buy products at the promotion cost price toenable stores to offer value to customers over a period longer than the specific promotion. Forwardbuying by a store is with the consent of the supplier and where the supplier is concerned a supplier
may look to restrict the amount a store can purchase via an allocation of stock or a retrospective
product cost price discount based on volume of retail sales (i.e., scan)”, Foodstuffs NI “Submission onMarket study into grocery sector draft report” (10 September 2021) at Appendix D [6.2]; Foodstuffs NI“Submission on Market study into grocery sector draft report” (10 September 2021) at [346]-[350];
Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021) at[315].

1104

[
].
1105
1106

The supplier may also need to finance a lean period with reduced volumes until the next promotion.
[
].

356

Retailers expecting suppliers to pay for merchandising
8.113

Some retailers appear to rely on significant merchandising support fromsuppliers.1107 Many suppliers have told us that they arrange their own
merchandisers to go into retail grocery stores throughout New Zealand.

8.114

In most sectors, merchandising is a retailer’s responsibility. Key functions ofmerchandisers include stocking products on the shelves and preparing productdisplays. We have heard that in overseas grocery markets it is less common for
suppliers to provide merchandising support than in New Zealand.1108

8.115

We have been told that retailers rely on supplier merchandising as a way of keeping
labour costs down.1109 Suppliers have an incentive to ensure their products are wellstocked on grocery retailers’ shelves, given their businesses’ dependence on thesesales volumes.

8.116

Some suppliers have told us that that they would prefer not to be involved inmerchandising, as this is a retail activity that grocery retailers are able to undertake
more efficiently.1110

8.117

In some circumstances there may be inefficiencies in suppliers undertaking
merchandising due to:1111

1107

8.117.1

the time and cost of travelling between retail grocery stores;

8.117.2

limited availability of backup staff (for example, due to illness); and

[
[

];
];

[
];
[
];
[
].

1108

[
[

]; [
].

1109

[
[
[

].
].

1110
1111

];

].

357

8.117.3

a supplier’s merchandisers dealing with a relatively narrow range of
products (compared to a retailer who is able to merchandise across theirfull range).

8.118

However, other suppliers have indicated that they prefer to have their own
merchandisers go into retailers’ stores, because it gives them greater control over
how their products are stocked and displayed. In some cases, we have been toldthat this is due to a lack of trust in the retailer to do the merchandising well. 1112

8.119

Regardless of whether the retailer or supplier undertakes the merchandising, we
understand that the supplier is often expected to meet the cost.1113 Given that bothparties benefit from merchandising, they could be expected to share the costs.

8.120

8.119.1

Where a supplier employs or contracts its own merchandisers, thesupplier will pay them directly.

8.119.2

Where the retailer undertakes the merchandising, the supplier may be
expected to finance this (for example, through a discount or rebate).1114

8.119.3

We are also aware of examples of retailers charging suppliers fees for
not providing merchandising support.1115

Foodstuffs NI has noted it sees benefits to increasing the transparency of terms of
how merchandising activities and costs are allocated. It also sees efficiency gains
from stores undertaking a greater level of merchandising on terms that are agreed
with suppliers.1116

1112

[
]; [
]. In
a workably competitive market, we would expect retailers to have strong incentives to undertake
merchandising well, because otherwise they would risk losing significant sales to other retailers.

1113

Foodstuffs NI has stated: “In many instances suppliers and stores agree the level of Merchandising to
be provided in store and where a supplier is not willing or able to meet the agreed level (this can befor various reasons) some suppliers agree to pay the stores to arrange for people to complete theMerchandising of shelves. Suppliers can choose not to enter into such agreements.” Foodstuffs NI“Submission on Market study into grocery sector draft report” (10 September 2021) at Appendix D[1.4].
[
];
[
];
[
].

1114

1115

[

1116

];
[
].
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[351].
[
].

358

8.121

Merchandising fees charged by retailers may be high relative to the costs involved.
A supplier told us that it is more affordable to undertake merchandising itself, than
pay the merchandising fees expected by a retailer.1117

Retailers seeking payments from suppliers for damaged, unsaleable, or lost stock
8.122

Products are sometimes damaged, unsaleable or lost in retail grocery stores. This isreferred to as shrinkage and wastage.

8.123

8.122.1

Shrinkage refers to a loss of grocery products due to theft, other loss or
accounting error.

8.122.2

Wastage refers to grocery products that are unfit for sale, for example,
due to damage.

Suppliers are often expected to meet at least part of the cost of shrinkage andwastage that occurs after the retailer has taken possession of the products.1118 Thiscan occur through either:

8.124

8.123.1

a fixed percentage deduction off their invoices to retailers, which can bereferred to as a ‘minor damage allowance’ (MDA), damaged productallowance (DPA) or ‘ullage’ term;1119 and/or

8.123.2

compensating retailers for ad hoc credit requests.

Suppliers have told us that in many cases credit requests which they consider
unreasonable have been made by grocery retailers. In some cases this has occurred
even when the supplier has already agreed to a MDA, DPA or ullage term.1120 We
have heard examples of retailers making credit requests for:8.124.1

1117
1118

1119

1120

1121

products damaged in retailers’ stores, without evidence;1121[].
Foodstuffs NI stated that: “Shrinkage, waste and damage are funded by either the store or the
supplier depending on the circumstances”, Foodstuffs NI “Submission on Market study into grocery
sector draft report” (10 September 2021) at Appendix D [1.5]-[1.6].
Foodstuffs NI stated: “MDA is designed to improve efficiencies for both suppliers and stores when
dealing with minor damages and credits”, Foodstuffs NI “Submission on Market study into grocery
sector draft report” (10 September 2021) at Appendix D [2.6];
[
]; [
];
[
].
[
[
[
].

];

[

]; [

];

].

359

8.124.2

stock that could not be located as part of a stock count;1122 and8.124.3

perishable stock that they were unable to sell.1123

8.125

We are aware of allegations of suppliers being threatened with having products
delisted if they refuse to compensate for credit requests they consider
unreasonable.1124

8.126

These examples suggest that, at least in some cases, retailers are using their strong
bargaining position to transfer risks to suppliers. A supplier has little or no ability to
manage the risk of shrinkage or wastage that occurs once the retailer has taken
possession of products. Further, the strong bargaining positioning of the major
grocery retailers means suppliers may have few alternatives to accepting theretailers’ terms regarding damaged products or providing compensation for credit
requests.

8.127

Foodstuffs NI and Foodstuffs SI submitted that the MDA and DPA are efficientapproaches to managing the costs of damaged products and minor faults.
Foodstuffs NI have stated that unreasonable credit requests (and associatedthreats of deletion) would not be acceptable.1125

Standard invoice settlement terms which include extended payment terms for retailers
8.128

Suppliers have told us that invoice settlement terms significantly favour large
retailers. We understand that standard practice in the New Zealand groceryindustry is a 2.5% settlement discount, which is deducted by the retailer for
payments made by the last trading day of the month following the date of theinvoice. 1126

8.129

Some suppliers have raised concerns that they effectively provide retailers withcheap funding due to the long standard settlement terms.1127 A supplier can wait
up to 60 days to have an invoice paid, and the retailer will still receive thesettlement discount.1128

1122
1123
1124

1125

1126

1127

1128

[
[
[
[

].
].
];
].

Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[352]; Foodstuffs SI “Submission on Market study into grocery sector draft report”(10 September 2021) at [316].
Foodstuffs SI “Supplier terms of trade” (28 August 2020) at 1, available at:https://suppliers.foodstuffs.co.nz/assets/documents/FSSI-Charge-Through-Terms-of-Trade-August2020.pdf.
[
].
[
[

];
].

360

8.130

Extended payment terms push extra cost onto suppliers, which may be muchsmaller businesses who are less able to manage this. As MBIE noted in a recent
discussion paper on business-to-business payment practices:1129
Good cash flow is crucial to a successful business. When customers take too long to
pay it makes it harder for business to pay their own bills, increases businesses stressand forces them to waste valuable time and money chasing debts. It can keepbusinesses from growing; in the worst cases it can cause businesses to fail.

8.131

We understand that suppliers have the option of accepting a greater settlement
discount to be paid more promptly.1130 Different settlement terms may also apply
to different product categories.1131 In addition, Woolworths NZ has noted that it
has implemented shorter payment terms for small suppliers, offering them theability to choose 14-day payment on standard settlement terms.1132

Reduced transparency and certainty over terms of supply
8.132

In well-functioning markets, market participants are able to make informed
decisions. Suppliers or consumers not having enough information to makeinformed decisions can lead to inefficient outcomes.1133 This is because they may
make production or consumption decisions which are not in their best interests.1134

8.133

We are aware of examples which suggest that in some cases major grocery retailers
are reducing transparency over price and non-price terms of supply, placing undue
uncertainty on suppliers. Examples include retailers:

1129

8.133.1

not providing notice or clear justification for delisting products;

8.133.2

taking a long time to respond to supplier requests for price increases;

8.133.3

setting off amounts against supplier’s invoices without prior consent;
andMBIE “Discussion paper: Improving business-to-business payment practices in New Zealand”(February 2020) at 6, available at: https://www.mbie.govt.nz/dmsdocument/11212-discussion-paperimproving-business-to-business-payment-practices.

1130

[
1131

1132

1133
1134

].
Foodstuffs NI stated that “Different standards will apply across different categories with a number ofcategories being settled on 7-day terms eg, fresh suppliers are typically paid on shorter terms. In
addition, the business has supported a number of small and local suppliers over the COVID-19
pandemic lockdowns and continues to do so”, Foodstuffs NI “Submission on Market study into
grocery sector draft report” (10 September 2021) at Appendix D [3.3].
This applies to New Zealand suppliers which Woolworths NZ purchases less than $250,000 of goods
from each year and whose annual turnover is less than $1m per annum, Woolworths NZ “Submission
on retail grocery market study preliminary issues paper” (4 February 2021) at 42.
In particular, there could be a loss of allocative and productive efficiency.
ACCC “Perishable agricultural goods inquiry” (November 2020) at 9, available at:https://www.accc.gov.au/system/files/Perishable%20Agricultural%20Goods%20Inquiry%20%20Final%20Report%20-%20December%202020.pdf.

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8.133.4

not committing to provide suppliers with promotional displays.

8.134

The uncertainty arising from this lack of transparency regarding terms of supply
makes it difficult for suppliers to run their businesses. This is likely to affectsuppliers’ ability to make efficient investment decisions, affecting the quality andrange of grocery products available for consumers.

8.135

Foodstuffs NI and Foodstuffs SI submitted that they have no interest in reducing
transparency over price and non-price terms of supply. Foodstuffs NI andFoodstuffs SI see the lack of formal contracts and documentation as more of an
indication of how practices have evolved in the sector from a cultural perspective
rather than a deliberate strategy.1135

Retailers not providing notice or clear justification for delisting products
8.136

We have consistently heard of major grocery retailers delisting products with no (orvery short) notice, or without clear justification.1136 We have also heard of retailers
accepting new products with agreed performance criteria, then delisting the
products months later citing different performance criteria.1137

8.137

A supplier indicated that in some cases it is unsure of the thresholds required tohave their products ranged by retailers, even after asking. It noted that there are“clear rules on paper” regarding whether ranging should be accepted, but it has
seen many examples where ranging is refused without commercial justification.1138

8.138

Unexpected product deletions and ranging decisions, which do not reflect genuine
commercial reasons, could:1139

1135

8.138.1

prevent efficient utilisation of supplier manufacturing facilities, which
could reduce suppliers’ competitiveness (and, in some cases, could cause
suppliers to exit the market);8.138.2

inhibit entry and expansion by suppliers; andFoodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[353]; Foodstuffs SI “Submission on Market study into grocery sector draft report”(10 September 2021) at [317].

1136

[
];
1137

[
[

].
].

1138

[
1139

].
[
]. As noted in footnote 1077, genuine commercial
reasons could include failure to meet agreed quality or quantity requirements, failure to meet agreed
commercial sales or profitability targets, or persistent failure to agreed delivery requirements.

362

8.138.3
8.139

reduce consumer choice, by limiting the range of products available on
the shelves of retail grocery stores.

Foodstuffs NI and Foodstuffs SI have noted that ranging decisions and assessments
are being made constantly, and are based on a number of considerations including
product performance, innovations, and developments in product categories. They
noted that finite shelf space and the significant pipeline of new products
sometimes leads to products being deleted even where products are not
performing poorly.1140

Retailers taking a long time to respond to supplier requests for price increases
8.140

Suppliers have raised concerns about the process for increasing the prices theycharge retailers. We have heard examples of:
8.140.1

price increases being rejected by retailers, despite suppliers facing
significant cost increases;1141 and

8.140.2

significant delays in retailers responding to requests for price increases,
with the process sometimes taking months.1142

8.141

Lengthy delays in responding to requests for price increases cause unnecessary
uncertainty and cost for suppliers.

8.142

Suppliers being unable to raise prices to reflect legitimate cost increases, which do
not reflect supplier inefficiency, could potentially affect product quality.1143 For
example, suppliers may seek to use lower-quality inputs or reduce pack sizes.1144
Otherwise, the viability of a supplier’s business may be at risk.

8.143

For Foodstuffs NI, the number of price increases appears to be a very low
percentage of total products. Foodstuffs NI noted the monthly average number ofarticles with a supplier price increase was 336 across January to September 2021
(excluding fresh).1145 Foodstuffs NI noted that this is a 20% increase on the monthly
average for the same period over the previous three years.1146

1140

1141

1142

1143

1144

1145

1146

Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[354], Foodstuffs SI “Submission on Market study into grocery sector draft report”(10 September 2021) at [318].
[
].
[
[

];
].

Retailers resisting price increases caused by supplier inefficiency could benefit consumers andenhance competition at the supplier level.
[
];
[
].
In total, Foodstuffs NI stocks over 80,000 products (including fresh). Foodstuffs NI “Submission onMarket study into grocery sector draft report” (10 September 2021) at [331.2] and [354].
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[331.2].

363

Retailers setting off amounts against supplier’s invoices without prior consent
8.144

We have heard concerns about grocery retailers setting off amounts against
supplier invoices without prior consent.1147 Set-off is where a retailer deducts any
amounts it is owed by a supplier when paying a supplier’s invoice. This can occur
where a retailer takes rebates which are not already deducted from the supplier’s
invoice.

8.145

Concerns have been raised about retailers automatically deducting rebates off their
payments to suppliers.1148 The supplier then needs to request a credit note fromthe retailer to check that the correct deductions have been made, which can takesome time. If the supplier disagrees with the deduction the retailer has made, itthen needs to try to get its money back.1149

8.146

We have been told that this approach to set-offs in the New Zealand grocery sector
is relatively unusual compared to other industries (where set-offs are lesscommon). This is likely to reflect the balance of power between grocery retailers
and their suppliers.1150

Retailers not committing to provide suppliers with promotional displays
8.147

Concerns have been raised about suppliers paying for access to in-store displays,
without any guarantee of receiving them. In particular, this can occur where
suppliers pay for promotional displays through a fixed percentage of their retailsales.

8.148

We understand that suppliers paying for displays based on a fixed percentage ofretail sales often do not receive any commitment for a certain number ofdisplays.1151 Some suppliers have told us they are receiving significantly fewer
displays under this model, despite paying a similar amount to what they did forguaranteed displays in the past.1152

1147

[

].

1148

[
].
1149
1150
1151

1152

[
].
[
].
[
]; Foodstuffs NI noted that
“Approximately 60% of displays are arranged through FSNI with the balance of displays recommended
to stores enabling efficiency gains through less visits to stores, less time negotiating each display,significant reduction in administration time. These benefits flow to both the supplier and FSNI,
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at
Appendix D [2.1].
[
];
[
].

364

8.149

Suppliers have told us they fear they will have their products delisted, or face otherconsequences, if they do not agree to this model.1153

Retailers limiting suppliers’ ability or incentive to provide favourable supply terms toother retailers
8.150

We have heard examples of retailers appearing to seek to limit the ability of their
suppliers to deal with other retailers. Several examples are discussed in Chapter 6,
including:1154
8.150.1

retailers applying pressure for suppliers to not supply competing retailstores due to low retail pricing;

8.150.2

best price guarantee clauses in supply agreements potentially reducing
competition between retailers; and8.150.3

exclusive supply arrangements limiting other retailers’ access to certain
brands of products.1155

8.151

These examples may reflect the strong bargaining position of retailers. Our
understanding is that in some cases suppliers have agreed to terms which limit
their ability to supply other retailers because they feel they have no choice. 1156 Thisis due to the dependence on the volumes sold through certain retailers.1157

8.152

As discussed in Chapter 6, retailers seeking to limit suppliers’ ability to deal withother retailers in these ways potentially raises barriers to entry and expansion in
the retail market. This is of particular concern given the New Zealand retail grocery
market is highly concentrated.1158

1153

[
];
[
];
[
1154
1155

].
See paragraphs 6.183 to 6.201 for further discussion of these examples.
Including through the use of “exclusive packs”, Transcript of Grocery Market Study Conference –Day 7 (2 November 2021) at 13 (lines 6-14).

1156

[
].
1157

[
];
[
].

1158

See Chapter 5 for further discussion of the level of concentration in New Zealand’s retail grocery
market.

365

There may be a slightly stronger tendency for pass-through of cost increases to consumers
8.153

For retailer buyer power to benefit consumers, better purchasing terms obtainedby retailers would need to flow through to lower prices or other benefits (forexample, increased range or product quality) for consumers of grocery products.

8.154

Our analysis of price-cost relationships described in Attachment D indicates that
there may be a slightly stronger tendency for the major grocery retailers to passthrough cost increases to consumers, compared to cost decreases. However, a very
wide range of pass-through rates for individual combinations of products andstores within each retail banner was also found.1159

What effect are private label products having on competition between
retailers and suppliers?
8.155

This section discusses the effect that private label products are having oncompetition in the New Zealand grocery market. It notes that:
8.155.1

private label products are provided by suppliers for sale under a retailer’s
own brand;

8.155.2

private label sales in New Zealand are growing, but are relatively low
compared to overseas markets;

8.155.3

consumers can benefit from private labels, through lower prices andgreater choice;

8.155.4

private labels can also negatively affect the already weak bargaining
position of grocery suppliers; and8.155.5the overall long-term impact of private labels on outcomes for
New Zealand consumers is unclear, but some aspects could harmcompetition.

Private label products are provided by suppliers for sale under a retailer’s own brand
8.156

1159

Private label grocery products (also known as home brands, own brands, store
brands or generics) are products manufactured or provided by a company for sale
under a retailer’s brand. Private label products are generally produced by existing
suppliers, who win the private label contract through a tender process.

Attachment D acknowledges comments received from HoustonKemp, on behalf of Foodstuffs NI,
regarding limitations of the pass-through analysis, Foodstuffs NI “Submission on Market study into
grocery sector draft report: Appendix B - HoustonKemp - Empirical evidence of grocery sector
competition” (10 September 2021) at [137]-[148].

366

8.157

The major grocery retailers offer their own private label products in their stores.
For example, Foodstuffs’ private label brands include the Pams, Pams Superfoods,
Pams Finest and Value ranges, and Woolworths NZ’s private label brands include its
Essentials, Countdown and Macro branded products. Woolworths NZ has notedthat it offers more than 3,000 private label products across more than 250 subcategories.1160

8.158

A supplier of private label products may also produce products under its own brand(supplier-branded products) in competition with private labels. Therefore, retailers
selling private label products are both customers and competitors of branded
suppliers. This can potentially lead to competition concerns where grocery retailers
selling private label products possess market power.

Private label sales in New Zealand are growing, but are relatively low compared tooverseas markets
8.159

The proportion of sales of private label products in New Zealand appears to be
growing, but slowly.1161

8.160

The penetration of private label products by sales revenue is relatively low in New
Zealand compared to other jurisdictions. Boston Consulting Group and IRI data
referred to by Woolworths NZ in its submission on our preliminary issues paper
suggests private label penetration in New Zealand is 15% for edible goods and 10%
for non-edible goods.1162 This is lower than the other countries shown in Figure 8.3
below.1163

8.161

However, many other countries have large grocery retailers who carry a very highproportion of private label products (for example, Aldi).1164 This is likely to influence
overall private label penetration in those counties.

1160

Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 64.

1161

[
];
[
].

1162

1163

1164

Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 66.
IRI reports that private-label brands in Australia have a 16.4% share. IRI “Market Moves 2020 Food &Grocery” (2021) at 40, available at: https://www.iriworldwide.com/IRI/media/IRIClients/International/au/2020-MM-F-G-Presentation.pdf.
For example, in the US, a typical Aldi offers about 1,500 SKUs, with approximately 90% of these being
private label products. See Forbes “Aldi, Right Moves - The German Grocer Sending Shock Waves
Throughout Walmart and Kroger” (25 October 2019), available at:https://www.forbes.com/sites/sanfordstein/2019/10/25/aldi-right-movesthe-german-grocer-sendingshock-waves-throughout-walmart-and-kroger/?sh=562af70c1bf7.

367

Figure 8.3

Penetration of private label products by jurisdiction

Source: Woolworths NZ submission on our preliminary issues paper.1165

8.162

Penetration of private label products varies by product category. Some products,
such as milk and baking needs (eg, flour) appear to have a relatively highproportion of private label sales.1166

Consumers can benefit from private labels, through lower prices and greater choice
8.163

Consumers may benefit from private label products through lower prices andgreater choice. Ipsos found that many consumers welcome private labels “as anaddition to their shop because they were more accessible for those on a set-budget
and provided additional choice”.1167

8.164

Traditionally private labels were low priced, lower quality, alternatives tosupplier-branded products. For example, analysis based on European markets
published in 2012 found that prices of private label products were on average 30%
less than equivalent national brands.1168

1165

1166

1167

1168

Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 66.
[
]; [
];
[
].
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 12.
SymphonyIRIGroup “Private Label in Europe 2012: Is there a limit to growth?” (October 2012),
[
].

368

8.165

However, private labels are increasingly also providing higher quality products for
consumers than they did in the past.1169 Doyle and Murgatroyd (2011) note thatwhile private labels initially expanded the market by introducing “value” or low-end
alternatives, more recently they have engaged in head-on competition with
supplier-branded products.1170 For example, in the New Zealand context:
8.165.1

Foodstuffs has its ‘Pams Finest’ range of products which are described as“gourmet and artisan”, “containing only the finest natural ingredientsand no artificial colours or flavours”.1171 Foodstuffs NI and Foodstuffs SI
have noted that increased customer acceptance of its private label brandhas enabled it to move to items that are less commoditised, such as the
Pam Finest range;1172 and8.165.2

Woolworths NZ has its ‘Macro’ range of products, which it noted have“introduced new organic and wholesome product offerings across a
range of categories”.1173

8.166

Retailers selling private label products could be considered a form of vertical
integration, which could generate benefits by reducing transaction costs andaligning incentives. To the extent that suppliers have market power in a productcategory, private labels could reduce double marginalisation by reducing the extent
to which the supplier and retailer both separately add mark-ups to their respective
costs.1174

8.167

Private label products can also promote competition, facilitating entry or expansion
by suppliers due to the large volumes these products can generate. For example, anexisting supplier adding private label products to its manufacturing portfolio canpotentially generate manufacturing efficiencies through the additional volumes
produced in its factories.

1169

1170

1171
1172

1173

1174

Nevo, Hila and Van den Bergh, Roger “Private Labels: Challenges for Competition Law and Economics”(2017) World Competition 40, no. 2 at 274, [].
Chris Doyle and Richard Murgatroyd “The role of private labels in antitrust” (July 2011) Journal ofCompetition Law & Economics, 7(3) at 632, [].
“Pams Finest” https://www.pams.co.nz/discover/pams-finest.
Foodstuffs NI "Post conference submission on Market study into grocery sector" (3 December 2021)
at [174.2]; Foodstuffs SI "Post conference submission on Market study into grocery sector"(3 December 2021) at [148.2].
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 65.
Nevo, Hila and Van den Bergh, Roger “Private Labels: Challenges for Competition Law and Economics”(2017) World Competition 40, no. 2 at 282, []; Marc Sachon and Victor Martinez de Albeniz“Private label introduction: Does it benefit the supply chain?” IESE Business School Working Paper
WP-832 (November 2009) at 2, []; and Philippe Bontems, Sylvette Monier-Dilhan andVincent Requillart “Strategic effects of private labels” European Review of Agricultural Economics Vol
26(2) (1999) at 147, [
].

369

8.168

8.169

Submissions from the major grocery retailers referred to private label products
having a positive impact on competition. Woolworths NZ noted that private label
products:1175
8.168.1

are priced very competitively, providing great value and increased choice
for New Zealand consumers;

8.168.2

provide a value benchmark that suppliers need to be cognisant of when
pricing their own products and, therefore, enhance price competition;

8.168.3

enhance competition on innovation, quality, and variety between
suppliers; and8.168.4

create growth opportunities for new suppliers to enter or expand by
producing private label products on its behalf.

Foodstuffs NI and Foodstuffs SI stated that the development and supply of private
label products enhances competition at the supplier level, is an important way
retailers can respond to the market power of major global suppliers (particularly in
product categories where there is high supplier concentration), is an importantsource of innovation, gives retailers greater influence over the supply chain, andenhances local manufacturing capacity.1176

Private labels can also negatively affect the already weak bargaining position of grocery
suppliers
8.170

Private label products also have the potential to negatively affect the already weakbargaining position of grocery suppliers. Given that retailers selling private label
products are both customers and competitors of suppliers, the retailers may have
incentives to ensure their private labels receive preferential treatment to
supplier-branded products.

8.171

The National Māori Authority has raised concerns about the purchasing power ofthe major grocery retailers that arises from importing cheaper goods to support
their home brand goods.1177

1175

1176

1177

Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 64-65; Woolworths NZ lists many recent examples of innovations andinvestments from suppliers of its private label products, Woolworths NZ "Post conference submission
on Market study into grocery sector" (24 November 2021) at [21.19.1]-[21.19.31].
Foodstuffs NI "Post conference submission on Market study into grocery sector" (3 December 2021)
at [173]; Foodstuffs NI “Submission on Market study into grocery sector draft report”(10 September 2021) at [363]-[364]; Foodstuffs SI “Submission on Market study into grocery sector
draft report” (10 September 2021) at [328]-[329].
National Māori Authority "Post conference submission on Market study into grocery sector"(30 November 2021) at 6.

370

8.172

8.173

Nevo and Van den Bergh (2017) note that vertically-integrated retailers selling
private label products weakens suppliers’ bargaining positions, for two reasons:1178
8.172.1

At the supplier level, private labels give retailers additional outside
options. In the food retailing industry, the bargaining power of retailers
is positively correlated to a larger market share of their own-brandproducts.

8.172.2

Private labels turn retailers into competitors of supplier-branded
products in the retail market. If the retail market is concentrated, large
retailers may become a ‘bottleneck’ for supplier-branded products
whose position has already been weakened in the upstream market.

Nevo and Van den Bergh (2017) note that there a range of ways retailers may seek
to use their strong bargaining position against suppliers:1179
Major supermarkets may exploit the asymmetric dependency of brand manufacturers
in several ways. A powerful retailer may utilize a broad range of practices to this end,
from restrictive contractual obligations (e.g. access fee payments in exchange forentering a supermarket’s product listing) to simply blocking access to its store. If
branded products are de-listed, product variety will decline and price competition
may dampen.

8.174

Similarly, Doyle and Murgatroyd (2011) refer to the potential for retailers toencourage consumers to purchase private labels over supplier-branded
products:1180
Since retailers control the final sale of all products to consumers, branded and private
label alike, they have the ability to “distort” their offerings so as to encourage
consumers to purchase one product over another, for example by giving their private
labels increased or preferential shelf-space, increased in-store promotion, raising theretail price of branded products, or ultimately by destocking brands altogether.
Furthermore, in the case of private labels they may also have the incentive to do thisbecause of the potentially higher margins available on such products, as the retailer
earns both the upstream and downstream margins on their sale. Such distortions may
serve to reduce inter-brand competition, with consumers facing a reduced range of
products or higher prices, and manufacturers potentially having reduced incentives toinvest in product quality and innovation.

1178

1179

1180

Nevo, Hila and Van den Bergh, Roger “Private Labels: Challenges for Competition Law and Economics”(2017) World Competition 40, no. 2 at 280, [].
Nevo, Hila and Van den Bergh, Roger “Private Labels: Challenges for Competition Law and Economics”(2017) World Competition 40, no. 2 at 280, [].
Chris Doyle and Richard Murgatroyd “The role of private labels in antitrust” (July 2011) Journal ofCompetition Law & Economics, 7(3) (July 2011) at 641, [
].

371

8.175

8.176

1181

1182

1183

1184

Castalia, on behalf of the NZFGC, submitted that private labels are likely toaccentuate and entrench the strong imbalance of bargaining power held byretailers in highly concentrated retail markets. Castalia’s report found that theeffects of private labels depend on the level of retail concentration in the market,
and that given New Zealand is a highly concentrated retail market, private labels
are highly likely to have a net negative long-term effect on consumer outcomes.1181
8.175.1

NERA, on behalf of Woolworths NZ, noted limitations of Castalia’s
analysis, in particular that it presents no empirical evidence to support
the claim that private labels are net detrimental for consumers in New
Zealand.1182

8.175.2

HoustonKemp, on behalf of Foodstuffs NI and Foodstuffs SI, argued that
Castalia’s analysis does not appropriately consider the degree of supplierconcentration at the product category level when assessing imbalances
in bargaining power.1183 HoustonKemp also noted other assumptions in
Castalia’s analysis that it considers have been either overstated or haveno empirical foundation.1184

We have heard several concerns about the impact of private label products in the
New Zealand market during our study. These include:
8.176.1

retailers promoting their private labels in preference to supplier brands;

8.176.2

retailers using suppliers’ intellectual property for their private label
products; and8.176.3

retailers leveraging information obtained through private label tenders
when negotiating with suppliers.

NZFGC “Submission on Market study into grocery sector draft report: Attachment - Castalia - Private
Labels, Buyer Power and Remedies in the NZ Grocery Sector” (26 August 2021) at 3-4.
Woolworths NZ "Post conference submission on Market study into grocery sector: Attachment 5 NERA - Grocery Market Study: Post-conference report” (24 November 2021) at [59]-[62].
Foodstuffs NI "Post conference submission on Market study into grocery sector: Attachment 4 HoustonKemp - Private label products in retail grocery markets” (3 December 2021) at [27]-[29].
Such as the high combined market share of the major grocery retailers, that retail competition is noteffective, and that supplier price reductions are a result of private labels would not be passed throughto consumers, Foodstuffs NI "Post conference submission on Market study into grocery sector:
Attachment 4 - HoustonKemp - Private label products in retail grocery markets” (3 December 2021) at
[9].

372

Retailers promoting their private labels in preference to supplier brands
8.177

A retailer selling private labels may have the ability and incentive to increase salesof its own branded products, by reducing competition from supplier-branded
products. For example, this could occur if a retailer seeks to reduce sales ofsupplier-branded products by limiting consumers’ access to them.1185 This risk isgreater where the retailer has market power at the retail level, limiting suppliers’
ability to switch to sell their products via other retailers.

8.178

Suppliers have raised concerns about private label products receiving preferential
treatment compared to supplier-branded products. For example, we have heard
examples of private label products receiving:
8.178.1

a disproportionate amount of shelf space relative to their market sharein the product category;1186 and

8.178.2

prime shelf locations and end of aisle displays ahead of supplier-branded
products.1187

8.179

The major grocery retailers have stated that their private label teams are aseparate part of their businesses, and that private label products compete for shelf
space in the same way that branded products do.1188

8.180

Consumers have also raised concerns about retailers placing greater emphasis on
private label products by reducing the range of supplier-branded products theystock (range consolidation). Ipsos stated:1189
A few participants felt that store brands could be pushing out other suppliers, and if
only the home brand is available, then it is about pricing out competitors. They
worried that in the future they might lack choice and indicated that they did not want
to be pushed to purchase only the store-brand product.

1185

1186

This is referred to as ‘customer foreclosure’. The incentive for customer foreclosure arises due to thenature of the vertical relationships between retailers and suppliers, where private labels turn retailers
into competitors of supplier branded products in the retail market.
[
]; [
];
[
].

1187

[

1188

Transcript of Grocery Market Study Conference – Day 3 (26 October 2021) at 33 (lines 2-7) and 40(lines 5-11); Woolworths NZ "Post conference submission on Market study into grocery sector"(24 November 2021) at [21.22]-[21.29]; Foodstuffs NI "Post conference submission on Market study
into grocery sector" (3 December 2021) at [176]-[178]; Foodstuffs SI "Post conference submission onMarket study into grocery sector" (3 December 2021) at [150]-[152].
Ipsos “Consumer behaviour and preferences in the New Zealand retail grocery sector – Consumer
study report” (July 2021) at 51.

1189

].

373

8.181

Range consolidation can potentially lead to a significant reduction in the number ofsupplier-branded products competing with retailer’s private labels.1190

8.182

Retailers placing greater emphasis on private label products, while significantly
reducing the number of supplier-branded products, is likely to reduce consumer
choice. This could reduce competition at the supplier level of the market, ultimately
leading to higher prices and lower-quality products for consumers in the longer
term.

8.183

There is also the potential for retailers to increase (or refuse to decrease) retailprices for supplier-branded products to encourage consumers to purchase theirprivate label products. Alternatively, a retailer may keep prices for supplierbranded products volatile, to indicate sustainability and predictability of the private
label choice.1191 We have heard an example of a retailer refusing a proposed retailprice reduction for a supplier’s products because of the potential impact on sales of
their private label products.1192

8.184

The NZFGC and Consumer NZ have submitted that private label products can createa price floor, as a retailer may not want competing branded products to be priced
below their private label products. The NZFGC referred to comments made by its
members (suppliers) that offers for better products at potentially lower prices havebeen rejected by retailers as these would be to the detriment the retailer’s private
label.1193

1190

For example:
[

];
[
].

1191

Nevo, Hila and Van den Bergh, Roger “Private Labels: Challenges for Competition Law and Economics”(2017) World Competition 40, no. 2 at 275, [
].

1192

1193

[
]. As noted in paragraphs 8.105 to 8.108 above, suppliers typically fund retail pricing
promotions.
NZFGC “Submission on Market study into grocery sector draft report” (26 August 2021) at [6.49];
Consumer NZ "Post conference submission on Market study into grocery sector" (18 November 2021)
at 3.

374

8.185

Foodstuffs NI submitted that it does not establish or enforce price floors in thismanner, rather it endeavours to negotiate best in market wholesale pricing toenable its retail stores to offer best in market retail pricing to its customers. 1194
Woolworths NZ also provided examples of branded products being retailed atprices below that of its comparable private label product.1195

Retailers using suppliers’ intellectual property for their private label products
8.186

Supplier-branded products tend to drive innovation and investment and some
private labels seek to replicate successful products.1196 This raises concerns for
suppliers about the use by retailers of their intellectual property for private label
products.1197

8.187

Suppliers can seek to recover the cost of new product development through future
sales of products carrying their brands. However, this relies on consumers being
aware of, and attributing value to, suppliers’ brands.

8.188

Some suppliers of fresh produce have told us that they have been required toprovide their products as private labels, despite wanting to supply under their own
brand.1198 Horticulture NZ submitted:1199
We have specific cases where growers have developed their own retail brands.
Supermarkets have then forced these growers to relinquish their brands and pack into
house branded packs. This maintains the ability of the supermarkets to “switch out”
packers and rides over both grower IP development and competitive outcomes.

8.189

1194

1195

1196

In its submission, the NZFGC also referred to examples of successful innovations infresh produce leading to a major grocery retailer requesting these products
become private labels.1200 The NZFGC noted this is a powerful disincentive to invest
in activities such as branding and packaging.1201

Foodstuffs NI "Post conference submission on Market study into grocery sector" (3 December 2021)
at 110.
Woolworths NZ "Post conference submission on Market study into grocery sector"(24 November 2021) at [21.23]-[21.23.8].
[
];
[
].

1197
1198

1199

1200
1201

[
[

].
]; [

Horticulture NZ “Submission on retail grocery market study preliminary issues paper”(9 February 2021) at 4; [
[
].

].

];

NZFGC “Submission on Market study into grocery sector draft report” (26 August 2021) at [6.44].
NZFGC “Submission on Market study into grocery sector draft report” (26 August 2021) at [6.43].

375

8.190

Requiring products to be provided as private labels, rather than under a suppliers’
own brand, potentially reduces consumer awareness of supplier-branded products.
We have heard this reduces suppliers’ incentives to innovate and invest, which
could ultimately lead to reduced choice and quality for consumers.1202 It also has
the potential to reduce competition between products.

8.191

The NZFGC has also claimed that retailers have replicated branded products under
their own private label using information acquired from suppliers of branded
products. For example, it noted occurrences where retailers have obtained
ingredients quantity and sourcing information from suppliers and used it to provide
their own private label products.1203

8.192

Foodstuffs NI acknowledged it asks for transparency in relation to ingredients andraw materials sources to ensure it meets food safety, corporate social
responsibility, and ethical sourcing commitments and offers to sign non-disclosureagreements for concerned suppliers.1204

8.193

Woolworths NZ has rejected suggestions of appropriation of intellectual property
and noted that it is not aware of any claims against it in relation to intellectual
property.1205 Foodstuffs NI told us that Foodstuffs Own Brands is not aware ofpractices or examples relating to appropriating suppliers’ intellectual property.
However, retailers may acquire and use suppliers’ information in the ways
described above without infringing intellectual property rights.

Retailers leveraging information obtained through private label tenders when negotiatingwith suppliers
8.194

Retailers can potentially use information gained through hard fought tender
processes for private label products to seek lower prices for supplier-branded
products. Woolworths NZ has noted that private label products “provide a valuebenchmark that suppliers need to be cognisant of when pricing their own products
and, therefore, enhance price competition”.1206

8.195

We agree with Woolworths NZ that private label products can enhance pricecompetition between suppliers. For example, this could occur where retailers:
8.195.1

1202
1203

1204

1205

1206

gather pricing information from private label tenders received fromsuppliers for a particular product; and[].
NZFGC “Submission on Market study into grocery sector draft report” (26 August 2021) at [6.42][6.43].
Foodstuffs NI “Submission on Market study into grocery sector draft report – Appendix D”(10 September 2021) at row 10.1.
Woolworths NZ "Post conference submission on Market study into grocery sector"(24 November 2021) at [21.21]. Transcript of Grocery Market Study Conference - Day 3(26 October 2021) at 33 (lines 14-18).
Woolworths NZ “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at 64.

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8.195.2

8.196

use this pricing information revealed during the private label tender
process to subsequently negotiate down prices for supplier-branded
products.

However, when combined with retail market power, there is a risk that suppliers
sell at lower prices to retailers without these price reductions being passed throughto consumers. Retailers’ margins would increase while retail prices remain
relatively stable.1207 This transfer of margins from suppliers to retailers could
negatively affect suppliers’ investment incentives, if suppliers’ expected returns are
reduced below the level expected under workable competition.

The overall long-term impact of private labels on outcomes for New Zealand consumers is
unclear, but some aspects could harm competition
8.197

It is difficult to assess the overall impact of private label products on New Zealandconsumers.

8.198

The proportion of sales of private label products in New Zealand appears to be
growing slowly.1208 Some retailers appear to be placing greater emphasis on private
label products, through consolidation of the range of grocery products they stock.

8.199

While the introduction of private label products could increase consumer choice
and lower prices in the short term, there is a risk that growth of private labels could
crowd out supplier-branded products. This could lead to a loss of consumer choice
and higher prices over the longer term. Nevo and Van den Bergh (2017) noted:1209
From a short term perspective, no harm can be seen if consumers prefer a private
label product over a branded one, enjoy a greater selection of products and profit
from better prices. From a long term perspective, though, the competition effects ofprivate labels in the downstream market are uncertain.
…
Private labels increase the bargaining power of large retailers and may broaden thescope for abuse of buyer power in upstream markets. The increasing size of discounts
to be granted and the transfer of commercial risks may weaken the financial viabilityof manufacturers and reduce their incentives to innovate. Private labels can also be
used strategically to limit competition in downstream markets (de-listing of branded
goods), so that the overall price level of goods will increase in the long run. However,
the empirical findings are yet indecisive in setting a clear correlation between private
label and abusive buyer power. There is no significant relationship between the shareof private label sales and customer choice but the likely negative impact on productinnovation warrants caution.

1207

1208
1209

As discussed in Attachment D, there is limited evidence that lower prices from suppliers are passed
through to consumers as lower retail prices. See paragraphs D52 to D63 for further details.
See paragraph 8.159 above.
Nevo, Hila and Van den Bergh, Roger “Private Labels: Challenges for Competition Law and Economics”(2017) World Competition 40, no. 2 at 280 and 297-298, [
].

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8.200

We agree that the risk of private label products adversely affecting outcomes for
consumers is greater when retail competition is relatively weak. Castalia (for the
NZFGC) submitted that “[c]oncentration in the retail market plays a significant rolein determining whether a private label is likely to have a detrimental effect on
outcomes”.1210 A competitive retail market is likely to constrain the impact ofprivate labels in a way that best reflects consumer preferences.1211

8.201

The impact of private labels is likely to vary across different product categories,
depending (among other things) on the proportion of sales of private labels foreach product category. Suppliers in categories that have a higher penetration ofprivate label sales may face a greater imbalance of bargaining power than inproduct categories where private label penetration is low.1212

8.202

At this stage, it is not clear whether the overall longer-term risks associated withprivate label products outweigh any potential benefits to consumers in the shortterm. However, there are specific ways in which retailer conduct regarding private
labels is likely to harm competition, such as:

1210

1211
1212

8.202.1

discriminating between own label and supplier-branded products (forexample, when allocating shelf space);

8.202.2

using suppliers’ intellectual property and reducing innovation; or8.202.3

a risk of increasing retailers’ buyer power, leading to further transfer ofrisks and reduced margins for suppliers.

NZFGC “Submission on Market study into grocery sector draft report: Attachment - Castalia - Private
Labels, Buyer Power and Remedies in the NZ Grocery Sector” (26 August 2021) at 3.
[].
Transcript of Grocery Market Study Conference – Day 3 (26 October 2021) at 33 (lines 14-18) and 37(lines 18-31). Paragraph 8.162 above identifies categories that appear to have higher private label
penetration.

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Chapter 9

Recommendations to enhance competition

Summary of recommendations
Recommendations to improve conditions for entry and expansion•

Recommendation 1: Improve the availability of sites for retail grocery stores underplanning law•

Recommendation 2: Prohibit restrictive and exclusive covenants that inhibit retailgrocery store development, and monitor land banking by the major grocery retailers•

Recommendation 3: Require the major grocery retailers to consider requests forwholesale supply in good faith, and meet associated disclosure obligations•

Recommendation 4: The next reviews of the Overseas Investment Act and Sale andSupply of Alcohol Act should consider whether they unduly impede entry or expansion
by grocery retailers•

Recommendation 5: Monitor strategic conduct that affects the conditions of entry or
expansion

Recommendations to improve competition for the acquisition of groceries•

Recommendation 6: Introduce a mandatory grocery code of conduct to govern
relationships between the major grocery retailers and their suppliers•

Recommendation 7: Consider a statutory authorisation or exception for collective
bargaining by grocery suppliers•

Recommendation 8: Amend the Fair Trading Act to strengthen the business-to-business
unfair contract terms regime

Recommendations to improve the ability of consumers to make informed decisions•

Recommendation 9: The major grocery retailers should ensure their pricing andpromotional practices are simple and easy to understand•

Recommendation 10: Mandate the consistent display of unit pricing•

Recommendation 11: The major grocery retailers should ensure disclosure relating toloyalty programmes and data collection and use practices is clear and transparent•

Recommendation 12: The major grocery retailers should cooperate with pricecomparison services

Other recommendations•

Recommendation 13: Establish a grocery regulator and dispute resolution scheme•

Recommendation 14: Review the state of competition in the grocery sector three years
after implementation of our recommendations, and collect information in the interim
to support this review

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Our approach
9.1

In this chapter we outline our recommendations to improve competition andproduce better long-term market outcomes for consumers in terms of PQRS.

9.2

The Act provides us with a broad power to make recommendations as part of the
final report. However, we are not required to make any recommendations. We only
make recommendations below where the information before us suggests that they
are likely to improve competition for the long-term benefit of New Zealand grocery
consumers.

9.3

We sought comment on options for recommendations in our draft report. We also
invited suggestions of other options for recommendations that could improve
competition. In reaching our final recommendations, we have considered thecomments and suggestions we heard in the consultation process.

9.4

In producing our final report, we have endeavoured to make recommendations
that would most directly address the factors affecting competition that we haveidentified, are likely to improve competition, and are likely to be feasible. Where
possible, we have made high-level judgements about the likely scale of the costs
and benefits of our recommendations. However, we consider that formal costbenefit analysis falls outside the scope of our study.

9.5

We also note that there may be other costs and benefits or policy considerations
that we have not considered as they are outside the scope of our study and do not
relate to competition. This analysis may be undertaken by policy makers whiledeveloping or giving effect to any Government decisions after considering our final
report.

9.6

For example, some Māori contributors have advocated for, or commented on,
options they consider might support Māori, hapū and iwi to achieve their
aspirations of greater involvement in the retail grocery sector. We acknowledge theimportance of these aspirations and the Government may wish to take these into
account in its response to our study. We have taken them into account in framing
our recommendations to the extent that they fall within the scope of our study.

9.7

Our recommendations are necessarily interdependent, and we acknowledge thatchanges in one part of the supply chain can have implications for other parts of the
supply chain. These recommendations ought to be considered with reference totheir interrelationship, their potential aggregate impact on the functioning of the
supply chain, and their ultimate impact on competition in the grocery market.

9.8

Several of the recommendations outlined below are directed at industry
participants, who we consider are best placed to implement them. Other
recommendations that are of a regulatory nature, or relate to the establishment of
new institutions, are directed at Government. We have also identified areas which,independent of this study, are relevant to the use of our compliance andenforcement functions and powers under the Fair Trading and Commerce Acts.

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Overview of our recommendations
Recommendations to improve conditions for entry and expansion
9.9

We consider that the best way to improve competition is through measures thatare likely to improve the conditions for entry and expansion, particularly to enable
a greater range of grocery retailers that can offer consumers a convenient one-stop
shopping option.

9.10

There are two main areas where we consider changes would be desirable to help
facilitate an increase in the number of grocery retailers that compete effectively
with the major grocery retailers:
9.10.1

The first is taking measures to make more sites available for grocery
retailing. We recommend using a range of mechanisms under planninglaw to ensure sufficient land is available to enable choice in sites for new
retail grocery stores. We also recommend prohibiting the use ofrestrictive covenants on land and exclusivity covenants in leases.

9.10.2The second is improving availability of a wide range of wholesale
groceries on reasonable terms. We consider that retail competition
would be enhanced by one or more of the major grocery retailers
offering wholesale supply of groceries to other retailers on a voluntarybasis. To increase transparency and predictability regarding thedevelopment of commercial wholesale arrangements, we recommend
some limited regulatory measures including an obligation to consider
requests for supply in good faith.

9.11

We expect that making more sites available, and greater voluntary wholesale
supply of groceries, would significantly improve the conditions for retail entry andexpansion. Freeing up sites for supermarkets is critical to facilitating directcompetition with the major grocery retailers. Wholesale supply of groceries on
reasonable terms is expected to enable other fringe grocery retailers to compete
more effectively on range and price. Wholesale supply could also provide a
stepping-stone for new entrants as they grow and develop their own direct
relationships with suppliers.

9.12

In addition, we recommend considering whether the Overseas Investment Act 2005
and Sale and Supply of Alcohol Act 2012 unduly impact on the conditions of entry
and expansion, the next time this legislation is reviewed. We also recommend
monitoring the major grocery retailers’ use of best price clauses and exclusive
supply agreements, which may impact on the conditions of entry and expansion.

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Recommendations to improve competition for the acquisition of groceries
9.13

To address imbalances in bargaining power between the major grocery retailers
and many of their suppliers, we recommend introducing a mandatory grocery codeof conduct, considering enabling collective bargaining by suppliers, andstrengthening provisions relating to unfair business-to-business contract terms instandard form contracts.

9.14

Combined, we expect these changes would limit the major grocery retailers’ ability
to use their strong negotiating position to require agreement to unfavourable
contract terms and transfer risk onto suppliers. This should help ensure that supply
terms are not unduly impacting on suppliers’ ability to invest and innovate toproduce grocery products that meet consumers’ needs, or leading to inefficient exitof the market by suppliers.

Recommendations to improve the ability of consumers to make informed decisions
9.15

We recommend measures directed at improving the ability of consumers to makeinformed decisions. These include the introduction of mandatory unit pricing, as
well as the major grocery retailers ensuring that their pricing and promotional
practices, and the terms and conditions of their loyalty programmes, are clear andeasy to understand. We expect these changes would help consumers make more
informed purchasing decisions and improve consumers’ confidence. This in turnshould enhance competition at the retail level of the market.

Other recommendations
9.16

Finally, we recommend that a sector-specific regulator and dispute resolution
scheme be established. A regulator could have responsibility for general oversight,
monitoring, and reporting on the performance of the retail grocery sector. It could
also have a range of specific responsibilities, including enforcing the grocery codeof conduct, unit pricing regulation, and prohibitions on the use of covenants. A
sector-specific regulator could also have a role in monitoring matters such asindustry progress regarding voluntary wholesale supply arrangements, use of bestprice clauses and exclusive supply agreements, and the major grocery retailers’pricing and promotional practices and loyalty programme terms and conditions. A
dispute resolution scheme would cover disputes relating to the code of conduct
and voluntary wholesale supply of groceries.

9.17

We consider that, if implemented, these recommendations should contribute to amaterial improvement in the state of competition in the sector. In particular, theyshould increase the prospect of a greater range of retailers emerging that canmeaningfully compete with the major grocery retailers by offering consumers aconvenient one-stop shopping option. However, it is difficult to anticipate the exact
likelihood or degree of improvements in competition that will arise as a result.

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9.18

We have considered other options which could directly stimulate retail competition
by offering consumers additional one-stop shopping options. This includes
facilitation or sponsorship of entry by government, or requiring the major grocery
retailers to sell some of their stores to create additional major grocery retailers.
Many consider that such initiatives are necessary because New Zealand is achallenging market for a new entrant and no large-scale competitors can be
expected to grow from the existing fringe of other grocery retailers under current
market conditions. We recommend options intended to improve the conditions forcompetition and we consider that they should be implemented and tested before
further considering whether other initiatives may be required.

9.19

Given this, we propose that a further review of the state of competition in the retailgrocery sector be undertaken three years after the Government has implemented
any reforms that it chooses to proceed with. Information on how competition has
developed would be available at this point. If competition is still not working as wellas it could after three years, the review could consider whether other initiatives are
required.

Recommendations to improve conditions for entry and expansion
9.20

As discussed above, we consider that the best way to improve competition isthrough measures that are likely to improve the conditions for entry andexpansion, particularly to enable a greater range of retailers that can meaningfullycompete with the major grocery retailers by offering consumers a convenient
one-stop shopping option. As discussed in Chapter 6, our view is that the New
Zealand market could sustainably accommodate at least one more large-scale rival,
and that reducing current constraints on entry and expansion would help tofacilitate this.

9.21

This section discusses the following measures to improve the conditions of entry
and expansion:
9.21.1

Recommendation 1: Improve the availability of sites for retail grocery
stores under planning law;

9.21.2

Recommendation 2: Prohibit restrictive and exclusive covenants that
inhibit retail grocery store development, and monitor land banking by
the major grocery retailers;

9.21.3

Recommendation 3: Require the major grocery retailers to consider
requests for wholesale supply in good faith, and meet associateddisclosure obligations;9.21.4

Recommendation 4: The next reviews of the Overseas Investment Act
and Sale and Supply of Alcohol Act should consider whether they unduly
impede entry or expansion by grocery retailers; and9.21.5

Recommendation 5: Monitor strategic conduct that affects theconditions of entry or expansion.

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9.22

9.23

We consider that these interventions are likely to increase the prospect of entry or
expansion. Entry or expansion could deliver the following benefits:
9.22.1more intense competition at the retail level and greater choice in termsof PQRS for consumers;

9.22.2

greater innovation, improved productivity and/or efficiency at the retaillevel through different business structures;

9.22.3in conjunction with our recommendations relating to a code of conduct(discussed below), more balanced bargaining positions between
suppliers and retailers, potentially enabling greater innovation andhigher quality products; and9.22.4a potentially greater range of grocery suppliers and associated products
as a result of an improved ability for suppliers to grow supply throughsmaller increments of demand.

These interventions may also support the achievement of aspirations we heard
from a number of Māori partners and stakeholders in terms of entry into the retailgrocery sector.

Recommendation 1: Improve the availability of sites for retail grocery stores underplanning law
9.24

As we discussed in Chapter 6, compliance with planning law – specifically the
Resource Management Act 1991 (RMA) – is a necessary pre-requisite to any entry
or expansion in retail grocery. This is particularly, but not exclusively, the case forbricks-and-mortar retailers.

9.25

We consider that planning law may materially affect the conditions of entry andexpansion for grocery retailers. Submitters on our draft report generally agreed
with this position, including the major grocery retailers, Te Waihanga –New Zealand Infrastructure Commission, and the New Zealand Initiative.1213

9.26

Planning law can affect the conditions of entry and expansion in multiple ways,
including:1213

9.26.1zoning rules significantly reducing the number of suitable sites available
for retail grocery stores;

9.26.2businesses attempting to use planning law to hinder their competitors’
access to or ability to develop suitable development sites; andComments by NZ Initiative, Transcript of Grocery Market Study Conference – Day 5 (28 October 2021)
at 20 (lines 7-14); Te Waihanga – New Zealand Infrastructure Commission “Submission on Market
study into grocery sector draft report” (26 August 2021) at 2; Foodstuffs NI “Submission on Market
study into grocery sector draft report” (10 September 2021) at 78; Foodstuffs SI “Submission onMarket study into grocery sector draft report” (10 September 2021) at 66; Woolworths NZ“Submission on Market study into grocery sector draft report” (10 September 2021) at 38.

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9.26.3rule setting, notification and consenting processes causing delay anduncertainty in the establishment or expansion of retail grocery stores orsupporting operations (such as distribution facilities).

9.27

All of these matters raise the cost of, and potentially discourage, entry andexpansion. This limits the ability of the major grocery retailers to compete witheach other in some areas and limits the constraints they face from other grocery
retailers. While our study is limited to factors affecting competition in the supply
and acquisition of groceries, these points may also be of general application inother industry sectors.

9.28

Disputes between the major grocery retailers under the RMA appear to have beencommon. Partially in response to this, Part 11A of the RMA was inserted to limit
trade competitors’ use of the objection process under the RMA.1214 While Part 11A
has placed some limits on such disputes, the information we have gatheredsuggests there is reason to believe that a number of other RMA-related barriers todeveloping a grocery store remain.

9.29

A review of determined RMA applications, in relation to retail grocery stores,suggests that applicants and decision-makers are not consistently taking into
account, or placing significant weight on, the benefits to consumers that arise fromincreased actual or potential competition. This is perhaps because there is a lack ofclarity as to whether provisions in the RMA such as section 104(3)(a), which wereintended to deter trade competitors from using resource management processes toprevent rivals from competing in the same market, allow the consideration of thepositive effects of competition.1215

9.30

In addition, as discussed in Chapter 6, the Courts have stated that, while they may
not have regard to the direct effects of trade competition, it is legitimate to take
into account flow-on ’retail distribution effects’ such as a downturn in business inan existing shopping centre when considering a request for resource consent. We
understand this to mean that decision-makers may choose to decline a consent if itwould lead to a significant downturn in economic activity in existing retail orcommercial centres.1216

1214

1215

1216

General Distributors Ltd v Foodstuffs Properties (Wellington) Ltd [2011] NZEnvC 212 (2011) 16 ELRNZ
573, [2012] NZRMA 215.
Ministry for the Environment “Departmental Report on the Resource Management (Simplifying andStreamlining) Amendment Bill” (June 2009) at 82-87.
Westfield (New Zealand) Limited v North Short City Council [2005] NZSC 17, [2005] 2 NZLR 597 at[119]-[120].

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9.31

The Government recently undertook a full review of the RMA, and is in the processof developing legislation that will replace it. This will include a new Natural and
Built Environments Act (NBA), and a Strategic Planning Act (SPA). The NBA will be
underpinned by national direction in the form of a National Planning Framework(NPF).1217

9.32

In our draft report, we outlined options to incorporate competition considerations
into the NBA through inclusion of competition as an environmental outcome to bepromoted, as an implementation principle, and through natural and built
environment plans.

9.33

Following the publication of our draft report, Parliament’s Environment Committee
reported back on its consideration on the Natural and Built Environments Bill
exposure draft, and recommended that the list of proposed environmental
outcomes be consolidated.1218 The proposed consolidated list includes referenceto:9.33.1enabling enough development for housing, business use, and primary
production to meet the diverse and changing needs of people andcommunities; and9.33.2an urban form that promotes economic, social, cultural, andenvironmental benefits.

9.34

Given the Committee’s recommendation to consolidate the list of the outcomes,
and to amend the list of environmental outcomes to reference business use andeconomic benefits, we no longer consider that a separate outcome related topromoting competition is necessary. We also note that the Committee consideredthat further work is required on whether a list of overarching implementation
principles is desirable.

1217

More information on the proposed new resource management system, including the respective rolesof the NBA, SPA, and NPF, is available at Ministry for the Environment “Our future resource
management system: Materials for discussion” (November 2021), available at:https://environment.govt.nz/assets/publications/Our-future-resource-management-systemmaterials-for-discussion.pdf.
Environment Committee “Inquiry on the Natural and Built Environments Bill: Parliamentary Paper”(November 2021)
https://www.parliament.nz/resource/enNZ/SCR_116599/0935c4f14c63608e55c528b75167a69daee92254.

1218

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9.35

There are, however, a range of other more specific interventions that could operate
alongside the overall purpose, outcomes and principles of the NBA to ensure thatthe planning system better promotes competition and ensures suitable sites are
made available for retail grocery store development. In particular, we make thefollowing recommendations:9.35.1

Recommendation 1A: District Plans should include sufficient land that iszoned to enable choice in sites for the development of retail grocery
stores;9.35.2

Recommendation 1B: The new planning system should require Regional
Spatial Strategies to provide sufficient spare capacity to enable choice insites for the development of retail grocery stores;

9.35.3

Recommendation 1C: The new planning system should require every
NBA plan to include a minimum proportion of urban land that is zoned
for retail grocery stores;

9.35.4

Recommendation 1D: The new planning system should limit thediscretion available to decision-makers regarding the approval of retailgrocery stores;

9.35.5

Recommendation 1E: The positive outcomes of trade competition shouldbe able to be considered in planning instruments under the NBA; and9.35.6

Recommendation 1F: Retail grocery store development should not beable to be declined on the basis of adverse retail distribution effects on
existing commercial centres.

9.36

We elaborate on each of these below.

9.37

We consider that these recommendations should materially improve the conditionsof entry and expansion for existing and new grocery retailers. We also consider thatthey can be implemented without unduly impacting on the purpose of the resource
management system in terms of protecting and enhancing the naturalenvironment.

Recommendation 1A: District Plans should include sufficient land that is zoned to enablechoice in sites for the development of retail grocery stores
9.38

It will be a number of years before the NBA, and associated NPF and NBA plans
become operative. In the interim, when undertaking a review of their District Plans
under the existing RMA, we recommend that territorial authorities ensure thatsufficient land is zoned to allow new retail grocery stores to be developed in places
where there is demand, or may be demand in the future.

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9.39

These plans should account for the different retail grocery store typologies andcommercial models including small, medium, and large-format stores. We
recommend that such plans avoid taking a prescriptive approach to where such
stores should be developed, and should provide excess capacity so as to bestenable competition to organically develop in line with demand.

9.40

Rather than simply reserving land for retail grocery stores, to ensure that capacity
provided for stores in District Plans – particularly in existing brownfields areas – isput to good use, territorial authorities may wish to consider making greater use of
mixed-use (and equivalent) zoning, to enable a range of activities to take place.

9.41

This recommendation builds upon the provisions contained in section 30 and 31 of
the RMA, and requirements in the National Policy Statement on Urban
Development 2020 (NPS-UD) that local authorities must provide at least sufficientdevelopment capacity to meet expected demand for business land from different
business sectors in the short, medium, and long term. Under the NPS-UD,‘sufficient’ includes a competitiveness margin of 15-20 per cent. However, weconsider that, when territorial authorities are giving effect to the NPS-UD, a greater
margin would better enable choice in sites and competition.1219

Recommendation 1B: The new planning system should require Regional Spatial Strategies toprovide sufficient spare capacity to enable choice in sites for retail grocery stores
9.42

The SPA is intended to work alongside the NBA to promote a strategic, integrated
and long-term approach to how land use is planned for, through mandating the useof Regional Spatial Strategies.

9.43

We recommend that the new planning system (via either the SPA or NPF) require
Regional Spatial Strategies to provide for sufficient capacity for the development ofretail grocery stores. This could be achieved by ensuring that sufficient capacity isprovided for growth in retail and commercial activity over the short, medium, andlong term, in a variety of locations, and a variety of typologies.

Recommendation 1C: The new planning system should require every NBA plan to include aminimum proportion of urban land that is zoned for retail grocery stores
9.44

As discussed in Chapter 6, a number of stakeholders have indicated that council
zoning policies currently impose a material limit on the number of sites available
for the purposes of retail grocery store development.

9.45

To address this, once the NBA is in effect, we recommend that the NPF include
rules that ensure that each NBA plan provides for a certain proportion or quantityof urban land in each district to be zoned to allow the development of retailgrocery stores. This proportion or quantity should be developed by Government in
consultation with local government, Māori, and businesses. This principle could
also be extended to other retail or commercial developments.

1219

National Policy Statement on Urban Development 2020 at [3.3] and [3.22].

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9.46

As above, we recommend that the NPF ensure that NBA plans account for andenable different retail grocery store typologies, avoid taking a prescriptive
approach to where retail grocery stores should be developed, and provide excess
capacity to enable competition to organically develop in line with demand. To
ensure that capacity provided is put to good use, the NPF could provide for joint
planning committees to make greater use of mixed-use zoning.

Recommendation 1D: The new planning system should limit the discretion available todecision-makers regarding the approval of retail grocery stores
9.47

In seeking to ensure that NBA plans provide sufficient capacity for future retailgrocery stores, we recommend that the planning system – either through the NBA
or NPF – ensure that zoning also provides sufficient certainty that such activities
can take place.

9.48

This may be best achieved by ensuring that retail grocery stores are either deemed‘permitted’ or ‘controlled’, rather than ‘discretionary’.1220 This would either remove
the need for a consent, or limit the discretion available to decision-makers when
considering a consent application. This principle could also be extended to otherretail or commercial developments.

9.49

Decision-makers would still be able to impose a range of restrictions regarding
height, bulk, setbacks, operating hours, noise, traffic management, and a range ofother matters through NBA plans. However, including such conditions up-front in
NBA plans, rather than at the case-by-case discretion of decision-makers, would
promote certainty and reduce the cost of entry or expansion.

Recommendation 1E: The positive outcomes of trade competition should be able to beconsidered in planning instruments under the NBA
9.50

The RMA contains a range of provisions that seek to prevent the impact of activities
on trade competition from being considered. These were intended to ensure thatbusinesses were not able to oppose development by their competitors. However,there is a lack of clarity as to whether they allow the positive impacts ofcompetition to be considered.

9.51

We consider that, under planning law, to the extent that decision-makers retain
discretion as to whether a retail grocery store may be built, decision-makers
should:9.51.11220

be able to take into account the benefits of increased competition that
may flow from a development; andSee Ministry for the Environment “Our future resource management system: Materials for discussion”(November 2021) at 30-31 for definitions of proposed resource consent activity categories.

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9.52

9.51.2be able to take into account the detriments of decreased competition
that may flow from a development;1221 but

9.51.3

not be able to take into account any harm that any individual competitor
may suffer from increased competition; and9.51.4

not be able to take into account any benefit that any individualcompetitor may receive from decreased competition.

To achieve this position, in developing the NBA, we consider that the references totrade competition and competitors in the RMA (such as in sections 61(3), 66(3),74(3), and 104(3)(a)(i)) may need to be amended, to the extent that they arecarried over to the NBA. We consider that Part 11A of the RMA, which provides
that the RMA must not be used to oppose trade competitors, should be carriedover to the NBA.

Recommendation 1F: Retail grocery store development should not be able to be declined on
the basis of adverse retail distribution effects on existing commercial centres
9.53

In addition to uncertainty as to whether decision-makers may formally consider the
positive impacts of competition under the RMA, when deciding whether or not togrant a resource consent, decision-makers may – in effect – choose to decline a
consent if it would lead to a significant downturn in economic activity in existingretail or commercial centres. Such impacts are commonly referred to as ‘adverse
retail distribution effects’.

9.54

Part of this appears to hang on the definition of “environment” in the RMA, which
includes social, economic, aesthetic, and cultural conditions and their effect on
people, communities, and amenity values. It also relates to the duty in the RMA toavoid, remedy, or mitigate adverse effects on the environment.1222

9.55

The definition of the environment in the NBA exposure draft does not refer toamenity values. However, it still refers to the social, economic and cultural
conditions that affect people and communities and the built environment theycreate. It also still includes a purpose of avoiding, remedying or mitigating adverse
effects on the environment.1223 As such, it appears that the NBA may continue toprovide decision-makers – to the extent that they retain discretion about whether aretail grocery store may be built – with the ability to decline consents for retailgrocery stores or other retail development on the basis that they may have anegative impact on existing commercial centres.

1221

1222
1223

For example, if there is only limited land available that is suitable for particular commercial activity(such as a port), and a resource consent is sought to rezone that land for residential housing.
Sections 2 and 17 of the Resource Management Act respectively.
Sections 3 and 5 of the exposure draft of the Natural and Built Environments Billhttps://www.parliament.nz/resource/enNZ/PAP_112017/9dc086f746eacef36a4b75ab6602f67f2ffe1e2e.

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9.56

We recommend that the NBA does not provide an ability for retail grocery store
developments to be declined solely or predominantly on the basis of adverse retail
distribution effects on existing commercial centres. This principle could also be
extended to other retail or commercial developments.

Recommendation 2: Prohibit restrictive and exclusive covenants that inhibit retail grocery
store development, and monitor land banking by the major grocery retailers
9.57

In Chapter 6 we explained that we have identified a large number of restrictive
covenants on sites, and exclusivity covenants in lease agreements, that could be
used to prevent parties from selling groceries.
9.57.1

A restrictive covenant is a promise not to do something that is registeredagainst land and imposes restrictions on how that land can be developed
or used. Restrictive covenants are attached to or run with land, meaningthat they bind any third parties who subsequently acquire (or lease) thatland.

9.57.2

Exclusivity covenants are provisions contained in lease agreements that
restrict competitors from operating in the same shopping centre. The
exclusivity covenants we have identified generally have durations of 20
or more years (after taking into account rights of renewal).

9.58

Such covenants are likely to reduce market participants’ ability to access suitablesites and may hinder and raise the cost of entry and expansion. This is particularly
so in developed urban areas where the cost of land is high and the number ofavailable and suitable sites is likely to be low. As such, covenants are likely to havemore impact on the conditions of entry and expansion in situations when planning
law is relatively restrictive than in situations where it is permissive.

9.59

As discussed in Chapter 6, some stakeholders have argued that there can bepro-competitive rationales for the use of both restrictive covenants and exclusivity
covenants in leases. This includes the use of exclusivity covenants as a means of
attracting grocery stores as anchor tenants of a shopping centre. However, overall,
we consider that the use of these covenants is likely to unduly restrict retailcompetition in the retail grocery sector, and that changes to the practice of lodging
covenants restricting the development of supermarket or other grocery retailers
would improve the conditions for entry and expansion.

9.60

The major grocery retailers have indicated that they have not found restrictive andexclusivity covenants to be a significant constraint on their ability to acquire sites.
However, the fact that covenants have (at least until the commencement of ourstudy) continued to be used suggests that they have value to the party imposing
the constraint in terms of impeding entry or expansion. In addition, Woolworths NZ
has acknowledged that actions taken by the ACCC to address exclusivity covenantsin leases in Australia have had a positive impact on competition.

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9.61

Submissions on our draft report (including by the major grocery retailers) weregenerally supportive of improving site availability by addressing restrictive
covenants and exclusivity covenants in leases.1224 For example:
9.61.1

Woolworths NZ has indicated support for making restrictive andexclusivity covenants unenforceable after a certain period following
investment in a new site.

9.61.2

Foodstuffs South Island indicated it is generally supportive of removing
existing restrictive covenants on land, is willing to provide a binding
undertaking that any covenants would not be enforced on land that has
been sold, would not register new restrictive covenants on land as partof the process of selling property, and is supportive of a review of theuse of covenants in other contexts.

9.61.3

Foodstuffs North Island indicated a willingness to immediately start theprocess to remove all existing restrictive land covenants and exclusivity
provisions in leases, and to make no further use of them, and is
supportive of the development and implementation of an industry-wide
solution addressing restrictive covenants and exclusivity provisions inleases. Foodstuffs North Island has advised that, following submissions, it
has already removed a number of restrictive covenants that wereformerly in place.1225

9.62

However, as outlined in our draft report, and confirmed by the major grocery
retailers in their submissions, the major grocery retailers may face practicaldifficulties in removing existing restrictive covenants on a voluntary basis. Even
where records have been kept of existing covenants, removing them would require
the support of other affected parties, such as the current owner. Proceedings
under the Property Law Act 2007 may be required.

9.63

Section 27 and 28 of the Commerce Act 1986 already apply to exclusivity clauses inleases and restrictive covenants, respectively. However, establishing breachrequires an assessment of local competition conditions on a case-by-case basis, ineach relevant geographic market. A new entrant attempting to achieve scale would
need access to sites for grocery retailing in multiple locations, and taking legal
proceedings in an attempt to obtain appropriate sites would add significant cost,delay and uncertainty.

1224

Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[370]-[372]; Foodstuffs SI “Submission on Market study into grocery sector draft report”(10 September 2021) at [358]-[363]; Woolworths NZ “Submission on Market study into grocery sector
draft report” (10 September 2021) at [13.1]-[13.2.2].
Foodstuffs NI “FSNI provides update on Action Plan ahead of grocery sector market study final report”(23 February 2022) https://www.foodstuffs.co.nz/news-room/fsni-provides-update-on-action-planahead-of-grocery-sector-market-study-final-report.

1225

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9.64

Given this, to address the practical barriers to the voluntary removal of covenants
that the major grocery retailers have identified, provide an enduring solution to theissue, and address the barriers to enforcement associated with sections 27 and 28
described above, we make the following recommendations:9.64.1

Recommendation 2A: Prohibit restrictive covenants that relate to thedevelopment of retail grocery stores;

9.64.2

Recommendation 2B: Prohibit exclusive covenants in leases that relate
to the operation of retail grocery stores; and9.64.3

Recommendation 2C: Monitor land banking by the major grocery
retailers.

9.65

We elaborate on each of these below.

9.66

We consider that these recommendations should complement our recommended
changes to planning law to materially improve the conditions of entry andexpansion for existing and potential grocery retailers. As discussed below, there
appear to be limited pro-competitive rationales for the use of restrictive andexclusive covenants, and we consider that the costs of these interventions are likely
to be limited.

9.67

Independent of this study, we have been reviewing whether there are any historicor ongoing matters raised in the context of the use of restrictive covenants andexclusive covenants in leases that might be at risk of breaching the Commerce Act
1986. We will continue to consider whether all or some of these matters warrant
prioritisation for further investigation. When considering whether to investigate,
we may have regard to the extent to which the major grocery retailers give effectto their commitments as outlined above, as well as whether our recommendations
are taken up by Government.

Recommendation 2A: Prohibit restrictive covenants that relate to the development of retailgrocery stores
9.68

We recommend that the Government prohibit the use of restrictive covenants that
relate to the development of retail grocery stores (including specialist retailers suchas greengrocers or butchers). In particular:
9.68.1

Restrictive covenants that explicitly and directly impede thedevelopment of retail grocery stores should be prohibited, regardless ofthe purpose of the covenant or the person lodging the covenant.

9.68.2

Restrictive covenants that indirectly impede retail grocery store
development (such as by saying that only certain (non-grocery-retail)activities may take place on the premises) should be prohibited if they:
9.68.2.1

have a purpose of impeding retail grocery store development;
or

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9.68.2.2

are lodged by a grocery retailer, or a person interconnected,
associated with, or otherwise assisted by a grocery retailer(regardless of the purpose or likely effect of the covenant).

9.69

We also recommend that consideration be given to making a form of authorisation
available to restrictive covenants that would fall within either of the above, where
it can be demonstrated that the benefits of the covenant outweigh any
detriment.1226

9.70

The prohibition should state that any existing or future restrictive covenants of thisnature are unenforceable, with a range of penalties and remedies for
non-compliance. These could be consistent with the penalties and remedies
provided for under Part 2 of the Commerce Act 1986.

9.71

These recommendations seek to provide an efficient and difficult to avoid methodof prohibiting the use of restrictive covenants in situations where they are most
likely to have a negative effect, while recognising that there may be justifications
for the use of covenants that indirectly impact on grocery store development.

9.72

The arguments relating to the use of restrictive covenants may apply more broadly
than just the retail grocery sector.1227 As such, the Government may wish toconsider extending any prohibition on the use restrictive covenants to othercontexts. In practice, this could take the form of amending section 28 of theCommerce Act to provide that a commercial land covenant is unenforceable unlessthe person that lodged a covenant can prove that it does not have the purpose,
effect, or likely effect of substantially lessening competition. However, as thepotential for unintended consequences increases in line with the breadth of theprohibition, we would not recommend introducing a broader prohibition without
further analysis as to potential unintended consequences (if any) of doing so.1228

1226

Under section 58 of the Commerce Act, authorisation is already available for certain restrictive tradepractices that would contravene sections 27, 28, 37 or 38 of the Act. However, if new provisions wereadded to the Commerce Act or other legislation relating specifically to supermarket covenants, thenthe existing authorisation power would need to be extended or replicated (with amendments asnecessary).
For example, in our retail fuel market study, we identified that restrictive Non-Petroleum Use (NPU)
covenants create a barrier to retail competition, and that the purpose of the covenants could beachieved by less restrictive means, Commerce Commission “Market study into the retail fuel sector:
Final report” (5 December 2019) at [6.122] and [8.128].
We note that MBIE’s departmental report on the Commerce Amendment Bill 2021 (9-1) analyses anumber of examples of covenants identified by a submitter and concludes that they are either
potentially anticompetitive, or that the objective of the covenant could be achieved via a lessrestrictive means, MBIE “Commerce Amendment Bill – Departmental Report to the Economic
Development, Science and Innovation Committee” (6 July 2021), available at:https://www.parliament.nz/resource/enNZ/53SCED_ADV_108304_ED1189/7aca35fe1deb3b200156fb6d85409ec2d36a327c.

1227

1228

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Recommendation 2B: Prohibit exclusive covenants in leases that relate to the operation ofretail grocery stores
9.73

We also recommend that the Government prohibit the use of exclusive covenantsin leases that relate to the operation of retail grocery stores.

9.74

This would prohibit lease agreements which provide that a condition of a lease isthat no other tenant may operate a retail grocery store (including specialist
retailers such as greengrocers or butchers) in competition with the lessee. It would
not, however, prohibit general clauses in lease agreements which state thatpremises may only be used for a particular type of activity.

9.75

As with restrictive covenants above, the prohibition should state that any existingor future exclusivity covenants in leases are unenforceable. A range of penalties
and remedies should be provided to address non-compliance.

9.76

We have considered whether this prohibition should be subject to a defence or
exception. While we acknowledge the potential pro-competitive rationales
associated with exclusivity covenants in leases, we consider that these are likely to
be outweighed by negative impacts on competition.

9.77

For example, we consider that, while a forward-looking time-limited exception for
the use of exclusivity covenants might provide certainty of a return on investment
by major grocery retailers, it may also have negative impacts that last well beyond
the period of an exemption. This is because, if – as a result of an exclusivity
covenant – a shopping centre is developed to include only one retail grocery store,
substantial redevelopment of the centre might be required to enable the entry of asecond grocery retailer. This may not take place until well after the exclusivity
covenant has expired.

9.78

We accept, however, that there may be a case for a backward-looking exception forexisting lease agreements. We note that undertakings accepted by the ACCC in
relation to this issue included a five-year exception for existing lease agreements,
but no exception was provided for new lease agreements.1229 As noted in Chapter
6, the ACCC has publicly stated that the removal of exclusivity covenants from newleases has led to an increase in the number of shopping centres with more than
one supermarket.

9.79

There is also the option to extend any prohibition on the use of exclusive covenantsin lease agreements beyond grocery stores to also cover provisions that restrict
competing retail or commercial developments more generally. However, as withrestrictive covenants, we would not recommend introducing a broader prohibition
without further analysis as to potential unintended consequences (if any) of doing
so.

1229

ACCC “Supermarket agreement opens way for more competition” (18 September 2009)https://www.accc.gov.au/media-release/supermarket-agreement-opens-way-for-morecompetition.

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Recommendation 2C: Monitor land banking by the major grocery retailers
9.80

As discussed in Chapter 6, there is the potential that any restriction on the use ofcovenants leads to an increase in land banking by the major grocery retailers. Given
this, we recommend that the government – via a new grocery sector regulator(discussed below) – monitors the extent of land banking undertaken by the major
grocery retailers.

9.81

In addition, land banking may, in some circumstances, be subject to section 47 of
the Commerce Act, which relates to anticompetitive acquisitions, or otherwise
section 27, which relates to anticompetitive agreements. We recommend that
suppliers and retailers closely review the compliance of any proposed landacquisitions with the Commerce Act. Independent of this study, we have beenreviewing whether there are any historic or ongoing matters raised in the context
of the acquisition of land that might be at risk of breaching these sections of theCommerce Act. We will continue to consider whether all or some of these matterswarrant prioritisation for further investigation.

9.82

We note that the Productivity Commission has previously considered issues related
to land banking in the context of housing and recommended a shift to rating on thebasis of land values to encourage the efficient use of land.1230

Recommendation 3: Require the major grocery retailers to consider requests forwholesale supply in good faith, and meet associated disclosure obligations
The absence of wholesale options limits constraint from small independent retailers andsmall new entrants
9.83

A grocery retailer cannot provide a widespread, full range, competitively priced
offering without first obtaining groceries on reasonable terms from either a rangeof suppliers or a grocery wholesaler.

9.84

As discussed in Chapter 6, there are limited wholesale options available in the New
Zealand grocery sector, and none that offer a full range of competitively priced
grocery products. For example, while independent foodservice wholesalers such as
Bidfood and Service Foods may have the infrastructure required to wholesale
grocery products, they operate in a different market from grocery wholesalers, anddo not appear to be a viable source of a full range of groceries for resale by grocery
retailers.

1230

Productivity Commission “Using land for housing” (September 2015)
https://www.productivity.govt.nz/assets/Documents/6a110935ad/using-land-for-housing-finalreport.pdf.

396

9.85

9.86

The major grocery retailers are vertically integrated, and this is common
internationally. While the major grocery retailers appear to be well-served by sucha model, for other smaller retailers the lack of comprehensive wholesale supply
options means that they may:
9.85.1

face high per-unit transaction costs in dealing with a wide range ofsuppliers, given their lack of scale;

9.85.2be unable to access as wide a range of products as the major grocery
retailers, either due to the transaction costs described above, or because
suppliers do not want to deal with them because of their small scale;

9.85.3

pay a higher per-unit cost for the goods they obtain from suppliers thanthe major grocery retailers, due to their lack of scale; and/or

9.85.4in some cases, find purchasing goods directly from the major grocery
retailers’ retail stores to be their best option, given the issues describedabove.

During our study, several existing or potential grocery retailers have expressedinterest in improved access to groceries for resale. Existing grocery retailers will –often by necessity – have direct relationships with suppliers and may wish to keep
or increase these over time. However, retailers may nevertheless seek wholesale
supply on the basis that:
9.86.1

there are grocery retailers who are unlikely to fully vertically integrate, as
they would be unlikely to achieve benefits across a full product range
greater than the cost savings offered by a wholesaler; and/or

9.86.2for some grocery retailers, access to groceries that supplement their
existing commercial relationships may enable them to expand faster.

9.87

Our consultation with some Māori partners and stakeholders also suggested there
are parts of New Zealand, particularly in rural areas, where the existing options do
not meet their needs. Improved access to groceries for resale may enable greater
options for these communities.

9.88

As discussed in Chapter 6, we consider that larger grocery retailers which mightseek to enter or expand in the retail grocery market in the future – such as Aldi,
Costco and The Warehouse – are unlikely to use wholesale in the long term (or, forsome, at all). This is because they would likely have sufficient volumes and scale toreceive competitive pricing by purchasing directly from suppliers.

9.89

However, wholesale supply may be viewed as an attractive long-term mechanism
for existing small independent grocery retailers and small new entrants to obtainthe full range of competitively priced grocery products needed for them to provide
a competitive offering comparable to the major grocery retailers.

397

9.90

In addition, retailers will often expand their offering (eg, number of stores or rangeof available products) over time after entering. Access to wholesale supply may
help grocery retailers receive competitively priced supply of grocery products in the
short-to-medium term, until they achieve a level of scale which allows them toreceive competitive prices directly from suppliers.

9.91

The price that grocery retailers pay suppliers for groceries, including any discounts
for volume and economies of scale, only partially reflects the final net cost of those
goods to the major grocery retailers. Suppliers also provide promotional funding (ortrade and marketing spend) which can significantly reduce the retail price of goods.
Any wholesale arrangement that does not address this issue is unlikely to result inwholesale prices to other grocery retailers lower than the retail prices charged by alarge grocery retailer such as PAK’nSAVE, and is therefore unlikely to promote retailcompetition.

9.92

We consider that improved access to groceries for resale on reasonable terms
would likely result in a material improvement in competition and outcomes for
consumers:

1231

[

9.92.1

Improved wholesale supply may enable small grocery retailers to
improve their customer offerings, such as increasing their range or
quality, or operating in new locations. An increase in range is likely tomaterially increase the extent to which these retailers are able to offer a
one-stop shop for consumers, and in doing so, compete for consumers’
main shop. This is particularly likely to be the case over the medium- tolong-term as grocery retailers adjust their store configurations andlocations. It may also permit new retail solutions to better meetcurrently unmet consumer demand, such as in areas that are notcurrently served well by existing major grocery retailers.

9.92.2

While improving wholesale prices may require that independent grocery
retailers receive a significant portion of suppliers’ promotional funding,this seems feasible. Suppliers may directly enter into promotional
funding relationships with independent grocery retailers, or in somecases may permit pass-through by the wholesaler. The feedback we havereceived indicates that supplier preferences may vary, but generally
suggests a willingness on the part of suppliers to consider negotiatingpromotional funding with independent grocery retailers receiving
wholesale supply from one of the major grocery retailers.1231

].

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9.93

9.94

While we consider greater availability of wholesale supply would likely lead to amaterial improvement in competition and outcomes for consumers, the exact
extent of any improvement is unclear:
9.93.1

As noted above, existing or aspiring large grocery retailers are unlikely tomake use of wholesale supply over the long term, and some may not
make use of it at all.

9.93.2

It is not clear whether improved access will also be associated withsignificant reductions in the price paid by independent grocery retailers.
This is a crucial issue for enhancing competition.

9.93.3As outlined in Chapter 5, we do not consider that small grocery retailers
such as Night n’ Day and Supie currently impose a significant constraint
on the major grocery retailers. However, improvements in the price,
range, and quality of products available to them would be likely toincrease the constraint. If we have underestimated the constraint posedby small independent grocery retailers, then it is likely we have also
underestimated the impact of improving wholesale access.

In the following sections, we discuss various options for achieving greater
availability of wholesale supply. These include:
9.94.1

commercial arrangements, without regulatory intervention;

9.94.2

limited measures to improve transparency and better-facilitatecommercial arrangements;

9.94.3

regulated access regimes; and9.94.4

measures to facilitate the availability of independent wholesale supply.

Commercial arrangements appear feasible
9.95

It is generally accepted that negotiation of commercial contractual arrangements
will involve lower costs than achieving the same outcome by economic regulation.
For these reasons if effective commercial arrangements are likely to be reached,
they are generally considered to be preferable.

9.96

The major grocery retailers each own firms which currently perform somewholesale functions, primarily for the foodservice sector. We consider commercial
supply by the major grocery retailers of groceries for resale will be likely to occur if
the following conditions are met:
9.96.1

commercial wholesale arrangements are technically feasible;

9.96.2major grocery retailers consider it is in their commercial interests to
supply rivals; and399

9.96.3

9.97

9.98

1232

1233

1234

potential customers consider it is in their commercial interests to rely on
supply from a rival because:
9.96.3.1

the supply offers something – such as price or range – that iscommercially attractive; and9.96.3.2

they have confidence that the commercial arrangements thatare offered will provide sufficient commercial certainty andprotection, including of confidential information, to makereliance on those arrangements appropriate.

In our draft report we concluded that it was unlikely that the major grocery
retailers would agree to supply on competitive terms absent the prospect ofregulatory intervention. This was for two primary reasons:1232
9.97.1

where a vertically-integrated firm faces limited retail competition, it islikely to have limited incentive to supply potential retail competitors; and9.97.2grocery retailers (or potential retailers) would be reluctant to rely on arival for wholesale supply given:
9.97.2.1

their supplier may be incentivised to provide supply on terms,
including wholesale prices, that may limit their ability tocompete in the retail market;

9.97.2.2

it may be uncertain when wholesale supply would beavailable, and on what terms, and whether supply may, in the
future, be withdrawn or limited; and9.97.2.3

their supplier could use information on quantity, range andprice of goods ordered to inform its own retail strategy.

Following publication of our draft report:
9.98.1

Woolworths NZ stated that it has an open mind toward voluntarily
negotiating commercial wholesale supply contracts with other grocery
retailers;1233 and9.98.2

Foodstuffs North Island and Foodstuffs South Island stated that they are
exploring how they could put together commercially attractive offers to
supply products to other grocery retailers.1234

Commerce Commission “Market study into the retail grocery sector – Draft report” (29 July 2021) at[9.39].
Woolworths NZ “Post conference submission on Market study into grocery sector”(24 November 2021) at [29.2].
Foodstuffs NI “Post conference submission on Market study into grocery sector” (3 December 2021)
at [4.2]; Foodstuffs SI “Post conference submission on Market study into grocery sector” (3 December2021) at [3.2].

400

9.99

These statements are predicated on establishing that there would be net benefits
from supplying groceries for resale, and only after other recommendations havebeen implemented without a resulting material improvement in competitive
conditions and/or after further engagement with the Commerce Commission or
government.

9.100

The benefits of vertical integration appear to be significant, and it appears thatthese, rather than technical difficulties associated with wholesale supply, are theprimary reason for the prevalence of vertically-integrated grocery retailers. The
information provided to us suggests that commercial wholesale is technicallyfeasible, although there will be costs in doing so. We note that Woolworths
Australia has recently entered the wholesale market.

9.101

Based on discussions with, and submissions from, stakeholders, we consider thatone (but not necessarily the only) feasible model for commercial wholesale supply
could involve:1235

9.102

1235

9.101.1

A separate wholesale unit with a sales and account team and separate
key performance indicators and financial reporting. This would be
supported by investment in ordering and inventory, customer
relationship management, and cost-to-serve systems and functions.

9.101.2

No separation of the buyer team. We accept submissions that there arelikely significant benefits in the end-to-end efficiencies and positive
customer outcomes of having a single, retail-facing, buying team.

9.101.3

No separation of logistics functions. We agree with submissions that it
would be important that existing distribution centre supply chain andlogistics processes were not disrupted, as this would create inefficiencies
and additional costs, and in some cases safety issues.

9.101.4

Information barriers between the wholesale unit and the rest of thebusiness.

This type of wholesale arrangement would not involve physical access by the accessseeker to the distribution centre. Orders could include the full range of products
stocked by the wholesaler’s retail arm, with the option, but no requirement, tostock wholesale-only products. Orders would be fulfilled by the wholesaler andwould involve a “full case” pick, rather than splitting boxes and setting out smaller
quantities.

[

].

401

9.103

9.104

As is discussed later in this chapter, potential customers have a clearly expressed
preference for an independent wholesale supplier, and have supported thepotential concerns outlined in our draft report. In particular, they are likely tocontinue to have concerns:
9.103.1

that purchasing from the major grocery retailers provides them withperformance and volume data which may undermine an independent
retailer’s ability to compete; and9.103.2

over the reliability of, and restrictions on, its supply arrangements, andthe potential for them to be cut off.

Addressing these concerns remains a hurdle to uptake of any commercial offer, but
given they are common commercial concerns, they do not seem insurmountable. It
is less clear whether any commercial offer will include something – such as price or
range – that is commercially attractive or enables direct competition.

We recommend some limited regulatory measures to facilitate commercial wholesale supply
9.105

Even if commercial arrangements are feasible, and potential customers are willingto purchase from a vertically-integrated wholesale supplier, there remains aquestion of whether the major grocery retailers would be incentivised to offer
wholesale supply on reasonable terms, absent the prospect of regulation.

9.106

We note Woolworths NZs’ views that it would be incentivised to make such acommercial offering work.1236 We agree that major grocery retailers would facesome incentive to make commercial supply work, to the extent that they haveinvested in wholesaling capabilities. However, such commercial incentives would
likely only exist to the extent that the return on investment in wholesale
capabilities was expected to exceed lost income as a result of greater retailcompetition.

9.107

To provide improved predictability and transparency for parties seeking
commercial wholesale supply, and to allow the government to monitor the extent
to which commercially attractive wholesale supply arrangements are developing,
we recommend some limited regulatory measures. This aligns with Woolworths
NZ’s submission that it would expect a grocery regulator to have some function in
relation to wholesale supply.1237

1236

1237

Woolworths NZ “Post conference submission on Market study into grocery sector”(23 November 2021) at [29.7.3].
Woolworths NZ “Post conference submission on Market study into grocery sector”(23 November 2021) at [29.7.2].

402

Recommendation 3A: Require the major grocery retailers to consider all requests forcommercial wholesale supply in good faith
9.108

As an overarching principle, we recommend that regulation provide that the major
grocery retailers must consider all requests for commercial wholesale supply ingood faith.1238

9.109

While there should be no regulatory obligation to agree to any request, werecommend that regulation provide that all requests for supply should be notified
to the grocery regulator, along with the outcome of any requests, and – in the casethat a request for supply is declined – a summary of the retailer’s reasons for
declining to provide supply.

Recommendation 3B: Require the major grocery retailers to put in place and disclose
principles and terms and conditions of wholesale supply
9.110

We also consider that some transparency over the rules, criteria or procedures
adopted by the major grocery retailers in considering such requests, as well as theirterms and conditions of wholesale supply, would be desirable. We recommend thatthe major grocery retailers be required to:9.110.1

put in place formalised rules, criteria and procedures for considering
requests for wholesale supply;

9.110.2

put in place standardised terms and conditions of wholesale supply, or,to the extent that particular terms and conditions (such as price) are notstandardised, put in place principles for determining how such terms andconditions will be decided; and9.110.3

provide these to the regulator, and to any person who requests them forthe purpose of considering or making a request for commercial
wholesale supply.

Recommendation 3C: Establish a formal dispute resolution mechanism for wholesale supply
disputes
9.111

1238

If our recommendations in relation to a grocery code of conduct (seeRecommendation 6 below) are accepted, and an appropriate dispute resolution
mechanism is created, we suggest that consideration be given to making thisservice available to resolve wholesale supply disputes. Much like supplierarrangements, the availability of fast, low cost, impartial dispute resolution is likely
to improve confidence in any wholesale arrangements.

This might involve, for example, acting honestly, reasonably, and not arbitrarily or capriciously.
Further discussion of the concept of good faith is included in relation to Recommendation 6.

403

9.112

We envisage that a dispute resolution mechanism could consider matters such aswhether the wholesale supplier considered requests for wholesale supply in goodfaith (particularly when it declines to provide supply), as well as other matters suchas disputes over order fulfilment or delivery. If it was found that the supplier did
not consider a request in good faith, it could be required to reconsider a request(and be subject to financial penalties or other remedies if it did not), but could not
be ordered to provide wholesale supply. To avoid costly and complex supply
disputes, we do not recommend that the dispute resolution mechanism extend to
the price or quantity of any actual or proposed supply agreement.

9.113

We also recommend that the dispute resolution body should be empowered toshare aggregated information on disputes with any grocery regulator. Reporting on
disputes will provide the regulator with greater insight into how well commercial
arrangements are operating. The regulator could then report to the Governmenton the success or otherwise of commercial wholesale agreements, including
making recommendations for further regulatory intervention, if it considered thatappropriate commercial arrangements were not being reached.

We do not recommend substantive access regulation at this time
9.114

Our recommendations outlined above are designed to increase transparency andpredictability regarding the development of commercial wholesale arrangements.
We consider that the measures proposed would be low cost, and unlikely to
discourage major grocery retailers from offering wholesale supply of groceries forresale.

9.115

However, while we are encouraged by the open mind that the major grocery
retailers have expressed regarding the development of commercial wholesale
supply arrangements, it is possible that attractive commercial wholesale supply
arrangements nevertheless do not develop. If this is the case, the transparency
mechanisms proposed above should alert the Government to this outcome andallow it to consider further regulation. Nevertheless, we have considered whether
more substantive intervention to facilitate wholesale supply should berecommended at the current time.

9.116

In our draft report, we consulted on the option of economic regulation designed toprovide access to groceries for resale. Access regulation comes in many forms,
including:
9.116.1

detailed regulation that seeks to base access terms on the accessprovider’s costs and an allowable return on its investments; or

9.116.2

lighter-touch regulation that avoids price or earnings control.

404

9.117

Although a number of submitters indicated they considered access to groceries forresale was important for competition, access regulation was generally notsupported. Generally, these submitters supported more significant interventions tocreate an independent wholesaler.1239

9.118

The submissions from the major grocery retailers have highlighted a number ofdifficulties with both types of access regulation. While some of the arguments
made by the major grocery retailers appear overstated, many appear wellgrounded. In particular, we would highlight:
9.118.1

The lack of any essential facility or natural monopoly characteristicmeans that grocery wholesaling is not the type of industry ordinarily
regarded as potentially amenable to such intervention.
9.118.1.1 Any regulation regime would be novel and unprecedented,
increasing the design and implementation cost – anduncertainty – arising from the regulation.1240 It would also
increase the risk of unintended consequences.
9.118.1.2 As there is no ‘monopoly asset’ involved, it is likely to be
more difficult to identify the precise boundaries of theregulated wholesale service, and what assets would be
required to provide that service.1241 Technological change andvertical integration mean the boundary between ‘wholesale’and ‘retail’ is increasingly indistinct.
9.118.1.3 The sector is more dynamic than many regulated sectors, andcertainly more diverse in its product offerings, increasing thecost and difficulty of regulation.1242

1239

1240

1241

1242

For example: Ernie Newman “Submission on Market study into grocery sector draft report”(26 August 2021) at 7; Comments from Night ‘n Day, Transcript of Grocery Market Study Conference –Day 6 (1 November 2021) at 5 (lines 1-5); Comments from Supie, Transcript of Grocery Market Study
Conference – Day 6 (1 November 2021) at 5 (lines 17-20); Comments from Tex Edwards, Transcript ofGrocery Market Study Conference – Day 6 (1 November 2021) at 4 (lines 32-35).
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [22.5.1].
Woolworths NZ "Post conference submission on Market study into grocery sector: Attachment 1 Peter Harris AO - Views on the Commerce Commission Draft Market Study Report on Grocery
Retailing in New Zealand” (25 November 2021) at [79].
Woolworths NZ "Post conference submission on Market study into grocery sector: Attachment 2 Henry Ergas AO -Comments on the recommendations for third party access by the CommerceCommission New Zealand” (25 November 2021) at [11]-[12].

405

9.119

9.118.2

Principles that might be necessary to implement a full regulatory accessregime, such as non-discrimination and equivalence, assume that theneeds of the independent grocery retailers are similar to those of the
major grocery retailers themselves, and that the service is to a degree“one-size-fits-all”.1243 Grocery wholesaling requirements are likely to varysignificantly, and require different services from the major grocery
retailers, meaning non-discrimination and equivalence may not beworkable principles for regulation.

9.118.3

Significant intervention could disrupt existing efficient vertical
integration efficiencies, operational efficiencies, efficiencies of scale andscope, dynamic efficiency, and introduce significant additional costs.1244
It may also reduce retail competition on price.1245 It will requiresignificant monitoring and regulatory oversight.1246

Given this, we do not recommend that substantive access regulation be imposed at
this time. There are a significant number of issues that would need to be resolved
before economic regulation would be feasible. Even if feasible, careful cost-benefit
analysis would be desirable, beyond that which is within the scope of our study.

We do not recommend operational or structural separation of retail and wholesale
9.120

As outlined above, we consider that there is a reasonable chance that greater
availability of wholesale supply will improve competition and outcomes for
consumers.

9.121

Above, we discuss options to improve the availability of wholesale supply from the
major grocery retailers. Our draft report also considered a number of options toimprove access to wholesale supply that is independent of the major grocery
retailers (to differing extents), such as:

1243

1244

1245

1246

9.121.1

operational separation of the major grocery retailers’ wholesale andretail businesses;

9.121.2

structural separation of the major grocery retailers’ wholesale and retailbusinesses, with or without divestiture; andWoolworths NZ “Submission on Market into grocery sector draft report” (10 September 2021) at[22.5.3]-[22.5.4].
Woolworths NZ "Post conference submission on Market study into grocery sector: Attachment 2 Henry Ergas AO - Comments on the recommendations for third party access by the CommerceCommission New Zealand” (25 November 2021) at [55]-[126].
Woolworths NZ “Post conference submission on Market study into grocery sector: Attachment 1 –Peter Harris AO – Views on the Commerce Commission Draft Market Study Report on Grocery
Retailing in New Zealand” (25 November 2021) at [79].
Woolworths NZ “Post conference submission on Market study into grocery sector: Attachment 1 –Peter Harris AO – Views on the Commerce Commission Draft Market Study Report on Grocery
Retailing in New Zealand” (25 November 2021) at [92].

406

9.121.3

facilitation of wholesale entry by the Government, such as by providing
funding following a contestable procurement process or entering into a
joint venture.

9.122

As discussed above, while we do recommend some limited regulatory measures,
we do not recommend a substantive regulatory wholesale access regime at this
time.

9.123

We received a range of views from stakeholders on the other options we proposed.
For example:

1247

1248

1249

1250

1251

9.123.1

The major grocery retailers, and consultants they commissioned, werestrongly opposed to operational or structural separation of wholesale
and retail businesses, including due to the practical difficulties associatedwith separation, potential loss of economies of scale and supply chain
resilience, and impacts on investment incentives, amongst otherreasons.1247

9.123.2

Coriolis has highlighted that Metcash is the only independent grocery
wholesaler in peer group countries, and that it is changing its businessmodel.1248 The concept of an independent wholesaler, Coriolis says, hasfailed and would not work in New Zealand.1249

9.123.3

Some existing retailers (Supie and Night n’ Day) have argued that an
independent wholesale grocery option is required. However, theirsubmissions did not offer evidence as to the feasibility of independent
grocery wholesale.1250

9.123.4

The NZFGC did not expressly advocate for operational or structural
separation, or facilitation of entry, but argued that “structural remedies
are not unprecedented, ‘radical’ or ‘extreme’ in the circumstances”.1251

For example: Woolworths NZ “Post conference submission on Market study into grocery sector”(23 November 2021) at [31]; Woolworths NZ “Post conference submission on Market study into
grocery sector: Attachment 1 – Peter Harris AO – Views on the Commerce Commission Draft Market
Study Report on Grocery Retailing in New Zealand” (25 November 2021); Foodstuffs NI “Postconference submission on Market study into grocery sector” (3 December 2021) at [282.3].
Corolis Ltd “Post conference submission on Market study into grocery sector” (18 November 2021)
at [43].
Corolis Ltd “Post conference submission on Market study into grocery sector” (18 November 2021)
at [45].
Comments from Night ‘n Day, Transcript of Grocery Market Study Conference – Day 6(1 November 2021) at 5 (lines 1-5); Comments from Supie, Transcript of Grocery Market Study
Conference – Day 6 (1 November 2021) at 5 (lines 17-20).
NZFGC “Post conference submission on Market study into grocery sector” (25 November 2021) at[3.23].

407

9.124

Taking into account our conclusions in previous chapters, informed by thesubmissions we have received, we do not consider operational or structural
separation (with or without divestment) of the major grocery retailers’ wholesale
and retail businesses (ie, vertical separation) to be necessary or desirable. This is fora number of reasons, including:
9.124.1

Our assessment is that any large potential competitors to the major
grocery retailers would largely seek to establish their own wholesale
supply (at least in the long term), rather than make use of the wholesale
supply of a separate wholesaler. This, and international evidence,suggests that it is unlikely that there would be sufficient demand tosupport the successful entry of an independent wholesaler without anassociated retail operation.

9.124.2

We accept the submissions of the major grocery retailers that there aresubstantial efficiencies associated with a degree of vertical integration in
respect of retail and wholesale operations. Without line-of-businessrestrictions preventing re-entry into wholesale markets, it is likely thatthe major grocery retailers would, in time, seek to re-establish theirwholesale functions, further limiting demand for the services of an
independent wholesaler. If line-of-business restrictions were imposed, it
is likely that this would have substantial implications for the efficienciesof the major grocery retailers’ operations.

9.124.3

We also accept that there would be a range of practical challenges andtransaction costs associated with operational or structural separation.

9.124.4

We consider that other options to improve competition that we haverecommended elsewhere in this chapter should be implemented andtested before considering whether other initiatives may be required.

We do not recommend proactive facilitation of wholesale entry at this time
9.125

It appears unlikely that demand from grocery retailers (excluding thevertically-integrated major grocery retailers) would form a sufficiently large
customer base to sustain entry by an independent wholesaler offering a full rangeof groceries. In addition to uncertainty around whether there would be sufficientdemand for an independent wholesaler, any procurement or joint venture process
would likely be complex, potentially expensive, and could present a high risk offailure. On this basis, we do not recommend proactive facilitation of wholesale
entry by Government at this time.

408

Recommendation 4: The next reviews of the Overseas Investment Act and Sale and Supplyof Alcohol Act should consider whether they unduly impede entry or expansion by grocery
retailers
Recommendation 4A: The next review of the Overseas Investment Act should consider its
impacts on grocery sector competition
9.126

9.127

Several parties have raised the impact of the Overseas Investment Act 2005 on theconditions of entry and expansion for foreign-owned grocery retailers. We
understand that recent changes to the Act have streamlined the regime andremoved the need for some transactions to seek approval. However, for thetransactions that still require approval, the regime could have impacts such as:
9.126.1

the delay associated with waiting for approval;

9.126.2

the uncertainty associated with the need for approval;

9.126.3

the legal and compliance cost associated with preparing an application;
and/or9.126.4

the cost of application fees.

As discussed in Chapter 6, the Overseas Investment Act is driven by a range ofpolicy considerations. Nevertheless, we recommend that, when the Act is next
reviewed, alongside any other matters driving the review, consideration is given towhether the residual impediments the Act may impose on entry or expansion byforeign-owned grocery retailers are justified by other policy considerations, and if
not, how these impediments could be reduced or removed.

Recommendation 4B: The next review of the Sale and Supply of Alcohol Act should consider
its impacts on grocery sector competition
9.128

As discussed in Chapter 6, some retailers have raised the potential for current
alcohol licensing laws to be a factor impacting on their ability to enter and expandin the retail grocery sector. In particular, the changes made by the Sale and Supplyof Alcohol Act 2012 restricted the types of premises in which alcohol may be sold.
As consumers value having a wide range of products in one place, the unavailabilityof alcohol in some existing or potential grocery stores may limit the ability of thoseretailers to effectively compete with the major grocery retailers.

409

9.129

We acknowledge that there are public policy reasons for restricting the types ofbusinesses which are licensed to sell alcohol, most notably to reduce the extent of
alcohol-related harm. We understand that the Minister of Justice has signalled his
intention to commence a review of the Sale and Supply of Alcohol Act thisparliamentary term.1252 We recommend that, when that review occurs, alongside
any other matters driving the review, consideration be given to whether the policy
considerations relating to restricting the availability of alcohol can be achieved in a
way that provides a more level playing field for grocery retailers. Options could
include either tightening current restrictions (such as by preventing the major
grocery retailers from selling alcohol), or loosening them (such as by allowing otherretailers to sell alcohol).

Recommendation 5: Monitor strategic conduct that affects the conditions of entry or
expansion
9.130

In Chapter 6, we discussed a range of conduct by suppliers and retailers which
could potentially affect the ability of new entrants or existing firms to source
products at competitive prices. This includes:
9.130.1

suppliers refusing to supply grocery retailers which set retail prices
below a certain level (either on their own accord or due to pressure fromother retailers);

9.130.2

supply arrangements affecting the terms on which suppliers can supply
to other parties, including exclusivity of supply agreements and bestprice clauses; and9.130.3

attempts at strategic acquisitions of actual or potential competitors.

9.131

We have distinguished this conduct from other terms and conduct between
retailers and suppliers (discussed below and in Chapter 8), as they primarily relate
to the conditions of entry and expansion, rather than issues of bargaining power.

9.132

All of this conduct is potentially subject to the Commerce Act 1986, andindependent of this study, the Commission will be alert to strategic conduct that
may breach the Act in the future. We note that the Commerce Amendment Billcurrently before Parliament contains amendments that will strengthen theCommerce Act’s prohibition against the misuse of market power, and could
potentially be used in relation to some forms of strategic conduct by major grocery
retailers in the future.1253

1252

1253

Rachel Thomas “Calls for urgent overhaul of laws to tackle NZ’s ‘British drinking culture’”(27 September 2021) https://www.stuff.co.nz/national/health/126499209/calls-for-urgent-overhaulof-laws-to-tackle-nzs-british-drinking-culture.
New Zealand Parliament “Commerce Amendment Bill” https://www.parliament.nz/en/pb/bills-andlaws/bills-proposed-laws/document/BILL_108304/commerce-amendment-bill.

410

We intend to further investigate refusals to supply due to low retail pricing
9.133

As discussed in Chapter 6, we are aware of examples of some suppliers refusing to
supply retailers where they are concerned that the retail prices being offered are
too low, or indicating that they are only willing to supply if a grocery retailer does
not undercut the retail prices set by other grocery retailers of the supplier’s
products. This may be due to:9.133.1

direct pressure from grocery retailers;

9.133.2

unilateral actions by suppliers, due to concern about the possible
response from major grocery retailers; or

9.133.3

unilateral action by suppliers for other reasons.

9.134

Refusal to supply due to low retail pricing could potentially breach sections 37 and
38 of the Act, which prohibit the practice of resale price maintenance. It could also
breach section 36 of the Act, to the extent that a refusal to supply reflects theinfluence of a major grocery retailer with substantial market power.

9.135

We have not enquired further into the types of conduct described above at thisstage. However, independent of this study, we intend to open an investigation into
compliance with the Act in respect of certain conduct that we have become awareof during the course of this study.

Recommendation 5A: Monitor the use of best price clauses
9.136

As discussed in Chapter 6, best price clauses can impede competition to the extent
that they prevent suppliers and retailers from freely bargaining over the price ofgoods to be supplied. In particular, they can act as a barrier to a supplier offering a
retailer lower prices for goods, on the basis that the supplier would then also need
to offer this (or potentially a lower) price to the retailer who they supply under thearrangement containing a best price clause.

9.137

However, they can also have pro-competitive rationales and efficiency benefits,
such as if a best price clause is used in conjunction with a commitment to buy acertain volume of goods. They also appear to be used relatively rarely in thegrocery sector. This conduct should also be distinguished from attempts to control
the retail (as distinct from wholesale) price of goods, as described above, which isless likely to have a pro-competitive rationale.

9.138

Best price clauses are already subject to section 27 of the Commerce Act, which
relates to anticompetitive agreements, where it can be established that such
clauses have the purpose, effect, or likely effect of substantially lessening
competition. We recommend that suppliers and retailers closely review thecompliance of any such clauses with the Commerce Act. Independent of this study,
if we identify any agreements that we consider may breach the Commerce Act in
the future, we may consider appropriate action utilising our Commerce Act
compliance and enforcement functions and powers at that time.

411

9.139

Given the potential impact of such clauses on the conditions of entry andexpansion, we also recommend that the government – via a new grocery sector
regulator (discussed below) – monitors the extent to which the major grocery
retailers make use of best price clauses. If there is increasing use of best priceclauses, or there is otherwise evidence that the use of these clauses is having anegative effect on the conditions of entry and expansion in the retail grocery
sector, the Government may wish to consider further regulatory intervention.

Recommendation 5B: Monitor the use of exclusive supply agreements
9.140

Exclusive supply agreements can, in some instances, impede entry or expansion,
particularly to the extent that they are negotiated in contracts with suppliers of‘must-have’ products. We have heard concerns from suppliers that they can berequested or imposed by retailers in situations where they are not sought by
suppliers.1254 We have also heard from competing retailers that exclusivity
agreements – whether in writing or otherwise – can have a material impact on theirability to obtain goods from key suppliers.1255

9.141

However, exclusive supply agreements can also be pro-competitive. We
understand that the justifications for exclusivity arrangements include that they
may be intended to reflect and recoup joint investment between retailers andsuppliers, that they can lead to greater promotional activity by retailers for
suppliers’ products, and that they can generally promote greater differentiation
between retailers.

9.142

Like best price clauses, exclusivity agreements are already subject to section 27 of
the Commerce Act. We recommend that suppliers and retailers closely review thecompliance of any such agreements with the Commerce Act. Independent of thisstudy, if we identify any agreements that we consider may breach the Commerce
Act in the future, we may consider appropriate action utilising our Commerce Act
compliance and enforcement functions and powers at that time.

9.143

As with best price clauses, we recommend that the government – via a new grocery
sector regulator (discussed below) – monitors the extent to which the major
grocery retailers make use of exclusive supply agreements. As above, if there isevidence that these agreements are having a negative effect on the conditions ofentry and expansion in the retail grocery sector, the Government may wish toconsider further regulatory intervention.

1254

For example, comments by NZFGC, Transcript of Grocery Market Study Conference – Day 7(2 November 2021) at 13.
For example, comments by Supie, Transcript of Grocery Market Study Conference – Day 7(2 November 2021) at 24.

1255

412

Strategic acquisitions are subject to the Commerce Act
9.144

As noted in Chapter 6, some submitters have raised historical strategic acquisitions(and attempts at strategic acquisitions) as impacting on competition in the grocery
sector. In the course of this study, we have not identified any recent or systemicacquisitions (or attempts) of a nature or scale that are sufficient to justify opening
an investigation into whether this conduct is likely to be in breach of the Commerce
Act 1986.

9.145

Any further attempted acquisitions would be subject to section 47 of theCommerce Act, as well as the clearance and authorisation regime set out insections 66 and 67. Given this, while we recommend that suppliers and retailers
closely review the compliance of any proposed acquisitions with the Commerce
Act, we do not recommend any specific interventions in respect of these matters.

Recommendations to improve competition for the acquisition of groceries
9.146

9.147

We consider that our recommendations to improve the conditions of entry andexpansion can be complemented through direct interventions in respect ofcompetition for the acquisition of groceries. This section discusses the following
recommendations:
9.146.1

Recommendation 6: Introduce a mandatory grocery code of conduct togovern relationships between the major grocery retailers and their
suppliers;

9.146.2

Recommendation 7: Consider a statutory authorisation or exception forcollective bargaining by grocery suppliers; and9.146.3

Recommendation 8: Amend the Fair Trading Act to strengthen thebusiness-to-business unfair contract terms regime.

Combined, we consider that these options are likely to constrain – albeit likely notremove – the major grocery retailers’ ability to use their strong negotiating position
to secure suppliers’ agreement to unfavourable contract terms. This should help
ensure that supply terms are not unduly impacting on suppliers’ ability to innovate
and produce high-quality goods for consumers, or leading to inefficient exit of themarket by suppliers.

413

Recommendation 6: Introduce a mandatory grocery code of conduct to govern
relationships between the major grocery retailers and their suppliers
9.148

We recommend that a mandatory code of conduct be introduced for grocery
retailers and their suppliers. There has been general support from submitters forthe introduction of a code of conduct.1256 A mandatory code would need to becontained in either primary or secondary legislation of some form.

9.149

As discussed in Chapter 8, for many suppliers, there are limited alternative options
available to them to sell their products other than to the major grocery retailers.
Those suppliers are significantly more dependent on retailers than the retailers areon those suppliers. As a result, those suppliers often have limited ability tonegotiate with the major grocery retailers.

9.150

This leads to an imbalance in bargaining power in many cases. This can result incost savings that are passed on to consumers. However, we consider the major
grocery retailers have the ability to use their strong negotiating position to:9.150.1

transfer costs and risks to suppliers, despite retailers being better placed
to manage them;

9.150.2

reduce transparency and certainty over terms of supply; and9.150.3

limit suppliers’ ability or incentive to provide favourable supply terms toother grocery retailers.

9.151

We have heard many examples which suggest that this is happening. Over time,
this type of conduct can lessen suppliers’ incentive and ability to innovate andinvest in ways that ultimately harm consumers. Most obviously, this could lead to
reduced production, reduced capacity, reduced product quality and fewer new
product offerings.

9.152

Suppliers have only been willing to approach us on a confidential basis, which
prevents the sharing of specific details with major grocery retailers. It is clear,
however, that some of these allegations are disputed, in some cases they may haveoccurred a number of years ago, and in any event may not involve all grocery
retailers equally.

1256

For example: Foodstuffs NI “Submission on Market study into grocery sector draft report”(10 September 2021) at [376]; Foodstuffs SI “Submission on Market study into grocery sector draft
report” (10 September 2021) at [371]; Woolworths NZ “Submission on Market study into grocery
sector draft report” (10 September 2021) at [7.2]; NZFGC “Submission on Market study into grocery
sector draft report” (26 August 2021) at [7.9].

414

9.153

We do not consider that necessarily means a code, or any specific part of it, is not
required:
9.153.1

the fact that the major grocery retailers may choose not to exercise theirstrong negotiating position does not mean that they do not have theability to do so;

9.153.2

a code of conduct will provide suppliers with greater certainty that they
will not be subject to these behaviours; and9.153.3a major grocery retailer that does not engage in these behaviours will
not be disadvantaged, avoiding a race to the bottom.

9.154

We acknowledge the risk that the introduction of a code of conduct could reduce
the ability of the major grocery retailers to negotiate fairly but firmly with suppliers,
and lead to higher prices for consumers. Our recommendations below are designed
to minimise this risk. In particular, many of the features of the proposed code
relate to procedural, rather than substantive, matters. We consider that thebenefits of a code in terms of providing more transparency and predictability, andbetter allocation of risk (with potential benefits in terms of a greater ability ofsuppliers to innovate and deliver high-quality goods) outweigh any risk of priceincreases or other poor outcomes for consumers.

9.155

We consider that the proposed provisions of the code – not least an overarching
duty of good faith – may support Māori suppliers to achieve some of theaspirations we have heard expressed by some Māori contributors in terms ofgreater access to retail distribution networks for Māori products. As with othersuppliers, it should address the concerns that we have heard from some Māori
contributors about the ability of the major grocery retailers to engage in conduct ortransfer risk to Māori suppliers that limits their ability to innovate and develop
high-quality products in the domestic market.1257 We recommend thatdevelopment of the code involves further consultation with Māori suppliers tounderstand whether they face different issues or have different aspirations thatshould be reflected in the code.

1257

For example, Rangitāne Tamaki nui-a-Rua Iwi “Post conference submission on Market study into
grocery sector” (25 November 2021) at [1c] and [1i]; Hoki-mai Chong “Post conference submission onMarket study into grocery sector” (25 November 2021) at 1.

415

A grocery code of conduct should be based on the provisions in the Australian Food andGrocery Code
9.156

Many of the concerns raised by suppliers with the Commission have beenaddressed in Australia through provisions in the Australian Food and Grocery
Code.1258 The United Kingdom has addressed similar concerns through a Groceries
Supply Code of Practice.1259 There is an opportunity for the development of a New
Zealand code to benefit from these codes, which have been in force for a numberof years.

9.157

One of our major grocery retailers, and a number of suppliers, operate in both
Australia and New Zealand. If our recommendation is accepted and a code of
conduct is to be adopted in New Zealand, we consider that, where there is a choiceof approach, the Australian approach should be preferred unless there is a goodreason not to.

Recommendation 6A: Supply relationships should be subject to an overarching principle ofgood faith
9.158

A grocery code of conduct should include an overarching principles-based
behavioural obligation to act in good faith, in line with the Australian Food andGrocery Code.

9.159

Good faith is not defined in the Australian Code. However, the Code lists a numberof factors that may be taken into account when deciding whether or not a retailer
or wholesaler has acted in good faith when dealing with a supplier.1260

1258

1259
1260

Australian Government “Competition and Consumer (Industry Codes—Food and Grocery) Regulation
2015” as amended.
UK Government “Groceries Supply Code of Practice” (4 August 2009).
For example, whether the retailer or wholesaler has:•
acted honestly;•
cooperated;•
not acted arbitrarily, capriciously, unreasonably, recklessly or with ulterior motives;•
not acted in a way that is retribution for past complaints and disputes;•
conducted their trading relationship with the supplier without duress;•
conducted their trading relationship with the supplier in a way that recognises the need forcertainty about the risks and costs of trading; and•observed any confidentiality requirements,
ACCC “Acting in good faith under the Food and Grocery Code”
https://www.accc.gov.au/business/industry-codes/food-and-grocery-code-of-conduct/acting-in-goodfaith-under-the-food-and-grocery-code.

416

9.160

Some parties suggested to us a distinction between an obligation to act in goodfaith, and a principle of fair dealing, as explained in the UK Groceries Supply Codeof Practice.1261 While these concepts are distinct, good faith is central to the UK
Code’s concept of fair dealing, and the Australian Food and Grocery Code has
expanded its concept of good faith to an extent where they substantially overlap.

9.161

If there is a desire to impose an additional obligation beyond the concept of goodfaith contained in the Australian code, we recommend doing so by further clarifyingor specifying the expectations of parties acting in good faith. This will provide
additional certainty, and assist in speedy resolution of disputes, when comparedwith a more broadly drafted obligation.

Recommendation 6B: A grocery code of conduct should include provisions to improve thetransparency of supply agreements
9.162

We consider that a code should set requirements aimed at improving the up-front
transparency of the terms of supply. Ambiguity in the terms of supply increases thelikelihood of disputes, and makes it more difficult for suppliers to understand andenforce their rights under any supply agreement.

9.163

To ensure parties are clear about their rights and obligations, we recommend acode includes a requirement that all agreements between major grocery retailers
and suppliers, including any variations, must be:

9.164

1261

9.163.1

recorded in writing;

9.163.2

written in clear and concise language;

9.163.3

kept by the retailer for the duration of the agreement, and a period
afterwards; and9.163.4

provided to the supplier.

To ensure that areas of common dispute, or areas that may significantly affect therights and obligations of the parties, are subject to agreement in advance, we also
recommend that some specified matters be required to be covered in all supply
agreements. These should include:
9.164.1

any quantity standards (such as minimum supply volumes);

9.164.2

any quality standards;

9.164.3

any delivery requirements set by the retailer;

The Code provides that fair dealing means that a retailer must at all times deal with its suppliers fairly
and lawfully. Fair and lawful dealing will be understood as requiring the retailer to conduct its trading
relationships with suppliers in good faith, without distinction between formal or informal
arrangements, without duress and in recognition of suppliers’ need for certainty as regards the risks
and costs of trading, particularly in relation to production, delivery and payment issues.

417

9.164.4

when groceries may be rejected;

9.164.5

the maximum period for payment; and9.164.6

circumstances when payment may be withheld, or deductions made.

Recommendation 6C: A grocery code of conduct should prohibit or limit a range of conduct
9.165

A grocery code of conduct should also identify any specific behaviours that should
not occur or should occur only in defined circumstances.

9.166

We suggest that consideration be given to including limits on matters including, but
not necessarily limited to:

1262

1263

9.166.1

Unilateral variations of the terms of supply, including the imposition of
additional costs or discounts. If these are to be permitted at all, theyshould only occur where the ability to do so is provided for in theagreement, should require reasonable notice, and should be reasonable
in the circumstances having regard to the benefits, costs and risks to the
supplier and retailer.

9.166.2

Retrospective variations of the terms of supply, including requests for
additional payments outside of the original terms. We consider
retrospective variations are unlikely to be justifiable, and consideration
should be given to their prohibition.

9.166.3

Payments for the major grocery retailers’ business activities or costs,
such as promotional funding or merchandising. As discussed in Chapter
8, promotional funding and payments for merchandising appear to be a
relatively entrenched feature of the retail grocery sector, and they canbe efficient in some circumstances. Prohibiting such payments entirely
would likely simply result in suppliers being paid a lower list price for
their products. However, as both retailers and suppliers can benefit fromboth promotional activity and fully-stocked shelves, there is a risk that
suppliers are expected to fund a disproportionate share of retailers’
benefits from such activities. Given this, we consider that such payments
should only be permitted when they are reasonable in thecircumstances, having regard to the benefits and costs to suppliers andretailers. We anticipate that guidance will be required as to when suchpayments are reasonable.

9.166.4

Payments for shrinkage or wastage.1262, 1263 We consider that payments
by a supplier to a retailer for shrinkage should be prohibited. Payments
for wastage should only be permitted in circumstances where thesupplier bears responsibility for the loss.

Shrinkage means a loss of grocery products that occurs after a retailer or wholesaler has taken
possession of them and arises from theft, other loss or accounting error.
Wastage means groceries that are unfit for sale.

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9.167

9.166.5

Discrimination on ranging and shelf allocation. Retailers should apply
the same product ranging and shelf-space allocation principles tosuppliers’ products and their own private label products.

9.166.6

The circumstances in which a major grocery retailer can delist a
supplier’s products. A code of conduct should address both thecircumstances in which this may occur, and the process that should be
followed.

We also consider that the code should incorporate protections for the confidential
information and intellectual property of suppliers, to address supplier concerns
about conduct such as their information and intellectual property being sharedwith the major grocery retailers’ private label divisions. This will ensure disputes
over these matters are able to be dealt with through the code dispute resolution
mechanisms where appropriate.

Separate provisions relating to fresh produce could be included in a code
9.168

The perishable nature of fresh produce creates some specific problems for fresh
produce suppliers. In particular:
9.168.1

different terms may be required, or different industry practices mayneed to be accommodated;

9.168.2

suppliers of fresh produce are particularly vulnerable to last-minute
renegotiation; and9.168.3

rapid dispute resolution will be essential.

9.169

A code of conduct could include provisions specific to fresh produce, in areas where
this would be desirable.

9.170

We note that a separate Horticulture Code of Conduct has been produced inAustralia. The Horticulture Code covers contracts between growers and merchants
or agents (not retailers). Although the Horticulture Code does not directly cover
relationships between growers and retailers, some of its principles may be relevant.

9.171

Consideration should be given to the terms of the Horticulture Code to see whether
matters relevant to fresh produce should be included in any New Zealand grocerycode of conduct.

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A grocery code of conduct should be mandatory
9.172

We consider that a code of conduct should be mandatory, to ensure sufficiently
wide coverage across grocery retailers in New Zealand. A mandatory code issupported by all of the major grocery retailers.1264

9.173

If a code was voluntary, one or more of the major grocery retailers, or any new
entrants, may not sign up to it, or may withdraw from the code. This would likely
undermine the effectiveness of a code. In particular, it is possible that market
participants, including new entrants, may respond to enhanced competition byseeking to apply greater pressure to suppliers. A mandatory code would help toprevent this from happening.

9.174

In reaching this view, we acknowledge the Australian Food and Grocery Code is, on
its face, voluntary. However, the Commonwealth Government has expressed viewson who should agree to be bound by the code, and we understand that this has
resulted in an expectation with similar effect to a mandatory code.1265

A grocery code of conduct should apply to the major grocery retailers, and all suppliers
9.175

We consider that the code should apply to the grocery retailers who are most likely
to have a significant bargaining power advantage over their suppliers. At present,
we consider that Foodstuffs North Island, Foodstuffs South Island, and Woolworths
NZ, have – in general – the greatest bargaining power over their suppliers. The
NZFGC has indicated that it agrees with this view.1266

9.176

Some stakeholders have argued that a wider range of grocery retailers should becovered by a code of conduct.1267 We agree that other retailers should be covered,to the extent that they develop significant bargaining power in relation to their
suppliers over time. While there is no single proxy for bargaining power, weconsider that annual grocery revenue is likely to be the most appropriate thresholdfor determining coverage of the code. The UK Groceries Supply Code of Practiceuses an annual grocery turnover threshold to determine who it applies to, and theAustralian Commonwealth Government’s view on who should agree to be boundby the Australian Food and Grocery Code was expressed in terms of revenue ormarket share.

1264

Comments by Woolworths NZ, Transcript of Grocery Market Study Conference – Day 3(26 October 2021) at 10; Comments by Foodstuffs NI, Transcript of Grocery Market Study
Conference – Day 3 (26 October 2021) at 12; Comments by Foodstuffs SI, Transcript of GroceryMarket Study Conference – Day 3 (26 October 2021) at 8.
Transcript of Grocery Market Study Conference – Day 3 (26 October 2021) at 16 (line 30) to 17(line 9).
Comments by NZFGC, Transcript of Grocery Market Study Conference – Day 3 (26 October 2021) at
14-15.
For example, comments by Woolworths NZ, Transcript of Grocery Market Study Conference – Day 3(26 October 2021) at 13.

1265

1266

1267

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9.177

In determining the application of the code, a decision would need to be made as towhether the code applied on a whole of business basis, or whether the annual
grocery revenue threshold applied on a store-by-store basis. We note that the
major grocery retailers have indicated a willingness to be covered on a whole ofbusiness basis.1268

9.178

We acknowledge that not all suppliers will require the protections offered by acode of conduct. However, there is likely to be limited downside to broadprotections:

9.179

9.178.1

even large suppliers rely on the major grocery retailers to stock theirproducts, and as such may still often be in a weaker relative bargaining
position;

9.178.2

many of the proposed provisions of the code are procedural, rather thansubstantive, and are therefore arguably appropriate to apply to larger
suppliers; and9.178.3

there could be practical difficulties in designing thresholds or screensthat identify those firms who have similar or greater bargaining power tothe major grocery retailers.1269

We therefore consider that the code should apply to all suppliers. Our
recommendations above regarding the content of a code are designed with theintent of avoiding undermining the ability of the major grocery retailers tonegotiate firmly but fairly with suppliers.

A grocery code of conduct should be determined by Government in consultation withindustry and Māori
9.180

We recommend that a grocery code of conduct be determined by Government, in
consultation with retailers, suppliers, and Māori, rather than set through industry
self-regulation.

1268

Comments by Woolworths NZ, Transcript of Grocery Market Study Conference – Day 3(26 October 2021) at 13; Comments by Foodstuffs NI, Transcript of Grocery Market Study
Conference – Day 3 (26 October 2021) at 21; Comments by Foodstuffs SI, Transcript of GroceryMarket Study Conference – Day 3 (26 October 2021) at 23.
For example, while a maximum revenue threshold could be set, decisions would need to be madeabout whether this was on the basis of a supplier’s total sales, sales to the major grocery retailers,or sales to each grocery retailer individually. As the major grocery retailers have thousands ofsuppliers, a maximum revenue threshold could also create practical issues for the major grocery
retailers in determining which of their suppliers are protected by the code.

1269

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9.181

It will be important that any code of conduct is workable for the parties that are
required to apply it. However, we do not recommend that the code be developed
by industry. Suppliers lack confidence in the current supplier charters, which werenegotiated by industry. To the extent there is a significant imbalance in bargaining
power, there is a real risk that the outcome of industry negotiations would further
reflect any imbalance in bargaining power and represent a minimal improvementon the current position.

Recommendation 6D: Establish a formal dispute resolution mechanism for grocery code of
conduct disputes
9.182

A code of conduct should include a formal mechanism to resolve disputes between
retailers and suppliers. A code dispute resolution mechanism will not prevent
disputes being resolved directly between a retailer and a supplier. It should,
however, provide access to an independent decision maker for disputes that are
not able to be resolved in this way.

9.183

We consider that a dispute resolution mechanism should, to the extent possible,
have the following attributes:
9.183.1

Independence. To provide suppliers with confidence in the process, thedispute resolution mechanism should be independent of, and unable to
be influenced by, the major grocery retailers.

9.183.2

Accessible and affordable. Cost should not be a barrier to raisingdisputes, particularly for small suppliers.

9.183.3

Timely. Feedback from those involved in administering and reviewing
the UK and Australian codes suggests that the speed of resolution is
crucial.

9.183.4

Informed by specialist expertise. A specialist adjudicator with industry
experience and/or commercial credibility is likely to be desirable.

9.183.5

Confidentiality. To avoid fears of retribution, the identity of suppliers
raising disputes should remain confidential.

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9.184

There may, in practice, be trade-offs between some of these attributes. Australia
and the UK have taken different approaches to each other, and over time, when
implementing their dispute resolution model. Australia, for example, has recently
introduced changes to its Code dispute resolution mechanism through theintroduction of Code Arbiters, backed by an Independent Reviewer.1270 The
Australian Independent Reviewer has noted that it may be too early to tell if thechanges to dispute resolution mechanisms are working as intended, with only four
complaints being referred to Code Arbiters in the 2020/21 reporting period.1271

The grocery code of conduct should be monitored and enforced by a grocery regulator
9.185

Where an industry is characterised by significant imbalances in bargaining power,
and there is the potential for retaliation against suppliers who make complaints,
self-enforcement and dispute resolution processes alone are unlikely to be
sufficient. This is further reinforced by the high cost of, and time taken to conclude,
civil litigation in New Zealand, and the disparity of resources between some
suppliers and major grocery retailers.

9.186

In addition to any dispute resolution body, we consider it will be necessary toestablish a regulator with appropriate powers and resources to monitor compliancewith the code, and undertake enforcement action where appropriate. We expectthat this regulator would generally take action in respect of systemic
non-compliance with the code, rather than in respect of individual disputes. This
regulator could also have a range of other responsibilities in relation to the grocery
sector, which we discuss later in this chapter.

1270

ACCC “Changes to the Food and Grocery Code” https://www.accc.gov.au/business/industrycodes/food-and-grocery-code-of-conduct/changes-to-the-food-and-grocery-code.
Under this model:•
Code Arbiters are appointed by retailers subject to the Code, but must not be engaged by theretailer in any other capacity, and may not be unduly influenced by the retailer.
•
Code Arbiters are responsible for investigating and proposing a resolution to disputes orcomplaints, and have authority to enter into an agreement on the behalf of a retailer orwholesaler.
•
Arbiters need to take all reasonable steps to conclude complaints within 20 business days.
•
Matters referred to a Code Arbiter remain confidential, except with the supplier’s explicit
consent, or where the identity needs to be disclosed to put in place a remedy.
•
The Independent Reviewer may review Code Arbiters’ processes in dealing with complaints,
identify and address emerging and systemic issues in the grocery supply chain relating to theoperation of the Code, and publish non-binding guidance material relating to compliancewith the Code.
•Suppliers can also seek independent mediation or arbitration of a dispute, outside of theCode Arbiter or Independent Reviewer process.
Food and Grocery Code Independent Review “Annual Report 2020-21” (2021), available at:https://treasury.gov.au/sites/default/files/2021-11/p2021-229034_0.pdf.

1271

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9.187

Monitoring of compliance and the publication of summary analysis is likely to
incentivise compliance and ensure that any enforcement action is able to beappropriately targeted. It is also likely to assist in any periodic review of the code.
We also recommend that there be an ability for the dispute resolution body toshare aggregated information with the regulator, to support the regulator’scompliance and enforcement activities.

9.188

We recommend that appropriate enforcement mechanisms be provided to
improve compliance with a code of conduct. This could include civil pecuniary
penalties to deter breaches of the code, and the ability to order payment ofcompensation to those affected by any breach of the code.

9.189

We also suggest that consideration be given to the protection of whistle-blowers
and complainants, including through the inclusion of anti-retaliation measures.
These may assist in bringing conduct to the attention of the dispute resolution bodyand the regulator.

Recommendation 7: Consider a statutory authorisation or exception for collective
bargaining by grocery suppliers
9.190

Collective bargaining in a product market involves two or more competitors jointly
negotiating with a common supplier or customer about terms and conditions ofsupply, which may include price. This may involve appointing a single
representative, such as an industry association, to act on their behalf innegotiations.

9.191

Small businesses can sometimes be better off negotiating as a group. They may beable to negotiate more efficiently with larger businesses and may be able toachieve better terms and conditions, than they can on their own. Larger businesses
may also benefit from collective bargaining, particularly where it reduces theircosts in dealing with individual suppliers.

9.192

In the retail grocery sector, we consider that collective bargaining by suppliers
could have benefits in situations such as where a major grocery retailer intends tomodify non-price terms and conditions that are common to many suppliers. We
note that collective bargaining is also relatively common in relation to groups offresh produce suppliers.

9.193

As collective bargaining by suppliers involves an agreement between competitors,
there is a risk that any such agreement may breach competition laws. Suchagreements can, and have, been authorised by the Commission under theCommerce Act where they are likely to be of net public benefit. There are,however, costs in obtaining an authorisation, and these costs may discourage small
businesses from individually applying. In addition, the existing application-based
authorisation regime may not be the most efficient means of enabling conduct
when the issues being addressed exist across a sector.

9.194

In our draft report, we suggested that collective bargaining by small suppliers could
be authorised, or provided a statutory exception, on a class basis.

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9.195

We received mixed feedback on this recommendation:
9.195.1

The Food and Grocery Council, Vegetables New Zealand and Horticulture
New Zealand were supportive of enabling collective bargaining, although
did not express a clear view on the circumstances in which collective
bargaining would be used.1272

9.195.2

The major grocery retailers generally indicated that they considered theauthorisation process contained in the Commerce Act to be sufficient,and that a class authorisation would not be in the interests of consumers
and could raise a range of practical considerations.1273

9.195.3

The National Māori Authority noted the challenges individual Māori
suppliers face at present in terms of being disconnected when bargaining
with the major grocery retailers.1274

9.196

We remain of the view that collective bargaining by suppliers may have somebenefits, in some circumstances. Collective bargaining by suppliers may not be
sufficient, on its own, to overcome a significant imbalance between suppliers andmajor grocery retailers. It may, however, complement some of our otherrecommendations, including a grocery code of conduct. We therefore recommend
consideration of a statutory authorisation or exception for collective bargaining bygrocery suppliers.

9.197

The benefits associated with collective bargaining do not appear to be particularly
pronounced in, or limited to, the retail grocery sector. We note, for example, that
the Australian Competition and Consumer Commission (ACCC) has recently issued aclass exemption for collective bargaining that extends across the economy.1275
Given this, consideration could be given to whether there are benefits in allowing
for a form of authorisation or class exception for collective bargaining that extends
beyond the grocery sector.

1272

Comments by NZFGC, Transcript of Grocery Market Study Conference – Day 3 (26 October 2021) at
41; Vegetables New Zealand and Horticulture New Zealand “Submission on Market study into
grocery sector draft report” (26 August 2021) at [14].
Comments by Woolworths NZ, Transcript of Grocery Market Study Conference – Day 3(26 October 2021) at 10 and 41; Comments by Foodstuffs NI, Transcript of Grocery Market Study
Conference – Day 3 (26 October 2021) at 8; Comments by Foodstuffs SI, Transcript of GroceryMarket Study Conference – Day 3 (26 October 2021) at 9.
National Māori Authority “Post conference submission on Market study into grocery sector”(30 November 2021) at 5.
Australian Competition and Consumer Commission “Collective Bargaining Class Exemption”(3 June 2021), available at:https://www.accc.gov.au/public-registers/class-exemptions-register/collective-bargaining-classexemption-0.

1273

1274

1275

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9.198

Any such authorisation or exception would need to ensure that:
9.198.1

The collective bargaining was limited to the businesses, andcircumstances, where it was likely to be beneficial. This would likely
include a maximum size for any business involved in collective
bargaining.

9.198.2

The collective bargaining did not permit, or facilitate, additional
conduct that would be likely to harm competition. This would include,
but not be limited to, cartel conduct such as price fixing.

9.198.3

It was transparent when collective bargaining was occurring. This would
allow the effect of any authorisation or exception to be monitored.

9.198.4

It can be tailored to circumstances as they arise. It would be desirable if
the authorisation or exception was able to be amended, to reflect any
identified concerns, unforeseen issues or changes in circumstances.

Recommendation 8: Amend the Fair Trading Act to strengthen the business-to-business
unfair contract terms regime
9.199

In August 2021, the Fair Trading Amendment Act 2021 received Royal Assent. From
August 2022, the Fair Trading Act will include a prohibition against unconscionableconduct and a business-to-business unfair contract terms regime.1276 These reforms
could potentially provide additional tools to address conduct of the kind reported
to us during our study.

9.200

The unconscionable conduct prohibition will be enforceable by the Commission andprivate parties. In Australia, the unconscionable conduct prohibition has been usedwith some success to address and deter unconscionable conduct by retailers
against suppliers.1277

9.201

The business-to-business unfair contract terms regime will apply to standard form
contracts that form part of a trading relationship with an annual value of less than$250,000 (including GST). Many suppliers to the major grocery retailers would havetrading relationships in excess of $250,000. However, the provisions will potentiallycover the standard form contracts entered into with the smallest suppliers who
may currently face the most significant imbalance in bargaining power and have an
inability to negotiate departure from standard form terms and conditions
presented on a ‘take it or leave it’ basis.

1276

Sections 6 and 7 of the Fair Trading Amendment Act 2021, respectively.
ACCC “Court finds Coles engaged in unconscionable conduct and orders Coles pay $10 million
penalties” (22 December 2014) https://www.accc.gov.au/media-release/court-finds-coles-engagedin-unconscionable-conduct-and-orders-coles-pay-10-million-penalties.

1277

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9.202

The principles-based nature of the unfair contract terms and unconscionability
provisions means they are potentially of wide application, but are inherently lesscertain than the specific provisions adopted in the UK and Australian codes ofconduct. We consider that this uncertainty, coupled with the application only tostandard form contracts and the annual value cap of $250,000 for the unfair
contract terms protections, means that – while useful – these provisions areunlikely to be a substitute for a code of conduct.

9.203

Unlike other provisions of the Fair Trading Act and the Commerce Act, both theexisting consumer and new business-to-business unfair contract terms provisions
are only able to be enforced by the Commission. They are also subject to a
‘two-step’ enforcement process, under which it is not an offence to include a termin a contract unless that term has previously been declared by a Court to be
unfair.1278

Recommendation 8A: Allow private action in respect of unfair contract terms
9.204

Any dispute between suppliers and retailers over unfair terms in a standard form
contract may form part of a larger dispute that could also relate to matters such as
misleading, deceptive, or unconscionable conduct. While private legal action may
be unlikely, for the reasons discussed above and in Chapter 8, we neverthelessconsider that the option should be available to suppliers in respect of unfair
contract terms, as it is for other matters. Given this, to provide greater incentives
for unfair terms to be proactively removed from grocery supply contracts, and to
improve consistency with the rest of the Act, we recommend that the Fair Trading
Act be amended to allow private action in respect of unfair contract terms.

Recommendation 8B: Simplify the mechanism for imposing penalties and other remedies inrelation to the use of unfair contract terms
9.205

1278

We also recommend that the provisions for unfair contract terms be amended (atleast insofar as they apply to grocery supply contracts), so that the prohibition
relates to the inclusion of terms that meet the definition of being unfair, rather
than only terms that have previously been declared to be unfair. This would mean
that, if a Court found that there was a contravention of the unfair contract terms
provisions, it could immediately impose penalties or other remedies, rather than
only if the party continued to include or rely on such terms. This could beaccompanied by a defence if, for example, a person had reasonable grounds tobelieve a term was not unfair.

This is because the prohibitions on unfair contract terms in the Fair Trading Act 1986 specifically relate
to terms that have previously been declared to be unfair. This differs from most other prohibitions in
the Fair Trading Act and Commerce Act, which relate to conduct generally, not solely conduct that has
previously been subject to a court declaration.

427

9.206

We note that the Government has already signalled an intent to consider this andRecommendation 8A in the future.1279

Recommendation 8C: Consider raising the transaction value cap for unfair contract terms
9.207

As discussed above, at present many suppliers will not be covered by thebusiness-to-business unfair contract term provisions, as the value of their trading
relationships with the major grocery retailers will exceed $250,000 per annum. We
recognise that the intent of the transaction value cap as provided for in the Fair
Trading Amendment Act was to avoid interfering in high-value, ‘strategic’ contracts
between businesses. However, in the context of the retail grocery sector, there arelikely to be many trading relationships with a value exceeding $250,000 per annum
where the supplier nevertheless still faces a substantial imbalance in bargaining
power with the major grocery retailers.

9.208

Consequently, the Government may wish to consider whether there would be
benefit in raising the transaction value cap for the business-to-business unfair
contract terms provisions (at least insofar as they apply to grocery supply
contracts), to increase the proportion of suppliers who benefit from theprotections. We consider that other features of the regime, in particular the factthat the protections only apply to standard form contracts that have not been
subject to ‘effective negotiation’, may be sufficient to ensure that the unfair
contract terms provisions do not inadvertently protect suppliers with a high degreeof bargaining power.

We will consider using our compliance and enforcement functions
9.209

Independent of the outcomes of this study, we will continue to provide guidanceand consider the appropriate use of the full range of our investigation andenforcement tools in relation to unfair business-to-business standard form
contracts and unconscionable conduct.

Recommendations to improve the ability of consumers to make informed
decisions
9.210

Well-functioning markets rely on consumers having an ability to makewell-informed decisions and switch to suppliers who best meet their needs.

9.211

This section discusses the following measures to improve outcomes for consumers
and enhance competition between the major grocery retailers:

1279

9.211.1

Recommendation 9: The major grocery retailers should ensure theirpricing and promotional practices are simple and easy to understand;9.211.2

Recommendation 10: Mandate the consistent display of unit pricing;

Office of the Minister for Small Business and Office of the Minister of Commerce and Consumer
Affairs “Unfair Commercial Practices: Policy Decisions” (24 July 2019) at [34], available at:https://www.mbie.govt.nz/dmsdocument/6621-unfair-commercial-practices-policy-decisionsproactiverelease-pdf.

428

9.212

9.211.3

Recommendation 11: The major grocery retailers should ensuredisclosure relating to loyalty programmes and data collection and use
practices is clear and transparent; and9.211.4

Recommendation 12: The major grocery retailers should cooperate withprice comparison services.

We expect that these recommendations, several of which are directed at the major
grocery retailers, should result in consumers having better tools to make more
informed comparisons and purchasing decisions, and improve consumer
confidence. This in turn should enhance competition between the major grocery
retailers.

Recommendation 9: The major grocery retailers should ensure their pricing andpromotional practices are simple and easy to understand9.213

As discussed in Chapter 7, the major grocery retailers make use of a range ofpromotional practices, and provide a range of information to consumers. The useof short-term promotional pricing is related to the use of promotional funding by
suppliers and retailers, as noted in Chapter 8.

9.214

Competitive pricing and the provision of information to consumers are generally
beneficial. However, where the promotional mechanism or information provided isconfusing, it may make it harder for consumers to make informed decisions.

9.215

In our view, the pricing and promotional practices and materials used by the major
grocery retailers can make it more difficult for consumers to make meaningfulcomparisons between offers and products. This is particularly the case wheremultiple pricing and promotional mechanisms are used frequently and often in
combination with one another.

9.216

For example, New World and Countdown currently use at least four pricing andpromotional tickets. The same style ticket may be used for both a “was/now”
promotion and a ‘multi-buy’ or an ‘everyday low price’ offering may also be part ofa multi-buy offer. Feedback we have received from consumers suggests they findsuch practices confusing, and that easy-to-understand pricing and promotional
mechanisms can help consumers to make better purchasing decisions.

9.217

To address these issues, we recommend that the major grocery retailers ensurethat their pricing and promotional practices and materials are simple and easily
understood by consumers. This could include:
9.217.1

ensuring that the number of different promotional mechanisms and theiruse in combination does not result in consumer confusion;

9.217.2

using different tickets for different mechanisms to clearly indicate thetype of mechanism being used;

9.217.3

ensuring that the usual price is accurate and consistently and clearly
displayed alongside the promotional price; and429

9.217.4
9.218

ensuring that member-only discounts are clearly labelled and easily
distinguishable from other pricing and promotional mechanisms.

As discussed in Chapter 7, the major grocery retailers have all indicated that they
have already, or are in the process of, reducing the frequency of their short-term
promotions and moving towards a greater proportion of products with ‘everyday
low pricing’. In addition, Foodstuffs NI has indicated that it intends to reduce thenumber of different promotional mechanisms used at its New World and
PAK’nSAVE stores.

We do not recommend specific regulation of pricing or promotional practices at this time
9.219

We have considered whether other interventions may be required, such as
sector-specific regulation regarding the use of promotional mechanisms or
frequency of discounting. However, on balance, we do not recommend sectorspecific regulatory intervention in relation to promotional pricing at this time.

9.220

While we consider that some level of voluntary simplification of promotional
mechanisms is likely to promote competition and improve outcomes for
consumers, there is a risk that prescriptive regulation of promotional mechanisms
could have negative impacts for consumers. For example, while requiring major
grocery retailers to shift entirely to an ‘everyday low price’ model could result inthe ‘usual’ price of many products reducing, it could also result in consumers
missing out on genuine savings during promotional periods. It could also limit
innovation and the extent to which retailers compete through promotions.

Pricing and promotional practices are subject to the Fair Trading Act 1986
9.221

While we do not recommend sector-specific regulation of promotional practices atthis time, we do recommend that the major grocery retailers closely review thecompliance of their pricing and promotional practices with the Fair Trading Act
1986. Independent of this study, the Commission will continue to consider and takeaction under the Fair Trading Act 1986 where appropriate in response tocomplaints it receives about the pricing and promotional practices of the major
grocery retailers. As discussed in Chapter 7, the Commission will also continue toconsider the scope of guidance on the Fair Trading Act that may assist businesses
engaged in price promotions in relation to grocery products, and across the retailsector.

Recommendation 10: Mandate the consistent display of unit pricing
9.222

As noted in Chapter 7, consistent unit pricing can help consumers compare theprice of goods within and between retailers. Even when not directly comparing
products and retailers, clear and accurate unit pricing information can help
consumers to develop perceptions of value over time which in turn help them todecide where to shop to best meet their needs.

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9.223

Where unit pricing information is not consistently available or cannot easily beassessed and acted upon by consumers, they may be less able to make informed
decisions and less likely to shop around. This can result in a softening ofcompetition between grocery retailers.

9.224

Unit pricing is mandated in Australia and the European Union.1280 While unit pricing
is not currently mandatory in New Zealand, it is used to a reasonable extent by the
major grocery retailers. It is not, however, used consistently.

9.225

We consider that consistent use of unit pricing would assist consumers to makeinformed decisions and – at the margin – help promote both inter-brand and interretailer competition. There was relative consensus among submitters to our draft
report, and participants at our conference, that regulation of the display of unit
pricing would be beneficial.1281

9.226

Given this, we recommend that certain grocery retailers be required to display unit
pricing in a specified and consistent format.1282 We consider that the Australian
Code is a useful starting point for such regulations. We recommend that:

1280

1281

1282

9.226.1

Minimum standards regarding display be specified. For example, inAustralia, the unit price for a grocery item must be prominent, legible,
unambiguous, and in close proximity to the selling price for the grocery
item.

9.226.2

Standardised units of measurement be specified for each category of
products to be covered by the requirements. For example, in Australia,
grocery items sold by weight must display unit prices per 100 grams,
while grocery volumes sold by volume must display unit prices per 100
millilitres, unless otherwise specified.

ACCC “Unit Pricing Code” https://www.accc.gov.au/business/industry-codes/unit-pricing-code;
European Commission “Price indication directive” https://ec.europa.eu/info/law/lawtopic/consumer-protection-law/unfair-commercial-practices-law/price-indication-directive_en.
Comments by Woolworths NZ, Transcript of Grocery Market Study Conference – Day 2(22 October 2021) at 32-33; Comments by Foodstuffs NI, Transcript of Grocery Market Study
Conference – Day 2 (22 October 2021) at 33; Comments by Foodstuffs SI, Transcript of GroceryMarket Study Conference – Day 2 (22 October 2021) at 33; Comments by National Council of
Women New Zealand, Transcript of Grocery Market Study Conference – Day 2 (22 October 2021) at
34; Comments by Consumer NZ, Transcript of Grocery Market Study Conference – Day 2(22 October 2021) at 34-35; Comments by Ian Jarratt, Transcript of Grocery Market Study
Conference – Day 2 (22 October 2021) at 35.
This could be done as a consumer information standard under the Fair Trading Act, or throughregulations under the same legislation that is used to put in place a code of conduct and/or otherrecommended interventions.

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9.226.3

Some product categories be exempted from a requirement to display aunit price, where the unit price would not provide useful information(for example, gift cards, magazines, and flowers). This aligns with theapproach taken in Australia, the major grocery retailers’ current
practices, and submissions on our draft report. Generally, we
recommend that only grocery products be included, to avoid a wide
range of products being included if ‘big box’ retailers such as The
Warehouse were to be covered by the provisions (see below).

9.226.4

The requirements apply to in-store display and advertising in print
media and online where the selling price is displayed, but not television,
radio, and other video or audio content. This is broadly consistent with
the EU Directive, UK legislation, and the Australian Code.

9.226.5

An appropriate transitional period be provided before compliance ismandatory, to ensure necessary retailer systems can be implemented.
For example, Foodstuffs NI has told us that more than two thirds of its
Four Square stores cannot currently offer unit pricing, as they do nothave appropriate software.1283

9.226.6

There be an appropriate monitoring and enforcement regime, including
penalties for non-compliance. The consumer information standard
regime under the Fair Trading Act 1986 already provides a means ofregulation and enforcement of information requirements. If a different
regulatory mechanism is used, the Fair Trading Act’s enforcement
framework could be carried across to this mechanism.

Both online and physical retailers above an annual grocery revenue threshold should be
subject to unit pricing requirements
9.227

Following the publication of our draft report, we received a range of views from
submitters about which retailers any unit pricing requirements should apply to.
Australia’s Unit Pricing Code applies to online retailers, and grocery retailers withmore than 1000 square metres of floor space, provided that they sell products fromall of 11 specified categories of food-based grocery items.1284

9.228

We received submissions that the scope of application of any New Zealandrequirements should be broader than the scope of the Australian Unit Pricing Code,to encompass a wider range of retailers.1285 On the other hand, we also heard
concerns that the inclusion of smaller retailers would create significant additionalcosts and impact on conditions of entry and expansion.

1283

Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[390].
These are: bread, breakfast cereal, butter, eggs, flour, fresh fruit and vegetables, fresh milk, meat,
rice, sugar, and packaged food (other than food already mentioned).
For example: Comments by Woolworths NZ, Transcript of Grocery Market Study Conference – Day 2(22 October 2021) at 32-33; Comments by Foodstuffs NI, Transcript of Grocery Market Study
Conference – Day 2 (22 October 2021) at 8.

1284

1285

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9.229

We recommend that retailers (both physical and online) be covered by unit pricing
requirements if they meet a minimum threshold in terms of annual grocery
revenue. A decision would need to be made about whether the minimum annual
threshold was at store level or group level. This could be influenced by factors suchas the scope of shared systems.

9.230

The major grocery retailers submitted, and we agree, that there should be aminimum threshold before retailers are required to comply with the code. This is toensure the code does not place disproportionate compliance costs on smaller
retailers and impact on the conditions of entry and expansion in the retail grocery
sector. We understand that both physical and online grocery retailers would facecompliance costs associated with unit pricing regulation. A revenue threshold –unlike the minimum floor space requirement used in Australia – would beapplicable to both physical and online retailers.

9.231

We considered whether grocery retailers should also need to sell a specified rangeof grocery products to be subject to a code, as in Australia. However, we consider
that application of the Australian Unit Pricing Code may be too narrow, and would
risk excluding retailers for which consumers could benefit from their inclusion. For
example, under the Australian Code, if a retailer does not sell meat, or fresh fruitand vegetables, it would not be required to display unit pricing. We think that agrocery revenue threshold is likely to be sufficient to limit coverage to where it ismost appropriate.

9.232

While we do not make a recommendation as to the specific annual revenue
threshold that should be employed, we consider that it may be appropriate for thethreshold to be lower than the threshold specified for any grocery code of conduct(discussed above). This is because unit pricing is about improving the availability of
information for consumers, and is likely to have benefits regardless of which
grocery retailer is providing this information. In contrast, a grocery code of conduct
is predominantly about addressing imbalances in bargaining power between large
grocery retailers and their suppliers, and is unlikely to be necessary or have thesame benefits when extended to smaller grocery retailers.

Recommendation 11: The major grocery retailers should ensure disclosure relating toloyalty programmes and data collection and use practices is clear and transparent
Recommendation 11A: The major grocery retailers should ensure disclosure of loyalty
programme terms and conditions is clear and transparent
9.233

As noted in Chapter 7, even when provided with some information, mostconsumers do not appear to have a good understanding of how loyalty
programmes such as Onecard and Clubcard work, particularly regarding rates atwhich benefits or points can be earned by consumers and redeemed for various
rewards.

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9.234

We consider that complex rewards structures could make it harder for consumers
to identify the benefits available to them, and – at the margin – reduce pricecompetition by shifting consumer focus away from retail prices and towards
rewards. They also make it difficult to compare the benefits offered by a loyalty
programme with other discount promotions offered by the same, or other grocery
retailers.

9.235

We do not consider these programmes and practices to be a significant
impediment to competition at this time. However, we consider that there would be
benefits from the major grocery retailers ensuring that the presentation of the
reward structures offered by their loyalty programmes is clear, transparent andreadily understandable by consumers. This could include:
9.235.1

explaining in clear and direct language the difference between
transaction-based benefits and accumulated rewards;

9.235.2

clearly and prominently explaining the rate of reward consumers canearn through accumulating points and its value (i.e. the dollar spend
required to earn points and the dollar value of any corresponding reward
once earned);

9.235.3

ensuring that consumers are adequately notified if their accumulated
points are approaching expiry; and9.235.4

notifying consumers of any changes to their rewards structures.

9.236

Following the publication of our draft report, the major grocery retailers havealready indicated a willingness to address many of these issues voluntarily.1286

9.237

We note that the issues related to the disclosure of loyalty programme terms andconditions are unlikely to be limited to the retail grocery sector. In Australia, the
ACCC has carried out a cross-sector study into customer loyalty schemes.1287
Outside of retail grocery stores, the Commission has received a small number ofcomplaints about loyalty schemes in other sectors, including fuel, airlines, andgeneral retail. Given this, consideration could be given to whether there would be
benefits in carrying out a similar cross-sector review into loyalty programmes in
New Zealand. As part of this, the agency undertaking the review could consider theextent to which the major grocery retailers have altered their practices in line with
our recommendations above.

1286

1287

Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[391]; Foodstuffs SI “Submission on Market study into grocery sector draft report”(10 September 2021) at [386]; Woolworths NZ “Submission on Market study into grocery sector draft
report” (10 September 2021) at [10.1].
Australian Competition and Consumer Commission “Customer loyalty schemes review” (2019)https://www.accc.gov.au/focus-areas/market-studies/customer-loyalty-schemes-review.

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Recommendation 11B: The major grocery retailers should ensure disclosure of consumer
data collection and use practices is clear and transparent
9.238

As noted in Chapter 7, we also consider that many consumers do not understandhow their personal data is collected and used in their loyalty programmes. This isunlikely to significantly impact on competition overall at this time. However, it may
inhibit competition for consumers with strong data use or privacy preferences, if
consumers are not able to make decisions about their participation in loyalty
programmes that accurately reflect their data use and privacy preferences.

9.239

While the major grocery retailers disclose some of these practices, their privacy
policies lack specificity about who might be provided with consumer data and on
what basis. In addition, the terms and conditions are lengthy and difficult for
consumers to understand. Consumers may therefore not be aware of what they are
signing up for.

9.240

We recommend that the major grocery retailers ensure that they are providing
consumers with appropriate relevant information to make informed decisions. This
could include:9.240.1

ensuring that their explanation of the nature of consumer data collection
and use practices is sufficiently prominent, by:9.240.1.1 improving the accessibility, clarity and readability of privacy
policies and other related terms and conditions;9.240.1.2 clearly describing how consumer data is shared, with whom
and why; and9.240.1.3 minimising information overload by prominently presenting
the key aspects of their policies;

9.240.2

providing consumers with timely and prominent notice of any changes tothese practices and an option to cancel their membership if they do not
accept the changes;

9.240.3

clearly disclosing if consumers’ payment cards are being linked to theirloyalty membership to track purchasing behaviour when they do notscan their loyalty card, or otherwise ceasing this practice; and9.240.4

ensuring that consumers are provided with information about how tocancel their membership and about the status (including any future use)of any personal information that has been collected or will continue tobe collected after cancellation of a membership.

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9.241

As with loyalty programme structures, the major grocery retailers have committed
to voluntarily addressing many of these issues.1288

9.242

We consider that data collection and use practices could also form part of thescope of a cross-sector review into loyalty programmes, as described above.

Recommendation 12: The major grocery retailers should cooperate with price comparison
services
9.243

As discussed in Chapter 7, price comparison websites can promote competition bymaking it easier for consumers to make well-informed decisions when choosing
between goods and services. They can also create a risk of facilitating coordination.
However we consider that the risk of increased coordination is low in the retailgrocery sector, as a high degree of price monitoring is already undertaken byretailers.

9.244

New Zealand consumers do not appear to widely use third-party grocery pricecomparison services. There is currently one price comparison website for retailgrocery in New Zealand: FoodMe. FoodMe allows consumers to add groceries to abasket and compare the prices of that basket. However, at present it only has
pricing information on a limited range of products, and is not integrated with the
major grocery retailers’ online ordering systems. This means that consumers
cannot currently create a basket of items on FoodMe and then purchase them via aretailer. We understand that there are other New Zealand services in development,
and similar services in Australia.

9.245

As noted in Chapter 7, the wide range of products, the low ticket-value of mostindividual grocery items, and the requirements of different shopping missions, canmake meaningful price comparison for retail groceries considerably more difficult
than in other markets. However, it is possible that a comprehensive pricecomparison site that is integrated into the online ordering systems of the major
grocery retailers could be valued by consumers.

9.246

Price comparison websites (including FoodMe) typically work by ‘scraping’ andcompiling publicly-available information about prices. However, they can also beenabled through direct feeds of information from suppliers and/or retailers. We
note that Woolworths NZ has already indicated a willingness to cooperate inrelation to the development of price comparison services.1289

1288

Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[391]; Foodstuffs SI “Submission on Market study into grocery sector draft report”(10 September 2021) at [386]; Woolworths NZ “Submission on Market study into grocery sector
draft report” (10 September 2021) at [10.1].
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [3.4.2]

1289

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9.247

As demand for grocery price comparison services from New Zealand consumers is
unclear at this stage, we do not recommend further intervention – such as
mandating the provision of direct feeds of pricing information to comparison
websites – at this time. However, given the international evidence about thebenefits of price disclosure and comparison websites (including in the retail grocery
sector), and the low likelihood of additional coordination being facilitated, we dorecommend that the major grocery retailers cooperate with existing or potential
providers of price comparison services.

9.248

If, at an appropriate time after the completion of this market study, theGovernment was of the view that there was sufficient demand for pricecomparison services in the retail grocery sector, and that there were barriers tothese services being put in place, it could consider regulatory intervention. For
example, we note that the Government has recently agreed to introduce a
consumer data right framework which would extend to product-level data
(information about the products or services offered to consumers by a business,
including prices) in designated sectors.1290

Options to directly improve retail competition in grocery markets
9.249

Our draft report considered options to directly facilitate greater retail grocerycompetition. This was on the basis that, while interventions such as improving theavailability of wholesale supply might enhance competition by making retail entry
or expansion easier in the long run, such measures might be less effective, costmore and take longer than direct structural change.

9.250

Options we considered included:1290

9.250.1

Government facilitating entry into retail grocery markets, such as byproviding funding following a contestable procurement process orentering into a joint venture. This could be facilitation of avertically-integrated entrant, or a retail-only entrant if there were readyaccess to wholesale grocery supply.

9.250.2

Government-mandated divestiture of existing retail stores by the major
grocery retailers.

Office of the Minister of Commerce and Consumer Affairs “Establishing a consumer data right”(2021)
https://www.mbie.govt.nz/dmsdocument/15536-establishing-a-consumer-data-rightproactiverelease-pdf. If extended to the retail grocery sector, this would allow the government torequire grocery retailers to provide data feeds relating to the price and other attributes of theirgrocery products to parties seeking to provide price comparison services.

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9.251

1291

1292

1293

1294

1295

Submissions on these options were mixed:
9.251.1

As with options to support access to wholesale supply, the major grocery
retailers, and consultants they commissioned, were strongly opposed todivestiture of existing retail stores, including due to the practicaldifficulties associated with separation, potential loss of economies ofscale and supply chain resilience, and impacts on investment incentives,amongst other reasons.1291

9.251.2

Coriolis Ltd argued that forced separation (at Foodstuffs) or divestment(at Woolworths NZ) was the only way to achieve greater competition
between traditional supermarkets in any meaningful timeframe.1292

9.251.3

Northelia recommended that the Government require the major grocery
retailers to divest 200 supermarkets to two new entities, or otherwise
sufficient retail stores to allow a new entrant to achieve a minimum of
15 per cent market share.1293

9.251.4

Most Māori contributors did not explicitly advocate for or against
divestment of retail stores. However, if there were to be divestment ofretail store assets, many advocated for consideration of Māori ownershipof these assets.1294

9.251.5

The New Zealand Initiative argued that a new government-backed
entrant into grocery retail would not be effective given that, without
solving underlying issues relating to the conditions of entry andexpansion, including planning law, it would face the same issues as a
privately-backed retailer seeking to enter the market.1295

For example: Woolworths NZ “Post conference submission on Market study into grocery sector”(23 November 2021) at [31]; Woolworths NZ "Post conference submission on Market study into
grocery sector: Attachment 1 - Peter Harris AO - Views on the Commerce Commission Draft Market
Study Report on Grocery Retailing in New Zealand” (25 November 2021); Foodstuffs NI “Postconference submission on Market study into grocery sector” (3 December 2021) at [262].
Corolis Ltd “Post conference submission on Market study into grocery sector” (18 November 2021)
at [72].
Northelia “Submission on Market study into grocery sector draft report” (26 August 2021) at 4;
Comments by Northelia, Transcript of Grocery Market Study Conference – Day 6 (1 November 2021)
at 23-24.
For example: Ngati Porou Holding Company Ltd “Post conference submission on Market study into
grocery sector” (23 November 2021) at 6; Rangitāne Tamaki nui a Rua Iwi “Post conference
submission on Market study into grocery sector” (25 November 2021); Ngāti Kahungunu Iwi
Incorporated “Post conference submission on Market study into grocery sector”(24 November 2021); Ngāi Tahu Holdings “Post conference submission on Market study into grocery
sector” (23 November 2021).
NZ Initiative “Submission on Market study into grocery sector draft report” (26 August 2021) at 7-8.

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9.252

As with the recommendations to improve the conditions of entry and expansion,
direct intervention to facilitate a greater number of retailers might have benefits interms of:9.252.1

more intense competition at the retail level and greater choice in termsof PQRS for consumers;

9.252.2

greater innovation, improved productivity and/or efficiency at the retaillevel through different business structures;

9.252.3

in conjunction with our recommendations relating to a code of conduct,
more balanced bargaining positions between suppliers and retailers,potentially enabling greater innovation and higher quality products(although it is likely that a degree of imbalance in bargaining power
would remain); and9.252.4

a potentially greater range of grocery suppliers and associated products
as a result of an improved ability for suppliers to grow supply throughsmaller increments of demand.

9.253

However, we have not been able to quantify the likelihood or extent to which
improvements would occur and would benefit consumers.

9.254

There are likely to be a range of costs associated with divestiture of existing retailstores, including:

9.255

9.254.1

practical challenges associated with divestment and transaction costs forthe businesses affected;

9.254.2

lost economies of scale and increased costs of supply; and9.254.3

lost bargaining power with multinational suppliers.

As discussed above, some Māori contributors suggested that divestment could
support Māori, hapū and iwi to achieve their aspirations of greater involvement in
the retail grocery sector. We acknowledge the importance of these aspirations andthe Government may wish to take them into account in its response to our study.
However, in this instance, we consider they fall outside the remit of the scope of
our study.

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We do not recommend divestiture of existing retail stores at this time
9.256

Based on the information available to us at this time, while we have considered theoption of divestment of existing retail stores, we cannot conclude that the benefitsof divestiture would exceed the costs, particularly as we expect that some of thebenefits could be achieved by the other interventions that we are recommending.
Elsewhere in this chapter, we have recommended a number of options intended to
improve the conditions for competition. We consider that they should be
implemented and tested before further considering whether other initiatives may
be required. This could occur three years after the Government has implemented
any reforms that it chooses to proceed with as a result of our recommendations, if
the Government concludes at that point that competition is still not working as wellas it could be.

We do not recommend proactive facilitation of retail entry by government at this time
9.257

We also do not recommend proactive facilitation of retail entry by government at
this time. This is, in part, because a new government-facilitated entrant would
likely face the same issues relating to conditions of entry or expansion as any otherpotential entrant. This includes in relation to access to suitable sites, andavailability of wholesale supply. In addition, as with proactive facilitation ofwholesale entry, any procurement or joint venture process would likely becomplex, potentially expensive, and could present a high risk of failure. Given this,
we propose that our recommendations relating to the conditions of entry andexpansion be implemented prior to proactive facilitation of retail entry. However,as above, this could be revisited three years after the response to ourrecommendations have been implemented.

Institutional arrangements
9.258

Our conclusions and recommendations outlined above are directed at a number ofparties, and have a range of institutional implications. The diagram below illustrates
these at a high level.

440

Figure 9.1

9.259

Institutional arrangements

Below, we explore these potential implications in more detail.

A number of our recommendations are directed at industry
9.260

A number of our recommendations are directed at industry. These include:
9.260.1

Recommendation 9: The major grocery retailers should ensure theirpricing and promotional practices are simple and easy to understand;9.260.2

Recommendation 11: The major grocery retailers should ensuredisclosure relating to loyalty programmes and data collection and use
practices is clear and transparent; and9.260.3

Recommendation 12: The major grocery retailers should cooperate withprice comparison services.

Some of our conclusions have implications for the Commerce Commission
9.261

A number of our conclusions relate to conduct which is subject to provisions of theCommerce Act 1986 and Fair Trading Act 1986, both of which are enforced by theCommission.

9.262

Our study does not enquire into compliance with the provisions of either Act, andtherefore a conclusion that particular conduct affects competition, and may be thesubject of a recommendation, is not a conclusion that it breaches the provisions ofeither Act.

441

9.263

However, we retain the ability to separately investigate anticompetitive or
misleading or deceptive conduct if information collected during our study, or
outside of it, gives us reason to believe that such conduct may be occurring inbreach of either Act. Throughout this report, we have identified instances where
we – independent of this process – will continue to consider the appropriate use of
the full range of our compliance, investigation and enforcement functions andpowers under these Acts.

9.264

In addition to enforcement of provisions in existing legislation enforced by theCommission, we also expect that some of our recommendations could potentiallylead to additional responsibilities for the Commission under that legislation. This
includes:9.264.1

Recommendation 2: Prohibit restrictive and exclusive covenants that
inhibit retail grocery store development, if any changes are made via theCommerce Act 1986; and9.264.2

Recommendation 10: Mandate the consistent display of unit pricing, if
this is implemented via a consumer information standard under the Fair
Trading Act 1986.

Many of our recommendations will need further policy work and implementation by
central or local government in the first instance
9.265

Aside from our recommendations that are directed at industry, or relate toenforcement of the Commerce Act or Fair Trading Act, our recommendations
would have a number of implications for central and local government. We expect
that:
9.265.1

Responsibility for giving effect to our recommendations relating to theplanning system would sit with the Ministry for the Environment,
Strategic Planning Reform Board, territorial authorities, and the joint
planning committees that are proposed under the resource management
reforms.

9.265.2

Responsibility for developing regulation relating to restrictions on theuse of restrictive and exclusive covenants (Recommendation 2),commercial wholesale supply (Recommendation 3), a grocery code of
conduct (Recommendation 6), collective bargaining (Recommendation7), unfair contract terms (Recommendation 8), and unit pricing(Recommendation 10) would sit with MBIE. MBIE would also have
responsibility for establishing any new grocery sector regulator anddispute resolution scheme (see below).

9.265.3

The Treasury, in conjunction with Land Information New Zealand, would
be responsible for any future review of the Overseas Investment Act
2005 (Recommendation 4A).

442

9.265.4

The Ministry of Justice would be responsible for any future review of theSale and Supply of Alcohol Act 2012 (Recommendation 4B).

Recommendation 13: Establish a grocery regulator and dispute resolution scheme
9.266

To give effect to a number of our other recommendations, we recommend theestablishment of a grocery sector regulator, and a dispute resolution scheme.

Recommendation 13A: Establish a grocery sector regulator
9.267

We envisage that a regulator could have responsibility for general oversight of theretail grocery sector, and monitoring and reporting – both publicly and to
government – on its performance.

9.268

In addition, we envisage that the grocery sector regulator would have a range ofother specific functions. These would include:
9.268.1

enforcing the grocery code of conduct, in situations where dispute
resolution or private enforcement is not appropriate or does not lead tosatisfactory outcomes;

9.268.2

overall stewardship of the relationship between major grocery retailers
and suppliers, including the dissemination of best-practice informationand guidance to sector participants about productive and appropriate
retailer-supplier relationships, informed by aggregated information
received from the dispute resolution body;

9.268.3

monitoring requests for voluntary wholesale supply and the terms on
which wholesale supply is provided, providing recommendations (butnot enforcement) about principles for wholesale supply arrangements,
and reporting to government on the success or otherwise of commercial
wholesale supply arrangements;

9.268.4

enforcing unit pricing regulation, if this was made under sector-specificlegislation rather than as a consumer information standard under the
Fair Trading Act;9.268.5

monitoring and reporting on the pricing and promotional practices, andloyalty programme terms and conditions, of the major grocery retailers(enforcement of the Fair Trading Act would remain with theCommission);

9.268.6

monitoring and reporting on government progress at improving theconditions of entry and expansion for grocery retailers, including underplanning law;9.268.7

monitoring and enforcing compliance by major grocery retailers withtighter restrictions on the use of restrictive covenants and exclusivity
covenants in leases, if any changes are made on a sector-specific basis
rather than via the Commerce Act 1986;

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9.268.8

monitoring the extent of land banking by the major grocery retailers;

9.268.9

monitoring the use of best price clauses and exclusive supply agreements
by the major grocery retailers; and9.268.10 collecting information from the major grocery retailers to enable asubsequent review of the state of competition three years after theGovernment has implemented any reforms that it chooses to proceedwith as a result of our recommendations.
9.269

The regulator would need robust information gathering powers to support many ofthese functions.

9.270

The Commission is not proposing that it would be the grocery sector regulator,
although we expect that any new regulator would need to work closely with theCommerce Commission, given our role as the enforcement body for the Fair
Trading Act 1986 and Commerce Act 1986. Decisions about institutionalarrangements are ultimately a matter for the Government.

Recommendation 13B: Establish a dispute resolution scheme
9.271

The dispute resolution scheme would consider disputes relating to both the code of
conduct, and disputes regarding commercial wholesale supply arrangements, as
discussed at paragraphs 9.111 and 9.182. It would not consider disputes regarding
the price or quantity of goods supplied under any actual or potential commercial
access arrangements.

Monitoring and review
Recommendation 14: Review the state of competition in the grocery sector three years
after implementation of our recommendations, and collect information in the interim tosupport this review
9.272

We have recommended a range of actions to be taken by the major grocery
retailers, and by Government, to improve competition in the retail grocery sector.
We consider that, if implemented, these recommendations should contribute to amaterial improvement in the state of competition in the sector. In particular, weconsider that – taken together – our recommendations should increase theprospect of a greater range of retailers emerging that can meaningfully competewith the major grocery retailers by offering consumers a convenient one-stop
shopping option.

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Recommendation 14A: Undertake a further review of competition three years after
implementation of our recommendations
9.273

It is difficult to anticipate the exact likelihood or degree of improvements incompetition that will arise as a result of our recommendations, particularly given
the dynamic nature of the sector. Given this, we recommend that Government
consider a further review of the state of competition in the retail grocery sector
three years after the Government has implemented any reforms that it chooses toproceed with. We recommend that a review be conducted by the new grocery
sector regulator.

9.274

If, after conducting this review, the Government still considers that competition is
not working as well as it could, then the Government may wish to consider further
intervention at that point.

9.275

The review could consider the extent to which there is greater competition withthe major grocery retailers in the form of additional competition for all shopping
missions, as well as larger-scale competitors that offer the convenience of a onestop shop. A review should also specifically consider the extent to which therecommendations given effect to have improved competitive outcomes from theperspective of Māori consumers, particularly those in remote communities, andMāori suppliers.

Recommendation 14B: Collect information to support a further review of competition
9.276

9.277

To facilitate a successful review, and to support the grocery regulator’s generalmonitoring and enforcement functions, we recommend that consideration be given
to implementing a form of information disclosure regime that would apply to
specified grocery retailers. This would require specified grocery retailers to collectand supply to the new grocery sector regulator (or another part of government)
information, in a consistent and specified format, on matters such as:
9.276.1

the market shares of grocery retailers, including at a regional andproduct category level;

9.276.2

store locations and details;

9.276.3

information to inform assessments of profitability;

9.276.4

proportion of retail sales that are private label; and9.276.5

numbers and details of consumer complaints received.

This information would sit alongside other information that we would expect theregulator to collect as part of its monitoring and enforcement functions describedabove, including in relation to supplier relationships and disputes, commercial
wholesale supply agreements, and land banking. Further work would be required todefine the types of information that would need to be supplied to enable thisanalysis, and we expect that the grocery regulator would have some influence overthose requirements.

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Attachment A

Additional maps of grocery stores

A1

This attachment includes maps additional to those included in our report showing
supermarket locations in New Zealand.

A2

Figure A1 and Figure A2 show the location of major grocery retailer stores by retailbanner in Wellington and Christchurch. A similar map of Auckland is included in
Chapter 2 at Figure 2.4.

A3

Figure A3 and Figure A4 show the location of major grocery retailer stores in theupper and lower North Island. A similar map of the South Island is included in
Chapter 2 at Figure 2.3.

A4

Figure A5 and Figure A6 show the location of other grocery stores in Wellington andChristchurch. Similar maps of Auckland, and regional maps of the North Island andSouth Island are included in Chapter 4 at Figure 4.8, Figure 4.9 and Figure 4.10.

A5

Chapter 4 also provides more detail of which other grocery stores are included inthese maps.
Figure A1

Major grocery retailer store locations in Wellington by retail banner

Source: Commission analysis of information provided by major grocery retailers, as at
December 2020.1296

1296

[

]; [

].

446

Figure A2

Major grocery retailer store locations in Christchurch by retail banner

Source: Commission analysis of information provided by major grocery retailers, as at
December 2020.1297

1297

[

]; [

].

447

Figure A3

Major grocery retailer store locations in the upper North Island

Source: Commission analysis of information provided by major grocery retailers, as at
December 2020.1298

1298

[

]; [

].

448

Figure A4

Major grocery retailer store locations in the lower North Island

Source: Commission analysis of information provided by major grocery retailers, as at
December 2020.1299

1299

[

]; [

].

449

Figure A5

Grocery store locations in Wellington

Source: Commission analysis of information provided by major grocery retailers. 1300

1300

[

]; [

].

450

Figure A6

Grocery store locations in Christchurch

Source: Commission analysis of information provided by major grocery retailers. 1301

1301

[

]; [

].

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Attachment B

Our assessment of WACC and ROACE profitability

Introduction
B1

This attachment provides details about how we assessed profitability within theretail grocery sector, focussing on our approach to estimating the WACC and ROACE.

B2

The sections in this attachment are:B2.1

our estimation of normal levels of profitability for grocery retailing in
New Zealand; andB2.2

our assessment of the ROACE for the major grocery retailers.

Our estimation of normal levels of profitability for grocery retailing in New
ZealandIntroduction
B3

This section explains how we have estimated a normal rate of return for firms in the
New Zealand retail grocery sector.

What is the cost of capital?
B4

Firms raise the capital they need from two main sources, debt and equity. Both havea cost. For debt, it is the future interest payments. For equity, it is the expectation ofdividend payments by the firm to equity investors. The WACC reflects the cost ofdebt and the cost of equity, and the respective portion of each that is used toprovide the firm’s capital.

B5

The cost of capital cannot be observed, and accordingly it needs to be estimated. For
this study we have:
B5.1

estimated the cost of debt with reference to the yield on publicly-traded
New Zealand corporate bonds of similar credit rating to the major grocery
retailers;

B5.2

estimated the cost of equity for a participant in the retail grocery sector
using our standard methodology for estimating the cost of equity;

B5.3

combined the cost of debt and equity to give an estimate of the WACC; andB5.4

compared this estimate of WACC against other available estimates of thecost of capital for this sector to test for reasonableness and long-term
estimates of average market return.

452

B6

Our approach to estimating the cost of capital has been developed since 2001 andhas been formalised in the context of economic regulation through our cost ofcapital input methodologies. These methodologies have been consulted on heavily,
with many parties over many years. They have been reviewed and accepted by theHigh Court.1302

B7

Our methodology for estimating the cost of capital has been applied to many
sectors, including electricity lines businesses, gas pipelines, specified airport services
and certain telecommunication services.1303 We consider that our standard
methodology for estimating the cost of capital is appropriate for the current study.

B8

We acknowledge the different businesses within the retail grocery sector. This
includes the differing scale of many of the grocery retailers, and the different
operations involved in grocery retailing, including grocery retailing itself andproperty ownership.

B9

We note that while there are a range of participants, our main focus is on the threemajor grocery retailers, which we consider are broadly similar to each other inrespect of grocery retailing.

B10

Consistent with our fuel market study we have developed a range of WACC
estimates. This includes a central estimate that is our best estimate of the WACC,
and a higher estimate of WACC, as a sensitivity. This is based on establishing a range
for certain of the key parameters that are required for estimating the WACC.

There are seven key parameters required to estimate the WACC
B11

The values for seven parameters are required to estimate the cost of capital. These
are the risk-free rate, the debt premium, asset beta (and subsequently equity beta),
tax-adjusted market risk premium, investor and corporate tax rates, and leverage.
Each parameter is described in turn. Combining these produces an estimate of
WACC.

B12

The key parameters for estimating a vanilla WACC, and how they feed into thecalculation of the WACC, are summarised in Figure B1 below.1304

1302

Wellington International Airport & Others v Commerce Commission [2013] NZHC 3289
[11 December 2013] at Part 6, available at:https://forms.justice.govt.nz/search/Documents/pdf/jdo/53/alfresco/service/api/node/content/work
space/SpacesStore/1c117dea-b8ba-491e-ba1d-d4cd30dbe522/1c117dea-b8ba-491e-ba1dd4cd30dbe522.pdf.
For example, Commerce Commission “Electricity Distribution Services Input Methodologies
Determination 2012” (20 May 2020), available at:https://comcom.govt.nz/__data/assets/pdf_file/0017/60542/Electricity-distribution-services-inputmethodologies-determination-2012-consolidated-January-2019-31-January-2019.pdf. The cost ofcapital input methodology was last reviewed during 2015 to 2016. For further details see CommerceCommission “2015/16 IM review” https://comcom.govt.nz/regulated-industries/inputmethodologies/projects/201516-im-review.
The parameters for estimating a post-tax WACC are the same as for the vanilla WACC, except that thecost of debt is also multiplied by 1 – the average corporate tax rate.

1303

1304

453

Figure B1

Components of the WACC

Source: Fibre Input Methodologies reasons paper.1305

Risk-free rate
B13

A risk-free rate is the rate of return expected when there is no risk of default. Debt
issued by the New Zealand Government and denominated in New Zealand dollars is
considered to be free of default risk. The return on New Zealand Government issued
debt can generally be readily observed from trading on the debt market.

B14

Generally, the rate of return varies with the term of the investment. In regulatory
contexts we choose a term of the risk-free rate that matches the length of theregulatory period, which is typically five years. However, in the context of a market
study there is no regulatory term. More common commercial practice is to use aterm of 10 years.

B15

In this market study we are using our estimate of WACC in various contexts,
including assessing the returns on new investment and assessing firm profitability
over longer time frames.
B15.1 Spot risk-free rates are useful when evaluating new investments, since spot
rates reflect the cost of funds at the time the investment is being made.
B15.2 However, spot rates are less useful when assessing the profitability of a firm
over longer time periods since the spot rate at one point in time is unlikely
to be reflective of the risk-free rate throughout the period (and investments
will have been made throughout the period).
B15.3 When assessing the profitability of an unregulated firm over time, anaverage risk-free rate is appropriate.

1305

Commerce Commission “Fibre input methodologies: Main final decisions – reasons paper”(13 October 2020) at Figure 6.1.

454

B16

The risk-free rate is volatile and has declined materially in recent years. This isparticularly true with the effects of the COVID-19 pandemic, which has seen a
reduction in interest rates internationally due to central bank policies to counter theadverse economic impacts.

B17

Given these considerations, we propose using the New Zealand and ten-year riskfree rate estimated during the years from 2015 to 2019, which is the period during
which our profitability assessment is focused. This ten-year risk-free rate averaged at2.70% pa.

Debt premium
B18

Companies fund part of their activities with money borrowed from others. When
companies raise debt, they pay a higher rate of interest than the Government (ie,the risk-free rate), to reflect the corporate’s default premium, liquidity premium andsystematic risk premium. This higher rate of return on corporate debt (above therisk-free rate) is called the debt premium.

B19

Using our standard methodology, we estimate the debt premium by looking at theyield to maturity on publicly-traded bonds in New Zealand relative to the yield tomaturity on government bonds. While corporates can raise money using a wide
range of debt instruments, we use publicly-traded bonds to estimate the debt
premium, as information on the cost of these is publicly available. The debt premiumon other debt facilities is generally not publicly known.

B20

In our retail fuel market study, we used Z Energy’s publicly-traded bonds to estimate
the debt premium to include in our estimate of WACC. However, the major grocery
retailers do not have publicly-traded debt in the New Zealand market for us todirectly observe.

B21

As such, we have observed the yield to maturity on publicly-traded bonds of New
Zealand companies that have a credit rating of between BBB- and BBB+. We havechosen this range because Woolworths Australia currently has three bond issues inAustralia with a Standard & Poor’s (S&P) rating of BBB.

B22

We estimated the average daily debt premium on publicly-traded bonds of credit
rating of BBB- and BBB+ above the risk-free rate with the same remaining term tomaturity for the six-monthly periods between 2015 to 2019.1306 For example, for abond with a remaining term of five years we:
B22.1 estimate its yield to maturity;
B22.2 estimate the risk-free rate on a government bond with an interpolated
remaining term of five years;

1306

Estimated by linear interpolation based on the Nelson-Siegel-Svensson approach to modelling interest
rate yield curves and term structures.

455

B22.3 take the difference between those estimates as an estimate of the debt
premium; andB22.4 repeat those calculations across the years 2015 to 2019.
B23

The resulting estimate of the debt premium on the sample of corporate bonds withthe longest remaining term to maturity ranged between 161 to 176 basis points (ie,1.61% to 1.76% pa, with a remaining term of close to five years) over this period. The
average debt premium was 167 basis points. This is summarised in Table B1.
Table B1

Estimated debt premium on NZ corporate bonds: BBB- to BBB+

Source: Commerce Commission analysis of Bloomberg data. 1307

B24

We have considered whether the use of a five-year term is too conservative.
However, our debt premium estimate is not inconsistent with the spread of
estimates used internally by Woolworths and Foodstuffs who should be well placed
to observe debt costs.

B25

In our draft report, consistent with our input methodology for determining WACC,
we included a 20 basis-point (0.2%) uplift in the debt premium to reflect debt
issuance costs. However, estimated firm-level profits are net of debt issuance costs,
so including them in WACC would double count these costs. Consequently, we haveexcluded debt issuance costs from our WACC estimate for the final report. This isconsistent with our approach in the retail fuel market study.

Asset beta
B26

The Brennan-Lally Capital Asset Pricing Model (CAPM) model requires an estimate of
the equity beta in calculating the cost of equity. We require an equity beta estimate
for the sector that we are investigating, and therefore need to use a sample ofcomparable companies in that sector with publicly-traded stocks.

B27

Beta is a measure of exposure to systematic risk. Systematic risk measures theextent to which the returns of a company fluctuate relative to the equity returns inthe stock market as whole.1308

1307

[
].
If an investment had no systematic risk (ie, it would show no correlation with returns on the market),its equity beta would be zero. If an investment in the equity of a company is of average risk, theequity beta will be 1. This means that the premium over the risk-free rate that equity investors expect
will be the same as the average for the overall market (known as the tax-adjusted market risk
premium, or TAMRP).

1308

456

B28

We start by estimating a sector-wide asset beta in order to strip out the effects ofeach firms’ leverage, which impacts its equity beta. Once we have estimated theaverage asset beta for the sector, we can re-lever the asset beta to estimate theequity beta using our estimate of notional leverage applying to the sector.

B29

We estimate asset beta empirically by identifying publicly-listed firms that undertake
activities that are broadly comparable to those undertaken by firms in the New
Zealand retail grocery sector. We then estimate the relationship between the shareprices of those publicly-listed firms and the market index for the country in which
they are listed.

B30

We identified comparable firms from Bloomberg using the following criteria:
B30.1 listed in an OECD country, with a market capitalisation of at least$100m US dollars (USD); andB30.2 in the Global Industry Classification Standard (GICS) category of Bloomberg
of “Food Retail”.

B31

Of the resulting sample of companies we excluded:
B31.1 companies whose percentage of revenue from ‘supermarkets’ was less than75%. This excluded those with more than 25% of their revenues comingfrom convenience store revenue, drug store and/or pharmacy store
revenue;
B31.2 companies who had over 75% revenue from “hypermarkets”; andB31.3 companies who had very little or no revenue data available in Bloomberg.

B32

This produced a sample of 30 companies, which are listed in Table B2 and which we
consulted on through our draft report.1309

B33

We note that this sample may include some companies that are not entirelycomparable to the New Zealand grocery retailers we are assessing. For example,
some of the overseas retailers may have a wider range of retail products, including
spirits with a higher alcohol content or retail higher volumes of fuel. In other cases,
the overseas retailers may own a greater proportion of their land and buildings, as
opposed to leasing the premises. Nevertheless, we still consider the sample isrepresentative of grocery retailing given the use of Bloomberg’s GICS category of“Food Retail”.

1309

We have included Woolworths Australia in our sample because it meets our sampling criteria, despite
Woolworths NZ being included in Woolworths Australia. However, Woolworths NZ is only a relatively
small portion of Woolworths Australia, so we are comfortable with its inclusion. We did however test
the exclusion of Woolworths Australia in the sample and it did not materially alter the results for
Asset Beta or Leverage.

457

Table B2

Listed comparator companies

Source: Commerce Commission analysis of Bloomberg data.1310

1310

[

].

458

B34

In response to submissions on our draft report we have also excluded a further threecompanies:
B34.1 Incenta reviewed the sample used in our draft report and, with one
exception, agreed with the firms included.1311 Incenta noted that Rallye SA
should be removed as it is a holding company of shares in Casino SA (andCasin SA is already in our sample). We have confirmed this and consequently
removed it from the comparator set.
B34.2 NERA noted that one company in the sample had a negative beta (Grocery
Outlet Holdings).1312 We consider that this company is an outlier in thesample and have consequently removed it from the comparator set.
B34.3 Woolworths noted that George Westin includes a pharmacy division.1313 An
examination of their accounts shows that the bulk of this company’s
revenue is from a separate grocery business called Loblaw and theiraccounts show that pharmacy sales make up 27.5% of its total sales.
Consequently, we have removed this firm from the comparator set.

B35

We also considered Woolworths NZ’s submission, raised in the context of profit tosales margins comparisons, that a number of comparable prominent supermarkets
should also be included in the comparator set.1314 Of the 14 companies referred toby Woolworths NZ, we found 10 are engaged in non-grocery activities such as nongrocery merchandise and the other four are privately owned. Consequently, we did
not add any of these firms to the comparator set.

B36

Consistent with our methodology for estimating the cost of capital under Part 4 andthe Telecommunications Act 2001, and our approach in our retail fuel market study,
we estimated asset beta for the comparator companies:
B36.1 for up to 20 years (subject to the availability of data) by splitting the period
into four consecutive five-year periods; andB36.2 using daily, weekly, and four-weekly data. To limit the risk of estimation
error based on the choice of reference day, the weekly and four-weekly
estimates are averaged over each day of each period, rather than being
sourced directly from Bloomberg estimates.1315

1311

1312

1313

1314

1315

Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix A - Incenta Review of grocery retailing: Comment on the Commerce Commission’s analysis of profitability”(10 September 2021) at [95]-[96].
Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA
Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [86].
Woolworths NZ “Submission on Market study into the grocery sector draft report”(10 September 2021) at [27.5.3].
Woolworths NZ “Submission on Market study into the grocery sector draft report”(10 September 2021) at [27.5.3].
Commerce Commission “Input methodologies review decisions: Topic paper 4: Cost of capital issues”(20 December 2016) at [291].

459

B37

The resulting sample averages for each period are shown in Table B3 below.1316
Table B3

Average comparator company asset beta
2000-2004

2005-20092010-20142015-2019

Number in sample

18

20

23

27

Weekly asset beta

0.39

0.45

0.45

0.49

Four-weekly asset beta

0.36

0.44

0.47

0.47

Average weekly and four-weekly asset beta for 2010-14 and 2015-19 periods

0.47

Source: Commerce Commission analysis of Bloomberg data. 1317

B38

Consistent with our retail fuel market study, we prefer to give greatest weight toweekly and four-weekly estimates, and the two more recent time periods of 2010 to2014 and 2015 to 2019.1318 The average of the weekly and four-weekly results over
the two five-year periods was 0.47.

Other evidence on asset beta
B39

Submissions on our draft report raised several points regarding asset beta. NERA
submitted that we should adopt the asset beta from the internal Woolworths
estimates and noted in support that:
B39.1 internal estimates for business purposes should be unbiased and theCommission should use the asset beta estimate of Woolworths Australia;1319
B39.2 there is wide variability of asset beta estimates from the Commission’s
comparator set;1320
B39.3 UK and Australian grocery retailers are the closest comparators;1321 and

1316

1317
1318

1319

1320

1321

As noted, we have excluded 2020 from our time period of analysis to remove the effects of the
COVID-19 pandemic.
[].
Daily asset beta estimates can be distorted by low liquidity stocks and older estimates may havesmaller sample sizes (and changes over time may mean older estimates are less relevant to the risks
faced today). For further discussion, see: Commerce Commission “Input methodologies review
decisions: Topic paper 4: Cost of capital issues” (20 December 2016) at [297]-[307].
Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA
Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [75]-[81].
Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA
Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [84]-[88].
Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA
Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [88]-[91].

460

B39.4 the Commission’s estimates for the UK companies and Woolworths Australia
alone (for the 2015-2019 sample) act as a cross-check which supports theinternal Woolworths estimate.1322
B40

We agree with the NERA submission that the asset beta estimates within thecomparator set are variable – this is not unusual, our experience in the airport andfibre sectors showed similarly high levels of variability.1323 By itself, variability does
not imply the estimate is biased. We note there are many subsets of the comparator
set which would give rise to a different overall beta estimate (both higher and lower)
and would lower variability. Without evidence as to why comparator retail grocerycompanies should be excluded, we prefer to keep a wide sample set which is more
likely to balance out any unknown firm-specific factors which may bias estimates
upwards or downwards.

B41

NERA has also pointed to a ‘jump’ between beta estimates of 0.45 and 0.55.1324 Thisjump only appears in the 2015 to 2019 period. We agree that there is a step change
in observed asset betas in the comparator set for this time period. However, this is
not apparent in the previous five-year period of 2010 to 2014, and we do not see
this as representing a fundamental flaw in the comparator set.

B42

NERA has proposed that the UK and Australian grocery retailers within thecomparator set are the best comparators to Woolworths NZ’s operations.1325 It has
further submitted that the higher asset beta that results from this refinedcomparator set of only UK and Australian grocery retailers (four firms) cross-checks
the internal estimate of Woolworths. We have tested these propositions against
available public evidence and note that:
B42.1 There is some evidence to suggest there is a difference between current
estimates of betas for US retailers and European retailers. Publicly-available
asset beta estimates from Professor Damodaran for the “Retail (Grocery andFood)” sector show US estimates are lower than European estimates andGlobal estimates. However, this varies over time and there is no suchdifference when the data is averaged over the 2015 to 2019 period.1326

1322

1323

1324

1325

1326

Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA
Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [88]-[91].
Commerce Commission “Input Methodologies review decisions: Topic Paper 4: Cost of capital issues”(20 December 2016) at [590]-[595.7]; Commerce Commission “Fibre input methodologies: Main final
decisions – reasons paper” (13 October 2020) at [6.896]-[6.899].
Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA
Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [88a].
Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA
Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [88b].
Professor Aswath Damodaran “Data Archives” Damodaran Online
https://pages.stern.nyu.edu/~adamodar/New_Home_Page/dataarchived.html#discrate.

461

B42.2 There is no further evidence, either submitted or that we have found, that
New Zealand grocery retailers’ exposure to systematic risk is closer togrocery retailers in Australia and the UK (or to the US). Nor why UK grocery
retailing differs in exposure to systematic risk to other western European
grocery retailers which would be excluded under NERA’s approach. In all
markets, grocery retailing sells essential items used daily by consumers, andwe would expect demand for such products to be considerably less affectedby general economic conditions than for many other products and services.
B42.3 Our comparator set of 27 companies is not particularly sensitive to the
exclusion of particular countries, unless it is narrowed to a very limited
subset as NERA has suggested. NERA's subset includes only four comparator
companies from Australia and the UK. We consider a comparator set limited
to only four companies to be unreliable given the variability which can occur
in stock market data.
B42.4 [
[
[

1327

[

1328

[

]1327
]1328
]

].
].

462

B43

NERA has further submitted that, because the internal beta estimates were forbusiness purposes, they will be unbiased and therefore should be used.1329 We haveinternal reports providing central estimates of [].1330 They therefore
provide a higher estimate than our comparator set. As NERA submitted theseestimates are developed for business use, including to assess capital investment
decisions. In our view, this means that they may in part reflect the business’ attitude
to risk, and we do not agree that they will necessarily be unbiased, for example:
B43.1 [
]1331[]

B43.2 [
]1332
B44

We have reviewed other estimates as a further reasonableness check on ourcomparator set. These provide limited support for a higher asset beta.

B45

An independent appraisal report, prepared by Grant Samuel for the Board of theColes Group, on a proposed takeover offer, provides a range of estimates for equity
beta.1333 Using our standard de-leveraging formula, we have estimated theequivalent asset beta range as 0.53 to 0.68.

B46

Professor Damodaran produces annual estimates of asset beta that we haveaveraged between 2015 and 2019 for Retail (Food and Grocery) for Europe (0.57),
US (0.53) and Global (0.54).1334 These estimates are produced based on industrial
classification so may not be as refined a comparator set and consequently need to
be treated with some caution.

1329

Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA
“Grocery Market Study: Review of the NZCC Draft Report” (10 September 2021) at [75]-[78].
[
];
[
]; [
].
[
].

1330

1331
1332
1333

1334

[
].
[
].
Grant Samuel “Independent Expert Report in Coles Group Limited: Scheme Booklet Supplement”(21 September 2007), available at:https://www.asx.com.au/asxpdf/20071001/pdf/314w5y3fgt938l.pdf.
Professor Aswath Damodaran “Data Archives” Damodaran Online
https://pages.stern.nyu.edu/~adamodar/New_Home_Page/dataarchived.html#discrate.

463

B47

PwC published a Cost of Capital report in 2019.1335 PwC’s estimates of asset beta for
New Zealand retail companies vary from 0.4 to 0.8 noting that it assumes aminimum asset beta of 0.4. These estimates include retailers we would expect tohave more exposure to systematic risk due to greater demand response to economic
conditions. For example, if we exclude the Kathmandu and Michael Hill the range
falls to 0.4 to 0.6.

B48This observation is consistent with Damodaran’s estimates for other retail sectors;
Food and Grocery asset beta is lower than that of other types of retailing (see Table
B4). This indicates that systematic risk is lower for essential goods.
Table B4

European Beta
2015-19

US Beta 2015-19

Global Beta
2015-2019

Retail (Automotive)

0.61

0.72

0.65

Retail (Building Supply)

0.47

1.07

0.75

Retail (Distributors)

0.58

0.83

0.55

Retail (General)

0.52

0.82

0.78

Retail (Grocery and Food)

0.57

0.53

0.54

Retail (Online)

1.17

1.26

1.22

Retail (Special Lines)

0.91

0.78

0.76

Industry Name

B49

Damodaran retail asset beta estimates1336

We have also considered our asset beta estimate for regulated airports in New
Zealand. Demand for airport services is derived from the demand for air travel,
which we would expect to be more sensitive to economic conditions than demand
for grocery items. Hence, we see this as a potential upper cap on beta for grocerycompanies. Our most recent estimate of asset beta for airports is 0.65.1337

Our conclusion on asset beta
B50

For the purposes of our retail grocery market study, we have used a central estimate
for asset beta of 0.47 and a higher estimate of 0.60. This range captures most of theobserved average asset betas above. Our higher estimate represents what we
believe to be the credible upper bound taking into account the wider evidence
before us.

1335

PwC “The PwC Cost of Capital Report” (December 2019).
[].
Unlevered beta data by year and region/country can be found on Damodaran’s website: Professor
Aswath Damodaran “Data Archives” Damodaran Online
https://pages.stern.nyu.edu/~adamodar/New_Home_Page/dataarchived.html#discrate.
Commerce Commission “Input methodologies review decisions: Topic paper 4: Cost of capital issues”(December 2016) at Chapter 4.

1336

1337

464

B51

Adopting a range for the asset beta input parameter helps address estimation error
and accounts for differences in the type of activities undertaken by the New Zealandgrocery retailers and those in the international sample, which may give rise todifferences in systematic risk between these companies.

B52

We do not need a single point estimate of asset beta for the purposes of market
studies in the same way that we do for Part 4 regulation.1338

B53

We tested whether the exclusion of companies who had over 75% revenue from“hypermarkets” was distortionary given we have determined that New Zealand has
a higher proportion of larger-scale supermarkets than overseas. There was only one
company in this category. Including this company in the sample did not materiallychange the average asset beta.

Tax-adjusted market risk premium
B54

The tax-adjusted market risk premium (TAMRP) is a market-wide measure whichreflects the additional expected return over and above the risk-free rate required tocompensate investors for holding the stock market portfolio. We use a range of
TAMRP from 7.0% to 7.5%. This range is consistent with the TAMRP we use under
our Part 4 regulatory regime of 7.0% and the latest estimate under Part 6 of theTelecommunications Act is 7.5%.1339

B55

This range of TAMRP is also consistent with the previous and most recent advice
from Dr Lally, an expert advisor to the Commission.1340

B56

Given our profitability assessment is primarily focused on the period from 2015 to2019, a 7.0% TAMRP is the more appropriate estimate of TAMRP for the retailgrocery sector. Nevertheless, we have adopted the latest estimate of TAMRP toreflect the most recent research and findings that are available in our high estimate.

1338

For example, we require single points estimate in Part 4 regulation for beta and WACC to set pricequality paths. In the regulatory context we recognise and treat estimation risk differently. Specifically,
we consider whether to apply an uplift to our mid-point estimate of WACC, Commerce Commission“Amendment to the WACC percentile for price-quality regulation for electricity lines services and gas
pipeline services” (30 October 2014) at Section 5, available at:https://comcom.govt.nz/__data/assets/pdf_file/0029/88517/Commerce-Commission-Amendmentto-the-WACC-percentile-for-price-quality-regulation-Reasons-Paper-30-October-2014.PDF.
Commerce Commission “Input methodologies review decisions: Topic paper 4: Cost of capital issues”(December 2016) at Chapter 4; Commerce Commission “Fibre Input Methodologies Determination
2020” (9 July 2021) at [67], available at:https://comcom.govt.nz/__data/assets/pdf_file/0029/259373/Fibre-Input-MethodologiesDetermination-2020-consolidated-July-2021-.pdf.
Dr Martin Lally “Estimation of the TAMRP” (26 September 2019), available at:https://comcom.govt.nz/__data/assets/pdf_file/0043/189889/Dr-Martin-Lally-Estimation-of-theTAMRP-26-September-2019.pdf.

1339

1340

465

Investor and corporate tax rates
B57

We assume a corporate and investor tax rate of 28%, consistent with the New
Zealand company tax rate and the prescribed investor tax rate for a portfolio
investment entity, respectively. More detailed reasons are set out in the Input
Methodologies (IMs) reasons paper 2010.1341

Leverage
B58

Leverage reflects the proportion of a company’s total funding that is borrowed/debt
financed. The international comparator companies we used in our assessment of theasset beta have an average leverage of around 17%.1342 We use this as our best
estimate of leverage for calculating the WACC.

B59

In our draft report we noted there was some variance in the leverage within thiscomparator sample. Based on the variance in this sample we used a range forleverage of 10% to 30%.

B60

However, our WACC estimate uses a zero debt beta. Using the average leverage ofthe comparator sample used to estimate asset beta avoids the anomaly of WACC
increasing with leverage.1343 We note that the higher asset beta is approximately
equivalent to restricting the sample set to just Western Europe and Australiancomparators, but this would give rise to a lower leverage figure. Consequently, we
have held leverage constant at 17% for both our central and higher estimates.

We estimate a WACC of between 5.5% to 6.6% for the retail grocery sector
B61

Combining these parameter values produces an estimate of WACC ranging from
5.5% to 6.6%. This is shown in Table B5.

1341

Commerce Commission “Input Methodologies (Electricity distribution and gas pipeline services)
Reasons Paper” (22 December 2010) at [H10.5]-[H10.17].
The reasons for this are set out in: Commerce Commission “Input Methodologies (Electricity
distribution and gas pipeline services) Reasons Paper” (22 December 2010) at Attachment H3.
Commerce Commission “Input Methodologies (Electricity Distribution and Gas Pipeline Services)
Reasons Paper” (22 December 2010) at Appendix H.

1342

1343

466

Table B5

Our parameter inputs for our estimate of WACC

Source: Commerce Commission analysis.1344

We have not amended our WACC estimate to account for operating leases
B62

Incenta commented on the use of the WACC when submitting on the impact ofoperating leases on profitability analysis.1345 Its comments were not primarily
concerned with the estimation of the WACC, but we have considered whether they
have any implications. Incenta has submitted that the IFRS 16 accounting standard
will align better with the underlying economic relationships by requiring arecognition of interest costs, assets and liabilities from renting.

B63

IFRS 16 was introduced over the period for which we estimate the WACC. We haveconsidered the potential implications of the introduction of IFRS 16 on leverage (andnet debt) when estimating beta and calculating our estimate of the WACC. In
particular:
B63.1 we use net debt to calculate company leverage to de-lever equity betas andlever asset betas in coming to estimate of beta for use in the WACC;1346 andB63.2 we use the overall leverage estimate from the sample set to estimate the
WACC overall.

1344
1345

1346

[
].
Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix A - Incenta Review of grocery retailing: Comment on the Commerce Commission’s analysis of profitability”(September 2021) at [25]-[30].
Commerce Commission “Input Methodologies (Electricity Distribution and Gas Pipeline Services)
Reasons Paper” (22 December 2010) at [H8.51]-[H8.60].

467

B64

We have examined the Bloomberg data for net debt of comparator companies and it
is clear that net debt figures increase substantially from the point firms implemented
the new accounting standards on operating leases. The dates at which companies
adopt the IFRS 16 accounting standard varies across the comparator sample.

B65

We have re-estimated beta and WACC using amended data by examining the change
in net debt at the point operating leases were capitalised to estimate a consistenttime trend of net debt. This assumes the value of operating leases incorporated into
net debt remains constant prior to the change to the new accountancy standards.

B66

This substantially increases net debt and leverage and therefore decreases asset
beta but has an ambiguous impact on equity beta (we use leverage to estimate
individual company asset betas but then use average leverage to estimate overall
equity beta from the average asset beta). The overall impact is that the mid-point
WACC estimate drops slightly compared with the base case not accounting for thehistorical impact of operating leases.

B67

In principle we would not expect the extent of leverage to change the cost of capitalfor firms unless leverage reached the point that endangered the financial viability of
the firm. This was debated when the IMs were set in 2010 and in the subsequent
Merits Review of that decision. Given this, and that all market estimates we areaware of that have not attempted to make a similar adjustment, we have opted toretain our original methodology.1347

Our estimate of WACC compared to the major grocery retailers’ estimates
B68

To test the reasonableness of our estimate of post-tax WACC we compared it to theestimates provided by the major grocery retailers.1348 These are higher than ourhigher WACC estimate. The key difference between our WACC estimates and thoseof the major grocery retailers is their choice of asset beta, which is higher than ourestimate of 0.47.

1347

Commerce Commission “Input Methodologies (Electricity Distribution and Gas Pipeline Services)
Reasons Paper” (22 December 2010) at [H3.46]-[H3.46].
[
].

1348

[

].

468

The risks of mis-estimating WACC
B69

As WACC cannot be observed, there is a risk of mis-estimating it, which is why weprovide a range of estimates above. In some contexts where a point estimate isrequired, we make an additional allowance for the risk of estimation error. This isespecially so when there are asymmetric consequences from getting that estimate
wrong.1349

B70

In this study we have estimated both a central WACC estimate and a higher WACC
estimate that we have compared profitability against. The use of a range increases
the likelihood that our estimates capture the true but unobservable level of WACC.

Our assessment of the ROACE for the major grocery retailers
B71

The following sections provide further information on our assessment of ROACE forthe three major grocery retailers: Foodstuffs NI, Foodstuffs SI and Woolworths NZ.
This includes details on the various adjustments and tests we have made whencalculating ROACE.

ROACE for Foodstuffs NI and Foodstuffs SI
Approach for calculating ROACE for Foodstuffs NI and Foodstuffs SI
B72

Our approach has been to combine the co-operative with its retail member stores
into a “whole of business” view of the profitability. As discussed in Chapter 3, thisapproach differs to the one we adopted in our draft report.

B73

We have also updated disaggregated ROACE calculations included within our draft
report for the Foodstuffs NI and Foodstuffs SI retail stores and the co-operatives.

Adjustments needed to calculate ROACE for Foodstuffs NI and Foodstuffs SI
B74

Following our draft report, Foodstuffs NI and Foodstuffs SI provided models of theirprofitability to us. These models included a number of adjustments that haveallowed us to conduct a more robust consolidation process and allow the ‘whole ofbusiness’ approach to be adopted. We have therefore adopted the financial
modelling of Foodstuffs NI and Foodstuffs SI for our whole of business, retail and cooperative ROACE calculations. We have cross checked the models’ results against
our own modelling and have found them to be consistent.

1349

In particular, we may make an allowance for estimation error when setting the maximum prices amonopoly supplier of services can charge its consumers. This is to protect consumers where webelieve the consequences of under-investment are significant enough to justify the cost of a higher
WACC to consumers, Commerce Commission “Amendment to the WACC percentile for price-quality
regulation for electricity lines services and gas pipeline services” (30 October 2014) at Section 5,
available at: https://comcom.govt.nz/__data/assets/pdf_file/0029/88517/Commerce-CommissionAmendment-to-the-WACC-percentile-for-price-quality-regulation-Reasons-Paper-30-October2014.PDF.

469

B75

We have made the following adjustments to Foodstuffs NI and Foodstuffs SI models
to calculate ROACE:
B75.1 We have adjusted the value of both Foodstuffs co-operative’s property
investments to reflect their market valuation. These adjustments have been
based on valuations that the Foodstuffs co-operatives provided for theirproperty investments. The individual valuation methods used by Foodstuffs
NI and Foodstuffs SI differed. We assessed each of these approaches andfound them to be sufficiently robust to be relied upon.
B75.2 We estimated the annualised capital gain that each co-operative has earned
between 2015 to 2019 based on the individual market valuations of each
property and its original purchase date. We derived each co-operative’s
annual capital gain as a weighted average of the movement on value of each
property held in that year.

B76

We removed certain business activities from the ROACE calculation of the two
Foodstuffs co-operatives as they are not strictly grocery retailing or they are notconsidered a major grocery retailer. These include the removal of Gilmours from
Foodstuffs NI, and the removal of Raewards Fresh and Trents from Foodstuffs SI.
Other non-grocery activities were also assessed, but these were found to beimmaterial.

B77

We also removed development assets from their financial accounts. This includes
land and buildings that are being held for future retail grocery development but are
currently not being employed in that activity.

ROACE estimates for Foodstuffs NI and Foodstuffs SI
B78

Provided below are the “whole of business” ROACE for Foodstuffs NI andFoodstuffs SI for the five years 2015 to 2019, compared to the higher WACC
estimate. This is a consolidation of co-operative, and the retail member stores ofeach co-operative.

470

Figure B2

Foodstuffs NI & Foodstuffs SI “whole of business” ROACE vs WACC Estimates

Source: Commerce Commission profitability analysis.1350

B79

As shown, the average ROACE for the five years from 2015 to 2019 was 13.1% for
Foodstuffs NI and 12.8% for Foodstuffs SI. This is well above our higher WACC
estimates.

ROACE estimates for the Foodstuffs retail and co-operative businesses
B80

We also present updated disaggregated ROACE results for the Foodstuffs NI andFoodstuffs SI retail stores (using the same approach as in our draft report where
capitalised leases were not included) and for the Foodstuffs NI and Foodstuffs SI
co-operatives.

B81

The average ROACE for Foodstuffs NI and Foodstuffs SI retail stores for the period
from 2015 to 2019 was 21.9% and 21.7% respectively.

B82

We have calculated ROACE for the retail stores using Foodstuffs’ models andincluding the adjustments described above. Gilmours and Raewards Fresh are notincluded in the retail stores’ ROACE calculations. Consistent with our draft reportapproach, these calculations do not include the capitalisation of leases as a right ofuse asset.

1350

[

].

471

B83

The average ROACE for Foodstuffs NI and Foodstuffs SI co-operatives for the period
from 2015 to 2019 was 7.0% and 2.7% respectively. ROACE for both co-operatives
have been calculated in the same way as our calculations for the retail stores.

B84

The lower levels of profitability observed for the two co-operatives relative to theretail stores’ profitability is a function of the relationship between the co-operatives
and retail stores, including levels of rent charged and cost recovery for services
provided

ROACE for Woolworths NZ
Adjustments needed to calculate Woolworths NZ’s ROACE
B85

We have made the following adjustments when calculating Woolworths NZ’s ROACE:
B85.1 included estimates of the value of capitalised leases in Woolworths NZ’s
asset base and the interest component on the leases in the profitability
calculation of the ROACE;
B85.2 removed certain non-grocery-related subsidiaries and assets;
B85.3 included Woolworths NZ’s brand intangibles at book value;
B85.4 adjusted Woolworths NZ’s land and property assets to reflect market values;andB85.5 removed all of Woolworths NZ’s goodwill from its assets employed.

Including the estimated value of capitalised leases and lease interest expenses
B86

Our draft report excluded the value of capitalised leases in the assets employed forvarious reasons. As discussed in Chapter 3, we have included estimated values ofcapitalised leases and the associated interest expense in our calculations.

B87

Woolworths NZ provided estimates of its capitalised leases and their associatedinterest payments from 2015 to 2019. These are only estimates because audited
capitalised leases have only been required since 2020 due to the changes ininternational accounting standards. We have examined Woolworths NZ’s estimatesand although they are based on a number of simplifying assumptions, their similarity
to the audited capitalised leases and interest payments shown in Woolworths 2020
financial accounts suggests they are sufficiently robust to be used in the ROACE.

Removing Woolworths NZ’s non-grocery related subsidiaries and assets
B88

Woolworths NZ owned two significant subsidiaries that were engaged in nongrocery retailing activities. These are Ezibuy and New Zealand Wine Cellars
Limited.1351 Given our market study is focused on grocery retailing, Woolworths NZ
provided an adjusted set of financial accounts with these two entities removed forthe years 2015 to 2019.

1351

Previously known as Cellar Masters Wines Pty Limited.

472

B89

Removing these non-grocery activities required the removal of the material loss that
Woolworths NZ incurred in its 2016 financial year from the sale of Ezibuy. This
caused the write down of $276 million in goodwill as a result of the sale of thecompany below its carrying book value.1352

B90

We also removed the development properties owned by Woolworths NZ from its
assets employed between 2015 and 2019. This includes land and buildings that are
being held for future retail grocery development but are currently not being
employed in that activity.

Including Woolworths NZ’s brand intangibles
B91

Woolworths NZ had intangible assets relating to brands of around $169 million on its
balance sheet each year from 2015 to 2019. We have included this asset in
Woolworths NZ’s asset base when assessing its ROACE. This is a change from ourdraft report.

B92

Submissions made by Woolworths NZ proposed that brands should be retained in
the assets employed when calculating ROACE.1353 To support this, these submissions
referred to a report from Oxera, which considered a company’s spending onmarketing could be capitalised into brand-value assets. This investment is made in
the current period in the expectation of making a return in later periods.
Woolworths NZ also presented a range of valuations for its brands as ademonstration of what the value could be.

B93

Based on these submissions we agree that brands have a value that should berecognised in the assets employed. However, we do not agree with the range ofvalues that Woolworths NZ has presented, because it is possible that thesevaluations could capture some element of economic rents. In addition, if we were tovalue brands, we would need to determine the annual capital gain and reflect this in
the ROACE as well, which could prove to be difficult.

B94

As such, we have included brands at book value in the asset base, which reflects theprice a party was willing to pay for the asset. This approach aligns our estimation of
the ROACE for the sample of overseas grocery retailers, which include the value ofacquired brands in the asset employed. It is also consistent with the approach in our
retail fuel market study.

1352

Woolworths New Zealand Group Limited “Annual Report 2016” (2016) at 26, available at:https://app.companiesoffice.govt.nz/companies/app/ui/pages/companies/1686297/documents.
Woolworths NZ "Post conference submission on Market study into grocery sector"(23 November 2021) at [5.4.8]; Woolworths NZ “Submission on Market study into grocery sector draft
report” (10 September 2021) at [27.7.5].

1353

473

Adjusting Woolworths NZ’s land and property assets to market values
B95

We have adjusted Woolworths NZ’s land and building assets to reflect their market(or economic) value. The 2019 book value of its land and buildings of $274 million isbased on purchase price, less accumulated depreciation.1354

B96

We undertook the following steps to adjust Woolworths NZ’s land and building
assets from their book value to a market value:
B96.1 Woolworths NZ provided us with various market valuations it has
undertaken between 2018 to 2021 on certain land and buildings it owns. We
compared market valuation to the book value of each property. This showeda weighted average valuation uplift.
B96.2 We applied this valuation uplift to the book value of all of Woolworths NZ’sland and buildings as a top-down adjustment to reflect the market value ofthese assets being employed.

B97

This adjustment reduces the ROACE estimate for Woolworths NZ. However, we have
not reflected the corresponding annual gain in the value of these assets in the
ROACE because of a lack of robust data. This means that our final ROACE estimate
will understate the true ROACE, but we do not consider this to be material.

Removing Woolworths NZ’s goodwill from its assets employed
B98

We have removed all of the $2.3 billion of goodwill from Woolworths NZ’s asset
base when calculating ROACE. This goodwill arose from Woolworths Australia’s
acquisition of Progressive Enterprises in 2005. It is a material proportion of the total
assets in Woolworths NZ’s balance sheet (around 57%).

B99

We have excluded goodwill because it is not an asset employed by Woolworths NZ
to generate earnings. Rather it is an asset that reflects the differences in the fairvalue (market value) of the assets being acquired and their purchase price when thecompany changed ownership. This difference can reflect a range of factors, including
expectations relating to future earnings.

B100

Woolworths NZ submitted that its goodwill should be retained in its assets employedwhen calculating the ROACE as it represents the actual cost to Woolworths NZ ofentering the New Zealand market that could not be avoided.1355 It stated that theacquisition meant it could enter the New Zealand market and avoid the full cost of
replicating the business it was acquiring, but it was required to pay some measure of
economic replacement cost materially above the depreciated book value of theassets.

1354

Woolworths New Zealand Group Limited “Annual Report 2019” (2019), available at:https://app.companiesoffice.govt.nz/companies/app/service/services/documents/954FC3EC59E0589
9BDD120E9A1F733B4.
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [27.7.8].

1355

474

B101

Woolworths NZ has also identified various specific sources of economic value thatare not reflected individually in its balance sheet, but rather embedded in the overall
goodwill value.1356 These include:
B101.1 Progressive Enterprises’ assets were heavily depreciated at the time of theacquisition, and by inference were recorded at levels well below theirreplacement value. Evidence for this lies in the difference between the asset
book values and Woolworths NZ’s estimates of the replacement cost ofthese assets. For assets where replacement costs are not available,
Woolworths NZ submitted that the historic cost is a good proxy. Woolworths
NZ estimates the difference between book value and fair replacement value
to be worth up to $698 million based on the replacement cost at the time ofacquisition.1357
B101.2 Woolworths NZ considers the capitalised value of long-term leases is notrecognised in the purchase price it paid for Progressive Enterprises, and it
should be. The accounting standards at the time did not recognise the valueof long-term leases as an asset which Woolworths NZ considers would havefactored into the purchase price. Woolworths NZ also notes that the recentchanges to the International Accounting Standard IFRS16 now requires allleases to be accounted for as assets on the balance sheet, which aligns with
its view. Woolworths NZ bases its estimation of the value of these leases on
Progressive Enterprises’ external operating lease expense in 2006 being$85 million. Capitalising this amount at a multiple of between 6.2x and 8.0x
provides a value of between $530 million and $680 million.
B101.3 Woolworths NZ expected the acquisition of Progressive Enterprises would
generate merger synergies.1358 Woolworths NZ’s internal estimates at thetime of the acquisition were for increased annual earnings as a result of theacquisition of between $35 million and $51 million in year five after thepurchase. Capitalising this earnings stream at an Earnings Before Interest,
Tax and Amortisation (EBITA) multiple of 13.4x would be worth between$469 million and $683 million.
B101.4 Land values were recorded on the balance sheet at an historic cost of $59
million, which does not reflect the fair market value of this asset. However,accurate records of specific land holdings in 2005 are not available andconsequently Woolworths NZ is unable to estimate the market value of theland at the time of acquisition.1359

1356

1357

Woolworths NZ "Post conference submission on Market study into grocery sector"(23 November 2021) at [5.7.2.2].
[
].

1358

[

].

1359

[

].

475

B101.5 Woolworths NZ also considers there are other sources of value in theacquisition that are not reflected on the balance sheet and more difficult toobjectively quantify.1360 These includes items such as licences, brands,
customer contracts, supplier relationships, and transport contracts /networks.
Our view on Woolworths NZ’s arguments for including goodwill
B102

We recognise that shareholders in Woolworths NZ paid for the goodwill and that thisoutlay therefore affects the total return on their capital.

B103

However, our focus is different – we are assessing the profitability of Woolworths
NZ’s grocery business. If Progressive Enterprises was earning economic rents prior to
its acquisition by Woolworths NZ, the purchase price would have been above thevalue of the assets and the difference would be reported as goodwill. Therefore, in
our assessment we have removed the goodwill and checked that the underlying
assets are recorded at market value.

B104

We have assessed Woolworths NZ’s arguments regarding goodwill in this context.
We make the following comments:
B104.1 It may be correct that Progressive Enterprises’ assets were heavily
depreciated at the time of the acquisition, and below their replacement
value. However, this was over 16 years ago, and the majority of these assets
are likely to have been fully depreciated, scrapped and (where appropriate)
replaced with new assets. The expected useful life of plant, equipment andfittings in Woolworths financial accounts is between 2.5 and 10 years.1361
Given we wish to understand the actual cost of the assets that were
employed to generate the earnings, any under-valuation of these shorterlived assets at the acquisition date will by now have little or no effect onbook values.
B104.2 We also note that Progressive Enterprises’ assets were revalued at the timeof acquisition to fair market value, so they would have reflected theirmarket value.1362

1360

[

1361

Woolworths New Zealand Group Limited, 2015 – 2019 Annual Reports, available at:https://app.companiesoffice.govt.nz/companies/app/ui/pages/companies/1686297/documents.
Woolworths Limited “Annual Report 2006” at 145, Note 30, available at:https://www.annualreports.com/HostedData/AnnualReportArchive/W/ASX_WOW_2006.pdf.

1362

].

476

B104.3 The leases that Woolworths NZ obtained through its acquisition of
Progressive Enterprises should be viewed similarly to the replacement valueof the fixed assets. We assume the majority of these leases would have
expired or be largely expired by 2015, which is the starting point of our
profitability assessment. Once again, we wish to understand the actual costof the assets that were employed to generate the earnings. Those assetsthat are no longer part of the asset base should be excluded from the asset
base in our profitability assessment.
B104.4 The synergies that were expected from the acquisition of Progressive
Enterprises are relevant for determining what an acquiring firm will pay for atarget firm because they are part of the value of future expected profits.
However, for our purposes we want to understand the market valued costof the assets that were employed to generate the profits, rather thancapturing any value of future expected profits.
B104.5 In addition, a competitive market would have seen any merger synergies
gradually reduced over time as the forces of competition eroded any
competitive advantage a single firm would have. Our ROACE analysis starts
in 2015, 10 years after the merger.1363
B104.6 We agree with Woolworths NZ’s argument that land and property values did
not reflect the true market value. However, these assets would have beenrevalued in 2005 to reflect fair market value. We also note that we haveadjusted the value of Woolworths NZ’s entire land and property assets toreflect the market value of these assets. This has resulted in an increase intotal assets employed in each year from 2015 to 2019.
B104.7 We also agree with Woolworths NZ’s argument that some elements ofgoodwill might have reflected items such as set-up costs for customer
contracts, supplier relationships, staff contracts, and transport contracts /networks. However, like leases and other depreciable assets, we consider
this asset would have also depreciated since the Woolworths NZ acquisition.
In addition, any expenditure by Woolworths NZ to maintain the value oforganisational capacity (such as staff training and IT spending) would bereflected in the ROACE through NPAT.
B105

Based on our review of Woolworths NZ’s submission, we continue to remove all of
Woolworths NZ’s goodwill from its assets employed.

1363

Our regulatory regime for electricity distribution businesses, under Part 4 of the Commerce Act,
assumes a five-year time frame for such synergies to be competed away.

477

B106

The draft report included a sensitivity test to understand the impact of a material
underestimation of the total value of assets. For this we included an additional valueof $300 million in the assets employed. However, given we have not seen any
evidence that we have underestimated the value of assets employed, we consider
this test is no longer required. Moreover, we do not wish to include an amount ofassets that could reflect market rents.

Woolworths NZ’s ROACE after adjustments
B107

Following these adjustments, we have determined the average ROACE for
Woolworths NZ was 12.7% from 2015 to 2019. This ranged between 10.9% and14.3%. Figure B3 shows Woolworths NZ’s ROACE for 2015 to 2019, including ourcentral and higher WACC estimate of 5.5% and 6.6% for the years 2015 to 2019.

B108

As shown, Woolworths NZ’s ROACE has been consistently above our higher WACC
estimate. This conclusion would also apply if we compared ROACE to the slightly
higher WACC range that Woolworths NZ submitted.
Figure B3

Woolworths NZ’s ROACE: Post adjustments

Source: Commerce Commission profitability analysis.1364

1364

[

].

478

B109

We note that these ROACE estimates are lower than shown in our draft report(which averaged 21.6% for the 2015 to 2019 period). This reduction is primarily due
to including capitalised leases and lease interest expenses in the calculation of
ROACE. If this adjustment were not made, the average ROACE from 2015 to 2019
would be 21.0%.

479

Attachment C

International price comparison

Introduction
C1

This attachment provides further details about the analysis we have conducted tocompare the prices of groceries in New Zealand with prices internationally. The
findings of this analysis are described in Chapter 3.

C2

The sections in this attachment are:C2.1

datasets used to compare grocery prices;

C2.2

methods used in interpreting datasets; andC2.3

further analysis and sensitivity testing.

Datasets used to compare grocery prices
C3

In this section, we discuss the datasets we have used and explain how they produce
price level and expenditure statistics.

Price-level datasets
C4

We used three datasets of prices for our international comparisons. These arecompiled by the ICP, the OECD and Numbeo.1365, 1366, 1367

C5The ICP and OECD collect “national annual average prices” on a regionallydetermined product list to produce their price datasets. The prices used are the final
prices paid by the consumer and are therefore tax inclusive. They present averaged
and normalised (to the World or OECD) prices at the “class” level, which are sets ofgoods such as bread and cereals. These datasets are produced every three (OECD)and six (ICP) years. The OECD dataset contains data for OECD countries while thelatest ICP dataset includes data for 176 economies.1368

C6

Numbeo collects crowd-sourced prices on a product list that it determines. This data
is presented as both an average price for each product and an aggregated (average)
grocery price index. Prices and indices are available for most countries.

1365

Frederic A. Vogel “Executive Summary” in World Bank Measuring the Real Size of the World Economy:
The Framework, Methodology and Results of the International Comparison Program (World Bank,
Washington DC, 2013) at xviii, available at:https://openknowledge.worldbank.org/bitstream/handle/10986/13329/9780821397282.pdf?sequen
ce=5.
Eurostat, OECD “Eurostat-OECD Methodological Manual on Purchasing Power Parities” (2012) at[5.8.1], available at: https://www.oecd.org/sdd/prices-ppp/PPP%20manual%20revised%202012.pdf.
Numbeo “Methodology and motivation for Numbeo.com”
https://www.numbeo.com/common/motivation_and_methodology.jsp.
World Bank Group “Purchasing Power Parities and the Size of World Economies: Results from the2017 International Comparison Program” (2020), available at:https://openknowledge.worldbank.org/bitstream/handle/10986/33623/9781464815300.pdf.

1366

1367

1368

480

C7

The EIU also compiles a dataset of prices in selected cities. The EIU collects data
twice annually on a product list that is the same for all cities in its survey. We
understand that the EIU presents an average of these two prices in its price data.
NERA (on behalf of Woolworths NZ) used the EIU in its comparison of international
prices. NERA excluded all products that were not priced in every city in its city list as
not all cities had prices for every product.

Expenditure datasets
C8

We also compared New Zealand’s expenditure on groceries with a number ofdifferent countries using three different expenditure datasets compiled by theOECD, ICP and the USDA.1369

C9

The USDA sources its expenditure statistics from a market research firm,
Euromonitor. This data is reported annually, broken down for food and nonalcoholic beverages, alcoholic beverages, and tobacco. The most recent data isavailable for 2018.

C10

The OECD and ICP report expenditure statistics for all “classes” at the same time as
prices.

Income datasets
C11

1369

1370

1371

1372

1373

We also used four different measures of income to compare New Zealand’s average
proportion of total income spent on groceries to other OECD countries. All measures
are in USD, converted using the market exchange rate unless otherwise stated.
These measures are:C11.1

Gross National Income (GNI), per capita;1370

C11.2

Net National Income (NNI), per capita;1371

C11.3

Adjusted Net National Income (Adjusted NNI), per capita;1372 andC11.4

Average Wage, per capita.1373

USDA “Data on expenditures on food and alcoholic beverages in selected countries: 2013-2018”(2019), available at: https://www.ers.usda.gov/media/10271/2013-2018-food-spending_update-april2019.xls.
OECD “Gross National Income (USD, per capita)”, available at:https://data.oecd.org/natincome/gross-national-income.htm.
OECD “Net National Income (USD, per capita)”, available at: https://data.oecd.org/natincome/netnational-income.htm.
World Bank Group “Adjusted Net National Income (USD, per capita)”, available at:https://data.worldbank.org/indicator/NY.ADJ.NNTY.PC.CD.
OECD “Average Wages” available at: https://data.oecd.org/earnwage/average-wages.htm.

481

C12

The income measures that we use are calculated in the following ways:
C12.1

GNI reflects the total incomes of the residents of an economy, which is
calculated by adding Net Income from Abroad to GDP;1374

C12.2

NNI is calculated by subtracting depreciation of fixed capital from GNI;1375

C12.3

Adjusted NNI is calculated by subtracting natural resources depletion from
NNI;1376 andC12.4

Average Wage measures the average annual earnings of an employee thatworks the average number of hours for a given country.1377

C13

Data for GNI and NNI is available as recently as 2017 for all OECD countries, whereas
data for Adj NNI is available as recently as 2018 for all OECD countries.

C14

For the purposes of this analysis, we chose to use income measures that:

C15

1374

1375

1376

1377
1378

1379

C14.1

are measured in USD and converted using annual average exchange
rates;1378, 1379 andC14.2

measure income based on current prices.

We opted not to use measures of average household income for two reasons:C15.1

our expenditure statistics are measured per person, whereas, householdincome statistics are measured as the income of multiple people. This meansthat it would be inappropriate to divide expenditure statistics by householdincome statistics to find the share of income spent on food, as it would
return to us the share of household income that is spent on one person’s
groceries, as opposed to the entire household; andC15.2

we expect that the number of individuals in a household varies significantly
from country to country, which means that the results would be difficult tocompare between countries.

Eurostat “European System of National and Regional Accounts” (2010) at [8.94], available at:https://ec.europa.eu/eurostat/documents/3859598/5925693/KS-02-13-269-EN.PDF/44cd9d01-bc6440e5-bd40-d17df0c69334.
OECD “Net National Income (USD, per capita)”, available at: https://data.oecd.org/natincome/netnational-income.htm.
World Bank Group “Adjusted Net National Income (USD, per capita)”
https://data.worldbank.org/indicator/NY.ADJ.NNTY.PC.CD.
OECD “Average Wages” available at: https://data.oecd.org/earnwage/average-wages.htm.
Income measures need to be measured in USD as our raw expenditure data is in USD. This means that
we can ensure that our proportions are measured using the same units. Similarly, income measuresneed to be based on current prices, as expenditures are measured using current prices.
Average wage data is only available converted with PPPs, or in local currency units. We obtained data
in local currency units for 2017, and converted them with annual average exchange rates provided by
the OECD to USD. Further details on this process can be found in paragraph C45.

482

C16

Data was collected from the OECD, and the World Bank when the data is unavailable
from the OECD.1380

The OECD and ICP price datasets are likely to be the most suitable for our analysis
C17

Our view is that, for the purposes of our study, the OECD and ICP datasets are likely
to be more suitable for analysis of price levels between countries than the Numbeo
or EIU datasets. This is because the OECD and ICP:
C17.1

provide extensive documentation detailing their process for collecting prices
and averaging them to produce a price level;

C17.2

source prices from national statistical offices, and report these as a national
annual average price.1381, 1382 Therefore, we expect that these prices may bebetter at smoothing seasonal effects and promotions, which affect price;
and

C17.3

average prices using processes that preserve the representativity andcomparability of products across countries.

C18

Due to the nature of user-reported data, we consider the Numbeo and EIU data to
be less robust than the OECD and ICP. However, we have used the Numbeo dataset
to compare international prices as a cross-check to the results of our analysis using
the OECD and ICP datasets. We have also conducted some sensitivity testing of theanalysis submitted by NERA using the EIU data (more details on this are provided inparagraphs C80 to C83 below).

C19

Although NERA told us that they conducted internal checks to verify the accuracy of
the EIU dataset, we note that NERA does not explain how these checks have been
conducted, or how accurate they believe the data is.1383 Therefore, our view remainsthat the EIU dataset is not as suitable as the OECD and ICP datasets for comparing
New Zealand’s grocery prices to other countries.

Products analysed in datasets
C20

To identify the price level for grocery products, we ensured that datasets of pricelevels use a product that would be expected to be found at a supermarket.

1380

GNI, NNI and Average Wage statistics were collected from the OECD, and Adjusted NNI statistics werecollected from the World Bank as they are not available from the OECD.
Prasada Rao “The Framework of the International Comparison Program” in World Bank Measuring theReal Size of the World Economy: The Framework, Methodology and Results of the International
Comparison Program (World Bank, Washington DC, 2013) at 29, available at:https://openknowledge.worldbank.org/bitstream/handle/10986/13329/9780821397282.pdf?sequen
ce=5.
Eurostat, OECD “Eurostat-OECD Methodological Manual on Purchasing Power Parities” (2012) at[5.8.1], available at: https://www.oecd.org/sdd/prices-ppp/PPP%20manual%20revised%202012.pdf.
Woolworths NZ "Post conference submission on Market study into grocery sector: Attachment 5 NERA - Grocery Market Study: Post-Conference report” (25 November 2021) at Appendix C.

1381

1382

1383

483

C21

The OECD and ICP datasets present price levels down to the “class” level. In Table C1
we present the product classes that are included in each category that we used forthis analysis.
Table C1

Product categories included in the OECD and ICP price indices andexpenditure statistics

OECD
•

ICP
Food and non-alcoholic beverages(category)•

Food and non-alcoholic beverages(category)oBread and cereals (class)oBread and cereals (class)oMeat (class)oMeat (class)oFish and seafood (class)oFish (class)oMilk, cheese and eggs (class)oMilk, cheese and eggs (class)oOils and fats (class)oOils and fats (class)o

Fruit, vegetables, potatoes(class)o

Fruit (class)o

Vegetables (class)oOther food (class)ooNon-alcoholic beverages (class)

Sugar, jam, honey, chocolate
and confectionery (class)•

Alcoholic beverages (class)oFood products n.e.c. (class)•Tobacco (class)oNon-alcoholic beverages(class)•Alcoholic beverages (class)•Tobacco (class)

Source: OECD and ICP datasets.1384, 1385

C22

Numbeo uses a product list with weights to calculate prices.1386 Given that theseprices are crowd sourced, we do not know what type of outlets these prices came
from.

1384

Eurostat, OECD “Eurostat-OECD Methodological Manual on Purchasing Power Parities” (2012) at[Box 13.3], available at: https://www.oecd.org/sdd/pricesppp/PPP%20manual%20revised%202012.pdf.
Paul McCarthy “National Accounts Framework for International Comparisons: GDP Compilation andBreakdown Process” in World Bank Measuring the Real Size of the World Economy: The Framework,
Methodology and Results of the International Comparison Program (World Bank, Washington DC,
2013) at 82-83, available at:https://openknowledge.worldbank.org/bitstream/handle/10986/13329/9780821397282.pdf?sequen
ce=5.
Numbeo “Methodology and motivation for Numbeo.com” available at:https://www.numbeo.com/common/motivation_and_methodology.jsp.

1385

1386

484

C23

We understand that the OECD, ICP, and USDA datasets only consider products thatare purchased for consumption at home. To support this, we obtained the following
evidence describing what types of products are included in the lists above.
C23.1

The OECD specifies that its food, non-alcoholic beverages, and alcoholic
beverages categories include those items when purchased for consumption
at home. They specifically exclude products:1387…sold for immediate consumption away from the home by hotels,
restaurants, cafes, bars, kiosks, street vendors, automatic vending machines,
etc.

C23.2

The ICP has a separate category for restaurants and hotels, implying thatgrocery items consumed at these locations are not included in thecalculation of price indices for food and (alcoholic and non-alcoholic)beverages.1388

C23.3

The USDA specifies that they calculate expenditures of products consumed
at home.1389

C24

As noted in Chapter 3, the indices that we have used include food, non-alcoholic
beverages, alcoholic beverages and tobacco bought at retail stores. As such, not all
products sold by supermarkets are captured in the indices. These are items such as
household cleaning supplies, which were included in other indices. These otherindices were not included in our analysis, because they also contained items thatwould not likely be purchased at a supermarket.

C25

For example, for the ICP dataset, non-durable household goods is included in the“furnishings, household equipment, and routine household maintenance” index
which also includes: “household textiles”, and “repair of furniture”. We consider
these items unlikely to be purchased at a grocery store, and therefore did notchoose to include that index.1390

1387

Eurostat, OECD “Eurostat-OECD Methodological Manual on Purchasing Power Parities” (2012) at[11.01.10.0], [11.01.20.0], [11.02.10.0], available at: https://www.oecd.org/sdd/pricesppp/PPP%20manual%20revised%202012.pdf.
Paul McCarthy “National Accounts Framework for International Comparisons: GDP Compilation andBreakdown Process” in World Bank Measuring the Real Size of the World Economy: The Framework,
Methodology and Results of the International Comparison Program (World Bank, Washington DC,
2013) at 87, available at:https://openknowledge.worldbank.org/bitstream/handle/10986/13329/9780821397282.pdf?sequen
ce=5.
USDA “Data on expenditures on food and alcoholic beverages in selected countries: 2013-2018”(2019), available at: https://www.ers.usda.gov/media/10271/2013-2018-food-spending_update-april2019.xls.
Paul McCarthy “National Accounts Framework for International Comparisons: GDP Compilation andBreakdown Process” in World Bank Measuring the Real Size of the World Economy: The Framework,
Methodology and Results of the International Comparison Program (World Bank, Washington DC,
2013) at 84-85, available at:https://openknowledge.worldbank.org/bitstream/handle/10986/13329/9780821397282.pdf?sequen
ce=5.

1388

1389

1390

485

Methods used in interpreting datasets
C26

In this report, we used three methods that allowed us to use datasets to attempt tofind the price level of groceries in New Zealand’s grocery stores.

C27First, we explain how we converted prices in local currency units to a standardised
unit.

C28

Second, we combined price levels for several product groups to create price indicesfor grocery products using the OECD and ICP datasets.

C29

Third, we choose a selection of countries that we will use to compare New Zealand’s
price level to which we think have similar determinants of price other thancompetition to New Zealand.

Conversion methods
C30

To create price-level indices and compare expenditures, prices must be converted to
a common unit.

C31

In this section, we assess submissions received from NERA and HoustonKemp (onbehalf of Foodstuffs) and explain our process for converting currency to a single unit,
known as the “blended approach”. We also explain how we sourced exchange rateand PPP data for use in our analysis.

NERA and HoustonKemp submissions on conversion methods
C32

In our draft report we considered that the market exchange rate is the mostappropriate method of conversion between grocery prices in different countries.1391
We came to this view for two reasons:C32.1

the market exchange rate is the appropriate method of conversion when
products are tradable. As grocery products are tradable, the market
exchange rate is the most appropriate means of conversion; andC32.2

the datasets we used for price comparison purposes use price indexes toconstruct PPP rates, so converting prices using PPP would strip out thedifference we are investigating.

C33

NERA and HoustonKemp later told us that PPP is the most appropriate method of
converting grocery prices, because grocery retailing, and costs associated with it, is
not tradable.1392, 1393

1391

Commerce Commission “Market Study into the retail grocery sector – Draft report” (29 July 2021) at[3.89].
Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA Grocery Market Study: Review of NZCC Draft Report” (10 September 2021) at [124].
Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix C HoustonKemp - International comparisons of grocery prices” (9 September 2021) at [57].

1392

1393

486

C34

Although we agree with NERA and HoustonKemp that the grocery retailingcomponent of price is not tradable, we remain of the view that the component ofprice associated with grocery products is tradable.

C35

Therefore, to reconcile these facts, we sought to convert each grocery pricecomponent (tradable and non-tradable) using their appropriate conversion rate. We
also converted expenditures in the same way. We discuss our process for conducting
these conversions in the next section.

Blended approach
C36

As discussed above, we agree with NERA and HoustonKemp that the costs involved
with grocery retailing (eg, labour, freight, store rents) are not tradable and that thisshould be accounted for in our price comparison methodology. Therefore, wesought to split the price of grocery products by their tradable and non-tradable
components and converted each share individually using PPP and market exchange
rates respectively.

C37

To use this method, we first had to determine the share of grocery prices that is
tradable and non-tradable. As a starting point, we used the average share ofrevenues paid to suppliers by each of the major grocery retailers as a proxy for theshare of grocery prices that is tradable. We are of the view that these revenues
provide us with a reasonable proxy for the tradable component of grocery prices asthese figures represent the revenues that are paid to suppliers in exchange for
products and thereby excludes the grocery retailing component of final grocery
prices.

C38

Table C2 shows the share of revenue paid to suppliers by the major grocery retailers.
We find that the average share paid is 66%. Using this figure, we are of the view that
it is appropriate for purposes of our analysis to consider that 66% of grocery prices
are tradable, and 34% of grocery prices as non-tradable.
Table C2
Share ofrevenues paid
to suppliers

1394

1395

1396

Share of revenues paid to suppliers

WWNZ1394

FSNI1395

FSSI1396

Average

63.1%

68.0%

67.0%

66.0%

Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at 69.
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[21].
Foodstuffs SI “Submission on Market study into grocery sector draft report” (10 September 2021) at[8.2].

487

C39

We invited comment on whether the blended approach would be appropriate at theconsultation conference. Parties made the following comments:
C39.1

HoustonKemp and Foodstuffs NI generally agreed that this method would
be appropriate but considered that the share converted at market exchange
rates should contain traded products only.1397 Foodstuffs NI also estimatedthat only 50% of grocery products may be traded.1398 They were of the viewthat the overall share converted at market exchange rates should be 33%,
and the non-tradable share should be 67% instead.1399, 1400

C39.2

NERA told us that although the Commission used a blended approach fortelecommunications in the past, it is unlikely to further inform us on thelevel of competition in the grocery retail market.1401

Limitations of the blended approach
C40

Aside from the general issues with conducting price comparisons, we consider thatthe main limitation of the blended approach is that our choice of tradable share may
not accurately reflect the proportion of grocery expenditure that is tradable.

C41

For example, NERA told us that the proportion of grocery products that is tradable(or traded) is unknown, and therefore the blended approach cannot be applied in arobust way.1402

C42

To address this issue, we sought to understand how New Zealand’s grocery pricerank changes as the proportion of grocery price that is tradable changes.

C43

Figure C1 shows New Zealand’s grocery price ranking compared to the share that we
consider as tradable. This figure was created using OECD data on food, non-alcoholic
beverage, alcohol and tobacco prices for 2017.

1397

Comments by Greg Houston, Transcript of Grocery Market Study Conference – Day 4(27 October 2021) at 6 (lines 12-22).
Comments by Jo Allan, Transcript of Grocery Market Study Conference – Day 4 (27 October 2021) at
14 (lines 1-5).
Comments by Greg Houston, Transcript of Grocery Market Study Conference – Day 4(27 October 2021) at 7 (lines 29-36).
Comments by Jo Allan, Transcript Grocery Market Study Conference – Day 4 (27 October 2021) at 14(lines 1-5).
Woolworths NZ "Post conference submission on Market study into grocery sector: Attachment 5 NERA - Grocery Market Study: Post-Conference report” (25 November 2021) at [43]; Comments byJames Mellsop, Transcript of Grocery Market Study Conference – Day 4 (27 October 2021) at 8 line
(1-14).
Woolworths NZ "Post conference submission on Market study into grocery sector: Attachment 5 NERA - Grocery Market Study: Post-Conference report” (25 November 2021) at [45].

1398

1399

1400

1401

1402

488

C44

It is evident from Figure C1 that only when the tradable share is 20% or less, does
New Zealand fall out of the top 10 most expensive grocery markets in the OECD.
Therefore, even if we were to take on Foodstuffs NI’s suggestion that 33% of grocery
price should be converted using the market exchange rate, grocery prices remainhigh in New Zealand by international standards. In Figure C1, 0% tradable represents
a conversion only with PPP, and 100% represents a conversion only with the market
exchange rate.

Figure C1

New Zealand’s grocery price rank as a function of the share of tradables(OECD dataset, 2017)1403

Source: Commission analysis of the OECD dataset.1404

Conversion to a common currency (USD)
C45

Price-level indices produced by the OECD and ICP use an annual average exchange
rate.1405 For expenditure statistics produced by the same datasets, we used theannual average exchange rates that the datasets provided to convert expenditure to
expenditure in USD.

C46

Numbeo uses a mid-year exchange rate to convert exchange rates.1406 We do notconsider this to be the most appropriate exchange rate to use, and therefore believe
this is an additional reason to place limited weight on analysis on the Numbeo data.

1403

Commerce Commission Analysis, [].
[].
Eurostat, OECD “Eurostat-OECD Methodological Manual on Purchasing Power Parities” (2012) at [2.4],
available at: https://www.oecd.org/sdd/prices-ppp/PPP%20manual%20revised%202012.pdf; WorldBank “ICP 2017” (2017) at Market exchange rate (US$ = 1), Classification
https://databank.worldbank.org/source/icp-2017.
Numbeo “Methodology and motivation for Numbeo.com”
https://www.numbeo.com/common/motivation_and_methodology.jsp.

1404
1405

1406

489

C47

The USDA converts expenditure data in current US dollars, for the year inquestion.1407 The USDA does not provide further detail as to which exchange rate isused beyond this.

Methods used in combining indices
C48

To compare prices across a range of products, we had to create a combined index of:
C48.1

the separate index for food and non-alcoholic beverages;

C48.2

the index for alcohol; andC48.3

the index for tobacco.

C49

To do this, we took an average of the indices for each category, weighted by theirshare of expenditure, to obtain a combined price level for all products.

C50

For the expenditure comparisons, we added together the per capita expenditureindices for the food and non-alcoholic beverages, alcohol, and tobacco categories.

Submissions on methods used in combining indices
C51

Following the publication of our draft report, NERA told us that alcohol and tobaccoshould be excluded from comparisons, and that our methodology for combining
indices understates the importance of alcohol and tobacco.

C52

NERA argued that alcohol and tobacco should be excluded from comparisons on thefollowing grounds:1408
C52.1

alcohol and tobacco are highly taxed in New Zealand compared to othercountries; andC52.2

alcohol and tobacco are not sold at supermarkets in some other countries,
so including these products in our analysis would not be a fair comparison of
New Zealand’s international grocery prices.

C53

We acknowledged in our draft report that tax on grocery products, which can varyfrom country to country and from product to product, can make comparisonsdifficult.1409

1407

USDA “Overview: International consumer and food industry trends”
https://www.ers.usda.gov/topics/international-markets-us-trade/international-consumer-and-foodindustry-trends/.
Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA Grocery Market Study: Review of NZCC Draft Report” (10 September 2021) at [118].
Commerce Commission “Market Study into the retail grocery sector – Draft report” (29 July 2021) at[3.85.4].

1408

1409

490

C54

However, we do not agree with NERA that we should exclude alcohol and tobacco
products from our analysis because they are not sold at supermarkets in somecountries. We expect that the range of products in supermarkets around the world
varies from country to country and that only including similar products sold insupermarkets in every country would result in a list too small to make meaningfulcomparisons from.

C55

Given that New Zealanders frequently purchase alcohol at supermarkets, we are of
the view that it still constitutes part of the overall grocery price level and that it isappropriate to include it for comparison purposes. Even if we removed alcohol andtobacco from comparisons, as we did in Figure 3.11, we still find that New Zealandcontinues to rank as the seventh most expensive grocery market in the OECD.

C56

NERA also submitted that our weighing of alcohol and tobacco products understatedthe importance of alcohol and tobacco in our analysis for two reasons:

C57

C58

C56.1

Our conversion methodology removed the effect of New Zealand’s
weighting;1410 and

C56.2

The choice of New Zealand as a base country understates the importance ofgoods where New Zealand is relatively expensive.

On these issues, we are of the view that neither methodology is necessarily better
than the other as:
C57.1

weighting only by other countries’ expenditure shares limits the influence of
products not commonly purchased in those countries, which may not be
representative of consumers’ purchasing habits in those countries; andC57.2

a choice of a different base country would cause similar distortions, as thisproperty holds with all choices of base.

However, even if we adjusted for these issues, our findings on grocery prices would
not substantially change. As NERA submits, our grocery price ranking increases tothird, if their methodology is adopted, meaning that grocery prices remain relatively
expensive.1411 Moreover, Figure 3.11 shows us that New Zealand’s prices are high,even when alcohol and tobacco are not included, showing that our weighting
methodology does not drive our findings on price.

Comparator countries
C59

As explained in Chapter 3, we identified some countries that appeared to represent
price determinants more similar to New Zealand than others.

1410

Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA Grocery Market Study: Review of NZCC Draft Report” (10 September 2021) at [A1]-[A5].
Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 – NERA –Grocery Market Study: Review of NZCC Draft Report” (10 September 2021) at [A1]-[A5].

1411

491

C60

These comparisons are for illustrative purposes and we acknowledge that caution
must be exercised when comparing prices between any two particular countries. The
determinants of price are complex and different factors will determine grocery
prices in every country; no country will perfectly mimic New Zealand’s determinantsof price.

C61

Nonetheless, we sought to identify countries that appeared more similar to
New Zealand in terms of the factors we considered most likely to affect price:

C62

C61.1

Supply factors such as the cost of production. For example, access toeconomies of scale and shipping networks.

C61.2

Demand factors such as tastes, preferences and income effects. In addition,
countries with similar tastes and preferences are likely to allow for morecomparisons between a more similar set of goods.

To act as a proxy for some of the above factors, we consider the closeness of New
Zealand to other countries in terms of output per capita, population, and population
density. This was because:
C62.1

output per capita is likely to capture some of the differences between
countries in their demand for grocery products – this is because we would
expect income levels to be one determinant of prices;1412 andC62.2

population and population density were selected as this may affect theeconomies of scale available for grocery retailers.

C63

Table C3 summarises these statistics for the countries that we selected ascomparators to New Zealand.

C64

We chose to look at five countries in more detail for illustrative comparisons. These
were Australia, Finland, Iceland, Ireland and Israel. We chose to focus on these forour illustrative comparisons for the following reasons:
C64.1

1412

Australia shares a common market with New Zealand through the Closer
Economic Relations regime, which may equalise some commodity pricesthat are inputs to the grocery market. However, we note that the populationof Australia is five times that of New Zealand, the population density issignificantly lower overall, that population is more clustered in urban areas,
and the climate and landscapes are different. It is unclear how these factors
will affect comparisons between New Zealand and Australia.

Countries with higher productivity (and therefore higher per capita output) tend to have higher prices,known as the Penn effect (also known as the Balassa-Samuelson effect), Paul A. Samuelson “Facets ofBalassa-Samuelson Thirty Years Later” Review of International Economics, 1994, Vol.2, No.3, at 205,
[
].

492

C64.2

Finland has a similar level of output, population, and population density to
New Zealand, meaning that input costs for labour and distribution costs may
be similar. However, Finland is a member of the European Union (EU)common market, and is geographically close to its neighbours meaning thatbarriers to trade are likely to be lower.

C64.3

Iceland, being an island in the middle of the Atlantic, may emulate some of
the geographic isolation that New Zealand experiences, which act as abarrier to trade. On the other hand, Iceland’s high per capita output,
significantly smaller size, and membership to the European Economic Area
(EEA) are likely to affect grocery prices in ways that differ from New Zealand.

C64.4

Ireland has similar output and production size to New Zealand. However,their proximity to the UK, population density and membership in the EUmean they are likely to face a significantly different environment for retailgrocery than New Zealand.

C64.5

Israel has a similar population and output level to New Zealand but is more
densely populated. Israel also faces a number of unique geopoliticalcircumstances but it is unclear whether these make it more of lesscomparable to New Zealand in terms of distance from trading partners andcosts for grocery retailers.

493

Table C3Comparator summary statistics
Population (2017)1414

Country

GNI/capita (2017) PPP
constant international
dollars1413

Population density(2017)1415

New Zealand

40,700.5

4,813,600

18.281

Australia

47,163.2

24,601,860

3.198

Iceland53,923.2

343,400

3.425

Ireland41,407.41416, 1417

4,807,388

69.784Israel

38,637.0

8,713,300

402.648

Finland47,593.9

5,508,21418.124

Source: Commission analysis of World Bank dataset.1418

Further analysis and sensitivity testing
C65

In order to better understand New Zealand’s relative grocery prices, we sought to:
C65.1

compare our analysis for 2017 to more recent years;

C65.2

present price index data from the OECD, split by alcohol and tobacco;

C65.3

present data on the proportion of income spent on groceries using otherdatasets and methods; andC65.4

conduct sensitivity analysis of data submitted by NERA.

Analysis using more recent datasets
C66

The analysis that we presented in Chapter 3 used data from 2017 as this was theyear with data available from a number of countries. To understand how findings
from 2017 are likely to be helpful in understanding prices today, we consideredresults from datasets that had more recently available data available.

1413

World Bank “Gross National Income (GNI) per capita PPP (constant 2017 international dollars)”
https://data.worldbank.org/indicator/NY.GNP.PCAP.PP.KD?locations=AU-NZ-IL-IE-FIIS&year_high_desc=true. Gross National Incomes are converted to a single unit, called theinternational dollar. One international dollar has the same purchasing power as one US Dollar in 2017.
World Bank “Population, total”
https://data.worldbank.org/indicator/SP.POP.TOTL?end=2017&locations=AU-NZ-IL-IE-FIIS&start=2017&year_high_desc=true.
World Bank “Population density (people per sq. km of land area)”
https://data.worldbank.org/indicator/EN.POP.DNST?end=2017&locations=AU-NZ-IL-IE-FIIS&start=2017&year_high_desc=true.
Ireland uses modified Gross National Income to discount for the effect of tax havens. This data isavailable from the Central Statistics Office. A PPP of 0.913 was used to convert to int’l $, which comesfrom the ICP dataset.
Central Statistics Office “Measuring Ireland’s Progress 2017”https://www.cso.ie/en/releasesandpublications/ep/p-mip/measuringirelandsprogress2017/ef/.
[
].

1414

1415

1416

1417

1418

494

C67

This sensitivity analysis suggests that there is unlikely to have been a materialchange in New Zealand’s relative ranking regarding grocery prices in recent years.

Sensitivity analysis using Numbeo data
C68

Data from Numbeo is available as recently as 2021, produced on a half-yearly basis.
Although we consider limited weight can be placed on the Numbeo data, we still
consider there to be some value in looking at more recent data from this source.

C69

Figure C2 below shows the price levels for OECD countries using the Numbeo, ICP
and OECD datasets for 2017 as a percentage difference relative to New Zealand’s
price level. This graph supports our preliminary finding in Chapter 3 that datasets are
consistent in their relative ranking of prices.

C70

Figure C3 below shows New Zealand’s ranking for grocery prices out of countries in
the OECD, calculated by Numbeo, between 2016 and 2021. It shows that New
Zealand’s relative ranking does not vary substantially from year to year. From this,we consider that it is unlikely that New Zealand’s relative grocery price ranking haschanged significantly since 2017.
Figure C2

Percentage difference in food, beverages (alcoholic and non-alcoholic)and tobacco prices compared to New Zealand (NZ = 0, blended
approach, 2017)

Source: Commission analysis of ICP, OECD and Numbeo datasets. 1419

1419

[

].

495

Figure C3

Ranking of New Zealand grocery prices within OECD countries(Numbeo, 2016-2021)

Source: Commission analysis of Numbeo dataset.1420

Sensitivity analysis using EIU data
C71

Although we have reservations about using the EIU dataset, we recognise that it wasmore recent than what we consider to be our most useful data sources. Therefore,
we replicated NERA’s analysis using the EIU data for 2017 and 2018. We thencompared the results to the analysis presented in the NERA report for 2019 and2020.1421

C72

For both Auckland and Wellington, the relative rankings are similar for every year
from 2017 through 2020. In all years, Auckland is ranked between the fifth and 10th
cheapest city out of the “metro cities” category in the EIU dataset using NERA’s
approach. A similar result can be found for Wellington in the categories of nonmetro cities. When a blended approach is applied, Auckland’s grocery price ranking
increases.1422

C73

In addition, we considered expenditure data from the OECD. The OECD compiles
expenditure statistics for food and non-alcoholic beverages annually, which isavailable as recently as 2019 for many OECD countries.

C74

Figure C4 below shows expenditure per capita on grocery items (alcohol and tobacco
exclusive) for OECD countries between 2008 and 2019. New Zealand is shown as the
red line, while other countries are in grey. We note that 2017 is the most recent year
where all countries in the OECD had submitted an expenditure statistic for food andnon-alcoholic beverages.

1420

[
[
[

1421
1422

].
].
].

496

C75

Out of 35 OECD countries that submitted expenditure statistics for 2019, Figure C4
shows New Zealand ranks as fifth in terms of grocery item expenditure. 1423
Figure C4

Per capita expenditures on food and non-alcoholic beverages forOECD countries (Blended Rate, 2008-2019)

Source: Commission analysis of OECD dataset.1424

Grocery prices inclusive and exclusive of alcohol
C76

In Chapter 3, we used data from the ICP dataset to show that grocery prices in New
Zealand are unlikely to be primarily driven by higher alcohol and tobacco prices.
Below, we show that the OECD dataset shows the same results as the ICP dataset.

C77

Figure C5 below shows a price level for groceries calculated with and without alcoholand tobacco using the OECD dataset.

C78

Figure C6 below shows per capita grocery expenditures, calculated with and without
alcohol and tobacco using the OECD dataset.

1423

Switzerland, Japan, and Costa Rica have not submitted food and non-alcoholic beverage expenditurestatistics for 2019.
[
].

1424

497

C79

Both Figure C5 and Figure C6 are the same as the graphs produced in Chapter 3 forthe ICP datasets. Analysis using data from the OECD shown below supports our
finding that grocery prices remain high when alcohol and tobacco are removed.

Figure C5

Percentage difference in grocery prices, inclusive and exclusive of alcohol(NZ = 0, blended, 2017)

Source: Commission analysis of OECD dataset.1425

1425

[

].

498

Figure C6

Per capita grocery expenditure, inclusive and exclusive of alcohol (USD, 2017)

Source: Commission analysis of OECD dataset.1426

Sensitivity testing of analysis submitted by NERA
C80

To understand how the use of a ranking mechanism could affect the results obtainedby NERA, we took the mean of prices for each city, and compared those results to
NERA’s analysis.

C81

We observed that when prices were averaged by taking a mean of prices, we see anincrease in the ranking of Auckland and Wellington.

C82

In Table C4 below, we demonstrate with an example how using a median ranking
system and mean can result in different price levels being measured. We calculate
the mean and median for three products in three cities using the prices given below.

Table C4

Example calculation of a mean and median price with for three products
Product X

Product Y

Product Z

MeanMedianCity A

$4

$4

$1

$3

$4

City B

$3

$3

$6

$4

$3

City C

$12

$2

$1

$5

$2

Source: Commission analysis of EIU dataset.1427

1426
1427

[
[

].
].

499

C83

In the example given, we see that using a mean to calculate an average, City C is themost expensive city, while City A is the least expensive. On the other hand, when amedian is used to calculate the average, City A ranks the highest, while City C ranks
the lowest. This demonstrates that using different methods to calculate the mean
and median can affect the relative rankings of these three cities.

Grocery prices as a proportion of income
C84

In our draft report we made comments about the proportion of grocery expenditure
being relatively high in New Zealand. NERA considered that we do not back up thisclaim with empirical analysis.1428

C85

In this section, we conduct further sensitivity testing of our findings on the average
proportion of income spent on groceries.

C86

Table C5 shows New Zealand’s grocery expenditure measured as a proportion ofincome compared to OECD countries, using several different income measures. We
find that when using either GNI, or NNI, New Zealanders appear to spend a relatively
large share of income on groceries relative to other OECD countries.

C87

Even when the measure of Average Wage is used, we find that New Zealand still
ranks within the top half of OECD countries in terms of the proportion of income
spent on groceries.

C88

However, when the adjusted NNI measure is used, it appears that New Zealanders
does not spend a relatively large share of income on groceries as compared to otherOECD countries. Therefore, we recognise that this analysis may be sensitive to themeasure of income used.
Table C5

New Zealand’s proportion of income spent on groceries ranking using
different measures of income

OECD

ICP

Gross
National
IncomeNet
National
IncomeAdjustedNet
National
IncomeAverage
Wage

Food

2

2

19

15

Alcohol/Tobacco

2

2

8

10

Combined

1

1

15

12

Food

2

3

19

15

Alcohol/Tobacco

2

2

8

10

Combined

1

1

15

13

Source: Commission analysis of EIU dataset.1429

1428

1429

Woolworths NZ “Submission on Market study into grocery sector draft report: Attachment 1 - NERA Grocery Market Study: Review of NZCC Draft Report” (10 September 2021) at [139].
[
].

500

C89

We note that our assessment of New Zealand’s ranking in terms of the proportion ofincome spent differs from the analysis undertaken by NERA.1430 We suspect thisdifference arises from differences in the specific income measures used.

C90

We note that NERA conducted their analysis for both PPP and market exchange
rates. However, when creating proportions, it is important to ensure that both
figures have the same units to ensure consistency in the methodologies used. As
expenditure statistics are reported in USD and converted with market exchange
rates, we are of the view that it is appropriate to convert income measures in thesame manner.

1430

Woolworths NZ "Submission on Market study into grocery sector draft report: Attachment 1 - NERA Grocery Market Study: Review of NZCC Draft Report” (10 September 2021) at [141].

501

Attachment D

Promotions and pricing data analysis

Introduction
D1

This attachment provides details of our analysis of pricing and promotion data thathas been provided by the major grocery retailers.

D2

The sections in this attachment are:

D3

D2.1

description of data provided;

D2.2

initial data cleaning;

D2.3

data limitations;D2.4

analysis of promotions; andD2.5

analysis of pricing behaviour.

The results of our analysis are also described in the main body of our report, inparticular, in Chapter 5, Chapter 7, and Chapter 8.

Description of data provided
D4

The analysis was based on detailed sales data provided by the three major grocery
retailers, Foodstuffs NI, Foodstuffs SI and Woolworths NZ, for their four main retailbanners: Four Square, New World, PAK’nSAVE, and Countdown.1431 Sales data forcalendar year 2019 was provided for all individual products sold in any store of eachof these retail banners. Foodstuffs NI and Woolworths NZ provided weekly data andFoodstuffs SI provided daily data.1432 After converting the Foodstuffs SI data to
weekly (see below), the combined dataset consisted of approximately 430 million
records.

Variables
D5

For every combination of store, product, and week (for Foodstuffs NI and
Woolworths NZ) or day (for Foodstuffs SI), the following key variables were provided
by all three major retail chains:1433
D5.1

1431

1432

1433

Product identifiers: SKU (article) number and description, and barcode (ifapplicable).

We were also provided with data on other retail banners but chose to focus this analysis on these four
retail banners. Foodstuffs NI also provided data for one Fresh Collective store. This was grouped with
Foodstuffs NI New World stores in the analysis.
The data provided spans 53 calendar weeks and includes the last few days of 2018 and the first few
days of 2020. All weeks were retained in the analysis, including those that partially fell outside
calendar 2019.
Various additional variables were provided by some of the three major grocery retailers and some ofthese were used to augment the analysis in ways that are described below, however most of theanalysis is based on the variables above that are common to the data provided by all of the major
grocery retailers.

502

D6

D5.2

Product characteristics: Descriptors of the product (eg, sales department or
category) and sales units (see below).

D5.3

Promotion label: The type(s) of promotion(s) that applied to the product in
the given store and week, if any.

D5.4

Total revenue: The revenue from sales of the product (including GST).

D5.5

Total quantity: The amount of the product sold, in appropriate units (seebelow).

D5.6

Total cost of goods sold (COGS): The total cost of the product sold (excluding
GST).

The variables above were used to calculate the quantity-weighted weekly average
price (total revenue/total quantity) and average COGS (total COGS/total quantity)
for each combination of store, product, promotion label, and week.

Sales quantities and units
D7

Quantities of products sold were provided separately for in-store and online sales.
Online sales were associated with a store in the dataset, so in-store and online sales
were added together to calculate the total weekly sales of each product in eachstore.

D8

Some products are sold in different units. For example, an item of wine may be soldas individual bottles or as cases of multiple bottles, with sales units of bottles(denoted ‘each’) and cases of multiple bottles as a single unit. Our analysis was
based on the sales units provided since prices and revenues correspond to sales
units.1434

D9

When a product was signalled as on promotion for a given week there may be bothpromotional and non-promotional sales of the product in a store that a week. Thiscan occur for promotions that last for less than a week, or for multi-buy or loyalty
card promotions that may not apply to all sales. The data provided by Foodstuffs NI
and Foodstuffs SI separated quantities of products sold on promotion and not on
promotion in a store in the same week, where this occurred.

D10

The data provided by Woolworths NZ did not separate weekly quantities into
promotional and non-promotional sales, but promotional and non-promotional unit
prices provided by Woolworths NZ were used to calculate the implied promotionaland non-promotional quantities where necessary.1435

1434

Foodstuffs NI and Woolworths NZ provided quantities in sales units while Foodstuffs SI provided
quantities in ‘base’ units (‘kg’ or ‘each’).
If 𝑝𝑃 and 𝑝𝑁𝑃 are the promotional and non-promotional prices of a product in a store in a week, 𝑞𝑃
and 𝑞𝑁𝑃 are the corresponding (unknown) quantities, 𝑅 = 𝑝𝑝 𝑞𝑃 + 𝑝𝑁𝑃 𝑞𝑁𝑃 is the total revenue, and𝑄 = 𝑞𝑝 + 𝑞𝑁𝑃 is the total quantity, then 𝑞𝑃 = (𝑄𝑝𝑁𝑃 − 𝑅)/(𝑝𝑁𝑃 − 𝑝𝑃 ) and 𝑞𝑁𝑃 = 𝑄 − 𝑞𝑝 .

1435

503

Additional datasets
D11

Separate datasets were also provided by each major grocery retailer that werelinked to the sales data using product identifiers:
D11.1 KVIs: lists of products that the major grocery retailers use to monitor theircompetitors’ pricing.
D11.2 Basket penetration: For each product sold in 2019, the proportion of total
shopping baskets in which that product appeared, across all stores of eachretail banner.

Initial data cleaning
Conversion of Foodstuffs SI daily data to weekly
D12

The daily data provided by Foodstuffs SI was aggregated to weekly summaries to beconsistent with the weekly data provided by Foodstuffs NI and Woolworths NZ. Thiswas done by summing revenues, COGS, and quantities for each combination of
store, product, promotion label, and calendar week in the Foodstuffs SI daily data.

D13

The minimum, mean, and maximum of the daily unit prices were also calculated foreach combination, to capture any variation of prices within a week.

Removing stores without a full year of data
D14

The data provided included 630 stores in total and the analysis was based on datafrom 594 stores where data was provided for all of calendar 2019. Data was not
used from 36 stores that opened or closed during calendar 2019, or which otherwise
had missing sales data for any weeks in 2019.

Validating barcodes
D15

Some data provided in the ‘barcode’ field for products were not valid barcodes, suchas four-digit codes for fresh produce or products sold in bulk. An algorithm was used
to identify the valid barcodes for products.1436

Identifying individual products
D16

Individual products were identified in the data using the combination of SKU number
and sales units (as described above) where sales units were provided. This enabled
products that have the same SKU number but different sales units to be
distinguished as separate products (eg, bottles and cases of wine). The combinationof SKU number and sales unit for a product is referred to as ‘product identifier’
below.

1436

Barcode entries were assumed to be invalid if they included any non-numeric characters or wereshorter than eight digits or longer than 14 digits. For numeric entries between eight and 14 digits, achecksum was computed to test if these were valid, Wikipedia “Check digit”
https://en.wikipedia.org/wiki/Check_digit.

504

Identifying common products sold by different major retail grocery chains
D17

Some of the analysis focused on a set of common products that are sold in at least
some stores of all major grocery retailers. These common products were identified
using product barcodes and product identifiers. To accommodate the possibility of a
product being sold under multiple barcodes, common products were identified bygrouping any products that had either the same barcode or the same productidentifier. This enabled some identical products that were sold using different
barcodes and/or different product identifiers to be grouped for analysis.1437

D18

In the context of validating barcodes, United Fresh noted that PLU codes areavailable and can be accessed free of charge.1438

D19

Products without barcodes (ie, most fresh produce) have been excluded from partsof the promotions analysis which required identifying identical products sold bydifferent banners.1439 These products are otherwise included in the rest of theanalysis of promotions. Only a very small proportion of products in the data
provided appear to use PLU codes, so including these seems unlikely to have asignificant effect on the results.

Data limitations
D20

The data has some limitations that affect the analysis and interpretation of results:
D20.1 The data provided by all three major grocery retailers does not containrecords for products that were not sold in a store in a week. This could occur
if the product was introduced or deleted at some point in 2019, wastemporarily out of stock (or out of season) in some weeks, or if it was instock but was not bought by any customers. This missing data has thefollowing implications.
D20.1.1 It is not possible to know why no sales were recorded for a
product in a store in a week. For a product without sales recordedin every week, an assumption must be made about whether it
was available for sale or not.
D20.1.2 In any cases where products were in stock but were not bought
by any customers in a store in a week, the price at which theseproducts were offered for sale is not known.

1437

1438
1439

For example, suppose that a product is sold by retail chain A under SKU numbers A1 and A2 using
barcode 1234 and is sold by retail chain B using SKU number B1 using barcodes 1234 and 4567. Thesefour different cases can all be linked to a single product group as they have either the same SKU
number or the same barcode as another product in the group.
United Fresh “Submission on Market study into grocery sector draft report” (24 August 2021) at 8.
In particular, the leader-follower pricing analysis and analysis of asymmetric cost changes acrossretailers.

505

D20.1.3 If all sales of a product are recorded as promotional sales, thisdoes not necessarily mean it was always on promotion, as it may
have been available for sale but was unsold whenever it was noton promotion.
D21

The data provided by Foodstuffs NI and Foodstuffs SI does not include information
about non-promotional prices for products in weeks where the only sales were at
promotional prices. This affects promotions that apply to all sales of a product in astore in a week (eg, New World’s ‘Saver’ and PAK’nSAVE’s ‘Extra Low’ promotions, if
these lasted for a full week), and may also affect loyalty card and multi-buy
promotions if all sales in a store in a week were at the promotional price. This affects
the comparison of promotional and non-promotional pricing for Foodstuffs NI andFoodstuffs SI.

D22

Analysis of pricing behaviour that involves looking at changes in prices over time islimited by the weekly frequency of the data. In practice, retailers may change theirprices more quickly in response to changes in external factors such as costs,
demand, and competitors’ pricing.

Analysis of promotions
D23

The main types of promotions used by the major grocery retailers in 2019 were
examined in the following ways:
D23.1 Proportion of revenue from products on promotion: Analysis of the
proportion of total revenues in 2019 which came from sales of products on
promotion.
D23.2 Prevalence of each type of promotion: Analysis of the overall extent to which
each promotion was used by each major grocery retailer in its stores. This
reflects the number of products that are on promotion as well as how often
during the year products were on promotion in each store.
D23.3 Prevalence of multiple promotions: How common it was for products to be
sold under more than one type of promotion in a store in a week.
D23.4 Frequency of promotions: For products that were sold on promotion at sometime during 2019, how often this occurred, ie, for how many weeks of theyear the product was on promotion in a retailer’s store.
D23.5 Pricing: Comparisons of promotional versus non-promotional prices for
products that were sold on promotion in at least some stores and weeks.

506

Revenue from promotions
D24

Across all major grocery retailers in 2019, around half of revenues came from salesof products on promotion. The largest category of promotional sales was all otherpromotions, with multi-buy and loyalty card promotions each accounting for lessthan 8% of revenues (Table D1).1440
Table D1

Proportion of total revenues from products on promotion
by type of promotion
Promotion type

Proportion of total
revenues

Multi-buy

1-7%

Loyalty card

3-8%

All other promotions

35-40%

Not on promotion

50-55 %

Source: Commission analysis of pricing and promotional data.1441

D25

The overall proportion of revenues from sales of products on promotion varies
across retail banners, from around a quarter to around two thirds of revenues (Table
D2).

Table D2

Proportion of total revenues in 2019 from sales of products on promotion
Retail banner

Proportion of total
revenues

FSNI: PAK’nSAVE

65 – 75%

FSSI: PAK’nSAVE

50 – 60%

FSNI: New World45 - 55%

FSSI: New World

40 – 50%

Woolworths:
Countdown

35 – 45%FSSI: Four Square

30 – 40%

FSNI: Four Square

25 – 35%

Source: Commission analysis of pricing and promotional data.1442

1440

1441
1442

The vast majority of all other promotions are fixed discount promotions and very small proportion are
in-store specials.
[
].
[
].

507

Prevalence of promotions
D26

For each major grocery retailer, the total set of ‘sales opportunities’ in 2019 is all
feasible combinations of products, stores, and weeks (PSW). Prevalence ofpromotions seeks to measure the proportion of PSW that are accounted for bypromotions, which reflects how many products were available for sale on
promotion, and in which stores and weeks these products were available for sale.

D27

For each store, the total number of product-weeks (PW) was calculated in two
different ways that reflect the limitations of the data discussed above and help toassess the potential impact of missing information about availability of products inweeks when they were not sold:D27.1 Weeks sold method: PW for a store reflects the number of weeks in whichsales of the product were actually recorded in the store.
D27.2 Full year method: PW for a store assumes that every product sold in thestore at some point during the year was available for sale in all weeks of the
year.

D28

These two methods can be thought of as upper and lower limits respectively for
estimating the true PSW for each retailer. For each major grocery retailer, total PSW
was calculated as the sum of PW across all its stores. Thus, the PSW for a retailerreflects the combinations of products and stores that were observed in the sales
data for 2019 and incorporates the fact that not all products are sold by all stores.

D29

The prevalence of each type of promotion used by each major grocery retailer was
calculated as the ratio of PSW for which sales were recorded under that promotion
to the total PSW for the retailer (using the two alternative definitions of total PSW
above).1443 This reflects the proportion of total ‘sales opportunities’ of that retailer
for which sales were recorded under each type of promotion. The prevalence ofmultiple weekly promotions was also examined by looking at the proportion of total
PSW for which products were on more than one different type of promotion in astore in a single week.

D30

Across all retail banners, the most prevalent type of promotion was fixed discountpromotions that apply to all sales of a product in a store for a given period (Figure
D1). Loyalty card and multi-buy promotions were less common overall, but theprevalence of these types of promotions does vary somewhat by retail banner.

1443

For example, if a retailer recorded sales of 50 products on ‘special’ promotion in 10 stores for
20 weeks and the retailer sells a total of 100 products in 25 stores for 52 weeks then the overall
prevalence of the ‘special’ promotion is 50 x 10 x 20 / (100 x 25 x 52) = 8% of total product-storeweeks.

508

Figure D1

Overall prevalence of promotions by type of promotion across all retailbanners combined – the lower and upper limits respectively reflect the‘full year’ and ‘weeks sold’ methods described above

Source: Commission analysis of pricing and promotional data.1444

D31This analysis indicated that the overall prevalence of promotions in 2019 varied
across retail banners from around 14% to 46% of PSW using the ‘full year’ method orfrom 31% to 70% of PSW using the ‘weeks sold’ method (Figure D2). Prevalence ofpromotions also varies across stores within each retail banner, with more variation
across stores observed for retail banners where individual stores have more ability
to price independently.

Figure D2

Overall prevalence of all promotions by retail banner – the lower and upper
limits respectively reflect the ‘full year’ and ‘weeks sold’ methods
described above

Source: Commission analysis of pricing and promotional data.1445

1444
1445

[
[

].
].

509

D32

Figure D3 breaks down prevalence of individual promotion types used by each retailbanner. Loyalty card promotions were more common in Foodstuffs SI New World
stores (Club Deals) compared to Foodstuffs NI New World (also Club Deals) andCountdown stores (Onecard). Multi-buy promotions were relatively uncommon
across all retail banners. Fixed discount promotions are most common across all
retail banners, and are particularly prevalent in Foodstuffs NI PAK’nSAVE stores.

Figure D3

Prevalence of promotions by retail banner and promotion type – the lower
and upper limits respectively reflect the ‘full year’ and ‘weeks sold’ methods
described above

Source: Commission analysis of pricing and promotional data.1446

1446

[

].

510

D33

Promotions (of any kind) were found to be relatively common for products inalcohol, dairy, meat, frozen products, and general grocery categories. Promotions
were relatively uncommon for speciality categories such as fresh flowers, tobacco,
pharmaceuticals, café, and other services. It was also relatively uncommon for
products to be on more than one type of promotion in a store in a single week. The
prevalence of multiple promotions was estimated to be rare for each of the retailbanners.

Frequency of promotions
D34

Frequency of promotions was analysed by looking at products that were sold on
promotion at some time during 2019. For these products, the proportion of total
store-weeks for which the product was sold on promotion was calculated (across allstores of the retailer where that product was sold).1447 Again, total store-weeks foreach product were calculated using the weeks sold and full year methods describedabove.

D35

Findings from this analysis include the following (Figure D4):
D35.1 Overall, around 35% of products were never on promotion in any of thestores in which they were sold during 2019. Across retail banners, this
proportion varied from 19% to 59% of products.
D35.2 Between 2.6% and 12.4% of products (depending on calculation method)were on promotion in more than three quarters of the combinations ofstores and weeks in which they were sold. Across retail banners, this
proportion varied from between 0.1% and 3.5% to between 13% and 43%.
This indicates that, for some retail banners, a significant proportion of
products were on promotion in almost all combinations of stores and weeks
in which they were sold.

1447

For example, if a product was sold on promotion in 10 stores for five weeks and in total it was sold in
20 stores for 52 weeks, it was on promotion for 10 x 5 / (20 x 52) = 5% of store-weeks.

511

Figure D4

Frequency of all types of promotions across all retail banners

Source: Commission analysis of pricing and promotional data.1448

D36

Figure D5 shows the proportion of products that were on promotion in more thanhalf of store-weeks in which they were sold, by retail banner. This proportion isrelatively high for PAK’nSAVE stores compared to other retail banners.

Figure D5

Proportion of products that were on promotion in more than 50% of storeweeks – the lower and upper limits respectively reflect the ‘full year’ and‘weeks sold’ methods described above

Source: Commission analysis of pricing and promotional data.1449

1448
1449

[
[

].
].

512

Promotional vs non-promotional pricing
D37

For each product sold in each store of each major grocery retailer that was sold on
promotion at some point in 2019, the overall quantity-weighted average nonpromotional and promotional prices were calculated by dividing total revenues bytotal quantity sold, for each type of promotion and for all non-promotional sales.1450
For some products in some stores, the average non-promotional price could not becalculated as no non-promotional sales were recorded during the year. For those
product-store combinations where average non-promotional prices could be
calculated, the average discount offered by each applicable type of promotion was
calculated by comparing the weighted average promotional and non-promotional
prices across the year.

D38

Weighted average promotional prices were also compared to some other pricing
metrics:
D38.1 The overall unweighted average of all selling prices observed for eachproduct in each store over the year (both promotional and non-promotional
prices). The difference between this average and the weighted average
promotional price gives an indication of the volume of promotional versus
non-promotional sales.
D38.2 The maximum and minimum weekly weighted average price (ie, weekly total
revenue/total quantity) observed for each product in each store over thewhole year. This gives an indication of how the average promotional pricecompares to the highest and lowest prices seen for a product in a store over
the year.

D39

Across all combinations of products and stores for which weighted average
promotional and non-promotional prices could be calculated, Figure D6 shows themedian and 2.5th / 97.5th percentiles of the promotional price discount, by type of
promotion. Multi-buy promotions tend to offer slightly greater discounts thanloyalty card or other promotions (ie, fixed price discounts). Across retail banners, themedian discount ranges from around 10% to 30% depending on the retail bannerand type of promotion.

1450

This was done for each product in each store separately to allow for differences in pricing of a productacross stores.

513

Figure D6Median and 2.5th / 97.5th percentiles of weighted average promotional prices
vs non-promotional prices across all retail banners, by type of promotion

Source: Commission analysis of pricing and promotional data.1451

D40This analysis also found that:
D40.1 Discounts calculated by comparing promotional prices versus unweighted
average prices are substantially smaller than discounts versus weighted
average non-promotional prices, indicating that promotions do have a
noticeable impact on customers’ purchasing patterns.
D40.2 In most cases, average promotional prices are greater than the lowest pricethat a product sold for in a store during the year.
D40.3 Depending on retail banner and promotion type, between 0.5% and 24% ofcombinations of products and stores had no sales recorded at nonpromotional prices in 2019. This is due to the combined impact of someproducts being on promotion very often (see Figure D4 above), and theeffect of promotions on customer purchasing behaviour such that someproducts are less likely to be bought when they are not on promotion.
D40.4 Small discounts were relatively common. Depending on retail banner andpromotion type, the average promotional price was less than a 10% discountoff the average non-promotional price for between 5% and 44% ofcombinations of products and stores for which average promotional andnon-promotional prices could be calculated.

Response to submissions on our analysis of promotions
D41

HoustonKemp (for Foodstuffs NI and Foodstuffs SI) submitted that promotions are asign of intense price-based competition. They stated:1452
D41.1 it is difficult to imagine that consumers can be confused by the existence ofpromotions;

1451
1452

[
].
Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix B HoustonKemp - Empirical evidence of grocery sector competition” (10 September 2021) at [124][129].

514

D41.2 if competition was very weak, we would not see as many promotions as we
do in practice; andD41.3 frequent and varied use of promotions is inconsistent with coordination or
accommodation between retailers.
D42

We disagree that the prevalence, size and variation of promotions suggests
competition in the retail grocery market is effective. An alternative explanation isthat retailers use promotions as a price discrimination strategy, and pricediscrimination is only possible when firms have market power. In addition:
D42.1 Promotions may make it harder for customers to compare prices for
shopping baskets across stores. Promotions could reduce the information
content of prices by adding noise. Some products that are on promotion
very often may confuse consumers as to what the normal price is, if they do
not pay close attention when shopping (and alter the purchasing decisions
accordingly).
D42.2 If competition was very strong, we would expect prices to be close to costs
and limited scope for price discrimination via promotions.
D42.3 Our analysis focused on promotions for individual products in individualstores. This analysis did not seek to test whether there is coordination at
higher strategic levels (for example, across product categories or types ofpromotions).

Analysis of pricing behaviour
D43

The data was used to examine some aspects of pricing behaviour by individual storesand by retail banners. This was done by looking at changes in prices over time during
2019 across stores and analysing relationships between prices and COGS.

Analysis of pricing correlations
D44

The data provided was used to calculate the weighted average weekly retail price foreach product in each store by dividing weekly total revenue by quantity sold. Theseaverages reflect both promotional and non-promotional pricing, where theseoccurred. Correlations of week-to-week changes in these average prices were
calculated for the set of common products across stores of different retail banners infive selected geographically defined clusters (Table D3). The clusters were selected
for this analysis based on having two or more stores from different retail banners in
relatively close proximity to each other.

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Table D3

Geographic clusters used for analysis of price correlations across stores
Cluster

Milford (Auckland)StoresMilford Countdown

No. of common
products
500 – 1,000

New World Milford
PAK’nSAVE Wairau Road
Hamilton Central

Hamilton Countdown

500 – 1,000

PAK’nSAVE Clarence Street
PAK’nSAVE Mill Street
Newtown(Wellington)

Newtown Countdown

OamaruOamaru Countdown

1,000 – 1,500

New World Newtown
1,000 – 1,500

New World Oamaru
Fendalton(Christchurch)

Church Corner Countdown

1,500 – 2,000

New World Ilam
Riccarton PAK’nSAVE

Source: Commission analysis of pricing and promotional data.1453

D45

Contemporaneous correlations (ie, pricing in the same week), as well as correlations
with lags of one and two weeks were calculated, to analyse whether stores in theseclusters appear to change their pricing at around the same time, or whether somestores tend to follow the price changes of other stores. Across all five clusters, thisanalysis found no clear pattern of high correlations of price changes with a one- or
two- week delay across stores, for products that are sold by all stores in the cluster.
Thus, there is no obvious evidence of leader-follower type pricing across the storesin the clusters used in this analysis.

D46

HoustonKemp submitted that this lack of evidence of leader-follower type pricing isinconsistent with any form of coordinating conduct.1454 Similarly, Woolworths NZ
submitted that no evidence was found of retailers increasing prices around the sametime, even though supplier cost increases flow through at the same time. 1455

D47

However, the above analysis only checks for a specific type of coordinating conduct(leader-follower behaviour) among individual stores in geographic clusters. Other
types of coordination could still be occurring. In addition, the analysis only
considered changes in prices and not how cost changes were passed through.

1453

[
].
Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix B HoustonKemp - Empirical evidence of grocery sector competition” (10 September 2021) at [131][132].
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [29.3.1.2].

1454

1455

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D48

This analysis revealed some products where pricing is very highly correlated acrossstores in a cluster, either in the same week or with a one- or two-week delay. In
some cases, this appears to be due to pricing promotions that alternate acrossstores of different retail banners within a cluster on a regular schedule. Several
examples of products were found with pricing promotions that alternate between
stores on a weekly basis for all or almost all weeks of the year.

D49

More detailed analysis of characteristics of products that were found to have highpricing correlations within these clusters showed that:D49.1 Between eight and 29 of the top 1,000 products (by annual revenue) havehigh pricing correlations across stores in the clusters. These products
account for between 0.4% and 2.1% of total annual store revenue.
D49.2 Across stores, between 0.1% to 2.1% of KVIs have high pricing correlations.
D49.3 Some products with high pricing correlations also have high basket
penetration. The median basket penetration ranking for high pricing
correlation products for each store in the clusters was between 420 and
3,359, with some high correlation products having basket penetration
ranking below 100 (ie, are within the top 100 products by basket
penetration).
D49.4 These proportions appear to vary by retail banner and by geographic cluster
within retail banners.

D50

HoustonKemp submitted that finding alternating promotion patterns across stores
does not indicate a lack of competition because:1456
D50.1 it was only found for a small number of products;
D50.2 it could reflect cost changes or suppliers driving promotions; andD50.3 it is not clear how retailers would benefit from alternating retail promotions.

D51

We agree that alternating promotions were only found for a small number of
products, and that suppliers play a role in determining promotional pricing andschedules. However, we consider that retailers are likely to benefit from alternatingpromotions, by seeking to maximise the demand response from reduced prices.

1456

Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix B HoustonKemp - Empirical evidence of grocery sector competition” (10 September 2021) at [134].

517

Analysis of price-cost relationships
D52

Relationships between weighted average weekly prices and weighted average
weekly COGS were analysed for individual products. As these relationships may
differ across stores within a retail banner, each product sold in each store wastreated as a separate item in this analysis. Several different methods were used to
examine the extent to which changes in average COGS were reflected in changes inaverage prices, and the extent to which changes in prices can be explained bychanges in COGS.1457

Analysis of one-off cost changes
D53

Products that experienced one-off increases or decreases in average COGS of at least
5% during 2019 were identified and weighted average prices in the periods before
and after these changes were compared. Pass-through of the cost change for anindividual product was calculated as the ratio of the difference in its average priceafter versus before the cost change to the difference in its average COGS after
versus before the change. Across all stores, 2,413 examples of one-off costdecreases and 3,327 examples of one-off cost increases were identified foranalysis.1458

D54This analysis found median pass-through across all combinations of products andstores for each retail banner of between 0% and 65% for cost decreases andbetween 8% and 75% for cost increases, which may suggest a slightly stronger
tendency for cost increases to be passed through compared to cost decreases.
However, a very wide range of pass-through rates for individual combinations of
products and stores within each retail banner was also found. Figure D7 shows therange (across retail banners) of the proportion of combinations of products andstores that fell into seven different categories of pass-through for cost decreases andcost increases. This shows:
D54.1 Negative pass-through (ie, average prices changing in the opposite direction
to average COGS) occurred for between 16% and 41% of product-store
combinations that experienced cost decreases, and for between 19% and
32% of product-store combinations that experienced cost increases.
D54.2 Zero pass-through (ie, average price remaining unchanged before and after
the cost change) occurred for between 4% and 14% of product-store
combinations that experienced cost decreases, and for between 4% and 10%of product-store combinations that experienced cost increases.

1457

1458

As COGS excludes GST, the analysis in this section was based on revenues and prices also excluding
GST.
As each product in each store was treated separately, some of these are cases where the same
product sold in multiple stores experienced a one-off cost increase or decrease. The analysis was also
restricted to combinations of products and stores where at least 20 weeks of sales were recorded
during 2019.

518

D54.3 Greater than 100% pass-through (ie, the change in average price exceeded
the change in average COGS) occurred for between 23% and 34% of
product-store combinations that experienced cost decreases, and for
between 26% and 47% of product-store combinations that experienced cost
increases.
D54.4 The remainder of products experienced rates of pass-through that weregreater than zero but less than 100%, ie, not all of the cost change wasreflected in prices.
Figure D7

Ranges of rates of pass-through of one-off cost changes to prices,across retail banners

Source: Commission analysis of pricing and promotional data.1459

Case studies of pack size changes
D55

Changes in pack sizes may have a similar effect as cost changes, even if unit costs
remain unchanged. Three case studies of products that had pack size changes during
2019 were identified and the trends in weekly average prices for these products
were examined for each retail banner. These examples illustrated a range of pricing
responses to pack size changes, including maintaining similar pricing, and changing
either or both of standard and promotional pricing.

1459

[

].

519

Price-cost correlation analysis
D56

For each combination of product and store, the correlation between its weekly
average price (excluding GST) and average COGS was calculated and the distributionof these correlations was analysed across retail banners and across products within
individual stores. Across retail banners, the median price-cost correlation for all
combinations of products and stores for each retail banner ranged from 0.25 to 0.69,
with substantial differences in the distribution of these correlations for each retailbanner. Figure D8 shows the distribution of price-cost correlations for all
combinations of products and stores for all retail banners combined. About 83% ofproduct-store combinations have positive correlations between prices and costs andalmost all the remainder have negative correlations (0.1% were zero). Weakcorrelations between prices and costs (between -0.1 and 0.1) were found for 16.5%
of product-store combinations. Correlations greater than 0.5 were found for 43.5%
of product-store combinations, and greater than 0.9 for 20.8% of product-store
combinations.
Figure D8

Distribution of price-cost correlations for all retail banners combined

Source: Commission analysis of pricing and promotional data.1460

D57

Figure D9 shows the distribution of median price-cost correlations for individual
products across all stores of all retail banners. This suggests that the relationshipbetween prices and costs varies across stores, with median correlations for storesranging from 0.17 to 0.85. Within stores, a wide range of correlations for individual
products was also found, as shown by the range between the 2.5 th and 97.5th
percentiles of correlations in Figure D9.

1460

[

].

520

Figure D9Median and 2.5th/97.5th percentiles of price-cost correlations of products ineach store

Source: Commission analysis of pricing and promotional data.1461

Analysis of asymmetric cost changes
D58

For the subset of products that were in the top 1,000 products by revenue for eachretail banner and were sold by all five retail banners, impacts on prices of costchanges that did not affect all retailers were examined relative to those that did
affect all retailers. Figure D10 shows the estimated median rates of pass-through forcost changes that affected both Foodstuffs and Woolworths compared to costchanges that affected only one retailer. This shows substantially higher pass-throughof cost changes that affected both retailers compared to changes that affected only
one retailer. Slightly higher pass-through for cost increases compared to costdecreases is also observed when both retailers are affected.

1461

[

].

521

Figure D10 Median pass-through elasticities for symmetric and asymmetric cost changes

Source: Commission analysis of pricing and promotional data.1462

Price-cost regression modelling
D59

Simple regression models of the relationship between changes in weekly averagecosts and prices for individual products in stores were estimated, of the form:∆𝑝𝑡 = 𝛼 + 𝛽1 ∆𝑐𝑡 + 𝛽2 ∆𝑝𝑡−1 + 𝛽3 𝑑𝑡 + 𝑒𝑡where Δp_t is the weekly change of the average price of a product in a store, Δc_t isthe weekly change in the product’s average COGS in the store, d_t is a dummy
variable indicating whether the product was on any kind of promotion in week t in
the store, and e_t is a random error. In this model, the long-run impact of changes incosts on changes in prices is valid if -1<β_2<1 and is estimated as β =̃ β_1/(1-β_2).

D60

Estimates of β ̃ were calculated for individual products in individual stores separately
and compared across products within stores and retail banners to understand thevariation in the overall relationship between costs and prices for different products.
Across retail banners, these models explain an average of between 29% and 85% of
the variation in weekly price changes.

D61

Figure D11 shows the distribution of these estimated long-run pass-throughcoefficients for all combinations of products and stores, across all retail banners
combined. Estimated pass-through coefficients were positive for 89% of
combinations of products and stores. Around 8.2% were between -0.1 and 0.1
indicating a weak relationship between price and cost. Around 68% were greaterthan 0.5 and 46% were greater than 1.0.

1462

[

].

522

Figure D11 Distribution of estimated long-run pass-through coefficients for all productstore combinations across all retail banners

Source: Commission analysis of pricing and promotional data.1463

Response to submissions on analysis of price-cost relationships
D62

HoustonKemp stated that the above analysis provides evidence of retailers passing
on both cost increases and cost decreases, and is completely consistent witheffective competition between the major grocery retailers. HoustonKemp
submitted:1464
D62.1 median pass-through rates for each retail banner do not provide information
as to whether the average rate of pass-through for cost increases is higher
than for cost decreases;
D62.2 consumer price inflation means that the analysis will tend to find higher
levels of pass-through for price increases than decreases;
D62.3 changes in prices are affected by changes in things other than COGS, such as
the demand for a product or existence of a promotion;

1463
1464

[
].
Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix B HoustonKemp - Empirical evidence of grocery sector competition” (10 September 2021) at [140][150].

523

D62.4 retailers compete across a wide range of products and dimensions otherthan price, so a cost reduction for a product could lead to a price reduction
for a different product, or an improvement in service quality;
D62.5 if there is any asymmetry of pass-through for cost increases vs costdecreases, this does not indicate any competition problem; andD62.6 finding higher rates of pass-through of cost changes that affect both
Foodstuffs and Woolworths, compared to cost changes that affect only one
retailer, is consistent with strong competition.
D63

We agree that there are limitations of the pass-through analysis we haveundertaken, including not capturing other factors (such as changes in demand).
However, we note that:
D63.1 Although median pass-through rates do not give the full picture, ranges ofpass-through for one-off cost changes are also provided in Figure D7 above.
D63.2 It is not clear that general inflation would lead to higher levels of passthrough for cost increases than cost decreases. This is likely to depend on
the way retailers adjust retail prices to reflect cost changes in practice.
D63.3 It is also possible that retailers could reduce quality in response to cost
increases. Unless the quality response is systematically different for cost
increases vs cost decreases, this should not affect our findings regarding therelative rates of pass-through for cost increases and cost decreases.
D63.4 Asymmetric pass-through could make consumers worse off than symmetricpass-through, and therefore could represent a competition problem.
D63.5 Finding higher rates of pass-through of cost changes that affect both
Foodstuffs and Woolworths NZ is consistent with each retailer imposing
some constraint on each other, but the strength of the constraint is unclear
from this result.

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Attachment E

Consumer survey

Introduction
E1

This attachment provides further information about our consumer survey.

E2

The sections in this attachment are:E2.1

about our consumer survey;

E2.2

how we designed and conducted this survey;

E2.3

how we have used the results of this survey;

E2.4

some limitations to our consumer survey;

E2.5

comparison of survey results with other datasets;

E2.6

how we conducted the quantitative analysis of this survey;

E2.7

summary of our analysis of shopping behaviour;E2.8

how respondents told us they get to their main store;

E2.9

why respondents choose to shop at their main store;

E2.10

how respondents compare and choose grocery products;

E2.11

what respondents told us about how they use grocery loyalty programmes;

E2.12

what respondents told us about their experiences shopping for groceries;
and

E2.13

question script for our consumer survey.

About our consumer survey
E3

In March 2021 we conducted an online consumer survey hosted on our website. The
aim of the survey was to help identify themes relevant to our study and better
understand consumer behaviour, including how consumers decide where to shop
and what to buy. Our consumer survey was available to the public from 4 March to
25 March 2021. During this time, we received 12,269 responses. Just over half of the
respondents also provided a free-text comment.

E4

The findings of this survey helped us to test information gathered from othersources and identify further areas for analysis. In particular, we used these findings
to gain further understanding where, how and why people shop where they do forgroceries, and whether this varied by location. This analysis also informed ourunderstanding of how consumers decide what groceries to purchase, and why
consumers join grocery loyalty programmes.

525

E5

Analysing the responses to our consumer survey highlights that there are range ofdifferent shopping behaviours from consumers in New Zealand, driven by a diverse
range of preferences. However, we also found that most respondents:
E5.1

do at least one grocery shop a week;

E5.2

consider convenience or price as their main drivers for their choice of main
store;

E5.3

drive and travel less than 10 minutes to their main store;1465

E5.4

shop at one of New World, Countdown or PAK’nSAVE in a typical week; andE5.5

consider one of New World, Countdown or PAK’nSAVE to be their main
store and would shop at these stores if their main store closed.

E6

We did not design this survey to be statistically representative. However, we
received a broad range of representation from a large number of New Zealandgrocery shoppers. This gives us confidence the results of this survey provide valuable
insights into consumers’ behaviours and perceptions in the retail grocery sector. We
discuss the demographics of who responded to our consumer survey at paragraphs
E53 to E58.

E7

For more explanation on how we have used the results of this survey to inform ourfindings, see paragraphs E27 to E32 below.

How we designed and conducted this survey
Design and development
E8This survey script contained 30 unique multiple-choice questions and an optional
free-text field. Some of these multiple-choice questions were repeated for
respondents who visited multiple stores. For example, if respondents said they
visited three different stores in a typical week, they would have been asked how
many times they visited, what they bought and how much they spent at each store.

E9

However, no respondent was asked all 30 questions, as many questions weredependent on previous responses. For example, respondents who stated they weremembers of a loyalty programme were asked about their experiences, those that did
not were asked why they were not a member. Additionally, as noted below,
respondents had the ability to skip some questions.

E10

This means the total number of questions asked of each respondent was dependent
on their shopping experiences. For example, a respondent who shopped at many
stores and was a member of a loyalty programme could be asked more than 35
questions, whereas a respondent not usually involved in the grocery shopping would
be asked only seven questions.

1465‘Main store’ was defined as “the store you spend most at or do most of your grocery shopping with”.

526

We sought to minimise framing effects
E11

Respondents’ answers to survey questions can vary systematically depending on
how the survey is designed. That is, how respondents interpret questions can affectthe response they provide. For example, research has observed respondents cananswer differently depending on the order in which the possible answers are listed,or how the questions or responses are worded.1466

E12

Given the potential for these effects to impact the reliability of any results of thesurvey, we sought to minimise the risk of these occurring. We did this byrandomising the order in which answers were presented to respondents and seeking
to word questions using plain language which did not prompt specific types of
responses.1467 For example, we attempted to frame the free-text question to allow
consumers to freely provide their views on any areas of the sector they deemed
relevant. Figure E1 below shows how respondents provided free-text response.
Figure E1

The free-text question as it was displayed to respondents

E13

To help with this, we were assisted by Professor Philip Gendall, an experienced
survey designer, during the development of this survey. Professor Gendall reviewed
a draft of the survey script and provided advice and recommendations to improve
this script to minimise the risk of framing bias and to gather the data we required.
However, we were responsible for the design and implementation of the survey.

1466

Regarding how responses can differ depending on the order in which answers are presented,
Holbrook, et al. “Response Order Effects in Dichotomous Categorical Questions Presented Orally”
Public Opinion Quarterly, Vol 71 (2007) at 325-348. Regarding how responses can vary due to wording,see: Chong et al. “Framing Theory” Annual Review of Political Science 10 (2007) at 103–106.
For the general principles we referred to when attempting to minimise these effects, CMA “Goodpractice in the design and presentation of customer survey evidence in merger cases (Revised)”(May 2018) at [3.7]-[3.31] and [3.20a].

1467

527

We adjusted the design in an attempt to capture ‘typical’ behaviour
E14

During the latter stages of the design process, a lockdown occurred in Auckland. To
minimise the effect of this, we adjusted parts of our survey. Notably, we changed
from asking about the previous week’s shopping to a “typical” week. We made thischange as we expected shopping behaviour during these lockdowns was likely todiffer from typical shopping behaviour. We do not think this change materiallychanges the quality of responses, as it still aids respondents to recall their typical
shopping behaviour.

We framed questions to aid recall and reduce cognitive load
E15

When asking respondents to recall some aspect of their behaviour, we framedquestions in a general sense as illustrated in Figure E2 below (eg, how long does it
usually take you to get to this store?). This was done to help respondents recall how
they do most of their shopping, accepting these behaviours may sometime differ
which could make it most challenging to respond accurately.
Figure E2

E16

Example of question-answer format presented to respondents

Additionally, some questions we asked were restricted to respondents’ “mainstores” (eg, how do you usually travel to your main store?). This was done to reducethe complexity of the survey design, and to minimise the time taken by respondents
to complete the survey.

528

E17

We received a submission from Woolworths NZ that some of our questions werecognitively challenging or hypothetical.1468 Its view was that this means consumers
were unlikely to be able to respond accurately or provide a meaningful reply. It
raised particular concern with question 14, which asked respondents to select which
store they would switch to if their current store closed. As discussed below, thehypothetical nature of this question may impact the accuracy of responses.
However, we have not relied on analysis of this question when forming our findingsin this report.

Conducting the survey
E18

The survey was conducted online and hosted on our website.1469 Respondents did
not have to provide any personal information to participate. We estimate it took
about five to 10 minutes to complete. However, as noted at paragraph E10, thiswould vary depending on the number of questions each respondent was asked.
Figure E3 shows the information provided to respondents at the start of the survey.
Figure E3

Landing page of our consumer survey

E19

To encourage consumers to complete the survey, we engaged Tilt Digital, a digitalmarketing agency, to run a social media advertising campaign across Facebook andInstagram. As nearly all New Zealanders buy groceries, the campaign aimed to getengagement and responses from across the population, and particularly from
communities we expected to be hard to reach based on prior experience. The
campaign ran with an accompanying short video fronted by Associate Commissioner
Joseph Liava'a explaining why we wanted consumers to take part.

1468

Woolworths NZ “Post conference submission on Market study into grocery sector”(24 November 2021) at [1.7] of Appendix Two.
Commerce Commission “Market study into the grocery sector” https://comcom.govt.nz/groceries/.

1469

529

Figure E4

An example of how we advertised our survey

E20

We conducted regular audience assessments of the three-week campaign, withtargeting changes made to reach communities who appeared underrepresented,
based on Statistics NZ demographic data, in the survey responses being collected.

E21

In conjunction with this advertising campaign, we engaged with a wide range ofconsumer organisations to help also promote the survey through their own
individual consumer channels. These groups included FinCap, Consumer
New Zealand, Consumer Protection (Ministry of Business Innovation and
Employment), Super Seniors (Ministry of Social Development), Federated Farmers,
Office of Ethnic Affairs, Ministry for Pacific Peoples and Age Concern.

The questions we asked
E22

Our survey asked a range of questions about where, why and how respondents shop
for groceries. The survey presented written questions to respondents, andrespondents selected the most appropriate answers from a list. Respondents could
skip most questions by selecting ‘Next’. For example, see Figure E2 above. We asked
questions about:
E22.1

shopping behaviour during a typical week (eg, how often they shop, howmuch they spend and what they buy);

E22.2

which store(s) they usually do most of their shopping at, and why this is;

E22.3

how they select products, including whether they have brand preferences orcheck unit price; and

530

E22.4

whether they were members of loyalty programmes and, if so, why theyjoined and their awareness of the attributes of these programmes.

We asked a range of demographic questions
E23

We also asked respondents a range of demographic questions, such as ethnicity,age, and income. Respondents had the ability to skip demographic questions or
select “Prefer not to say”.

E24

We also asked questions about where respondents lived, as we wanted to compare
responses to some questions by location. We asked respondents about which
region, district, city, and, in some cases, suburb they lived in. The options provided
were based on the Statistics NZ Geographic Areas Table 2021 dataset(Geographic Areas Table), except for the following cities: 1470
E24.1

Auckland;

E24.2

Lower Hutt;

E24.3

Tauranga;

E24.4

Christchurch;

E24.5

Dunedin;

E24.6

Hamilton; andE24.7

Wellington.

E25

The suburb-level options provided to for these cities were instead created based onlists of suburbs available online. This is because we considered the options provided
for these cities in the Geographic Areas Table would not be easily recognised byrespondents.

E26

An illustrative copy of the survey script, including a full list of the questions asked, isprovided at the end of this attachment at page 582.

How we have used the results of this survey
E27

We have used the findings from this survey to identify areas of interest, and tosupport information we have collected from other sources. These findings are notintended to draw specific conclusions on the behaviour and perceptions of all
grocery consumers in New Zealand. Rather, it is one piece in the puzzle to building adetailed picture of consumer behaviour and perceptions in New Zealand’s retailgrocery sector.

1470

Statistics NZ “Geographics Areas Table 2021” https://datafinder.stats.govt.nz/table/105172geographic-areas-table-2021.

531

E28

The results of the survey are unlikely to be truly representative of the underlying
population of interest (ie, grocery shoppers in New Zealand). This means we havenot sought to draw specific statistical inferences from the analysis conducted withthis data regarding to the behaviour of all New Zealand grocery shoppers.

We are confident this survey provides good insights into consumer behaviour andperceptions
E29

Despite the limitations discussed below, we consider our consumer survey provides
valuable insights into consumer behaviour and perceptions in the retail grocery
sector. This is because:
E29.1

our sample size is very large;

E29.2

we had a broad range representation across many demographic variables;
and

E29.3

estimates of other variables are consistent with other datasets.

Our sample size is large
E30

A large number of consumers told us about their grocery shopping behaviour, and it
is important we reflect this. As noted, 12,269 New Zealand grocery shoppers
responded to our consumer survey. This provides a large sample of respondents todraw on when conducting our analysis.

We had a broad range of representation across many demographic variables
E31

As discussed from paragraph E47 below, we received a broad range ofrepresentation across geography and ethnicity. This gives us confidence theresponses to this survey represent a diverse range of grocery shoppers with different
experiences and perceptions in the sector.

Estimates of other variables are consistent with other datasets
E32

As noted at E59 to E61 below, our estimates of respondents’ spending behaviour are
consistent with our findings in Chapter 5 (see, for example, Table 5.1 and Figure 5.1).
This gives us confidence our underlying data, and ensuing analysis, is broadly
consistent with other, statistically robust, datasets.

Some limitations to our consumer survey
Certain groups of consumers are likely to be underrepresented
E33

Due to the design of our consumer survey, it is possible some groups of consumers
with particular attributes are systematically underrepresented. For example, grocery
shoppers who do not have internet access, and therefore were unlikely to havecompleted our consumer survey, may have different experiences with the retailgrocery sector than those who do.

532

E34

If this is the case, our results may be biased, and this should be considered wheninterpreting this analysis.1471

E35

However, as explained below, we have conducted analysis and comparisons to
identify any areas where responses appear biased. While we cannot fully verify theextent of this potential bias, these results provide reassurance that our consumer
survey results are unlikely to be misleading regarding the general behaviour andperceptions of grocery shoppers in New Zealand.

Our survey was publicly available
E36

As discussed above, anyone with internet access was able to participate in our
survey. The purpose of this was to ensure we heard from a broad range of New
Zealanders from across different groups. Woolworths NZ submitted that it considers
this presents a “significant risk” to the robustness of our insights from the survey. 1472
It holds this view because this approach means we are unable to ensure thedemographic profile of respondents is statistically representative.

E37

We agree with Woolworths NZ’s view that we are unable to ensure our sample isstatistically representative. However, as discussed at paragraphs E6 and E28, we
acknowledge that the survey may not be statistically representative, and we haveassessed the insights from our analysis with regard to this caveat.1473

E38

Woolworths NZ also submitted that, because our survey was publicly available, thismeant organisations with a specific viewpoint (eg, consumer advocacy
organisations) were able to encourage their audiences to complete the survey.1474 Its
view is this presented a risk of respondent skew.

E39

We do not consider that the public availability of our survey reduces the usefulnessof the insights gained from it for two reasons:
E39.1

1471

1472

1473

1474

As noted by Woolworths NZ, there are many ways respondents could haveheard about the survey (eg, our media release, website, or our social media
channels). Of note, as discussed at paragraphs E19 to E21 above, we
conducted an extensive marketing campaign to promote the survey via
various channels, targeting various demographic groups using neutral
language.

Foodstuffs NI made a similar submission on our draft report, stating our survey was “naturally biased
towards those who have ready online access”, Foodstuffs NI “Submission on Market study into
grocery sector” (10 September 2021) at [238.1].
Woolworths NZ “Post conference submission on Market study into grocery sector”(24 November 2021) at [1.2] of Appendix Two.
Commerce Commission “Market study into the retail grocery sector – Draft report (29 July 2021) at[F6].
Woolworths NZ “Post conference submission on Market study into grocery sector”(24 November 2021) at [1.3] of Appendix Two.

533

E39.2

The survey questions were predominantly descriptive or behavioural
questions (eg, what do you typically purchase when shopping at Retailer X),
as opposed to questions soliciting opinions or feelings about the grocery
sector. We consider it unlikely the answers to these descriptive or
behavioural questions would be affected by a respondent’s views or
attitudes toward the retail grocery sector.

Our survey focuses on grocery shopping
E40

The questions in our consumer survey intended to capture how New Zealanders
shop for groceries. Our survey is unlikely to capture respondents’ shopping andspending on all food consumed in a typical week as our consumer survey did notprovide specific options for some sources of food like take-away foods, restaurants,
or markets.

E41

However, some respondents may have included these sources of food under the
option ‘other.’ Therefore, it is important to note that our analysis relates to how
respondents’ source groceries rather than all types of food in a typical week.

The survey required respondents to recall past behaviour which may inhibit accuracy
E42

Respondents may struggle to accurately recall some aspects of their past behaviour,such as how much they typically spend at a given store. As discussed at paragraph
E15 above, we attempted to mitigate this by framing questions in ways that would
aid recall. However, this risk of reduced accuracy is an inherent limitation in this typeof survey design, as it relies on respondents recalling past actions.

E43

Although this design may result in imperfect recall, we do not consider this is likely
to cause a systematic over or under-reporting of certain behaviour (generally
referred to as a response bias). Response bias is a systematic, rather than random,
error caused by differences in the accuracy of respondents’ recollections of past
behaviour.1475

Respondents may have over-reported their in-store behaviour
E44

However, there may have been systematic over-reporting of some questions. Thatis, respondents may have reported engaging in certain behaviour (such as comparing
prices between products) more often than they actually do.

E45This is referred to as a social desirability bias, which is the tendency of some
respondents to report an answer in a way they deem more socially desirable thantheir “true” answer.1476 For example, some respondents may have considered theact of comparing prices or referring to unit pricing as being socially desirable, leading
to an over-reporting of this behaviour.

1475

Paul Lavrakas “Encyclopedia of Survey Research Methods” (2008) at 486, available athttps://methods.sagepub.com/reference/encyclopedia-of-survey-research-methods/n486.xml.
Paul Lavrakas “Encyclopedia of Survey Research Methods” (2008) at 537, available athttps://methods.sagepub.com/reference/encyclopedia-of-survey-research-methods/n537.xml.

1476

534

E46

However, this analysis still provides useful insight, for example, when comparing
variance in reported behaviour between different groups of respondents.

We have not reweighted this survey
E47

We chose not to reweight the results of this survey using the demographic data wecollected. Given we did not design this survey to collect a statistically representative
sample, reweighting the results would give a misleading impression about thestatistical representativeness of any findings.

E48

However, we did conduct some sensitivity testing on some pieces of analysis using
reweighted samples to check whether this materially changed the outcomes of theanalysis. This reweighting did not appear to change the analysis in any material way.
We conducted this testing by re-running some pieces of analysis using four datasets,
each reweighted by a separate demographic variable: ethnicity, age, region, andurban-rural location.

E49

Where we received submissions that specific aspects of the demographic
distribution of our sample may have affected certain results, we sought to re-test
our analysis using the relevant reweighted dataset to identify any effects.1477

Comparison of survey results with other datasets
E50

We received responses from 12,269 New Zealanders. More than 99% of these werethe main grocery shopper in their household. We cleaned our data and removed
unreliable data from the raw dataset before conducting analysis on the results of ourconsumer survey. This resulted in removing 172 responses across the whole dataset,and removing less than 20 responses across responses to questions around store
behaviour and loyalty programmes. This explains why the sample size is less than
12,269 in the figures below. We discuss our cleaning process in paragraph E62 to E73
below.

E51

As shown in the analysis below, our sample is broadly consistent with key population
demographics collated by Statistics NZ, such ethnicity and region. This gives us
confidence that our consumer survey respondents reflect a broad range of
New Zealand grocery shoppers.

E52

We also compared spending estimates from responses with other datasets, such as
Statistics NZ household expenditure statistics. Our estimates appear to be broadly
consistent with these external datasets.

1477

For example: Woolworths NZ “Submission on Market study into retail grocery sector draft report”(10 September 2021) at [28.7.7] and [28.7.5]; Foodstuffs NI “Submission of Market study into grocery
sector draft report” (10 September 2021) at [199]-[200].

535

Demographics of respondents in comparison to Statistics NZ data
E53

The regional representation of respondents appears to be broadly consistent with
Statistics NZ population estimates, as illustrated in Figure E5 below. However,
Wellington was somewhat overrepresented in the sample and Auckland wasunderrepresented in the sample.
Figure E5

Region of respondents in comparison to Statistics NZ 2020 estimates

Source: Commission analysis based on data from our consumer survey (n=12,003) and from
Statistics NZ.1478

1478

Statistics NZ “Subnational population estimates: At 30 June 2020”
https://www.stats.govt.nz/information-releases/subnational-population-estimates-at-30-june-2020;
[
].

536

Figure E6

Ethnicity of respondents in comparison to Statistics NZ 2018 estimates

Source: Commission analysis based on data from our consumer survey (n=12,097) and from
Statistics NZ.1479

E54

Respondents to our consumer survey identified with a range of ethnicities, as
illustrated in Figure E6 above.1480 The distribution of ethnicities identified is largely
consistent with Statistics NZ Census 2018 data. However, Chinese and Indian
respondents were relatively underrepresented in our sample.

E55

As discussed at paragraph E20, we re-targeted our communications to try andmitigate this underrepresentation. This re-targeting had some effect on
engagement; however, these groups remained underrepresented in the final
sample.

E56

Woolworths NZ submitted this underrepresentation of Chinese and Indian
respondents means that our analysis understates the proportion of Kiwis that use aninternational grocery retailer for their main shop (in turn, overstating the proportion
who use a major grocery retailer).1481 As discussed at paragraph E109 below, thisunderrepresentation does have a marginal effect of the proportion of respondents
using ethnic retailers, but this does not materially impact our analysis of main store
choice.

1479

Statistics NZ “Estimated resident population (2018-base): At 30 June 2018”https://www.stats.govt.nz/information-releases/estimated-resident-population-2018-base-at-30june-2018); [].
As with the Statistics NZ 2018 census, our consumer survey enabled respondents to select as many
ethnicities as they identified with, explaining why each dataset sums to >100%.
Woolworths NZ “Submission on Market study into retail grocery sector draft report”(10 September 2021) at [28.7.7].

1480

1481

537

Figure E7

Age of respondents compared to Census 2018 data

Source: Commission analysis based on data from our consumer survey (n=11,927) and Census 2018
data based on usually resident population counts for individuals aged 16 or over. 1482

E57

Representation of older age groups was higher in our consumer survey, compared topopulation estimates. Although it is possible main household shoppers are generally
older than the population average, this is unlikely to completely explain the
overweighting towards older respondents in our sample as illustrated Figure E7
above.

E58

Foodstuffs NI noted this overrepresentation in its submission on our draft report,
stating that it may have implications for some pieces of analysis, such as thefrequency of shopping trips.1483 As discussed at paragraph E95 below, thisoverrepresentation did not have a material impact on analysis of the frequency of
shopping trips.

Estimated shares of supply in comparison to other estimates
E59

We also used responses on weekly spend to estimate shares of supply for thegrocery sector. This estimate is shown in Figure E8.

1482

Statistics NZ “2018 Census totals by topic – national highlights (updated)” (30 April 2020)
https://www.stats.govt.nz/information-releases/2018-census-totals-by-topic-national-highlightsupdated; [].
Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[238.2] and [199]-[200].

1483

538

E60

We do not necessarily consider our estimate to be a representative view of shares ofsupply in the retail grocery sector. However, we consider its consistency with morerobust estimates, conducted by other parties, supports the strength of this spending
data.

E61

In Chapter 5, we reviewed a range of estimates from the major grocery retailers, andwe calculated our own estimates. We found that most estimates of the combined
shares of supply for the major grocery retailers were between 80% to 90% (seeFigure 5.1 and Table 5.1). Our estimate based on respondents reported spending is
consistent with this, finding that the major grocery retailers had a market share of88%.
Figure E8

Estimated national market share of grocery sector from our survey

Source: Commission analysis based on data from our consumer survey.1484

1484

[

].

539

How we conducted the quantitative analysis of this survey
We cleaned the raw dataset
E62

Given that our consumer survey was publicly available, there is a risk that we
received responses to the survey that may not be genuine or which lack accuracy
due to haste in completion. However, the fact half of the respondents took the time
to submit free-text responses indicates most were prepared to spend time toaccurately provide the information requested.

E63

Nonetheless, we sought to identify responses that we considered were unlikely toaccurately reflect the grocery shopping experiences of New Zealanders. We did thisby removing data which may be unreliable and removing responses to certain
questions.

E64

We removed 172 responses across the whole dataset. We also removed some
responses and additional variables created related to store behaviour or loyalty
programmes. Our cleaning resulted in less than 20 observations being turned tomissing for most responses and variables.

E65

The rest of this section discusses how we identified and removed potentiallyunreliable data, and the impact of this process.

How we identified unreliable data
E66

We identified potentially unreliable data by identifying respondents who wereunlikely to be representative of grocery shoppers in New Zealand. This could include
respondents who told us they do not usually do grocery shopping and respondents
with potentially unrealistic shopping habits.

E67

For example, some respondents who did not report visiting the stores they selected
as their main store(s). Respondents’ “main store” was defined as the grocery store
or service they spend most at or do most of their shopping with.

E68

Given the purpose of our consumer survey was to understand consumer behaviour
and perceptions of New Zealand grocery shopper, these types of respondents areunlikely to be the type of consumers we are aiming to seek views from.

We removed some unreliable data from the whole dataset
E69

We removed responses by respondents who we did not consider to be
representative of typical grocery consumers in New Zealand. This resulted in us
removing:
E69.1

85 responses from respondents who said they are not usually involved in thegrocery shopping;E69.2

17 responses with the Commerce Commission’s IP address, as these
responses may have been influenced by information about our study;

540

E70

E69.3

11 responses made before 4 March 2021 as our consumer survey was not
publicly available until this date, these are likely to be test responses;

E69.4

31 responses made after the survey closed on 25 March 2021. This occurredbecause the webpage was still live until 29 March 2021 when thewebservice provider closed the survey; andE69.5

28 duplicate responses which were submitted from the same IP address, on
the same day, gave the same responses to questions around how they
shopped and identical free-text responses.1485

We also checked whether any respondents selected the first answer to eachquestion, as this may have indicated that their responses were rushed or
unconsidered. We did not find any respondents who did this.

We removed some unreliable data from questions related to shopping behaviour and loyalty
programmes
E71

1485

1486

We removed some responses to questions related to shopping behaviour in a typicalweek, choice of main store and the stores respondents would shop at if their main
store closed, and loyalty programmes. We did this by transforming responses into
missing observations, meaning these responses were not included in our analysis.
E71.1

We generated dummy variables (explained at paragraph E79 below) to
identify whether a respondent visited a store in a typical week. Dummy
variables are variables take the value of 0 or 1 to indicate whether acondition is true or not, and they are useful for grouping responses into
categories.1486

E71.2

We removed some observations within some dummy variables about
shopping behaviour. We did this if a respondent reported visiting a store but
did not report spending anything at the store as we would expect a
consumer to spend money at a store. We removed between 0 and 20
observations depending on the dummy variable.

E71.3

We also asked respondents what their main stores were (respondents could
select up to two) and we created dummy variables to identify if a
respondent reported a store as their main store or not. We transformed
observations in the dummy variables to missing if respondents did notreport having a main store in the first place or did not report visiting theirmain store(s) in a typical week.

The questions around shopping behaviour related to shopping involvement (main shopper, notinvolved, shared with others), number of people shopped for, shopping channel (in store, online anddelivered, ordered online and collected at store) and frequency of shops in a typical week.
For example, a dummy variable may be created to take the value of 1 if a respondent lives in Napier,and 0 if they do not.

541

E71.4

We would expect a respondent to visit their main store in a typical week asmain store was defined as the store a respondent spends most at or does
most of their grocery shopping with.

E71.5

We also generated dummy variables to indicate which stores respondents
told us they would shop at if their main store(s) closed for the foreseeable
future. We removed observations from these dummy variables if a
respondent did not report having a main store or did not report shopping at
any stores in a typical week. This resulted in up to 345 observations being
removed, depending on the variable. These observations were removed as
respondents told us they do less than one shop a week and therefore were
not asked questions about their shopping in a typical week.

E72

We turned five observations into missing for dummy variables related to loyalty
programmes. These dummy variables indicated which type of loyalty programme
membership respondents had. We also created dummy variables indicating thereasons for having a loyalty card if respondents did not report being a member of aloyalty programme in the first place.

E73

We also adjusted responses to questions around shopping behaviour which we
considered were outliers and potentially unrealistic. This included transforming
responses to store behaviour questions to missing if:
E73.1

respondents bought more than 20 product categories per person in ahousehold in a typical week. This resulted in up to 59 observations beingtransformed to missing;1487 andE73.2

respondents spent less than $10 or more than $400 per person in ahousehold in a typical week. This resulted in up to 16 observations beingtransformed to missing.

We created additional variables to conduct our analysis
E74

We also derived variables from our raw dataset for our analysis.

We derived estimates from some variables
E75

We created estimates of some variables by taking the mid-point of responses tomulti-choice questions. For example, when asking respondents how long it takes
them to travel to their main store, we provided options such as “0-5 minutes”,“5-10 minutes” and so on. These responses were then converted to numeric values
such as 2.5 and 7.5.

1487

Respondents could choose up to 15 groups of product categories per store. Examples of productcategories include fresh fruit or vegetables or meat, poultry, or seafood.

542

E76

We presented these questions as multi-choice options, rather than an asking
respondent to construct their own estimate, as we considered it would significantly
ease the cognitive load on respondents. Further, we considered asking for an exact
estimate may give an impression of false accuracy in the responses.

E77

Following this process enabled us to calculate estimates such as total travel time tomain stores (see Figure E20) and total spending across stores (see Figure E14).

E78

Using mid-point estimates requires assuming responses are distributed around the
mid-point of each option (ie, the mean spending of respondents who selected“$100-$150” is $125). We recognise we are unable to test this in practice. However,this assumption is unlikely to materially bias our analysis, given the large sample
size, and our spending estimates appear broadly consistent with Statistics NZ
estimate.

We created dummy variables
E79

E80

E81

We created dummy variables from the raw dataset which we used to create many of
the figures in our analysis of respondents’ shopping behaviour and why respondents
choose to shop at their main store. For example, we created the following dummy
variables to indicate:
E79.1

whether respondents visited a store in a typical week;

E79.2

whether respondents selected a store as one of their main store(s); andE79.3

whether respondents selected a store as one of the store(s) they would
shop at if their main store closed for the foreseeable future.

We also created a dummy variable to categorise types of stores visited in a typicalweek, main stores and substitute stores. These dummy variables indicate:E80.1

if respondents only visited major grocery retailers, only other stores, orvisited a mix of major grocery retailers and other stores in a typical week;

E80.2

if respondents’ main stores were only major grocery retailers, only otherstores or a mix of major grocery retailers and other stores in a typical week;
and

E80.3

if respondents selected stores they would shop at if their main store closed
which were only major grocery retailers, only other stores or a mix of major
grocery retailers and other stores.

Survey respondents were able to select from retail banners owned by Foodstuffs
and Woolworths NZ, or categories of other grocery retailers as shown in Table E1
below. A mix of stores refers to a mixture of major grocery retailers and othergrocery retailers. These dummy variables are used in Figure E13, Figure E15, Figure
E17 and Figure E24.

543

Table E1

Grocery retailers survey respondents could select from

Major grocery retailers

Other grocery retailers

New World

Ethnic supermarket (eg, Tai Ping, Japan
Mart, Yogijis Food Mart)Countdown

Another supermarket (eg, Farro Fresh,
Moore Wilson’s, Bin Inn)

PAK’nSAVE

A single-category or specialist grocery store(eg, greengrocers, butchers, bakeries)

Four Square

A general merchandiser (eg, The
Warehouse)

FreshChoice

A convenience store (eg, dairies, petrol
stations, Night ‘n Day)

SuperValue

A meal kit provider (eg, Hello Fresh, My
Food Bag)
An online-only supermarket (eg, The Honest
Grocer)Other (please state)

Urban-Rural IndicatorE82

As shown in a number of graphs below, we conducted some analysis by looking at
where respondents lived. To achieve this, we constructed a variable which matched
respondents against the “Urban-Rural Indicator 2018” variable from the Statistics NZ
Geographic Areas Table using the location respondents provided.

E83

However, as noted at paragraph E24 above, the suburb options for some cities
differed from those contained in the Geographic Areas Table. These cities wereinstead marked with the Urban-Rural Indicator corresponding to their population
size, as defined by Statistics NZ (see Table E2 below). For example, all observations
with Area=Auckland were set to “Major urban area”.

E84

The parameters of these Urban-Rural Indicators, as defined by Statistics NZ, are set
out in Table E2 below.1488

1488

Statistics NZ “Urban accessibility – methodology and classification” (2020) at 25, available at:https://www.stats.govt.nz/assets/Uploads/Methods/Urban-accessibility-methodology-andclassification/Download-document/Urban-accessibility-methodology-and-classification.pdf.

544

Table E2
Urban-Rural Indicator

Respondents’ urban-rural location
Population

ExamplesMajor urban area

100,00 or more residents

Auckland, Christchurch, Wellington, Hamilton,
Tauranga, Dunedin and Lower Hutt

Large urban area

30,000-99,999 residents

Rotorua, Whanganui and Invercargill

Medium urban area

10,000-29,999 residents

Cambridge, Te Awamutu and Rolleston

Small urban area

1,000-9,999 residents

Thames, Stratford and Gore

Rural settlements

200-1,000 residents, or at least 40
residential dwellings

Rural other

Other mainland areas locatedoutside urban areas or rural
settlements

E85

The “rural settlement” and “rural other” categories were consolidated at theanalysis stage. We did this as the geographic data provided by respondents made itchallenging to easily distinguish which category of the two categories was mostappropriate based on the Geographic Areas Table.

E86

Summary statistics of this variable, in comparison to Statistics NZ’s 2018 population
estimate, is at Figure E9 below.
Figure E9Area of respondents compared to Census 2018 data

Source: Commission analysis based on data from our consumer survey (n=11,205) and Census 2018
data.1489

1489

Environmental Health Intelligence New Zealand “Urban-rural profile”
https://www.ehinz.ac.nz/indicators/population-vulnerability/urbanrural-profile/; [

].

545

E87

7.3% of respondents did not provide enough geographic data to generate an
Urban-Rural Indicator (eg, they provided no response, or only region).

Summary of our analysis of shopping behaviour
E88

This section summarises some of the analysis we conducted to understand how
respondents told us they shop for groceries. We asked respondents a range ofquestions about how often they shop, where they shop, how much they spend andwhat their main store is.

Main findings on shopping behaviour
E89

Based on this analysis, it appears that:
E89.1

most respondents visit between one and three different grocery stores in a
typical week;

E89.2

most visits are to Countdown, New World and PAK’nSAVE;

E89.3

around 60% of respondents shop only at stores owned by Foodstuffs andWoolworths in a typical week;

E89.4

respondents who visit Countdown, New World or PAK’nSAVE or use meal kit
services spend more on average in a typical week compared to respondents’
spending at other stores or services in our consumer survey; andE89.5

most respondents report Countdown, New World and PAK’nSAVE as theirmain stores across the whole of New Zealand and across different regions.

E90

These findings indicate that most respondents shop at Countdown, New World and
PAK’nSAVE and spend the most money there. This results in Foodstuffs andWoolworths NZ having a larger estimated market share, compared to other retailers,
as shown in Figure E8 above.

E91

We discuss the following findings on shopping behaviour which shows how
respondents reported the shopped below:
E91.1

how often respondents told us they shop;

E91.2

where respondents told us they shop;

E91.3

how much respondents told us they spend; andE91.4

respondents’ choice of main store(s).

How often respondents told us they shop
E92

Figure E10 shows that 86% of respondents visit between one and three different
grocery stores in a typical week.

546

Figure E10

Number of different grocery stores respondents said they visit
in a typical week

Source: Commission analysis based on data from our consumer survey, n=10,619. 1490

Figure E11

Number of shop visits in a typical week

Source: Commission analysis based on data from our consumer survey, n=10,543. 1491

1490
1491

[
[

].
].

547

E93

Figure E11 above shows more than half of respondents conduct between one andthree shops in a typical week. Almost three quarters conducting between one andfour shops.

E94

Foodstuffs NI submitted that, given the underrepresentation of respondents aged
16-40 years, our analysis is likely to overstate consumers’ preferences for shopping
once a week.1492 It stated that research it commissioned indicates missions shoppingis less common amongst people aged 55 and over. Woolworths NZ made a similar
submission, stating the skew towards older respondents in the sample causes anundue emphasis of the importance of the “main shop”.1493

E95

Our analysis of the average number of shop visits in a typical week suggests thatthose aged 65 years and over tend to make slightly fewer shops per week than
younger cohorts. However, this relative underrepresentation of younger cohorts inthe sample does not appear to cause material bias in the average number of shop
visits for the sample: the average number of shop visits in a typical week remains atapproximately 3.7 when the sample is reweighted to reflect the population age
distribution.

Where respondents told us they shop in a typical week
E96

1492

1493

Figure E12 below shows the following:E96.1

A large proportion of respondents reported visiting one or more ofCountdown, New World and PAK’nSAVE in a typical week. For example,
more than half of respondents reported visiting Countdown in a typical
week.

E96.2

Nearly one in five respondents reported visiting a single-category or
speciality grocery store (eg, greengrocers, butchers and bakers) in a typical
week.

E96.3

It was uncommon for respondents to report visiting other types of grocery
store in a typical week. For example, less than one in 10 respondents
reported visiting an ethnic supermarket in a typical week and less than one
in 20 reported shopping with a meal kit provider in a typical week.

Foodstuffs NI “Submission on Market study into grocery sector draft report” (10 September 2021) at[199]-[200].
Woolworths NZ “Submission on Market study into grocery sector draft report” (10 September 2021)
at [28.7.5].

548

Figure E12

Proportion of respondents who reported visiting a given store
in a typical week

Source: Commission analysis based on data from our consumer survey, n=12,097. 1494

E97

1494

Figure E13 shows that, in a typical week:
E97.1

60% of respondents visit only major grocery retailers;

E97.2

less than 0.5% visit only other stores; andE97.3

40% visit a mix of major grocery retailers and other stores.

[

].

549

Figure E13

Proportion of respondents who visit only major grocery retailers, only otherstores, or a mix of both types of stores in a typical week

Source: Commission analysis based on data from our consumer survey, n=10,523.1495

How much respondents told us they spend
E98

Figure E14 below shows that respondents who visit Countdown, New World,
PAK’nSAVE or use meal kits in a typical week spend nearly twice as much on averageas respondents who reported their spending at other stores.

E99

As discussed earlier, we estimated average spending by using the mid-point ofspending categories selected by respondents. For example, if respondents statedthey spent $0-$10 a week at a store, this would be treated as $5 for the purposes ofthe estimate. Therefore, it is important to interpret our spending estimates as anindication of how much respondents’ may spend in a typical week.

E100

Woolworths NZ submitted that, in its experience, respondents typically find it
challenging to accurately recall their spending behaviour, especially if they are
required to differentiate between store types.1496 We agree that it is likely
challenging for respondents to provide accurate accounts of their spending
behaviour, and the ensuing analysis should be interpreted with this caveat in mind.

E101

However, this inaccuracy is unlikely to vary between store types. This means,
although the estimates should be treated as such, the analysis provides useful
insight into the relative levels of spending among different retailers.

1495

[
].
Woolworths NZ “Post conference submission on Market study into retail grocery sector”(24 November 2021) at [1.9] of Appendix Two.

1496

550

Figure E14

Average spend at each store in a typical week for respondents who said they
visited the given store

Source: Commission analysis based on data from our consumer survey, n=12,097. 1497

E102

Figure E15 shows average spending by respondents who only visit major grocery
retailers, only visit other stores or a mix of both.

E103

Figure E15 shows that the level of average spending by respondents varies across allstores. Only Countdown, New World and PAK’nSAVE have similar and high levels ofspending. This high level of spending is regardless of whether a respondent only
shops at only that store, or at a mix of both major grocery retailers and other stores.

E104

Average spending in a typical week also appears to vary depending on whether
respondents shop only at major grocery retailers, only at other retailers, or a mix ofstores. Figure E15 shows:
E104.1 average spending at other stores is generally higher if respondents only shop
at other stores compared to respondents who shop at a mix of stores.
However, we recognise the sample of respondents who shop at otherretailers is very small and so this finding may not be representative ofconsumers in New Zealand;1498 and

1497
1498

[
].
From the sample of respondents used to estimate Figure E15, a total of 36 respondents shop at otherretailers and the sample of respondents shopping at individual other retailers ranges from two to 12
respondents. For example, two respondents used meal kit providers and 12 respondents boughtgroceries from other stores.

551

E104.2 there is little difference in average spending at major grocery retailers by
respondents who shop only at major grocery retailers or a mix of stores.
Figure E15

Average spending by respondents who only visit only major grocery retailers,
only other stores or a mix of both types of store in a typical week1499

Source: Commission analysis based on data from our consumer survey, n=2 to n=3,919.1500

Respondents’ choice of main store(s)E105

We asked respondents what their main grocery store was. Respondents could
choose up to two stores. We explained to respondents that their “main store” wasdefined as “the store you spend most at or do most of your grocery shopping with”.

E106

Figure E16 below shows that most respondents (91%) reported Countdown,
New World and PAK’nSAVE as one of their main store(s).1501

1499

The sample size ranges from two for respondents who only visit other stores/services and one ofthose other services is meal kits up to 3,919 for respondents who only visit major grocery retailers andone of those major grocery retailers is Countdown.
[].
The totals of these proportions may sum to >100% due to respondents being able to select two
options. We chose not to reweight respondents who provided two options, as we considered thiswould cause proportions for some stores to be misreported. Sensitivity testing indicates thisreweighting would increase the relative proportion of respondents who reported a major grocery
retailer as their main store, and decrease the relative proportion of respondents who selected
another type of retailer as their main store.

1500
1501

552

Figure E16

Proportion of respondents who report a store as their main store, or one of
their main storesSource: Commission analysis based on data from our consumer survey, n=12,097. 1502

E107

Figure E17 shows that most respondents (95%) reported only major grocery retailers
as their main store(s). This means that out of the respondents who reported one
main store, most told us their main store was a major grocery retailer; and out of the
respondents who reported two main stores, most told us their two main stores weremajor grocery retailers.

E108

Woolworths NZ submitted that our survey overstates the proportion of main shopsthat occur at the major grocery retailers because respondents of Chinese and Indianethnicity were underrepresented in our sample.1503 It said that, given many
international grocery retailers specialise in Chinese and Indian cuisine, it expects our
initial results understate the proportion of Kiwis who use international grocers fortheir main shop.

E109

However, this underrepresentation of Chinese and Indian respondents does notmaterially affect the results of this analysis. This is shown by the orange bars in
Figure E17 below: when our sample is reweighted to reflect 2018 Census population
ethnicity estimates, we only see a marginal decrease in the proportion of
respondents who selected a major grocery retailer as their main store.

1502

[
].
Woolworths NZ “Submission on Market study into retail grocery sector” (10 September 2021) at[28.7.7].

1503

553

Figure E17

Proportion of respondents who report main store(s) which were only major
grocery retailers, only other stores, or a mix of both types of storesSource: Commission analysis based on data from our consumer survey, n= 11,730.1504

E110

We also see that there is the same overall trend in respondents’ choice of main
stores across New Zealand as shown in Figure E16, as respondents’ choice of main
stores across different regions in Figure E18.

E111

However, there are some slight differences in respondents’ main stores acrossdifferent regions. We find that:
E111.1 more respondents told us Four Square and FreshChoice are one of theirmain stores in rural areas and medium and small urban areas compared tolarge and major urban areas;
E111.2 fewer respondents told us New World is their main store in large and majorurban areas compared to other areas;
E111.3 more respondents told us Countdown is their main store in large and majorurban areas compared to other areas; andE111.4 fewer respondents told us PAK’nSAVE is their main store in small andmedium urban areas compared to other areas.

1504

[

].

554

Figure E18

Proportion of respondents who report each store as one of theirmain store(s) by region

Source: Commission analysis based on data from our consumer survey, n=1253 to n=8379. The
sample size ranges from 1253 in rural other and rural settlements to 8379 in large and major urban
areas.1505

How respondents told us they get to their main store
E112

We asked respondents how they usually travel to their main store, and how long it
usually takes them to get there. We found:E112.1 most respondents said they usually drive to their main store;
E112.2 most respondents said they usually travel less than 10 minutes to their main
store; andE112.3 respondents in more rural areas were more likely to drive and tended totake longer to get to their main store.

E113

The responses only covered how respondents travel to their main store. Consumers’mode of travel, and travel times, may differ for other types of shopping missions (eg,
top-up shops).

Most respondents said they drive to their main store
E114

More than nine in 10 respondents said they usually drive to their main store. As
shown in Figure E19 below, this tended to be higher in smaller urban and rural areas(eg, 98% of rural respondents drive to their main store).

1505

[

].

555

Figure E19

Proportion of respondents who do not usually drive to their main store

Source: Commission analysis based on data from our consumer survey, n=11,328. 1506

Most respondents do not usually drive more than five to 10 minutes to their main store
E115

On average, respondents in medium, large and major urban areas said they usually
travel less than 10 minutes to their main store. Respondents in rural areas, on
average, said they travel almost 20 minutes to their main store. Approximately aquarter of urban respondents said they travel less than five minutes to their main
store. A summary of this analysis is shown in Figure E20 below.

1506

[

].

556

Figure E20

How long it usually takes respondents to get to their main store

Source: Commission analysis based on data from our consumer survey, n=10,363. 1507

Figure E21

Average time it takes respondents to drive to their main store

Source: Commission analysis based on data from our consumer survey, n=6,534. 1508

1507
1508

[
[

].
].

557

Why respondents choose to shop at their main store
E116

We asked respondents to select from a range of 19 options (including a free-textbox) to reflect why they choose to shop at their main store. There was a wide rangeof reasons why respondents said they choose to shop at their main store. However,convenience and low prices were the most common key drivers.

E117

Figure E22 below shows respondents’ stated reasons for shopping at their main
store. For this question, respondents could select as many reasons that they felt
applied.

“Convenience/easy to get to” and “low prices overall” are key drivers of store choice
E118

Many respondents said they value attributes such as easy parking, convenient
opening times and good specials. However, very few respondents consider any ofthese to be the single most important reason they shop at their main store.

E119

This is illustrated by Figure E22 below. The total bar shows the proportion of
respondents who considered the attribute to be a reason for their main store choice,when they could select multiple options (eg, 30% considered “low prices overall”
one of the reasons they shop at their main store). The smaller, dark blue bars is the
proportion of respondents who considered the attribute to be the single mostimportant reason for their choice of main store (eg, just over 15% considered “lowprices overall” the single most important reasons for their main store choice).

E120

Some drivers of main store choice which are very common when multiple options
are allowed, are very uncommon key drivers of main store choice. For example, 45%of respondents said ‘easy parking’ was one reason for their main store choice,however less than 1% considered it the single most important reason.

E121

The dark blue bars show that convenient/easy to get to and low prices were themost common key drivers of main store choice. For this question, respondents could
only select the single most important reason why they choose to shop at their main
store. HoustonKemp, acting on behalf of Foodstuffs NI, submitted on this analysis
and provided views on how these findings should be interpreted.1509 This isdiscussed in Chapter 4 at paragraphs 4.65 to 4.72.

1509

Foodstuffs NI “Submission on Market study into grocery sector draft report: Appendix B HoustonKemp - Empirical evidence of grocery sector competition” (10 September 2021) at [91]-[97].

558

Figure E22

Why respondents said they shop at their main store

Source: Commission analysis based on data from our consumer survey, n=11,880. 1510

There is some geographic variance in the key drivers of store choiceE122

As shown in Table E3 below, respondents’ key drivers of store choice varied
depending on where they lived in. Of note:E122.1 "there is no other option in my area" was the most common key driver ofmain store choice for those in small urban areas;
E122.2 "convenient/easy to get to" was a more common key driver for those inlarger urban areas, such as Auckland, than in smaller urban or rural areas;andE122.3 a larger proportion of respondents in smaller urban areas selected"Familiarity with the store/service" than in larger urban areas.

1510

[

].

559

Table E3
Ranking1
2
3Single most important drivers of store choice, by urban-rural

Major urban
area
Convenient/easy
to get toLarge urban
area
Convenient/easy
to get to

Medium urban
area
Convenient/easy
to get to

Low prices
overallGood value formoney

Low prices
overall
Familiarity withthestore/service
Good value formoney

Low prices
overallGood value formoney

Small urban
area
There is noother option in
my area
Convenient/easy
to get to
Low prices
overall

Familiarity withthestore/service
Wide choice of
products

Familiarity withthestore/service
Wide choice of
products

Familiarity withthestore/service
Wide choice of
products

4
5

Wide choice of
products

Rural
Low prices overall

Familiarity withthe store/service
Convenient/easy
to get toGood value formoney
Wide choice of
products

Commission analysis based on data from our consumer survey, n=9,047. 1511

Where respondents said they would shop if their main store(s) closed
E123

We asked respondents where they would shop if their main store(s) closed for theforeseeable future. We gave respondents the option to choose up to 12 types ofstores, modified to account for their main store as respondents could select “I would
go to the same store in a different location, or use the same type of store/service
somewhere else.”

E124

We asked this question to understand which stores respondents considered to be
their best alternative if their main store was unavailable. We asked this question to
see which stores respondents consider are the closest substitutes to their main
store.

E125

If respondents consider a store to be their best alternative to their current offering,
this could be an indication that the two stores are competing closely, at least
compared to stores which are not considered close alternatives.

E126

We considered that it was important to phrase the question based on respondent’s
best alternatives if their current store was closed. This was because this was easierfor respondents to understand compared to hypothetical pricing scenarios.

E127

This means, while we may gain some indication of which stores respondents
consider to be the closest alternatives for each other, we are not able to infer thatthe closest alternatives are competing closely with each other. This is because a
consumer might choose to go to a particular store if their current store is unavailable
but would not switch store even if faced with a significant reduction to their current
offering, such as higher prices.

1511

[

].

560

E128

We have also taken the following into account when analysing responses to thisquestion:
E128.1 Many factors may influence a consumer’s choice of store such as location,
quality and range and some consumers are more likely to switch stores in
response to changes in these factors than others.1512
E128.2 Woolworths NZ submitted that hypothetical questions, such as this one, arelikely to present significant cognitive challenges to respondents, particularly
due to including concepts such as ‘foreseeable future’.1513 We acknowledge
this question may have been challenging for some respondents to answer.

E129

Our analysis may overestimate spending diverted to retailers other than major
grocery retailers, as we did not ask respondents to estimate how they would split
their spend between different options. We assumed that the spend would be split
evenly. This approach may overestimate the proportion of spend that would bediverted to retailers other than the major grocery retailers as, based on the other
responses, we expect that consumers are likely to spend more at the major grocery
retailers than other retailers. Despite these limitations, we consider it useful toreproduce this analysis below for completeness. However, we have not relied on theanalysis of responses to this question in reaching our findings on consumer
behaviour.

E130

In addition to looking at respondents’ choice of main store by region, we also lookedat where respondents would shop if their main store(s) closed by region as thesetwo questions are related.

Main findings on where respondents would shop if their main store(s) closed
E131

Our main findings are that:E131.1 just over half of respondents would shop at Countdown, New World or
PAK’nSAVE if their main store closed. We found this result did not varyacross different types of regions;E131.2 most respondents who reported one of the major grocery retailers as theirmain store would shop at the same retail banner in a different location orsame type of retail banner, or a major grocery retailer; and

1512

1513

CMA “Good practice in the design and presentation of customer survey evidence in merger cases”(May 2018) at 35, available at:https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/708169/Survey_good_practice.pdf.
Woolworths NZ “Post conference submission on Market study into grocery sector”(24 November 2021) at [1.10] of Appendix Two.

561

E131.3 most respondents who said they would shop at the same retail banner in adifferent location or same type of retail banners as their main store reported
New World, Countdown or PAK’nSAVE, or a combination of two of thesestores.
E132

These findings indicate that respondents report that they would switch to similartypes of stores to their main stores and stores they would shop at in a typical week.

Which stores respondents would shop at if their main store(s) closed
E133

Figure E23 below shows that 51% of respondent would shop at New World,Countdown and PAK’nSAVE if their main store closed, and 24% would shop at thesame store or same type of store as their main store.1514 Same store largely refers to
New World, Countdown and PAK’nSAVE as 98% of respondents who told us theywould shop at the same store if their main store closed, reported that at least one of
their mains store was New World, Countdown and/or PAK’nSAVE.
Figure E23

Proportion of respondents who would shop at a store if theirmain store(s) closed

Source: Commission analysis based on data from our consumer survey, n=12,097. 1515

E134

Figure E24 below shows that over 77% of respondents who shop at a major grocery
retailer would switch their shopping to only the major grocery retailers if theyreported their main store as Countdown, New World or PAK’nSAVE. This is relevant
as most respondents reported these stores as one of their main stores.

1514

Respondents could select ‘I would go to the same store in a different location or use the same type ofstore/service somewhere else’.
[
].

1515

562

Figure E24

Type of stores respondents said they would switch to if their main store
closed, grouped by respondents’ main store choice

Source: Commission analysis based on data from our consumer survey, n=3,700 to 4,775. The sample
size ranges from 3,700 for New World customers to 4,775 for Countdown customers.1516

E135

Figure E25 shows that most respondents would shop at New World, PAK’nSAVE or
Countdown if their current main store closed across different regions. These results
are similar to respondents’ choice of substitute store across New Zealand as shownin Figure E23 and respondents’ choice of main store across regions in Figure E18
above.

E136

However, there are some slight variations across region:
E136.1 fewer respondents told us they would shop at the same store in a different
location or same type of store in small and medium urban areas comparedto other areas;
E136.2 fewer respondents told us they would shop at PAK’nSAVE in other rural andrural settlements compared to other areas; andE136.3 more respondents told us they would shop at Four Square or FreshChoice inurban areas compared rural areas.

1516

[

].

563

Figure E25

Proportion of respondents who would shop at a store if their main store
closed, by region

Source: Commission analysis based on data from our consumer survey, n=1,515 to 10,818. The
sample size ranges from 1,515 in rural other and rural settlements to 10,818 in large and major urban
areas.1517

How respondents compare and choose grocery products
E137

We asked respondents some questions about how they choose what products topurchase. These were:
E137.1 how often do you check unit pricing on products (where available)?
E137.2 how often do you usually compare prices between similar products whengrocery shopping (eg, three different brands of laundry detergent)?
E137.3 which of these best describes which brands of grocery products you buy?

E138

As discussed at paragraph E44, some respondents may have over-reported thefrequency with which they check unit prices or compare prices between products.

1517

[

].

564

Respondents report a high rate of checking unit pricing
E139

Almost two thirds of respondents reported always or usually checking unit pricing,where available, when grocery shopping. A very small proportion of respondents
stated they did not know what a unit price was, indicating most respondents had atleast a general awareness of the practice.

E140

The question provided an example of unit pricing to ensure respondents would be
able to easily understand the question (see Figure E27 below). Therefore, any
confusion regarding what is meant by a unit price is likely to be minimal.
Figure E26

Reported use of unit priceSource: Commission analysis based on our consumer survey data, n=12,083.1518

1518

[

].

565

Figure E27

How the unit price question was displayed to respondents

Reported use of unit pricing does not vary much between the main retail banners
E141

Reported checking of unit price is relatively consistent between PAK’nSAVE,Countdown and New World (albeit slightly less frequent for New World shoppers).

E142

Reported checking of unit price appears higher for other retailers, for example,
ethnic supermarkets. However, given the relatively small sample sizes for thesegroups (n<100), additional care should be taken when reviewing these results.

566

Figure E28

Reported use of unit price, by retail banner

Source: Commission analysis based on our consumer survey data, n=10,287.1519

Respondents also said they often compare prices between products
E143

Similar to the responses regarding unit pricing, two thirds of respondents said they‘usually’ or ‘always’ compare prices between similar products when grocery
shopping, as shown in Figure E29 below.

1519

[

].

567

Figure E29

Reported checking of prices between similar products

Source: Commission analysis based on our consumer survey data, n=12,067. 1520

What respondents told us about how they use grocery loyalty programmes
E144

We asked respondents a range of questions about their experiences with grocery
loyalty programmes. This included what programmes they were members of, why
they signed up for the programmes, how well they know how the retailer uses theirdata, and how closely they read the terms and conditions when registering.

E145

Respondents could select from five options in the survey:
E145.1 Clubcard (New World);
E145.2 Airpoints (New World);
E145.3 Onecard (Countdown);
E145.4 AA Smartfuel (Countdown); andE145.5 Other (free text).

1520

[

].

568

E146

Flybuys is also an option at New World stores. This option was inadvertently missedfrom the survey script. Foodstuffs made us aware of this omission in the latterstages of the survey being live; however, by this stage it was impractical to amend
the script.

E147

This omission may have resulted in the under-reporting in the number of
respondents who are members of the Flybuys programme. It is possible this may
have had some effect on our results, however responses to questions about loyalty
programmes did not seem to vary depending on what programmes were a member
of. Additionally, respondents had the ability to provide a free-text response
regarding what programme they are a member of.1521

E148

Woolworths NZ submitted that the way we listed the five options of loyalty
programmes may have been confusing to respondents, as the list conflates
supermarket loyalty schemes (eg, Clubcard) with other loyalty schemes that have asupermarket relationship (eg, Airpoints). 1522 The purpose of providing this list was tocapture the range of loyalty programme cards accepted at the major grocery
retailers and/or linked to rewards available through supermarket loyalty schemes.

Most respondents are a member of a grocery loyalty programme
E149

Nine in 10 respondents are a member of at least one grocery loyalty programme. On
average, these respondents are member of 2.3 programmes. This appears consistent
with figures about loyalty programme membership contained in research provided
by the major grocery retailers.1523

1521

Approximately 78 out of 328 respondents provided “Flybuys” as a free-text response to this question.
Woolworths NZ “Post conference submission on Market study into grocery sector”(24 November 2021) at [1.11.1] of Appendix Two.
For example: [
];
[
].

1522

1523

569

Figure E30

Number of loyalty programmes respondents are a member ofSource: Commission analysis based on our consumer survey data, n=12,097. 1524

Member-only discounts were the most common reasons respondents signed up for theirrespective loyalty programme
E150

Respondents said they signed up for loyalty programmes for a range of reasons.
Figure E31 below shows that the most common reasons why respondents signed up
for the grocery loyalty programme they use most often.

E151

For this question, we provided respondents a list of seven reasons why they signed
up for the programme they use most often. Respondents could select multiple
options or provide a free-text response if their reason was not listed.

1524

[

].

570

Figure E31

Respondents’ reasons for joining their main loyalty programme

Source: Commission analysis based on our consumer survey data, n=11,141. 1525

Less than one in 10 respondents said they read all the terms and conditions of the loyalty
programme they use most often
E152

When respondents who are members of a grocery loyalty programme were asked
how closely they read the relevant terms and conditions most did not read all ofthem or could not remember.

1525

[

].

571

Figure E32

How closely respondents reported reading the terms and conditions of the
programme the use most often

Source: Commission analysis based on data from our consumer survey, n=11,039. 1526

A third of respondents said they do not know how their data is used
E153

When respondents who are members of a grocery loyalty programme were asked
about their awareness of how their data was used by the operator of thisprogramme, most said they did not know exactly how their data is used.

1526

[

].

572

Figure E33

How respondents described their awareness of how their grocery loyalty
programme uses the data it collects

Source: Commission analysis based on data from our consumer survey, n=11,105. 1527

Almost three quarters of respondents said they always scan their loyalty card
E154

When respondents who are a member of a grocery loyalty programme were asked
how often they scan their card when making a purchase, almost all respondents said
they usually or always scan or swipe their card.

1527

[

].

573

Figure E34

How often respondents said they swipe or scan their loyalty card when
making a purchase

Source: Commission analysis based on data from our consumer survey, n=10,505.1528

The reasons why some respondents were not members of a loyalty programme varied
E155

About 8% of respondents reported not being a member of any programme. The
most common reason for this was that a loyalty programme is not available where
they shop. However, there did not appear to be any strong reasons why these
respondents were not members of any programme.

E156

It also possible that a proportion these respondents are actually a member of the
Flybuys programme but did recall they were a member, due to the omission of
Flybuys as an option.

1528

[

].

574

Figure E35

Why respondents said they are not a member of any grocery
loyalty programmes

Source: Commission analysis based on data from our consumer survey, n=953.1529

What respondents told us about their experiences shopping for groceries
E157

We received 6,617 free-text responses to the question “Is there anything else you
would like to tell us about your experiences shopping for groceries?”. We read eachof these comments to identify themes and common narratives. These are discussed
in detail below. A wide range of themes were represented in these comments andrespondents often raised many different points in their response.

E158

We conducted this analysis to capture and present what respondents told us, using
this to identify common themes and narratives. Given respondents did not provide
any personally identifiable information, we are unable to contact any respondent toverify, or further understand, what they have told us.

E159

The Ipsos report, which is published alongside this report, provides detailed
qualitative research into many of the themes and comments raised by respondents.
Our consumer survey was not designed with the intent of conducting in-depth
qualitative research.

How we conducted our analysis of the free-text responses
E160

Responses that contained text, but were non-responses (eg, “no comment”, “n/a”,
etc.) were removed to yield 6,617 free-text responses.

1529

[

].

575

E161

We then categorised these responses, using keywords, into eight main themes. For
example, responses which contained words such as “price” or “cost” werecategorised within the Price theme.

E162

We then read each response to:E162.1 ensure the themes assigned using key words were accurate (and removing
them if they were not);E162.2 add any other main themes which were relevant;E162.3 add relevant sub-themes; andE162.4 identify any emerging narratives from the responses.

E163

Table E4 below shows the themes and sub-themes we assigned the responses
against.

E164

Responses were coded with a sub-theme if they related to a specific matter. For
example, a response discussing pricing labels will have already been assigned under‘Price’, but this would additionally be assigned under the sub-theme ‘Pricing labelsand discounts’.

E165

This categorisation was completed by following defined sub-themes.1530 This wasdone to minimise definition shift during the code process, to ensure consistency.

E166

Once we completed the coding, some key themes were selected to analyse infurther detail. These were selected as we considered them particularly relevant toour study. Responses related to these themes were then summarised, and peer
reviewed for consistency.

1530

For example, the ‘Dietary requirements’ sub-theme was defined as comments on ‘The range of
products stocked by grocery retailers which cater to various dietary requirements (eg, gluten free,vegan, free-from)’.

576

Table E4

Themes and sub-themes used to categorise the free-text responses

Price

Quality

Range

Service

Price change due to
COVID-19 pandemic
High prices/poor
value

Sustainability/environ
mentalBakeryDietary requirements

Low prices/goodvaluePricing labels anddiscounts
Price integrity

Meat/seafood

Availability of
products

Store
cleanliness
COVID-19
pandemic
procedures
Staff andcheckouts
Convenience

Promotions

Fresh produce

Choice of products

Competition

Suppliers

Loyaltyprogrammes
Datacollection/privacy
Loyalty discounts

Remedies

Consumer benefit

New entrant

Tax
Price
controls

Consumer
information
Country oforigin577

Overview of the themes from the responses
E167

Figure E36 below shows the prevalence of the themes people talked about in theirfree-text responses. Price was the most discussed theme. However, it is clear
respondents care about a range of things beyond price when grocery shopping.
Figure E36

Themes of free-text responses

Source: Commission analysis based on data from our consumer survey, n=6,617.1531

E168

In general, the prevalence of these themes did not tend to vary significantly
depending on region or other demographic variables. However, there were somedifferences. For example, as shown in Figure E37 below, comments about
competition appeared to be more prevalent in smaller urban and rural areas.

1531

[

].

578

Figure E37

Where people who discussed competition live

Source: Commission analysis based on data from our consumer survey, n=6,058.1532

Respondents’ perceptions
E169

As shown in Figure E36 above, over half the responses we received discussed price.
Of these, the most common comment was about the perception of high prices (orpoor value) of groceries in New Zealand.

What respondents said about prices
E170

Roughly one third of feedback about prices was that the price of groceries in
New Zealand is high or poor value, particularly in comparison to other countries.
Respondents also commented how the cost of groceries has increased relative totheir income. These types of comments appeared to be more prevalent among
respondents in younger age brackets.

E171

Some respondents said they are more likely to purchase products that are on special
and may avoid buying products that are at full price.

E172

Some respondents identified factors that make it harder for them to base theirdecisions on price and made it harder to compare prices. These reasons include:E172.1 products can be advertised as “special” where there is no discount or special
offer;
E172.2 the standard price and discounted prices change rapidly, and prices can vary
between different stores under the same retail banner;

1532

[

].

579

E172.3 perceived discrepancies between the shelf price and the checkout price(either an error or member-only discount);1533 andE172.4 unit pricing is not used consistently and is often missing on promotional
price labels.
What respondents said about product quality
E173

Many respondents also provided feedback on the quality of products that thesupermarkets provide. Typically, feedback focused on quality across three broad
areas: bakery, meat and seafood, and produce.

E174

Some respondents that discussed quality told us that the quality of meat, seafood
and produce at the major grocery retailers is poor. Some respondents would visit
specialist stores such a green grocers, butchers or farmers markets for better quality
products.

E175

Some respondents that discussed quality identified that better quality products(such as meat) are produced in New Zealand but exported rather than sold in local
stores.

What respondents said about the range of products available
E176

The range of products available in store was a key theme for roughly a quarter of
respondents. These respondents provided feedback about the range of products
available at any given store or retail banner, as well as how many stores wereaccessible to them and near where they live.

E177

Some consumers reported that they have noticed that there are fewer brands tochoose from for some products, and that branded products may be discontinued if a
private label alternative is introduced. Private label products were described
generally as a cheaper alternative to branded products.

E178

Respondents who would prefer to do all their shopping at one supermarket told usthat the range of products available was a key factor for their decision to shop
elsewhere as well.

E179

For respondents that identified a specific dietary requirement (such as gluten free),the range available at a given supermarket heavily influenced which store they
visited. Several respondents noted that the range of diet-specific products available
can be particularly limited.

1533

Approximately 200 respondents discussed concerns relating to the perceived consistency of prices
between advertisements/in-store, shelf prices/till prices, etc.

580

What respondents said about service and convenience
E180

Many respondents told us how many supermarkets were nearby, or the travel timeto their nearest store. Consistent with the responses in the previous section, in thefree-text responses respondents told us that they found supermarkets nearby to be
more convenient, and told us that this was likely to impact which supermarket theydecided to visit, and how often they shop each week.

E181

Our feedback indicated that when a consumer has several shops nearby, they arelikely to target a specific store that offers the best value to them (a combination ofprice, quality or range), for a large weekly shop. They will supplement the single
shops with smaller shops at whichever supermarket is closest to access.

E182

Some respondents that used online shopping indicated they would shop with only
one shop once they had initially compared the quality of each online website. The
decision was based more on the quality of the online store and delivery cost rather
than groceries value.

What respondents said about loyalty programmes
E183

A small number of respondents (less than five percent) commented on loyalty
programmes. Feedback was mixed between the benefits (or lack there-of) of thecards and the requirement to have a card to access discounts.

E184

Some respondents expressed frustration at the requirement to be a loyalty
programme member to access a discount. Some respondents appeared to not likethe fact that retailers use loyalty cards to collect data about their purchase
information. Feedback also included frustration at missing out on discounts if the
respondent did not have a card on them for a particular visit.

E185

For the respondents that provided feedback, it appeared as though a key driver forjoining loyalty programmes was to access the member-only discounts rather thanthe programmes other rewards (such as fuel discounts or points). When a
respondent did refer to the benefits, they typically found the benefits (other thanaccess to member-only discounts) negligible.

Respondents’ suggestions and views about potential recommendations
E186

Approximately 10% of respondents made recommendations to the issues that theyraised in their feedback.

E187

In the context of high prices for healthy foods, some respondents suggested GST
should not apply to some foods. This was primarily suggested for fresh produce andwas also suggested for other core food items such as meat. Other feedback that
identified the low price of processed foods suggested a sugar tax.

581

E188

The most suggested recommendation was the entry of a new retailer to address alack of competition, with approximately 180 respondents making comments to thiseffect. Many of these comments suggested that a grocery retailer, such as Aldi,
should be encouraged to enter New Zealand. Other respondents noted they felt
there was limited competition in their area and expressed a desire for more options.
This feedback identified the lack of competition as a reason for high prices, limited
range, or poor quality.

E189

Many of these respondents had previously lived overseas and made comparisons tointernational groceries markets (such as the UK or Australia), and specificcompetitors such as Aldi or Costco.

E190

Some respondents were concerned with the current lack of visibility of a product’s
country of origin. These respondents would prefer to see better information about
where a product’s ingredients are sourced, and whether they are produced ethicallyand sustainably.

582

Question script for our consumer survey
Introductory page

Kia Ora and Welcome
Thank you for clicking through to our survey, it should take you around five to 10 minutes tocomplete.
This survey will help us understand how New Zealanders typically shop for groceries. Whencompleting the survey, please think about how you typically shop for groceries (ie, at Alert Level 1),
rather than how you might shop due to any COVID-19 pandemic restrictions.
Your response will be used by the Commission as part of our study into New Zealand’s grocery sector.
We will not share your response with third parties unless required to do so by law.
Your response will be grouped with others and we may publish a summary of these grouped resultson our website.
If you need to provide the Commission with confidential, commercially sensitive or personal
information, please email us at marketstudies@comcom.govt.nz to discuss the best way to do this.
The Commission has also published a factsheet [hyperlink] which outlines the purpose of the study
and what we are looking at, the process we are following, what the potential outcomes can be, andhow and when you can take part.
To go directly to the survey please click on the 'Next' button at the bottom of the page.

Begin Survey
Survey questionsFirst, some questions about how you shop for groceries
By groceries, we mean meat, fruit and vegetables, canned goods, dairy products and other types of food anddrink, as well as other household products, like toilet paper, cleaning products and pet food. These products canusually all be purchased at a supermarket, but are often available through other shops as well.

1.

How involved are you in the grocery shopping for your household?

By your ‘household’ we mean the people you shop for groceries for and who live in the same place as you
a. Main shopperb. Shared with othersc. Not usually involved in the grocery shopping[if c, skip to Q25]
2.

INCLUDING YOURSELF, how many people do you generally shop for?
a. 1
b. 2
c. 3
d. 4
e. 5 or more

583

3.

How do you usually buy most of your groceries?
a. In store
b. Online and delivered to mec. Ordered online and collected in store

4.

Which of the following best describes how you usually shop for groceries each week?
a. I tend to make one or two large shop(s)/get one or two large order(s)b. I tend to do one or two larger shop(s)/order(s) and a few smaller shop(s)/order(s)c. I do several smaller shops/orders
d. None of these, I usually do less than one shop a week

[if 3d go to Q9, otherwise continue to Q5]

For the next few questions, think about your shopping during a typical week
We want to understand how you usually shop under normal conditions when not affected by restrictions due to
Alert Levels 2 or 3. If you are not sure what a typical week is for you, think about how you shopped for groceries
in the most recent week you can remember at Alert Level 1.
5. During a typical week, which of these stores/services do you buy groceries from?
a. New Worldb. Countdown
c. PAK’nSAVE
d. Four Squaree. FreshChoicef. SuperValueg. An ethnic supermarket (eg, Tai Ping, Japan Mart, Yogijis Food Mart)h. Another supermarket (eg, Farro Fresh, Moore Wilson’s, Bin Inn)i.
A single-category or specialist grocery store (eg, greengrocers, butchers, bakeries)j.
A general merchandiser (eg, The Warehouse)k. A convenience store (eg, dairies, petrol stations, Night n Day)l.
A meal kit provider (eg, Hello Fresh, My Food Bag)
m. An online-only supermarket (eg, The Honest Grocer)n. Other (please state)[Questions 6 to 8 are provided for all stores selected at Q5]
6.

During a typical week, how many times would you shop with [store response to Q5]?
Number of times [ ]7.

During a typical week, how much in total would you spend with [store response to Q5]?
a. $0-10
b. $10-25
c. $25-50
d. $50-100
e. $100-200
f. $200-300
g. $300+

584

8.

During a typical week, what would you buy from [store response to Q5]?
Please select all that apply
Fresh fruit or vegetables
Meat, poultry or seafood
Dairy or eggs (eg, milk, cheese, eggs)
Frozen food (eg, frozen vegetables, ice cream, pizza)
Chilled food (eg, sauces, dips, soups)
Deli goods (eg, salads, small goods, cooked meats)
Baked goods (eg, bread, muffins)
Confectionery, nuts or snacks (eg, chocolate, potato crisps)
Other food (eg, pasta, tinned vegetables, breakfast cereals, flour)
Alcohol
Non-alcoholic drinks
Pet supplies (eg, pet food)
Cleaning products and other household supplies (eg, dishwashing detergents and powders,
paper towels)
n. Personal care products (eg, toothpaste, shampoo, deodorant)o. Other (please specify)
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.

These questions are about how you usually do your main shop
9.

Which of the below is usually your MAIN grocery store/service (the one you spend the most at, or
do most of your grocery shopping with)?
If you have more than one main store/service, select the two you use most often
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.

New WorldCountdown
PAK’nSAVE
Four Square
FreshChoice
SuperValue
An ethnic supermarket (eg, Tai Ping, Japan Mart, Yogiji’s Food Mart)
A specialty supermarket (eg, Farro Fresh, Moore Wilson’s, Bin Inn)
A single-category store (eg, a butcher, baker, greengrocer or farmers’ market)
A general merchandiser (eg, The Warehouse)A meal kit provider (eg, Hello Fresh, My Food Bag)
An online-only supermarket (The Honest Grocer)
A convenience store (eg, a dairy, petrol station, Night and Day)
Other [text box]
I don’t have a main shop

[If 4b, 9k or 9l, go to Question 12][If 9o, go to Question 15][Questions 10 to 13 are provided for all stores selected at Q9]

585

These questions are about your main shop with [{FOR EACH} main store in Q9]
10. How do you usually get there?
a. Driveb. Walkc. Bus/train
d. Bicycle/scootere. Taxi/ridesharef. Other: please explain
11. How long does it usually take you to get there?
a. 0-5 minsb. 5-10 minsc. 10-15 mins
d. 20-25 minse. 25+ mins
12. Why is it your main grocery store/service?
Please select all that apply
Randomise ordera. Convenient/easy to get tob. Good value for moneyc. Low prices overalld. Good specials
e. Good quality products
f. Wide choice of products
g. Familiarity with the store/service
h. Easy parking
i. Quick checkouts/easy to pay
j. Have a loyalty cardk. My household prefer itl. Open at convenient times
m. Has self-scanning
n. Has ATM/pharmacy/dry cleaningo. The store is pleasant to be in
p. Has petrol available
q. Am given a lift to the store
r. There is no other option in my areas. Other: explain
13. Please choose the single most important reason why [main store in Q9] is your main grocery
store/service:[auto populate list from selections at Q12]586

14. If your main grocery store/service(s) closed for the foreseeable future, which store/service(s) would
you use instead?
If you would replace your main shop(s) with many smaller ones, please select all stores you would
visit[Delete Q9 response(s) from list (i.e. if 9a hide 14b)]a.

I would go to the same store in a different location, or use the same type of store/service
somewhere else.
b. New Worldc. Countdown
d. PAK’nSAVE
e. Four Square
f. FreshChoiceg. SuperValueh. An ethnic supermarket (eg, Tai Ping, Japan Mart, Yogijis Food Mart)
i. Another supermarket (eg, Farro Fresh, Moore Wilson’s, Bin Inn)
j. A single-category or specialist grocery store (eg, greengrocers, butchers, bakeries)
k. A convenience store (eg, dairies, petrol stations, Night n Day)
l. A meal kit provider (eg, Hello Fresh, My Food Bag)
m. An online-only supermarket (eg, The Honest Grocer)n. Other (please state)Now, some questions about how you decide what groceries to buy
15. Which of these best describes how you decide which grocery products to buy?
a. I usually have preferred brands I look forb. I have preferred brand for some products, but for others I decide each time I shopc. I don’t really have preferred brands; I decide each time I shop
d. I always decide each time I shop
16. How often do you usually compare prices between similar products when grocery shopping (eg,three different brands of laundry detergent)?
a. Neverb. Rarelyc. Sometimes
d. Usuallye. Always
f. I don’t know

587

17. How often do you check unit pricing on products (where available)?
Here is what unit pricing looks like

a.
b.
c.
d.
e.
f.
g.

Never
RarelySometimes
Usually
AlwaysNone of the products I buy display unit prices
Until now, I didn’t know what unit prices wereThese questions are about how you use grocery loyalty programmes
18. Which of the following grocery loyalty cards do you belong to?
Select all that apply
a. Clubcard (New World)b. Airpoints (New World)c. Onecard (Countdown)d. AA Smartfuel (Countdown)e. Nonef. Other (please state)[if 18, skip to Q24]
[if more than one selected, continue to Q19]
[if only one selected, skip to Q20]
19. Which do you use most often?
a. [auto-populate based on selections at Q18]
20. How often do you swipe or scan your [card selected at Q19 (or Q18 if only one selected)] when
making a purchase?
a. Neverb. Rarelyc. Sometimes
d. Usuallye. Always
21. Why did you join [card selected at Q19 (or Q18 if only one selected)]?
Select all that apply
a. To get access to members-only discounts
b. To collect rewards points which allow me to get vouchers
c. To collect points for other programmes (e.g. Flybuys)
d. To enter the exclusive competitions and promotions
e. To get members-only discounts on fuelf. I don’t know/can’t remember
g. Other reason [text box]

588

22. Which of these best describes your awareness of how [card selected at Q19 (or Q18 if only one
selected)] uses the data it collects when you swipe or scan it?
a. I understand exactly how my data is usedb. I understand mostly how my data is usedc. I understand a little how my data is used
d. I don’t know how my data is used
23. When you signed up for [card selected at Q19 (or Q18 if only one selected)], which statement best
describes how you read the terms and conditions?
a. I read all of themb. I skimmed the key bitsc. I did not read them at alld. I can’t remember[only if 18e]
24. Please select the statement that best describes why you are not a member of any grocery loyalty
programmes:a. I don’t want grocery stores to collect my datab. I shop at too many stores for it to be worthwhilec. They don’t provide enough valued. No particular reason
e. Not available where I shop
f. I’m not sureg. Other [free text]

Your experience shopping for groceries
25. Is there anything else you would like to tell us about your experiences shopping for groceries? [freetext]This could include your views on the grocery options available to you or anything else you think we should beaware of.

A bit about you
26. How old are you?
Under 16 years
16 to 25 years
25 to 40 years
40 to 65 years
65 years and overPrefer not to say

27. What suburb/region do you live in?
[Conditional drop-down boxes:]
Chapter 1
Chapter 2
Chapter 3
Chapter 4

Regions
District/Cities
Cities/Suburbs, depending on region selected
Suburbs (for five most populous cities)

589

28. Which of the following best describes your household?
By your ‘household’ we mean the people you shop for groceries for and who live in the same place as you
a.
b.
c.
d.
e.
f.
g.

Single, living alone
Group flatting (single or with a partner)
Couple, no kids living in household
Household with children
Single parent
Household with multiple generations
Prefer not to say

29. What ethnicity(ies) do you identify with?
Please select as many that apply
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.

New Zealand European
Māori
SamoanCook Islands Māori
TonganNiueanChineseIndianEuropean
Other, please state: [text box]
Prefer not to say

30. What is the total annual income of your household?
a. Less than $15,000
b. $15,001 - $45,000
c. $45,001 - $75,000
d. $75,001 – $105,000
e. $105,001 - $135,000
f. $135,001 - $165,000
g. More than $165,000
h. Prefer not to say

Final pageThank you for taking the time to complete our survey.
The information you have provided will help us in our study into whether competition is working wellin the retail grocery sector.
If you want to be kept up to date with progress on the study, please subscribe to our mailing list
[here].

590

Attachment F

Supplier survey

Introduction
F1

This attachment provides further information about our supplier survey.

F2

In early 2021, we conducted a supplier survey to help to build our understanding of
how well competition is working for the acquisition of groceries. We sought views on
suppliers’ trading relationships with grocery retailers and wholesalers.

F3

We received 126 responses to our supplier survey.1534 These respondents supplied
across a range of grocery retailers and product categories.

F4

The responses we received have informed our analysis of competition for theacquisition of groceries by retailers, as discussed in Chapter 8 of this report.

F5

The sections in this attachment are:F5.1

how we designed and conducted our supplier survey;

F5.2

our approach to confidentiality of suppliers’ information;

F5.3

who responded to our supplier survey;

F5.4

how we have used the results of our supplier survey; andF5.5question script for our supplier survey.

How we designed and conducted our supplier survey
F6

Our supplier survey was conducted online and hosted on our website. The survey
was available from 4 March to 25 March 2021.

F7

The survey included 31 questions in total, but none of the respondents were asked
all of these.1535 The questions respondents were asked depended on their answers
to previous questions.

1534
1535
1536

1537

F7.1

Respondents who indicated that they currently supply grocery retailers orwholesalers in New Zealand were asked either 17 or 18 questions.1536

F7.2

Respondents who indicated that they do not currently supply grocery
retailers or wholesalers in New Zealand, but have done so in the past, wereasked 11 questions.1537[].
The full question script for our supplier survey is included on pages 593 to 603 below.
Q1-Q17 and Q31 on pages 595 to 603 below. Q9 only applied to respondents who currently supply
major grocery retailers.
Q1, Q18-Q26 and Q31 on pages 595 to 603 below.

591

F7.3

Respondents who indicated that they do not currently supply grocery
retailers or wholesalers in New Zealand, but either hope to in the future or
have no intention of doing so in the future, were asked 6 questions.1538

F8

The initial questions were designed to get an overview of the respondents’ business,
including the products they supply and who they supply to.1539 Tick-box options
were provided for many of these questions.

F9

Subsequent questions focused on respondents’ trading relationships with New
Zealand grocery retailers and wholesalers, or their role in the supply chain. 1540
Respondents were generally only able to provide free-text responses to thesequestions.

F10

Topics covered in questions regarding respondents’ trading relationships with New
Zealand grocery retailers and wholesalers included:
F10.1

the form of supply agreements and terms of trade;

F10.2

suppliers’ views on their bargaining power relative to that of the grocery
retailers and wholesalers they supply; andF10.3

any specific behaviour or conduct which may be positively or negatively
affecting the respondents’ business.

F11

We sought to frame the questions using neutral language, to allow suppliers tofreely provide their views.

F12

We promoted the survey to seek input from a wide range of suppliers, including
publishing a media release and adding a link to the survey on the home page of our
website.1541 We also engaged with a range of industry associations, asking them tohelp promote the survey to their members through their communication
channels.1542

Our approach to confidentiality of suppliers’ information
F13

We were conscious that some of the information suppliers wanted to share with us
could be commercially sensitive and highly confidential.

1538

Q1, Q27-Q30 and Q31 on pages 595 to 603 below.
Q1-Q9, Q18-21 and Q27-Q28 on pages 595 to 603 below.
Q10-Q17, Q22-Q26 and Q29-Q30 on pages 595 to 603 below.
Commerce Commission “Media release – Surveys launched to help suppliers and consumers inform
grocery market study” (4 March 2021).

1539
1540
1541

1542

[
].

592

F14

Respondents were able to either complete the survey anonymously or share theirdetails with us. Of the 126 responses received, 58 provided their details and 68
remained anonymous.1543

F15

The option to respond anonymously was included given concerns had been raised
regarding the potential reluctance of suppliers to share their views with us.1544

F16

We implemented additional information handling measures for information
provided to us by suppliers, including restricting the number of our staff who haveaccess to the information. The identities of suppliers have also been protected withcode-names.

F17

We have published limited details regarding responses received due to the highly
sensitive nature of the identities of survey respondents and the information they
provided. Given that many of the substantive survey questions required free-text
responses from respondents, it is difficult to provide details of the responses
received without risking identifying individual suppliers.

Who responded to our supplier survey
F18

Of the 126 responses we received, 110 indicated that they are current suppliers togrocery retailers or wholesalers in New Zealand.1545 The remaining 16 respondents
indicated that they do not currently supply grocery retailers or wholesalers in New
Zealand, but either:
F18.1

have done so in the past;

F18.2

hope to in the future; orF18.3

have no intention of doing so in the future.

F19

Responses received from the 110 current suppliers indicated that they supply acrossa range of product categories, as shown in Figure F1 below.

1543

[
].
For example, the NZFGC submitted: “…given the concentrated nature of the industry, [theCommission] will face significant challenges obtaining evidence. Much of the conduct is purposefully
not committed to writing, and suppliers will be naturally reticent to comment on such a small
market”, NZFGC “Submission on retail grocery market study preliminary issues paper”(4 February 2021) at [10(c)].
[
].

1544

1545

593

Figure F1

Product categories supplied by survey respondents

35

30# of respondents

25

20

15

10

5

0

Source: Commerce Commission analysis of responses to our supplier survey.1546
Note: Some respondents supply products across multiple categories, so the number of responses in
Figure F1 above is greater than 110.

F20

These 110 respondents also indicated that they supply across a range of New
Zealand grocery retailers and wholesalers, as shown in Figure F2 below.

1546

[

].

594

Figure F2

NZ grocery retailers and wholesalers supplied by survey respondents

100
90
80

# of respondents

70
60
50
40
30
20
10
0

Source: Commerce Commission analysis of responses to our supplier survey.1547
Note: Some respondents supply across multiple retailers and wholesalers, so the number of
responses in Figure F2 above is greater than 110.

How we have used the results of our supplier survey
F21

Our supplier survey enabled us to seek the views of a wide range of suppliers. We
were able to identify common themes by reviewing the responses received. These
themes are described in Chapter 8 of this report, as part of our analysis ofcompetition for the acquisition of groceries by retailers.

F22

The survey was not designed to be statistically representative. Rather, it was
intended to be a simple way of gathering the views of a range of suppliers within ashort period of time.1548

F23

Follow-up meetings were held with some respondents to our supplier survey to seek
clarification or further details regarding comments they had made. We were notable to meet with all survey respondents, so we met with a sample of suppliers ofdifferent sizes across a range of product categories.

1547

[
].
Across the 126 responses we received to our supply survey, the average combined number of words
provided in response to all questions which required a free text response was 394,
[
].

1548

595

Question script for our supplier survey
Introductory page
Kia ora and welcome
Thank you for clicking through to our supplier survey – it should take you up to 30 minutes tocomplete (potentially longer if you choose to provide particularly detailed comments).
You have options at the end of the survey to either share your details with us or to remain
anonymous.
We have published a factsheet with more information on why it is important we hear from suppliers,
what we want to know, and how we may be able to protect the confidentiality of information you
supply us.
We may publish a summary of supplier feedback received via this survey. However, the information
will be anonymised and, if we consider there is any risk that information specifically relating to you
could identify you, this will be discussed with you prior to publication.
If you wish to provide us with information outside of using the survey or have any questions about theconfidentiality of information you want to provide us, please contact us at
marketstudies@comcom.govt.nz or ring Market Studies Project Manager Karen Smith on 04 924 3863
to discuss further.
Please note:•••

this survey is designed to be completed using a PC or laptop
if you would prefer not to answer a question, you can click ‘next’ at the bottom of the page
if you wish to pause and complete the survey later, your responses will be stored as long as
you keep the survey open.

Click 'Begin' below to start the survey.

Begin

596

Definitions page
Before you begin, here is an overview of some terms used in this survey
Groceries or products means a range of food and drinks, including meat, fruit and vegetables, canned
goods and dairy products. Groceries also include a range of other household products, like toilet
paper, cleaning products and pet food. These products can usually all be purchased at a supermarket,
but are often available through other shops as well.

Grocery retailers means businesses which sell grocery products directly to final consumers in New
Zealand. Examples include:
•
•
•
•
•
•
•
•

Major grocery retailers (eg, Foodstuffs North Island, Foodstuffs South Island, Woolworths NZ)
Ethnic supermarkets (eg, Tai Ping, Japan Mart, Yogijis Food Mart)
Other supermarkets (eg, Farro Fresh, Moore Wilson’s, Bin Inn)
Single-category or specialist grocery stores (eg, greengrocers, butchers, bakeries)
General merchandisers (eg, The Warehouse)
Convenience stores (eg, dairies, petrol stations, Night n Day)
Meal kit providers (eg, Hello Fresh, My Food Bag)
Online-only supermarkets (eg, The Honest Grocer).

Major grocery retailers means:•••

Foodstuffs North Island (New World, PAK’nSAVE, Four Square, Gilmours)
Foodstuffs South Island (New World, PAK’nSAVE, Four Square, Raeward Fresh, On the Spot,
Trents)Woolworths NZ (Countdown, SuperValue, FreshChoice).

Grocery wholesalers means intermediaries who on-sell products to grocery retailers. Examples
include:••fresh produce wholesalers/distributors (eg, Turners & Growers, MG Marketing, Fresh Direct)
food service wholesalers (eg, Bidfood).
Next

597

Survey questionsFirst, some questions about your business1.

Do you currently supply products to grocery retailers or wholesalers in New Zealand?
(Tick the option which most accurately describes your business.)
1.1

We currently supply grocery retailers or wholesalers in New Zealand

1.2

We do not currently supply grocery retailers or wholesalers in New Zealand, but havedone so in the past

1.3

We do not currently supply grocery retailers or wholesalers in New Zealand, but hope
to in the future

1.4

We do not currently supply grocery retailers or wholesalers in New Zealand, and haveno intention of doing so in the future[If 1.1 is ticked, go to Q2][If 1.2 is ticked, go to Q18]
[If 1.3 or 1.4 are ticked, go to Q27]

2.

Which of the following categories of products do you supply to grocery retailers orwholesalers in New Zealand?
(Tick all relevant product categories below.)
2.1

Fresh fruit or vegetables

2.2

Meat, poultry or seafood

2.3

Dairy or eggs (eg, milk, cheese, eggs)

2.4

Frozen goods (eg, frozen vegetables, ice cream, pizza)

2.5

Chilled goods (eg, dips, soups, sauces)

2.6

Deli goods (eg, salads, small goods, cooked meats)

2.7

Baked goods (eg, bread, muffins)

2.8

Cereals or grains (eg, flour, rice, breakfast cereals, pasta products)

2.9

Food additives or condiments (eg, sugar, dried herbs, mayonnaise, olive oil)

2.10

Confectionery, nuts or snacks (eg, chocolate, nuts, potato crisps)

2.11

Other food items (eg, canned food, spreads, baby food)

2.12

Alcoholic beverages (eg, beer, wine, cider)

2.13

Non-alcoholic beverages (eg, coffee, soft drinks)

2.14

Pet supplies (eg, pet food)

2.15

Cleaning products and other household supplies (eg, dishwashing detergents andpowders, paper towels)

2.16

Personal care products (eg, toothpaste, shampoo, deodorant)

2.17

Other (please specify): [Free text box]

598

3.

Do you supply private label products (eg, home brands or own brands, such as Pams andEssentials) to grocery retailers or wholesalers in New Zealand?
(Tick the option which most accurately describes your business.)

4.

3.1

No, we do not supply any private label products

3.2

Yes, some of the products we supply are private labels

3.3

Yes, about half of the products we supply are private labels

3.4

Yes, most of the products we supply are private labels

3.5

Yes, all of the products we supply are private labels

Approximately how many different individual products (stock keeping units) do you supply
to grocery retailers or wholesalers in New Zealand?
(Please type your best estimate in the box using numbers only (ie, not letters or a range).)[Reponse box (restricted to numbers only)]5.

Who do you supply your products to?
(Tick all relevant options below)
5.1

Foodstuffs North Island (New World, PAK’nSAVE, Four Square, Gilmours)

5.2

Foodstuffs South Island (New World, PAK’nSAVE, Four Square, Raeward Fresh, On theSpot, Trents)

5.3

Woolworths NZ (Countdown, SuperValue, FreshChoice)

5.4

Ethnic supermarkets (eg, Tai Ping, Japan Mart, Yogijis Food Mart)

5.5

Other supermarkets (eg, Farro Fresh, Moore Wilson’s, Bin Inn)

5.6

Single-category or specialist grocery stores (eg, greengrocers, butchers, bakeries)

5.7

General merchandisers (eg, The Warehouse)

5.8

Convenience stores (eg, dairies, petrol stations, Night n Day)

5.9

Meal kit providers (eg, Hello Fresh, My Food Bag)

5.10

Online-only supermarkets (eg, The Honest Grocer)

5.11

Fresh produce wholesalers (eg, Turners & Growers, MG Marketing, Fresh Direct)

5.12

Food service wholesalers (eg, Bidfood)

5.13

Processors/manufacturers who use your products as an input when producing othergrocery products

5.14

Markets outside New Zealand (eg, exports)

5.15

We sell direct to consumers (eg, we have own our outlet/website)

5.16

Other (please specify): [Free text box]

599

6.

Approximately how much annual revenue do you earn from sales of your products in New
Zealand?
(Please type your best estimate in the box. When answering this question, please consider atypical year – avoiding the impact of significant global events such as the COVID-19 pandemic
which may have distorted revenue or costs.)$[Free text box]

7.

Approximately what proportion of your total revenues are generated by sales to New
Zealand’s major grocery retailers?
(When answering this question, please consider a typical year – avoiding the impact ofsignificant global events such as the COVID-19 pandemic which may have distorted revenue
or costs.)

8.

7.1

Don’t sell to major grocery retailers

7.2

0-20%

7.3

20-40%

7.4

40-60%

7.5

60-80%

7.6

80-100%Please give a brief description of where your products are grown, manufactured, orprocessed.
(For example, are the products you supply 100% grown in or manufactured in New Zealand,
do you import products and use these to manufacture others?)[Free text box]

[If any of 5.1, 5.2 or 5.3 were ticked, go to Q9. If not, go to Q10.]

9.

Please describe what you would do if all of the major grocery retailers you supply were nolonger able or willing to stock your products.
(For example, what options would you have for selling any excess stock? What would theimpact on your business be?)[Free text box]

600

Next, some questions on your trading relationships with grocery retailers and wholesalers in New
Zealand
10.

What form do your supply agreements with New Zealand’s grocery retailers andwholesalers typically take?
(Tick the most applicable option.)

11.

10.1

We generally have individualised written supply agreements with each retailer orwholesaler

10.2

We generally supply under each retailer’s or wholesaler’s standard written terms of
trade

10.3

We generally supply under our own standard written terms of trade

10.4

We generally supply under informal, unwritten, arrangements

10.5

Other (please specify): [Free text box]

Please describe your experience regarding whether the terms on which you supply New
Zealand grocery retailers or wholesalers clear and predictable.
(For example:••

how are the prices and quantities you supply set, and to what extent is this known inadvance?
what happens if there are unexpected events (eg, differences in product quality or
quantity)?)[Free text box]

12.

Please describe your experience regarding New Zealand grocery retailers’ promotionalschedules, including any input or influence you have on promotions.
(For example:••

how often are your products on promotion?
what are the benefits and costs of your products being on promotion (eg, payments
you make, how your products are displayed)?)[Free text box]

13.

Please describe your experience regarding where your products are placed on New Zealandgrocery retailers’ shelves, including any input or influence you have on this.
(For example:••

where are your products typically located on the shelf?
do you make payments to retailers to access preferred shelf space or displays?)[Free text box]

601

14.

Please describe your experience negotiating with the New Zealand grocery retailers andwholesalers you supply, including whether you are able to negotiate and, if so, on whatterms?
(Please explain your views, including any impact this has on your business.)[Free text box]

Nearly done, next are some questions on the impact of grocery retailers’ and wholesalers’
behaviour on your business
15.

Please describe any behaviour from New Zealand grocery retailers or wholesalers whichhas positively affected your business, including approximately how often this has occurred
and the impact it has had on your business.
(For example, this behaviour could relate to displays/promotions, distribution logistics etc. In
your response, please specify the retailer(s) whose behaviour you are referring to.)[Free text box]

16.

Please describe any behaviour from New Zealand grocery retailers or wholesalers which
has negatively affected your business, including approximately how often this has occurred
and the impact it has had on your business.
(For example, this behaviour could relate to terms of supply agreements, payment terms,
product stocking and display, pricing negotiations etc. In your response, please specify theretailer(s) whose behaviour you are referring to.)[Free text box]

17.

Are there any New Zealand grocery retailers or wholesalers you have had particularly
positive or negative experiences with?
(Please explain, including examples where possible.)[Free text box]

[Go to Q31]

602

[Introductory questions continued, for respondents who ticked 1.2]
18.

Which of the following categories of products did you previously supply to grocery retailers
or wholesalers in New Zealand?
(Tick all relevant product categories below.)
18.1

Fresh fruit or vegetables

18.2

Meat, poultry or seafood

18.3

Dairy or eggs (eg, milk, cheese, eggs)

18.4

Frozen goods (eg, frozen vegetables, ice cream, pizza)

18.5

Chilled goods (eg, dips, soups, sauces)

18.6

Deli goods (eg, salads, small goods, cooked meats)

18.7

Baked goods (eg, bread, muffins)

18.8

Cereals or grains (eg, flour, rice, breakfast cereals, pasta products)

18.9

Food additives or condiments (eg, sugar, dried herbs, mayonnaise, olive oil)18.10 Confectionery, nuts or snacks (eg, chocolate, nuts, potato crisps)
18.11 Other food items (eg, canned food, spreads, baby food)18.12 Alcoholic beverages (eg, beer, wine, cider)18.13 Non-alcoholic beverages (eg, coffee, soft drinks)
18.14 Pet supplies (eg, pet food)18.15 Cleaning products and other household supplies (eg, dishwashing detergents andpowders, paper towels)
18.16 Personal care products (eg, toothpaste, shampoo, deodorant)
18.17 Other (please specify): [Free text box]

19.

Did you previously supply private label products (eg, home brands or own brands, such as
Pams and Essentials) to grocery retailers or wholesalers in New Zealand?
(Tick the option which most accurately describes your business.)

20.

19.1

No, we did not supply any private label products

19.2

Yes, some of the products we supplied were private labels

19.3

Yes, about half of the products we supplied were private labels

19.4

Yes, most of the products we supplied were private labels

19.5

Yes, all of the products we supplied were private labels

What year did you stop supplying your products to grocery retailers or wholesalers in New
Zealand?
[Free text box]

603

21.

Who do you currently supply your products to?
(Tick all relevant options below.)
21.1

Processors/manufacturers who use your products as an input when producing othergrocery products

21.2

Markets outside New Zealand (eg, exports)

21.3

I no longer supply grocery products, my business has been sold21.4

I no longer supply grocery products, my business has closed

21.5

We sell direct to consumers (eg, we have own our outlet/website)

21.6

Other (please specify): [Free text box]

Next, some questions on your previous trading relationships with grocery retailers and wholesalers
in New Zealand22.

Please explain why you no longer supply your products to grocery retailers or wholesalers
in New Zealand.
[Free text box]

23.

Please describe your experience negotiating with the New Zealand grocery retailers andwholesalers you previously supplied, including whether you were able to negotiate and, if
so, on what terms?
(Please explain your views, including any impact this had on your business.)[Free text box]

24.

Please describe any behaviour from New Zealand grocery retailers or wholesalers which
positively affected your business, including approximately how often this occurred and theimpact it had on your business.
(For example, this behaviour could relate to displays/promotions, distribution logistics etc. In
your response, please specify the retailer(s) whose behaviour you are referring to.)[Free text box]

25.

Please describe any behaviour from New Zealand grocery retailers or wholesalers which
negatively affected your business, including approximately how often this occurred and theimpact it had on your business.
(For example, this behaviour could relate to terms of supply agreements, payment terms,
product stocking and display, pricing negotiations etc. In your response, please specify theretailer(s) whose behaviour you are referring to.)[Free text box]

604

26.

Were there any New Zealand grocery retailers or wholesalers you supplied which you had
particularly positive or negative experiences with?
(Please explain, including examples where possible.)[Free text box]

[Go to Q31]

[Introductory questions continued, for respondents who tick 1.3 or 1.4]
27.

Who do you supply your products to?
(Tick all relevant options below.)

28.

27.1

Processors/manufacturers who use your products as an input when producing othergrocery products

27.2

Markets outside New Zealand (eg, exports)

27.3

We sell direct to consumers (eg, we have own our outlet/website)

27.4

Other (please specify): [Free text box]

Which of the following categories of products do you supply?
(Tick all relevant product categories below.)
28.1

Fresh fruit or vegetables

28.2

Meat, poultry or seafood

28.3

Dairy or eggs (eg, milk, cheese, eggs)

28.4

Frozen goods (eg, frozen vegetables, ice cream, pizza)

28.5

Chilled goods (eg, dips, soups, sauces)

28.6

Deli goods (eg, salads, small goods, cooked meats)

28.7

Baked goods (eg, bread, muffins)

28.8

Cereals or grains (eg, flour, rice, breakfast cereals, pasta products)

28.9

Food additives or condiments (eg, sugar, dried herbs, mayonnaise, olive oil)28.10 Confectionery, nuts or snacks (eg, chocolate, nuts, potato crisps)
28.11 Other food items (eg, canned food, spreads, baby food)28.12 Alcoholic beverages (eg, beer, wine, cider)28.13 Non-alcoholic beverages (eg, coffee, soft drinks)
28.14 Pet supplies (eg, pet food)28.15 Cleaning products and other household supplies (eg, dishwashing detergents andpowders, paper towels)
28.16 Personal care products (eg, toothpaste, shampoo, deodorant)
28.17 Other (please specify): [Free text box]

605

Next, some questions on your role in the New Zealand grocery supply chain
29.

Please explain why you do not currently supply your products to grocery retailers orwholesalers in New Zealand.
[Free text box]

30.

Please describe the extent to which your products offer an alternative to those sold bygrocery retailers or wholesalers in New Zealand.
[Free text box]
[Go to Q31]

Finally, any other views you would like to share
31.

Is there anything else regarding New Zealand’s grocery sector that you think we should beaware of?
(Please provide details where possible.)[Free text box]

[Go to final page]

Final page
Please click ‘Submit’ below to finalise your response
Thank you for taking the time to complete our survey.
We would like you to identify yourself to us if you feel you can. Identifying yourself improves ourability to investigate any comments you have provided.
Further details regarding how we may be able to protect the confidentiality of information you supply
us are contained in our supplier factsheet.

32.

If you are comfortable with the Commission knowing your identity and potentiallycontacting you, please provide your details. If not, you may leave this blank.
32.1

Organisation: [Free text box]

32.2

Contact person: [Free text box]

32.3

Email address: [Free text box]

32.4

Phone number: [Free text box]

Please click on the ‘Submit’ button to record your responses.

606

Attachment G

Store density analysis

Introduction
G1

This attachment provides details about the analysis we have conducted to compare
store density in New Zealand with international comparators.

G2

A 2017 Nielsen report included a comparison of supermarkets per million
inhabitants in 19 European countries from 2015.1549 This comparison was broken
down into:

G3

G2.1

“Small supermarkets”, defined as having a selling surface (or retail floorarea) of between 400 and 1,000 square metres;

G2.2“Large supermarkets”, defined as having a selling surface of between 1,000
and 2,500 square metres; andG2.3“Hypermarkets”, defined as having a selling surface of over 2,500 square
metres.

We have produced a list of New Zealand supermarkets falling within each store size
category using data provided by industry participants.1550 This list is not intended tobe comprehensive, but we consider it gives a reasonable approximation of store
numbers for the purposes of conducting a comparison of supermarket density.

Findings of our analysis
G4

G5

1549

1550

We estimate that New Zealand has approximately:
G4.1

100 Small supermarkets;

G4.2

220 Large supermarkets; andG4.3

129 Hypermarkets.

Based on these figures, we estimate that New Zealand has approximately:G5.1

449 supermarkets which are 400 square metres or larger (all Small
supermarkets, Large supermarkets and Hypermarkets as defined in the
Nielsen report);

G5.2

349 supermarkets which are 1,000 square metres or larger (all Large
supermarkets and Hypermarkets as defined in the Nielsen report); andG5.3

129 supermarkets which are 2,500 square metres or larger (allHypermarkets as defined in the Nielsen report).

Nielsen “Nielsen Grocery Universe 2017” (2017) at 50 and 56, available at:https://www.nielsen.com/wp-content/uploads/sites/3/2019/04/nielsen-grocery-universe-2017.pdf.
[
].

607

G6

We have subsequently calculated the number of supermarkets in each of thesecategories per million people in New Zealand using population data estimates from
Statistics New Zealand, which estimated that New Zealand’s population was
5,116,300 at 31 March 2021.1551

G7

Our results indicate that, per million people in New Zealand, there areapproximately:1552

1551

1552

G7.1

88 supermarkets which are 400 square metres or larger (all Small
supermarkets, Large supermarkets and Hypermarkets as defined in the
Nielsen report);

G7.2

68 supermarkets which are 1,000 square metres or larger (all Large
supermarkets and Hypermarkets as defined in the Nielsen report); andG7.3

25 supermarkets which are 2,500 square metres or larger (all Hypermarkets
as defined in the Nielsen report).

Statistics NZ “Estimated population of NZ” []https://www.stats.govt.nz/indicators/population-ofnz?gclid=EAIaIQobChMIqYnQ1ae08AIVwrWWCh16VQmvEAAYASAAEgLPlvD_BwE.
[
].

608

G8

Table G1 below compares these New Zealand numbers with the numbers for
19 European countries.
Table G1

Comparison of number of stores per million people
Stores 400 sqm andabove per million
peopleCountryStores 1,000 sqm andabove per million
peopleStores 2,500 sqm andabove per million
peopleNew Zealand

88

68

25

United Kingdom

105

56

26

Hungary

127

80

17

Portugal

142

58

9

Greece158

60

5Czech Republic

160

41

31

Italy

178

41

9

France

190

79

33

Poland191

99

Sweden

208

84

21

Spain

209

91

10

Ireland

214

86

19

Finland

216

144

28

Belgium

240

84

5

Switzerland

242

116

31

Netherlands

275

105

3

Germany

333

94

25

Denmark

438

85

18

Austria

441

46

10

Norway

501

115

10

Source: Commerce Commission analysis of supermarket density.1553 The New Zealand data wasestimated by the Commission, and all other data was taken from a Nielsen report. 1554

G9

1553
1554

1555

Out of the 20 countries listed in Table G1, New Zealand has:1555
G9.1

the lowest number of supermarkets (400 square metres and above) per
million people; andG9.2

the sixth-equal highest number of supermarkets that are 2,500 square
metres and above per million people.

[].
Nielsen “Nielsen Grocery Universe 2017” (2017) at 56, available at: https://www.nielsen.com/wpcontent/uploads/sites/3/2019/04/nielsen-grocery-universe-2017.pdf.
[
].

609

G10

We note the following qualifiers in relation to this analysis, noting that as discussed
at paragraph G3, this analysis is not intended to be a comprehensive comparison of
store densities.
G10.1 We have attempted to estimate the number of supermarkets in New
Zealand using data which is available to us (primarily provided by the major
grocery retailers). These are approximate numbers which we use for the
purposes of this comparison and may not include every supermarket that
may fall within the size categories.
G10.2 Some of this data has been provided to us at different points in time
(between December 2020 and June 2021), and may not account for
subsequent store openings or closures.
G10.3 The Nielsen store density data we have used as the basis for our comparison
is dated 2015, while the New Zealand store data we have used forcomparison was received between December 2020 and June 2021.

G11

The comparison was only conducted in relation to a selection of European countries,
and results may differ if a wider range of countries are used for the purposes of thiscomparison.