The Commerce Commission (Commission) released its findings of its market study into New Zealand’s grocery sector on 8 March 2022 in its 609-page long “Market study into the grocery sector final report” (Report). In the Executive Summary, the Commission concluded that competition in the industry is “not working well for consumers” and has recommended changes, including regulatory measures to help improve the sector’s current state. The findings and recommendations of this Report, if implemented, will likely have impacts on all stakeholders of the groceries market. The Government recently published its response to the supermarket study on 30 May 2022, accepting 12 of the Commission’s 14 recommendations. In this article, we focus on the potential impacts of the Report from a consumer protection perspective.

The overarching aim of the Report is to promote competition in markets for the long-term benefit of consumers within New Zealand. It intends to inform the public, industry and the Government about competition in the sector and how it operates. Gaining an understanding of the commercial relationships between market participants is a key aspect to identifying potential competition problems in the sector. 

The Commission stressed that the best options for improving competition are those that enable an increase in the number of retailers directly competing against the two major retailers (i.e., Foodstuffs and Woolworths NZ) to offer a convenient one-stop shopping option, and recommended, among other things that:

• imbalances in bargaining power between the major grocery retailers and many of their suppliers should be addressed by strengthening the Fair Trading Act’s business-to-business unfair contract terms provisions; and
• retailers should help consumers make more informed purchasing decisions and competition should be enhanced at the retail level, by introducing mandatory unit pricing, as well as asking the major retailers to ensure that their pricing and promotional practices, and the terms and conditions relating to their loyalty programmes, are simple and easy to understand.  

In section 1.9, the Commission also noted that it may separately investigate conduct which it considers could breach the Fair Trading Act 1986 (FTA).

Background

In November 2020, the Government requested the Commission to conduct a study and prepare a report on whether competition in the grocery sector is working well, and if not, what changes could be made to improve it. This request was seen as being in the public interest, as the supermarket industry is of strategic importance to the New Zealand economy with the average Kiwi spending roughly 17 percent of its weekly expenses on food. The high level of concentration in the market, the potential competition concerns and the high prices for groceries were cited by the Minister, the Hon Dr David Clark, as reasons for asking the Commission to undertake the study. 

In section 3.19, The Commission measured between 2015 and 2019 to exclude the ‘pandemic effect’ from its report, and focused on market composition and competitiveness. In section 3.21, data availability restricted the potential measures for the study, meaning the Report did not have the same range as used in the retail fuel market study. 

Findings

The market

The Report found that New Zealand’s grocery market is dominated by Foodstuffs and Woolworths which effectively operate as a duopoly. In the last decade, there has been no large-scale retail grocers with comparable offerings to Pak’nSAVE, Countdown or New World. The two retailers have a significant combined market share of the total consumer spend on grocery products across different types of shopping missions. Some estimates of market share suggest the retailers combined share is more than 90% for consumers’ main shop, and more than 80% for top-up shops. The profitability of major grocery retailers appears to be high, with New Zealand grocery prices also appearing high by international standards. 

The Commission describes the competition as “muted”, despite a diverse fringe of other retailers whose impact is limited due to their inability to compete effectively. Potential new entrants to the retail grocery market face substantial barriers such as lack of suitable land sites to develop stores, which is significant in New Zealand given the country’s size and population profile. The availability of land is also impacted by major retailers placing restrictive covenants on land to prevent rivals from developing stores. Further, planning laws and implementation by local authorities creates uncertainty as to whether positive effects of trade competition can be considered in the planning process. 

Consumers

Consumers face complex pricing strategies, promotions and customer loyalty programmes which impact their decision-making, the Report has found. The major retailers use a variety of promotional mechanisms, making it difficult for an every-day consumer to make informed decisions. As a result, consumers are less likely to shop between products and retailers, impacting competition. 

The imbalance of power in the retailer-supplier relationship is another key factor indicating competition is not working as well as it could. As many suppliers are reliant on both Foodstuffs and Woolworths, the two retailers can transfer certain costs, risk, and uncertainty onto suppliers. The suppliers face the risk of their products being taken off store shelves if they do not agree to the retailer terms. This reduces the incentive to invest and innovate, which in turn, impacts consumers as it reduces choice.

The Commission has received 701 complaints about grocery retailers for the fifteen-month period from 1 November 2020 to 31 January 2022, making up 7.9% of all FTA related complaints it received over the same period. An increased number of these complaints related to potentially misleading promotional pricing practices, pricing inaccuracies, unfair standard form contract terms and conditions f loyalty programmes, and privacy principles relating to data collection from consumers and consumer groups during its study. The Commission considered these FTA-related issues to the extent that they directly relate to whether competition in the grocery sector is working effectively, and analysed pricing practices over time to the extent they relate to competition. 

While the Commission did not draw any conclusions as to whether these practices amount to breaches of the FTA, it has summarised these complaints in the Report, noting that the Commission has considered what further action may be required in relation to the major grocery retailers’ pricing practices. It is likely that the Commission will engage with the retailers further about these concerns.

Promotions and loyalty programs are valuable to competition, building reliability and helping consumers to make informed decisions. The major grocery retailers use a variety of pricing strategies which can make it hard for a consumer to shop around effectively. Consumers are susceptible to being confused when it comes to combinations of promotional techniques and loyalty programmes. Pricing and promotional practices can be regarded as misleading and deceptive conduct as per the FTA.

The Commission has been involved in previous price discrepancy issues, exampled by the PAK’nSAVE Mangere case. The price discrepancies were identified by mystery shoppers at the conduct of the Com-mission. Despite taking significant steps to remedy the problem, PAK’nSAVE Mangere was fined $78,000 as the “immediate failure to act was inexcusable”.

It is crucial to not mislead consumers when marketing goods and services. Retail pricing promotions are a major feature for grocery retailers and make up a large aspect of competition. Accordingly, the Commission recommends the major grocery retailers ensure their pricing and promotional practices are simple and easily understood.

Unfair contract terms regime

Through the changes introduced to the FTA by the Fair Trading Amendment Act 2021, from 16 August 2022, the FTA will prohibit:

• including an unfair contract term in a standard form small trade contract (a contract in trade with an annual value of less than $250,000), unless the term is included in a way that complies with the terms (if any) of the decision of the court; or 
• apply, enforce, or rely on the unfair contract term in a standard form contract. 

Currently, for a term in a standard form small trade contract to be deemed an unfair contract term, the Commission must apply to the court for a declaration that the term is unfair, and the court must rule as such. 

Private parties are not able to apply to have such term declared to be unfair – although they can make a complaint to the Commission requesting that the Commission make a court application. 

The Commission recommends in the Report that the newly introduced business-to-business unfair contract terms regime should be strengthened by:

• allowing private parties to apply for a declaration by the court;
• extending the prohibition to the inclusion of terms that meet the definition of being unfair, rather than only terms that have previously been declared to be unfair; and
• raising the transaction value cap for small trade contracts.

The Commission acknowledged the existence of clauses in supply agreements which may hinder the ability of suppliers to supply to other parties, such as best price clauses. Exclusive supply arrangements in some circumstances can be pro-competitive as they can enhance efficiency. 

Privacy

The Commission noted that it has not drawn any conclusions as to whether the privacy issues raised by the consumers and consumer advocacy groups are potential matters of interest to the Office of the Privacy Commissioner under the Privacy Act 2020. However, it highlighted not all consumers with certain data collection or privacy preferences are able to make informed decisions that reflect such preferences . For example, in its submissions to the draft Report, Foodstuffs communicated its intent with the Commission to ensure that its customers are aware that they are authorizing Foodstuffs to link their payment cards with their loyalty accounts by signing up to a Clubcard membership. 

The Commission also raised concerns about the major grocery retailers’ privacy policies, noting that these retailers sell consumer insights data derived from loyalty programmes to third parties, and the policies lack clarity about who might be provided with consumer data and on what basis. The major grocery retailers lessen the consumers’ ability to accurately assess the value of the loyalty programmes by making it hard for consumers to understand how their data will be used. The Commission notes that this can reduce competition among loyalty programme operators.

Overseas Jurisdictions

In Australia, the Food and Grocery Industry Code of Conduct aims to level the playing field for food and grocery suppliers in their transactions with major supermarkets. The code utilises principles relating to the trading relationships between retailers and suppliers, providing greater certainty for the industry. The Australian Competition and Consumer Commission has conducted two rounds of compliance checks since the Grocery Code was introduced. These checks have confirmed some improvement, which is hopeful for the New Zealand industry if a similar code is introduced. 

The unconscionable conduct prohibition like the FTA has been used in Australia with some success to deter unconscionable conduct by retailers against suppliers. This is encouraging for New Zealand competition if a similar path is followed.

Key Recommendations

The Commission recommended a variety of changes to enhance competition and consequently improve the price, quality, and range of groceries available to consumers.  

The key recommendations are outlined below:

1. Improve conditions for entry and expansion by: 

• freeing up land for supermarket development under planning law;
• prohibiting the use of restrictive covenants on land and exclusivity covenants in leases and
• requiring major retailers to consider requests for wholesale supply in good faith. 

2. Improve competition for acquisition of groceries by:

• introducing a mandatory grocery code of conduct;
• considering statutory authorisation or exception for collective bargaining by suppliers;
• amend the FTA to strengthen the business-to-business unfair contract terms regime; and
• considering whether to allow collective bargaining by suppliers. 

3. Improve ability of consumers to make informed decisions by:

• ensuring pricing and promotional practices are consistent;
• mandating the consistent display of unit pricing;
• enhancing transparency of data collection relating to loyalty programs; and
• encouraging major retailers to cooperate with price comparison services. 

4. Introduce a grocery sector industry regulator to monitor and oversee the industry by providing a dispute resolution scheme to resolve any potential supplier and wholesale supply disputes. 

The Commission also noted further review should be undertaken in three years to assess the impact of the recommendations if implemented. 

Government Response to Market Study

The Government has recently accepted 12 of 14 Commission recommendations from the Report, publishing its response on 30 May 2022. The two recommendations not accepted relate to implementing a voluntary wholesale access regime, and a review of competition in three years. 

The Government has, and over the coming months, plans to progress on reform including:

1. Improving the conditions for entry and expansion by grocery retailers, to introduce more competitive pressure into the market:

• Improve access to sites through planning law reform with the Ministry of Environment;
• The Commerce (Grocery Sector Covenants) Amendment Bill which amends the Commerce Act 1986, prohibiting restrictive and exclusive covenants over land and leases and making existing exclusive covenants unenforceable has received royal assent on 29 June 2022, and became law;
• New powers are given to the Commerce Commission allowing it to require supermarkets to hand over information regarding contracts, arrangements and land covenants which make it difficult for. competing retailers to set up shop;
• Implementing a monitored wholesale access regime and develop an additional mandatory wholesale grocery access regime to provide a regulatory backstop;
• Reviewing potential barriers to competition in other Acts;

- The Minister of Justice has signaled an intention to commence a review on the Sale and Supply of Alcohol Act 2012, which will involve considering the impacts of this Act on retail grocery competition. 

2. Improving competition for the acquisition and supply of groceries;

• Consultation on a mandatory code of conduct between major grocery retailers and suppliers underway;
• Implementing an exception from relevant Commerce Act provisions to allow grocery suppliers to collectively bargain;
• Changing the FTA unfair contract terms regime to allow private action in respect of unfair contract terms and raise the transaction value cap for grocery supply contracts.

3. Improving the ability of consumers to make informed purchasing decisions;

• Opening consultation on implementing mandatory unit pricing on grocery products.

4. Introducing a monitoring and oversight regime; 

• Introducing a retail grocery regulator, which monitors strategic conduct that affects the conditions of entry and expansion;
• Establishing a dispute resolution scheme to deal with supplier-retailer disputes.
• The Minister of Commerce and Consumer Affairs Hon. Dr David Clark has recently announced the establishment of new industry watchdog: the Grocery Commissioner (‘Commissioner’). The Commissioner is expected to hold the sector to account and ramp up competition by providing annual state-of-competition reviews. The role is to be part of the Commerce Commission. The Commissioner is expected to be appointed before mid-2023. The Commissioner will have the ability to issue warnings, put fines in place for breaches of the code of conduct and go to court to seek that contracts be overruled. 

5. Further matters;

• Working on the Grocery Industry Competition Bill to introduce regulatory changes;
• Undertaking work to examine potential steps to improve competition, such as requiring major grocery retailers to divest some of their stores or retail banners.

These updates are expected to be implemented by early 2023. The consultation and information on having your say on mandatory unit pricing for grocery products is available on MBIE’s website. For the full Market study into the retail grocery sector final report click here.

What do these mean to you?

New Zealanders currently pay the fifth highest in terms of grocery prices out of 35 OECD countries that submitted expenditure statistics for 2019, and are currently facing a cost of living crisis. The Commission believes, among other things, that Kiwis will benefit from at least one more large-scale rival in the retail grocery industry. 

It will be interesting to see if the Commission’s recommendations will be adopted by the Government, in what way, and how they will affect consumers and businesses alike. 

Reach out to us if you have any questions about competition or consumer law. Our specialists are on hand to provide you practical advice on the potential impacts of the Report on you or your business. Get in touch with Hayley Miller or David Campbell if we can help you with competition and consumer protection issues in this space.