The Government has mused about a more proactive response to the lack of competition, including the establishment of a government-run distribution centre, but that would be foolhardy and doomed to failure
Comment: The recent surge in food prices is putting pressure on the Government to bring the cost of living under control. Because New Zealand has enjoyed very low inflation for about the past 30 years, most people are not used to the rapid and steep price rises they are now seeing and are therefore frustrated that the Government is not doing more to curb them.
However, history suggests government-led efforts to bring prices down are unlikely to be successful. Wartime price controls and rationing of basic foodstuffs in the 1940s and early 1950s proved inefficient and disruptive, creating black markets, shortages, and other distortions that people became keen to see the end of. Rising inflation in the late 1960s and early 1970s caused the National government to look at an integrated prices and incomes policy, but its efforts proved weak and ineffective and were quietly abandoned.
In 1974, the Labour government proposed a radical scheme, setting a maximum retail price for all retail goods. However, by the time it left office in 1975 it had only got as far as designing the shield displaying the maximum retail price that was to appear on all goods. The scheme, which would have been extremely cumbersome to administer, was quickly dropped by the incoming National government.
A decade later, the Muldoon government introduced the country’s most comprehensive wage and price freeze. But when it was lifted by Labour in 1985, there was a sudden leap in prices as suppliers sought to recover lost margins, and workers sought higher wages to cover rising costs. It was only the implementation of the Reserve Bank Act after 1989, giving the bank control of monetary policy that brought more than two decades of persistent inflation under control.
Throughout this time, the dominance of the supermarket duopoly - Foodstuffs and Progressive (now Woolworths) - strengthened. Foodstuffs, established in 1922, now owns the New World, Pak’nSave, Four Square, Pams and Liquorland brands, and has a 53% share of the grocery market. Woolworths has been around since 1949 and controls the Countdown, Fresh Choice and SuperValue supermarket chains.
An attempt by the British supermarket entrepreneur Albert Gubay to establish his 3 Guys chain in New Zealand from 1973 was fiercely resisted by the duopoly, with Gubay eventually selling his supermarkets to Progressive in 1984. There has been no serious attempt to challenge the duopoly since then.
A recent Commerce Commission study noted that Foodstuffs and Woolworths control about 80% of the domestic grocery market, that “competition in the industry was not working well for New Zealanders” and that “competitors wanting to enter or expand face significant challenges”. However, it stopped short of recommending radical changes to the sector to improve competition.
For its part, the Government, while welcoming the Commerce Commission report, has also mused about a more proactive response to the lack of competition, including the possible establishment of a government-run distribution centre to make products available at more competitive prices to existing supermarkets or emerging competitors. However, based on the history of previous government attempts over the years to control prices, such a move would be foolhardy and doomed to failure.
It would almost certainly require a massive taxpayer subsidy to become competitive with the supermarket industry over the long term, with no guarantee it could achieve a more reliable or cheaper level of access to the ever-increasing range of products customers are looking for. Moreover, no government in the last century has been successful in running business in the private sector, and there is no reason to believe direct involvement in today’s highly sophisticated grocery market would be any different.
In any case, New Zealand stopped directly subsidising food costs when bread and milk subsidies were removed in the mid-1970s, and indirectly when agricultural subsidies were abolished in the 1980s. Their reimposition in any form now would almost certainly be in breach of our international trade obligations.
The Commerce Commission’s recommendations looked at structural impediments to developing new supermarkets. They focused on land banking by the duopoly, restrictive land covenants and exclusivity clauses in leases that prevent new retail grocery stores being developed. The commission wants planning laws to be changed to free up sites for new entrants. It also wants improved, more transparent and competitively priced access to the wholesale grocery market, by regulating major grocery retailers to fairly and transparently consider any requests to supply competitors.
Overseas experience suggests these proposals are likely to achieve mixed results at best. The real counter to the power of the duopoly would be the introduction of a strong competitor. To get around the land banking problem, such a competitor would need an already established domestic network or an international presence. An international player like Costco could make inroads, assuming consumers embrace its membership-only approach. The likes of the Warehouse, Bunnings, or perhaps even Briscoes are local possibilities, but only if they saw the market potential as worthwhile.
However, the basic problem any new potential entrant would encounter remains the small size of the domestic market, which leaves little room for new players to emerge. This is not restricted to the grocery sector, as potential domestic airline competitors to Air New Zealand have found over the years. But short of that new entrant, consumers' best hopes for a cooling in grocery prices in the immediate future lie with the Government taming the emerging inflation beast. However, the combination of the international situation after Covid-19, the invasion of Ukraine, and the Government’s reluctance to curb its own inflationary spending, makes that unlikely.
In the absence of that, it looks as if consumers will have to become more aggressive in their pursuit of supermarket bargains, and more intolerant of seemingly unjustified price rises, while they wait to see if Grant Robertson’s soothing assurances that the inflation spike is temporary is true, or whether, as they fear, long-term inflation and rapidly rising prices are back.
