Stuff: Supermarket prices — Politicians have dropped the ball

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The forensic evisceration on Thursday of our uncompetitive supermarket duopoly is a landmark moment, a sign of shifting attitudes towards capitalism – and a massive test for Commerce Minister David Clark.

The Commerce Commission’s draft report into competition – or rather, the lack thereof – in the supermarket sector is damning. New Zealanders face the sixth highest grocery prices in the developed world. Innovation is limited, and suppliers are beholden to retailers.

Why? In large part it’s because just two firms, Foodstuffs and the Countdown empire, utterly dominate the $22 billion grocery market.

Speaking on Thursday, the commission’s chair, Anna Rawlings, was suitably blunt. “Our preliminary view is that the core problem is the structure of the market,” she said. It’s uncompetitive, in short.

The minor players “are unable to compete with the major grocery retailers on price and product range”. Large firms find it hard to enter, because the wholesale market (where the big two supply groceries to other firms) is not competitively priced and sites for large stores are lacking.

Unsurprisingly, the duopoly make profits “consistently and materially” above what they should. Their profit margins are a staggering 50 per cent above the global norm.

These conclusions mount an assault on a form of entrenched market power that should have concerned politicians across the spectrum – but which has been tolerated for far too long.

One of the casualties of recent decades has been our vigilance against monopolies (the dominance of a market by one firm), duopolies (two firms) and oligopolies (a very small number of firms).

Influenced by laissez-faire thinking, politicians have told themselves comforting untruths. Even if there were no new entrants to a market, they said, the mere potential for someone to enter would keep big players honest.

The efficiency of larger firms would compensate for competitive shortfalls. And as a small country, New Zealand couldn’t expect that many competitors.

None of this was substantially true. Other countries don’t tolerate such uncompetitive markets. Similar-sized Denmark, for instance, has six major supermarket chains, four of them holding over 10 per cent of the market each.

Competition is essential because it is the only thing that makes capitalism work. Without the threat of going out of business, firms lack incentives to improve. Indeed, Countdown and Foodstuffs cosily divide up the market, appearing “to avoid competing strongly with each other”, Rawlings noted. We, as consumers, bear the cost in inflated prices and poor service.

This point has been forgotten globally, where the worst monopolists are of course Amazon, Facebook and Google. In the US, their home turf, the political mood has shifted sharply against these tech giants, albeit action remains limited.

We cannot affect that global picture, but we can clean up our own backyard. It’s not just supermarkets. A handful of electricity “gentailers’’, some of them state-owned, dominate their market, apparently able to exclude competitors.

The banking sector looks like an oligopoly, although Kiwibank and others may partially constrain the big Aussie-owned firms. Our petrol markets have already proven uncompetitive. Fletchers utterly dominates some building supplies markets.

These developments should concern National just as much as Labour, because conservatives need capitalism to work properly and retain the public’s support.

For now, of course, the ball is in the court of David Clark. And he cannot allow this moment to pass.

Some of the commission’s suggestions – like forcing the big players to supply other retailers with groceries on “fair and non-discriminatory terms” – could be useful in the short term. Ditto action against the literally hundreds of cases where the duopoly have – outrageously – signed land covenants that block competitors from setting up shop.

But the basic point remains: only a guaranteed increase in competition will fix the problem. Step forward, big government. “Without intervention,” Rawlings said on Thursday, “we currently see little prospect of a new or expanding rival being able to constrain the major retailers effectively”.

Her bombshell idea is to ensure another entrant – by forcing Foodstuffs and Countdown to sell some of their shops to a third outfit, or by government’s investing in a joint venture with a new player then exiting “once competition is established”.

Though I can’t see the state running a supermarket well in the long term, this could be the short-term circuit breaker we need. The risks would require careful assessment, but the benefits to consumers and suppliers would probably be substantial.

Clark will need to pursue these options vigorously, and resist what will undoubtedly be a determined lobbying campaign by the supermarket duo. Politically, he has a chance for redemption after his unhappiness in the health portfolio. Being the man “who broke up the big two” would be some legacy.

It would mark, too, a realisation that markets don’t “naturally” work: they have to be constantly shaped and guided by governments, if they are to deliver consumers their promised benefits.