COVERSHEET
Minister

Hon Dr David Clark

Portfolio

Commerce and Consumer
Affairs

Title of
Cabinet paper

Response to the CommerceCommissions Retail Grocery
Sector Market Study

Date to be
published

8 June 2022

List of documents that have been proactively released
Date
Title
AuthorMay 2022
Response to the Commerce Commission’s Retail Office of the Minister ofGrocery Sector Market Study
Commerce and Consumer
Affairs
23 May 2022
Response to the Commerce Commission’s Retail Cabinet Office
Grocery Sector Market Study
CAB-22-MIN-0186 MinuteMay 2022

Regulatory Impact Statement: Government
MBIE
response to the Commerce Commission Grocery (Published 5 July 2022)
Sector Market Study – Policy decisions

Information redacted

YES / NO [select one]

Any information redacted in this document is redacted in accordance with MBIE’s policy on
Proactive Release and is labelled with the reason for redaction. This may include information thatwould be redacted if this information was requested under Official Information Act 1982. Where
this is the case, the reasons for withholding information are listed below. Where information has
been withheld, no public interest has been identified that would outweigh the reasons forwithholding it.
Some information has been withheld under the grounds of confidential advice to government andconstitutional conventions.

© Crown Copyright, Creative Commons Attribution 4.0 International (CC BY 4.0)

Regulatory Impact Statement:
Government response to theCommerce Commission Grocery
Sector Market Study – Policy
decisions

Coversheet
Purpose of Document
Agree to a set of regulatory changes to implement theGovernment’s response to the Commerce Commission’s market
study into New Zealand’s retail grocery sector report.

Decision sought

Note that the detail of several proposals will be subsequently
consulted on during the legislative process.
Advising agencies

Ministry of Business, Innovation and Employment (MBIE)

Proposing Ministers

Minister of Commerce and Consumer Affairs, Hon Dr David Clark

Date finalised

6 May 2022

Problem Definition
Competition is not currently working well for consumers in New Zealand’s retail grocery
sector. The retail grocery sector is characterised by a duopoly of two major grocery
retailers making profits that exceed a normal rate of return for the market, with a range ofsmaller retailers that have a limited impact on competition. This problem is likely topersist without government intervention.
Executive Summary
Regulatory Impact Statement – Government response to the retail grocery sector market study | 1

Background
Groceries are a vital part of consumer spending in New Zealand, with consumers
spending around $22 billion each year on groceries. New Zealand’s retail grocery market
is dominated by three major grocery retailers – Woolworths New Zealand, Foodstuffs
South Island and Foodstuffs North Island (with the two Foodstuffs co-operatives
operating in separate geographic markets) – with a range of smaller retailers such as
international food stores, meal box companies and online-only supermarkets.
The Commerce Commission undertook a market study looking at the features ofcompetition in New Zealand’s retail grocery sector. On March 8 2022 the Commission
released its final report, which identified the following market outcomes:

Major grocery retailers enjoy high levels of profitability over and above what would
be expected under workable competition1
Grocery prices in New Zealand appear high by international standards
Innovation in New Zealand’s retail grocery sector is low compared to overseas
There has been no major new entrant into the sector recently.

In the Commission’s view, there is unlikely to be an increase in competition without any
intervention. Major grocery retailers would continue to hold high levels of market share,with only limited price and non-price competition between retailers.
Problems identified by the Commission
The Commission’s key finding is that competition in the retail grocery sector is notworking well for consumers. Consistently high profits by retailers, high food prices, andrelatively low innovation indicate there is a lack of workable competition in this sector.
Competition in this important sector is muted and this impacts in a limited retail grocery
offering to consumers and impacts the price, quality, range, and service of grocery
offerings to consumers.
There are three main problems underpinning competition in this sector:Issue one: Entry and expansion conditions are not conducive to competition
Issue two: There is an imbalance in bargaining power between major retailers andsuppliers
Issue three: It is difficult for consumers to make informed purchasing decisions.

Options considered in this RIS
In this RIS we consider actions to address these issues based on feasible options
identified by the Commission as part of its market study. We consider how these options
contribute to the overarching objective in this paper of promoting competition in grocery
markets for the long-term benefit of consumers.

1

The term ‘workable competition’ is drawn from the Commerce Act 1986. It is used to distinguish from the nonoptimal ‘perfect competition’ where there are many suppliers and buyers, but also weak incentives to innovate andinvest. Workable competition is based on rivalry amongst firms, where each firm takes efforts to equal or exceed theattractiveness of their competitor’s offerings, and consumers can make informed choices between vendors. A
workably competitive market is one where no firm has significant and enduring market power, and prices are not too
much or for too long significantly above cost.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 2

Based on the analysis in this paper, we recommend a suite of regulatory and nonregulatory options that address the three issues above. The preferred package of options
include:Issue one: Entry and expansion conditions are not conducive to competition:
Implementing a new regulatory oversight regime for wholesale supply of groceries
by the major grocery retailers. This will include an obligation on the major grocery
retailers to respond to requests for wholesale supply in good faith and in atransparent manner.



Monitoring strategic conduct by major grocery retailers in relation to best priceand exclusivity clauses to ensure that such clauses do not unreasonably impede
the ability of independent grocery retailers to directly access groceries fromsuppliers at competitive prices.

Separate from this impact assessment, decisions have also been made, or will be made,relating to the Commission’s recommendations relating to access to suitable sites forretail grocery development.
Issue two: There is an imbalance in bargaining power between major retailers andsuppliersEnabling in statute the making of delegated legislation for the creation of a codeof conduct to govern relationships between major grocery retailers and suppliers
based on good faith principles and reasonable terms. A subsequent regulatory
impact assessment will be prepared for the code before it is adopted.



Establishing an exception from Part 2 of the Commerce Act 1986 to allow forcollective bargaining between suppliers and major grocery retailers (which may beotherwise prohibited by the cartel prohibition in that Act).

Strengthening the unfair contract terms regime currently in the Fair Trading Act
1986 to make these protections more available to suppliers of groceries. The
amendments include raising the monetary threshold for grocery transactions
subject to the regime and providing for private enforcement.

Issue three: It is difficult for consumers to make informed purchasing decisions


Monitoring non-regulatory commitments by the major grocery retailers to enhance
information for consumers to improve pricing and promotional practices, loyalty
programmes, data collection and co-operation with price comparison services.



Mandating the consistent use of unit pricing for retail groceries. This may be given
effect in delegated legislation, as a consumer information standard under the Fair
Trading Act 1986. A subsequent regulatory impact assessment will be prepared
for the unit pricing consumer information standard before it is adopted.

Many of the recommendations above will require legislative change to implement them.
These will be advanced through a standalone Grocery Industry Competition Bill, which
will be introduced to Parliament in 2022, as well as making relevant changes to the Fair
Trading Act 1986 and Commerce Act 1986.
In addition, consultation will also be undertaken on the details to be included in a code of
conduct to govern retailer and supplier relationships and a mandatory unit pricing
consumer information standard. These documents are being developed outside of thisRegulatory Impact Statement – Government response to the retail grocery sector market study | 3

RIS, but high-level Cabinet agreement is being sought to these measures as part of theGovernment’s response to the Commission’s final report.
Implementation and monitoring
In terms of implementation, a new grocery regulator function will be developed andimplemented in one or more agencies. This agency will provide oversight of competitionin the retail grocery sector and monitor closely how competition develops. The actual
agency to hold these functions will be confirmed as part of upcoming work.
The Commission recommended that a review of the regulatory regime is carried out after
it has been in effect for three years. We intend to provide that MBIE or the grocery
regulator is resourced to conduct annual reviews as required (including annual monitoring
and reporting). These reviews will enable the Government and public to identify if there
are any serious unintended consequences arising from the regulatory regime, or if thebenefits of competition are not emerging in reasonable time.
Limitations and Constraints on Analysis
Range of options considered
The range of options considered in this paper is based on the Commerce Commission’s(the Commission’s) analysis in its final market study report titled Market study into theretail grocery sector – final report (the Final Report) released on 8 March 2022.
The Commission was charged with identifying any factors that may affect competition forthe supply or acquisition of groceries by retailers in New Zealand. This scope excluded
non-competition factors that may be resulting in high grocery prices, such as goods orservices tax on food or food and biosecurity regulation.
The timeframe for the market study also meant that the Commission took a broad look forcommon issues across grocery markets, rather than analysing the supply chain for any
particular grocery products.
In this RIS, we have focused on the Commission’s findings and the suite ofrecommendations outlined in its final report, but if appropriate, we have also consideredother options to respond to the findings. Some of these additional options could beconsidered in future if monitoring and evaluation of the preferred regime reveals thatfurther regulation is desirable.
In addition, given the tight timeframes for developing the options and the focus of theCommission study, we have not considered whether some of the issues and options may
have wider application to other sectors in the economy. As relevant, this could beconsidered in the future.
Quality of data used for impact analysis
This RIS relies on much of the analysis in the Commission’s final report, the submissions
from interested parties to the Commission, and information gathered by MBIE as part oftargeted stakeholder engagement on the Commission’s final recommendations.
MBIE has confidence in the Commission’s analysis.
We note that much of the data used by the Commission in its report predates the state ofnational emergency in response to COVID which was imposed in March 2020. This was
to avoid basing its assessment on the unusual market conditions that applied in the shortterm under the lockdowns. However, the Commission has made a qualitative assessment

Regulatory Impact Statement – Government response to the retail grocery sector market study | 4

of whether any issues or practices that emerged during the pandemic are likely to affectcompetition in the longer term.
The sources of information we used did not include much quantitative assessments of thecosts and/or benefits of options. We have therefore set out qualitative and quantitative
analysis in this RIS, to the extent possible.
Consultation and testing
The RIS has been prepared under significant time constraints, and as such, MBIE has
not tested its analysis with interested parties outside of targeted consultation on theCommission’s final recommendations. We intend to further refine the proposals and ouranalysis as we carry out further work on the details and consult as part of informing
further decisions by Cabinet.
Responsible Manager(s) (completed by relevant manager)
Glen Hildreth
Acting Manager
Competition and Consumer Law
Ministry of Business, Innovation and Employment
12 April 2022
Quality Assurance (completed by QA panel)
Reviewing Agency:

Ministry of Business, Innovation and Employment

Panel Assessment &Comment:

The Ministry of Business, Innovation and Employment’s
Regulatory Impact Analysis Review Panel has reviewed theattached Regulatory Impact Statement Government Response to
the Commerce Commission Grocery Sector Market Study –Policy decisions, prepared by MBIE.
The Panel notes that an advance decision taken by Cabinet on
one recommendation from the Grocery Sector Market Study was
made without a Regulatory Impact Statement [recommendation2], and will be subject to a Supplementary Analysis Report. Thisdecision is therefore not analysed in this Impact Statement anddoes not impact upon the analysis summarised in this Impact
Statement.
The Panel considers that the information and analysis
summarised in the Impact Statement meets the criteria
necessary for Ministers to make informed decisions on the
proposals in this paper.

Regulatory Impact Statement – Government response to the retail grocery sector market study | 5

Section 1: Diagnosing the policy problem
1.1 What is the context behind the policy problem and how is thestatus quo expected to develop?
Characteristics of New Zealand’s retail grocery market
Groceries are a vital part of consumer spending
1.

Groceries are an essential purchase for all New Zealanders and make up a significant
proportion of household spending. In the year to September 2021, more than $22
billion was spent at supermarkets and grocery stores.2

2.

In the year to June 2019, food was the second largest expenditure category for New
Zealand households, with an average spend of $234 a week, or 17.3% of weekly
expenditure.3 Households with lower incomes – such as superannuitants and Māori (onaverage) – often allocate an even higher proportion of their expenditure to food than
average.4

3.

New Zealanders are a diverse group of shoppers with different wants, needs, anddemographics. New Zealand consumers regularly undertake different types of
shopping trips (which the Commission referred to as ‘shopping missions’ in its report)
to grocery retailers, that can be broadly categorised as a main shop, a secondary shop,
and a top-up shop.

4.

For most consumers, convenience and price are the key considerations that informtheir choice of grocery store.5 Convenience includes things like being able to purchasea wide range of groceries in a single location – in a ‘one-stop’ shop – and otherconvenience factors such as time/distance of travel, the range of products available,
the length of opening hours, and parking accessibility.

5.

Māori contributors to the market study indicated the ability to access competitive prices
and a wide range of goods are important for many Māori, hapū and iwi in both urban
and rural 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.

Consumers purchase groceries from major grocery retailers and smaller ‘fringe’ retailers
6.

There are three ‘major grocery retailers’ operating in New Zealand. These are

2 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-survey-September2021-quarter/Download-data/retail-trade-survey-september-2021-quarter.xlsx.
3 Statistics NZ “Household Expenditure Statistics: Year ended June 2019”. Includes GST. Note this includes
spend on restaurant and ready-to-eat food but excludes alcoholic beverages and tobacco. See:
https://www.stats.govt.nz/information-releases/household-expenditure-statistics-year-ended-june-2019 .
4 In 2021 the average spend by the lowest income and expenditure quintile is 21.2% and 21.8% of weekly
expenses, compared to an average of 20.5%. Refer to Statistics NZ “Household Living Costs Price Indexes
September 2021 Quarter Expenditure Weights”. Includes GST. Note this includes spend on restaurant andready-to-eat food, and excludes alcoholic beverages and tobacco. https://www.stats.govt.nz/informationreleases/household-living-costs-price-indexes-september-2021-quarter. This data is not directly comparablewith the 2019 household economic survey, so cannot be used to infer a change in grocery prices from 2019
to 2021.
5 Commerce Commission, “Market study into the retail grocery sector: Final report”, (8 March 2022), at chapter 4.
(Henceforth called Final report).
Regulatory Impact Statement – Government response to the retail grocery sector market study | 6

Woolworths New Zealand Limited (Woolworths NZ), Foodstuffs North Island Limited(Foodstuffs NI), and Foodstuffs South Island Limited (Foodstuffs SI).
7.

However, there are only two major grocery retailers operating stores under national
brands on each island – Woolworths NZ and Foodstuffs NI or Foodstuffs SI. This isbecause the Foodstuffs co-operatives do not operate in the same geographic market.6

Figure 1: New Zealand’s major grocery retailers

Woolworths New ZealandFoodstuffs• Woolworths NZ is owned by
Woolworths Group Limited (Woolworths
Australia).

• Foodstuffs NI and SI are memberowned cooperatives, supplying theirmember-owned and operated retailstores.

• Woolworths NZ operates three retailbanners: Countdown, Fresh Choice andSuperValue.
• There are more than 180 Countdown
stores owned and operated by
Woolworths NZ, as well as four e-storesfor online grocery supply.
• Woolworths NZ is franchisor for 71
locally owned and operated Fresh
Choice and SuperValue stores.
•In 2019, it was estimated that about
three million customers were served at
Countdown stores every week.

8.

• Foodstuffs NI supplies 101 New World,
43 PAK’nSAVE, and 167 Four SquareStores (as at 31 December 2020)
across the North Island.
• Foodstuffs SI supplies 42 New World,
12 PAK’nSAVE and 62 Four Square
stores, as well as Five Raeward Freshand 99 On the Spot retail stores acrossthe South Island.
•Foodstuffs NI stores serve an averageof 2.7 million customers every week (instore or online), while Foodstuffs SI
stores serve over 600,000 customers
each week.

The major grocery retailers offer the convenience and product range for consumers tocomplete their shopping in one place. They are each other’s closest competitors. Their
most well-known retail banners differentiate their offerings to attract different consumer
types:


PAK’nSAVE stores provide an offering targeting consumers who value low prices



New World stores aim to attract consumers who place relative value on friendly
staff who provide a quality service

Four Square stores are situated and operated either for convenience or specificshopping missions, often in smaller regional centres

Countdown stores aim to provide its customers with a mix of choice, value, andconvenienceFreshChoice and SuperValue stores provide a quick and friendly service and abroad range.7

6 Commerce Commission, Final report, at 2.11.
8 Commerce Commission, Final report, at 2.76-2.77. Data from NZ Post indicates that online sales of specialty
food, groceries and liquor increased by 47% to $1.3 billion between 2019 and 2020, and that customers
Regulatory Impact Statement – Government response to the retail grocery sector market study | 7

9.

In addition to major grocery retailers, New Zealand’s retail grocery market also includes
other retailers, which typically provide a more focused offering. These include:

Figure 2: Other grocery retailer types

International foodstores (e.g. Tai
Ping, Japan Mart)

Fresh format or
cash’n carry (e.g.
Farro Fresh, Moore
Wilson’s)Single category or
specialist grocery
stores (e.g.
greengrocers,
butchers, bakeries)

Generalmerchandisers(e.g. The
Warehouse)

Convenience
stores (e.g.
diaries, petrol
stations, Night ‘nDay)

Meal kit providers(e.g. Hello Fresh,
My Food Bag)

Food box
operators (e.g.
Foodbox andOoooby)Online-onlysupermarkets(e.g. The Honest
Grocer, Supie)

Specialist online
retailers (e.g.
Hypermeat).

10.

The New Zealand grocery sector lacks a significant presence of some grocery
business formats that are common overseas, such as limited assortment stores
offering low-priced groceries (e.g. Aldi), supercentre stores (e.g. Walmart supercentre)
and wholesale clubs (e.g. Costco). However, Costco has confirmed that it intends toopen a store in Auckland in 2022 and is also thought to be looking for store sites inChristchurch and Wellington.

11.

Most consumers visit a retail store (either a major grocery retailer or fringe store) topurchase groceries. A small proportion shop online. However, the online grocery
market has been growing rapidly, and online sales growth has been accelerated by the
COVID-19 pandemic lockdowns.8 It is estimated to have accelerated demand for online
by about 6 years.9

carried out 41% more online transactions in 2020 with a growth in basket size of 5%. 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.
8 Commerce Commission, Final report, at 2.76-2.77. Data from NZ Post indicates that online sales of specialty
food, groceries and liquor increased by 47% to $1.3 billion between 2019 and 2020, and that customers
carried out 41% more online transactions in 2020 with a growth in basket size of 5%. 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.
9 Commerce Commission, Final report, at 3.191.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 8

Figure 3: Online grocery sales as a percentage of total grocery sales (2020)

12.

All major grocery retailers have online offerings to varying degrees. These online
offerings are growing. For example, Woolworths NZ’s online sales grew from 3% in2014 to over 13%.10

New Zealand’s major grocery retailers are vertically integrated
13.

The major grocery retailers (and others such as Supie) are vertically integrated withintegrated acquisition, distribution and retail operations. This means that they purchasedirect from the suppliers (primary producers, manufacturers), not a separate
wholesaler, and operate their own distribution centres and supply-chain infrastructuresuch as warehousing. Vertical integration generates significant economies of scale formajor retailers, enabling them to reduce costs across their networks.

10 Commerce Commission, Final report, at 2.78.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 9

Figure 4: High-level summary of the supply chain for the retail grocery sector

14.

While major grocery retailers are vertically integrated, there is currently no wholesale
supplier stocking the full range of groceries for smaller grocery retailers to purchasefrom. There are some limited wholesale supply options in single product categories like
fresh produce or meat, for international products, and for the import of globally branded
products.11 Major grocery retailers also operate wholesale brands, but these are
typically targeted at the food service industry.

15.

Māori have a strong role in grocery supply as growers and primary producers. In New
Zealand, Māori own 50% of the fishing quota; 30% of lamb, sheep, and beef
production; and 10% of dairy production and kiwifruit.12 However, the Commission’s
consultation with Māori indicated that Māori do not currently have a prominent role in
the retailing of groceries.13

Pricing information, promotional practices, and loyalty schemes influence buying behaviours
16.

Promotions and discounts are used by grocery retailers to encourage consumers toshop at their store, or to purchase certain products in store. New Zealand consumers

11 Commerce Commission, Final report, at 2.57-2.59.
12 Commerce Commission, Final report, at 2.61.
13 Commerce Commission, Final report, at 2.31
Regulatory Impact Statement – Government response to the retail grocery sector market study | 10

appear to be highly sensitive to promotions: nearly 60% of consumer spending ingrocery retail in 2017 was on products on promotion.14
17.

Countdown and New World offer loyalty programmes, and most consumers are
members of at least one of these programmes.15 Members of loyalty programmes
exchange their consumer data for access to member-only discounts, accumulated
rewards (such as on fuel or travel) and may include personalised offers. These loyalty
programmes enable retailers to gather data on consumers’ preferences and purchasing
behaviour.16

Market outcomes
Profitability of major grocery retailers appears higher than expected under workable competition18.

In a competitive market, profits would not significantly exceed a normal rate of return
over time. The Commerce Commission (the Commission) has found that the major
grocery retailers achieved higher profits than would be expected in a workablycompetitive market for at least the five years prior to the COVID-19 pandemic.17

19.

The Commission calculated an estimated return on average capital employed(ROACE) for each of the major grocery retailers for 2015 to 2019. These estimates
were 12.8% for Foodstuffs SI, 12.7% for Woolworths NZ, and 13.1% for Foodstuffs NI.
This is above the normal rate of return (the working average cost of capital, WACC) of
about 5.5 percent the Commission would expect under workable competition.18

Figure 5: Average ROACE for major grocery retailers compared to WACC (2015-19)

20.

The high profitability of the major retailers was relatively stable over 2015-2019, anddid not demonstrate any clear upward or downward trajectory, yet continued to exceed

14 Commerce Commission, Final report, at 2.44 – 2.45. Figure 2.5 is from page 35.
15 Commerce Commission, Final report, at 2.49-2.50.
16 Commerce Commission, Final report, at 2.51.
17 Commerce Commission, Final report, Executive Summary, at p.5
18 Commerce Commission, Final report, at 3.7, and 3.53.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 11

a normal rate of return over time.19
Figure 6: Annual ROACE for each major grocery retailer (2015-19)

21.

If the major grocery retailers’ profitability was closer to a normal rate of return then it isexpected their profits would be lower by between $365m and $430m per year.20

Grocery prices in New Zealand appear high by international standards
22.

In a workably competitive market, firms have incentives to compete on price. These
incentives are lessened when competition is not working well. However, even incompetitive markets, prices can be impacted by a range of non-competition factors
such as input costs, regulatory costs, and economies of scale.

23.

Grocery prices in New Zealand appear high by international standards. Out of OECD
countries, New Zealand ranked fifth highest in terms of grocery prices, and fourthhighest in terms of grocery expenditures.21

19 Commerce Commission, Final report, Figure 3.3, at page 56.
20 Commerce Commission, Final report, at 3.54.
21 Commerce Commission, Final report, at 3.91. The Commission considers this conclusion to be the mostreliable evaluation of international prices due to the use of official data sources and a blended approach
using market exchange rates and purchasing power parity (each where appropriate) to compareinternational prices.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 12

Figure 7: Percentage difference in food, beverages, and tobacco prices compared to
New Zealand (NZ =0 0, blended approach, 2017)

Figure 8: Per capita expenditures on food, beverages (alcoholic and non-alcoholic)and tobacco (blended approach, $, 2017)

24.

When compared to countries with similar demand and supply factors, namely Australia,

Regulatory Impact Statement – Government response to the retail grocery sector market study | 13

Finland, Iceland, Ireland, and Israel,22 New Zealand still had a higher price than
average, and was more expensive than Australia, Finland, and Ireland regardless ofwhether alcohol and/or tobacco was excluded.23
Innovation and investment in New Zealand’s grocery retail market is low compared to overseas
25.

In a workably competitive market, firms will invest and innovate to meet consumer
demands and earn profits in the future. Where there are opportunities for innovationand investment to deliver high margins or profits, firms would be expected to compete
for the potential profits these innovations bring.

26.

The Commission’s report noted that the scale and pace of innovation in New Zealandhas been less than might be expected in a workably competitive market:2427.

The major grocery retailers appear to be largely adopters of other retailers’ or
suppliers’ innovations rather than generating their own innovations



Their buying power can also weaken suppliers’ incentives to invest in new
products



The benefits of supply chain efficiencies may not be shared with consumers to thesame extent as would be likely if competition was stronger

Some of the major grocery retailers have been slow to introduce online sales
channels

Global innovations in food retailing have been rapidly advancing – such as
developments of robotic fulfilment centres and drone delivery25 – but these are
yet to be adopted in New Zealand.

The Commission suggests that the slow innovation pace of major grocery retailers is
likely due to lower than expected competition not driving innovation pressure, not New
Zealand’s size or location. Evidence supporting this view are that major retailers havebeen matching innovative offerings by other retailers such as meal kit providers andonline-only retailers.26

There has been no major new entrant into New Zealand’s retail grocery sector recently
28.

No large-scale retail grocer with an offering comparable to PAK’nSAVE, Countdown or
New World has entered the sector in the last decade.27 In 2006, the Warehouselaunched Warehouse Extra, a chain of hypermarkets which included grocery offerings.
Plans to continue with the format were abandoned in 2008 and stores were converted
to the standard stores.

29.

Recently, Costco has confirmed that it intends to open a store in Auckland in 2022, andit appears to be actively looking for store sites in Christchurch and Wellington, although
this may depend on the success of its Auckland store.28 Costco’s entry is likely to place

22 Commerce Commission, Final report, at 3.133.
23 Commerce Commission, Final report, at 3.133-3.135.
24 Commerce Commission, Final report, at 3.218.
25 For example: Mike Troy, Abby Kleckler and Lynn Petrak “2020 Grocery Innovation Outlook” (1 February 2020)
Progressive Grocer https://progressivegrocer.com/2020-grocery-innovationoutlook.
26 Commerce Commission, Final report, at 3.221.
27 Commerce Commission, Final report, at 2.27.
28 Commerce Commission, Final report, at 2.29.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 14

some limited constraint on the major grocery retailers in the areas it is present.
However, its prospects to establish a national store network appear very limited and its
offerings are differentiated from the major grocery retailers.

Competition in the retail grocery sector without any intervention
30.

Consistent with the outcomes above, the Commission has found that competition in theretail grocery sector in New Zealand is not currently working well for consumers.

31.

The retail grocery sector is characterised by a duopoly of two major grocery retailers(Foodstuffs and Woolworths), who are each other’s’ closest competitors. The strategiesof the major grocery retailers – and their brand differentiation – are nationally coordinated, resulting in little competition on price dimensions except for promotional
price competition, which is often driven (and funded) by suppliers.

32.

While there are many smaller fringe retailers, these have a limited impact oncompetition. The competition that does occur between major grocery retailers andother grocery retailers is asymmetric. Major grocery retailers constrain the othergrocery retailers, but the constraint imposed by the other grocery retailers is generally
limited.29

Major grocery retailers capture the majority of consumer shopping missions
33.

More than 95% of respondents to the Commission’s consumer survey indicated they
use a major grocery retailer for their main shop.30

Figure 9: Main store choice by respondents to our consumer survey (%)

34.

More broadly, most consumers use a major retailer for most of their shopping
missions.31 Approximately 60% of respondents to the survey reported only shopping at
the major grocery retailers in a typical week, 40% reported shopping at a mix of major
grocery retailers and other stores, and only 0.5% reported shopping exclusively at non-

29 Commerce Commission, Final report, at 5.30 – 5.45.
30 Commerce Commission, Final report, Figure 4.2 page 110.31 Commerce Commission, Final report, at 4.39.
31 Commerce Commission, Final report, at 4.39.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 15

major grocery retailers.32
35.

Consumers prefer major grocery stores because they are uniquely well placed toprovide the convenience of ‘one-stop’ shopping with comparatively low prices. These
are key drivers of consumer shopping habits, and the ability of major grocery retailers
to respond directly to these preferences means they are likely to continue to dominate
shopping choices for many New Zealanders.

Figure 10: Drivers of store choice in New Zealand

Major grocery retailers are well placed to compete on convenience and price for consumer spend
36.

Major grocery retailers are uniquely placed to cater to consumer preferences forconvenience. They have large stores which stock a wide range of grocery products,
enabling consumers to do one-stop shopping. Additionally, major grocery retailers havea clear brand identity, which influences consumers’ perceptions of store familiarity.33

37.

Major grocery retailers are also able to cater to consumer preferences on price, with
their significant buying power enabling them to offer lower prices. Other grocery
retailers have difficulty matching the major grocery retailers on price across the fullrange of products.34

38.

Other grocery retailers tend to focus on the non-price dimensions, such as productrange and quality. Examples include offering a different range of fresh produce andmeat products, take-away food options, convenience/impulse products, andinternational foods.35

39.

Overall, other grocery retailers do not compete strongly with major grocery retailers
because they cannot target their offering to the key drivers of consumer preference –32 Commerce Commission, Final report, at 4.48.
33 Commerce Commission, Final report, at 4.91-4.97.
34 Commerce Commission, Final report, at 4.98-4.99.
35 Commerce Commission, Final report, at 4.86, and 5.34-5.45. The Commission notes that major grocery
retailers are not consistently monitoring the prices and products carried by other grocery retailers.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 16

convenience and price. This means there is a low likelihood that a significant number ofconsumers will shift their grocery spend away from a major grocery retailer to one ofthe other grocery retailers.36
Major grocery retailers hold high market share
40.

The Commission has determined that the major grocery retailers have a highproportion of market share, with “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%.”37

41.

This market share is persistently high and relatively stable over time and exceeds the
60% threshold that the Commission suggests is an informal metric of a duopoly, as the
major grocery retailers’ market share is consistently over 70%.38 However, theCommission is clear that a high market share between Woolworths NZ and Foodstuffs
is not conclusive evidence of a lack of competition in the retail grocery market.39

42.

What matters is that the relative stability of these market shares and the highconcentration are together an indicator of market power and weak competition. This isparticularly compelling because the concentration of market share has remained highdespite the entry and expansion of other grocery retailers such as meal kit providers
and some online-only retailers. This is further evidence that the major grocery retailers
are each other’s closest competitors and that other grocery retailers do not compete
strongly with other grocery retailers.40

43.

It is not clear what the market share of the online grocery market is between the major
grocery retailers and the other grocery retailers. However, the Commission does notconsider that consumer preferences will change at such a pace to remove the benefitsof a physical ‘bricks-and-mortar’ store in the near future.41

Competition between major grocery retailers across price, quality, range and service
44.

Major grocery retailers are each other’s closest competitors and compete, to varying
degrees, across dimensions of price, quality, range and service (PQRS). However, theCommission considers the intensity of competition to be “muted”, and not reflective ofworkable competition.42

45.

One reason the intensity of competition is muted is due to the major grocery retailers
differentiating their product offering, often on non-price grounds. This allows major
grocery retailers to partially segment the grocery market according to consumer
preferences in a way that reduces their need to compete with rival major grocery
retailers on price.43

36 Commerce Commission, Final report, at 4.89 and 5.26-5.28.
37 Commerce Commission, Final report, at 5.79. The Commission noted several complexities andapproximations involved in calculating market share such as the judgements on the definition of the market
and the firms in the market.
38 Commerce Commission, Final report, at 5.72 and refer to footnote 443.
39 Commerce Commission, Final report, at 5.63.
40 Commerce Commission, Final report, at 5.82 – 5.85.
41 Commerce Commission, Final report, at 5.97.
42 Commerce Commission, Final report, at 4.80-4.81, 4.84, and 5.3.
43 Commerce Commission, Final report, at 5.118-5.125. The Commission says 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
Regulatory Impact Statement – Government response to the retail grocery sector market study | 17

Non-price competition between major retailers
46.

Major retailers compete to ensure they meet consumers’ expectations around productrange, quality, and service. Some common examples include major grocery retailers
adjusting product range to address the specific demographics in local markets,
ensuring stock availability to provide the full range of groceries all the time, andproviding online services (including delivery) with ongoing improvements in the qualityof the online purchasing option.44

47.

An example of the impact of non-price differentiation is that there appears to be very
little cross-shopping between only New World and PAK’nSAVE consumers. This could
be because Foodstuffs has avoided these two retail banners directly competing for the
consumers with the same preferences, to better enable them to compete with
Woolworths NZ.45

48.

While brand differentiation is done at a national level, many decisions on non-pricecompetition, such as product range, are made at the individual store rather than on anational level.46

Price competition between major retailers
49.

Major grocery retailers’ decisions on pricing and promotions tend to be made at anational level, meaning that competition at the national level is a key driver of prices.47
This means that major grocery retailers are largely not competing on price with othergrocery retailers in local markets.

50.

Promotional price competition tends to be limited and temporary in nature, with thepromotions by the different major grocery retailers often being staggered.48 This sort ofcompetition benefits consumers who prefer the discounted products and (bycoincidence or deliberate effort) make purchases at the time of the promotion. It does
not benefit all consumers and there may be a reliance on some consumer datacollected by the major grocery retailers to inform and drive promotional practices.

51.

The Commission concludes that some retail promotional activity is driven bycompetition between suppliers rather than between retailers as a method to generatesales. Promotions are often funded by suppliers.49

52.

Aside from promotional pricing, evidence suggests that price competition is limited to a
relatively small subset of “key value items” (KVI). A KVI is a grocery item that drives thevalue and price perception of a grocery retailer by consumers. The Commission’sreport noted that price monitoring and price competition between the major grocery

particular segment of the PQRS spectrum have weaker incentives to compete strongly, particularly on price,with competitors who target a different segment” (5.121).
44 Commerce Commission, Final report, at 4.83 and at 5.115.
45 Commerce Commission, Final report, at 5.119.
46 Commerce Commission, Final report, at 4.143-4.151 and 5.126. This means there may be more competition
locally on non-price factors.
47 Commerce Commission, Final report, at 4.137-4.142 and 5.126
48 Commerce Commission, Final report, at 5.132-5.133. The Report discusses this matter further in Chapter 7 as
the promotional practices of the major grocery retailers are examined.
49 Commerce Commission, Final report, at 5.130-5.131. The Commission notes that retailers negotiate a rangeof matters relating to promotions with suppliers, including: the size of the discount from the usual shelf price,
the wholesale price that suppliers will offer (namely the discount from the usual wholesale price), and the
suppliers’ trade and marketing spend. While retailers may contribute funds to promotions, the suppliers
generally fund the majority if not all.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 18

retailers seems to focus on these KVIs.
53.

The Commission does not consider that declining real grocery prices or evidence thatall price increases are not completely passed-through to consumers are indications ofworkable competition.50 This is because:

The largest driver of nominal food prices is the conditions in the relevant foodproduction market, not the competition in the retail market



It is expected that not all cost increases are passed on to consumers, except inlimited circumstances, and this is therefore not indicative of the intensity ofcompetition.51

Conclusions on price and non-price competition between major grocery retailers
54.

The Commission considers that major grocery retailers are engaged in some level ofcompetition on both price and non-price grounds. However, the Commission found thatcompetition is muted and does not reflect workable competition.52 This is because:

The major grocery retailers are each other’s closest competitors and have similarcompetitive strategies which are well knownThe price gains that might be made from more intense price competition such as
promotions are limited and short term, carrying the risk of a ‘price war’The likelihood of needing to adjust the competitive strategy to accommodate a
disruption (like entry or expansion by a new competitor) is limited.53

Likelihood of the status quo changing without intervention
55.

56.

Without intervention, the Commission expects the situation described above (the statusquo) to continue. This is because the market conditions and the outlook for major
grocery retailers are relatively stable due to:

Demand for groceries, which are a consumer staple, is relatively stable andpredictable compared with other industries

The conditions for entry and expansion (notably, lack of access to suitable sites
and to wholesale supply) appear to be entrenched. Section 1.2 discusses thesebarriers, which are central to the problem definition

Absent a significant entry event, major retailers will continue to enjoy costadvantages in the acquisition and distribution of groceries, which limits the abilityof smaller retailers to compete directly on price

The major retailers themselves expect profits to continue to be well above normal
return (as evidenced in Figure 6 above).

Entry (or expansion) by a retailer able to operate on a similar scale to the incumbents isthe most likely way to materially increase competition in the market. The Commission
assesses the likelihood of this happening as low under current market conditions is not

50 Commerce Commission, Final report, at 5.19-5.24. These were two assertions raised by the major grocery
retailers.
51 Commerce Commission, Final report, at 5.19-5.24.
52 Commerce Commission, Final report, at 5.148.
53 Commerce Commission, Final report, at 5.148.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 19

aware of any factors which are likely to change the current lack of competitively priced
wholesale for a full range of groceries.54 The barriers to competition improving under
the current market settings is evidenced by recent closures of two online-only retailers,This Local Piggy and The Honest Grocer, in May 2022.55
57.

Certain practices affecting consumers may lessen without further intervention. For
example, the major grocery retailers have indicated a willingness to discontinue use orenforcement of covenants affecting site availability and said they intend to decrease
promotional pricing and increase long-term low price strategies (which are easier for
consumers to assess and compare). However, while these are positive competitionenhancing steps, it is unlikely that competition in this sector will materially improve
without more significant interventions and actions.

What regulatory systems are already in place?
New Zealand’s competition regulatory system
58.

59.

The Commerce Act 1986 (the Act) is part of the Competition Regulatory System. The
purpose of the Commerce Act is to promote competition in markets for the long-term
benefit of consumers within New Zealand. The Act protects the process of competition,or if competition is limited, provides for regulation for outcomes that are consistent withcompetition. The main prohibitions in the Act applicable to the grocery sector relate to:Anticompetitive arrangements between parties – arrangements that substantiallylessen competition (section 27), land covenants that substantially lessen
competition (section 28), and agreements between competitors containing cartel
provisions (sections 30-33)

Anticompetitive conduct by single firm – taking advantage of substantial market
power (section 36) and resale price maintenance (sections 37-42)

Anticompetitive mergers or acquisitions that substantially lessening competition(section 47).

The Commerce Amendment Act 2022 reforms the prohibition in section 36 andstrengthens the Act’s operation. For example, it will:Strengthen the cartel prohibition / offence to include land covenants where theparties are competitors (sections 30-33). The application of the Act to ‘land’ is also
clarified

Reform section 36 to redefine the prohibited conduct by a firm with substantial
market power to being that which has the purpose, effect or likely effect of
substantially lessening competition

Raise the penalties for anticompetitive mergers or acquisitions.

Consumer and commercial regulatory system
60.

The Fair Trading Act 1986 and Consumer Guarantees Act 1993 are part of theConsumer and Commercial Regulatory System, which aims to enable consumers andbusinesses to transact with confidence. This system helps consumers to:

54 Commerce Commission, Final report, at 5.92-5.100, and 6.24.
55 Accessed from Newsroom.co.nz on 5 May 2022: 'Heartbreaking': Grocery Start-Ups Close and Retrench In
Shadow of Dominant Supermarkets | Newsroom
Regulatory Impact Statement – Government response to the retail grocery sector market study | 20

61.

62.



Access and understand information to inform their purchasing decisions

Be protected from high levels of detriment from actions outside of their control



Access appropriate avenues for redress if their expectations are not met.

The Fair Trading Act 1986 applies to the retail sale of groceries and any advertising,promotional prices, or loyalty schemes associated with the sale of groceries. Some of
the key provisions of the Fair Trading Act 1986, in relation to the grocery sector,
include:

Restrictions on unfair contract terms in standard form consumer contracts

Prohibitions against misleading and deceptive conductProhibitions against false or misleading representations, including with respect to
price



Specific prohibitions against advertising goods for supply at a price that theperson does not intend to offer or offering gifts, prizes, or free items in connection
with the supply of any goods without the intention of provide these as offered.

The Fair Trading Amendment Act, which passed in August 2021, introduces new
protections for vulnerable businesses against unconscionable conduct and unfair
contract terms in business-to-business contracts, although the latter only applies tocontracts below a $250,000 value threshold on an annual basis.

Fitness-for-purpose of the regulatory systems
63.

MBIE has primary responsibility for maintaining, monitoring, evaluating and improving
the regulatory systems above. MBIE is accountable to the Minister of Commerce andConsumer Affairs for the competition and consumer and commercial regulatory system.

64.

Regulatory charters and systems assessments are publicly available on MBIE’s
website. The last regulatory system assessments were completed in June 2017, andthese are expected to take place every five years. The 2017 system assessments
found the regimes to be generally fit for purpose.

Related government regulations
Consumer data right
65.

The Government has agreed to establish a consumer data right, similar to that
implemented in Australia. A consumer data right is a mechanism that requires dataholders to share consumer data with third parties with consumers’ consent. This could
improve consumer welfare by giving consumers access to a wider range of products
and services that better meet their needs, as well as providing benefits for the wider
economy by improving productivity, incentivising innovation and facilitating competition.

66.

The consumer data right will be applied to individual sectors using a designation model.
In the future, subject to the designation of sectors, the consumer data right may havesome implications for the retail grocery sector in relation to consumer loyalty schemes,
and the management and use of data in the grocery sector.

Reform of the Resource Management Act 1991 (RMA)67.

The Government has stated that the RMA has not delivered on its desired
environmental or development outcomes, nor have RMA decisions consistently given
effect to the principles of the Treaty of Waitangi. Government plans to repeal the RMA

Regulatory Impact Statement – Government response to the retail grocery sector market study | 21

and replace it with three new pieces of legislation. The three proposed acts are:Figure 11: Components of planning law reforms
The Natural and Built
Environments Act(NBA)
The main replacement for
the RMA, to protect andrestore the environment
while better enabling
development

68.

The Strategic Planning
Act (SPA),The Climate Adaptation
Act (CAA)

Requires thedevelopment of long-term
regional spatial strategies
to coordinate andintegrate decisions madeunder legislation

This addresses complex
issues associated withmanaged retreat.

This reform to planning law is relevant to the performance of the retail grocery sector inso far as it influences opportunities for entry and expansion of grocery retailers byenabling access to land for supermarket sites.

Regulatory Impact Statement – Government response to the retail grocery sector market study | 22

1.2 What is the policy problem or opportunity?
Competition in the retail grocery sector is not working well for consumers
69.

The Commission has carried out extensive analysis into the state of competition in thegrocery sector, and it considers that competition is not working well for consumers. We
agree. As described in the section 1.1, consistently high profits by the major grocery
retailers, high grocery prices by international standards, and relatively low market
innovation indicate there is a lack of workable competition in New Zealand’s retailgrocery market.

70.

The Commission characterises the retail grocery market as a duopoly of two major
grocery retailers (Woolworths NZ and Foodstuffs) with a fringe of other competitors that
do not have a direct influence over competition.56 Competition is muted. This lack of
workable competition results in a limited retail grocery offering to consumers andimpacts the price, quality, range, and service of grocery offerings to consumers.

71.

There are three main problems causing this lack of workable competition in the sector,
each of which are explored in more detail below.

Figure 12: Three problems underpinning the lack of competition in the retail grocery
sectorIssue one: Entry andexpansion conditions are notconducive to competition

72.

Issue two: There is an
imbalance in bargaining
power between major
retailers and suppliers

Issue three: It is difficult for
consumers to make informed
purchasing decisions

Officials consider that issue one is the primary issue relating to competition given it
directly limits the ability of additional retailers needed to improve inter-retailer
competition. Issues two and three contribute to a lack of competition also but have acomparatively smaller impact on competition.

Issue one: Entry and expansion conditions are not conducive to competition
73.

The Commission’s thesis is that the best way to improve competition is throughmeasures likely to improve entry and expansion:

Entry means a new grocery retailer entering the market to compete with the major
grocery retailers

Expansion can take the form of expansion of product range, or geographic
location, or expansion from another sector such as general merchandising, or
expanding into different parts of the supply chainWhile there has been entry and expansion by a range of grocery retailers (e.g.
online retailers), the Commission considers that entry and expansion is likely to
be particularly beneficial if it relates to grocery retailers able to offer a convenient
one-stop shopping option in competition with the major grocery retailers. It
considers that the New Zealand market could sustainably accommodate at least

56 Woolworths NZ and Foodstuffs NI in the North Island and Woolworths NZ and Foodstuffs SI in the South
IslandRegulatory Impact Statement – Government response to the retail grocery sector market study | 23

one more large-scale rival and that reducing current constraints on entry andexpansion would help to facilitate this additional competition.
74.

The Commission identified several conditions preventing or slowing entry andexpansion in the grocery sector (retail and wholesale).

A lack of supermarket site availability (solutions not considered in this RIS)
75.

Because many supermarket sites are built on large footprint sites in urban or peri-urban
areas, there are a limited number of sites that are viable for supermarket development.
A requirement for successful entry and expansion on a regional or national basis isaccess to suitable sites in areas where existing grocery retailers are present.

76.

The Commission identified two conditions of entry and expansion that may impact site
availability or development – planning regulations and restrictive covenants andexclusivity covenants in leases.57

77.

Planning regulations, created under the Resource Management Act 1991 (RMA)(which has been reviewed and reforms are underway), can set limitations on land-use
through District Plans and Regional Plans, which can have the effect of stopping, ordelaying the development of a site for a supermarket. The consenting process is also
costly, time consuming and uncertain. Additionally, the RMA provides for submissions
on consents and appeals, which can slow the process of development. However, there
are restrictions to stop these from being used for anti-competitive purposes.58

78.

In the past, the RMA has resulted in some lengthy delays to development, andgenerally the RMA process can be time consuming and costly. The Commission notedthat aspects of the current planning regime can impede or slow entry and expansion by
grocery retailers, in the following ways:59
Council zoning policies and relevant District Plans can limit the number of sites
available for grocery retail

Developments requiring resource consents or plan changes are slow and can be
subject to legal challenges that take further time, costs, and may result inconditions that reduce the viability of the proposed development.

The lack of a consistent approach to applying planning laws across territorial
authorities can impede large-scale entry across the country.

79.

For completeness, we note that in May 2022 Cabinet approved policies and a Bill thatis intended to address the constraint placed on site availability by certain restrictive
covenants on land titles, and exclusivity covenants on leases. This Bill amends theCommerce Act 1986 to directly prohibit restrictive land covenants and exclusivity
covenants in leases in which any designated grocery retailer has an interest if they
impede use of a site by a competing grocery retailer. The Commission identified 90
such restrictive land covenants and over 100 such exclusivity covenants, the majorityof which affect sites in major urban areas – Auckland, Wellington and Christchurch.60

80.

Although these amendments will immediately alleviate some constraints on availabilityof sites for entry or expansion by grocery retailers, Free and frank opinions

57 Commerce Commission, Final report, at 6.57.
58 Commerce Commission, Final report, at 6.62, 6.65.
59 Commerce Commission, Final report, at 6.65.
60 Commerce Commission, Final report, at 6.77-6.80.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 24

Free and frank opinions

These will take longer to address and are beyond the scope of thisdocument.
Major grocery retailers enjoy cost advantages accessing grocery supply
81.

Major grocery retailers have significant cost advantages over other competitors due tothe efficiencies of vertical integration (combined with their purchasing power tonegotiate lower product prices) and economies of scale by spreading fixed costs
across many retail stores.61

82.

A new entrant or retailer looking to expand will need to overcome cost disadvantages
to compete with major grocery retailers on price across a broad range of products while
operating at smaller scale. These challenges make it hard to compete with the major
grocery retailers to try and meet consumers’ preferences for convenience and price.62

83.

Further evidence supporting the impact of cost disadvantages is the view presented by
Coriolis that there is no organic entry of a new “traditional supermarket”63 in adeveloped grocery market. These cost disadvantages mean that new entrants tend to
adopt a differentiated product offering – such as an online-only eCommerce (Supie), a‘limited assortment store’ offering a range of products but fewer offerings within that
range (Aldi), or as a ‘wholesale club’ with membership costs and (Costco).64 However,this is a way to overcome cost disadvantages rather than indicating that economies ofscale is not required for effective competition.

84.

The Commission also noted that constraints on direct supply of product from suppliers,
and lack of access to wholesale supply, also impedes entry and expansion.

Constraints on direct supply of groceries from suppliers
85.

86.

The Commission heard concerns about:Grocery retailers pressuring suppliers to limit access to other grocery retailers

Instances of suppliers indicating they will only be willing to supply if the retailer
does not undercut retail prices set by another grocery retailerThe possibility that some suppliers may decline to supply potential entrants, even
without direct pressure, due to concerns about a possible response from the
major grocery retailers.65

Refusal to supply has the potential to impact entry and expansion by reducing theability of new entrants and grocery retailers to source products directly from suppliers.

61 Commerce Commission, Final report, at 6.115.
62 Commerce Commission, Final report, at 6.122-124.
63 Defined as “Stores offering a full line of groceries, meat, and produce with at least $2 million in annual sales
and up to 15% of their sales in GM/HBC. These stores typically carry anywhere from 15,000 to 60,000 SKUs
(depending on the size of the store), and may offer a service deli, a service bakery, and/or a pharmacy.”
Other types of retailers, according to Coriolis’ classification are Fresh Format (eg Farro Fresh), LimitedAssortment Stores, Super Warehouses (eg PAK’nSAVE), Other small grocery (eg Night ‘ Day,), Wholesale
Club (eg Costco), Supercentre, Non-store/non-chain eCommerce (eg Supie). Refer to Coriolis “Postconference submission on Market study into grocery sector” (18 November 2021), page 5 at [56].
64 Commerce Commission, Final report, at 6.20.
65 Commerce Commission, Final report, at 6.185, 6.187, and 6.188.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 25

The Commission intends to open an investigation into conduct of this nature.66
87.

However, behaviour by retailers to limit favourable supply terms to other grocery
retailers using best price clauses or exclusive supply agreements was relatively
uncommon and is not having a significant impact on the entry or expansion of retailers.

Constraints on wholesale supply
88.

There is currently a limited wholesale market in New Zealand for fresh produce, meat,and some international groceries but little wholesale offerings for other products. There
does not appear to be any likelihood of a new entrant into the wholesale market in thenear future.67

89.

The limited wholesale market is unlikely to be as significant an issue for large newentrants, which are more likely to bring their own supply chains or invest in vertical
integration. However, improved access to wholesale may assist with the early stages ofentry by a large retailer or expansion by a smaller existing retailer. The Commission’sview is that a large new entrant is more likely to provide meaningful competition to thecurrent major retailers.68

90.

A range of other retailers are offering viable businesses now without access towholesale. However, smaller retailers face challenges providing an offering that meets
customers’ desire for convenience and price as they face higher costs-to-serve (due toscale/efficiencies), and the lack of access to the full range of wholesale goods atcompetitive prices may be hindering these firms from stocking certain products orbrands that consumers expect to purchase in a ‘one stop’ shop (eg dry goods). This isa contributing factor for why other retailers are only providing a limited competitive
constraint on the major grocery retailers.69

91.

The Commission is of the view that the lack of wholesale supply has a material but
limited impact on the conditions for entry and expansion, particularly in relation to small
retailers.

Barriers posed by legislation regulating foreign investment
92.

Some submitters mentioned the Overseas Investment Act 2005 is potentially making it
difficult for overseas retailers to enter. Some of the possible concerns have beenaddressed through recent legislative reforms, including streamlining consent
processes, and removing consent requirements for low-risk transactions.70

93.

However, there is still the possibility that there are barriers to overseas investment inretail grocery, for example – submissions opposing consent by a competitor.

Challenges posed by alcohol licencing laws
94.

Retailers such as the Dairy and Business Owners Group, Night ‘n Day, and The
Warehouse Group raised the potential for alcohol licensing laws to be a factor
impacting on their ability to enter and expand in the retail grocery sector.71

66 Commerce Commission, Final report, at 6.189-6.191.
67 Commerce Commission, Final report, at 6.147.
68 Commerce Commission, Final report, at 6.148-6.153.
69 Commerce Commission, Final report, at 6.154-6.157.
70 Commerce Commission, Final report, at 6. 210-6.215.
71 Commerce Commission, Final report, at 6.216.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 26

95.

The Sale and Supply of Alcohol Act 2012 limits the issuance of ‘off-licences’ to sell
alcohol in a retail setting to either specialised liquor stores, supermarkets with a floorarea of at least 1000 square metres or grocery stores (as defined in associatedregulations). This legislation may make it difficult for some retailers to offer the fullrange of products that consumers want to buy in a ‘one stop’ shop given theirpreference for convenience.72

Issue two: Imbalances in bargaining power between major retailers and suppliers
96.

Major grocery retailers have a significant market share across the country and are a
key route to market for many suppliers.

97.

The major grocery retailers each have many suppliers. Woolworths NZ has over 1,400
suppliers while Foodstuffs NI has approximately 1,850 suppliers and Foodstuffs SI has
a little over 1,800 suppliers. The majority of these are small suppliers. As a result, themajor retailers can often choose to change supplier and with little impact on theirbusiness. Retailers even develop products themselves through private labels, whichmakes it easier for the retailer to switch supplier of their private label without any
impact on their grocery offering to consumers.73

98.

For many suppliers there are few alternative buyers for their products at the same
volume outside of major grocery retailers.74 There is also little recourse for suppliers
that encounter difficulties while trading with major grocery retailers.

99.

The Commission’s view is that for most suppliers, and particularly smaller suppliers,
there appears to be an imbalance in bargaining power in favour of major grocery
retailers.75 This appears to hold also for Māori suppliers which are a significant
proportion of production in the primary sector.76

100. There are a few suppliers with relatively more bargaining power than others due to thenature of their product or strength of their brand. However, it is not clear that any
suppliers have comparatively more bargaining power than retailers as even somestrong brands are dependent on supermarkets for their supply channels.77
101. In its analysis the Commission points to three ways that major retailers are using theirstronger negotiating position to:Transfer costs and risks to suppliers, despite retailers being better placed to
manage them in certain cases



Reduce transparency and certainty over terms of supply

Limit suppliers’ ability or incentive to provide favourable supply terms to othergrocery retailers (although the use of best price clauses and exclusive supply
arrangements are relatively uncommon).78

102. The imbalance of bargaining power has a flow-on impact of reducing incentives for

72 Commerce Commission, Final report, at 6.219.
73 Commerce Commission, Final report, at 8.63-8.68.
74 Commerce Commission, Final report, at 8.50-8.56.
75 Commerce Commission, Final report, at 8.60.
76 Commerce Commission, Final report, at 8.62.
77 Commerce Commission, Final report, at 8.58-8.61.
78 Commerce Commission, Final report, at 6.193-6.199 and 8.150.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 27

suppliers to invest and innovate – including developing new products to bring to market– which should have associated benefits to food production productivity and growth.
Improved food production productivity and growth should ultimately improve the prices,quality, and range of products available to consumers. However, the pressure exerted
by retailers on supplier margins also has the potential to benefit consumers if thosecost reductions are passed onto consumers.
Transferring costs and risks to suppliers
103. The Commission observed that costs and management of risks are often allocated tothe supplier, despite the retailer being in a better position to manage these. This
impacts on the business of the supplier, potentially reducing their ability to invest andinnovate. Some of the costs and risks placed on suppliers include:Retailers seeking payments from suppliers for damaged, unsaleable, or lost stockthat occurred while the retailer was in possession of the productStandard invoice settlement terms which include extended payment terms forretailers

Bearing a disproportionate share of the costs and risks of promotional discounts



Often being expected to pay for merchandising.79

Reducing transparency and certainty over terms of supply
104. Reduced transparency over price and non-price terms of supply can undermine theconfidence of suppliers and their ability to make efficient investment decisions.
105. Some examples of this include not providing clear justification for delisting products(which was consistently raised with the Commission), slow responses to requests forprice increases80, setting off amounts against supplier’s invoices without prior consent,
and not committing to provide suppliers with promotional displays (even if suppliers arepaying for access to in-store displays).81 It is not clear that these examples are limited
to smaller suppliers, although it is possible that some larger suppliers with strong brandrecognition and alternative channels to market may be less likely to be affected.
Limiting favourable supply terms to other grocery retailers.
106. The Commission heard some examples of retailers seeking to limit the ability ofsuppliers to deal with other retailers, including pressuring suppliers not to supply
competing stores with lower retail pricing, best price guarantee clauses, and (in rare
instances) exclusive supply agreements.82 The ability of retailers to require such terms
reflect the favourable bargaining position of retailers.
Private labels
107. There is the possibility of supplier-branded products being crowded out by private label
brands or squeezed by retailers in favour of their own products. The Commission is not

79 Commerce Commission, Final report, at 8.102-8.131.
80 Suppliers often request price increases from retailers, for example where the supplier faces increasing input
costs.
81 Commerce Commission, Final report, at 8.132-8.149.
82 The Commission determined it was unlikely that limiting favourable supply terms to other grocery retailers washaving a significant impact on the entry or expansion of retailers.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 28

clear whether any of the longer-term risks associated with private label products
outweigh the benefits to consumers.83

Issue three: It is difficult for consumers to make informed purchasing decisions
108. Consumers have a set of preferences in relation to grocery shopping and need to beable to make comparisons between different retail grocery offerings to determine what
will best meet their demands. Difficulty comparing retail grocery offerings means
consumers are less able to make informed decisions which may reduce pricecompetition, and mean retailers receive less accurate information about consumer
preferences – making it harder for retail offerings to cater to consumer demands.84
109. The Commission identified that the following factors affect consumers ability to makeinformed purchasing decisions:

Pricing and promotional mechanismsInconsistent use of unit pricing



Loyalty programmes.

Pricing and promotional mechanisms
110. The major grocery retailers use a range of pricing and promotional mechanisms online
and in store. These include everyday low pricing (EDLP), specials and multi-buys, andmember-only discounts such as club deals.
111. The Commission found that “the use of complex and/or multiple promotional
mechanisms by the major grocery retailers may make it harder for consumers tocompare prices of products in store”. This may hinder consumers from making
purchases that best reflect their preferences, with the flow-on impact of providing
inaccurate information to retailers and making price competition less effective in thelonger-term.85
Inconsistent use of unit pricing
112. Unit pricing helps consumers to make informed purchasing decisions by enabling rapid
comparisons between the value of different sized products, and the identification of“shrinkflation” where products are shrunk in size, quantity, or quality, while prices
remain the same or increase.86 It is possible that unit pricing could also help drivecompetition between retailers by putting pressure on grocery retailers to compete on
metrics such as value and pricing transparency.
113. Major grocery retailers often use unit pricing on their products, but this is often
inconsistently applied with some differences in units used and some promotions notshowing unit prices. These inconsistencies reduce the benefits consumers may derivefrom unit pricing, and the contribution unit pricing can make to competition.87
114. The Commission is of the view that “where unit pricing information is not consistently
available or cannot easily be assessed and acted upon by consumers, they may be

83 Commerce Commission, Final report, at 8.202.
84 Commerce Commission, Final report, at 7.3
85 Commerce Commission, Final report, at 7.69.
86 Commerce Commission, Final report, at 7.105.
87 Commerce Commission, Final report, at 7.114-7.118.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 29

less able to make informed decisions and less likely to shop around. This may reducethe major grocery retailers’ incentives to engage in price-based competition.”88
Loyalty programmes
115. Loyalty programmes can provide benefits to consumers such as member-only
discounts and other rewards. However, complex reward structures, and unclear datacollection and use policies confuse consumers. If consumers have a limited
understanding of complex rewards structures, this can shift consumers’ focus awayfrom making price and quality comparisons, instead focusing on rewards-based offers.
116. Consumers with certain data and privacy preferences may not make purchases thatreflect their preferences if they do not know how their data is collected and used.89The
Commission notes that these are “issues for consumers that also have the potential toaffect consumer decision making and competition if consumers with privacy and data
preferences are not able to make informed decisions about their participation in these
programmes. Competition for these consumers will be inhibited.”90

1.3 What objectives are sought in relation to the policy problem?
117. The overall objective sought in relation to this policy problem is to promotecompetition in grocery markets (both the retail market, and the supply of goods
to the retail market) for the long-term benefit of consumers within New Zealand.
Achieving this objective would result in competition benefits to consumers. Underneath
this objective are three sub-objectives:
Figure 13: Objectives relating to this policy problem
Objective: to promote competition in grocery markets
for the long-term benefit of consumers by:
improving competition in the retail grocery
marketcreating new opportunities for economic
growth in the grocery sector
ensuring information is available to support
consumers' making decisions

88 Commerce Commission, Final report, at 7.119
89 Commerce Commission, Final report, at 7.128.
90 Commerce Commission, Final report, at 7.157.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 30

Section 2: Deciding upon the options to address thepolicy problem
2.1 What criteria will be used to compare options to the status quo?
118. Based on The Treasury’s ‘Best Practice Regulation: Principles and Assessments(February 2015), the following six criteria will be used to compare the different options:Figure 14: Criteria used in this Regulatory Impact Statement

1. Enabling competitivemarkets• Enabling a competitive retail grocery markets, at both
local and national levels.
• Enabling a competitive grocery sector, including themarket for the acquisition of grocery produce fromprimary producers, manufacturers, and suppliers

2. Ability to support
economic growth /efficiency• Encouraging innovation within the grocery sector.
• Encouraging investment and initiatives that will
enhance productivity and enable economic growthacross New Zealand.
• Ensuring that the sector operates efficiently.

3. Proportionality• Regulation is proportionate given costs and benefits
and provide a proportionate impact on consumers,
retailers and suppliers in relation to levels of benefit orcost.

4. Durablilty• Regulation is up-to-date with current industry andregulatory practice, and are cognisant of expected
future context.
• Changes are flexible over time and improve in
response to feedback received.

5. Certainty• Intervention is predictable and understandable forgovernment and market players to minimise uncertainty
and manage risks.
• Consistency with other regulatory regimes.
• Any decision-making criteria are clear and provide
certainty of process.

6. Timeliness• Changes or regulations can be implemented in a timely
manner.

Regulatory Impact Statement – Government response to the retail grocery sector market study | 31

119. No criterion will be given greater weighting than another criterion in the options analysis(refer to Section 2.2, below).
120. However, there is some inherent overlap between the criteria and some potential tradeoffs between different criteria.
121. An example of overlap is that two of the six criteria - enabling competitive markets andability to support economic growth – overlap and link directly to the desired objective(refer to Section 1.3 above). We consider that having a full 1/3 of the criteria focusedon economic objectives is appropriate.
122. In terms of how these two criteria overlap, we argue that improved competition
generates opportunities for economic growth by signalling opportunities for profits
where firms should focus investment and innovation.
123. There are also some trade-offs between criteria. For example:An option that provides high levels of certainty over time because it is consistentand less likely to change may be less durable for those very same reasons
because it may not have the flexibility to change to potential changes over time.

An option that is timely and can be implemented rapidly may also be less certainand efficient because it the details may not be well understood by the relevant
stakeholders (such as the major retailers) if they have not had time to prepare forthe change.

Regulatory Impact Statement – Government response to the retail grocery sector market study | 32

2.2 Summary of options
What scope are options being considered within?
124. The options considered to address the problems in section 1.3 are split out by thecompetition problem they seek to address and are based on the feasible options
identified by the Commission in its market study.
125. Note that some of the Commission’s final recommendations are not considered as partof this options analysis because they are being, or have been, progressed under
different legislation, or through a different policy process. These include:Improving access to sites through planning law – this is being progressed under
the RMA reforms being led by Ministry for the Environment (MfE) to ensurechanges made to support competition are consistent with the new purpose andstructure of reformed planning laws

Prohibiting restrictive and exclusive covenants that inhibit retail grocery store
development – Cabinet approved policies and a Bill to this effect (amending theCommerce Act 1986) in May 2022



Reviewing whether the Overseas Investment Act and Sale and Supply of Alcohol
Act unduly impede entry of expansion – the impacts on grocery competition will
be considered in the next review of the Sale and Supply of Alcohol Act (no reviewof the Overseas Investment Act is currently planned)The design of a mandatory unit pricing regime – a separate public consultation
document is being progressed.

126. Recommendations to establish a regulator and dispute resolution scheme, andundertake a review in three years, are considered under the implementation,
monitoring and evaluation sections below.

Options considered by MBIE in this document
127. To address the three competition problems noted above, MBIE is considering thefollowing options presented by the Commission in its final report as they relate to thethree problem areas identified in section 1.3. Collectively the options explored below
contribute to addressing these three issues and enhancing competition in the retailgrocery sector for the benefit of consumers (our overall objective in this paper).
Figure 15: Categories of options and how they relate to the issues identified
Issue one: Entry andexpansion conditions are
not conducive tocompetition

Issue two: There is an
imbalance in bargaining
power between major
retailers and suppliers

Issue three: It is difficult
for consumers to makeinformed purchasing
decisions- Improving conditions forentry and expansion access to groceries- Address imbalances inbargaining power
between major grocery
retailers and suppliers- Improving the ability of
consumers to makeinformed decisions

Improve conditions for entry and expansion – access to groceries

Option 1.1 – Counterfactual
Regulatory Impact Statement – Government response to the retail grocery sector market study | 33Option 1.2 – Regulatory oversight of wholesale supply (preferred)

Option 1.3 – Regulated wholesale access

Option 1.4 – Non-regulatory option to monitor strategic conduct by major grocery
retailers with suppliers (preferred)

Option 1.5 – Prohibit supplier terms that limit competition.

Address imbalances in bargaining power between major grocery retailers and suppliers

Option 2.1 – Status quoOption 2.2 – Introduce a voluntary, non-enforceable, grocery code of conductOption 2.3 – Introduce a mandatory grocery code of conduct (preferred)

Option 2.4 – Develop an exception from Part 2 of the Commerce Act 1986 toallow for collective bargaining (preferred)

Option 2.5 – Amend value cap and allow private action in relation to the Fair
Trading Act for the grocery sector (Recommendations 8A & 8C) (preferred)

Option 2.6 – Amend the mechanism for imposing penalties and other remedies inrelation to the unfair contract terms regime for the grocery sector in the Fair
Trading Act (Recommendation 8B).

Improve ability of consumers to make informed decisions


Option 3.1 – Non-regulatory option to monitor existing steps by major grocery
retailers to enhance information for consumers (preferred)

Option 3.2 – Mandate simplified pricing and promotional practices



Option 3.3 – Mandate the consistent use of unit pricing (preferred).

128. Each of these options sets are explored in further detail below, noting where there areinterdependencies between different options above. Section 2.3 considers each of theoptions above against the criteria presented in section 2.1 above.

Options to improve conditions for entry and expansion – access to groceries
129. The Commission identified a problem for independent grocery retailers, particularly
smaller retailers, in accessing a full range of groceries at competitive prices. To
address this, MBIE has considered the following options at two levels of the supply
chain:


Option 1.1: Counterfactual

Options for wholesale supply of groceries by major grocery retailers


Option 1.2: Regulatory oversight of wholesale supply (preferred)

Option 1.3: Regulated wholesale access

Options for the direct supply of groceries from suppliers

Option 1.4: Non-regulatory option to monitor strategic conduct by major grocery
retailers with suppliers (preferred)

Regulatory Impact Statement – Government response to the retail grocery sector market study | 34Option 1.5: Prohibit supplier terms that limit competition.

Interaction between the options
130. The options for intervention for wholesale supply by major grocery retailers and direct
supply of groceries from suppliers are not mutually exclusive.
131. There are significant efficiencies from vertical integration. This includes the retailer
being able to collaborate with suppliers:On merchandising strategies and promotions

By providing demand forecasting to support alignment with the suppliers’ capacityand production

To curate product range based on the suppliers’ brand (e.g. ‘green’), customer
demand and to support new product offeringsTo support resilience of the supply chain, including during disruptions.

132. If commercially feasible, most grocery retailers seek to develop direct relationships with
suppliers. As such, the options for wholesale supply may provide a stepping-stone for a
new entrant grocery retailer until it develops scale and develops those direct supply
relationships. However, for smaller grocery retailers, wholesale supply options may
provide a longer-term solution to enable them to provide more competitive offerings on
price.
Interaction with options dealing with other problems
133. These options also interrelate with options dealing with other problems, including thoserelating to:Site accessibility (not covered by this RIS)

Contractual arrangements with suppliers, such as supply terms relating to:i. Promotional discounts
ii. Payments for merchandising – stocking on shelves and product displays
iii. Payments for damaged, unsaleable, or lost stock.

134. This interrelationship will be considered in the next section of the RIS when developing
the preferred package of options.
Option 1.1 – Counterfactual
135. This option considers the current ease of access to groceries and the potential for
improvements from direct supply, existing wholesalers, and potential wholesalers.
136. Some independent grocery retailers negotiate directly with a large number of suppliers
and arrange distribution, which may include the operation of their own warehouses anddistribution centres. In favour of this:

There is some concentration in grocery supply markets which could mitigate thetransaction costs for a grocery retailer of contracting directly for a basic productrange. For example, for Foodstuff NI, 90% of sales relate to 228 suppliers and forFoodstuffs SI, 90% of sales relate to 198 suppliers, but for both over 1,600
suppliers make up the remaining 10% of sales.

Regulatory Impact Statement – Government response to the retail grocery sector market study | 35

There are some large suppliers who can support ‘direct store’ delivery, such as
Tip Top Bakeries, Coca-Cola, Frucor, Fonterra, Goodman Fielder and Unilever.



Large multinational grocery retailers may enter the New Zealand market with theirown international supply chain and relationships with overseas suppliers.

137. Against this:Suppliers may not wish to deal with many retailers, particularly for small volumes.
Minimum order quantities may apply. There may also be some reluctance orcontractual constraints on suppliers’ ability to deal with other grocery retailers.



A full product range retail grocery offering is likely to require access to domestic
brands and products preferred by New Zealand consumers, meaning that an
overseas supply chain is not a close substitute.

138. Current wholesale options for a full range of groceries at competitive prices andassociated services in New Zealand are limited.
139. There are independent wholesale options for some product categories:

fresh produce (T&G Fresh, Fresh Direct and MG Marketing)Meat (JR Wholesaler Meat, Wholesale Meat Distributors)International – Indian, Chinese, Korean foodsSome globally branded products (e.g confectioneries, tobacco).

140. The major grocery retailers also own and operate firms which perform wholesale
functions:

Woolworths NZ owns Wholesale Distributors Limited, which is the franchisor to 71
locally owned and operated SuperValue and FreshChoice stores. It also provides
wholesale to some Pacific Island and has a supply arrangement with Night ’n Day.



Foodstuffs SI and Foodstuffs NI own Trents Wholesale and Gilmours(respectively). These wholesalers primarily supply the hospitality and foodservice
channel, and this is reflected in their limited product range. They also supply
some convenience retailers (e.g. dairies and petrol stations), however, atcomparatively higher prices (on average over 40% more expensive than thelowest retail price).

141. However, the Commission considers that the major grocery retailers are unlikely toprovide a significant wholesale supply offering to independent retailers under the statusquo. This is because:

The major grocery retailers would have limited incentives to supply potential retail
to competitors. For example, Foodstuffs does not permit grocery resellers to shop
at Pak’nSAVE.

The independent retailers would be reluctant to rely on the major grocery retailers
due to:i. the supply is unlikely to be at prices that would enable them to becompetitiveii. security of supply may be an issue, with the supplier having the ability towithdraw or limit supply at any time
Regulatory Impact Statement – Government response to the retail grocery sector market study | 36

iii. the supplier could use information on quantity, range and price of goods
ordered to inform its own retail strategy.
142. Potentially some foodservice wholesalers could pivot to wholesale supply (given theirinvestments in distribution centres, logistics and transport):
i. Bidfood has distribution centres and processing facilities at over 17
regional locations from Whangarei to Invercargill, with over 450 trucks on
the road everyday delivering a range of over 20,000 products.
ii. Service Foods has 11 branches across New Zealand, with over 125 trucks
delivering a range of over 4,000 imported and 8,000 locally produced
products.
143. But many of their products are sold in formats that are not suitable for grocery and they
are unlikely to obtain competitive prices due to low purchase volumes. Costco is an
emerging entrant that supplies to business customers, but it is also likely to only sell alimited range of products.
144. Coriolis says that there are no ‘independent grocery wholesalers’ in the world. They are
either ‘cooperatives’ or ‘captives’ (i.e. dependent on specific retailers). This reflects thesignificant efficiencies from vertical integration.
145. The Commission concludes, and we agree, that they 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 and brands in the New Zealand grocery
sector.91
Wholesale supply of groceries by major grocery retailers
Option 1.2 – Regulatory oversight of wholesale supply (preferred)
Commerce Commission’s recommendation 3
146. This option would involve establishing a regulatory framework for oversight ofwholesale supply by the two major grocery retailers. The three main elements of thisregulatory framework are to:Require the major grocery retailers to consider all requests for commercial
wholesale supply in good faith. There would be no obligation to supply, but all
requests would be notified to the grocery regulator, along with the outcome of any
requests and, if declined, a summary of the retailers’ reasons for declining toprovide supply.



Require the major grocery retailers to put in place and disclose principles andterms and conditions of wholesale supply. That is, the major grocery retailers
would be required to:i. put in place formalised rules, criteria, and procedures for considering
requests for wholesale supply
ii. put in place standardised terms and conditions of wholesale supply, or, tothe extent that particular terms and conditions (such as price) are notstandardised, put in place principles for determining how such terms and

91 Commerce Commission final report, para 6.147.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 37

conditions will be decided, andiii. provide these to the regulator, and to any person who requests them forthe purpose of considering or making a request for commercial wholesale
supply.


Establish a formal dispute resolution mechanism for wholesale supply disputes.
The dispute resolution mechanism:i. should be fast, low cost, and impartial
ii. consider matters such as: whether the wholesale supplier considered
requests for wholesale supply in good faith (particularly when it declines toprovide supply), as well as other matters such as disputes over orderfulfilment or delivery
iii. 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 toprovide wholesale supply
iv. to avoid costly and complex supply disputes, disputes would not extend to
the price or quantity of any actual or proposed supply agreementv. should be empowered to share aggregated information on disputes withany grocery regulator and how well commercial arrangements areoperating. The regulator could then report to the Government on the
success or otherwise of commercial wholesale agreements, including
making recommendations for further regulatory intervention, if itconsidered that appropriate commercial arrangements were not being
reached.

147. The major grocery retailers have indicated a willingness to provide wholesale supply
under this arrangement. Following publication of the Commission’s draft report:

Woolworths NZ stated that it has an open mind toward voluntarily negotiating
commercial wholesale supply contracts with other grocery retailers. For example,
Woolworths Australia has recently entered the wholesale market entering into along-term wholesale supply agreement with Caltex (now Ampol) and is in theprocess of scaling up its business-to-business operations.



Foodstuffs NI and SI said they are exploring how they could put together
commercially attractive offers to supply products to other grocery retailers.

148. Critical for the major grocery retailers is that the obligations do not impact on theefficiencies of their own vertically integrated business operations. Confidentiality

149. Some other stakeholders question whether this regime will lead to wholesale supply atcompetitive prices.
Does this option address the problem?
150. This option would increase transparency and predictability regarding the developmentof commercial wholesale arrangements and provide independent grocery retailers acost-effective means to have disputes heard. The measures proposed would be low
cost, and unlikely to discourage major grocery retailers from offering wholesale supply
Regulatory Impact Statement – Government response to the retail grocery sector market study | 38

of groceries for resale.
151. This option may provide a stepping-stone for a new entrant grocery retailer until it
develops scale and develops those direct supply relationships. For smaller grocery
retailers, it may provide a longer-term solution to enable them to provide morecompetitive offerings on price.
152. However, there will be some complexities to be worked through by the major grocery
retailers and independent retailers in developing commercial wholesale arrangements.
For example:

Negotiating commercial pricing arrangements, including the treatment ofpromotional pricing conditions in existing contracts between suppliers and the
major grocery retailers. Promotional prices are price reductions borne by suppliers
to promote their products in competition with other suppliers in their productcategory. Promotional pricing arrangements are a significant reason why the
major grocery retailers can retail at lower comparative prices. Suppliers would
need to be involved in decisions about whether promotional pricing could be
passed on to other retailers. The Commission notes that under this option,
suppliers may choose to directly enter promotional funding relationships withindependent grocery retailers, or in some cases may permit pass-through by thewholesaler.



Putting in place information barriers between the wholesale unit and the retailstrategy arm of the major grocery retailers’ businesses to protect the independent
grocery retailers’ commercially sensitive information.

153. The benefit of this option is that if these commercial wholesale arrangements do notdevelop in reasonable timeframes, the transparency mechanisms outlined should alert
the Government to this outcome and allow it to consider further regulation. For
example, further intervention may be considered if wholesale offerings by the major
grocery retailers are uncompetitive and/or there is a high incidence of refusals to
supply or disputes.
What impacts does this option have and does it address the objective?
154. This option could promote competition through two means:Provide a new channel for independent grocery retailers, particularly small or
niche alternative format retailers, to access a full range of groceries at one place.
Free and frank opinions

Potentially strengthen competition between the two major grocery retailers as
wholesale supply may provide a means to achieve additional scale economies
and spread fixed costs over larger volumes. If wholesale supply is able to beprovided efficiently at low cost, this diversification of business could be a service
where the major grocery retailers compete with each other.

Option 1.3 – Regulated wholesale accessThis option was considered by the Commission, but not recommended
155. Access regulation is a form of economic regulation designed to provide access to an
essential input provided by a vertically integrated firm to facilitate competition in
downstream or related markets. The Commission outlines that access regulation may
come in many forms, including:Regulatory Impact Statement – Government response to the retail grocery sector market study | 39Detailed regulation that seeks to base access terms on the access provider’scosts and an allowable return on its investments; orLighter-touch regulation that avoids price or earnings control and instead aims toincrease the viability of actual and potential competitors.

156. The Commission concludes that the lack of any ‘essential facility’ or ‘natural monopoly’characteristic means that grocery wholesaling is not the type of industry ordinarily
regarded as potentially amenable to access regulation. For example, the Commission
found that warehousing and distribution logistics were duplicable or available for supply
from third parties. In addition, often these factors were bypassed, with suppliersdelivering their groceries directly to stores. The boundaries between ‘wholesale’ and‘retail’ were often difficult to define.
157. Rather, the comparative advantage of ‘economies of scale’ that is enjoyed by the major
grocery retailers largely arises through their relationships with suppliers and consumers
preference for one-stop shopping. Applying access regulation to ‘wholesale supply ofgroceries’ would raise the risk of overriding suppliers’ freedom to contract and their own
promotional and marketing arrangements.
158. Also as indicated above, there are significant efficiencies from vertical integration.
Buying arrangements and logistics are optimised to focus on retail product-offerings.
The sector is dynamic, involving a large and diverse range of product offerings.
Significant intervention could disrupt existing efficient vertical integration efficiencies,
operational efficiencies, efficiencies of scale and scope, dynamic efficiency, andintroduce significant additional costs which could be passed on to consumers in higher
grocery prices.
159. A further complicating factor is the diversity of grocery retail business formats and thataccess to groceries is unlikely to be ‘one-size fits all’. Retailers are likely to seek todifferentiate their retail offerings and will want to customise the price, range and qualityof grocery products purchased. Most large retailers would seek to develop their own
supply chains, meaning any demand for wholesale access would be short term, if used
at all.
160. Given these and other factors, the Commission recommended against imposing
substantive access regulation at this time. It considered other more proportionate lowcost options should be tried and tested first. As such this option is not well developed in
its final report.
161. Drawing on the Commission’s draft report, submissions to the Commission andapplying on our own assessment, we have fleshed out some high-level elements ofwhat a regulated wholesale access regime may cover for the purposes of this impact
assessment.
162. Confidential advice to Government

Regulatory Impact Statement – Government response to the retail grocery sector market study | 40

Confidential advice to Government

163.

164.

165.

166. We have not consulted on this option, and if this was to proceed, further work andconsultation would be desirable. However, we can gauge high-level stakeholder viewson this regime from the submissions to the Commission’s proceedings.
167. The major grocery retailers raised several concerns that the Commission consideredappeared to be well-grounded. Given the lack of any essential facility or natural
monopoly characteristic, and the diverse range of grocery products, such a regulatory
regime would be novel and unprecedented. This would increase the design andimplementation cost – and uncertainty – arising from the regulation. It would also
increase the risk of unintended consequences.
168. Independent grocery retailers generally considered a regulated wholesale accessregime to be ‘second best’ to a structural solution to competition problems in thegrocery sector. This is because:It would require them to deal with, and be reliant upon, one of their major
competitors to gain access to groceries.



The major grocery retailers would benefit from the additional volume of wholesale
supply going through their supply chains, further increasing their economies ofscale and cost advantage in the sector.

169. We are not aware of major suppliers’ views on this option. The New Zealand Food andGrocery Council noted that access to supply on competitive terms was likely to be abarrier to entry, but did not comment on the potential impacts of access regulation on
the ability of suppliers to control their supply arrangements with different grocery
retailers and different distribution channels.
Does this option address the problem?
170. In theory, this option would allow independent grocery retailers to benefit from the low
retail prices that the major grocery retailers can currently offer consumers. It would
enhance their ability to compete on the elements of “price, quality, range and service”
spectrum for groceries.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 41

171. Free and frank opinions
For example, Aldi typically enters at both the retail and wholesale levels by building
several stores (about 10 stores being the benchmark) as well as distribution stores toservice them. It brings its overseas supply chain, supplemented by direct supply
arrangements with suppliers.
172. Free and frank opinions

What impacts will this option have and does it address the objective?
173. This option could promote competition by alternative business format retailers,particularly those competing at the fringe, such as the 3,000 or so dairies operating on
the route trade (with sales of about $1.2 billion per annum)92. The Commission
considered that small independent retailers did not impose a significant competitive
constraint on the major grocery retailers, and it is unclear if regulated access togroceries would increase this constraint.
174. A regulated wholesale access regime could also disrupt the major grocery retailers’existing efficient vertical integration efficiencies, operational efficiencies, efficiencies ofscale and scope, dynamic efficiency, and introduce significant additional costs. It may
also reduce retail competition on price. It would require significant monitoring andregulatory oversight.
175. If the regime is to be in long-term benefits to consumers, the benefits must exceed thecosts. Further work would be required to assess this. Such an option could be exploredfurther after progressing other less-costly options or as a regulatory backstop to a
voluntary access option (such as Option 1.2).
Other options for wholesale access to groceries not considered
176. The Commission considered other options to improve access to wholesale supply ofgroceries that is independent of the major grocery retailers (to differing extents). These
options could supplement options two or three above related to wholesale access or be
standalone. The options include:

Operational separation of the major grocery retailers’ wholesale and retailbusinessesStructural separation of the major grocery retailers’ wholesale and retailbusinesses, with or without divestiture

Facilitation of wholesale entry by the Government, such as by providing funding
following a contestable procurement process or entering a joint venture.

177. The Commission defined these terms as follows93:
Operational separation is where a wholesale only business unit would be

92 Dairy and Business Owners Group submission to the Commerce Commission draft report, dated 25 August2021.
93 Refer transcript of Commission conference, day 6.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 42

established within each of the major grocery retailers. It would have its own
leadership team, run its own budgets and accounts.
Structural separation would take the operationally separated wholesale business
unit and turn it into a company with its own board of directors. However, it could
still be owned by the same shareholders as the major grocery retailer.



Divestment is where the structurally separated wholesale business unit,
potentially with or without associated retail banners and/or stores, would be soldto different owners.

178. Internationally, operational or structural separation may be introduced in regulatedindustries where a firm is operating simultaneously in a non-competitive (monopoly)
activity and a potentially competitive complementary activity. Divestment may be used
as a remedy to horizontal competition concerns where one firm has substantial market
power in a particular activity, and it is technically feasible for more than one firm tocarry out that activity.
179. The Commission did not recommend these options, and we agree, for the following
reasons:

There is likely insufficient demand by independent grocery retailers to support anindependent wholesaler to give it sufficient scale to compete with the major
grocery retailers. Some stakeholders estimated that approximate 15% market
share would be necessary to achieve minimum scale, which exceeds the market
share of existing independent grocery retailers (less than 10% by mostestimates). Any large potential competitors to the major grocery retailers would
likely seek to establish their own supply chains and not use independent
wholesale on a longer-term basis.



The major grocery retailers could be required to divest some retail stores orbrands to create this demand for wholesale supply, but this would come at theexpense of the substantial efficiencies from end-to-end vertical integration, fromthe buying relationship with suppliers through to supply to retail stores and thecustomer relationship. Coriolis highlighted in its submission that Metcash is the
only independent grocery wholesaler in peer group countries, and it is changing
its business model. The concept of an independent wholesaler (e.g. J B RattrayLtd) has failed and would not work in New Zealand. Retail divestment could be
explored further as a way of directly improving more retail competition but is notjustified solely on the basis of facilitating more independent wholesale supply.

Operational or structural separation would raise a range of practical challenges
and transaction costs. The same concerns as outlined above would apply for any
proactive facilitation of wholesale entry. Any procurement or joint venture process
would likely be complex, potentially expensive, and could present a high risk offailure.

180. As such, we do not consider these options further as a possible solution to address the
problem of wholesale access to groceries. But retail divestment could be considered infuture to introduce actual competition in the sector if the current approach of removing
barriers to entry and expansion to ‘potential competition’ is not effective.
Direct supply of groceries from suppliers
Option 1.4 – Non-regulatory option to monitor strategic conduct by major grocery retailers with
suppliers (preferred)
Commerce Commission’s recommendation 5

Regulatory Impact Statement – Government response to the retail grocery sector market study | 43

181. The Commission identified a range of conduct by major grocery retailers in theirrelationships with suppliers that could potentially affect the ability of independent
grocery retailers to enter or expand. This includes:
Best price clauses, or most favoured nation (MFN) clauses, which ensure aparticular buyer obtains products from a supplier on terms that are at least as
good as (or in some cases, better than) those provided other buyers



Exclusive supply clauses, specifying that a supplier to supply products or certain
brands of products exclusively to a particular grocery retailer.

182. These terms could harm an independent grocery retailers’ ability to compete if theycannot access these grocery products or purchase them at comparable prices, and:


Alternative substitute grocery products are not available in reasonable time; andConsumers would expect to see those products or brands in a competitive
grocery retail offering.

183. However, the Commission did not find widespread use of these clauses in supply
arrangements.94
184. Under this option, the Commerce Commission or new grocery regulator would have arole in monitoring the use and effect of these clauses in supply arrangements, but noregulation would be imposed. The nature of this monitoring function would be specified
further when setting up the new grocery regulator function. The CommerceCommission may also have an enforcement role if these provisions have a material
impact on competition. This option was recommended by the Commerce Commission.
Does this option address the problem?
185. Provisions in contracts, arrangements or understandings that substantially lessen
competition are prohibited under section 27 of the Commerce Act 1986. Monitoring thenature and extent of use of these clauses would support effective enforcement under
the Commerce Act and inform the case for further regulation if required.
What impact does this option have and does it meet the objective?
186. This option would increase transparency regarding the use of conditions in suppliercontracts that may limit competition and the direct supply of groceries to independent
grocery retailers. Where commercially feasible, vertical integration from supplierthrough to consumer relationships has considerable efficiency benefits. This could be a
low-cost way to limit a potential barrier to entry and expansion.
Option 1.5 - Prohibit supplier terms that limit competition
187. Under this option, regulations could limit the use of best price or exclusive supply
clauses in supplier contracts. These measures could be included in the supplier codeof conduct or primary legislation.
188. The Commission did not recommend this option, and we agree. The reasons being:Provisions in contracts, arrangements or understandings that have the purpose,
effect, or likely effect of substantially lessening competition in a market are

94 Commerce Commission final report, paras 6.197 to 6.198, page 254.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 44

already prohibited under the Commerce Act 1986


There are efficiency rationales for including these clauses in contracts that would
justify their use in some cases. For example:
i. Best price clauses may reduce transaction costs between parties byreducing the need for renegotiations whenever prices fluctuate over time(e.g. due to seasonal changes in availably or quality)
ii. Exclusivity clauses may be used if a retailer has made relationship-specificinvestments into a product or supplier and wants to avoid other buyers
free-riding on them.

189. However, this option could be explored if monitoring indicates that the use of theseclauses is harming competition.
Does this option address the problem?
190. This option could ensure that grocery retailers (being one of the majors or an
independent) are not prevented from accessing certain groceries or negotiatingcompetitive prices. But the Commission did not find widespread use of these clauses,
so their prohibition may make little difference in practice.
What impact does this option and does it achieve the objective?
191. There are efficiency rationales for the use of these clauses in supply contracts. A
blanket prohibition could undermine some procompetitive arrangements for investment.
Other options not considered
192. The Commission considered whether the major grocery retailers have engaged in any
strategic acquisitions of suppliers or brands that would have the effect of foreclosing
these groceries to other retailers.
193. However, the Commission did not find any recent or systematic acquisitions (orattempts) that would support further intervention. Acquisitions that substantially lessen
competition are already prohibited under section 47 of the Commerce Act 1986. We
agree with this conclusion. Therefore, options to strengthen the prohibition or theCommission’s voluntary clearance regime, such as by requiring the major grocery
retailers to notify the Commission of any planned acquisitions relating to the grocery
sector, have not been considered.

Address imbalances in bargaining power between major grocery retailers and suppliers
194. The Commission’s view is that for most suppliers, and particularly smaller suppliers,
there appears to be an imbalance in bargaining power in favour of major grocery
retailers.95 This appears to hold also for Māori suppliers who account for a significant
proportion of production in the primary sector.96 This section considers options toaddress these imbalances in power.
195. We are not limiting this analysis to options identified in the Commission’s final report toaddress problems relating to an imbalance of negotiating power between certain
suppliers and retailers. However, we are limiting the scope of options to problems

95 Commerce Commission, Final report, at 8.60.
96 Commerce Commission, Final report, at 8.62.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 45

specific to the grocery retail sector.97
196. This section considers the following options to:Option 2.1: Status quoOption 2.2: Introduce a voluntary, non-enforceable, grocery code of conductOption 2.3: Introduce a mandatory grocery code of conduct (Preferred)

Option 2.4: Develop an exception from Part 2 of the Commerce Act 1986 to allow
for collective bargaining (Preferred)

Option 2.5: Amend value cap and allow private action in relation to the Fair
Trading Act for the grocery sector (Preferred).



Option 2.6: Amend the mechanism for imposing penalties and other remedies inrelation to the unfair contract terms regime for the grocery sector in the Fair
Trading Act (Recommendation 8B).

197. Some of the options above are mutually exclusive, namely Options 2.2 and 2.3. All
options address the imbalance of negotiating power in different ways. We addressthese interactions in the evaluation table below.
198. There is also an interaction between any options suggesting a Code of Conduct andoptions for the direct supply of groceries from suppliers that prohibit supplier terms that
limit the use of best price or exclusive supply clauses in supplier contracts. This
interaction relates to the detail of what is in a Code of Conduct and is not discussed
further in this analysis.
Option 2.1 – Status quo
199. This option would allow the status quo to persist, where there is a lack of competition
for the acquisition of groceries. The current imbalance of negotiating and bargaining
power between the major grocery retailers and their suppliers would be expected tocontinue.
200. Notably, the major grocery retailers have ‘supplier charters’, relatively high-level
documents setting out the principles and expectations of major grocery retailers.98
Neither of the supplier charters have an independent dispute resolution process,something the Commission indicates is needed. These do not appear to have stopped
the problems identified by the Commission from arising.
201. Under this option, unfair contract term provisions under the Fair Trading Act would
provide some additional protections and recourse in certain cases (when thesechanges come into force on 16 August 2022). However, the benefit of these provisions
would be limited under the status quo:

97 This excludes options from the Commission of extending a specific statutory authorisation or exception forcollective bargaining, making changes to unfair contract terms across the economy, or developing a power
to make industry codes of conduct beyond the grocery sector. It also excludes the option of empowering theCommission to generally grant class exemptions for specified types of business conduct that mightotherwise be prohibited by Part 2 of the Commerce Act.
98 Woolworths New Zealand Supplier Charter - https://www.countdown.co.nz/media/9959/wwnz-supplier-charter180618.pdf and Foodstuff Supplier Charterv (covers both Foodstuffs NI and Foodstuffs SI) https://suppliers.foodstuffs.co.nz/assets/documents/Supplier_relationship_charter.pdf
Regulatory Impact Statement – Government response to the retail grocery sector market study | 46Contracts below a $250,000 value threshold will be protected by unfair contract
terms and provisions, however, a number of supply contracts with major grocery
retailers are expected to be above this amount.

No provision has been made for private action in relation to unfair contract terms.
Only the Commission has the ability to take a case seeking a Court judgementthat a contract term is unfair

Unfair contract terms are subject to a two-step enforcement process and it is not
an offence to include a term in a contract unless that term has previously been
declared unfair by a Court.

202. Under the status quo, existing legal and procedural barriers mean that collective
bargaining99 between suppliers would remain limited. To collectively bargain withconfidence they are not entering into unlawful arrangements or agreements, suppliers
would need to apply to the Commission for authorisation. This can be a costly andtime-consuming process (though the actual time and cost required is often casespecific).
Option 2.2 – Introduce a voluntary, non-enforceable, code of conduct
Option not recommended by Commerce Commission
203. Under this option a code of conduct would be developed between retailers andsuppliers. It would be voluntary with no legislative backing. It may be possible for sucha Code to include enforcement procedures, but these would only be binding to theextent that the Code was binding on those parties which were signatories.
204. A Code without legislative backing could be created by Government with assistancefrom industry, or it could be created by industry. It would likely need to be funded byindustry and would rely on some form of industry body to maintain. Any Code could
contain provisions addressing the transfer of risks and costs to suppliers and the lackof transparency and certainty, for example:An overarching principle of good faithObligations on retailers to set out terms and conditions of supply in writtenagreements, including a range of matters such as any quality or quantity
standards, shelf allocation criteria, range review processes, and matters relating
to delisting.

Obligations on retailers in relation to payment and pricing, such as the timing of
payments, any payments for shrinkage or wastage, and promotional
pricing/payment matters.

205. This option could include some form of dispute resolution mechanism, although it may
not be completely independent, and may only be binding to the extent that a retailer
voluntarily continues to be a signatory to the Code.

99 Collective bargaining in a product market involves two or more competitors jointly negotiating with a common
supplier or customer about terms and conditions of supply, which may include factors influencing price or output(and therefore risk amounting to a cartel). This may involve appointing a single representative, such as anindustry association, to act on their behalf in negotiations. An example the Commission provides of whencollective bargaining may be useful is when a major retailer is seeking to modify non-price terms or conditions inagreements common to the suppliers.

Regulatory Impact Statement – Government response to the retail grocery sector market study | 47

206. This option would not have regulatory oversight such as monitoring, reporting, andenforcement. However, the industry body tasked with maintaining the Code may beable to carry out some sort of monitoring functions.
207. While Australia has a voluntary Code in so far as qualifying grocery retailers may
choose whether to participate, the Code has regulatory standing under the AustralianCompetition and Consumer Act 2010 and is binding on grocery retailers once they
have opted-in. The Australian Code has more Government oversight than a voluntary
New Zealand Code with no legislative backing would have.
208. It is unclear which industry body may be able to play the lead role to develop andmaintain a Code. There are some examples of industry operated codes with disputebodies such as the Advertising Standards Authority and the Insurance Council, but weare not aware of such an entity in the grocery sector.
Does this option address the problem?
209. This option could impose some limitations on how the major grocery retailers use theiradvantage in negotiating power, but only to the extent that major grocery retailers
agree to comply with a voluntary code and that the parties involved in determining acode agree a code is sufficient to address the conduct of concern. It does not address
the underlying causes of the imbalance in negotiating power, but it would reduce theability of the major retailers to leverage their advantage into terms that shift costs andrisks onto suppliers or to take an approach that favours certain suppliers over others.
What impacts will this option have and does it address the objective?
210. This option is likely the best way to progress a Code of Conduct without legislativechange. Whether this option makes a significant improvement to the conditions facedby suppliers depends largely on the industry body that designs and maintains theCode, and the relative power that retailers have to shape the design of the Code before
they are willing to sign-on.
211. The impacts of this option are likely to include some benefits for suppliers, althoughthese are likely to be dependent on the industry body and the willingness of retailers tosign on. The nature of the possible benefits include some distribution benefits as
suppliers are more evenly able to negotiate with retailers, and also some dynamic
efficiency benefits as suppliers have a greater profit incentive to invest and innovate.
212. This approach would impose a lower regulatory burden than a mandatory Code, and it
would require less input from Government because the code would be privately
designed and maintained. Additionally, this Code could more easily be extended to any
new entrants in the near future if required, and would be more able to respond to any
changes.
213. However, the benefits to suppliers – and the extent to which this approach addresses
the imbalance of negotiating power – are less likely to occur than under a mandatory
Code because this option provides the retailers with some control over the content of a
Code and relies on their voluntary sign-on.
214. One way that this option may be more likely to deliver benefits is if there is social andsocietal awareness of this Code of Conduct and pressure to persuade retailers to signon.
215. This approach also has some risks:One or more of the major retailers may not sign up to the Code or may hold-off
signing up to the Code until changes are made so the Code does reduce theirbargaining power.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 48

While Government could contribute to the development of a Code, there isnothing to stop the major retailers developing their own Code and signing up to it,
this could result in an industry-designed Code with minimal competition benefits
above the status quo.



If a Code was developed and implemented, there is a risk that suppliers would besuspicious of the Code and whichever dispute resolution body is created or
appointed to address disagreements.

216. The Commission did not recommend that a code of conduct be set by industry selfregulation. It commented that “suppliers lack confidence in the current suppliercharters, which were negotiated 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 aminimal improvement on the current position.”100
217. In particular, we note that this option does not address the fundamental causes of theimbalance of negotiating power (refer to Issue two above). Instead, this option places
limitations around the use of that negotiating power by retailers.
218. Overall, we consider that this option has only a limited ability to deliver an improvement
in competition by addressing the imbalance of negotiating power between suppliers
and retailers because it relies on the voluntary action of retailers.
Option 2.3 – Introduce a mandatory Code of Conduct (preferred)
Commerce Commission’s Recommendation 6
219. This option is focused only on the provisions in primary legislation that would be
required to enable the creation of a mandatory Grocery Code of Conduct. Any detail
relating to the creation of a Grocery Code of Conduct would be developed as
secondary legislation and the regulatory impact of any such Code would be consideredat that time.
220. The intent of a mandatory Grocery Code of Conduct, as recommended by theCommission, would be to:Create an obligation of good faith on the major grocery retailers in all theirinteractions with suppliers

Improve the transparency of supply agreements

Prohibit or limit a range of conduct

Be complemented by a formal dispute resolution mechanism.

Be aligned with the proposed creation of a Grocery Regulator – particularly interms of information gathering and sharing, reporting and accountability, andenforcement powers.

221. The key provisions in primary legislation to achieve this are:Powers to establish a Grocery Code of Conduct as secondary legislation

Transitional arrangements clarifying how the Grocery Code of Conduct applies to

100 Commerce Commission, Final report at 9.181.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 49

existing contracts101
Enabling provisions to levy funding for the relevant Grocery Code of Conduct
related powers held by the Grocery RegulatorProvisions to provide the Grocery Regulator with powers to enforce and monitor
the Code of Conduct.

Does this option address the problem?
222. A mandatory Grocery Code of Conduct is recommended by the Commission as anintervention to address the competition issues in the acquisition of groceries and theimbalance of negotiating power between the major retailers and suppliers.
223. While this intervention does not address the structural elements of the market that giverise to the imbalance of negotiating power – ie the reliance of suppliers on the two
major retailers as the primary route to market – it will limit the ability of retailers to use
any bargaining power over suppliers.
224. It will do this by imposing regulatory controls on conduct by the major retailers in theindustry. Likely components include an overarching behavioural obligation – such as
good faith – on retailers, as well as improving transparency and certainty around theterms of supply, limiting or prohibiting the transfer of certain risks and costs to suppliers
when they are better addressed by retailers, and by providing an independent dispute
resolution mechanism.
225. As the Commission noted, this option may proportionally benefit Māori as suppliers of
products to the major grocery retailers.102
What impacts will this option have and does it address the objective?
226. Based on the experience of Australia and the United Kingdom (UK), which both havesome form of grocery sector code of conduct, we estimate that developing a mandatory
Grocery Code of Conduct is likely to improve competition in the long-run by rebalancing
the negotiating relationships between retailers and suppliers. Overall, this option could
provide consumers with a broader range of products at good prices if it results inimproved food production productivity and growth.
227. Suppliers facing increased risks and costs, would be expected to benefit from an
improved relationship with retailers. In the UK, suppliers experiencing Code-related
issues has decreased from 79% in 2014 to 29% in 2021103, while in Australia, suppliers
are reporting that they are always or mostly treated fairly and respectfully by retailers
between 75-95% of the time.104 One example of this would be that suppliers may
benefit from more prompt payment by retailers, while suppliers and retailers may

101 Upon implementation, the Australian Grocery Code of Conduct had transitional arrangements of up to 12
months for retailers. The arrangements were intended to allow new signatories time to change their businesspractices to comply with the new regulations. Refer to The Australian Treasury’s Independent Review of theFood and Grocery Code of Conduct Final Report, September 2018, at p.24. Accessed athttps://treasury.gov.au/sites/default/files/2019-03/Independent-review-of-the-Food-and-Grocery-Code-ofConduct-Final-Report.pdf.
102 The Commission, Final report, at 2.61. and 9.155.
103 refer to the former Groceries Code Adjudicator’s (Christine Tacon) Post conference submission at slide 8.
Accessed here: https://comcom.govt.nz/__data/assets/pdf_file/0036/269847/Christine-Tacon-The-Impact-ofGroceries-Regulation-in-the-UK-New-Zealand-Briefing-GCA-2013-October-2020.pdf
104 Refer to the Food and Grocery Code Independent Reviewer, Annual Report, 2020-21, at Figure 3. Accessed
here: https://treasury.gov.au/sites/default/files/2021-11/p2021-229034_0.pdf
Regulatory Impact Statement – Government response to the retail grocery sector market study | 50

benefit from improved communications and more efficient working.
228. Developing a dispute resolution pathway gives improved certainty that the benefits ofthe code will be realised. Evidence from the UK indicates since 2019 the percentage ofsuppliers who say they would raise an issue with the Groceries Code Adjudicator has
risen to 57%.105
229. The benefits for suppliers, include some distribution benefits as suppliers are more able
to negotiate with retailers, and also some dynamic efficiency benefits as suppliers havea greater profit incentive to invest and innovate.
230. The risks associated with this approach are a possible increase in prices for consumers
due to compliance costs on retailers and if the Code reduces the ability of retailers tobargain for competitive prices from suppliers.
231. The best available estimate of the cost of this option is based on the regulatory burden
and administrative costs of the UK model, which has a mandatory code and similar
monitoring functions to what is proposed for New Zealand:

Costs to government from implementing the regulatory functions associated with
the Grocery Code of Conduct are estimated to be approximately $1.5-$1.6 million
per year.106

Compliance costs to grocery retailers and suppliers are estimated to beapproximately $750,000 - $800,000 per annum. This is based on the original UK
estimates of approximately £290,000 a year in 2008, including costs associatedwith disputes, complaints and queries from the regulator.107

232. Similar to option 2.2, we note that this option does not address the fundamental causesof the imbalance of negotiating power (refer to Issue two above). Instead, this option
places limitations around the use of that negotiating power by retailers.
233. However, different to option 2.2, we consider that this option may deliver an
improvement in competition by establishing a mandatory Code that should provide
clear limitations on the acceptable conduct of retailers and therefore address theimbalance of negotiating power between suppliers and retailers.
Option 2.4 – Develop an exception from Part 2 of the Commerce Act 1986 to allow for collective
bargaining (preferred)
Commerce Commission’s recommendation 7234. This option would be to develop an exception that prevents sections 27 (prohibiting
anticompetitive agreements) and 30 (prohibiting cartels) from applying to arrangements
between certain grocery suppliers to collectively negotiate terms of supply with grocery
retailers. This would facilitate communication and arrangements between suppliers forthe purpose of collectively negotiating terms of supply with grocery retailers according

105 Groceries Code Adjudicator Annual report and Accounts, 2020-2021, at p.11, Accessed at:https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/995915/G
roceries_Code_Adjudicator_Annual_Report_and_Accounts_2020-2021.pdf
106 This is based on the current costs of the UK, at approximately £0.8 million per year, covering a staff ofapproximately 5FTE106 excluding any arbitration or investigation costs (that are typically recovered from therelevant retailer, but an investigation is estimated to cost around £1 million106.).
107 Refer to “The supply of groceries in the UK market investigation” by the UK Competition Commission, on 30
April 2008. at 11.409.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 51

to their common interests.
235. The scope of the exception would need to be carefully designed. At this stage weenvisage that it might be limited in three ways:

It would apply only to a specified class of persons – namely, grocery suppliers (egof a specified by size) – who have made certain disclosures to the regulator (atthe very least, of their intention to collectively bargain).

It might apply only to arrangements and interactions between suppliers that arenecessary for specified purposes. These purposes could reflect the intended
benefits of collectively negotiating reasonable terms with grocery retailers.



There could be a protections against arrangements or interactions likely tofacilitate unintended outcomes, such as collective boycotts.

236. Any activities between suppliers that fall outside the scope of this exception would
remain vulnerable to the possibility of contravening prohibitions in Part 2 of theCommerce Act 1986.
237. This exception would not oblige any suppliers to collectively bargain, nor would any
retailer be obliged to negotiate with suppliers making use of the exception. It would also
not prevent suppliers party to collective bargaining arrangements from negotiating
bilaterally with retailers concurrently with any collective bargaining process.
Does this option address the problem?
238. To the extent it is used by suppliers, this exception would remove disadvantages theyexperience negotiating terms with retailers in isolation from one another, without
enabling suppliers to negotiate clearly inefficient or anticompetitive outcomes. It would
directly remove cost and uncertainty barriers associated with the process of obtaining
authorisation from the Commission.
What is the impact of this option and does it address the objective?
239. To the extent collective bargaining does increase under this option, we expect it would
contribute to our objectives in a few ways108:

We would expect modest improvements to competition in terms of the overallvalue of supplier offerings in the long-term. Collective bargaining would enablesuppliers to secure more favourable and efficient contractual outcomes fromretailers. This would tend to increase supplier confidence and incentivise greater
investment and productivity by suppliers, which improves the long-term quality
and value of their offerings to consumers. If these more favourable contractual
outcomes constitute a transfer from grocery retailers to suppliers, it is therefore
likely to be a beneficial one.



The costs of negotiating terms of supply are likely to materially decrease for someor all negotiating parties (increasing ‘efficiency’ in the sector). At the very least, we
expect that some bargaining costs to suppliers will be avoided where common
terms of supply are able to be negotiated collectively and resources shared.



It is possible this would slightly improve conditions for entry or expansion by

108 We note the first two of these expected benefits are broadly consistent with those identified by theCommerce Commission in its draft determination of an application by Tegel chicken growers to collectively
bargain with Tegel Foods Limited.
Regulatory Impact Statement – Government response to the retail grocery sector market study | 52

competitors to the major retailers by increasing the ease with which a competitor
could do business with suppliers (to the extent they seek to do this directly rather
than access wholesale supply).
240. There is at least some potential for an increase in collective bargaining to also facilitate
conduct that can reduce competition:


For the acquisition of groceries (eg higher prices negotiated by suppliers may
affect a new entrant into the retail market), and

For the supply of groceries (eg increasing opportunities for cartels beyond thescope of authorisation or abuse of collective bargaining power that is madepossible by the authorisation to secure returns that are higher than consistent withordinary competition for supply of groceries, and which are likely to be passed
onto consumers).

241. We assess these risks as low given they can be accounted for in the design of the
exception and the fact retailers are not obliged to accept any terms sought by thecollective. We also expect that collective bargaining in the grocery sector would
predominantly concern non-price terms of supply (particularly where there isheterogeneity in the products offered within the collective, which we expect would becommon).
242. Collective bargaining may also appear to present risks to dynamic and productive
efficiency. It creates the potential to weaken performance incentives by enabling lessefficient suppliers to benefit from contractual outcomes negotiated by the collective or
the potential to commit more ambitious suppliers to collectively negotiated terms thatprevent them from innovating or otherwise differentiating their offerings from thecollective. This would depend on the nature of any collective bargaining agreement the
suppliers reach. However, for exactly these reasons, it seems unlikely to us that
suppliers would foreclose their freedom to negotiate bilaterally if their interests are notbeing adequately met by strategies being pursued and outcomes being obtained thecollective.
Option 2.5 – Amend value cap and allow private action in relation to the Fair Trading Act for thegrocery sector
Commerce Commission’s recommendations 8A and 8C
243. This option would implement two of the three components the Commission
recommended to strengthen the business-to-business unfair contract terms regime in
the Fair Trading Act as they apply to grocery suppliers:109Allowing private action in respect of unfair contract terms so that a grocery
supplier may take a case to the Court (District Court or High Court) to seek adeclaration that a contract term is an unfair contract term.

109 For context, the test for an unfair contract term is defined in the Fair Trading Act as a term that:

would cause a significant imbalance in the contractual parties’ rights and obligations arising under
the contract;

is not reasonably necessary in order to protect the legitimate interests of the party who would be
advantaged by the term; and

would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or
relied on.

Regulatory Impact Statement – Government response to the retail grocery sector market study | 53

Lifting the transaction value cap to allow unfair contract terms provisions to apply
to a larger proportion of grocery suppliers. The unfair contract terms regime is notavailable in circumstances where the value of the trading relationship exceeds$250,000. In the grocery sector there are likely to be many trading relationships
exceeding $250,000 per annum where the supplier still faces a substantial
imbalance in negotiating power with a retailer.

244. The proposed increase of the transaction value cap for the retail grocery industry would
be to $1 million per year under this option. We expect this increase would capture
about two-thirds of the major retailers’ suppliers and would not capture the larger
suppliers. This on the basis that 900 out of 1400 of Woolworths NZ’s suppliers haveretail sales of less than $1 million per annum.
245. This will apply to contracts for the supply to retail groceries (defined in terms of therange of products that may be found in a retail grocery store), but only for larger
grocery retailers where there may be an imbalance of negotiating power (defined byeither annual turnover or store size).
246. For consistency, in addition to allowing private action by grocery businesses in relation
to unfair contract terms, we propose that the grocery regulator will also be able to takeproceedings.
Does this option address the problem?
247. This option is expected to improve the imbalance of negotiating power by extending theprohibition on unfair contract terms to a greater number of suppliers, providing stronger
incentives for major grocery retailers to remove what they suspect may be unfair
contract terms from grocery supply contracts and providing an avenue for grocery
suppliers to take private action in relation to unfair contract terms.
248. Enabling private action allows for those suppliers to take action against unfair contract
terms in a more efficient way than waiting for action by the Commission. Providing theability to take private action will better address the problem if it is combined with
provisions in a Code of Conduct to protect suppliers from retribution – something that
may otherwise hinder suppliers from taking action.
What impacts will this option have and does it address the objective?
249. Overall, we think this option is likely to contribute positively to competition by making
positive steps to address the Commission’s finding of an imbalance in negotiating
power between major retailers and their suppliers. It addresses the issues around thepower imbalance in the acquisition of groceries, including the transfer of costs and risks
to suppliers and the uncertainty or lack of transparency over terms of supply. In turnthis should improve competition for consumers by enabling more supplier investment
and innovation in the market.
250. Increasing the transaction cap can benefit smaller suppliers of major retailers –particularly those whose trading relationships exceed $250,000 per annum but who still
face a substantial imbalance in negotiating power with a retailer. Increasing the cap to$1,000,000 per annum would extend the benefits of the unfair contract terms regime tomost suppliers of major grocery retailers:

Approximately 900 of Countdown’s suppliers, out of 1,400 suppliers

Up to 1650 of Foodstuffs NI’s suppliers, out of 1850 totalUp to 1600 of Foodstuffs SI’s suppliers out of around 1800 total.

251. The benefits of extending unfair contract terms to more grocery suppliers will
Regulatory Impact Statement – Government response to the retail grocery sector market study | 54

complement other changes recommended by the Commission – such as implementing
a mandatory code of conduct between retailers and suppliers. Collectively, thesechanges help to provide a more even negotiating environment between retailers andsuppliers in future.
252. These benefits are likely to be both distributional and dynamic. Distributional benefits
may accrue to suppliers as possibly unfair contract terms are removed from theirtrading relationship with retailers. Dynamic efficiency benefits as suppliers have agreater profit incentive to invest and innovate to increase output or bring new products
to market at competitive prices.
253. This option manages a number of possible risks:
Avoiding creating undue risks for retailers by discouraging them from using
contract terms that are legitimate protections (for fear of liability) by retaining thetwo-step process for a Court to determine a term to be an unfair contract term
separately from any penalties.



Not restricting the flexibility retailers need to negotiate for better prices for
consumer while protecting suppliers from the use of unfair contract terms.

254. Similar to option 2.2 and 2.3, this option does not address the causes of the imbalanceof negotiating power (refer to Issue two above). Instead, this option places limitations
around the use of that negotiating power by retailers.
255. However, like with option 2.3, we consider that this option may deliver an improvement
in competition by protecting suppliers from the use of unfair contract terms andenabling suppliers take action themselves in relation to the use of unfair contract terms
that they may otherwise be pressured to accept due to the imbalance of negotiating
power between suppliers and retailers.
Option 2.6 – Amend the mechanism for imposing penalties and other remedies in relation to theunfair contract terms regime for the grocery sector in the Fair Trading Act
Commerce Commission’s recommendations 8B
256. The Commission recommended changes to strengthen the business-to-business
contracts regime in the Fair Trading Act. In keeping with the scope of these options, weare only evaluating an option to extend these provisions in relation to the grocery
sector, not the broader economy.
257. This option is complementary to option 2.5. It would make changes to the Fair Trading
Act to simplify the mechanism for imposing penalties and other remedies in relation to
the use of unfair contract terms (Commission’s Recommendation 8B).
258. An ‘unfair contract term’ only exists once a term has been declared such by the Court,
and it is only after a declaration that it is an offence to include such a term in a standard
form contract or enforce the term if it is in an existing standard form contract. Thismeans a second court case is required if it the term continues to be used. However, nofurther court action is required if the contract parties do not add the unfair contract term
(to new contracts) or cease to enforce the term (to existing contracts). There is no
penalty or costs associated with the use of the unfair contract term prior to it being
declared such by the Court.
259. There is significant complexity involved in this option, which proposes to allow the
Courts to both declare a term to be unfair and at the same time impose penalties forthe prior use of that term. While this recommendation also has the potential to address
the imbalance of negotiating power between grocery retailers and suppliers, it has
some significant risks:
Regulatory Impact Statement – Government response to the retail grocery sector market study | 55



The change is complex from a legislative design perspective and would result in
effectively having three regimes: consumer contracts, small trade contracts (asper the recent amendments), and grocery contracts.



The legislative change may create legal uncertainty around contract terms that
may hinder the ability of retailers to negotiate firmly and fairly with suppliers toprovide groceries to consumers at the best possible prices.

260. We note that further work is planned to address the enforcement of unfair contract
terms in business-to-business contracts – across the entire economy, not just for thegrocery sector –and that this option may be better considered as part of this wider
piece of work.
Does this option address the problem?
261. This option would improve the imbalance of negotiating power by adjusting in favour of
suppliers. This option provides the greatest incentives for major grocery retailers toremove (what they suspect may be) unfair contract terms from grocery supply contracts
and would provide an avenue for grocery suppliers to take private action in relation to
unfair contract terms.
262. However, like option 2.5, this option will better address the problem if it is combinedwith provisions in a Code of Conduct to protect suppliers from retribution – somethingthat may hinder suppliers from taking action.
What impacts will this option have and does it address the objective?
263. This option addresses the objective in a similar way to option 2.5. It contributes toachieving the objective of improving competition for the long-term benefit ofconsumers, by enabling both distributional and dynamic benefits to suppliers. It
addresses the issues around the power imbalance in the acquisition of groceries (Issue
two above), but does not address the imbalance itself.
264. This option would also complement option 2.3 (creating a mandatory Code of
Conduct). For example, the Code of Conduct may prohibit retribution against a supplier(as is the case internationally), which could be a necessary enabler for a firm to use theFair Trading Act’s provisions to address an (perceived) unfair contract term that shifts
some form of risk or cost from retailers to suppliers.
265. This option adds a level of complexity to the Fair Trading Act regime that may outweighthe benefits it provides. The benefits are that retailers are incentivised to not use any
terms that may be determined to be unfair, because they could face an immediate
penalty. This may benefit suppliers – either if they receive some of the penalty imposedon the retailer, or if they benefit from less use of terms that could be unfair contract
terms.
266. Costs include the complexity involved in developing another legislative regime, and thepossible confusion of having two definitions of ‘unfair contract terms’ for different
business-to-business regimes within the same Fair Trading Act. This may result in
extra compliance costs for businesses and may reduce the ability of retailers to bargain
firmly and fairly to give the best price to consumers.
267. Additionally, this option adds to the relative risk that the legislative design will becomplex and could create confusion. Overall, we think the intent of Recommendation
8B may be best considered as part of a broader review of business-to-business unfair
contract terms.

Regulatory Impact Statement – Government response to the retail grocery sector market study | 56

Improve ability of consumers to make informed decisions
268. This section considers options for improving the ability for consumers to make informed
decisions. Most of the recommendations of the Commission in this area are directed tomajor grocery retailers to improve pricing and promotional practices, loyalty
programmes, data collection and co-operation with price comparison services.
269. In respect of the recommendations to major grocery retailers, this section considers
both:

Option 3.1: Non-regulatory option to monitor existing steps by major grocery
retailers to enhance information for consumers (preferred)

Option 3.2: Mandate simplified pricing and promotional practices.

270. Free and frank opinions

271. Free and frank opinions

272. The Commission has recommended that government mandate the consistent displayof unit pricing. Unit pricing helps consumers to make informed purchasing decisions byenabling rapid comparisons between the value of different sized products and helps
combat “shrinkflation” where products are shrunk in size, quantity, or quality, while
prices remain the same or increase. Unit pricing can help drive competition between
retailers by putting pressure on grocery retailers to compete on metrics such as value
and pricing transparency.
273. In respect of the recommendation to government to make unit pricing consistent, thissection considers:

Option 3.3: Mandate the consistent use of unit pricing (preferred).

274. As set out above, this paper only considers the case for making unit pricing mandatory
under legislation. The form and content of any unit pricing requirements are being
tested separately as part of a consultation document on unit pricing options.
Option 3.1 – Non-regulatory option to monitor existing steps by major grocery retailers to enhance
information for consumers
Commerce Commission’s recommendations 9, 11 and 12275. The Commission has recommended that major grocery retailers should:

Ensure their pricing and promotional practices are simple and easy to understandEnsure disclosure relating to loyalty programmes and data collection and use
practices is clear and transparent

Co-operate with price comparison services.

276. Under this option, there would be no further regulatory action (notwithstanding any
action under the Fair Trading Act for misleading, deceptive or unfair conduct). It would
be up to each major grocery retailer to take steps to ensure the recommendations

Regulatory Impact Statement – Government response to the retail grocery sector market study | 57

above are progressed and reflected in their operations.
277. Major grocery retailers have been reviewing the above practices and have provided theMinister of Commerce and Consumer Affairs with updates on this work. They are
expected to complete the implementation of changes over the remainder of this year.
Does this option address the problem?
278. Under this option, major grocery retailers will examine a range of areas that theCommerce Commission has identified as affecting consumer decision-making. These
include identifying any complex and confusing pricing and promotional mechanisms,
considering how information about loyalty schemes and data collection is presented,
and what arrangements could be put in place to support price comparison services.
279. The Commission has commented that ‘some level of voluntary simplification ofpromotional mechanisms is likely to promote competition and improve outcomes for
consumers’.
280. The extent to which these issues will be addressed is yet to be seen, as it depends on
how substantial and extensive the changes made by major grocery retailers will be.
There are also questions about how durable any changes will be as marketingstrategies evolve over time.
What impacts does this option have and does it address the objective?
281. This option better informs consumers through voluntary changes to major grocery
retailer processes and practices. The extent to which the objective of promoting
competition for the long-term benefit of consumers will be addressed is yet to be seen,
as it depends on how substantial and extensive the changes made by major grocery
retailers will be, and how durable they will be over time.
Option 3.2 – Mandate simplified pricing and promotional practices
Option considered by the Commission but not recommended
282. Under this option, new statutory provisions would be introduced to mandate simplified
pricing and promotional practices by grocery retailers.
283. There are several potential approaches to prescribing these practices:

An (extreme) approach is that price promotions on groceries would be prohibited
altogether – i.e. all goods would be sold at an ‘everyday low price’ without
discounts or other price promotion.

Another possibility would be to permit grocery retailers to apply temporary
discounts based on a single promotional mechanism (e.g. ‘special’) with limits on
the duration and frequency of those discounts (e.g. a single item could be
discounted for less than 10% of the year)

Does this option address the problem?
284. The above versions of this option would address issues with pricing and promotional
practices by major grocery retailers by constraining pricing and promotional strategies
in the interests of providing more consistent and informative information to consumers.
What impacts does this option have and does it address the objective?
285. Simplifying pricing and promotional practices is likely to assist consumers to makemore informed shopping decisions by reducing the complexity of the information
environment in which they make decisions. Limiting promotions may also reduce theRegulatory Impact Statement – Government response to the retail grocery sector market study | 58

‘usual’ price of groceries by strengthening competition on these prices. Some of thebenefits of more informed choice and strengthened competition may be distributionalfrom suppliers to consumers, but there is also a total welfare gain by enhanced pricediscovery and incentives for efficient allocation of resources over time.
286. However, the Commission noted that prescriptive regulation of this form may limit
innovation and the extent to which retailers compete through promotions. The more
restrictive options (only permitting ‘everyday prices’) could also result in consumers
missing out on genuine savings during promotional periods. These options would also
be likely to have upstream effects on suppliers, who enter into agreements with grocery
retailers to offer promotions (funded in part by suppliers) as a mechanism forcompeting with other suppliers.
Option 3.3: Mandate the consistent use of unit pricing
Commerce Commission recommendation 10
287. This option would involve making it mandatory for retailers to implement unit pricing on
products. A legislative or regulatory mechanism would be used to set a specified andconsistent format for unit pricing information – including minimum standards for display
and standardised units of measurement for product categories. The specific regulatory
mechanism to be used will be considered further.
288. This option is similar to how unit pricing has been implemented in other countries –including Australia and the European Union. The form and content of the specific unit
pricing requirements will need to be considered further, should this option be
advanced. As set out above, a public consultation document will be used to test thefeatures of this option in more detail.
Does this option address the problem?
289. Mandated use of unit pricing by grocery retailers would address issues withinconsistent use of unit pricing by grocery retailers. Consumers will be better able to
make informed choices and comparisons between products under this option.
What impact does this option have and does it address the objective?
290. The provision of consistent unit pricing information could better support competition
between suppliers and between retailers by arming consumers with information to help
them make more informed choices between different products and enable them toshop around.
291. It is possible that even when not directly comparing between products and retailers,
clear and accurate unit pricing information could help consumers to develop
perceptions of value over time which in turn help them to decide where to shop to best
meet their needs. Where unit pricing information is not consistently available or cannot
easily be assessed and acted upon by consumers, they may be less able to makeinformed decisions and less likely to shop around. This can result in a softening ofcompetition between grocery retailers.
292. Similar to option 3.2, some of the benefits of more informed choice and strengthened
competition may be distributional from suppliers to consumers, but there is also a total
welfare gain by enhanced price discovery and incentives for efficient allocation of
resources over time.

Regulatory Impact Statement – Government response to the retail grocery sector market study | 59

2.3 How do the options compare to the status quo/counterfactual?
293. The options outlined above are analysed on an issue-by-issue basis against the criteria.

Key for qualitative judgements in tables:

Table One: Improve conditions for entry and expansion – access to groceries++

much better than doing nothing/the status quo/counterfactual

Table Two: Address imbalances in bargaining power between major grocery retailers and suppliers+

better than doing nothing/the status quo/counterfactual

Table Three: Improve ability of consumers to make informed choices.

0

about the same as doing nothing/the status quo/counterfactual-

worse than doing nothing/the status quo/counterfactual--

much worse than doing nothing/the status quo/counterfactual

Table One: Improve conditions for entry and expansion – access to groceries

Option 1.1 – CounterfactualCompetitive markets

Economic growth

Proportional

DurableCertain

TimelyOption 1.2 - Regulatory oversight ofwholesale supply

Option 1.3 - Regulated access regime

Option 1.4 – Non-regulatory option tomonitor strategic conduct by major grocery
retailers with suppliers

Option 1.5 – Prohibit terms of supply that
limit competition

0

+

++

+

+/-

Competition is not working well for
consumers. The market is a relatively
stable duopoly with a fringe of othercompetitors. Competition between the
major grocery retailers is muted.

Provide a new channel for independent
grocery retailers to access a full range ofgroceries, but demand is uncertain.
Potentially disrupt duopoly tostrengthen competition between thetwo major grocery retailers.

Provide a new channel for independent
grocery retailers to access a full range ofgroceries. Potential for increased
uptake if backed by stronger regulatory
oversight. Potential steppingstone forlarge new entrant.

Monitoring improves transparency andeffective enforcement to deter use ofclauses that harm competition.

Provide a new channel for independent
grocery retailers to access a full range ofgroceries. Unclear if would improve
price competition.

0

+

+/-

+

-

The level of innovation appears lower
than expected under workablecompetition.

Potential to facilitate investment andgrowth by independent grocery
retailers.

Potential to cause inefficiencies for
major grocery retailers and undermine
their incentives to invest in supply chain
capacity or innovations. But could
facilitate investment by new entrants.

Potential to support growth if facilitates
direct supply from suppliers to
independent grocery retailers.

Discourage some forms of collaborationand co-investment in innovation.

0

+

-

+

-

The grocery sector is subject to genericcompetition law (i.e. the CommerceAct). However, market power of major
grocery retailers is high and enduring.

Major grocery retailers should have
incentives to voluntarily provide
commercial wholesale offering if
benefits exceed costs.

Dependent on design, but potential forcosts to exceed the benefits. Unclear on
extent it would be used.

Maintains freedom to contract oncommercial basis, while providing lowcost oversight of arrangements.

No indication of widespread use ofclauses or harm to competition to justify
introduction currently. Would prevent
use where benefits exist.

0

+

-

+

-

Public calls for intervention in markets
to address high cost of groceries andexcessive profits.

Commercial arrangements forwholesale supply are likely to be flexible
and durable.

Would introduce rigidity in an otherwise
dynamic retail sector. Likely to lead todisputes, with risk of regulatory creep.

Maintains freedom to contract oncommercial basis, which is likely to beflexible and durable.

Would introduce some rigidity in supply
arrangements.

0

+

--

+

+

Public calls for intervention in markets
undermines certainty.

Transparency promotes predictability of
regime, supported by effective dispute
resolution.

Novel and unprecedented regulation,with high risk of unforeseen
consequences.

Transparency promotes predictability ofCommerce Act enforcement.

Would be clear and predictable in its
application.

0

-

--

-

--

60

Overall assessment

Largely effective now. Some new entry
and expansion likely (e.g. Costco).

Could be introduced within 12 months.

Dependent on design but could take 2
to 3 years to implement.

Could be introduced within 12 months.

Could be introduced for new contracts
within 12 months, and for existing
contracts up to a year later.

Competition is not working well for
consumers.

+4

-4

+4

-4

Potential to improve competition.
Transparency will enable better
oversight of market performance andfacilitate additional intervention if
required.

Consider other less costly options first.
Further work would be required on
design to ensure benefits exceed costs.

Potential to improve competition.
Transparency will enable better
oversight of market performance andfacilitate additional intervention if
required.

Unlikely that benefits exceed the costs
based on current evidence.

61

Table Two: Address imbalances in bargaining power between major grocery retailers and suppliersCompetitive markets

Efficiency

Proportional

DurableOption 2.1–
Status quo

Option 2.2 - Introduce a
voluntary, non-enforceable,
grocery code of conduct

0

+/0

0

0

0

Option 2.3 - Introduce a
mandatory grocery code of
conduct(Recommendation 6)

Option 2.4 - Develop a statutory
authorisation or exception forcollective bargaining (recommendation
7)

Option 2.5 – Amend value cap and allow
private action in the Fair Trading Act
unfair contract terms regime for thegrocery sector(Recommendations 8A & 8C)

Option 2.6 - Amend the mechanism
for imposing penalties in the Fair
Trading Act unfair contract terms
regime for the grocery sector(Recommendation 8B)

++

+

++

+

Voluntary Code has someincentives for suppliers toinvest and innovate, byaddressing issues caused byretailer’s negotiating power.
However, improvements are
dependent on voluntary signon by retailers.

Mandatory Code should
incentivise suppliers to invest andinnovate, by addressing issues
caused by retailer’s negotiating
power.

Presents both risks and benefits tocompetition. We believe the risks areable to be mitigated by good regulatory
design. The benefits are likely to be
more significant, in terms of an
improvement in the quality of products
available as a result of suppliers being
able tonegotiate more favourable
contractual outcomes (as this would
incentivise investment and innovationin product offerings). This could becharacterised as a beneficial transferfrom grocery retailers to suppliers, inview of the resulting improvement in
the quality of supplier offerings to
consumers.

Improve incentives for suppliers to invest
and innovate, by protecting smaller
suppliers from the use of unfair contract
terms, which suppliers may otherwise bepressured to accept due to the retailer’snegotiating power.

Improve incentives for suppliers totake action against retailers to get
unfair contract terms removed fromgrocery contracts.

0-

Voluntary Code minimises any
inefficient costs, but isunlikely to improve efficiency.

Mandatory Code as regulation is
likely to add administrativecompliance costs to retailers,possibly some costs to suppliers
as well (depending on design of
Code)

+

++

Voluntary Code has some
distributional and dynamic
benefits outweighing costs(particularly to suppliers) with
impact flowing on to
consumers.

Possible benefits for consumers
from suppliers increasing output
or developing new products atcompetitive prices.

This option complements option 2.3,
which when combined may result in
suppliers taking action against retailers to
get unfair contract terms removed fromgrocery contracts.

This option complements option 2.3
and 2.5, and provides limited benefits
if advanced separately.

0/-

0/-

Potentially neutral, but new unfair
contract terms could impose small
administrative costs on Government andgrocery sector.

Potentially neutral, but could impose
inefficiency due to legislativecomplexity caused by multiple ‘unfair
contract terms’ definitions.

+

+

+

Mandatory Code provides
distributional and dynamic
benefits outweighing costs(particularly to suppliers) with
impact flowing on to consumers.

There are modest set up and ongoingcosts to administer a collective
bargaining scheme, which we expect
would be justified by the benefits(provided suppliers make reasonable
use of the scheme).

Costs of regime should be relatively low
and exceeded by potential benefits.

Costs of regime should be relatively
low and exceeded by potential
benefits.

-

+

+

0

-

Voluntary Code is likely torequire re-working in the near

Mandatory Code as regulationreflects best practiceThe statutory authorisation could bedesigned to accommodate a range of

Changes to legislation add complexity but
should be durable in implementation.

Changes to penalties introduces
legislative complexities that may+
Modest improvements and risks toefficiency. Transaction costs are likely todecrease for at least some negotiating
parties. Some potential for inefficient
outcomes from collective bargaining,but these are likely to be self-correcting.

62

CertainTimelyOverall assessment

future to better address issues
caused by difference innegotiating powerinternationally. Is durable andflexible over time

supplier relationships in the grocery
sector and approaches to collective
bargaining consistent with the policy
intent. However, it’s primary purpose ispremised on a state of limitedcompetition for acquisition of groceries,
which we hope will change over time.

-

+

-

0

0

Reliance on voluntaryagreement by retailers to
Code (and content of Code)means there is no certainty ofoutcomeMandatory Code will improve
imbalance of negotiating power
between suppliers and retailer.
Further details will be
determined as the Code itself isdeveloped.

We have a considerable degree of
uncertainty over the degree to which
and manner in which a statutory
exception would be used by suppliers.

Not completely sure which firms would fit
under a modified value cap.

Not sure if any small firms would
access the new penalties mechanism.

0/-

--

-

-

-

Could be introduced in
between 6 - 12 months.

Could be introduced within 12
months, fully in force within 24
monthsRequires legislative change, but benefits
could be realised very soon afterenactment.

Could be introduced within 12 months.

Could be introduced within 12
months.

0+2 / -2+3+2+ 3 / +1

0 / -1status quo
remains.

Some benefits but limited by
the Code being voluntary forretailers.

Dependent on the design of themandatory Code, will limit
retailers’ use of negotiating
power to create incentives for
suppliers to innovate and invest
with long-term benefits to
consumers from new products atcompetitive prices.

Expected benefits exceed risks,
provided the authorisation/exception isdesigned effectively. We have also
assumed a reasonable degree of uptake
by suppliers in reaching thisassessment.

When combined with option 2.3, canlimit retailers’ use of negotiating power
to incentivise suppliers to innovate andinvest with long-term benefits to
consumers from new products atcompetitive prices.

Comparatively this option adds little inaddition to option 2.5. It has
legislative complexity and increased
risk of inefficiency.

00require reworking in near future (referto para 260).

63

Table Three: Improve ability of consumers to make informed choices
Option 3.1 – Non-regulatory option to monitor existing steps by major grocery
retailers to enhance information for consumers
Competitivemarkets0

Economic growth0

Proportional

DurableCertain

TimelyOverallassessment

Option 3.2 – Mandated simplified pricing and promotions

3.3 – Mandate the consistent use of unit pricing+/-+

Would simply consumer decision-making but may reduce retailer
competition through promotions.

Enables informed comparisons between product offerings andretailers, informed by consistent and comparable information.

--

Discourages innovative promotional activities and may affectinnovation by suppliers.

May discourage or hamper retailer innovation on pricing and pricelabelling.

---

May be prescriptive and costly to implement.

Prescription of unit pricing information may be prescriptive and costly
to implement+++

Likely to result in longer term change than voluntary measures.

Less flexible, but likely to result in longer term change and benefits to
consumers than current voluntary measures.

+++

Could improve certainty of Fair Trading Act provisions relating topromotions.

Mandating requirements provides longer-term certainty for retailers,and consumers, on how unit pricing needs to be applied and used.

0

-

-

Major grocery retailers voluntarily reporting to Minister and MBIE on
progress.

Novel regulation that may be complex and time consuming to design.

Timeliness will depend on the mechanism used to set the mandated
unit pricing requirements (e.g. changes to primary legislation may
take a long time)

0

0

+2

Voluntary initiatives by major grocery retailers are expected to improve
consumer information and decision-making.

Consider other less costly options first. Further work would be
required on design to ensure benefits exceed costs

Mandating the consistent use of unit pricing ensures a certain anddurable way of enabling consumers to make informed purchasing
decisions and comparisons.

0

0

0

64

2.4 What options are likely to best address the problem, meet thepolicy objectives, and deliver the highest net benefits?
Preferred options
294. Based on the analysis above, MBIE recommends progressing a suite of options toaddress the different issues identified and contribute towards the overall objective ofpromoting competition for the long-term benefit of consumers in New Zealand. The
following options are recommended:
To improve the conditions for entry and expansion by enabling access to supply of groceries,
MBIE recommends:


Option 1.2 – Regulatory oversight of wholesale supply

Option 1.4 – Non-regulatory option to monitor strategic conduct by major grocery
retailers with suppliers

To address imbalances in negotiating power between major grocery retailers and suppliers,
MBIE recommends:


Option 2.3 – Introduce a mandatory grocery code of conductOption 2.4 – Develop a statutory authorisation or exception to allow for collective
bargaining

Option 2.5 – Amend value cap and allow private action in relation to the Fair
Trading Act for the grocery sector.

To improve consumers’ ability to make informed decisions, MBIE recommends:


Option 3.1 – Non-regulatory option to monitor existing steps by major grocery
retailers to enhance information for consumers



Option 3.3 – Mandate the consistent use of unit pricing.

295. This package of measures is intended to provide a comprehensive and balanced
response to improving the different issues with competition in the retail grocery sector.
Many of these options are complementary and several contribute collectively to thesame issue or problem (as discussed in the options analysis section).
296. The measures above represent a significant improvement on the counterfactual, wherecompetition is not currently working well for consumers. These measures would begiven effect to through several different means, as outlined below:

Stakeholder views on preferred options
297. Officials have undertaken targeted stakeholder engagement on the options above.
There are mixed views as to the efficacy of these options within stakeholder groups
with stakeholders supporting some proposals and recommendations, but not others.
Major retailers
298. Confidentiality

65

299.

Confidentiality

300.

301.

302.
Other retailers (including non-profits and potential entrants)
303.

Confidentiality

304.
305.

Māori as producers, grocery retailers, and grocery consumers
306. Confidentiality

307.

66

Consumer interest groups
308. Confidentiality

Industry (supplier) interest groups
Confidentiality672.5 What are the marginal costs and benefits of the option?
311. The table below presents costs and benefits of the preferred option as a package,compared to taking no action at all under the counterfactual. Where appropriate, thespecific costs or benefits for a particular group or option have been noted.
312. A scale of low, medium and high is used to assess the magnitude of the impact. This
scale is in reference to size of the grocery sector (estimated at $22 billion per annum)
and the Commission’s assessment of excess returns in the order of $430 million perannum.
Figure 16: Cost and benefit summary table
Affected groups

Comment

ImpactEvidence
Certainty

Additional costs of the preferred option compared to taking no action
Major grocery
retailers

Major grocery companies will incur additional costs
in relation to enhancing price and non-priceinformation in-store for consumers, and marginalincreases in cost from negotiating with suppliers on
a more even negotiating position.

MediumMediumProviding access to grocery supply to third parties
will also create costs for major grocery retailers aspart of establishing separate processes andoperations to enable third-party supply.
Other grocery
retailers

Costs for most other grocery retailers are likely to
be low as recommendations relating to improving
consumer information are not targeted at them.

Low

Low

Grocery suppliers

Retailers of grocery items may need to shoulder
fewer costs in relation to product supply as therebalancing of negotiating power between retailers
and suppliers would prevent retailers being able topass costs on to suppliers that they may not be well
suited to manage.

Low

Low

Consumers

Increasing the negotiating power of suppliers may
result in increased cost for some goods if retailers’ability to exert pressure on supplier prices reduces.

Low

Low

Regulators

Government will need to meet the costs ofimplementing a regulator and dispute resolution
scheme for the grocery sector and meet theongoing costs of these functions – including themonitoring and review functions of the regulator(such as monitoring the strategic conduct of major
grocery retailers with suppliers).

Māori

We do not foresee any additional costs to Māori
compared to the status quo, except as part of theconsumer, supplier and retailer groups noted
above.

Low

Low

Wider government

We do not foresee any additional costs to wider
government functions compared to the status quo.

Low

Low

Total monetised
costs

Confidentiality
Only quantifiable information available is for thecost to government of establishing and running thegrocery sector regulator.

Confidentiality

Medium

Unknown

68Non-monetisedcosts

We anticipate a medium increase in non-monetised
costs to major grocery retailers, other grocery
retailers, suppliers, and consumers.

MediumLow

Additional benefits of the preferred option compared to taking no action
Major grocery
retailers

The measures set out above are expected to havesome marginal benefits to major grocery retailers,such as the benefits provided by access to dispute
resolution for any disputes with suppliers.

Low

Low

Other grocery
retailers

Other grocery retailers are expected to benefit fromthese measures, such as through provision of betterwholesale access to groceries will help retailers
looking to expand their grocery offerings.

MediumLow

Grocery suppliers

Suppliers will have a stronger ability to negotiatewith retailers and have recourse to resolution when
disputes arise and be provided with a morebalanced negotiating position by the code of
conduct.

High

Low

MediumLow

In addition, the ability to collectively bargain andextension of unfair contract terms provisions will
also benefit suppliers.
Consumers

Consumers will benefit from the improved
competition in the sector through better grocery
product prices, higher quality goods, increased
ranges of products, and better services.
Provision of better information will also better allow
consumers to compare different products andretailer offerings.

Regulators

The government will have better information tomonitor competition in the sector and greater ability
to intervene to support competition where needed.

Low

Low

Māori

Māori as consumers will benefit from the provisionof better consumer information.

MediumLow

Māori as suppliers of grocery items, including
primary produce, will benefit from a more evennegotiating position with retailers.
Wider government

There are wider social benefits from improving theaffordability of grocery items.

Low

Low

Total monetised
benefits

Without accurate quantifiable evidence, it is notpossible to provide an estimate.

Unknown

Unknown

Non-monetised
benefits

We anticipate a medium level of benefits fromincreased competition – with these benefits largely
falling to other grocery retailers (outside of major
grocery retailers), suppliers, consumers, and Māori.

MediumLow

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Section 3: Delivering an option
3.1 How will the new arrangements be implemented?
Process for implementation
313. The preferred regulatory package is proposed to be implemented in phases, using a
range of non-regulatory and regulatory measures, as outlined and discussed below.
Figure 17: Means to give effect to the preferred proposals
OptionNon-regulatory

Legislation

New regulations

Improving the conditions for entry and expansion by enabling access to supply of groceries
Option 1.2 – Regulatory
oversight of wholesale
supplyOption 1.4 – Nonregulatory option to monitor
strategic conduct by major
grocery retailers with
suppliers

Framework for the accessregime would be included in
the Grocery Industry
Competition Bill
New grocery regulator
would monitor best priceand exclusive supply
clauses

Additional detail on
the form andfunctions of thegrocery regulator

This function of the grocery
regulator would bedetermined in legislation

Addressing imbalances of power between major grocery retailers and suppliers
Code of conduct to be mademandatory under theGrocery Industry
Competition Bill

Development of adispute resolution
scheme enabled
under regulations

Option 2.4 – Develop astatutory authorisation or
exception for collective
bargaining

Collective bargaining
authorisation or exception
would be enabled throughchanges to the Commerce
Act 1986, as part of theGrocery Industry
Competition Bill

Technical detail ofthe authorisation or
exception forcollective
bargaining may beprescribed inregulations.

Option 2.5 – Amend value
cap and allow private action
in relation to the Fair
Trading Act for the grocery
sector.

Amendments specific to thegrocery sector would bemade to the existing unfair
contract term provisions in
the Fair Trading Act 1986, aspart of the Grocery Industry
Competition Bill

Option 2.3 – Introduce a
mandatory grocery code of
conduct

Content of the code of
conduct to be developedwith input from industry

Improving consumers’ ability to make informed decisions
Option 3.1 – Nonregulatory option to monitor
existing steps by major
grocery retailers toenhance information for
consumers

Major grocery retailers
have been instructed to
implement theserecommendations via a
letter from the Minister ofCommerce andConsumer Affairs.

Option 3.3 – Mandate theconsistent use of unit
pricing

The content of
mandatory unit pricing(e.g. its form) will be
developed and consulted

Mandatory unit pricing will be provided for undereither amendment to legislation, or throughdevelopment of regulations.
70

on separately.

Unit pricing
314. Mandating the consistent use of unit pricing can be implemented as a consumer
information standard under section 27 of the Fair Trading Act 1986, throughamendment of the Weights and Measures Act, or through new primary legislation. A
statutory prerequisite for regulations to be made is for Minister to consult with such
persons or representatives of such persons as the Minister considers will be
substantially affected by any regulations and those persons have had the opportunity tocomment to the Minister.
315. Cabinet approval will be sought to release a consultation document in May 2022. The
intention is that regulations will be made early in 2023, with a suitable transitional
period to allow affected grocery retailers to implement the new systems and for theCommerce Commission to develop guidance.
New Grocery Sector Competition Bill
316. The remainder of the preferred regulatory package is intended to be given effect in a
new Grocery Industry Competition Bill. The Bill is intended to be progressed this year
Confidentiality

317. Confidentiality
318. The Bill will also provide for secondary legislation to be made, such as in relation the
supplier code of conduct. This reflects that the code will include technical matters that
require input from industry experts and key stakeholders. We propose to develop thecode in parallel with the passage of the Bill through the House. This reduces the risk ofinconsistencies between the primary and secondary legislation and facilitates the early
implementation of the code.

Who will be responsible for implementation?
319. The proposed regulatory package to be given effect in the new Grocery Sector
Competition Bill has a range of institutional implications. MBIE will have responsibility
for policy advice and regulatory stewardship. One or more agencies will be required tocarry out the following functions:

Dispute resolution in relation to the supplier code of conduct and wholesale
access to groceries

Carrying out education activities, including disseminating information andguidance to promote healthy relationships between retailers and their suppliers

Enforcement of the supplier code of conductMonitoring and oversight of the grocery sector, including monitoring the following:i. Relationships between the major grocery retailers and their suppliers
ii. The use of best price clauses and exclusivity supply agreements by the
major grocery retailers
iii. The operation of the major grocery retailers’ arrangements for wholesale
supplyiv. The extent of land banking by the major grocery retailers

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v. Grocery retailers’ pricing and promotion practices
vi. State of competition in the retail grocery industry
vii. Conducting reviews and preparing reports on the performance of theregime.
320. The agency or agencies responsible for monitoring and enforcement will need robust
information gathering powers to support these functions. This may include a mix ofregular reporting obligations on the major grocery retailers and mandatory powers torequire information to be provided. Information sharing powers between the agencies(and the Commission) will also be desirable to promote coherence in the system.
321. Decisions on which agency or agencies will carry out these functions will be madebefore the Bill is introduced. Options for the grocery regulator include:

A dedicated business unit within MBIE with statutory functions. This model is likethe United Kingdom Groceries Code Adjudicator, which is a unit located in the
Department for Business, Energy & Industrial Strategy.



The Commission for most functions, with dispute resolution functions carried out
by one or more dispute resolution service providers.



A new standalone grocery regulator with statutory powers and functions tooversee the grocery sector.

322. Funding arrangements will be determined once the responsible agency is determined.

Compliance by the grocery industry
323. The Commission carried out an open and robust consultation process in preparing its
report. The major grocery retailers have generally responded positively to the report’s
recommendations and given assurances of implementing some of the changes on a
voluntary basis or in advance of the regulation.
324. As the preferred regulatory package is closely based on the Commission’s
recommendations, we anticipate that the risk of industry stakeholders being surprisedby the package of options above to be low. We expect communication withstakeholders to continue through the development of the Bill and associatedregulations.

What are the implementation risks?
325. We see three major implementation risks.
326. The first of these is regulatory error which may take a few forms. The regulatory
package could:Have unintended adverse consequences

Have materially higher costs than expected

Be ineffective at either addressing the problem or achieving the objective.

327. We think this risk is relatively low as the Commission’s report is well-researched andthe recommendations proposed are designed to be proportionate. We propose tofurther manage this risk through ongoing consultation with stakeholders as theregulatory regime is developed. In addition, a robust monitoring regime will be put inplace to identify any regulatory errors in a timely manner, so that it may be addressed.
72328. The second risk is that the regulator is ill-suited, under resourced or unprepared at thetime the regulatory scheme comes into force. The regulatory regime relies upon agrocery regulator that is responsive to the needs of the sector and can carry out its
functions in a timely and low-cost manner. Management of this risk will be consideredas part of the institutional design of this option, drawing on overseas and domestic
comparators. MBIE will also work with the Treasury to seek necessary funding andarrangements are put in place.
329. A third risk is that addressing a key condition to entry, addressing barriers to site
availability, depends on work being progressed outside of this RIS to reform New
Zealand’s key planning law framework under the RMA. The Commission noted that
addressing these barriers will be an important enabler of improving competition. Thisrisk will be managed by MBIE closely engaging and coordinating with MfE to ensure
the planning law recommendations are progressed by MfE and ensuring that actions by
MfE align with the direction of other changes undertaken by MBIE.

73

3.2 How will the new arrangements be monitored, evaluated, andreviewed?
330. The regulatory regime will form part of MBIE’s Competition Regulatory System andhave a close interface with the Consumer and Commercial Regulatory System.
331. The design of the new regulatory regime will support good regulatory stewardship,
because it provides for the ability to monitor, review, and adapt the regulatory
framework in response to emerging issues and trends to ensure it continues to be fit for
purpose.
332. Key features of the new regulatory regime that will support monitoring, evaluation andreview are:

The regulator having explicit functions to monitor the regime, collect relevant
information and to report on performance.

Provisions to ensure collaboration and information sharing between regulatory
agencies (if more than one) will also be included in the design. This will include
measures to ensure the integration of this sector-specific competition regime withthe wider competition system.

333. The Commission’s final report sets out a clear intervention logic and a baseline against
which the effectiveness of the regulatory regime may be assessed. This will be
supplemented by the information gathered under the monitoring regime, with theregulator intended to be given robust powers to gather information. In addition, we
expect that one of the functions of the new regulator will be to develop performancemeasures for specific elements of the regime, and the UK Grocery Regulator’s annual
reports on the effectiveness of its supplier code of conduct has been identified as bestpractice.
334. The Commission recommended that a review of the regulatory regime is carried out
after it has been in effect for three years. We intend to provide that MBIE or the grocery
regulator is resourced to conduct annual reviews as required. Annual reviews may alert
the Government and public to serious unintended consequences, or if the benefits ofcompetition are not emerging in reasonable time.

74

Annex One: Final recommendations in the Commerce Commission’s market study report
Category#

Commerce Commission Recommendation

#
1A

1B

1C
1

Improve the availability of sites for retail grocery stores underplanning law.
1D

1E

1F
Recommendations to improve conditions forentry and expansion at the grocery
wholesale and retail level2

Prohibit restrictive and exclusive covenants that inhibit retailgrocery store development, and monitor land banking by the
major grocery retailers.

Require the major grocery retailers to consider requests forwholesale supply in good faith, and meet associated disclosure
obligations.

5

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.
Monitor strategic conduct that affects the conditions of entry or
expansion.

6

Ministry for theEnvironment (MfE)
MfE

MfE

MfE

2B

Prohibit exclusive covenants in leases that relate to theoperation of retail grocery stores.

MBIE

2C

Monitor land banking by the major grocery retailers.

MBIE/New grocery
regulator

3B

4A
4B

Require the major grocery retailers to consider all requests forcommercial wholesale supply in good faith.
Require the major grocery retailers to put in place and disclose
principles and terms and conditions of wholesale supply.
Establish a formal dispute resolution mechanism for wholesale
supply disputes.
The next review of the Overseas Investment Act should
consider its impacts on grocery sector competition.
The next review of the Sale and Supply of Alcohol Act should
consider its impacts on grocery sector competition.

5A

Monitor the use of best price clauses.

5B

Monitor the use of exclusive supply agreements.

6B
Introduce a mandatory grocery code of conduct to govern
relationships between the major grocery retailers and their
suppliers.

Strategic Planning Reform
Board

Ministry of Business,
Innovation and
Employment (MBIE)

6A

Recommendations to improve competition
for the acquisition of groceries (i.e. therelationship with suppliers)

Territorial authorities

Prohibit restrictive covenants that relate to the development ofretail grocery stores.

3C

4

Implementing party

2A

3A
3

Sub-recommendation
District plans should include sufficient land that is zoned toenable choice in sites for the development of retail grocery
stores.
The new planning system should require Regional Spatial
Strategies to provide sufficient spare capacity to enable choicein sites for the development of retail grocery stores.
The new planning system should require every Natural and
Built Environment Plan to include a minimum proportion ofurban land that is zoned for retail grocery stores.
The new planning system should limit the discretion available
to decision-makers regarding the approval of retail grocery
stores.
The positive outcomes of trade competition should be able tobe considered in planning instruments under the Natural and
Built Environments Act.
Retail grocery store development should not be able to be
declined based on adverse retail distribution effects on existing
commercial centres.

Supply relationships should be subject to an overarching
principle of good faith.
A grocery code of conduct should include provisions toimprove the transparency of supply agreements.

MBIE
MBIE
MBIE
Treasury
Ministry of Justice
MBIE/New grocery
regulator
MBIE/New grocery
regulator
MBIE
MBIE

6C

A grocery code of conduct should prohibit or limit a range ofconduct.

MBIE

6D

Establish a formal dispute resolution mechanism for grocerycode of conduct disputes.

MBIE

75

7

Recommendations to improve the ability of
consumers to make informed decisions

Institutional arrangements
Monitoring and review

Consider a statutory authorisation or exception for collective bargaining by grocery suppliers.
8A Allow private action in respect of unfair contract terms.
Simplify the mechanism for imposing penalties and other
Amend the Fair Trading Act to strengthen the business-to8B
8remedies in relation to the use of unfair contract terms.
business unfair contract terms regime.
Consider raising the transaction value cap for unfair contract
8C
terms.
9 The major grocery retailers should ensure their pricing and promotional practices are simple and easy to understand.
10 Mandate the consistent display of unit pricing.
The major grocery retailers should ensure disclosure of loyalty
11A
programme terms and conditions is clear and transparent.
The major grocery retailers should ensure disclosure relating to
11 loyalty programmes and data collection and use practices is
The major grocery retailers should ensure disclosure ofclear and transparent.
11B consumer data collection and use practices is clear andtransparent.

MBIE
MBIE

12 The major grocery retailers should cooperate with price comparison services.
13A Establish a grocery sector regulator.
13 Establish a grocery regulator and dispute resolution scheme.
13B Establish a dispute resolution scheme.
Undertake a further review of competition three years after
Review the state of competition in the grocery sector three
14A
implementation of the recommended regime.
14 years after implementation of the recommended regime andcollect information in the interim to support this review.
14B Collect information to support a further review of competition.

Major grocery retailers
MBIE
MBIE
MBIE/New grocery
regulator
MBIE

MBIE
MBIE
Major grocery retailers
MBIE
Major grocery retailers

Major grocery retailers

76