A convenience store chain negotiating cut-price grocery wholesale deals with the big supermarkets says it expects to pay 15 to 20 percent less than retail prices. And Costco, which announces details of its NZ opening today, says it will be 30 percent cheaper than the supermarkets.
West Auckland's Olivera Janevska was so looking forward to the opening of New Zealand's first Costco Wholesale this weekend, that she booked leave from work. When the global retail giant announced the 15,000 square metre store's opening had been delayed, she was furious.
Today Patrick Noone, the Costco country manager for Australia and NZ, is to visit the near-complete store which it is aimed to open in late September. "I am just excited that we are getting new brands in New Zealand," Janevska says.
Signed-up Costco members have set up a fan page on Facebook; some say they will camp out overnight in order to be the first through the doors in the morning.
Janevska has never been to a Costco, overseas. But her brother in Australia and her cousin in the United States have shopped at Costco from time to time, and have told her all about it. Customers must pay a $60 membership fee to shop at the big stores, where they can buy bulk supplies off the pallets – everything from from diamond rings to clothing, giant teddy bears to coffins, hearing aids to glasses. All the groceries are in bulk. According to a US headline this week, the chain there is selling 27 pound (12kg) tubs of macaroni cheese that will last 20 years.
And it's not just oversea goods: Costco has signed up 200 new New Zealand suppliers, at last report. Kiwi producers and manufacturers seem almost as excited about the store's opening as the shoppers: more than 1000 potential suppliers took part in a Zoom seminar run by NZ Trade & Enterprise, which has worked hard over the past five years to get the retailer to New Zealand.
It's hiring hundreds of locals, too, though building supplies and labour shortages are factors in its delayed opening. Just a week or two away from throwing wide its doors, it's still advertising 20 jobs on its website: two forklift drivers, a butcher, a baker, an optometrist, an audiologist, and more.
"In our view, Kiwi families are not getting the essential groceries they need at reasonable prices from supermarkets. So we welcome the Government's actions to make it a more level playing field, and we’re hopeful that this will bring meaningful change." – Nick Grayston, The Warehouse
The Prime Minister previously met with Noone in Australia, and seems hopeful that new arrivals like Costco will help bring competition to the New Zealand grocery market. “We also want more larger operators in the market as well, because of what that will likely provide,” she says. “That won't happen unless they can access the products to stock their shelves."
But Costco Wholesale had broken ground to build its west Auckland store long before the Government announced it would force open access to supermarket wholesale warehouses and cool stores; there's a question mark over how much the new Government regulation will encourage wholesale competition, and the extent to which competitors are pushing on regardless.
Conversely, German-owned Aldi still has no plans to cross the Tasman and open up in New Zealand.
Online grocery store Supie has hired 40 staff since it opened last year, signed up 27,000 members, and is now offering wholesale to smaller retailers. The Government's intervention has changed nothing for these companies.
Noone told BusinessDesk, last month, that Costco didn't need access to the duopoly's wholesale supply networks. In Australia, up to 25 percent of its sales were to trade members such as corner stores that would buy all their bulk confectionery, soft drinks, coffee, paper plates and more, from Costco. "Wholesale is already part of our business. So, in terms of wholesale vertical integration, it's probable, in fact likely, that we will be a competitor," he said.
On the other side of the retail coin, The Warehouse has been gradually rebuilding its groceries offering, store by store, product by product, after a disastrous foray into groceries 16 years ago. On that occasion, Foodstuffs and Progressive (Countdown's former owner) each bought up a 10 percent share in The Warehouse Group, then used their acquired voting power on its board to reverse its groceries strategy.
Now, Warehouse chief executive Nick Grayston is upbeat about regulated wholesale access. "In our view, Kiwi families are not getting the essential groceries they need at reasonable prices from supermarkets," he says. "So we welcome the Government's actions to make it a more level playing field, and we’re hopeful that this will bring meaningful change."
"I don't think supermarkets operate on a massive margins in terms of their gross profit. They work more on volume. But it needs to be, I reckon now, 15 to 20 percent cheaper." – Matthew Lane, Night 'n' Day
And family-owned convenience store chain Night 'n' Day has more than 50 stores nationwide, making it the country's third largest grocery retailer by number of outlets. It is reliant on The Big Two for most of its wholesale supplies; director Matthew Lane says over the past few years they have taken turns freezing him out when he threatened to expand, or when he needed them most in the pandemic and lockdowns.
He's jubilant about the regulatory backstop to force the supermarkets to open up their wholesale access, and has already entered into talks with both Foodstuffs and Woolworths. While the discount won't be significant, he thinks they will settle on a price that's closer to what their own co-op members pay than to what retail customers pay at the checkout. And that's an improvement on having to send staff round in a van to the nearest supermarket to pay retail prices, because their wholesale order hasn't turned up.
While he's not breaching any confidences, he says the negotiations have been informative. "I don't think supermarkets operate on a massive margins in terms of their gross profit. They work more on volume. But it needs to be, I reckon now, 15 to 20 percent cheaper."
It appears the talks are also progressing well from the big supermarket chains' point of view. Woolworths NZ managing director Spencer Sonn confirms it's on the verge of signing up its first multi-store wholesale customer. And it's had more than 50 expressions of interest from small retailers and other organisations. Foodstuffs has only released figures for its North Island co-op: that business has had 40 expressions of interest from other retailers who want access to its wholesale supplies.
Stick wielded on sticker prices
It seems clear that Foodstuffs and Woolworths wouldn't have opened up access to their wholesale but for the threat of the regulatory stick. Ardern and Commerce Minister David Clark detailed just how weighty that stick would be this week.
The Grocery Commissioner, who will work within the Commerce Commission, will have extensive monitoring powers, and can regulate wholesale price and range if the supermarkets are deemed too obdurate.
"Supermarkets would be well advised to lock in good-faith wholesale arrangements on their own terms, since otherwise government will have no problem stepping in to do it for them," Clark says. "We will see a more competitive grocery industry one way or another."
"We're discussing a food distribution market that is monopolised so it looks like communist Russia in the 1970s, with the lack of innovation in supermarkets." – Tex Edwards, Northelia
The concern expressed by Supie founder Sarah Balle (and, indeed, by the Commerce Commission) is that this regulation entrenches the duopoly's market domination. In the past they were accused of obtaining exclusive supply arrangements through bullying and intimidation; now they have the backing of a regulatory framework designating them the main wholesalers to every corner butcher, baker and dairy in the country.
"This is something we've carefully considered and one of the factors that will be completely permitted in this is for suppliers to not enter into that wholesale regime," Clark says. "If suppliers choose to go directly to other would-be competitors in the market, they can do that. They won't be locked into this wholesale regime as it stands, and that introduces additional competition in the market which I think is a good thing."
Like Matthew Lane, though, he won't be drawn on a fair price for smaller retailers to pay the big wholesalers. "Can I say which particular products will get cheaper, at what timeframe? No, I can't."
The commissioner might decide that wholesale groceries should be supplied at non-discriminatory terms the same price as they're sold to the company's own retail members or franchisees. Or the commission could opt for the even bigger stick of "price-quality regulation" – but the starting point is simply voluntary compliance, and greater transparency.
"We see this as a centrepiece of the Government's response to addressing competition shortfalls in the grocery sector," Clark said. "We need to address wholesale access because you cannot run a supermarket on empty shelves ... Imagine, if you will, being able to do an affordable shop at the local dairy or the corner store."
The Government has already passed a law banning supermarket land and lease covenants. Submissions have closed recently on consistent, transparent unit pricing, and on a grocery code of conduct. And in October, Clark intends to announce a decision of the much more vexed question of whether the two big companies should be forced to divest some of their stores to new players.
That would be the most dramatic step, and one the supermarkets would fight tooth and nail. They argue it would be extraordinarily complex, arbitrary, and an unprecedented assault on their property rights, and those of their co-op members and franchisees.
“If today’s announcement is a demonstration of anything, it is how difficult we as a government found it to swallow the Commerce Commission’s report that $1 million a day in excess profit was being taken directly out of Kiwis’ pockets. We could not accept that.” – Jacinda Ardern, Prime Minister
But Tex Edwards, the disruptive entrepreneur who founded 2 Degrees to take on the Telecom/Vodafone duopoly, insists forced retail divestment is the final and most important part of this puzzle. He thinks Foodstuffs and Woolworths must be made to relinquish at least 100 stores to a new player, to give them a foot up into the market.
He says he's pulled together a consortium of investors, including iwi, who want to establish a third big grocery chain to bring down prices.
"Working out what stores, to force a retail divestment, is complex and arduous," he acknowledges. "However, it must happen otherwise you reward incumbents and other monopolies in New Zealand for surrounding themselves in complexity.
"We're discussing a food distribution market that is monopolised so it looks like communist Russia in the 1970s, with the lack of innovation in supermarkets."
Food distribution is a critically important market, he argues. "It's the welfare of New Zealand. It's not just the Prada handbag market. It's not a premium shoe market. This is an important industry that needs regulatory controls, because it's essential to every man, woman and child in the country."
Why is the Government intervening?
The Prime Minister was asked this week when big increased revenues off the back of straitened households constituted excessive profiteering, and when are they were simply healthy earnings. Is the difference whether the Government clips the ticket?
That was put to the Jacinda Ardern, when she fronted a press conference announcing plans to force down the prices charged by the two big supermarket chains.
“If today’s announcement is a demonstration of anything,” Ardern said, “it is how difficult we as a government found it to swallow the Commerce Commission’s report that $1 million a day in excess profit was being taken directly out of Kiwis’ pockets. We could not accept that.”
The supermarket duopoly’s profit may well be excessive – the Commerce Commission says yes; Foodstuffs and Woolworths NZ predictably say no.
But the big three state-controlled power companies have also just reported big operating profit jumps – up from $1.51 billion last year to $1.73b this year. To put that in the ministers' terms, that's nearly $5m a day between them.
Rising electricity prices are also hitting household budgets, but ministers aren't castigating those as excessive. Is that because these three big power gentailers are each 51 percent owned by the Government, and paying increased dividends?
Ardern would brook no suggestion that the private owners and shareholders in the two big supermarket chains were hard-done by, comparatively. Fair prices for food and fuel were critical, she said, so that was where the Govt had intervened. “Those are expenses that NZers can't avoid. And I think that's rightly where we should be looking."
She rejected the suggestion the Government was conflicted, as a 51 percent shareholder in the power companies. "No, it just shows that this has been a priority for us."
The supermarket owners and managers see things differently. Foodstuffs boss Chris Quin argued in the NZ Herald earlier this week that the industry’s profitability was very similar to overseas supermarkets – but the Commerce Commission had wrongly focused on profitability as a percentage of capital invested, to reach the conclusion that the industry was making excess profits of $1m a day.
That was ridiculous, he said: "The premise of this is that a business shouldn't make more than its cost of capital and our belief is that's a real problem. Compared to the rest of the world, our return on capital is about the same.”
Quin tells Newsroom the co-op is holding grocery price rises below CPI at a time of high inflation and in the face of continued cost increases from its suppliers. “Inflation being at 30-year highs is out of our control – and shouldn’t be conflated with structural competition.”
Spencer Sonn, his Woolworths counterpart, says inflation is being driven by high commodity prices for goods, increased freight costs, labour shortages, unpredictable weather and global inflationary pressures that many much larger markets are also experiencing. “Unnecessary and overly complex regulation will not solve those problems, and in fact, could make the cost of living crisis worse.”
His company, too, argues its profits are not so high as the Commerce Commission claims. Indeed, today Woolworths reported a 12.5 percent decrease in its before-tax earnings, falling from $361m last year to $316m in 2021-22.
While total sales grew by 5.8 percent to $7.6 billion, it says its net profit after tax now equates to a profit of 1.8 cents per $1 spent with Woolworths NZ. Foodstuffs claims its profits are just 4 cents in every dollar spent.
The company had absorbed some of the increases in dairy and other prices: butter and margarine costs were up 11 percent, cheese was up 15 percent, frozen fruit up 30 percent, toilet rolls and tissues up 24 percent, pet food up 9 percent, and flour up 19 percent.
“When we look ahead to the next financial year, the outlook is still very challenging," Sonn says. "Managing industry-wide inflationary pressures will continue to be our focus as we work hard to provide customers with good value, while also managing the cost pressures facing our supplier partners, particularly those based here at home in New Zealand."
There are some who would argue that competitors like online supermarket Supie and international retail giant Costco will contribute more to lower wholesale prices than government intervention.
